CACI International Inc. — Form 10-Q Summary
Business context and period: This report covers the three months ended September 30, 2017, CACI’s fiscal 2018 first quarter. CACI provides technology and professional services, primarily to U.S. government customers; 94.0% of revenue came from U.S. government agencies, compared with 93.7% a year earlier.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $1,085.8 million | $1,073.3 million | +1.2% |
| Operating income / margin | $67.3 million / 6.2% | $69.7 million / 6.5% | Income down 3.4% |
| Income before taxes | $56.1 million | $57.2 million | Down 1.9% |
| Net income | $42.0 million | $36.7 million | +14.7% |
| Diluted EPS | $1.67 | $1.47 | +13.6% |
| Operating cash flow | $79.7 million | $57.8 million | +$21.9 million |
- Revenue growth reflected new business, partly offset by contract completions. Department of Defense revenue rose 3.2%; federal civilian revenue fell 2.3%, and commercial and other revenue fell 3.1%.
- Operating margin contracted as direct costs rose to 68.1% of revenue from 67.8%, and indirect costs rose to 24.1% from 24.0%. Management cited contract completions and investments in growth and efficiency initiatives; higher subcontract work and material purchases also increased direct costs.
- Net income benefited from a lower effective tax rate, 25.0% versus 35.9%. The filing attributes the decline in part to excess tax benefits from stock-based compensation and also cites COLI gains and the research and development tax credit. The lower rate, rather than improved operating income, was the principal contributor to higher net income.
- Cash from operations increased, primarily due to the timing of vendor payments and receivable collections. DSO was 64 days, versus 59 days a year earlier. Capital expenditures were $7.5 million; operating cash flow less capital expenditures was approximately $72.2 million.
- Cash and cash equivalents were $67.0 million at September 30, 2017. Current assets of $933.2 million and current liabilities of $609.2 million imply a current ratio of approximately 1.53.
- Principal debt was $1,180.4 million, down from $1,243.9 million at June 30, 2017; cash less principal debt was approximately $1,113.3 million. The $1,981.3 million secured credit facility included $965.4 million of term loans and $215.0 million drawn on the $850 million revolver. The effective borrowing rate, including swaps, was 3.26%. The company reported compliance with its financial covenants.
Changes, outlook, and risks
- Operating income and margin declined despite modest revenue growth, while net income and EPS rose due chiefly to the lower tax rate. The company also reduced principal debt during the quarter.
- Management said cash, internally generated funds, and available bank borrowings should cover operating needs, customary capital expenditures, debt service, and working capital for the next 12 months. The filing provides no specific revenue or earnings guidance.
- The federal government was operating under a continuing resolution through December 8, 2017. Management warned that funding gaps, shutdowns, sequestration, shifting budget priorities, procurement delays, and contract protests could affect current and future work. Competition for skilled and security-cleared staff is another risk.
- The company expects the new revenue recognition standard, planned for adoption July 1, 2018, to change the timing of revenue on some contracts; the cumulative equity adjustment was still being quantified. Adoption of the new lease standard was also under evaluation.
- Government cost audits and a government investigation remain matters to monitor. Management said it had accrued its best estimate for potential disallowances and estimated the likely outcome of the investigation within a range of zero to $3.9 million. Management did not expect the audits to materially affect financial position, results, or cash flows.
- In the Al Shimari litigation, the court heard CACI’s motion to dismiss and denied it pending a written decision; the related Abbass case remained stayed. Management said it was vigorously defending the cases and believed them to be without merit. Two U.K. acquisitions completed after quarter-end had stated purchase considerations of approximately $8.8 million and $6.6 million.
- The company wrote off $250.7 million of fully amortized intangible assets during the quarter; net intangible assets declined to $226.1 million from $235.4 million. The filing identifies the written-off assets as fully amortized.
Important facts for investors to verify
- Whether revenue growth and new awards can offset contract completions and declines in civilian and commercial work.
- Whether operating margin stabilizes after the quarter’s cost increases and growth-related investments.
- How much earnings growth persists if stock-compensation tax benefits, COLI gains, or other tax-rate benefits change.
- Receivables, DSO, and working-capital cash-flow movements, given the quarter-to-quarter timing effects.
- Debt repayment capacity, revolver availability, floating-rate exposure, and the substantial debt maturity scheduled for 2020.
- Federal funding developments, contract protests, government audit and investigation outcomes, and the pending litigation decision.
- The quantified effects of revenue-standard adoption and the integration and performance of the two post-quarter acquisitions.