CACI International Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018; filed February 1, 2019. CACI provides government-focused IT, mission, intelligence, and professional services. U.S. government agencies generated 95.1% of revenue in the first half of fiscal 2019.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year change | Six months ended Dec. 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,181.6 million | +8.6% | $2,347.5 million | +8.0% |
| Operating income | $102.3 million | +15.9% | $201.9 million | +29.8% |
| Operating margin | 8.7% | Up from 8.1% | 8.6% | Up from 7.2% |
| Income before taxes | $92.8 million | +20.1% | $183.6 million | +37.6% |
| Net income | $68.6 million | −52.0% | $147.4 million | −20.2% |
| Diluted EPS | $2.71 | Down from $5.66 | $5.81 | Down from $7.33 |
Revenue growth reflected acquisitions and organic growth. For the quarter, acquired revenue contributed $68.1 million of the $93.8 million increase; for the six-month period, acquisitions contributed $112.1 million of the $173.8 million increase. DoD revenue rose 13.8% for the quarter and 13.1% for the half, with growth from acquisitions and new intelligence-services and network-support work. Federal civilian revenue declined 2.8% and 3.8%, respectively, mainly due to reduced intelligence and litigation-support services.
Operating margin improved as management cited better program performance, acquisition contributions, and indirect-cost controls. Net income fell despite stronger operating results because the prior-year comparison included a substantial tax benefit from remeasurement of deferred taxes following the Tax Cuts and Jobs Act. Effective tax rates were 26.1% versus (84.7)% for the quarter and 19.7% versus (38.6)% for the half. Management also cautioned that changes in gains or losses on company-owned life-insurance investments could cause the fiscal 2019 effective tax rate to fluctuate.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $139.5 million, down from $152.1 million. Management attributed the decline mainly to the timing of vendor payments and receivable collections.
- Investing cash outflow was $107.1 million, including $91.2 million of acquisition payments and $17.8 million of capital expenditures. Financing cash outflow was $27.0 million; net repayments under credit facilities were $8.5 million.
- Cash was $70.7 million at December 31, 2018. Current assets of $1,157.4 million exceeded current liabilities of $637.1 million.
- Debt principal was $1,064.9 million, or $1,055.0 million net of discounts and issuance costs. Debt consisted of $914.9 million in term loans and $150.0 million drawn on the revolver. The effective interest rate, including swaps, was 3.27%; $700 million of floating-rate debt was hedged. CACI reported compliance with debt covenants.
- On January 17, 2019, CACI increased revolving-facility capacity from $1.1 billion to $1.5 billion. Management said cash, internally generated funds, and available borrowings should meet expected operating, capital, debt-service, and working-capital needs for the next 12 months.
- Days sales outstanding was 73 days, compared with 61 days a year earlier; the company cited normal fluctuations and lower collections following closure of some government payment offices near quarter-end.
Backlog, outlook, and significant developments
- Remaining performance obligations were $5.3 billion, excluding unexercised options and certain IDIQ task orders; CACI expected to recognize approximately 86% as revenue over the next year. Total backlog, including options, was $12.6 billion, of which $2.5 billion was funded. Backlog is not assurance of future revenue.
- The filing gives no specific full-year revenue, earnings, or margin guidance.
- On August 15, 2018, CACI acquired CSRA’s systems engineering and acquisition-support business unit for an initial $90.0 million, including a preliminary working-capital adjustment. Purchase-price allocation remained provisional.
- After quarter-end, CACI completed its $225 million acquisition of Mastodon Design on January 29, 2019, and agreed on January 25 to acquire LGS Innovations for $750 million in cash, subject to adjustments. The LGS transaction was expected to close in the third quarter of fiscal 2019.
- A new receivables-purchase facility allows sales of eligible U.S. government receivables up to $200 million. No receivables had been sold under it by December 31, 2018; initial sales occurred in the following quarter.
- The late-2018 to January 2019 federal shutdown had no material impact on results for this reporting period, but CACI said contract and task-order effects could increase depending on appropriations actions.
Risks, contingencies, and unusual items
- Key business risks include shifts or delays in federal spending, contract protests and procurement delays, contract termination or nonrenewal, government audits, competition for cleared personnel, pricing pressure, and acquisition integration. Government-contract audits were ongoing; management considered reserves adequate and did not expect material effects.
- In the Al Shimari litigation, a trial date was set for April 23, 2019 if needed; CACI had filed dispositive motions scheduled for a February 15, 2019 hearing. A related Abbass case remained stayed. Management said it was vigorously defending the cases and believed them without merit; it assessed the broader legal matters as not expected to materially affect operations or liquidity.
- ASC 606 was adopted July 1, 2018 using the modified retrospective method; prior-year results were not restated. The standard increased reported 2018 revenue by $4.0 million for the quarter and $11.2 million for the half, and net income by $3.9 million and $9.2 million, respectively. This affects comparability.
- The company expected adoption of the new lease standard on July 1, 2019 to add a material right-of-use asset and lease liability to the balance sheet, without a material impact on cash flows or results of operations.
Investor verification priorities
- Assess the sustainability and organic contribution of growth, particularly DoD growth, separately from acquisitions.
- Reconcile reported earnings growth with the prior-year tax benefit and review ASC 606’s effect on period-to-period comparisons.
- Monitor receivables, DSO, collections, and operating cash conversion.
- Verify acquisition funding, integration progress, purchase-price adjustments, and the expected LGS closing and financing.
- Track conversion of funded backlog and remaining performance obligations into revenue, along with government appropriations and shutdown-related impacts.
- Review litigation developments, government audit outcomes, debt covenant headroom, and exposure to floating interest rates.