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CACI > SEC Filings for CACI > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for CACI INTERNATIONAL INC /DE/


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

There are statements made herein which do not address historical facts and, therefore, could be interpreted to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: regional and national economic conditions in the United States and globally (including the impact of uncertainty regarding U.S. debt limits and actions taken related thereto); terrorist activities or war; changes in interest rates; currency fluctuations; significant fluctuations in the equity markets; changes in our effective tax rate; failure to achieve contract awards in connection with re-competes for present business and/or competition for new business; the risks and uncertainties associated with client interest in and purchases of new products and/or services; continued funding of U.S. government or other public sector projects, based on a change in spending patterns, implementation of spending cuts (sequestration) under the Budget Control Act of 2011, changes in budgetary priorities, or in the event of a priority need for funds, such as homeland security or the war on terrorism; government contract procurement (such as bid protest, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the results of government investigations into allegations of improper actions related to the provision of services in support of U.S. military operations in Iraq; the results of government audits and reviews conducted by the Defense Contract Audit Agency, the Defense Contract Management Agency, or other governmental entities with cognizant oversight; individual business decisions of our clients; paradigm shifts in technology; competitive factors such as pricing pressures and/or competition to hire and retain employees (particularly those with security clearances); market speculation regarding our continued independence; material changes in laws or regulations applicable to our businesses, particularly in connection with (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, and (iii) competition for task orders under Government Wide Acquisition Contracts (GWACs) and/or schedule contracts with the General Services Administration; the ability to successfully integrate the operations of our recent and any future acquisitions; our own ability to achieve the objectives of near term or long range business plans; and other risks described in our Securities and Exchange Commission filings.

Overview

The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q.

We derived 94.5 percent and 93.8 percent of our revenue during the three months ended September 30, 2012 and 2011, respectively, from contracts with U.S. government agencies. These were derived through both prime and subcontractor relationships. We also provide services to state and local governments and commercial customers. We provide the following information solutions and services to our clients:

Enterprise IT solutions - We support our clients' critical networked operational missions by providing tailored, end-to-end, enterprise-wide information solutions and services for the design, development, integration, deployment, operations and management, sustainment, and security of our clients' infrastructure. Our operational, analytic, consultancy, and transformational services make effective use of leading-edge practices, standards, and innovations to enable and optimize the full lifecycle of the enterprise IT environment - improving the services, increasing the efficiency, and reducing the total cost and complexity of heterogeneous, networked, and geographically-dispersed operations. Our capabilities in network infrastructure design, deployment and management, data center design and management, cloud computing, virtualization, application development and hosting, mobility solutions, and advanced service desk management provide secure and efficient operational environments for our customers.

Knowledge management solutions - We deliver a full spectrum of information solutions and services that automate the knowledge management lifecycle, from data capture through information analysis and understanding. We provide commercially-based products, custom solutions development, and operations and maintenance services that facilitate information access and sharing, foster innovation and learning, locate and leverage expertise, manage intellectual capital and assets, and help navigate from data to decision. Our information technology solutions are complemented by a suite of analytical expertise support offerings for our clients in the homeland security and intelligence communities, Department of Defense (DoD), Department of Justice (DoJ) and other federal agencies.

Business systems solutions - We provide the full range of information solutions and services required to plan, manage, architect, develop, deploy, and sustain the complex, integrated system solutions that the DoD and federal civilian agencies need to accomplish their transformation goals and achieve ever-increasing efficiency and effectiveness in their mission functions and business operations. Working in the domains of procurement, financial management, human capital


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management, and logistics and supply chain management, we have implemented enterprise-level system solutions for over 100 federal agencies. From complex commercial-off-the-shelf enterprise resource planning integrations to custom service-oriented architecture-based solutions that address unique federal mission support needs, we bring disciplined industry best practices, advanced technology, and a deep understanding of federal processes and their unique compliance constraints.

Logistics and material readiness solutions and services - We offer a full suite of solutions and service offerings that plan for, implement, and control the efficient, effective, and secure flow and storage of goods, services, and information in support of U.S. government agencies. We develop and manage logistics information systems, specialized simulation and modeling toolsets, and provide logistics engineering services. Our operational capabilities span the supply chain, including advanced logistics planning, demand forecasting, total asset visibility (including the use of Radio Frequency Identification technology), and life cycle support for weapons systems. Our logistics services are a critical enabler in support of defense readiness and combat sustainability objectives.

ISR solutions and services - We provide a full-spectrum of Intelligence, Surveillance, and Reconnaissance (ISR) solutions and services in support of national defense, intelligence and homeland security missions. Our ISR solutions and services include systems engineering and integration, agile development and deployment and end-to-end life cycle planning and support services that enable complex, leading edge mission capabilities. We provide rapid-response services in support of military missions in a coordinated and controlled operational setting. We integrate sensors, intelligence information systems, data fusion and dissemination systems, and mission applications that connect with our clients' fixed and mobile networked sites.

Command, Control, Communications and Computer (C4) solutions and services - We provide a broad range of leading edge information solutions and services that enable our clients to effectively and efficiently conduct mission operations and achieve information dominance. Our C4 offerings support our nation's military, homeland security, law enforcement, and emergency responders. We provide leading-edge Communications solutions that ensure critical information is rapidly and securely provided to the user. Our broad-based solutions offer Command, Control, Communications and Computer capabilities for soldier systems, mobile platforms, fixed facilities, and the enterprise, aiding users in understanding situational awareness, collaboratively planning, fusing information, making essential decisions and conducting training.

Cyberspace solutions - Our information solutions and services support the full lifecycle of preparing for, protecting against, detecting, reacting to, and actively responding to the full range of cyber threats. We achieve this through comprehensive, consistently managed, risk-based, and cost-effective capabilities, controls, and measures to protect information, systems, and networks operated by the U.S. government. We proactively support information operations and the operational use and availability/reliability of information.

Integrated security solutions - Our integrated security solutions and services support the U.S. and our international partners and allies in mitigating and countering the effects of natural, technological, and man-made hazards which are unrestrained by political and geographical boundaries, elements of national power, and international law. Our security services and technical solutions assist clients in the development, integration, and sustainment of graduated, flexible capabilities that anticipate and address asymmetric and irregular threats and vulnerabilities. Sought by domestic and international clients for our ability to provide customer value often restricted by silo-centric systems, our services address security policy; definition and capacity building; risk management; critical infrastructure protection; consequence management; critical event and incident preparedness; and training.

Geospatial solutions - We support the collection, processing, exploitation, analysis and dissemination of geospatial information relating to Defense, Intelligence, Homeland Security, and commercial applications. We use imagery and other collected data from government and commercial sources to produce hardcopy and digital maps, and other value added enhanced imagery and 3-dimensional products. Our geospatial solutions employ advanced analytical training, focused tools and applications development, and feature database extraction and maintenance. We provide time-proven expertise in multi-source data analysis and conflation, diverse sensor exploitation, intelligence analysis, and geographic information system (GIS) integration and deployment. We offer mobile solutions and secure web-based data accessibility and subscription services on an enterprise scale.

Investigation and litigation support solutions - We support government investigations and litigations in support of the DoJ with full service technology solutions. Using comprehensive training to carefully honed processes and procedures, we help attorneys acquire, organize, develop, control, and present evidence throughout the course of litigations, from pre-filing investigation, through complaint, discovery, and trial, to post-trial briefs, review, and appeals. Our portfolio of legal-support offerings includes: cloud hosting (on-line, evidentiary information management to rapidly enable data storage and accessibility); e-discovery consulting and support; data forensic extraction and analysis; document/data capture and processing; database development, population, and maintenance; pre-trial, trial and post-trial support; case management; training; claims management; and Freedom of Information Act (FOIA) support.


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Healthcare IT solutions - We meet the steadily accelerating demand for new healthcare strategies and technology required by government, industry, and patients. We assist the federal medical community in focusing on the patient, ensuring that systems and processes at the backbone of health organizations are running efficiently. We provide both functional subject matter expertise and health IT services to the Department of Veterans Affairs, the Department of Defense Military Health System, and the Department of Health and Human Services. Our capabilities include medical logistics and facility management, design, development and integration of healthcare information technology systems, including virtual electronic health records, information assurance, and security of personally identifiable information.

Identity management solutions - We provide solutions that enable our clients to manage, detect, and protect identities of individuals, entities, organizations, groups, nation states, networks, and associations in both the physical and digital worlds. Our solutions capitalize on our vast experience supporting the Intelligence Community, war fighters, and law enforcement in areas such as biometric collection and identification, human factors analysis, forensics, large-volume identity-related data exploitation and assessment, information management, and managed security services.

Mobility solutions and services - Our mobility solutions and services provide end-to-end capability for the full lifecycle of mobility enablement, from development through sustainment. This includes a layered set of offerings within a framework that addresses back end provisioning through the cloud infrastructure through mission specific applications. We provide unique hardware and software mobility based solutions for the DoD, U.S. civilian agencies and the Intelligence Community. Our capabilities include end-to-end mobility architecture and design, cloud hosting, cloud provisioning and support, secure wireless transport, secure mobile device configuration and management of leading commercial smartphones and tablets, virtual desktops, and other mobile applications development, provisioning, delivery, and security vetting.

Program management and system engineering and technical assistance (SETA) services - We support U.S. government Program Executive Offices and Program Management Offices via subject matter experts and comprehensive technical management processes that optimize program resources. This includes translating operational requirements into configured systems, integrating technical inputs, characterizing and managing risk, transitioning technology into program efforts, and verifying that designs meet operational needs, through the application of internationally recognized and accepted standards. Additionally, we provide SETA and advisory and assistance services that include contract and acquisition management, operations support, architecture and system engineering services, project and portfolio management, strategy and policy support, and complex trade analyses.

We carefully follow federal budget, legislative and contracting trends and activities and continually evolve our strategies to take these into consideration. The government is currently operating under a continuing resolution, scheduled to expire on March 31, 2013. If Congress and the Administration are unable to reach agreement to either change or delay sequestration, scheduled to take effect on January 2, 2013, reductions in both defense and civil agency expenditures will take place. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we may experience reduced funding on some of our programs, we do not expect the cancellation of any of our major programs.

We also face some uncertainties due to the current general business environment and we continue to see a number of protests of major contract awards and delays in government procurement activities. In addition, many of our federal government contracts require us to employ personnel with security clearances, specific levels of education and specific past work experience. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain and competition for skilled personnel in the information technology services industry is intense. In addition, a shift of expenditures away from programs that we support could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty, or to decide not to exercise options to renew contracts. Additional factors that could affect our federal government contracting business include an increase in set-asides for small businesses and budgetary priorities limiting or delaying federal government spending in general. In addition, future gains or losses on assets invested in corporate-owned life insurance policies could cause fluctuations in our income tax expense.


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Results of Operations for the Three Months Ended September 30, 2012 and 2011

Revenue. The table below sets forth revenue by customer type with related
percentages of total revenue for the three months ended September 30, 2012 and
2011, respectively:



                                                Three Months Ended September 30,                      Change
(dollars in thousands)                          2012                       2011                   $             %
Department of Defense (DoD)             $ 705,061        75.7 %    $ 733,267        79.3 %    $ (28,206 )       (3.8 )%
Federal civilian agencies                 174,654        18.7        134,009        14.5         40,645         30.3
Commercial and other                       48,201         5.2         52,982         5.7         (4,781 )       (9.0 )
State and local governments                 3,320         0.4          4,137         0.5           (817 )      (19.7 )

Total                                   $ 931,236       100.0 %    $ 924,395       100.0 %    $   6,841          0.7 %

For the three months ended September 30, 2012, total revenue increased by 0.7 percent, or $6.8 million, over the same period a year ago. This increase in revenue resulted primarily from acquired revenue. Revenue generated from the date a business is acquired through the first anniversary of that date is considered acquired revenue. Our acquired revenue in the three months ended September 30, 2012 was $36.5 million. Revenue from existing operations decreased by 3.2 percent, or $29.7 million, for the three months ended September 30, 2012.

DoD revenue decreased 3.8 percent, or $28.2 million, for the three months ended September 30, 2012, as compared to the same period a year ago. The decline in DoD revenue is largely attributable to our reduced activities in Southwest Asia. DoD revenue includes services provided to the U.S. Army, our largest customer, where our services focus on supporting readiness, tactical military intelligence, and communications systems. DoD revenue also includes work with the U.S. Navy and other DoD agencies across all of our major service offerings.

Revenue from federal civilian agencies increased 30.3 percent, or $40.6 million, for the three months ended September 30, 2012, as compared to the same period a year ago. The aforementioned acquisitions accounted for 58.6 percent of this total growth, contributing $23.8 million.

Commercial and other revenue decreased 9.0 percent, or $4.8 million, during the three months ended September 30, 2012, as compared to the same period a year ago. Commercial revenue is derived from both international and domestic operations. International operations accounted for 68.4 percent, or $33.0 million, of total commercial revenue, while domestic operations accounted for 31.6 percent, or $15.2 million. Acquisitions accounted for $9.2 million of growth which was offset by a $12.0 million single product sale in the three month period ended September 30, 2011.

Revenue from state and local governments decreased by 19.7 percent, or $0.8 million, for the three months ended September 30, 2012, as compared to the same period a year ago. Revenue from state and local governments represented less than one percent of our total revenue for both the three months ended September 30, 2012 and 2011.


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Income from Operations. The following table sets forth the relative percentage that certain items of expense and earnings bore to revenue for the three months ended September 30, 2012 and 2011, respectively.

                                                                         Percentage of
                                            Dollar Amount                   Revenue
                                         Three Months  Ended          Three Months Ended
                                            September 30,                September 30,                   Change
(dollars in thousands)                   2012           2011          2012           2011            $             %
Revenue                                $ 931,236      $ 924,395         100.0 %       100.0 %    $   6,841          0.7 %

Costs of revenue
Direct costs                             645,637        634,931          69.3          68.7         10,706          1.7
Indirect costs and selling expenses      207,623        200,282          22.3          21.7          7,341          3.7
Depreciation and amortization             13,239         13,528           1.4           1.4           (289 )       (2.1 )

Total costs of revenue                   866,499        848,741          93.0          91.8         17,758          2.1

Income from operations                    64,737         75,654           7.0           8.2        (10,917 )      (14.4 )
Interest expense and other, net            6,782          5,600           0.8           0.6          1,182         21.1

Income before income taxes                57,955         70,054           6.2           7.6        (12,099 )      (17.3 )
Income taxes                              21,965         27,941           2.4           3.0         (5,976 )      (21.4 )

Net income including portion
attributable to noncontrolling
interest in earnings of joint
venture                                   35,990         42,113           3.8           4.6         (6,123 )      (14.5 )
Noncontrolling interest in earnings
of joint venture                            (282 )           27            -             -            (309 )         -

Net income attributable to CACI        $  35,708      $  42,140           3.8 %         4.6 %    $  (6,432 )      (15.3 )%

Income from operations for the three months ended September 30, 2012 was $64.7 million. This was a decrease of $10.9 million, or 14.4 percent, from income from operations of $75.7 million for the three months ended September 30, 2011. Our operating margin of 7.0 percent for the period ended September 30, 2012 decreased from 8.2 percent during the period ended September 30, 2011. During the quarter ended September 30, 2011, we benefited from a single commercial product sale that generated $10.1 million in operating income.

As a percentage of revenue, direct costs were 69.3 percent and 68.7 percent for the three months ended September 30, 2012 and 2011, respectively. Direct costs include direct labor and other direct costs (ODCs), which include, among other costs, subcontracted labor and material purchases. ODCs are common in our industry and may vary from period to period. The single largest component of direct costs, direct labor, was $252.0 million and $236.8 million for the three months ended September 30, 2012 and 2011, respectively. This increase in direct labor was attributable to both acquisitions and organic growth. ODCs were $393.6 million and $398.2 million during the three months ended September 30, 2012 and 2011, respectively. This decrease was primarily driven by lower subcontractor labor during the three months ended September 30, 2012.

Indirect costs and selling expenses include fringe benefits (attributable to both direct and indirect labor), marketing and bid and proposal costs, indirect labor, and other discretionary expenses. As a percentage of revenue, indirect costs and selling expenses were 22.3 percent and 21.7 percent for the three months ended September 30, 2012 and 2011, respectively. Total stock compensation expense, a component of indirect costs, was $2.4 million and $3.2 million for the three months ended September 30, 2012 and 2011, respectively.

Depreciation and amortization expense was $13.2 million and $13.5 million for the three months ended September 30, 2012 and 2011, respectively. The decrease of $0.3 million, or 2.1 percent, was primarily attributable to decreased amortization of intangible assets associated with prior year acquisitions, offset by increases in depreciation and amortization expense associated with our growing infrastructure.

Interest expense and other, net increased $1.2 million, or 21.1 percent, during the three months ended September 30, 2012 as compared to the same period a year ago. The increase was primarily attributable to an increase in outstanding debt.

The effective tax rate was 38.1 percent and 39.9 percent during the three months ended September 30, 2012 and 2011, respectively. The tax rate reported during the first quarter of both FY2013 and FY2012 was favorably impacted by non-taxable gains on assets invested in corporate owned life insurance (COLI) policies to date. If gains or losses on these investments throughout the rest of the current fiscal year vary from our estimates, our effective tax rate will fluctuate in future quarters of the year ending June 30, 2013.


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Liquidity and Capital Resources

Historically, our positive cash flow from operations and our available credit facilities have provided adequate liquidity and working capital to fund our operational needs.

As of September 30, 2012, our Credit Facility was a $750.0 million credit facility, which included a $600.0 million revolving credit facility (the Revolving Facility), and a $150.0 million term loan (the Term Loan).

The Revolving Facility is a secured facility that permits continuously renewable borrowings and has subfacilities of $50.0 million for same-day swing line borrowings and $25.0 million for stand-by letters of credit. As of September 30, 2012, we had $263.0 million outstanding under the Revolving Facility, no borrowings on the swing line and no outstanding letters of credit. On October 26, 2012, we entered into a Lender Joinder and Increase Agreement (the Agreement) pursuant to which we exercised our right to increase the Revolving Facility by $150.0 million, bringing the total available under the Revolving Facility to $750.0 million. All other terms of the Credit Facility remained the same. The Revolving Facility matures on November 18, 2016.

The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of $1.9 million through September 30, 2015 and $3.8 million through September 30, 2016, with the balance due in full on November 18, 2016. As of September 30, 2012, $136.9 million was outstanding under the Term Loan.

Subsequent to the October 26, 2012 Agreement, at any time and so long as no default has occurred, we have the right to increase the Term Loan or Revolving Facility in an aggregate principal amount of up to $150.0 million with applicable lender approvals.

The interest rates applicable to loans under the Credit Facility are floating interest rates that, at our option, equal a base rate or a Eurodollar rate plus, in each case, an applicable margin based upon our consolidated total leverage ratio.

The Credit Facility requires us to comply with certain financial covenants, . . .

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