CACI International Inc. — Form 10-Q Summary
Period: Quarter and nine months ended March 31, 2016; filed May 2, 2016. The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 third-quarter results.
Business context
CACI provides technology and professional services, primarily to U.S. government customers. U.S. government contracts generated 93.6% of revenue in both nine-month comparison periods. The February 1 acquisition of L-3 National Security Solutions (NSS) was the main driver of reported quarterly revenue growth.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $977.3 million, up 19.5% | $2,630.2 million, up 7.4% |
| Operating income / margin | $63.7 million / 6.5% | $183.7 million / 7.0% |
| Net income attributable to CACI | $34.0 million, up 17.2% | $98.2 million, up 15.7% |
| Diluted EPS | $1.38, versus $1.18 | $3.98, versus $3.49 |
| Operating cash flow | Not separately reported for the quarter | $188.3 million, versus $190.4 million |
Quarterly operating margin eased from 6.6% to 6.5%; nine-month margin improved from 6.6% to 7.0%. Nine-month capital expenditures were $13.2 million, implying operating cash flow less capital expenditures of approximately $175.1 million. Cash was $34.8 million at March 31, 2016, compared with $35.4 million at June 30, 2015. Receivables rose to $765.5 million from $596.2 million; days sales outstanding increased to 64 from 61 a year earlier.
At March 31, principal debt was $1.503 billion ($1.485 billion net carrying value), versus $1.074 billion principal at June 30, 2015. The credit facility had $457.0 million drawn on its $850.0 million revolver, plus $1.046 billion in term loans; the company reported covenant compliance. The effective interest rate, including swaps, was 3.0%. Management said cash, internally generated funds, and available borrowings should cover the next 12 months’ operating, capital, debt-service, and working-capital needs.
Changes and significant transactions
- Reported revenue growth substantially reflected acquisitions. Excluding acquired revenue, organic revenue decreased 2.7% in the quarter and 0.4% for the nine months, primarily due to reduced requirements, purchasing delays, and contract completions.
- DoD revenue rose 18.4% in the quarter, but fell 4.1% excluding acquired revenue; nine-month DoD revenue rose 5.1%, but fell 2.8% excluding acquisitions. NSS contributed $171.9 million revenue and $5.6 million net income from acquisition through March 31.
- CACI paid approximately $587.8 million, net of cash acquired, for acquisitions during the nine months. NSS consideration was preliminarily estimated at $547.9 million; purchase-price allocations remain subject to adjustment. CACI recorded $7.3 million in acquisition-related expenses and $3.2 million in integration and restructuring costs through March 31.
- Quarterly interest expense increased 31.2%, mainly due to acquisition financing. Nine-month interest expense increased 8.9%. The acquisition was funded in part with $250 million of revolver borrowings and $300 million of additional term loans.
Outlook, risks, and contingencies
- No quantified revenue, earnings, or margin guidance is provided in the supplied filing text. Management expected the potentially favorable effects of the FY2016 appropriations and budget legislation to continue during the fiscal year, while noting reduced funding on some programs.
- Management did not expect cancellation of any major programs, but cited sequestration, procurement delays and protests, contract competition and termination risk, shifting government priorities, and difficulty recruiting and retaining cleared personnel as risks.
- Floating-rate debt remains exposed to interest-rate changes; $600 million was hedged with swaps. Management estimated a one-percentage-point rate change would alter nine-month interest expense by approximately $4.1 million. Additional $300 million swaps were entered into in April 2016.
- Government contract audits and investigations, German VAT and Virginia sales/use-tax audits, and litigation remain disclosed contingencies. Management said it had accrued estimated potential disallowances where appropriate and did not expect the matters, individually or in aggregate, to materially affect results or liquidity. The Al Shimari appeal was scheduled for May 12, 2016; another related case remained stayed pending that appeal.
- Pro forma acquisition results include NSS historical goodwill impairment charges of $476.2 million for the nine months ended March 31, 2016 and $158.7 million in the comparable 2015 period; those pro forma net losses are not CACI’s reported consolidated results.
Investor verification priorities
- Reconcile reported growth with acquired revenue and the underlying organic declines, especially in DoD.
- Review final NSS purchase accounting, goodwill and intangible valuations, integration costs, and subsequent operating contribution.
- Track cash conversion, receivables, DSO, and liquidity after the acquisition-related increase in debt.
- Monitor debt covenants, floating-rate exposure, and the effect of additional interest-rate swaps.
- Follow federal budget execution, contract protests and awards, audit outcomes, litigation, and tax contingencies.