CACI International Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three months ended September 30, 2013, CACI’s first fiscal quarter of FY2014. The company provides IT, intelligence, engineering, and other services, primarily to U.S. government customers; U.S. government contracts generated 94.2% of revenue, versus 94.5% a year earlier.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Quarter ended Sep. 30, 2013 | Quarter ended Sep. 30, 2012 | Change |
|---|---|---|---|
| Revenue | $864.3 | $931.2 | (7.2%) |
| Operating income | $61.2 | $64.7 | (5.5%) |
| Operating margin | 7.1% | 7.0% | Up 0.1 percentage point |
| Net income attributable to CACI | $33.0 | $35.7 | (7.6%) |
| Diluted EPS | $1.33 | $1.49 | (10.7%) |
| Operating cash flow | $27.3 | $71.3 | Down $44.0 |
- Direct costs were $601.4 million, or 69.6% of revenue, compared with 69.3%; indirect costs and selling expenses were $188.7 million, or 21.8% of revenue, compared with 22.3%. Management attributed the lower indirect-cost ratio partly to cost-reduction measures begun in the second half of FY2013.
- Operating income was pressured by a loss on a fixed-price contract. Lower material purchases and subcontract labor, associated with the Southwest Asia drawdown and federal budget reductions, contributed to lower revenue and direct costs.
- Cash and cash equivalents were $102.7 million at September 30, up from $64.3 million at June 30. Cash from investing activities was negative $4.0 million; financing activities provided $14.2 million.
- Operating cash flow fell year over year, which management attributed primarily to slower government invoice payments, partly due to sequestration-related furloughs at payment offices. Days sales outstanding was 65, versus 57 at September 30, 2012.
- Debt principal totaled $631.3 million ($618.9 million net of unamortized discount and issuance costs), including $300.0 million of convertible notes and $331.3 million under the bank facility. The current portion of debt was $299.0 million. The notes mature May 1, 2014; management expected to repay them with available credit, cash, or proceeds from a new debt security.
- The company reported compliance with its credit-facility financial covenants. The facility’s effective interest rate, including swaps, was 2.08% at quarter-end. A 1 percentage-point change in applicable rates would have changed quarterly interest expense on variable-rate debt by approximately $0.8 million.
Material changes and business drivers
- Department of Defense revenue declined 12.4% to $617.6 million, a decrease of $87.4 million. Federal civilian agency revenue grew 12.3% to $196.2 million, which management attributed primarily to acquisitions completed in the prior December quarter.
- Domestic operations generated $830.9 million in revenue and $30.7 million of net income attributable to CACI; international operations generated $33.4 million and $2.3 million, respectively.
- Interest expense and other, net increased 8.9% to $7.4 million; management cited accrued interest related to the Virginia sales-and-use-tax audit. The effective tax rate was 38.2%, compared with 38.1%.
- Weighted-average diluted shares increased to 24.835 million from 23.980 million, including a larger dilutive effect from the convertible notes.
Outlook, risks, contingencies, and unusual items
- Management estimated the October 1–16, 2013 federal government shutdown would reduce revenue by $10 million and operating income by $4 million in the quarter ending December 31, 2013, with some lost work potentially recovered in the second half of FY2014.
- Management expected sequestration-related funding reductions to continue through FY2014. CACI reported reduced funding on some programs but did not expect cancellation of any major programs. It also cited contract-award protests, procurement delays, possible spending shifts, and challenges recruiting and retaining cleared personnel.
- On October 8, 2013, after quarter-end, CACI agreed to acquire Six3 Systems for $820 million, subject to regulatory approvals, with closing anticipated in the quarter ending December 31, 2013. It secured an $800 million financing commitment and expected to use that financing and revolver borrowings. The quarter included $1.7 million of acquisition-related expenses.
- Other exposures include government contract audits, a Defense Criminal Investigative Service subpoena concerning one contract (estimated possible outcome range of $0–$1.8 million, with an accrual for management’s best estimate), a German VAT audit (estimated possible losses of $1.5–$3.5 million, not accrued), and a Virginia sales-and-use-tax audit (estimated range $0.9–$3.7 million, with an accrual for management’s best estimate).
- The filing describes ongoing detainee-related litigation, including a new complaint by 55 plaintiffs; CACI said it was vigorously defending the cases and believed them to be without merit. Management stated that other ordinary-course legal matters were not expected to have a material adverse effect.
- The company stated that its available cash, internally generated funds, and bank borrowings should meet operating and customary liquidity needs for the next 12 months. It cautioned that longer-term cash generation and financing needs, including those associated with Six3, depend on future performance and factors outside its control.
Important facts for investors to verify
- Whether government payment timing normalizes and DSO and operating cash flow improve.
- The revenue and margin effects of sequestration, the federal shutdown, contract protests, and the fixed-price contract loss.
- Six3’s closing, final financing terms, acquisition integration, and resulting debt and interest burden.
- The repayment or refinancing of the $300 million convertible notes due May 2014 and compliance with credit-facility covenants.
- Developments in the government investigations, contract-cost audits, tax audits, and litigation, including any changes to recorded estimates.