CACI International Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and six months ended December 31, 2019 (fiscal Q2 and first half of FY2020). CACI provides expertise and technology to U.S. government and other customers, primarily in defense, intelligence, and federal civilian markets. U.S. government agencies generated 95.5% of revenue in the first half, compared with 95.1% a year earlier.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $1,395.5 million | $1,181.6 million | $2,758.9 million | $2,347.5 million |
| Operating income | $110.2 million | $102.3 million | $210.3 million | $201.9 million |
| Net income | $79.2 million | $68.6 million | $147.2 million | $147.4 million |
| Diluted EPS | $3.11 | $2.71 | $5.78 | $5.81 |
| Operating margin | 7.9% | 8.7% | 7.6% | 8.6% |
| Net margin | 5.7% | 5.8% | 5.3% | 6.3% |
- Growth and earnings: Q2 revenue rose 18.1% and net income rose 15.5%. First-half revenue rose 17.5%, while net income was nearly flat, down 0.2%; diluted EPS declined 0.5%.
- Cash flow: First-half operating cash flow was $237.0 million, up from $139.5 million. Investing used $143.1 million, including $102.1 million for acquisitions and $41.0 million of capital expenditures. Financing used $97.5 million; cash declined $3.4 million to $68.6 million.
- Liquidity and debt: Current assets were $1,024.1 million and current liabilities $769.4 million (current ratio about 1.33). Debt principal was $1,608.0 million, versus $1,676.5 million at June 30, 2019; cash was $68.6 million. The $1.5 billion revolving facility had $740 million drawn. The effective borrowing rate, including swaps, was 3.12%; the company reported compliance with financial covenants.
- Contract base: Remaining performance obligations were $6.4 billion; the company expected about 84% to be recognized as revenue in the next 12 months. Total backlog was $20.3 billion, including $2.8 billion funded. Backlog includes unexercised options and is not assurance of future revenue.
Material changes and management commentary
- Revenue growth reflected organic program growth, new awards, and acquisitions, partly offset by completed contracts. Q2 DoD and federal civilian revenue increased $155.6 million and $54.1 million, respectively, year over year.
- Direct costs fell as a share of revenue, but indirect costs and selling expenses rose to 25.3% of Q2 revenue from 22.8% and to 25.7% for the first half from 22.8%. Management cited higher research and development, bid and proposal spending, acquisition-related indirect labor, and workforce benefits. Depreciation and amortization also increased following acquisitions.
- Interest expense rose 56.2% in Q2 and 72.2% for the first half, primarily due to higher debt associated with acquisitions. The LGS acquisition, completed in March 2019, had purchase consideration of approximately $757.1 million. Three additional strategic acquisitions closed in Q2 for approximately $105.8 million in aggregate; purchase accounting remained preliminary.
- Contract estimate-at-completion (EAC) adjustments increased pretax income by $17.2 million in Q2 and $23.8 million in the first half, compared with $4.2 million and $10.6 million in the comparable periods. These estimates are subject to change as contract costs, schedules, and fees are reassessed.
- The effective tax rate was 17.1% for Q2 and 17.7% for the first half, down from 26.1% and 19.7%. Management attributed the decrease primarily to excess tax benefits on stock compensation; it noted the FY2020 rate could fluctuate with gains or losses on company-owned life insurance assets.
- Management said enacted FY2020 federal appropriations increased defense and non-defense funding and expressed confidence in continued investment in defense and national security. It stated that available cash, operating cash flow, and borrowing capacity should support operations and obligations over the next 12 months. No specific company revenue or EPS guidance is provided in the supplied filing text.
Risks, contingencies, and unusual items
- Key risks include dependence on U.S. government contracting and appropriations, procurement delays and bid protests, contract termination or performance issues, government audit outcomes, pricing competition, and recruiting and retaining cleared personnel. Continuing resolutions can delay new programs and awards.
- The Al Shimari litigation remains a significant legal matter; the district court stayed proceedings while CACI pursued a U.S. Supreme Court petition. The Supreme Court invited the Solicitor General to submit the government’s views. A related Abbass case remained stayed. CACI said it is vigorously defending the matters; management stated that the broader litigation is not expected to materially affect operations or liquidity.
- Government contract costs remain subject to audit. Management believes reserves for potential disallowances are adequate and does not expect audit adjustments to have a material effect.
- Adoption of lease accounting on July 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet; the company said adoption did not affect results or cash flows. At December 31, lease liabilities totaled $392.6 million.
- Interest-rate exposure remains on floating-rate debt despite $900 million of swaps. Management estimated that a one-percentage-point rate change would have changed first-half interest expense by approximately $3.6 million. The company also reported foreign-currency exposure, though it seeks to match contract currencies with expenses.
Important facts for investors to verify
- Whether revenue growth translates into improved operating and net margins, given increased indirect costs and acquisition-related amortization.
- How much first-half earnings benefited from favorable EAC adjustments and whether contract estimates remain supportable.
- Acquisition integration, final purchase-price allocations, and the returns generated relative to added debt and goodwill.
- Backlog funding, option exercise, and conversion to revenue; $17.5 billion of reported backlog was not funded at period end.
- Cash generation, receivables-sale activity, debt repayment capacity, and covenant headroom; DSO was 51 days versus 73 days a year earlier.
- Developments in the Al Shimari litigation, pending government contract audits, and the effect of appropriations or procurement delays.