CACI International Inc. — FY2018 Form 10-K
Period clarification: The filing covers the fiscal year ended June 30, 2018, not a standalone 2017 fourth quarter. It also presents unaudited quarterly results, including FY2018 Q4.
Business context
CACI provides information technology solutions and services, primarily to U.S. government customers. It reported approximately 18,800 employees and added Space Operations and Resiliency as a market area. U.S. government contracts generated 93.5% of FY2018 revenue; DoD accounted for 66.6%. The company reported two operating segments: domestic and international.
Key financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $4.468 billion | $4.355 billion | +2.6% |
| Operating income | $340.7 million | $297.3 million | +14.6% |
| Operating margin | 7.6% | 6.8% | +0.8 percentage points |
| Net income | $301.2 million | $163.7 million | +84.0% |
| Diluted EPS | $11.93 | $6.53 | +82.7% |
| Operating cash flow | $325.1 million | $281.3 million | +$43.9 million |
FY2018 net income included an estimated $103.3 million tax benefit from the Tax Cuts and Jobs Act, equal to $4.09 per diluted share. The reported effective tax rate was negative 0.8%, versus 34.2% in FY2017; therefore, the reported earnings increase substantially reflects this tax item. Excluding the disclosed tax benefit, FY2018 diluted EPS would be approximately $7.84.
At June 30, 2018, cash was $66.2 million, working capital was $392.2 million, and total debt principal was $1.073 billion ($1.062 billion net of unamortized discounts and issuance costs). Debt principal was down from $1.244 billion a year earlier. The company had $135.0 million drawn on its $1.1 billion revolving facility and $938.4 million outstanding on its term loan. It reported compliance with credit-facility covenants. The term loan matures June 30, 2023.
Investing activities used $118.3 million, including $76.9 million for acquisitions and $41.6 million of capital expenditures. Financing activities used $206.5 million, including net repayments under the credit facility. Accounts receivable were $806.9 million current, and days sales outstanding rose to 60 from 59.
Changes and notable items
- Revenue growth was modest compared with FY2017’s 16.3% increase, which was primarily acquisition-driven. FY2018 DoD revenue rose 5.1%; federal civilian revenue fell 4.6%; commercial and other revenue rose 9.5%.
- Operating income and margin improved despite revenue growth of 2.6%. Management cited higher intelligence work, fixed-price and fixed-unit-price contracts, award and incentive fees, and cyber product sales. Lower interest expense also supported results.
- FY2018 cost mix was 51.0% cost-reimbursable, 32.6% fixed-price, and 16.4% time-and-materials. Cost-reimbursable share increased from 48.9% in FY2017; time-and-materials declined from 18.8%.
- Year-end backlog was $11.3 billion, including $2.1 billion funded. Management expected most funded backlog to convert to FY2019 revenue, while cautioning that backlog is not assured revenue and much remaining value is unfunded.
- The company completed several acquisitions in FY2018, including U.S. cyber and enterprise IT businesses and U.K. technology businesses. Subsequent to year-end, it acquired CSRA’s systems engineering and acquisition support business for $84 million; the transaction was expected to add about $190 million in annual revenue.
- ASC 606 was adopted July 1, 2018. Management expected a $15 million to $25 million increase to opening shareholders’ equity and changes to revenue timing for some award-fee and fixed-price service contracts.
Outlook, risks, and contingencies
The filing provides no specific FY2019 revenue or earnings guidance. Management expected higher federal discretionary spending in government FY2018 and FY2019 under the 2018 Bipartisan Budget Act, but warned that continuing resolutions, delayed appropriations, and renewed sequestration pressures could delay awards, disrupt programs, or lead to contract reductions or terminations. The company said internally generated funds, cash, and available borrowing capacity should cover near-term operating and capital needs.
Key risks include heavy dependence on federal contracting and DoD, competitive bidding and protests, contract renewals and funding, fixed-price cost overruns, employee clearance and retention, cybersecurity and system failures, audits and regulatory compliance, acquisition integration, and debt covenants and floating-rate exposure. The company had $800 million of interest-rate swaps; it estimated that a 1 percentage-point rate change would affect annual interest expense by approximately $3.6 million.
Two Iraqi detainee-related lawsuits, Al Shimari and Abbass, remained disclosed. CACI said it was vigorously defending the cases and believed them without merit; the filing does not provide a clear quantified exposure. Separately, a government contracting investigation was resolved through a settlement payment of approximately $1.5 million. Management stated that other legal matters and outstanding contract audits were not expected to have a material financial effect. The annual goodwill impairment test found no impairment.
Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of the FY2018 earnings and EPS increase is attributable to the one-time tax benefit, and what the finalized TCJA accounting shows.
- Conversion and funding of the $11.3 billion backlog, particularly the $2.1 billion funded portion, and subsequent award activity.
- Whether FY2019 federal appropriations, continuing resolutions, and sequestration affect contract starts, renewals, or customer demand.
- Cash generation, receivables and DSO trends, debt repayment, and compliance with credit-facility covenants.
- Developments in the Al Shimari and Abbass litigation, government contract audits, and integration and revenue performance of recent acquisitions.
- The actual financial-statement effects of ASC 606 adoption and the contribution from the post-year-end CSRA business acquisition.