CACI International Inc. — Form 10-Q summary
Reporting period: Three months ended September 30, 2016, the first quarter of CACI’s fiscal 2017. The company provides technology and professional services, primarily to U.S. government customers; 93.7% of quarterly revenue came from U.S. government agencies.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $1,073.3 million | $822.4 million | +30.5% |
| Operating income | $69.7 million | $64.5 million | +8.0% |
| Operating margin | 6.5% | 7.8% | Down 1.3 percentage points |
| Net income | $36.7 million | $34.6 million | +5.9% |
| Diluted EPS | $1.47 | $1.40 | +5.0% |
| Operating cash flow | $57.8 million | $79.3 million | Down $21.5 million |
Revenue growth primarily reflected the February 2016 acquisition of L-3 National Security Solutions (NSS) and other recent acquisitions. Excluding acquired revenue, organic revenue declined 1.3%, primarily due to lower customer requirements and government purchasing delays. DoD revenue rose 27.4%, but declined 2.8% excluding acquired revenue; federal civilian revenue rose 39.2%, including $81.5 million of NSS revenue.
Operating margin contracted as acquired NSS contracts had lower gross margins and the company planned higher indirect costs. Direct costs were 67.8% of revenue versus 65.4% a year earlier; indirect costs and selling expenses were 24.0% versus 25.0%. Interest expense and other, net increased 36.0% to $12.5 million, mainly due to debt used to fund NSS. The effective tax rate was 35.9%, compared with 37.4%; management cited gains on corporate-owned life insurance investments and the work opportunity tax credit as favorable factors.
Cash, debt and liquidity
- Cash and equivalents were $49.7 million at September 30, 2016, versus $49.1 million at June 30, 2016.
- Operating cash flow was $57.8 million; management attributed the year-over-year decline primarily to the timing of vendor payables. Capital expenditures were $11.2 million, compared with $4.5 million a year earlier.
- Principal debt outstanding was $1.414 billion ($1.399 billion net of unamortized issuance costs), versus $1.473 billion principal at June 30, 2016. The debt comprised $1.019 billion in term loans and $395.0 million in revolver borrowings.
- The secured credit facility totals $1.981 billion and matures June 1, 2020. The $850 million revolving facility had $395.0 million drawn and a $0.4 million letter of credit outstanding. The effective interest rate, including swaps, was 3.13%. $900 million of floating-rate debt was hedged; management estimated a 1 percentage point rate change would alter quarterly interest expense by about $1.8 million.
- CACI reported compliance with its financial covenants and expects cash, internally generated funds and available bank borrowings to meet operating, capital expenditure and debt-service needs over the next 12 months.
Material developments, outlook and risks
- NSS acquisition: Preliminary purchase consideration was approximately $547.5 million, including adjustments. The allocation included $367.3 million of goodwill and $110.5 million of intangible assets; valuation remained subject to revision during the measurement period, with potential adjustments possibly material.
- Government spending: A continuing resolution funded the U.S. government through December 9, 2016. Management expected budget and funding actions to affect FY2017 contracts, reported reduced funding on some programs, but did not expect cancellation of major programs. No quantified earnings or revenue guidance was provided.
- Execution and market risks: Management cited procurement delays and protests, sequestration and budget uncertainty, possible contract reductions or terminations, competition for cleared personnel, and acquisition integration. Organic revenue was already declining.
- Contingencies: Government contract audits and investigations continued. The company accrued its best estimate, including a potential outcome in a Defense Criminal Investigative Service matter estimated within a $0–$3.9 million range, and a Virginia sales/use tax audit estimate within a $1.0–$2.5 million range. Management said other audit adjustments were not expected to be material.
- Litigation: On October 21, 2016, an appeals court vacated and remanded a ruling in the Al Shimari case for further determinations. A related case remained stayed pending that appeal. The company said it was vigorously defending the cases and believed them to be without merit.
- Other items: The quarter included a $13.6 million refund of NSS net working capital and $4.7 million of proceeds from equity-method investments. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Separate acquired growth from organic performance, particularly the trend in DoD requirements and federal procurement delays.
- Monitor NSS integration, contract margins and final purchase-price allocation, including goodwill and intangible-asset assumptions.
- Track operating margin, cash conversion and working-capital timing; quarterly operating cash flow was below the prior-year level.
- Review debt repayment, floating-rate exposure, covenant headroom and refinancing needs ahead of the June 2020 facility maturity.
- Follow federal appropriations and contract awards, and developments in government audits, investigations, tax matters and the Al Shimari litigation.