SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 2003
Commission File Number 0-8401
CACI International Inc
(Exact name of registrant as
specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
54-1345888
(I.R.S. Employer Identification No.)
1100 North Glebe Road, Arlington, VA 22201
(Address of principal executive offices)
(703) 841-7800
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
CACI International Inc Common Stock, $0.10 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of December 31, 2003: CACI International Inc Common Stock, $0.10 par value, 29,121,218 shares.
1
CACI INTERNATIONAL INC AND SUBSIDIARIES
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
2
PART 1
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share data)
Three Months Ended
December 31
Revenue
Costs and expenses
Direct costs
Indirect costs and selling expenses
Depreciation and amortization
Total operating expenses
Operating income
Interest income
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares and equivalent shares outstanding
See notes to condensed consolidated financial statements (unaudited)
3
4
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Cash and equivalents
Marketable securities
Accounts receivable, net:
Billed
Unbilled
Total accounts receivable, net
Deferred income taxes
Prepaid expenses and other
Total current assets
Property and equipment, net
Accounts receivable, long term, net
Goodwill
Other assets
Intangible assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable
Accounts payable
Accrued compensation and benefits
Other accrued expenses
Income taxes payable
Total current liabilities
Notes payable, long-term
Deferred rent expenses
Other long-term obligations
Shareholders’ equity
Common stock - $.10 par value, 80,000 shares authorized, 36,924 and 36,509 shares issued, respectively
Capital in excess of par
Retained earnings
Accumulated comprehensive income
Treasury stock, at cost (7,803 and 7,774 shares respectively)
Total shareholders’ equity
Total liabilities & shareholders’ equity
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of net income to net cash (used in) provided by operating activities
Benefit for deferred income taxes
Changes in operating assets and liabilities, net of effect of acquisitions
Increase in accounts receivable, net
Increase in prepaid expenses and other assets
Decrease in accounts payable and accrued expenses
Decrease in accrued compensation and benefits
Increase in other long-term obligations
Increase in deferred rent expense
Decrease in income taxes payable
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Cash paid for purchase of businesses
Purchase of marketable securities
Proceeds from sale of marketable securities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from employee stock purchase plans
Proceeds from exercise of stock options
Purchase of common stock for treasury
Net cash provided by financing activities
Effect of changes in currency rates on cash and equivalents
Net decrease in cash and equivalents
Cash and equivalents, beginning of period
Cash and equivalents, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for income taxes, net
Cash paid for interest during the period
See notes to condensed consolidated financial statements (unaudited).
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Currency translation adjustment
Change in fair value of interest rate swap
Comprehensive income
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments and reclassifications (all of which are of a normal, recurring nature) that are necessary for fair presentation for the periods presented. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the audited condensed consolidated financial statements and the notes thereto included in the Company’s latest annual report to the Securities and Exchange Commission on Form 10-K for the year ended June 30, 2003.
Certain reclassifications have been made to the prior period’s financial statements to conform to the current presentation.
The Company considers all investments with a maturity of three months or less to be cash equivalents. The Company classifies investments with a maturity of more than three months but less than twelve months as short-term marketable securities. To date, marketable securities have been classified as available-for-sale and have been carried at fair value with any unrealized gains and losses reported as a separate component of comprehensive income. The fair value of marketable securities was determined based on quoted market prices for those instruments at the reporting date. The cost of securities sold is based on specific identification. Premiums and discounts are amortized over the period from acquisition to maturity and are included in investment income, along with interest and dividends. To date, there have been no realized or unrealized gains or losses. The Company’s cash and equivalents and short-term marketable securities at December 31, 2003, and June 30, 2003, consisted of the following (cost approximated fair value):
Certificate of Deposit
Money Market Funds
Stock
Municipal Securities
Cash
Total
8
Total accounts receivable are net of allowances for doubtful accounts of approximately $3,455,000 and $3,390,000 at December 31, 2003 and June 30, 2003, respectively. Accounts receivable are classified as follows;
Billed receivables
Billable receivables at end of period
Total billed receivables
Unbilled pending receipt of contractual documents authorizing billing
Unbilled retainages and fee withholdings expected to be billed beyond the next 12 months
Total unbilled receivables
Total accounts receivable
The gross carrying amounts and accumulated amortization of the Company’s acquired intangible assets as of December 31, 2003 and June 30, 2003, were as follows:
Customer contracts and related customer relationships
Covenants not to compete
Other
Intangible assets are being amortized over periods ranging from 12 to 120 months. Amortization expense for the six months ended December 31, 2003 and fiscal year ended June 30, 2003 was approximately $2.9 million and $2.8 million, respectively. Future amortization expense related to intangible assets is expected to be as follows:
Six months ended June 30, 2004
Fiscal year ended June 30, 2005
Fiscal year ended June 30, 2006
Fiscal year ended June 30, 2007
Fiscal year ended June 30, 2008
9
The Company is involved in various lawsuits, claims, and administrative proceedings arising in the normal course of business. Management is of the opinion that any liability or loss associated with such matters will not have a material adverse effect on the Company’s operations and liquidity.
The Company has entered into a subcontract agreement with a vendor to purchase a number of directional finding units to be ordered in connection with the performance of one of the Company’s contracts over a four year period ending in fiscal year 2006. The subject subcontract provides for unit price decreases as the number of units purchased under the subcontract increases. Based on the present status of contract performance, management believes that the Company will purchase a sufficient number of units over the subcontract term to allow it to realize the lowest unit cost available. Based upon that expectation, unit costs incurred to date have been recognized in “Other Direct Costs” at such lowest unit cost. Based on the number of units ordered to date and assuming that no other units are ordered under the subcontract, the Company’s maximum unit price exposure (the difference between the unit price that would be applicable to the number of units actually purchased as compared to the discount price at which the Company has recognized the purchases to date) is estimated to be approximately $1,720,000, which has not been recorded in the Company’s financial statements as of December 31, 2003.
The Company is currently under examination by the State of Indiana. The examination is for the period beginning June 30, 1991 and ending June 30, 2000 and focuses on whether the Company established a taxable presence in Indiana during the examination period. Management of the Company believes that it has not established a taxable presence and will contest the State’s conclusion vigorously. While the outcome of the examination is uncertain, the Company estimates the range of exposure to be between $0 and $1.5 million. The Company does not believe the outcome will have a material adverse effect on its financial statements.
The Company currently accounts for employee stock-based compensation transactions using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, as amended by Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation. No compensation cost was recognized in connection with these transactions in the three and six months ended December 31, 2003 and 2002. If the Company’s employee stock-based compensation transactions had been accounted for based on their fair value, as determined under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the pro forma earnings would have been as follows:
(amounts in thousands, except per share amounts)
Reported net income
Stock-based compensation costs that would have been included in the determination of reported net income, if the fair value method was applied to all awards, (net of tax)
Pro forma net income
Basic earnings per share:
Reported earnings per share
Compensation costs (net of tax)
Pro forma earnings per share
Diluted earnings per share:
10
The weighted average fair value of options granted during the six months ended December 31, 2003 and 2002 were $11.76 and $20.33, respectively. The fair value of each option granted is estimated on the grant date using the Black-Scholes option pricing model. These pro forma results may not be indicative of future results for the full fiscal year due to the potential grants vesting and other factors. The following significant assumptions were made in estimating fair value:
Risk-free interest rates
Expected life in years
Expected volatility
Expected dividends
The Company adopted the 2002 Employee Stock Purchase Plan (“ESPP”), Management Stock Purchase Plan (“MSPP”), and Director Stock Purchase Plan (“DSPP”) at its annual shareholder meeting on November 21, 2002 and implemented these plans beginning July 1, 2003 (the start of the Company’s fiscal year 2004). There are 500,000, 300,000, and 75,000 shares authorized for grants under the ESPP, MSPP and DSPP, respectively. The aforementioned plans provide employees, management, and directors with an opportunity to acquire or increase an ownership interest in the Company through the purchase of shares of the Company’s common stock at a discounted rate (except for the DSPP which offers no discount), subject to certain terms and conditions.
The ESPP is implemented through one offering during each quarter of each fiscal year, beginning effective July 1, 2003. The ESPP allows the Company’s full-time employees to purchase shares of common stock at 85% of the fair market value of a share of common stock on the first day or the last day of the offering period, whichever is lower. The maximum number of shares that an eligible employee may purchase during any offering period is equal to two times an amount determined as follows: 20% of such employee’s compensation over the offering period divided by 85% of the fair market value of a share of common stock on the first day of the offering period. As the ESPP is a qualified plan under Section 423 of the Internal Revenue Code and the Company follows APB Opinion No. 25, no compensation expense has been recorded in connection with the ESPP. The Company follows the disclosure provisions of SFAS No. 123 in accounting for the ESPP. As of December 31, 2003, participants have purchased approximately 18,000 shares under the ESPP.
The MSPP provides senior executives with stock holding requirements a mechanism to acquire Restricted Stock Units (“RSUs”) in lieu of up to 30% of their annual bonus. The RSUs are awarded under the MSPP at 85% of the market price of the Company’s common stock on the date of the award and vest three years from the date of the award, upon a change of control of the Company or the participant’s death or permanent disability. Vested RSUs will be settled in shares of common stock. The Company accounts for MSPP transactions in accordance with APB Opinion No. 25. As of December 31, 2003, there have been approximately 29,000 RSUs issued under the MSPP.
The DSPP provides an opportunity for Non-Employee Directors to acquire an equity interest in the Company. The DSPP allows directors to elect to receive RSUs, which vest three years from the date of the award, upon a change of control of the Company, or the participant’s death or permanent disability, at the market price of the Company’s common stock on the date of the award in lieu of up to 50% of their annual retainer fees. Vested RSUs will be settled in shares of common stock. As of December 31 2003, there have been no RSUs issued under the DSPP.
11
SFAS No. 128, Earnings Per Share requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share includes the incremental effect of stock options calculated using the treasury stock method. The chart below shows the calculation of basic and diluted earnings per share for the three and six month periods ended December 31, 2003 and 2002, respectively:
December 31,
Six Months Ended
Weighted average number of shares outstanding during the period
Dilutive effect of stock options after application of treasury stock method
On October 16, 2003, the Company acquired all of the outstanding stock of C-CUBED Corporation (“C-CUBED”). C-CUBED provides specialized services in support of C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) initiatives to clients in the Department of Defense, federal, civilian, and intelligence communities. The total purchase price was $35.3 million, of which $33.3 million has been paid. The balance of $2.0 million is payable in the form of contingent consideration to the former shareholders of C-CUBED, regardless of their employment status with the Company, based on the achievement of level of effort goals on an existing contract for 18 months after the acquisition. The Company has placed this amount in escrow and recorded it as an Other Asset in the Consolidated Balance Sheet, and will record additional goodwill if the contingent consideration is earned. Approximately $19.0 million of the purchase price has been allocated to goodwill based primarily on the excess of the purchase price over the $7.9 million estimated fair value of the net assets acquired and the $6.4 million value assigned to identifiable intangible assets. The Company is amortizing substantially all such intangible assets over a period of two to five years. C-CUBED contributed revenue of $8.9 million for the period from October 16, 2003 to December 31, 2003.
The following unaudited proforma combined condensed statements of operations set forth the consolidated results of operations for the three and six months ended December 31, 2003 and 2002 as if the above described acquisition had occurred at the beginning of each period presented. The unaudited proforma information does not purport to be indicative of the results that actually would have occurred if the combination had been in effect for the three and six month periods ended December 31, 2003 and 2002.
12
The Company reports operating results and financial data in two segments: domestic operations and international operations. Domestic operations provide information technology and communications solutions through all four of the Company’s major service offerings: systems integration, managed network services, knowledge management and engineering services. Its customers are primarily U.S. federal agencies, however, it does serve a number of agencies of foreign governments and customers in the commercial and state and local sectors and places employees in locations around the world in support of these clients. International operations offer services to both commercial and government customers primarily through the Company’s systems integration line of business. The Company evaluates the performance of its operating segments based on income before income taxes. Summarized financial information concerning the Company’s reportable segments is shown in the following tables.
Quarter Ended December 31, 2003
Revenue from external customers
Pre-tax income
Quarter Ended December 31, 2002
Six Months Ended December 31, 2003
Six Months Ended December 31, 2002
On February 12, 2004, the Company announced it had signed a definitive purchase agreement to acquire all of the outstanding shares of CMS Information Services, Inc. (“CMS”). For the year ended December 31, 2003, CMS reported revenue of approximately $39 million. The Company expects to pay between $25 million and $30 million at the time of closing. The transaction is expected to close at the end of February 2004, upon successful completion of due diligence efforts.
13
In November 2002, the Emerging Issues Task Force (“EITF”) issued a final consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“Issue 00-21”). Issue 00-21 provides guidance on how and when to recognize revenues from arrangements requiring delivery of more that one product or service. It also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in an arrangement. To the extent that a deliverable is part of an arrangement that is within the scope of other existing higher-level authoritative literature, Issue 00-21 does not apply. Issue 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. To date, the adoption of EITF Issue 00-21 has not had a material effect on the Company’s results of operations and financial position.
14
Results of Operations For the Three Months Ended December 31, 2003 and 2002.
Revenue. The table below sets forth revenue by customer segment with related percentages of total revenue for the three months ended December 31, 2003 (FY2004) and 2002 (FY2003), respectively:
Second
Quarter Change
Department of Defense
Federal Civilian Agencies
Commercial
State & Local Governments
For the three months ended December 31, 2003, total revenue increased by 28.8%, or $58.8 million, over the same period a year ago. Increased revenue in the second quarter resulted from continued growth in the systems integration, engineering services, and knowledge management offerings of the Company’s domestic operations. This growth is a result of the Company’s strategic focus on national security and the reshaping of the way government agencies communicate, use and disseminate information, deliver services, and conduct business.
Acquisitions made during the last twelve months have accounted for $28.5 million of the growth in the quarter. On October 16, 2003, the Company acquired all of the outstanding stock of C-CUBED Corporation (“C-CUBED”). In the second quarter of FY2004, C-CUBED contributed $8.9 million of additional revenue. On May 15, 2003, the Company acquired substantially all of the assets of Premier Technology Group, Inc., (“PTG”) which contributed $16.4 million of FY2004 second quarter revenue. On February 28, 2003, the Company purchased all of the outstanding capital stock of Applied Technology Solutions of Northern Virginia, Inc., (“ATS”) which contributed $1.7 million of FY2004 second quarter revenue. On October 16, 2002, the Company acquired all of the outstanding capital stock of Acton Burnell, Inc. Acton Burnell contributed $1.5 million in incremental revenue for the second quarter of FY2004.
Department of Defense (“DoD”) revenue increased 32.3%, or $42.0 million, for the three months ended December 31, 2003 as compared to the same period a year ago. DoD revenue growth was primarily due to increased demand from customers such as strategic and tactical organizations in the military intelligence community, the U.S Army’s Communications-Electronics Command and its Intelligence and Security Command, the U.S. Navy’s Chief of Naval Aviation, and the Naval Surface Warfare Command. The aforementioned acquisitions contributed $23.5 million of this increased revenue in the current quarter, a portion of which was derived from the customer base described above.
Revenue from Federal Civilian Agencies increased 30.9%, or $17.7 million, for the three months ended December 31, 2003, as compared to the same period a year ago. Approximately 37.1% of Federal Civilian Agency revenue was derived from the Department of Justice (“DoJ”), for whom the Company provides litigation support services and maintains an automated debt management system. Revenue from DoJ was $27.9 million for the second quarter of FY2004, as compared to $21.6 million for the same period a year ago. The C-CUBED, PTG, ATS and Acton Burnell acquisitions contributed approximately $4.8 million of the total growth in Federal Civilian Agency revenue for the quarter. The remaining growth in Federal Civilian Agency revenue came primarily from higher volumes of work from customers in the national intelligence community.
Commercial revenue is derived from both international and domestic operations. The international operations accounted for $10.9 million, or 86.0%, of the total Commercial revenue, while the domestic operations accounted for $1.8 million, or 14.0%. Total Commercial revenue decreased by 11.1%, or $1.6 million, during the second quarter of FY2004, as compared to the same period a year ago. This decrease was primarily the result of winding down a contract with a customer in bankruptcy that ended during the quarter.
Revenue from State and Local Governments increased by $0.7 million, or 25.5%, to $3.6 million for the quarter ended December 31, 2003. Revenue from State and Local Governments represented approximately 1.4% of the total Company’s revenue for the three months ended December 31, 2003 and 2002, respectively.
15
Income from Operations. The following table sets forth the relative percentage that certain items of expense and earnings bore to revenue for the quarters ended December 31, 2003 and 2002, respectively.
Dollar Amount
Second Quarter
Percentage of
Costs and expenses:
Indirect costs & selling expenses
Depreciation & amortization
Income from operations
Earnings before income taxes
Net Income
Operating income increased 38.0%, or $6.4 million, for the three months ended December 31, 2003 as compared to the same period a year ago. This increase in operating income was driven primarily by a favorable mix of business and by operational cost efficiencies achieved primarily in connection with acquired operations. The growth of the Company’s operations, including recently acquired operations, continued to be driven by increased demand for mission-critical support for intelligence community customers, and knowledge management, engineering and logistics, and systems integration support for the Department of Defense and civilian agencies.
As a percentage of revenue, direct costs were 62.1% and 61.6% for the quarters ended December 31, 2003 and 2002, respectively. Direct costs include direct labor and “other direct costs” such as equipment purchases, subcontractor costs and travel expenses. Other direct costs are common in our industry; they are incurred in response to specific client tasks, and vary from period to period. The largest component of direct costs, direct labor, was $77.7 million and $61.0 million for the second quarters of FY2004 and FY2003, respectively. The increase in direct labor was attributable to the internal growth in federal government business, both in DoD and Federal Civilian Agencies, as well as from the FY2004 acquisition of C-CUBED and the FY2003 PTG, ATS and Acton Burnell acquisitions, all of which are described above. Other direct costs were $85.8 million and $64.9 million in FY2004 and FY2003, respectively. The increase in other direct costs was primarily the result of increased subcontractor and equipment costs within the systems integration and engineering services lines of business and the aforementioned acquisitions.
Indirect costs and selling expenses include fringe benefits, marketing and bid and proposal costs, indirect labor and other discretionary costs. Most of these are highly variable and have grown in dollar volume generally in proportion to the Company’s growth in revenue. As a percentage of revenue, indirect costs and selling expenses were 27.5% and 28.8% for the three months ended December 31, 2003 and 2002, respectively. This 1.3% decrease was primarily due to cost efficiencies achieved in connection with acquisitions.
Depreciation and amortization expense increased by $1.2 million, or 42.5%, in FY2004 as compared to FY2003. This increase was primarily due to amortization of approximately $23.8 million of intangible assets acquired over the last twelve months. Amortization of intangible assets increased approximately $1.6 million during the quarter as compared to a year ago.
Interest income decreased 56.4%, or $92,000, during the quarter ended December 31, 2003 as compared to the same period a year ago. This decrease is due to the Company’s portfolio of cash and equivalents and marketable securities decreasing from $120.8 million at December 31, 2002 to $41.3 million at December 31, 2003. This cash was used primarily for the Company’s acquisition activities and working capital.
The effective income tax rates for the second three months of FY2004 and FY2003 were 38.6% and 37.5%, respectively.
16
Results of Operations For the Six Months Ended December 31, 2003 and 2002.
Revenue. The table below sets forth revenues by customer with related percentages of total revenues for the six months ended December 31, 2003, (FY2004) and December 31, 2002 (FY2003), respectively:
For the six months ended December 31, 2003 the Company’s total revenue increased 27.2%, or $106.6 million, over the same period a year ago. Revenue growth was driven by increased demand from federal government customers across all lines of business.
Acquisitions made during the last twelve months accounted for $55.5 million of the revenue growth for the year. The acquisition of C-CUBED accounted for $8.9 million of the growth. The PTG acquisition accounted for $28.1 million of the growth. ATS accounted for $3.6 million of the growth and Acton Burnell accounted for $12.7 million of the growth. Finally, the August 15, 2002 acquisition of Condor (“Condor”) accounted for approximately $2.2 million of the growth during the year.
DoD revenue increased 29.3%, or $72.9 million, for the six months ended December 31, 2003 as compared to the same period a year ago. The aforementioned acquisitions accounted for over half of this growth, contributing $40.1 million in revenue. The Company also continued to experience increased demand for mission-critical support for intelligence community customers and for engineering and logistics and systems integration support for the DoD.
Revenue from Federal Civilian Agencies increased 30.8%, or $34.1 million, for the first six months of FY2004 as compared to the first six months of FY2003. Approximately 36.8% of Federal Civilian Agency revenue for the year was derived from DoJ, for whom the Company provides litigation support services and maintains an automated debt collection system. Revenue for DoJ was $53.3 million for the six months ended December 31, 2003 as compared to $44.0 million for the same period a year ago. The overall increase in Federal Civilian Agency revenue was generated from the previously mentioned acquisitions, and increased demands from the Company’s existing customers within the national intelligence area.
Commercial revenue is derived from both international and domestic operations. The international operations accounted for $20.2 million, or 82.0%, of the total Commercial revenue while the domestic operations accounted for $4.4 million, or 18.0%, of total revenue. Total Commercial revenue decreased by 8.1%, or $2.2 million, during the first six months of FY2004 as compared to the same period a year ago. International operations were down approximately $900,000 from a year ago, although up in the quarter while domestic operations were down approximately $1.3 million as a result of winding down a contract with a customer in bankruptcy, that ended during the quarter.
Revenue from state and local governments increased 29.3%, or $1.8 million, in FY2004 as compared to FY2003. Revenue from state and local governments represented 1.6% of the total Company’s revenue for the six months ended December 31, 2003 and 2002, respectively.
17
Income from Operations. The following table sets forth the relative percentage that certain items of expense and earnings bore to revenues for the six months ended December 31, 2003 and December 31, 2002, respectively.
Year to Date
Percentage ofRevenue
Interest (income) expense, net
Operating income for the first six months of FY2004 was $43.7 million, an increase of 38.9% over operating income of $31.5 million reported a year earlier. The higher operating income was driven primarily by operational cost efficiencies, cost synergies associated with acquisitions, and a favorable mix of business.
As a percentage of revenue, direct costs were 61.9% and 61.3% for the six months ended December 31, 2003 and 2002, respectively. Direct costs include direct labor and “other direct costs” such as equipment purchases, subcontractor costs and travel expenses. Other direct costs are common in our industry because they are incurred in response to specific client tasks and may vary from period to period. The largest component of direct costs, direct labor, was $147.3 million and $118.8 million for the six months ended December 31, 2003 and 2002, respectively. The increase in direct labor was attributable to the internal growth in our federal government business, both in DoD and Federal Civilian Agencies as well as from the C-CUBED, PTG, ATS, Acton Burnell and Condor acquisitions (the Company acquired the Government Solutions Division of Condor Technology Solutions, Inc. in August 2002). Other direct costs were $162.0 million and $121.8 million for the first six months of FY2004 and FY2003, respectively. The increase in other direct costs occurred primarily due to increased volume of tasking across most lines of business as well as the aforementioned acquisitions.
Indirect costs and selling expenses include fringe benefits, marketing and bid and proposal costs, indirect labor and other discretionary costs. Most of these are highly variable and have grown in dollar volume generally in proportion to the growth in revenue and increase in number of employees. As a percentage of revenue, indirect costs and selling expenses were 27.7% during the first six months of FY2004 as compared to 29.2% over the same period a year ago. This 1.5% decrease was primarily due to cost efficiencies achieved in connection with acquisitions.
Depreciation and amortization expense increased by $2.3 million, or 40.6%, in FY2004 as compared to FY2003. The increase was primarily due to amortization of approximately $23.8 million of intangible assets acquired over the last twelve months. Amortization of intangible assets increased $1.8 million for the six months ended December 31, 2003 as compared to the prior year.
Interest income decreased 12.9%, or $62,000, for the six months ended December 31, 2003 as compared to the same period a year ago. This decrease is due to the Company’s portfolio of cash and equivalents and marketable securities decreasing from $120.8 million at December 31, 2002 to $41.3 million at December 31, 2003. This cash was used primarily for the Company’s acquisition activities and to fund operations.
The effective income tax rate for the first six months of FY2004 and FY2003 were 38.3% and 37.5%, respectively.
18
Liquidity and Capital Resources
Historically, the Company’s positive cash flow from operations and available credit facilities have provided adequate liquidity and working capital to fully fund the Company’s operational needs. Since March 2002, the proceeds from the Company’s offering of approximately 4.9 million shares of additional common stock have been a principal source of liquidity and capital to fund business acquisitions. Cash and equivalents and marketable securities were $41.3 million and $89.0 million as of December 31, 2003 and June 30, 2003, respectively. Working capital was $198.3 million and $182.6 million as of December 31, 2003 and June 30, 2003, respectively. Operating activities used cash of $12.9 million and provided cash of $12.5 million for the six months ended December 31, 2003 and 2002, respectively. The Company’s working capital requirements increased significantly during the three months ended December 31, 2003 to support the start up of several new contracts and compensate for delays in receiving funding from our federal government clients. As a result, collections of receivables were slower than anticipated. This caused the Company’s days sales outstanding to increase from 77 days a year ago to 86 days at December 31, 2003. The Company expects its days sales outstanding to improve to between 75 and 77 days at June 30, 2004, generating approximately $25 million to $30 million of additional cash flow from operations. Cash flow from operations also was affected by the timing of vendor payments and tax payments.
The Company used $32.2 million and $53.4 million of cash in investing activities during the first six months of FY2004 and FY2003, respectively. The cash used in both years was primarily in support of the Company’s on-going business acquisition activities.
The Company generated cash from financing activities of $5.7 million during the first six months of FY2004 as compared to $3.1 million over the same period a year ago. In both years, such cash was generated primarily from proceeds from the exercise of stock options and employee stock transactions, partially offset in 2003 by the purchase of stock to meet the requirements of the Company’s stock plans as approved by the stockholders at the FY2003 Annual Meeting.
In anticipation of continuing its strategy of business acquisitions and in order to secure lower interest rates, on February 4, 2002, the Company executed a five year unsecured revolving line of credit. The agreement permits borrowings of up to $185 million with a sublimit of $75 million per year on amounts borrowed for acquisitions. The applicable interest rate is based on LIBOR plus a margin. In addition, the Company pays a fee on the unused portion of the facility. The margin rate and unused portion fee are determined quarterly based on leverage, net worth and fixed charge coverage ratios. In addition, the agreement has covenants that obligate the Company to operate within certain limits on those same ratios. The Company is currently in compliance with those covenants. The Company also maintains a 500,000 pounds sterling, unsecured line of credit in London, England, which expires in December 2004. As of December 31, 2003 the Company had no borrowings under either of these lines of credit.
The Company believes that the combination of internally generated funds, available bank borrowings and cash and cash equivalents on hand will provide the required liquidity and capital resources for the foreseeable future.
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As of December 31, 2003, the Company had investments in marketable securities valued at $5.8 million. Approximately $5.2 million of investments is held in a certificate of deposit that matures in August 2005. However, the Company has negotiated a one-time breakage clause that allows for redemption of principal plus accrued interest without any penalties. The remaining securities consisted of highly liquid investments that had maturities of less than 365 days at December 31, 2003. These investments are subject to interest rate risk and will decrease in value if market interest rates increase. Hypothetically, a 10% increase or decrease in market interest rates from the December 31, 2003 rates would not cause a material change in the value of these short-term investments. The Company does not expect the value of these investments to be affected to any significant degree by the effect of a sudden change in market interest rates. Declines in interest rates over time will, however, reduce our interest income. As of December 31, 2003, the Company did not have significant holdings in equity investments. Therefore, the Company did not have any material equity price risk.
Approximately 4.1% and 5.7% of the Company’s total revenues in the first six months of FY2004 and FY2003, respectively, were derived from our international operations, primarily in the United Kingdom. The Company’s practice in its international operations is to negotiate contracts in the same currency in which the predominant expenses are incurred, thereby mitigating the exposure to foreign currency exchange fluctuations. It is not possible to accomplish this in all cases; thus, there is some risk that profits will be affected by foreign currency exchange fluctuations. As of December 31, 2003, the Company had approximately $16.7 million in cash that is held in pounds sterling in the United Kingdom. This allows the Company to better utilize its cash resources on behalf of its foreign subsidiaries, thereby mitigating foreign currency conversion risks.
As of the end of the 90 day period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out this evaluation.
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PART II
OTHER INFORMATION
Appeal of CACI International Inc, ASBCA No.53058
Reference is made to Part II, Item 1, Legal Proceedings, in the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2003, for the most recently filed information concerning the appeal filed on September 27, 2000, with the Armed Services Board of Contract Appeals (“ASBCA”) challenging the Defense Information Systems Agency’s (“DISA”) denial of its claim for breach of contract damages. The Registrant’s appeal seeks damages arising from DISA’s breach of a license agreement pursuant to which the Department of Defense agreed to conduct all electronic data interchanges (which can be broadly understood to mean e-commerce) exclusively through certified value-added networks, such as the network maintained by Registrant’s wholly-owned subsidiary, CACI, INC.-FEDERAL, for the period from September 2, 1994 through April 22, 1998. By decision of March 22, 2001, in the companion case of GAP Instrument Corporation, ASBCA No.51658 (2001), the ASBCA held that the Government’s failure to conduct all electronic data interchanges exclusively through certified value-added networks constituted a breach of contract. As a result, unless the GAP Instrument decision is overturned on appeal, Registrant will pursue collection of its damages, which are substantial and which could have a material impact on the Company’s earnings.
Since the filing of Registrant’s report indicated above, the trial of the matter has been completed and a post-hearing briefing schedule set. The briefing will be completed by mid-April, with a decision likely before the end of calendar 2004.
None.
At the Company’s annual meeting on November 20, 2003, the stockholders elected Dr, J.P. London, Michael J. Bayer, Peter A. Derow, Richard L. Leatherwood, Barbara A. McNamara, Arthur L. Money, Dr. Warren R. Phillips, Charles P. Revoile, Richard P. Sullivan, John M. Toups, and Larry D. Welch to serve as directors of the Company for the next year and ratified the appointment of Ernst &Young LLP as independent auditors.
Forward Looking Statements
There are statements made herein which may 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 United Kingdom, (the UK economy is experiencing a downturn that affects the Registrant’s UK operations) including conditions that result from terrorist activities or war; changes in interest rates; currency fluctuations; failure to achieve contract awards in connection with recompetes 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, or in the event of a priority need for funds, such as homeland security, the war on terrorism or rebuilding Iraq; government contract procurement (such as bid
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protest, small business set asides, etc.) and termination risks; individual business decisions of our clients; the financial condition of our clients; paradigm shifts in technology; competitive factors such as pricing pressures and competition to hire and retain employees; our ability to complete and implement acquisitions appropriate to achievement of our strategic plans; material changes in laws or regulations applicable to our businesses, particularly legislation affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) competition for task orders under Government Wide Acquisition Contracts (“GWACS”) and/or schedule contracts with the General Services Administration; and (iv) expensing of stock options; our own ability to achieve the objectives of near term or long range business plans; and other risks described in the Company’s Securities and Exchange Commission filings.
Exhibits
Reports
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: February 13, 2004
/s/
Dr. J. P. London
Chairman of the Board, President
Chief Executive Officer and Director
(Principal Executive Officer)
Stephen L. Waechter
Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer)
James D. Kuhn
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
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