CACI International Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019 (FY2020 first quarter). Comparative period: three months ended September 30, 2018. Unaudited results; amounts below are in millions except per-share data.
Business context
CACI provides expertise and technology to U.S. government enterprise and mission customers, including defense, intelligence, and federal civilian agencies. U.S. government contracts generated 95.5% of quarterly revenue, versus 95.2% a year earlier; the Department of Defense accounted for $937.6 million. The quarter’s growth reflected organic program growth, new awards, and acquired revenue, partly offset by completed contracts. The LGS Innovations acquisition, completed in March 2019 for approximately $757.1 million, expanded CACI’s SIGINT and cyber capabilities.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $1,363.4 | $1,165.9 | +16.9% |
| Income from operations | $100.2 | $99.6 | +0.6% |
| Operating margin | 7.3% | 8.5% | Down 1.2 percentage points |
| Income before taxes | $83.3 | $90.7 | -8.1% |
| Net income | $68.0 | $78.8 | -13.8% |
| Diluted EPS | $2.66 | $3.10 | -14.2% |
| Operating cash flow | $103.2 | $83.1 | +24.2% |
Net margin was approximately 5.0%, compared with 6.8%. Direct costs fell to 64.5% of revenue from 67.2%, but indirect costs and selling expenses rose to 26.2% from 22.7%, reflecting higher independent research and development, bid and proposal costs, indirect labor, and employee benefits. Depreciation and amortization increased, partly due to acquisition-related intangibles. Interest expense and other, net nearly doubled to $16.8 million, primarily because of higher debt associated with acquisitions. The effective tax rate rose to 18.4% from 13.1%, primarily due to timing of excess stock-compensation tax benefits.
Cash, debt, and liquidity
- Cash and equivalents were $83.2 million at September 30, 2019, up from $72.0 million at June 30, 2019.
- Operating cash flow was $103.2 million; capital expenditures were $22.5 million. Investing activities used $23.9 million, versus $99.7 million in the prior-year quarter, which included substantially higher acquisition spending.
- Financing activities used $67.1 million, including $66.7 million of net repayments under the credit facility. Cash increased by $11.2 million during the quarter.
- Debt principal was $1,609.7 million ($1,598.9 million net of discounts and issuance costs), compared with $1,676.5 million principal at June 30. Approximately $730.0 million was outstanding on the revolver and $879.7 million on the term loan. The effective borrowing rate, including swaps, was 3.09%.
- The company had $394.3 million of operating lease liabilities recognized on adoption of the lease standard. It reported compliance with credit-facility covenants and stated that available cash, operating cash generation, and borrowing capacity should meet expected needs over the next 12 months.
- Days sales outstanding improved to 53 days from 67 days a year earlier. CACI also sold eligible government receivables through a facility with a $200 million maximum capacity; $90.3 million of sold receivables remained outstanding at quarter-end after accounting for collected amounts not yet remitted.
Backlog, outlook, and risks
Remaining performance obligations were $7.1 billion; CACI expected to recognize approximately 73% as revenue over the next year. Total backlog, including unexercised options, was $19.5 billion, of which $3.3 billion was funded. Backlog is not assured revenue and can change through awards, modifications, deobligations, or termination. The filing provides no specific company revenue or earnings guidance.
Management cited the 2019 Bipartisan Budget Act’s increased defense and non-defense spending caps as supportive of its markets, while noting that the FY2020 continuing resolution funded agencies only through November 21, 2019. Continuing resolutions can delay program starts and awards, and a lapse in appropriations could disrupt government operations. Other disclosed risks include contract competition and protests, government audits, recruiting and retaining cleared personnel, budget changes, interest-rate and currency movements, and acquisition integration. Management said there were no material changes to the risk factors in its latest 10-K.
Material legal matters include the Al Shimari litigation. The Fourth Circuit dismissed CACI’s appeal concerning derivative sovereign immunity in August 2019, and the case returned to the district court in October; CACI intended to seek a stay while pursuing certiorari. Management stated it was vigorously defending the litigation and believed the lawsuits were without merit. CACI said ordinary-course legal matters and government contract audits were not expected to have a material adverse effect, and that reserves for potential audit disallowances were adequate.
Other notable items
- Adoption of lease accounting on July 1, 2019 added right-of-use assets and lease liabilities to the balance sheet; the company said adoption did not affect results of operations or cash flows.
- LGS acquisition purchase accounting remained preliminary; measurement-period adjustments during the quarter increased purchase consideration by $6.6 million, and further adjustments could be material.
- Subsequent to quarter-end, during FY2020’s second quarter, CACI completed three acquisitions for an aggregate purchase price of approximately $105 million.
- Management concluded disclosure controls were effective as of September 30, 2019; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue growth translates into improved operating margins, given rising indirect expenses and acquisition-related amortization.
- Cash conversion and working-capital trends, including the use and renewal of the receivables-sale facility.
- Debt reduction, interest-rate exposure on unhedged borrowings, and compliance with credit covenants.
- Conversion of funded backlog and remaining performance obligations into revenue, and the timing and funding of government awards.
- Developments in the Al Shimari case, government contract audits, and the final valuation of LGS acquisition assets and liabilities.