CACI International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2011 (the third quarter of fiscal 2011; fiscal year ends June 30). The filing is dated May 6, 2011. Unless noted otherwise, amounts below are U.S. dollars.
Business context and results
CACI provides professional services and information technology solutions, primarily to U.S. government customers. U.S. government agencies generated 94.8% of revenue in the nine-month periods in both 2011 and 2010; the Department of Defense was the principal source of growth.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $913.4 million, up 16.5% | $2,614.6 million, up 13.7% |
| Operating income | $61.8 million, up 30.6% | $173.3 million, up 23.1% |
| Operating margin | 6.8%, versus 6.0% | 6.6%, versus 6.1% |
| Net income attributable to CACI | $36.4 million, up 36.4% | $98.3 million, up 28.3% |
| Diluted EPS | $1.16, versus $0.87 | $3.16, versus $2.51 |
| Interest expense and other, net | $5.7 million, down 12.5% | $17.5 million, down 16.2% |
Management attributed higher operating margins mainly to strong direct labor growth and cost control. Indirect costs as a share of revenue declined, while direct costs increased as a share of revenue. Results also benefited from lower interest expense and, in the quarter, a $2.6 million reduction in acquisition-related contingent consideration.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $146.8 million, compared with $122.9 million a year earlier. Investing used $143.5 million, including $129.6 million for acquisitions; financing used $160.9 million.
- Cash was $98.3 million at March 31, 2011, down from $254.5 million at June 30, 2010. Accounts receivable was $573.1 million; reported days sales outstanding were 54, versus 59 at March 31, 2010.
- Total debt principal was $448.1 million: $300 million of 2.125% convertible notes and $148.1 million under the term loan. Debt carrying value was $408.9 million after unamortized discount. The notes mature in 2014; the credit facility expires in 2015. The facility’s effective interest rate on outstanding borrowings was 2.29% at March 31.
- The $750 million secured credit facility included a $600 million revolver; none was drawn at quarter-end. CACI briefly borrowed $150 million on April 8 amid a possible federal government shutdown and repaid it on April 11 after a budget agreement. The company reported compliance with credit-facility financial covenants.
- During the nine months, CACI repurchased approximately 0.9 million shares for $44.3 million. On May 2, the board authorized up to $175 million of additional share purchases; timing and actual purchases were not assured.
Changes, outlook, and risks
- Revenue growth was led by DoD: up 20.2% for the quarter and 16.3% for the nine months. Nine-month federal civilian revenue rose 1.5%, commercial and other rose 17.8%, and state and local revenue fell 21.1%.
- Organic revenue growth was 14.3% for the quarter and 11.6% for the nine months; acquired revenue was $17.0 million and $47.4 million, respectively. Acquisitions included TechniGraphics and Applied Systems Research in November 2010, and Chronotech in February 2011. Acquired businesses contributed $23.2 million of revenue from their acquisition dates through March 31.
- The filing provides no specific revenue or earnings guidance. Management said operating cash generation, available borrowing capacity, and cash on hand should fund operations, customary capital expenditures, debt service, and working capital needs over the next 12 months; longer-term debt capacity depends on future performance and factors outside the company’s control.
- Key business risks include federal budget priorities and contract funding, award protests and terminations, recompete and new-contract competition, small-business set-asides, reliance on cleared and skilled employees, acquisition integration, and government audits. Management noted uncertainty in the business environment and continuing protests of major awards.
- Legal proceedings related to allegations concerning Abu Ghraib remained pending; CACI said it was vigorously defending them and considered them without merit. The company did not expect general legal matters to materially affect operations or liquidity.
- Government contract audits and cost-allocation disputes remain possible. CACI accrued its best estimate within a $0–$3.4 million range for one questioned-cost matter and a $0–$2.9 million range for a DCMA dispute over legal-cost allocation; it appealed the latter determination.
- The quarter and nine-month effective tax rates were 34.7% and 36.6%, respectively. Management said non-taxable gains on corporate-owned life insurance affected the rates and that future gains or losses could cause fourth-quarter tax-rate fluctuations.
- The filing states that disclosure controls were effective at a reasonable assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether DoD-led organic growth and operating-margin improvement persist, given the high concentration in U.S. government work and variable subcontractor/material costs.
- Federal budget and procurement developments, contract protests, recompete outcomes, and funding or termination decisions affecting major programs.
- Cash conversion, receivables and DSO, acquisition integration and performance, and any further use of the revolver or share-repurchase authorization.
- Debt-service and covenant capacity, including the 2014 convertible-note maturity and floating-rate exposure; management estimated a 1% interest-rate change would affect nine-month interest expense by about $1.3 million.
- Developments in Abu Ghraib-related litigation and government cost audits, including whether accrued estimates require revision.
- Tax-rate variability from corporate-owned life insurance investment gains or losses and acquisition-related contingent consideration remeasurements.