CACI International Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017; filed August 21, 2017. Although the request metadata says “2016 Q4,” this filing is an annual report for FY2017 and includes unaudited FY2017 fourth-quarter results.
Business context
CACI provides information technology solutions and services, primarily to U.S. government customers, across defense, intelligence, civilian, cyber, enterprise IT, logistics and other markets. It reported approximately 18,600 employees. U.S. government contracts generated 93.9% of FY2017 revenue, including 65.0% from the Department of Defense (DoD). The NSS acquisition completed in February 2016 materially expanded the domestic business.
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $4.355 billion | $3.744 billion | +16.3% |
| Operating income | $297.3 million | $264.8 million | +12.3% |
| Operating margin | 6.8% | 7.1% | Down 0.3 percentage points |
| Net income attributable to CACI | $163.7 million | $142.8 million | +14.6% |
| Diluted EPS | $6.53 | $5.76 | +13.4% |
| Cash flow from operations | $281.3 million | $242.6 million | +16.0% |
- Revenue growth was primarily acquisition-driven; excluding acquired revenue, organic revenue declined 0.2% year over year.
- Direct costs rose to 67.4% of revenue from 66.4%, while indirect costs and selling expenses declined to 24.1% from 24.8%. Total costs of revenue were 93.2% of revenue versus 92.9%.
- FY2017 fourth-quarter revenue was $1.137 billion, operating income $80.1 million, net income attributable to CACI $44.2 million and diluted EPS $1.76.
- Revenue mix by customer: DoD $2.829 billion (65.0%); federal civilian agencies $1.259 billion (28.9%); commercial and other $266.1 million (6.1%).
- Revenue by contract type: cost-reimbursable 48.9%, fixed-price 32.3%, and time-and-materials 18.8%.
Liquidity, debt and capital
- Cash and cash equivalents were $65.5 million at June 30, 2017, versus $49.1 million a year earlier. Working capital was $353.2 million, compared with $356.7 million.
- Principal debt under the credit facility was $1.244 billion: $978.9 million term loans and $265.0 million revolving borrowings. Net of cash, this is approximately $1.178 billion. The facility matures June 1, 2020; CACI reported compliance with its financial covenants.
- Operating cash flow was $281.3 million; capital expenditures were $43.3 million. Investing activities used $24.8 million, while financing activities used $240.0 million, including net credit-facility repayments of $229.0 million.
- Days sales outstanding improved to 59 from 62. CACI said internally generated funds, available borrowings and cash should cover operating needs, customary capital expenditures and debt service over the next 12 months.
- Management had $900 million of floating-to-fixed interest-rate swaps; a 1 percentage point rate move was estimated to change annual interest expense by approximately $5.4 million. No cash dividend was paid, and none was planned at that time.
Changes, outlook and notable items
- FY2017 revenue increased substantially, but the company said NSS accounted for primarily all of the $390.0 million DoD revenue increase. Federal civilian revenue excluding NSS rose 1.0%; organic revenue overall was down 0.2%.
- Backlog was $11.2 billion, including $1.9 billion funded. CACI expected most funded backlog at year-end to generate revenue in FY2018, while cautioning that backlog may not convert to revenue.
- The filing provides no specific numerical FY2018 revenue or earnings guidance. Management expected constrained federal spending and sequestration-related effects to continue into government FY2018; it cited potential contract delays, program disruption and terminations.
- Adoption of the new revenue-recognition standard was planned for July 1, 2018. Management expected changes to the timing of recognition for some award/incentive-fee and fixed-price contracts; the cumulative equity adjustment was still being quantified.
- Goodwill was $2.577 billion, approximately two-thirds of total assets. The annual impairment assessment found no impairment and management said reporting units were not at near-term risk, but future estimates and market conditions could change that assessment.
- Material litigation includes the Abu Ghraib-related Al Shimari matter, which remained active after appellate remand, and the related Abbass action. CACI said it was vigorously defending the cases and believed them without merit. Management stated that other legal matters were not expected to materially affect operations or liquidity.
- Government cost audits remained ongoing, including audits of CACI and acquired NSS periods. Management said reserves were adequate and did not expect audit adjustments to have a material effect; a separate investigation-related matter had an accrued estimated range of $0 to $3.9 million.
Most important facts for investors to verify
- How much of subsequent revenue growth and earnings came from acquisitions versus organic performance, given FY2017 organic revenue declined 0.2%.
- Conversion and funding of the $11.2 billion backlog, particularly the $1.9 billion funded portion, and the impact of federal budgets, continuing resolutions and sequestration.
- Debt repayment capacity, covenant headroom and refinancing plans ahead of the June 2020 credit-facility maturity.
- Whether margins stabilize after the FY2017 operating-margin decline, and how fixed-price performance and contract mix affect profitability.
- Developments in the Al Shimari and Abbass litigation, government contract audits, and any related financial exposure beyond recorded estimates.
- The quantified financial and equity impact of adopting the new revenue-recognition standard in FY2019.