CACI International Inc. — Form 10-Q Summary
Period: Quarter and nine months ended March 31, 2014, compared with the corresponding 2013 periods. The request metadata says “2013 Q3,” but the filing itself reports fiscal 2014 Q3.
Business context and reporting period
CACI provides information technology, intelligence, and other services, primarily to U.S. government customers. U.S. government contracts generated 93.9% of revenue for the nine months ended March 31, 2014. The November 15, 2013 acquisition of Six3 Systems expanded CACI’s cyber, signals intelligence, ISR, and intelligence operations businesses.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the same prior-year period.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $900.4, down 0.6% from $906.2 | $2,658.8, down 4.0% from $2,769.1 |
| Operating income / margin | $60.5 / 6.7%, versus $68.6 / 7.6% | $188.2 / 7.1%, versus $202.9 / 7.3% |
| Net income attributable to CACI | $30.8, down 19.6% from $38.4 | $98.8, down 13.2% from $113.8 |
| Diluted EPS | $1.19 versus $1.62 | $3.89 versus $4.79 |
| Operating cash flow | Not separately provided for the quarter | $146.3 versus $148.0 |
For the nine-month period, direct costs declined 5.0%, while depreciation and amortization rose 16.8% to $47.1 million, primarily due to Six3-related intangible amortization. Interest expense and other, net increased 46.7% to $28.3 million, mainly reflecting acquisition-related borrowing. The nine-month effective tax rate was 38.0%, compared with 37.8%.
Liquidity, debt, and cash flow
- At March 31, 2014, cash was $48.4 million, current assets were $753.2 million, and current liabilities were $477.3 million.
- Debt principal was $1,321.3 million, including $300 million of convertible notes, $831.3 million under the term loan, and $190 million drawn on the revolving facility. The balance-sheet carrying value of debt was $1,314.5 million.
- Nine-month investing cash outflow was $851.1 million, including $838.4 million paid for acquisitions. Financing cash inflow was $687.5 million, largely reflecting borrowing. Cash decreased by $16.0 million from June 30, 2013.
- The $1.7 billion secured credit facility matures November 15, 2018. The filing reports compliance with its financial covenants. A $400 million notional amount of interest-rate swaps hedged a portion of floating-rate debt.
- Management said cash on hand, internally generated funds, and available bank borrowing were expected to meet operating, capital, debt-service, and working-capital needs for the next 12 months.
Material changes and unusual items
- Six3 Systems was acquired for total consideration of approximately $847.3 million. It contributed $153.6 million in revenue and $3.1 million in net income from acquisition through March 31; the reported net income included $7.8 million of acquired-intangible amortization and $2.5 million of executive retention expense.
- Excluding Six3, nine-month revenue declined $263.8 million, or 9.5%. Management attributed weakness to delayed awards, lower professional-services contract run rates, and reduced Afghanistan-related material purchases. Six3’s contribution partly offset those declines.
- The October 2013 federal shutdown was estimated to reduce fiscal 2014 revenue by $13.0 million and operating income by $5.2 million.
- Nine-month acquisition-related costs were $11.6 million, including a $4.1 million loss on extinguishment of debt. Higher amortization and borrowing costs also weighed on earnings.
- After quarter-end, on May 1, 2014, CACI repaid the $300 million convertible notes and accrued interest, and issued 1.4 million shares upon conversion. The call options provided shares to CACI in connection with the conversion.
Outlook, commentary, and risks
The filing provides no quantified revenue or earnings guidance. Management expected sequestration-related funding effects, contract-award delays, and reductions in some programs to continue during fiscal 2014, but did not expect cancellation of any major programs. It also cited intense competition for cleared and skilled employees, procurement protests, possible contract terminations or non-renewals, and uncertainty over government spending and budget priorities. Future results depend in part on integrating Six3 and realizing its expected performance.
Contingencies include government cost audits, a federal investigative subpoena matter with an accrued estimated exposure range of zero to $1.8 million, a German VAT audit with estimated reasonably possible losses of $1.5 million to $3.5 million, and a Virginia sales-and-use-tax audit with an accrued estimated range of $0.9 million to $2.1 million. CACI said it intended to appeal final determinations on 2006 and 2007 incurred-cost audits. The company also reported ongoing litigation and said it was vigorously defending the cases. Management did not expect the described matters to have a material adverse effect, based on its assessment.
Management concluded disclosure controls were effective at March 31, 2014; Six3 was excluded from the internal-control assessment because it had been recently acquired.
Important facts for investors to verify
- Whether Six3 is integrated successfully and delivers the revenue and earnings performance anticipated, given its acquisition costs and substantial acquired goodwill and intangibles.
- Debt repayment and financing after the convertible notes matured, including the impact of higher leverage, interest expense, and the shares issued on conversion.
- Whether federal budget conditions, award delays, protests, and program funding reductions continue to pressure revenue and margins.
- Developments in government audits, tax matters, investigations, and litigation, including any changes to estimated exposures.