CACI International Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended December 31, 2020. Dollar amounts below are in millions unless stated otherwise. Comparisons are with the prior-year periods.
Business context
CACI provides expertise and technology to U.S. government and other customers, primarily in national security and government transformation. About 69% of quarterly revenue came from the Department of Defense and 27% from federal civilian agencies. The company acquired Ascent Vision Technologies (AVT), a provider of electro-optical/infrared, computer-vision and counter-UAS technologies, on August 11, 2020, for approximately $348.8 million.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,468.7 | +5.2% (+4.3% organic) | $2,928.2 | +6.1% (+5.2% organic) |
| Operating income | $141.5 | +28.5% | $276.0 | +31.2% |
| Operating margin | 9.6% | 7.9% prior year | 9.4% | 7.6% prior year |
| Net income | $106.5 | +34.5% | $200.1 | +36.0% |
| Diluted EPS | $4.18 | $3.11 prior year | $7.86 | $5.78 prior year |
Quarterly net margin was 7.2%, versus 5.7% a year earlier; six-month net margin was 6.8%, versus 5.3%. Management attributed improved cost-of-revenue margins to strong program performance, lower-than-estimated costs on certain fixed-price contracts, and a greater mix of technology revenue. Lower indirect expenses as a share of revenue and reduced interest expense also supported earnings. Depreciation and amortization increased, partly from acquired intangible assets.
- Revenue mix: Quarterly DoD revenue was $1,012.9 million (+2.3%); federal civilian revenue was $390.0 million (+14.0%). Six-month increases were 4.6% and 10.5%, respectively. Technology revenue grew faster than expertise revenue in the reported periods.
- Cash flow: Six-month operating cash flow was $382.3 million, up from $237.0 million. Management cited higher net income, $52.5 million of employer Social Security tax deferrals under the CARES Act, favorable collection timing and other working-capital changes. DSO was 43 days, versus 51 a year earlier.
- Investment and financing: Six-month investing cash outflow was $387.0 million, including $355.1 million for acquisitions; capital expenditures were $31.9 million. Financing cash outflow was $5.9 million, and cash declined $5.1 million to $102.1 million.
- Liquidity: Current assets were $995.7 million and current liabilities $772.8 million at December 31, 2020. The company said cash, operating cash generation, receivables sales and available credit should fund operations and obligations for at least the next 12 months.
- Debt: Debt principal was $1,426.1 million ($1,418.1 million net of unamortized discounts and issuance costs), compared with $1,413.6 million principal at June 30, 2020. The company had $605.0 million drawn on its $1.5 billion revolver and $821.1 million outstanding on its term loan. Its effective borrowing rate, including swaps, was 2.49%; $800 million of floating-rate debt was hedged. It was in compliance with financial covenants.
Material changes and operating outlook
- Total backlog reached $22.4 billion, up 10.4% from $20.3 billion a year earlier; funded backlog was $2.9 billion, up 2.8%. Quarterly contract awards were $2.1 billion. Remaining performance obligations were $6.5 billion, of which CACI expected to recognize approximately 90% as revenue over the next 12 months. Backlog is not guaranteed revenue and includes unexercised options.
- Quarterly and six-month pretax income included favorable estimate-at-completion (EAC) adjustments of $18.1 million and $25.9 million, respectively, compared with $17.2 million and $23.8 million in the prior-year periods. These contract-estimate adjustments are subject to change.
- The effective tax rate rose to 19.6% for the quarter and 22.1% for the six months, from 17.1% and 17.7%. Management cited lower excess stock-compensation tax benefits, partly offset by favorable COLI investment-related changes, and said FY2021’s rate may fluctuate with COLI investment results.
- Management described the federal budget environment as favorable for defense and national security spending, while noting uncertainty around appropriations and potential continuing resolutions, which can delay program starts and contract awards. The filing provides no numerical FY2021 revenue or earnings guidance.
- COVID-19 had not significantly affected liquidity, cash flows or capital resources to date, but social-distancing limits at classified facilities reduced billable hours on some programs. CARES Act support for eligible employees unable to access required facilities was extended through March 31, 2021.
- Risks include dependence on U.S. government contracts and appropriations, procurement delays and protests, contract performance and cost-estimate uncertainty, competition for cleared personnel, government audits, acquisition integration, interest-rate and currency movements, and pandemic-related disruption. CACI reported ongoing litigation related to Al Shimari and Abbass, said it was vigorously defending the matters, and did not expect normal-course proceedings and claims to materially affect operations or liquidity.
Important facts for investors to verify
- Whether revenue growth, especially federal civilian growth, and improved operating margins persist after the AVT acquisition and current favorable contract EAC adjustments.
- Conversion and funding of the $22.4 billion backlog and $6.5 billion remaining performance obligations, including the assumptions behind expected near-term recognition.
- Cash-flow quality and sustainability, given the contribution of CARES Act tax deferrals and collection timing; also monitor receivables-sale activity under the $200 million MARPA program.
- Acquisition integration, purchase-price allocation and resulting amortization; goodwill and intangible assets increased following AVT.
- Debt, covenant headroom, floating-rate exposure and the large 2024 maturity shown in the debt schedule.
- Developments in government appropriations, COVID-19 impacts, tax-rate variability and the cited legal proceedings.