CACI International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2013 (fiscal 2013 Q3; not 2012 Q3). Amounts are in U.S. dollars. CACI provides professional services and IT solutions, primarily to U.S. government customers; 94.4% of nine-month revenue came from U.S. government agencies.
Financial performance
| Metric | Three months ended March 31, 2013 | Nine months ended March 31, 2013 |
|---|---|---|
| Revenue | $906.2 million, down 2.3% | $2,769.1 million, down 2.0% |
| Operating income / margin | $68.6 million / 7.6% (prior-year margin 7.8%) | $202.9 million / 7.3% (prior-year margin 7.9%) |
| Net income attributable to CACI | $38.4 million, down 6.1% | $113.8 million, down 8.3% |
| Diluted EPS | $1.62, versus $1.45 | $4.79, versus $4.37 |
| Operating cash flow | Not presented for the quarter alone | $142.4 million, versus $144.8 million |
Quarterly diluted EPS rose despite lower net income, alongside a substantially lower weighted-average diluted share count (23.7 million versus 28.1 million). For nine months, the effective tax rate was 37.8%, compared with 39.3% a year earlier; management attributed the lower rate partly to non-taxable gains on corporate-owned life insurance investments.
Liquidity, debt, and capital allocation
- At March 31, cash was $56.3 million; working capital was $297.3 million. Current assets were $732.5 million and current liabilities $435.1 million.
- Debt principal was $703.1 million ($684.5 million carrying value after discounts and issuance costs), versus $563.8 million principal at June 30, 2012. This included $300 million of 2.125% convertible notes due May 2014, a $133.1 million term loan, and $270 million drawn on the revolving facility.
- The $750 million revolving facility matures in November 2016; $480 million was undrawn, before the $0.4 million letter of credit. The company reported compliance with financial covenants and a 1.7% effective rate on credit-facility borrowings.
- Nine-month investing cash outflow was $121.7 million, including $105.4 million for acquisitions; financing provided $19.9 million. CACI borrowed net $138.8 million under its credit facility and repurchased 2.2 million shares for $126.5 million.
Changes and business drivers
- DoD revenue fell 7.1% in the quarter and 6.5% for nine months, mainly reflecting lower other direct costs associated with the Afghanistan drawdown and sequestration-related reductions.
- Federal civilian agency revenue rose 17.0% in the quarter and 18.6% for nine months, substantially supported by acquisitions. The three acquisitions—Delta, Emergint, and IDL—contributed $55.8 million of revenue from their acquisition dates through March 31; total consideration was $106.3 million.
- Existing-operations revenue declined 5.7% in the quarter and 5.3% for nine months. Nine-month operating margin also declined, partly because the prior-year comparison benefited from unusually strong profitability on a large fixed-price contract.
- International segment revenue was $34.2 million for the quarter and $101.4 million for nine months; domestic operations remained the large majority of revenue.
Outlook, risks, and unusual items
- Management said sequestration and the continuing-resolution environment were reducing funding on some programs and could cause further reductions. It did not expect cancellation of any major programs, but said the impact would become clearer as customers implemented cuts. No numeric revenue or earnings guidance is provided in the supplied filing text.
- Management cited procurement delays and protests, contract renewal and termination risk, budget priorities and small-business set-asides, competition for cleared personnel, and acquisition-integration risks. Government contract audits and investigations are additional exposures.
- During Q3, CACI concluded it was probable that the performance target for its FY2013 employee PRSUs would not be met and reversed $1.5 million of previously recorded compensation expense. It also recorded $3.3 million of severance payments for former executives. A one-time grant of 300,000 RSUs was made to the new CEO.
- Potential contingencies include a government investigation with an accrued estimated exposure within a range of zero to $1.8 million; a False Claims Act investigation for which no liability was accrued because an unfavorable outcome was not considered probable; and German VAT audit exposure estimated at $1.5 million to $3.5 million, with no accrual. Management did not expect general legal matters or the Iraq-related matter to materially affect results or liquidity.
- The filing describes ongoing litigation related to Abu Ghraib allegations; CACI stated it was vigorously defending the proceedings and believed the lawsuit was without merit. CACI International Inc. had been dismissed from the action, while claims against its subsidiary remained in proceedings described in the filing.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How sequestration, procurement delays, and reduced DoD spending affected subsequent contract revenue, backlog, and margins.
- Whether acquisitions deliver expected growth and returns relative to their purchase price and added goodwill and intangible assets.
- Debt repayment and refinancing plans for the $300 million convertible notes due in 2014, as well as compliance with credit-facility covenants.
- Resolution and any financial consequences of the government investigations, German VAT audit, and remaining litigation.
- Whether the lower reported tax rate and earnings per share are sustainable, given the COLI gains and reduced share count.