CACI International Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015; filed August 21, 2015. The filing also reports fourth-quarter results. Although the request metadata says “2014 Q4,” the filing covers FY2015 and compares its fourth quarter with the quarter ended June 30, 2014.
Business context
CACI provides information technology solutions and services, primarily to U.S. federal government customers, across defense, intelligence, and civilian markets. It reported approximately 16,600 employees. Federal government work generated 93.7% of FY2015 revenue, including 66.9% from the Department of Defense. The company completed its acquisition of LTC Engineering Associates for $16.0 million in April 2015.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $3.313 billion | $3.565 billion |
| Operating income | $236.4 million | $257.4 million |
| Operating margin | 7.1% | 7.2% |
| Net income attributable to CACI | $126.2 million | $135.3 million |
| Diluted EPS | $5.17 | $5.38 |
| Cash from operations | $223.2 million | $198.6 million |
| Cash and cash equivalents at year-end | $35.4 million | $64.5 million |
| Working capital at year-end | $276.8 million | $313.3 million |
FY2015 revenue declined 7.0%, operating income fell 8.2%, and attributable net income fell 6.7% year over year. The operating margin eased 0.1 percentage point. Cash from operations increased about 12.4%. Capital expenditures were $17.4 million; investing cash outflow was $31.4 million, versus $851.7 million in FY2014, which included the Six3 acquisition.
Fourth quarter: Revenue was $865.5 million, operating income $75.1 million, net income attributable to CACI $41.4 million, and diluted EPS $1.68. Compared with FY2014 Q4, revenue decreased 4.4%, while operating income increased 8.4% and attributable net income increased 13.3%.
Debt and liquidity: At June 30, 2015, principal borrowings were $1.074 billion: $779.3 million under the term loan and $295.0 million under the revolving facility. The balance-sheet debt amount, net of issuance costs, was $1.068 billion. The revolving facility totals $850 million; CACI reported compliance with its financial covenants. Its credit facility was amended to extend maturity to June 1, 2020. The filing states that internally generated funds, available bank borrowings, and cash on hand should cover operations and obligations over the next 12 months.
Backlog: Total backlog was $9.6 billion at June 30, 2015, up from $7.1 billion a year earlier; $2.0 billion was funded. CACI expected most funded backlog to generate revenue in FY2016, while noting backlog may not convert to revenue.
Material changes and management commentary
- DoD revenue fell 14.0% to $2.217 billion, primarily reflecting reduced subcontractor and other direct costs, the Southwest Asia drawdown, contract end-of-life, and government budget constraints. Federal civilian revenue rose 15.1% to $888.2 million, supported by Six3, OPM contract growth, and new work.
- Management attributed lower operating income partly to startup and ramp-up costs on the growing OPM contract and federal budget reductions. Indirect costs and selling expenses increased to 24.7% of revenue from 22.9%.
- Revenue mix shifted: cost-reimbursable contracts were 46.3% of revenue, fixed-price 35.6% (up from 30.7%), and time-and-materials 18.1% (down from 20.3%). Management notes margins can vary with contract mix and performance.
- Management expected constrained federal discretionary spending and sequestration effects to continue into U.S. government FY2016. It warned that full sequestration could resume October 1, 2015 absent changes to spending levels. The filing provides no specific numeric earnings or revenue guidance.
- No cash dividends have been paid, and CACI said it did not intend to pay them at that time. Goodwill was $2.190 billion; the annual impairment test found no impairment and management said reporting units were not then at near-term risk.
Risks, contingencies, and unusual items
- High exposure to federal budgets, appropriations, contract renewals and options, competitive rebidding, bid protests, and potential contract termination; the top ten revenue-producing contracts represented 35.2% of FY2015 revenue.
- Fixed-price execution and cost-estimation risk, pressure on pricing and contract fees, and reliance on subcontractors and cleared, skilled employees.
- Substantial debt with floating-rate exposure; $600 million of floating-rate debt was hedged with swaps. Management estimated a 1-percentage-point rate change would alter annual interest expense by approximately $7.2 million.
- Government contract audits and investigations remain relevant. DCAA audits of incurred costs after FY2008 were incomplete; the company had appealed determinations for FY2006–FY2008. The filing describes a government investigation and a False Claims Act inquiry, for which CACI reported accruing its best estimate of potential loss in one matter and no liability in the other because an unfavorable outcome was not considered probable.
- Two Iraqi detainee-related lawsuits were disclosed. In Al Shimari, the district court entered judgment for CACI Premier Technology in June 2015; plaintiffs appealed in July 2015. The Abbass action was stayed pending the Al Shimari appeal. CACI said it believed the lawsuits were without merit.
- Other disclosed matters include a Virginia sales-and-use-tax audit with an accrued estimated range of $2.9 million to $5.1 million, and a German VAT audit with reasonably possible losses estimated at zero to $3.2 million. Management did not expect the DCAA audit adjustments to be material based on its accruals.
- On July 1, 2015, after year-end, CACI acquired U.K. company Rockshore for $5.5 million initial consideration plus up to $5.5 million in earn-out payments.
Important facts for investors to verify
- Whether FY2016 federal appropriations, sequestration, or continuing resolutions affect contract funding, award timing, and backlog conversion.
- How much of the $9.6 billion backlog is ultimately funded and realized, and whether the DoD revenue decline stabilizes.
- Debt repayment capacity, covenant headroom, and sensitivity to interest rates and operating cash flow.
- Progress and potential exposure from the disclosed litigation, contract investigations, tax audits, and pending government cost audits.
- Whether OPM contract ramp-up costs, fixed-price work, and acquisition integration affect margins and earnings.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of June 30, 2015.