CACI INTERNATIONAL INC The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our unaudited consolidated financial statements and the notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q.
Information Relating to Forward-Looking Statements
There are statements made herein that do not address historical facts and, therefore, could be interpreted to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risk factors that could cause actual results to be materially different from anticipated results. These risk factors include, but are not limited to, the following:
• our reliance on
the government contract procurement process (such as bid protest, small
business set asides, loss of work due to organizational conflicts of interest,
etc.) and termination risks;
• significant delays or reductions in appropriations for our programs and
broader changes in
• legislation that amends or changes discretionary spending levels or budget
priorities, such as for
COVID-19;
• legal, regulatory, and political change from successive presidential
administrations that could result in economic uncertainty;
• changes in
foreign events, or any other events which may affect the global economy,
including the impact of global pandemics like COVID-19;
• the results of government audits and reviews conducted by the Defense Contract
entities with cognizant oversight;
• competitive factors such as pricing pressures and/or competition to hire and
retain employees (particularly those with security clearances);
• failure to achieve contract awards in connection with re-competes for present
business and/or competition for new business;
• regional and national economic conditions in
including but not limited to: terrorist activities or war, changes in interest
rates, currency fluctuations, significant fluctuations in the equity markets,
and market speculation regarding our continued independence;
• our ability to meet contractual performance obligations, including
technologically complex obligations dependent on factors not wholly within our
control;
• limited access to certain facilities required for us to perform our work,
including during a global pandemic like COVID-19;
• changes in tax law, the interpretation of associated rules and regulations, or
any other events impacting our effective tax rate;
• changes in technology;
• the potential impact of the announcement or consummation of a proposed
transaction and our ability to successfully integrate the operations of our
recent and any future acquisitions;
• our ability to achieve the objectives of near term or long-term business
plans;
• the effects of health epidemics, pandemics and similar outbreaks may have
material adverse effects on our business, financial position, results of
operations and/or cash flows.
The above non-inclusive list of risk factors may impact the forward-looking
statements contained in this Quarterly Report on Form 10-Q. In addition, other
risk factors include, but are not limited to, those described in "Item 1A. Risk
Factors" within our Annual Report on Form 10-K. The forward-looking statements
contained in this Quarterly Report on Form 10-Q are as of the date of its
filing.
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--------------------------------------------------------------------------------Overview
The Company provides Expertise and Technology to Enterprise and Mission customers in support of national security missions and government transformation.
• Enterprise - CACI provides capabilities that enable the internal operations of
an agency. This includes business systems, business process reengineering, and
enterprise information technology (IT). For example, CACI customizes,
implements, and maintains commercial-off-the-shelf (COTS) and custom
enterprise resource planning (ERP) systems. This includes financial, human
capital, asset and material, and logistics and supply chain management
systems. CACI also designs, develops, integrates, deploys and sustains
enterprise-wide IT systems in a variety of models. As an
(AWS) Premier Consulting Partner and Microsoft Cloud Solution Provider for
Government, we deliver cloud-powered solutions, performance-based service
management, mobility, defensive cyber and network security, end-user services,
and infrastructure services.
• Mission - CACI provides capabilities that enable the execution of an agency's
primary function, or "mission". For example, we support strategic and tactical
Mission customers with capabilities in areas such as command and control,
communications, intelligence collection and analysis, signals intelligence
(SIGINT), electronic warfare (EW), and cyber operations. CACI develops tools
and offerings in an open, software-defined architecture with multi-domain and
multi-mission capabilities.
• Expertise - CACI provides Expertise to both Enterprise and Mission customers.
For Enterprise customers, we deliver talent with the specific technical and
functional knowledge to support internal agency operations. And for Mission
customers, we deliver talent with technical and domain knowledge to support
the execution of an agency's mission.
• Technology - CACI delivers Technology to both Enterprise and Mission
customers. For Enterprise customers, Technology includes developing and
implementing business systems, enterprise applications, and end-to-end IT
systems. We also modernize infrastructure through migration to the cloud and
IT or software as-a-service. For Mission customers, Technology includes
developing and deploying multi-domain offerings for signals intelligence,
electronic warfare, and cyber operations. We also deliver actionable
intelligence through multi-source collection and analysis. And we generate
unique intellectual property through advanced research and development.
Budgetary Environment
We carefully follow federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration. In lateJuly 2019 ,Congress passed the Bipartisan Budget Act of 2019 (BBA 2019), which increased the caps for defense and non-defense spending for government fiscal year (GFY) 2020 and GFY 2021, established discretionary spending caps for GFY 2020 and GFY 2021, and suspended the national debt limit throughJuly 2021 . OnAugust 2, 2019 , the President signed the measure into law. BBA 2019 called for defense spending, including Overseas Contingency Operations funds, of$738 billion in GFY 2020 and$740.5 billion in GFY 2021. Both represent increases from GFY 2019 levels of$716 billion , which itself represented an increase over GFY 2018 levels. InDecember 2019 ,Congress passed two GFY 2020 appropriations bills totaling$1.4 trillion:$738 billion for defense and$632 billion for non-defense agencies, which represent increases over GFY 2019 of$22 billion and$27 billion , respectively. OnDecember 20, 2019 , the President signed both bills into law. We believe that bipartisan support remains for continued investment in the areas of defense and national security. While we view the budget environment as favorable and believe there is bipartisan support for continued investment in the areas of defense and national security, it is uncertain when GFY 2021 appropriations bills will be passed. OnOctober 1, 2020 , the President signed a continuing resolution (CR), a temporary measure allowing the government to continue operations throughDecember 11, 2020 at prior year funding levels. During those periods of time when appropriations bills have not been passed and signed into law, government agencies operate under a CR. Depending on their scope, duration, and other factors, CRs can negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. When a CR expires, unless appropriations bills have been passed byCongress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. 20 --------------------------------------------------------------------------------
Impact of COVID-19
As travel restrictions, social distancing advisories, and other requirements began to be implemented in March, we instructed our workforce to begin to work remotely to the extent possible. While a majority of our workforce is able to work remotely, some employees must still travel to client or company facilities in order to work. While CACI employees were deemed part of the 'critical infrastructure workforce', ensuring their ability to work despite state travel limitations, our business still experienced some impacts as a result of COVID-19 risk mitigation efforts. For example, in order to reduce personnel concentration and ensure social distancing in classified environments, shift work was implemented, which reduced the number of hours our employees could work and we could bill customers on certain programs. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed byCongress and signed by the President onMarch 27, 2020 , provides a mechanism to bill hours where our employees are ready and able to work but unable to access required facilities due to COVID-19. This support was extended throughDecember 11, 2020 under the CR signed by the President onOctober 1, 2020 . We continue to work with our customers to implement the related provisions of the CARES Act, as well as appropriate risk mitigation efforts and alternative work arrangements.
Market Environment
Across our addressable market, we provide expertise and technology to government enterprise and mission customers. Based on the analysis of an independent market consultant retained by the Company, we believe that the total addressable market for our offerings is approximately$230 billion . Our addressable market is expected to continue to grow over the next several years. Approximately 70 percent of our revenue comes from defense-related customers, including those in the Intelligence Community (IC), with additional revenue coming from non-defense IC,homeland security , and other federal civilian customers. We continue to align the Company's capabilities with well-funded budget priorities and took steps to maintain a competitive cost structure in line with our expectations of future business opportunities. In light of these actions, as well as the budgetary environment discussed above, we believe we are well positioned to continue to win new business in our large addressable market. We believe that the following trends will influence the USG's spending in our addressable market:
• A favorable USG budget environment, particularly in defense and
intelligence-related areas;
• A shift in focus from readiness toward increased capabilities, effectiveness,
and responsiveness;
• Increased USG interest in faster contracting and acquisition processes;
• Increased focus on cyber, space, and the electromagnetic spectrum as key
domains for National Security;
• Continued focus on counterterrorism, counterintelligence, and counter
proliferation as key
• Balanced focus on enterprise cost reductions through efficiency, with
increased spend on infrastructure modernization and enhancements to cyber
security protections; and
• Increased investments in advanced technologies (e.g., Artificial Intelligence,
5G).
We believe that our customers' use of lowest price/technically acceptable (LPTA)
procurements, which contributed to pricing pressures in prior years, has
moderated, though price still remains an important factor in procurements. We
also continue to see protests of major contract awards and delays in USG
procurement activities. In addition, many of our federal government contracts
require us to employ personnel with security clearances, specific levels of
education and specific past work experience. Depending on the level of
clearance, security clearances can be difficult and time-consuming to obtain and
competition for skilled personnel in the information technology services
industry is intense. Additional factors that could affect USG spending in our
addressable market include changes in set-asides for small businesses, changes
in budget priorities as a result of the COVID-19 pandemic, and budgetary
priorities limiting or delaying federal government spending in general.
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Results of Operations for the Three Months Ended
The following table provides the relative percentage that certain items of
expense and earnings bear to revenue for the three months ended
Dollar Amount Percentage of Revenue
Three Months Ended Three Months Ended
September 30, September 30, Change
(dollars in thousands) 2020 2019 2020 2019 $ %
Revenue $ 1,459,506 $ 1,363,392 100.0 % 100.0 % $ 96,114 7.0 %
Operating costs and
expenses:
Costs of revenue 939,934 878,881 64.4 64.5 61,053 6.9
Indirect costs and selling
expenses 355,004 357,592 24.3 26.2 (2,588 ) (0.7 )
Depreciation and
amortization 30,144 26,762 2.1 2.0 3,382 12.6
Total operating costs and
expenses 1,325,082 1,263,235 90.8 92.7 61,847 4.9
Income from operations 134,424 100,157 9.2 7.3 34,267 34.2
Interest expense and other,
net 9,980 16,811 0.7 1.2 (6,831 ) (40.6 )
Income before income taxes 124,444 83,346 8.5 6.1 41,098 49.3
Income tax expense 30,800 15,369 2.1 1.1 15,431 100.4
Net income $ 93,644 $ 67,977 6.4 % 5.0 % $ 25,667 37.8 %
Revenue. For the three months ended September 30, 2020 , total revenue was $1.5
billion , 7.0 percent greater than last year with 6.1 percent from organic
growth. The remaining growth in revenue was attributable to acquired
revenues. Out of our primary customer groups, Department of Defense and Federal
Civilian revenue increased by $66.6 million and $26.2 million , respectively,
compared with the same period a year ago.
The following table summarizes revenue by customer type with related percentages
of revenue for the three months ended September 30, 2020 and 2019, respectively:
Dollar Amount Percentage of Revenue
Three Months Ended Three Months Ended
September 30, September 30, Change
(dollars in thousands) 2020 2019 2020 2019 $ %
Department of Defense $ 1,004,195 $ 937,640 68.8 % 68.8 % $ 66,555 7.1 %
Federal Civilian Agencies 390,179 363,993 26.7 26.7 26,186 7.2
Commercial and other 65,132 61,759 4.5 4.5 3,373 5.5
Total $ 1,459,506 $ 1,363,392 100.0 % 100.0 % $ 96,114 7.0 %
•
single largest customer, where our services focus on supporting readiness,
tactical military intelligence, and communications systems.
includes contracts with the
• Federal civilian agencies' revenue primarily includes services and products
provided to non-
including intelligence agencies and Departments of Justice, Agriculture,
• Commercial and other revenue primarily includes services and products provided
to
governments and agencies through our International reportable segment.
Costs of Revenue. For the three months endedSeptember 30, 2020 , costs of revenue increased$61.1 million or 6.9 percent, compared with the same period a year ago. As a percentage of revenue, costs of revenue were 64.4 percent and 64.5 percent for the three months endedSeptember 30, 2020 and 2019. While overall costs of revenue increased primarily related to direct labor costs from organic growth on existing programs and acquired contracts, our margins improved against the comparative period due to certain fixed-price contracts that we were able to deliver on with significantly less costs than originally estimated. Indirect Costs and Selling Expenses. For the three months endedSeptember 30, 2020 , indirect costs and selling expenses decreased$2.6 million or 0.7 percent, compared with the same period a year ago. As a percentage of revenue, indirect costs and selling expenses were 24.3 percent and 26.2 percent for the three months endedSeptember 30, 2020 and 2019, respectively. This percentage decrease is driven primarily by reduced bid and proposal (B&P) costs, indirect travel, and recruiting expenses, partially offset by increased expenses due to a larger workforce, resulting in increased labor, fringe benefits and facility costs. 22 -------------------------------------------------------------------------------- Depreciation and Amortization. For the three months endedSeptember 30, 2020 , depreciation and amortization expense increased$3.4 million or 12.6 percent, compared with the same period a year ago. The increase is primarily attributable to intangible amortization from recent acquisitions and increased depreciation from the Company's higher average property and equipment balances. Interest Expense and Other, Net. For the three months endedSeptember 30, 2020 , interest expense and other, net decreased$6.8 million or 40.6 percent, compared with the same period a year ago. The decrease in interest expense is primarily attributable to lower average outstanding debt balances on the Company's Credit Facility and lower interest rates. Income Tax Expense. For the three months endedSeptember 30, 2020 , the effective tax rate was 24.8 percent compared to 18.4 percent for the same period last year. The Company's effective tax rate was lower in the prior year quarter primarily due to the timing of excess tax benefits of employee stock-based payment plan awards. For both comparative reporting periods, the Company's effective tax rate was impacted by the change in value of assets invested in COLI policies. If gains or losses on the COLI investments throughout the rest of the current fiscal year vary from our estimates, our FY2021 effective tax rate will fluctuate. Contract Backlog The Company's backlog represents total value on our existing contracts that has the potential to be recognized into revenue as work is performed. The Company includes unexercised option years in its backlog amount and excludes task orders that may be issued underneath a multiple award IDIQ vehicle until such task orders are issued.
The Company's backlog as of period end is either funded or unfunded:
• Funded backlog represents contract value appropriated by a customer that is
expected to be recognized into revenue.
• Unfunded backlog represents the sum of unappropriated contract value on
executed contracts and unexercised option years that is expected to be
recognized into revenue.
As ofSeptember 30, 2020 , the Company had total backlog of$21.9 billion , compared with$19.5 billion a year ago, an increase of 12.6 percent. Contract awards were$1.8 billion for the three months endedSeptember 30, 2020 . Funded backlog as ofSeptember 30, 2020 was$3.4 billion , compared with$3.3 billion a year ago, an increase of 3.8 percent. The total backlog consists of remaining performance obligations (see Note 6 - Revenue Recognition) plus unexercised options. There is no assurance that all funded or potential contract value will result in revenue being recognized. The Company continues to monitor our backlog as it is subject to change from execution of new contracts, contract modifications or extensions, government deobligations, or early terminations. Based on this analysis, an adjustment to the period end balance may be required.
Liquidity and Capital Resources
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. Existing cash and cash equivalents and cash generated by operations are our primary sources of liquidity, as well as sales of receivables under our MARPA (as defined and discussed in Note 10) and available borrowings under our Credit Facility (as defined in Note 11) described below. The Company has a$2,438.4 million Credit Facility, which consists of an$1,500.0 million Revolving Facility and a$938.4 million Term Loan. The Revolving Facility is a secured facility that permits continuously renewable borrowings and has subfacilities of$100.0 million for same-day swing line borrowings and$25.0 million for stand-by letters of credit. As ofSeptember 30, 2020 , we had$790.0 million outstanding under the Revolving Facility and no borrowings on the swing line. The Term Loan is a five-year secured facility under which principal payments are due in quarterly installments of$11.7 million until the balance is due in full onJune 30, 2024 . As ofSeptember 30, 2020 ,$832.8 million was outstanding under the Term Loan. The interest rates applicable to loans under the Credit Facility are floating interest rates that, at our option, equal a base rate or a Eurodollar rate plus, in each case, an applicable margin based upon our consolidated total leverage ratio. 23
-------------------------------------------------------------------------------- The Credit Facility requires us to comply with certain financial covenants, including a maximum total leverage ratio and a minimum interest coverage ratio. The Credit Facility also includes customary negative covenants restricting or limiting our ability to guarantee or incur additional indebtedness, grant liens or other security interests to third parties, make loans or investments, transfer assets, declare dividends or redeem or repurchase capital stock or make other distributions, prepay subordinated indebtedness and engage in mergers, acquisitions or other business combinations, in each case except as expressly permitted under the Credit Facility. Since the inception of the Credit Facility, we have been in compliance with all of the financial covenants. A majority of our assets serve as collateral under the Credit Facility.
A summary of the change in cash and cash equivalents is presented below:
Three Months Ended
September 30,
2020 2019
Net cash provided by operating activities $ 176,900 $ 103,204
Net cash provided by (used in) investing activities (370,377 ) (23,887 ) Net cash provided by (used in) financing activities 208,939 (67,062 ) Effect of exchange rate changes on cash 2,164 (1,101 ) Net increase in cash and cash equivalents$ 17,626 $
11,154
Our operating cash flow was$176.9 million for the three months endedSeptember 30, 2020 . This represents an increase of$73.7 million or 71.4 percent, from our operating cash flows of$103.2 million for the three months endedSeptember 30, 2019 . The year-over-year increase is primarily related to increases of$25.7 million in FY2021 net income,$31.5 million related to deferrals of employer related social security taxes under the CARES Act, and$16.5 million of other net favorable working capital changes. Days sales outstanding (DSO) was 47 days atSeptember 30, 2020 , compared with 53 days atSeptember 30, 2019 . Cash used in investing activities was$370.4 million and$23.9 million during the three months endedSeptember 30, 2020 and 2019, respectively. During the three months endedSeptember 30, 2020 , we paid$354.1 million for business acquisitions, as compared to$1.4 million during the same period a year ago. Capital expenditures of$16.3 million and$22.5 million during the first three months of FY2021 and FY2020, respectively, accounted for the remaining funds used in investing activities. Cash provided by financing activities was$208.9 million during the three months endedSeptember 30, 2020 , compared to cash used in financing activities of$67.1 million during the same period a year ago. During the three months endedSeptember 30, 2020 , we had net borrowings under our Credit Facility of$209.3 million compared to net repayments of$66.7 million during the same period a year ago. During the three months endedSeptember 30, 2020 andSeptember 30, 2019 , we also used cash of$0.7 million and$0.5 million , respectively, to pay taxes on equity transactions. We believe that the combination of internally generated funds, available bank borrowings and cash and cash equivalents on hand will provide the required liquidity and capital resources necessary to fund on-going operations, customary capital expenditures, debt service obligations, and other working capital requirements over the next twelve months. We may in the future seek to borrow additional amounts under a long-term debt security. Over the longer term, our ability to generate sufficient cash flows from operations necessary to fulfill the obligations under the Credit Facility and any other indebtedness we may incur will depend on our future financial performance which will be affected by many factors outside of our control, including worldwide economic and financial market conditions. Critical Accounting Policies
There have been no significant changes to the Company's critical accounting
policies as disclosed in our Annual Report on Form 10-K for the year ended
Off-Balance Sheet Arrangements and Contractual Obligations
We have no material off-balance sheet financing arrangements.
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