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;
• 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;
• 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;
• 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 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
During the six months endedDecember 31, 2019 , the Company generated$2.6 billion or 95.5 percent of our revenue from contracts withU.S. government agencies compared with$2.2 billion or 95.1 percent for the same period in 2018. Our contract revenues were generated from both prime and subcontractor relationships. In addition toU.S. government agencies, we also provide services to commercial customers and, through our international operations, to non-U.S. government agencies.
The Company provides Expertise and Technology to Enterprise and Mission customers in support of national security missions and government transformation.
• Enterprise - CACI's Enterprise business 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 Amazon Web
Services (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 -
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 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. During those periods of time when appropriations bills have not been passed and signed into law, government agencies operate under a continuing resolution (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. 23
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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$220 billion , comprised of approximately$130 billion for the enterprise market area and approximately$90 billion for the mission market area. 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 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
December 31, December 31, Change
(dollars in thousands) 2019 2018 2019 2018 $ %
Revenue $ 1,395,469 $ 1,181,641 100.0 % 100.0 % $ 213,828 18.1 %
Costs of revenue
Direct costs 904,867 790,849 64.8 66.9 114,018 14.4
Indirect costs and selling
expenses 352,448 269,677 25.3 22.8 82,771 30.7
Depreciation and
amortization 27,967 18,852 2.0 1.6 9,115 48.4
Total costs of revenue 1,285,282 1,079,378 92.1 91.3 205,904 19.1
Income from operations 110,187 102,263 7.9 8.7 7,924 7.7
Interest expense and other,
net 14,714 9,421 1.1 0.8 5,293 56.2
Income before income taxes 95,473 92,842 6.8 7.9 2,631 2.8
Income tax expense 16,278 24,246 1.2 2.1 (7,968 ) (32.9 )
Net income $ 79,195 $ 68,596 5.7 % 5.8 % $ 10,599 15.5 %
For the three months ended December 31, 2019 , total revenue increased by 18.1
percent, or $213.8 million , compared with the same period a year ago. This
increase was attributable to organic growth on existing programs, new contract
awards, higher award and incentive fees, and acquired revenues, partially offset
by the completion of certain contracts. In addition, during the three months
ended December 31, 2019 , the Company received notification that certain contract
close out risks had been mitigated on previously satisfied performance
obligations and therefore recorded a reduction to its established reserve
amount. Out of our primary customer groups, Department of Defense and Federal
Civilian revenue increased by $155.6 million and $54.1 million , respectively,
compared with the same period a year ago.
For the three months ended December 31, 2019 , direct costs increased 14.4
percent or $114.0 million , compared with the same period a year ago. The
increase in direct costs is primarily related to increased direct labor expenses
due to organic growth on existing programs and acquired contracts. As a
percentage of revenue, direct costs were 64.8 percent and 66.9 percent for the
three months ended December 31, 2019 and 2018, respectively. Direct costs
include direct labor, subcontract labor, material expenses, and other direct
costs.
Indirect costs and selling expenses increased $82.8 million or 30.7 percent for
the three months ended December 31, 2019 , compared with the same period a year
ago. As a percentage of revenue, indirect costs and selling expenses were 25.3
percent and 22.8 percent for the three months ended December 31, 2019 and 2018,
respectively. This percentage increase is driven primarily by increased
independent research and development (IR&D) efforts, increased bid and proposal
(B&P) costs, increased indirect labor from recent acquisitions and additional
fringe benefits for our larger workforce.
Depreciation and amortization expense increased $9.1 million or 48.4 percent for
the three months ended December 31, 2019 , compared with the same period a year
ago. The increase is primarily attributable to intangible amortization from
recent acquisitions and depreciation from the Company's higher average property
and equipment.
For the three months ended December 31, 2019 , interest expense and other, net
increased $5.3 million or 56.2 percent, compared with the same period a year
ago. The increase in interest expense is primarily attributable to higher
outstanding debt balances on the Company's Credit Facility as a result of recent
acquisitions.
For the three months ended December 31, 2019 , the effective income tax rate was
17.1 percent compared with 26.1 percent for the same period last year. The
Company's effective income tax rate decreased primarily due to the timing of
excess tax benefits under ASU 2016-09, Stock Compensation. For both comparative
reporting periods, the Company's effective tax rate was impacted by excess tax
benefits under ASU 2016-09, Stock Compensation. If gains or losses on the value
of assets invested in COLI throughout the rest of the current fiscal year vary
from our estimates, our FY2020 effective tax rate will fluctuate in future
quarters for the year ending June 30, 2020 .
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Results of Operations for the Six Months Ended
The following table provides the relative percentage that certain items of expense and earnings bear to revenue for the six months endedDecember 31, 2019 and 2018, respectively. Dollar Amount Percentage of Revenue Six Months Ended Six Months Ended December 31, December 31, Change (dollars in thousands) 2019 2018 2019 2018 $ % Revenue$ 2,758,861 $ 2,347,505 100.0 % 100.0 %$ 411,356 17.5 % Costs of revenue Direct costs 1,783,748 1,573,609 64.7 67.0 210,139 13.4 Indirect costs and selling expenses 710,040 534,434 25.7 22.8 175,606 32.9 Depreciation and amortization 54,729 37,599 2.0 1.6 17,130 45.6 Total costs of revenue 2,548,517 2,145,642 92.4 91.4 402,875 18.8 Income from operations 210,344 201,863 7.6 8.6 8,481 4.2 Interest expense and other, net 31,525 18,307 1.1 0.8 13,218 72.2 Income before income taxes 178,819 183,556 6.5 7.8 (4,737 ) (2.6 ) Income tax expense 31,647 36,127 1.1 1.5 (4,480 ) (12.4 ) Net income$ 147,172 $ 147,429 5.3 % 6.3 %$ (257 ) (0.2 )% For the six months endedDecember 31, 2019 , total revenue increased by 17.5 percent, or$411.4 million , compared with the same period a year ago. This increase was attributable to organic growth on existing programs, new contract awards, and acquired revenues, partially offset by the completion of certain contracts. Out of our primary customer groups,Department of Defense andFederal Civilian revenue increased by$275.0 million and$125.9 million , respectively, compared with the same period a year ago. For the six months endedDecember 31, 2019 , direct costs increased 13.4 percent or$210.1 million , compared with the same period a year ago. The increase in direct costs is primarily related to increased direct labor expenses due to organic growth on existing programs and acquired contracts. As a percentage of revenue, direct costs were 64.7 percent and 67.0 percent for the six months endedDecember 31, 2019 and 2018, respectively. Direct costs include direct labor, subcontractor labor, material expenses, and other direct costs. Indirect costs and selling expenses increased$175.6 million or 32.9 percent for the six months endedDecember 31, 2019 , compared with the same period a year ago. As a percentage of revenue, indirect costs and selling expenses were 25.7 percent and 22.8 percent for the six months endedDecember 31, 2019 and 2018, respectively. This percentage increase is driven primarily by increased independent research and development (IR&D) efforts, increased bid and proposal (B&P) costs, increased indirect labor from recent acquisitions and additional fringe benefits for our larger workforce. Depreciation and amortization expense increased$17.1 million or 45.6 percent for the six months endedDecember 31, 2019 , compared with the same period a year ago. The increase is primarily attributable to intangible amortization from recent acquisitions and depreciation from the Company's higher average property and equipment. For the six months endedDecember 31, 2019 , interest expense and other, net increased$13.2 million or 72.2 percent, compared with the same period a year ago. The increase in interest expense is primarily attributable to higher outstanding debt balances on the Company's Credit Facility as a result of recent acquisitions. For the six months endedDecember 31, 2019 , the effective income tax rate was 17.7 percent compared with 19.7 percent for the same period last year. The Company's effective income tax rate decreased primarily due to the amount of excess tax benefits under ASU 2016-09, Stock Compensation. For both comparative reporting periods, the Company's effective tax rate was impacted by excess tax benefits under ASU 2016-09, Stock Compensation. If gains or losses on the value of assets invested in COLI throughout the rest of the current fiscal year vary from our estimates, our FY2020 effective tax rate will fluctuate in future quarters for the year endingJune 30, 2020 . 26 --------------------------------------------------------------------------------
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 of
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
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 ofDecember 31, 2019 , we had$740.0 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 ofDecember 31, 2019 ,$868.0 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. 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. Cash and cash equivalents were$68.6 million and$70.7 million as ofDecember 31, 2019 and 2018, respectively. A summary of cash flow information is presented below: Six Months Ended December 31, 2019 2018 Net cash provided by operating activities$ 237,025 $
139,540
Net cash used in investing activities (143,091 ) (107,088 ) Net cash used in financing activities (97,474 ) (27,044 ) Effect of exchange rate changes on cash 157
(874 )
Net increase (decrease) in cash and cash equivalents
Our operating cash flow was$237.0 million for the six months endedDecember 31, 2019 . This represents an increase of$97.5 million or 69.9 percent, from our operating cash flows of$139.5 million for the six months endedDecember 31, 2018 . The year-over-year increase is primarily related to strong cash collections on our accounts receivable. Days sales outstanding (DSO) was 51 days atDecember 31, 2019 , compared with 73 days atDecember 31, 2018 . 27 -------------------------------------------------------------------------------- Cash used in investing activities was$143.1 million and$107.1 million during the six months endedDecember 31, 2019 and 2018, respectively. During the six months endedDecember 31, 2019 , we paid$102.1 million for business acquisitions, as compared to$91.2 million during the same period a year ago. Purchases of office and computer related equipment of$41.0 million and$17.8 million during the first six months of FY2020 and FY2019, respectively, accounted for a majority of the remaining funds used in investing activities. Cash used in financing activities was$97.5 million and$27.0 million during the six months endedDecember 31, 2019 and 2018. During the six months endedDecember 31, 2019 and 2018, we had net repayments under our Credit Facility of$68.5 million and$8.5 million , respectively. During the six months endedDecember 31, 2019 andDecember 31, 2018 , we also used cash within financing activities of$29.1 million and$18.0 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.
Off-Balance Sheet Arrangements and Contractual Obligations
The Credit Facility provides for stand-by letters of credit aggregating up to$25.0 million that reduce the funds available under the Revolving Facility when issued. We have no other material off-balance sheet financing arrangements.
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