CACI International Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended December 31, 2012; comparative period ended December 31, 2011. CACI provides IT and professional services, primarily to U.S. government customers. U.S. government contracts represented 94.4% of revenue in the six-month period. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $931.6 | $973.2 | $1,862.9 | $1,897.6 |
| Operating income | $69.6 | $74.7 | $134.3 | $150.4 |
| Operating margin | 7.5% | 7.7% | 7.2% | 7.9% |
| Net income attributable to CACI | $39.7 | $41.1 | $75.4 | $83.2 |
| Diluted EPS | $1.69 | $1.51 | $3.17 | $2.91 |
| Operating cash flow | Not separately provided | Not separately provided | $91.5 | $85.3 |
- Q2 revenue fell 4.3%; operating income declined 6.9% and net income 3.4%. Six-month revenue fell 1.8%, operating income 10.7%, and net income 9.4%.
- EPS rose despite lower net income, alongside a substantial reduction in weighted-average shares: Q2 basic shares were 22.9 million versus 26.5 million; six-month basic shares were 22.9 million versus 27.7 million.
- Six-month effective tax rate was 37.6%, down from 39.7%; management attributed the reduction to non-taxable gains on corporate-owned life insurance investments and cautioned the rate may fluctuate.
Revenue mix and material changes
- Q2 DoD revenue fell 8.5% to $703.5 million, primarily due to lower subcontractor other direct costs following the Afghanistan drawdown. Federal civilian revenue rose 10.5% to $175.8 million; acquisitions contributed $16.0 million of the $16.6 million increase.
- For the six months, DoD revenue declined 6.2% to $1,408.5 million. Federal civilian revenue increased 19.5% to $350.4 million, including $39.8 million from acquisitions and $17.5 million from existing operations.
- Existing-operations revenue declined 6.9% in Q2 and 5.1% for six months. The six-month comparison also reflected a $12.0 million commercial product sale in the prior-year period.
- Three acquisitions—Delta, Emergint, and IDL—closed during the six months. Estimated total consideration was $106.8 million; preliminary purchase accounting allocated $71.5 million to goodwill and $19.9 million to intangible assets. Acquired businesses contributed $28.7 million of revenue through December 31.
- Management noted that the prior-year six-month operating margin benefited from better-than-expected profitability on a large fixed-price contract. Indirect costs and selling expenses rose to 22.4% of revenue from 21.3% for the six-month comparison.
Liquidity, debt, and cash flow
- Cash was $37.5 million at December 31, up from $15.7 million at June 30, 2012. Working capital increased to $263.0 million from $200.9 million. Days sales outstanding were 59, compared with 61 a year earlier.
- Six-month operating cash flow was $91.5 million. Investing activities used $112.5 million, including $100.1 million for acquisitions; financing activities provided $42.3 million. CACI repurchased 2.2 million shares for $125.4 million during the period.
- Debt principal totaled $725.0 million ($300.0 million convertible notes, $135.0 million term loan, and $290.0 million revolver); reported debt net of discount and issuance costs was $702.7 million. Debt was $534.8 million net at June 30, 2012.
- The secured credit facility totals $900.0 million, including a $750.0 million revolving facility; $290.0 million was drawn on the revolver at period-end. The company reported compliance with its financial covenants. The credit-facility effective rate was 1.71%; a 1% rate change would have affected six-month interest expense by approximately $2.0 million.
- The $300.0 million convertible notes mature May 1, 2014. No conversion conditions had been met at December 31, 2012. CACI expects cash, internally generated funds, and available borrowings to meet needs over the next twelve months.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided in the filing. Management described heightened customer caution on awards and spending amid the continuing resolution and uncertainty over sequestration, scheduled at the time to take effect March 1, 2013. CACI reported reduced funding on some programs but did not expect cancellation of any major program.
- Key business risks include federal budget cuts or shifts in priorities, procurement delays and bid protests, contract termination or non-renewal, competition for cleared personnel, and successful integration of acquisitions. The filing states there were no material changes to the risk factors in the prior Form 10-K.
- The company is cooperating with a Defense Criminal Investigative Service investigation concerning a contract and accrued its current best estimate within a stated potential outcome range of $0–$1.8 million. The Department of Justice is investigating possible False Claims Act issues under a GSA contract; no liability was accrued because an unfavorable outcome was not considered probable based on then-current knowledge.
- German VAT audits carry an estimated reasonably possible loss range of $1.5–$3.5 million, with no liability accrued. Other lawsuits and government-contract audits were not expected by management to have a material adverse effect. The Abu Ghraib-related civil case remained active; CACI said it was vigorously defending the case and considered it without merit.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Investor verification priorities
- Track DoD contract revenue, subcontractor costs, Afghanistan-related work, and the effect of federal budget decisions and sequestration.
- Assess whether operating margins stabilize after the decline and whether indirect costs remain elevated.
- Review acquisition integration, final purchase-price allocations, and the contribution of acquired revenue to reported growth.
- Monitor debt growth, cash generation, share repurchases, covenant headroom, and the May 2014 convertible-note maturity.
- Follow the DCIS and DOJ investigations, German VAT exposure, and the Abu Ghraib-related litigation for changes in status or estimated exposure.