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 condensed 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 onU.S. government contracts, which includes general risk around 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 forhomeland security or to address global pandemics like COVID-19;
•legal, regulatory, and political change from successive presidential administrations that could result in economic uncertainty;
•changes in
•the results of government audits and reviews conducted by the
•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 inthe United States and globally, 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; and
•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.
16
--------------------------------------------------------------------------------Overview
The Company provides Expertise and Technology to Enterprise and Mission customers in support of national security and government modernization.
•Enterprise - CACI provides capabilities that enable the internal operations of a government agency.
•Mission - CACI provides capabilities that enable the execution of a government agency's primary function, or "mission".
•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. Examples include functional software development expertise, data and business analysis, and IT operations support. For Mission customers, we deliver talent with technical and domain knowledge to support the execution of an agency's mission. Examples include engineering expertise such as naval architecture, marine engineering, and life cycle support; and mission support expertise such as intelligence and special operations support, and network and exploitation analysis. •Technology - CACI delivers Technology to both Enterprise and Mission customers. For both Enterprise and Mission, CACI provides: Software development at scale using open modern architectures, DevSecOps, and agile methodologies; and advanced data platforms, data operations and analyst-centric analytics including application of Artificial Intelligence and multi-source analysis. Additional examples of Enterprise technology include: Network and IT modernization; Commercial Solutions for Classified (CSfC); The customization, implementation, and maintenance of commercial-off-the-shelf (COTS) and enterprise resource planning (ERP) systems including financial, human capital, and supply chain management systems; and cyber security active defense and zero trust architectures. Additional examples of Mission technology include: Developing and deploying multi-domain offerings for signals intelligence, resilient communications, free space optical communications, electronic warfare including Counter-UAS, cyber operations, and Radio Frequency (RF) spectrum awareness, agility and usage. CACI invests ahead of customer need with research and development to generate unique intellectual property and differentiated technology addressing critical national security and government modernization needs. Budgetary Environment We carefully follow federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration. OnDecember 29, 2022 , the President signed into law the omnibus appropriations bill that provided full-year funding for the government fiscal year (GFY) endingSeptember 30, 2023 (GFY23). Of the total approximately$1.7 trillion in discretionary funding, approximately$858 billion was for national defense and approximately$773 billion was for nondefense, as well as an additional$47 billion of supplemental funding forUkraine . The defense and nondefense funding levels represent increases of approximately 10% and 6%, respectively, over GFY22 enacted levels, which themselves were increases of approximately 6% and 7%, respectively, over GFY21. OnMarch 9, 2023 , the President released his budget request for GFY24, which calls for an increase in defense spending of approximately 3% and an increase in nondefense spending of approximately 8% over GFY23 levels. While future levels of defense and nondefense spending are difficult to project, we believe that there continues to be bipartisan support for defense and national security-related spending, particularly given the heightened current global threat environment, including the conflict inUkraine . While we view the budget environment as constructive and believe there is bipartisan support for continued investment in the areas of defense and national security, it is uncertain when in any particular GFY that appropriations bills will be passed. During those periods of time when appropriations bills have not been passed and signed into law, government agencies operate under a continuing resolution (CR), a temporary measure allowing the government to continue operations at prior year funding levels. 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. Market Environment 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$260 billion . Our addressable market is expected to continue to grow over the next several years. Approximately 70% 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 stable-to-higher USG budget environment, particularly in defense and intelligence-related areas;
•Increased focus on cyber, space, and the electromagnetic spectrum as key domains for National Security;
17
--------------------------------------------------------------------------------•Increased spend on network and application modernization and enhancements to cyber security posture;
•Increased investments in advanced technologies (e.g., Artificial Intelligence, 5G), particularly software-based technologies;
•Increasing focus on near-peer competitors and other nation state threats;
•Continued focus on counterterrorism, counterintelligence, and counter
proliferation as key
•Increased demand for innovation and speed of delivery.
We believe that our customers' use of lowest price/technically acceptable (LPTA) procurements, which contributed to pricing pressures in past 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.
Results of Operations for the Three and Nine Months Ended
The following table provides our results of operations (in thousands):
Dollar Amount Dollar Amount
Three Months Ended March 31, Change Nine Months Ended March 31, Change
2023 2022 Dollar Percent 2023 2022 Dollar Percent
Revenues $ 1,744,270 $ 1,583,980 $ 160,290 10.1% $ 4,999,445 $ 4,560,656 $ 438,789 9.6%
Costs of revenues:
Direct costs 1,143,781 1,022,181 121,600 11.9% 3,293,867 2,970,370 323,497 10.9%
Indirect costs and selling
expenses 410,235 402,227 8,008 2.0% 1,180,619 1,114,310 66,309 6.0%
Depreciation and amortization 35,220 34,216 1,004 2.9% 106,255 99,484 6,771 6.8%
Total costs of revenues 1,589,236 1,458,624 130,612 9.0% 4,580,741 4,184,164 396,577 9.5%
Income from operations 155,034 125,356 29,678 23.7% 418,704 376,492 42,212 11.2%
Interest expense and other,
net 23,570 9,084 14,486 159.5% 59,705 30,491 29,214 95.8%
Income before income taxes 131,464 116,272 15,192 13.1% 358,999 346,001 12,998 3.8%
Income taxes 30,722 20,855 9,867 47.3% 82,031 72,176 9,855 13.7%
Net income $ 100,742 $ 95,417 $ 5,325 5.6% $ 276,968 $ 273,825 $ 3,143 1.1%
Revenues. The increase in revenues for the three and nine months ended March 31,
2023 , as compared to the three and nine months ended March 31, 2023 , was
primarily attributable to new contract awards and growth on existing programs.
The increase in revenues for the nine months ended March 31, 2023 was also
attributable to revenues from the acquisitions completed in fiscal year 2022.
The following table summarizes revenues by customer type with related
percentages of revenues for the three and nine months ended
Dollar Amount Dollar Amount
Three Months Ended March 31, Change Nine Months Ended March 31, Change
2023 2022 Dollar Percent 2023 2022 Dollar Percent
Department of Defense $ 1,298,700 $ 1,118,665 $ 180,035 16.1% $ 3,554,080 $ 3,155,806 $ 398,274 12.6%
Federal Civilian Agencies 355,612 380,837 (25,225) (6.6)% 1,179,467 1,166,398 13,069 1.1%
Commercial and other 89,958 84,478 5,480 6.5% 265,898 238,452 27,446 11.5%
Total $ 1,744,270 $ 1,583,980 $ 160,290 10.1% $ 4,999,445 $ 4,560,656 $ 438,789 9.6%
•DoD revenues include Expertise and Technology provided to various
•Federal civilian agencies' revenues primarily include Expertise and Technology provided to non-DoD agencies and departments of theU.S. federal government, including intelligence agencies and Departments ofHomeland Security , Justice, Agriculture,Health and Human Services , and State.
•Commercial and other revenues primarily include Expertise and Technology
provided to
18
--------------------------------------------------------------------------------
Direct Costs. The increase in direct costs for the three and nine months ended
March 31, 2023 , as compared to the prior year periods, was primarily
attributable to the increased revenues and a higher volume of materials and
other direct costs. As a percentage of revenue, direct costs were 65.6% and
65.9% for the three and nine months ended March 31, 2023 , respectively and 64.5%
and 65.1% for the three and nine months ended March 31, 2022 , respectively.
Direct costs include direct labor, subcontractor costs, materials, and other
direct costs.
Indirect Costs and Selling Expenses. The increase in indirect costs and selling
expenses for the three and nine months ended March 31, 2023 , as compared to the
prior year periods, was primarily attributable to the incremental costs of
running the businesses acquired in fiscal year 2022 and an increase in fringe
benefit expenses. As a percentage of revenue, indirect costs and selling
expenses were 23.5% and 23.6% for the three and nine months ended March 31,
2023 , respectively and 25.4% and 24.4% for the three and nine months ended
March 31, 2022 , respectively.
Depreciation and Amortization. The increase in depreciation and amortization for
the three and nine months ended March 31, 2023 , as compared to the prior year
periods, was primarily attributable to depreciation from the Company's higher
average property and equipment and intangible amortization from the acquisitions
in fiscal year 2022.
Interest Expense and Other, Net. The increase in interest expense and other, net
for the three and nine months ended March 31, 2023 , as compared to the prior
year periods, was primarily attributable to higher interest rates on outstanding
debt.
Income Tax Expense. The Company's effective income tax rate was 23.4% and 22.8%
for the three and nine months ended March 31, 2023 , respectively, and 17.9% and
20.9% for the three and nine months ended March 31, 2022 , respectively. The
effective tax rates for the three and nine months ended March 31, 2023 , and 2022
both benefited from the favorable impact of research and development credits and
the amount of excess tax benefits related to stock-based compensation, and are
partially offset by the unfavorable impacts of certain executive compensation.
Contract Backlog
The Company's backlog represents value on existing contracts that has the
potential to be recognized into revenues as work is performed. The Company
includes unexercised option years in its backlog and excludes the value of task
orders that may be awarded under multiple award indefinite delivery/indefinite
quantity ("IDIQ") vehicles until such task orders are issued.
The Company's backlog as of period end is either funded or unfunded:
•Funded backlog represents contract value for which funding has been appropriated less revenues previously recognized on these contracts.
•Unfunded backlog represents estimated values that have the potential to be recognized into revenue from executed contracts for which funding has not been appropriated and unexercised priced contract options.
As of
There is no assurance that all funded or potential contract value will result in revenues being recognized. The Company continues to monitor backlog as it is subject to change from execution of new contracts, contract modifications or extensions, government deobligations, early terminations, or other factors. Based on this analysis, an adjustment to the period end balance may be required.
Liquidity and Capital Resources
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 6) and available borrowings under our Credit Facility (as defined in Note 7) described below. The Company has a$3,200.0 million Credit Facility, which consists of a$1,975.0 million Revolving Facility and a$1,225.0 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 ofMarch 31, 2023 , we had$625.0 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$7.7 million throughDecember 31, 2023 and$15.3 million thereafter until the balance is due in full onDecember 13, 2026 . As ofMarch 31, 2023 ,$1,186.7 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 net leverage ratio. EffectiveApril 3, 2023 , as a result of reference rate reform and the expected discontinuation of LIBOR, CACI completed the transition of its Credit Facility and its interest rate swaps designated as cash flow hedges from LIBOR-indexed interest payments to SOFR-indexed interest payments. We do not expect that the LIBOR to SOFR transition will have a material impact to our liquidity, capital resources, operations or financial condition. 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 19 -------------------------------------------------------------------------------- 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. During fiscal year 2023, a provision of the TCJA went into effect which eliminated the option to deduct domestic research and development costs in the year incurred and instead requires taxpayers to amortize such costs over five years. Although it is possible thatCongress amends this provision, potentially with retroactive effect, we have no assurance thatCongress will take any action with respect to this provision. Based on the law as currently enacted, the provision is expected to decrease fiscal year 2023 cash flows from operations by$95.0 million and increase net deferred tax assets by a similar amount. The Company's estimated federal and state income tax payments related to this provision were$5.1 million and$51.1 million for the three and nine months endedMarch 31, 2023 , respectively. The actual impact will depend on the amount of research and development costs the Company will incur during fiscal year 2023 and whether new guidance and interpretive rules are issued by theU.S. Treasury , among other factors. A summary of the change in cash and cash equivalents is presented below (in thousands): Nine Months Ended March 31, 2023 2023 2022 Net cash provided by operating activities$ 235,954 $ 593,013 Net cash used in investing activities (39,218) (653,588) Net cash (used in) provided by financing activities (207,895) 100,835 Effect of exchange rate changes on cash and cash equivalents 3,144
(3,217)
Net change in cash and cash equivalents $
(8,015)
Net cash provided by operating activities decreased$357.1 million for the nine months endedMarch 31, 2023 , when compared to the nine months endedMarch 31, 2022 , as a result of a$278.1 million increase in cash paid for income taxes,$153.8 million in net unfavorable changes in operating assets and liabilities driven by increased revenue volume and the timing of vendor payments, partially offset by a$39.3 million increase in cash received from the Company's MARPA.
Net cash used in investing activities decreased
Net cash used in financing activities increased$308.7 million for the nine months endedMarch 31, 2023 , when compared to the nine months endedMarch 31, 2022 , primarily as a result of a$263.1 million increase in repurchases of our common stock and a$52.7 million increase in net payments under our Credit Facility. 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, share repurchases, and other working capital requirements over the next twelve months. In the future we may 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The interest rates on both the Term Loan and the Revolving Facility are affected by changes in market interest rates. We have the ability to manage these fluctuations in part through interest rate hedging alternatives in the form of interest rate swaps. We have entered into floating-to-fixed interest rate swap agreements for an aggregate notional amount of$1,200.0 million related to a portion of our floating rate indebtedness. All remaining balances under our Term Loan, and any additional amounts that may be borrowed under our Revolving Facility, are currently subject to interest rate fluctuations. With every one percent fluctuation in the applicable interest rates, interest expense on our variable rate debt for the nine months endedMarch 31, 2023 would have fluctuated by approximately$8.3 million . 20
--------------------------------------------------------------------------------
Approximately 2.8% and 3.2% of our total revenues during the nine months endedMarch 31, 2023 and 2022, respectively, were derived from our international operations headquartered in theU.K. Our practice in our international operations is to negotiate contracts in the same currency in which the predominant expenses are incurred, thereby mitigating the exposure to foreign currency exchange fluctuations. It is not possible to accomplish this in all cases; thus, there is some risk that profits will be affected by foreign currency exchange fluctuations. As ofMarch 31, 2023 , we held a combination of euros and pounds sterling in theU.K. andthe Netherlands equivalent to approximately$70.4 million . This allows us to better utilize our cash resources on behalf of our foreign subsidiaries, thereby mitigating foreign currency conversion risks.
© Edgar Online, source
