CACI International Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended December 31, 2017. CACI provides government-focused IT and professional services; 93.7% of first-half revenue came from U.S. government contracts. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Revenue | $1,087.9 (+2.9%) | $1,057.5 | $2,173.7 (+2.0%) | $2,130.8 |
| Operating income | $88.3 (+10.0%) | $80.3 | $155.6 (+3.8%) | $149.9 |
| Operating margin | 8.1% | 7.6% | 7.2% | 7.0% |
| Net income | $142.8 | $42.4 | $184.8 | $79.1 |
| Diluted EPS | $5.66 | $1.69 | $7.33 | $3.16 |
First-half operating cash flow was $155.8 million, versus $135.4 million a year earlier; capital expenditures were $22.0 million, implying operating cash flow less capex of $133.7 million. Cash declined to $56.3 million from $65.5 million at June 30, 2017. DSO was 61 days, compared with 60 days at December 31, 2016.
At December 31, 2017, principal debt was $1,161.9 million ($1,151.8 million carrying value), including $80.9 million current; the effective interest rate was 3.36%. The company had $210.0 million drawn on its $850 million revolver and a $0.4 million letter of credit. It reported compliance with credit-facility covenants.
Changes and notable items
- Revenue growth reflected new business, partly offset by contract completions. First-half DoD revenue rose 4.2% to $1,434.3 million; federal civilian revenue fell 3.1% to $602.8 million; commercial and other revenue increased 3.4% to $136.6 million.
- Management attributed improved operating margin to lower indirect costs and higher-margin new work. First-half interest expense and other declined 10.5%, primarily due to lower debt balances.
- Reported net income benefited substantially from the Tax Cuts and Jobs Act: CACI recorded a provisional $94.8 million deferred-tax-liability remeasurement benefit, partly offset by $9.7 million of transition-tax expense. The net $92.3 million tax benefit increased diluted EPS by $3.66 for both the quarter and first half. Tax accounting remained provisional.
- CACI acquired three businesses during the quarter: a U.S. business for approximately $53.0 million and two U.K. businesses for approximately $9.1 million and $7.5 million. First-half cash paid for acquisitions was $45.6 million.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management expected the TCJA to favor future after-tax earnings, principally through the lower federal tax rate, but had not fully assessed its free-cash-flow effects. CACI planned to adopt the new revenue-recognition standard on July 1, 2018; it expected changes to the timing of recognition for some contracts, with the cumulative adjustment still being quantified.
Management cited continuing federal continuing resolutions, a recent shutdown, sequestration and debt-limit uncertainty, procurement delays and bid protests, contract funding and termination risk, and competition for cleared personnel. The company reported reduced funding on some programs but did not expect cancellation of a major program. Management believed available cash, internally generated funds, and bank borrowing capacity would meet requirements for the next 12 months.
Government contract costs remain subject to audit; management considered its reserves adequate and did not expect audit adjustments to be material. A government investigation concerning a contract remains ongoing; CACI recorded its current best estimate within an estimated liability range of $0–$3.9 million. The filing also describes the Al Shimari litigation and a related stayed case; CACI said it was defending them and believed them without merit. Management did not expect ordinary-course legal matters to materially affect operations or liquidity.
Key facts for investors to verify
- How much future reported earnings growth reflects operating performance versus the one-time, provisional TCJA tax benefit.
- Whether new contract awards can sustain growth amid federal funding uncertainty and offset contract completions and civilian-agency declines.
- Acquisition integration, final purchase-price allocations, and the contribution of acquired businesses to revenue and margins.
- Debt repayment and refinancing needs ahead of the June 1, 2020 credit-facility maturity, including exposure to floating rates despite $800 million of interest-rate swaps.
- Developments in government audits, the contract investigation, and the disclosed litigation; also the eventual impact of adopting the new revenue standard.