CACI International Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended December 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Business context and reporting period
CACI provides expertise and technology to U.S. government, national security, and international customers. Nearly 70% of revenue is defense-related. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1,485.8M | $1,468.7M | $2,976.7M | $2,928.2M |
| Operating income | $124.1M | $141.5M | $251.1M | $276.0M |
| Operating margin | 8.4% | 9.6% | 8.4% | 9.4% |
| Net income | $90.3M | $106.5M | $178.4M | $200.1M |
| Diluted EPS | $3.83 | $4.18 | $7.52 | $7.86 |
Revenue increased 1.2% in Q2 and 1.7% for the first half. Management attributed growth mainly to existing programs and acquisitions, partly offset by completed contracts. Operating income and net income fell despite revenue growth: direct costs rose faster than revenue, while interest expense also increased. Direct costs were 65.6% of Q2 revenue versus 64.5% a year earlier. Q2 income included a $5.5M pretax benefit from changes in contract estimates; the comparable prior-year benefit was $18.1M.
Cash flow and liquidity: First-half operating cash flow was $308.8M, down from $382.3M; capital expenditures were $21.6M. Cash used in acquisitions was $609.4M, compared with $355.1M a year earlier, contributing to investing cash outflow of $630.1M. Cash ended the period at $124.1M, up from $88.0M at June 30, 2021. Management said cash, operating cash generation, receivables sales, and available borrowing capacity should fund expected needs for the next 12 months.
Debt: Principal debt was $2,121.5M at December 31, 2021, compared with $1,742.6M at June 30, 2021; carrying value was $2,110.5M. The December credit facility amendment established $3,200M of total capacity, including a $1,975M revolver and $1,225M term loan. Revolver borrowings were $896.5M. The effective borrowing rate, including swaps, was 1.92%; $650M of floating-rate debt was hedged. CACI reported compliance with financial covenants.
Other metrics: Current assets were $1,335.1M and current liabilities $937.0M. Backlog was $24.1B, up 7.6% year over year; funded backlog was $3.1B, up 6.9%. Remaining performance obligations were $7.2B, with approximately 85% expected to be recognized over the next 12 months. Four acquisitions were completed for approximately $616.2M, adding preliminary goodwill of $436.4M and intangible assets of $180.6M.
Material changes versus the prior comparable period
- Q2 revenue growth was modest, while operating income declined 12.3% and net income declined 15.2%. For the first half, operating income declined 9.0% and net income declined 10.9%.
- Q2 cost growth outpaced revenue growth; higher direct costs and acquisition-related amortization contributed to lower operating profitability.
- First-half operating cash flow fell by $73.5M. The company cited prior-year payroll-tax deferrals under the CARES Act, lower net income, and other working-capital changes; lower cash taxes partly offset the decline.
- Debt increased following acquisitions and related financing activity. First-half net borrowing activity was higher than in the prior-year period.
- Technology revenue increased while expertise revenue decreased for the first half. Commercial and other revenue grew 17.6%; DoD revenue grew 1.0%.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance for the fiscal year is provided in the supplied filing text. Management described the defense and national-security budget environment as constructive, but noted that FY2022 appropriations were not yet enacted and continuing resolutions can delay awards and program starts.
- Management identified COVID-19, including the Omicron surge, as a source of customer facility-access limits and potential disruption. Risks also include government funding delays, contract protests and terminations, pricing and labor competition, hiring personnel with clearances, contract execution, acquisition integration, interest-rate exposure, and foreign exchange.
- A federal tax provision effective January 1, 2022 requires domestic research and development costs to be amortized rather than deducted when incurred. If not delayed by legislation, CACI expects a reduction in operating cash flow and a corresponding increase in deferred tax assets; the impact was still under evaluation.
- Pending litigation includes the Al Shimari matter, for which plaintiffs estimated compensatory damages of $6.0M–$9.0M and punitive damages of $23.5M–$64.0M. The company says it is vigorously defending the lawsuits and believes them without merit. Management stated that ordinary-course claims and government contract audit adjustments are not expected to materially affect results.
- Interest-rate sensitivity: a 1 percentage-point rate change would have changed first-half interest expense on variable-rate debt by approximately $5.4M. The company amended its credit facility in December, extending maturity, increasing capacity, and improving pricing; the amendment resulted in a write-off of deferred financing costs.
Important facts for investors to verify
- Whether subsequent quarterly results show improved operating margins and whether acquisition-driven revenue growth translates into earnings and cash flow.
- Conversion of the $24.1B backlog and $7.2B of remaining performance obligations into funded work and recognized revenue, including the timing and cancellation or deobligation risk.
- Debt repayment, leverage, borrowing costs, covenant headroom, and availability under the amended credit facility.
- Cash-flow effects of the R&D tax amortization rule and any subsequent legislative change.
- Developments in the Al Shimari and Abbass litigation, government contract audits, and the continuing-resolution and appropriation process.