CACI International Inc. — FY2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended December 31, 2015; comparisons are with the corresponding periods in 2014. Amounts below are in U.S. dollars unless otherwise noted. CACI provides technology, mission, and professional services, principally to U.S. government customers; 93.5% of revenue in each six-month period came from U.S. government contracts.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $830.4 million | +1.8% | $1,652.9 million | +1.4% |
| Operating income | $55.5 million | +16.7% | $120.0 million | +11.5% |
| Operating margin | 6.7% | 5.8% prior year | 7.3% | 6.6% prior year |
| Net income attributable to CACI | $30.3 million | +23.1% | $64.1 million | +15.0% |
| Diluted EPS | $1.23 | $1.01 prior year | $2.60 | $2.30 prior year |
For the six-month period, operating cash flow was $134.7 million, versus $93.3 million a year earlier. Investing activities used $23.9 million, including $15.6 million for acquisitions; financing activities used $75.8 million, including net credit-facility repayments of $74.5 million. Cash increased to $69.0 million at December 31, 2015 from $35.4 million at June 30, 2015. Management attributed stronger operating cash flow mainly to receivable collections and lower cash tax payments; days sales outstanding was 60, versus 67 at December 31, 2014.
At December 31, 2015, current assets were $675.7 million and current liabilities were $399.3 million. Accounts receivable was $561.1 million. Debt principal was $999.8 million ($994.5 million net of unamortized issuance costs), compared with $1,074.3 million principal at June 30, 2015. The company had $759.8 million outstanding on its term loan and $240.0 million on its revolver. Its effective borrowing rate, including interest-rate swaps, was 2.9%; $600 million of floating-rate debt was hedged. CACI reported compliance with its debt covenants.
Material changes and drivers
- Federal civilian revenue rose 9.1% in the quarter and 8.7% for six months, supported by investigations and litigation support, business systems, and FY2015 new business.
- Department of Defense revenue declined 0.8% in the quarter and 1.4% for six months, reflecting lower Afghanistan-related material purchases and, for the six-month period, lower subcontractor costs and other direct costs.
- Operating margin improved in both periods. Management cited lower amortization of acquired intangible assets and growth in investigations and litigation support, business systems, and new business. Higher indirect and selling costs, including acquisition-related one-time costs, fringe benefits, and incentive costs, partly offset the improvement.
- International operations contributed $36.9 million of quarterly revenue and $73.7 million for six months; domestic operations accounted for most remaining revenue. The filing reports segment net income, but does not provide segment operating margins.
- Two acquisitions were completed during the six months: U.K.-based Rockshore Group and a U.S. security technology services business. Initial combined purchase price was $18.8 million, with up to $10.5 million additional contingent consideration.
Outlook, risks, and contingencies
The filing provides no quantified company earnings or revenue guidance. Management expected the Bipartisan Budget Act of 2015 and FY2016 appropriations to have a potentially favorable effect on contracts and task orders through FY2016. It reported funding reductions on some programs but did not expect cancellation of major programs, while noting procurement delays and contract protests. Identified risks include future federal budget reductions and sequestration, contract awards and recompetes, termination or nonrenewal, audit outcomes, pricing and talent competition, and acquisition integration.
On February 1, 2016, after quarter-end, CACI completed its $550 million cash acquisition of L-3 National Security Solutions and L-3 Data Tactics, expected to add approximately $1.0 billion to annual revenue. CACI funded the purchase with $250 million drawn on its revolver and an amendment allowing $300 million of additional term loans. The resulting debt and integration effects were not reflected in the December 31 balance sheet.
Contingencies include ongoing government contract and tax matters. CACI accrued its best estimate for several matters, including an estimated $0–$1.8 million range related to a government investigation, $0.1 million for an Army contract appeal, and $2.9–$5.2 million for a Virginia sales-and-use-tax audit. It disclosed a possible $0–$3.5 million loss range for a German VAT audit without an accrual, and no accrual for a Department of Justice False Claims Act investigation because an unfavorable outcome was not considered probable. Management said pending lawsuits were without merit and were being defended; one case remained stayed and another was on appeal. Management did not expect the other described litigation or government audits to materially affect results, financial position, or cash flows.
Management concluded disclosure controls were effective at December 31, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether civilian-agency growth and improved operating margins continue, and whether lower DoD material activity persists.
- The effect of the February 2016 L-3 acquisition on debt, interest expense, liquidity, integration costs, and future results.
- Federal budget execution, contract protests, procurement delays, recompetes, and funding exposure across major programs.
- Cash conversion and receivable collections, as well as covenant headroom and exposure to floating interest rates.
- Developments and potential outcomes in government contract audits, the False Claims Act investigation, tax audits, and pending litigation.