CACI International Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended September 30, 2014; comparative period is the three months ended September 30, 2013. CACI is a government-focused IT and professional-services contractor; 93.6% of quarterly revenue came from U.S. government agencies.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $814.7 million | $864.3 million | Down 5.7% |
| Operating income / margin | $60.1 million / 7.4% | $61.2 million / 7.1% | Income down 1.8% |
| Net income attributable to CACI | $31.1 million | $33.0 million | Down 5.6% |
| Diluted EPS | $1.29 | $1.33 | Down 3.0% |
| Operating cash flow | $111.7 million | $27.3 million | Up $84.4 million |
Direct costs fell 10.8%, chiefly due to lower material purchases and subcontract labor associated with the Southwest Asia drawdown and federal budget reductions. Indirect costs and selling expenses rose 6.4%, and depreciation and amortization rose 33.1%, partly reflecting Six3 Systems acquisition costs. Interest expense and other, net increased 22.9% to $9.1 million, primarily due to acquisition-related borrowing, partly offset by the maturity of convertible notes. The effective tax rate was 38.8%, versus 38.2%.
Balance sheet, debt and liquidity
- At September 30, 2014, cash was $100.0 million, up from $64.5 million at June 30, 2014; current assets were $718.3 million and current liabilities $425.8 million.
- Total debt carrying value was $1.210 billion ($1.215 billion principal), down from $1.280 billion at June 30. Debt comprised $800.1 million in term loans and $415.0 million in revolving borrowings; the $850 million revolving facility had substantial undrawn capacity. Net debt based on carrying value was approximately $1.110 billion.
- The credit facility matures November 15, 2018; its effective interest rate, including swaps, was 2.67%. $600 million of floating-rate debt was hedged with swaps. CACI reported compliance with all financial covenants.
- Operating cash flow benefited from a $47.1 million cash source from accounts receivable, versus a $13.6 million use in the prior-year quarter. Days sales outstanding was 61, compared with 65 a year earlier. Capital expenditures were $3.4 million. Financing activities used $73.3 million, including net credit-facility payments of $70.4 million.
Material changes and management commentary
- Revenue declined $49.5 million. DoD revenue fell 10.3% to $554.3 million, while federal civilian agency revenue rose 6.2% to $208.2 million, primarily reflecting the Six3 Systems acquisition. Commercial and other revenue increased 8.8% to $50.8 million. Domestic operations generated $779.5 million of revenue; international operations generated $35.2 million.
- Management attributed lower revenue mainly to reduced material purchases and subcontract labor linked to the Southwest Asia drawdown and federal budget-related reductions. It said some programs had reduced funding, but did not expect cancellation of any major programs.
- Management stated that cash on hand, internally generated funds and available bank borrowings should meet operating, capital expenditure, debt-service and working-capital needs for the next 12 months. The filing provides no numerical earnings or revenue guidance.
Outlook, risks and contingencies
- The U.S. government began fiscal 2015 under a continuing resolution funding operations through December 11, 2014. Management expected sequestration effects to continue through CACI’s fiscal 2015 and was monitoring at-risk programs. Procurement delays and contract-award protests were also noted.
- Key risks include federal budget and funding changes, contract recompetes and terminations, bid protests, government audits, competition for cleared staff, pricing pressure, and integration of acquisitions. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
- Government cost audits and reviews remain ongoing. CACI appealed final determinations relating to fiscal 2006 and 2007 incurred-cost submissions and had accrued its best estimate for potential disallowances. A separate government investigation had an estimated potential outcome range of zero to $1.8 million; the company had not accrued a liability for a Department of Justice False Claims Act investigation because an unfavorable outcome was not considered probable.
- For a Virginia sales-and-use-tax audit, CACI accrued its best estimate within a $2.8–$4.8 million range. For a German VAT audit, it reported no accrual and estimated reasonably possible losses of no more than $3.0 million. Management said other lawsuits and proceedings were not expected to materially affect operations or liquidity. Two lawsuits related to alleged conduct in Iraq remained pending; CACI said it was vigorously defending them.
- The company disclosed that the new revenue-recognition standard, ASU 2014-09, was effective for its fiscal 2018 reporting and that it was still evaluating the impact and adoption method.
Important facts for investors to verify
- Whether DoD revenue stabilizes after the reported 10.3% decline and whether federal civilian growth can offset further government spending reductions.
- Whether the strong operating cash flow recurs; this quarter’s improvement included a favorable accounts-receivable movement.
- Debt repayment, revolving-facility usage, interest-rate exposure and continued compliance with credit-facility covenants.
- Subsequent developments in the government audits, investigations, tax matters and pending litigation, including any effect on accrued contingencies.
- Actual FY2015 funding and procurement developments after the continuing resolution deadline, and any changes to management’s expectation regarding major program cancellations.