CACI International Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2016 (the second quarter of fiscal 2017). Unaudited results are compared with the corresponding prior-year periods. CACI provides government-focused IT, mission, intelligence, and professional services; 93.8% of revenue for the six months came from U.S. government agency contracts.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Quarter ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $1,057.5 million | $830.4 million | $2,130.8 million | $1,652.9 million |
| Income from operations | $80.3 million | $55.5 million | $149.9 million | $120.0 million |
| Operating margin | 7.6% | 6.7% | 7.0% | 7.3% |
| Net income | $42.4 million | $30.5 million | $79.1 million | $65.1 million |
| Diluted EPS | $1.69 | $1.23 | $3.16 | $2.63 |
| Interest expense and other, net | $12.3 million | $8.2 million | $24.8 million | $17.4 million |
For the six-month period, operating cash flow was $135.4 million, essentially unchanged from $135.6 million a year earlier. Capital expenditures were $21.8 million, compared with $7.6 million. Cash and cash equivalents were $72.7 million at December 31, 2016, versus $49.1 million at June 30, 2016. DSO was 60 days at both December 31, 2016 and December 31, 2015.
At December 31, 2016, principal debt was $1,374.3 million ($1,359.8 million net of unamortized issuance costs), comprising $1,019.3 million of term loans and $355.0 million of revolver borrowings. The $1,981.3 million credit facility matures June 1, 2020; $0.4 million of letters of credit was outstanding. The effective borrowing rate, including swaps and excluding financing-cost amortization, was 3.22%. CACI reported compliance with financial covenants. It had $850 million of revolving capacity, of which $355 million was drawn, subject to facility terms and availability.
Material changes and drivers
- Quarterly revenue rose 27.3% and six-month revenue rose 28.9%, primarily from the February 2016 acquisition of L-3 National Security Solutions (NSS) and other acquisitions. Excluding acquired revenue, organic revenue declined 4.7% for the quarter and 3.0% for the six months, mainly because of reduced customer requirements and government purchasing delays.
- Quarterly operating margin improved year over year, with management citing NSS and the absence of prior-year one-time acquisition transaction costs. Six-month operating margin declined to 7.0% from 7.3%, reflecting lower gross margins on some NSS contracts and planned indirect-cost increases.
- Six-month interest expense increased 42.9%, primarily due to debt incurred to finance NSS. CACI made net credit-facility repayments of $98.5 million during the six months.
- Revenue mix remained concentrated in U.S. government work. For the quarter, DoD represented 64.8% and federal civilian agencies 29.1% of revenue. CACI identified the U.S. Army as its largest customer.
Outlook, risks, and contingencies
- No quantitative full-year revenue or earnings guidance is provided in the filing text. Management said it expects internally generated funds, available bank borrowings, and cash on hand to meet operating, capital expenditure, debt service, and working-capital needs over the next 12 months.
- Federal FY2017 funding was under continuing resolutions, the second extending government operations through April 28, 2017. Management said funding and legislative actions could affect contracts and task orders through FY2017. Some programs had reduced funding; management did not expect cancellation of any major programs.
- Key business risks include government budget and procurement delays, contract protests and terminations, recompete and new-award outcomes, audit adjustments, competition for cleared personnel, pricing pressure, and integration of acquisitions. Management cautioned that actual results may differ from forward-looking statements.
- Legal and audit matters include the Al Shimari litigation, remanded by the Court of Appeals in October 2016 for further consideration; related Abbass litigation remains stayed. CACI said it is vigorously defending both matters and believes them without merit. The filing also describes government contract investigations and cost audits, with management’s estimated accruals for certain matters; management did not expect audit adjustments overall to be material.
- The NSS purchase-price allocation remained preliminary and subject to measurement-period adjustments. CACI recorded adjustments during the six months, including an $8.6 million reduction in goodwill. The filing also describes a U.K. acquisition for approximately $2.8 million, including deferred and contingent consideration.
- Interest-rate exposure remains on unhedged floating-rate debt; $900 million of debt was covered by floating-to-fixed swaps. Management estimated that a 1 percentage-point rate change would have affected six-month interest expense by approximately $3.4 million. Foreign-currency exposure also exists.
- Management reported disclosure controls and procedures were effective at December 31, 2016, with no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether acquisition-driven growth can be sustained and whether organic revenue returns to growth after reported declines.
- Track NSS integration, acquired-contract margins, and the still-preliminary purchase-price allocation.
- Review government funding developments, procurement delays, contract awards and recompetes, and the trajectory of reduced customer requirements.
- Monitor operating margin, cash conversion, capital spending, debt repayment, floating-rate exposure, and compliance with credit-facility covenants.
- Follow the status and potential financial exposure of the disclosed litigation, government investigations, and contract-cost audits.