CACI International Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended December 31, 2013. CACI provides information technology, intelligence, cybersecurity, and related services, primarily to U.S. government customers; 93.9% of first-half revenue came from U.S. government contracts.
Financial performance
Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $894.2 | $931.6 | $1,758.5 | $1,862.9 |
| Operating income | $66.5 | $69.6 | $127.6 | $134.3 |
| Operating margin | 7.4% | 7.5% | 7.3% | 7.2% |
| Net income attributable to CACI | $35.0 | $39.7 | $68.0 | $75.4 |
| Diluted EPS | $1.38 | $1.69 | $2.71 | $3.17 |
| Interest expense and other, net | $9.5 | $6.2 | $16.8 | $13.0 |
- Cash flow: First-half operating cash flow was $44.6 million, down from $96.0 million. Investing cash outflow was $843.7 million, mainly due to the Six3 Systems acquisition; financing cash inflow was $831.8 million. Ending cash was $98.2 million.
- Liquidity and debt: At December 31, current assets were $871.6 million and current liabilities $494.6 million. Debt principal was $1.461 billion ($1.451 billion net carrying amount), versus $611.3 million principal at June 30. The amended $1.7 billion secured credit facility included $831.3 million of term loans and $330.0 million drawn on its $850 million revolver. CACI reported compliance with its financial covenants.
- Receivables: Days sales outstanding rose to 67 from 59 at December 31, 2012. Management attributed weaker cash conversion partly to slower government invoice payments.
Changes and significant transactions
- Revenue fell 4.0% in the quarter and 5.6% in the first half. Excluding Six3 Systems’ $48.9 million of post-acquisition quarterly revenue, quarterly revenue declined 9.3%.
- DoD revenue decreased 7.6% in the quarter and 10.0% in the first half, reflecting program reductions, procurement delays, the government shutdown, and lower subcontractor costs following the Afghanistan drawdown. Federal civilian revenue increased 6.3% and 9.3%, respectively.
- CACI acquired Six3 Systems on November 15, 2013, for estimated total consideration of $847.3 million. The acquisition added $702.7 million of provisional goodwill and $164.3 million of customer-related intangibles. Six3 contributed $48.9 million revenue and $0.1 million net income after acquisition. CACI incurred $11.4 million of acquisition-related expenses in the first half, including a $4.1 million debt extinguishment loss.
- Higher acquisition-related debt raised first-half interest expense 29.4%; acquired intangible amortization also increased depreciation and amortization.
Outlook, risks and contingencies
- Management estimated the October 2013 federal shutdown would reduce FY2014 revenue by $17 million and operating income by $7 million; the quarter’s revenue impact was estimated at approximately $19 million. Management expected sequestration-related effects and some program funding reductions to continue through FY2014, but did not expect major program cancellations.
- No specific revenue or earnings guidance was stated in the provided filing text. Management said cash, internally generated funds, and available borrowing capacity should cover the next 12 months’ operating, capital, debt-service, and working-capital needs.
- $300 million of convertible notes mature May 1, 2014. CACI said it expected to repay them using credit-facility capacity or proceeds from a long-term debt security. Holders could convert beginning January 1, 2014; principal must be settled in cash. The notes’ quoted fair value was $405.5 million at December 31, 2013.
- Federal budget uncertainty, contract protests and procurement delays, contract termination or non-renewal, government audits, competition for cleared personnel, and successful Six3 integration were identified as risks. A one-percentage-point change in applicable rates would have changed first-half interest expense by approximately $2.7 million.
- Contingencies include ongoing government contract audits and a government investigation for which CACI accrued its best estimate within a potential range of zero to $1.8 million; a German VAT audit with estimated reasonably possible losses of $1.5–$3.5 million and no accrual; and a Virginia sales/use tax audit with an accrued estimate within a $0.9–$3.7 million range. The company also disclosed pending litigation relating to alleged treatment of Iraqi detainees and said it considers the claims without merit.
- Management concluded disclosure controls were effective at a reasonable assurance level. Six3 Systems was excluded from the internal-control assessment as a recently acquired business.
Important facts for investors to verify
- Whether Six3 integration, acquired contract performance, and provisional purchase-accounting values develop as expected.
- Whether government funding, sequestration, procurement delays, and shutdown effects continue to pressure revenue and margins.
- Collection trends and days sales outstanding, given the decline in operating cash flow and increase in receivables.
- How CACI funds or settles the $300 million convertible notes at maturity and manages its higher debt balance and floating-rate exposure.
- Developments in the disclosed contract investigation, tax audits, and pending litigation, including any change in estimated exposure.