CACI International Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. The filing also reports fourth-quarter results; it is not a standalone 2013 Q4 filing. CACI provides information technology and mission-support services, primarily to U.S. government customers.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $3.565 billion | $3.682 billion |
| Operating income / margin | $257.4 million / 7.2% | $270.8 million / 7.4% |
| Net income attributable to CACI | $135.3 million | $151.7 million |
| Diluted EPS | $5.38 | $6.35 |
| Cash from operations | $198.6 million | $249.3 million |
| Cash and cash equivalents, June 30 | $64.5 million | $64.3 million |
| Total debt principal, June 30 | $1.285 billion | $611.3 million |
- Revenue declined 3.2%; operating income fell 5.0%, net income attributable to CACI fell 10.8%, and diluted EPS declined 15.3%.
- Operating cash flow decreased by $50.7 million. Investing activities used $851.7 million, including $839.1 million for acquisitions; financing activities provided $651.5 million, largely reflecting borrowing to fund the Six3 acquisition.
- Working capital was $313.3 million, compared with negative $18.7 million a year earlier; the prior-year figure reflected the $300 million convertible notes classified as current before their May 2014 maturity.
- At year-end, $810.5 million was outstanding under the term loan and $475.0 million under the revolver. The company reported compliance with credit-facility covenants. It had $850 million of revolving capacity, subject to facility terms and outstanding borrowings.
- Cost-reimbursable contracts generated 49.0% of revenue, fixed-price contracts 30.7%, and time-and-materials contracts 20.3%. U.S. government customers generated 94.0% of revenue, including 72.3% from DoD.
Business changes and fourth-quarter results
- Revenue fell primarily because of lower DoD activity, delayed contract awards, reduced Afghanistan-related material purchases, lower professional-services run rates, sequestration, and the 16-day U.S. government shutdown in October 2013. CACI attributed approximately $13 million of lost revenue to the shutdown.
- The November 2013 acquisition of Six3 Systems for approximately $847.3 million of final consideration added $268.4 million of revenue and $8.9 million of net income from acquisition through year-end. Excluding Six3, revenue declined 10.5% year over year.
- Six3-related acquisition expenses were $11.7 million; amortization of acquired intangible assets and a $4.1 million debt-extinguishment loss also weighed on results. Interest expense and other rose 47.8% to $38.2 million, principally due to acquisition financing.
- FY2014 fourth-quarter revenue was $905.7 million, operating income $69.2 million, net income attributable to CACI $36.5 million, and diluted EPS $1.49. In the prior-year fourth quarter, the respective figures were $912.9 million, $67.9 million, $37.9 million, and $1.56.
- Total backlog was $7.1 billion at June 30, 2014, versus $6.9 billion a year earlier; $1.6 billion was funded. Management expected most funded backlog to convert to revenue in FY2015, while noting that backlog—especially unfunded amounts—is not a guarantee of future revenue.
Outlook, risks and contingencies
- No specific FY2015 revenue or earnings guidance is provided in the filing. Management expected constrained federal spending and sequestration effects to continue into government FY2015, while expressing confidence in opportunities in areas such as cybersecurity, cloud computing, analytics, and modernization.
- Key exposures include dependence on federal contracting and DoD budgets, contract award delays and protests, contract termination or non-renewal, pricing competition, cost-estimation risk on fixed-price work, funding uncertainty, and the ability to recruit cleared personnel and integrate acquisitions.
- Floating-rate debt creates interest-rate exposure; $400 million of debt was hedged with swaps. Management estimated that a 1-percentage-point rate change would affect annual interest expense by about $7.5 million. The facility matures November 15, 2018 and includes financial and other restrictive covenants.
- Goodwill was $2.19 billion, including $702.7 million recorded for Six3. The annual impairment test found no impairment; management cautioned that changed assumptions or market conditions could lead to a future charge.
- Material legal and government matters disclosed include the Abu Ghraib-related Al Shimari litigation, remanded for further proceedings on June 30, 2014; a related 55-plaintiff Abbass case stayed pending the Al Shimari appeal; government contract investigations; and tax audits. CACI said it was defending the lawsuits and did not consider the claims meritorious. It accrued its best estimate for certain matters, including a Virginia sales-and-use-tax audit range of $2.8–$4.8 million; it estimated possible German VAT losses of $1.5–$3.5 million without accruing a liability.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded Six3 from the year-end internal-control assessment; Six3 represented 7.5% of FY2014 revenue.
Most important facts for investors to verify
- Whether government budget constraints, sequestration, continuing resolutions, and award delays continue to pressure core DoD revenue and margins.
- Whether Six3 delivers expected growth and strategic benefits, and how acquisition debt, interest costs, and acquired-intangible amortization affect earnings and cash generation.
- How much of the $7.1 billion backlog is funded, ordered, and likely to convert, and whether reported cash flow can support debt service and scheduled repayments.
- Developments in the Al Shimari and Abbass cases, contract-related investigations and audits, and the tax matters, including potential outcomes beyond recorded accruals.
- Quarterly and annual filings for updated guidance, covenant headroom, interest-rate exposure, goodwill impairment indicators, and integration or control updates concerning Six3.