CACI International Inc (CACI) 2014 Q1 法說會逐字稿

Welcome to the CACI International first quarter fiscal year 2014 conference call. (Operator Instructions).

At this time I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Nicole and good morning, ladies and gentlemen. I am Dave Dragics, Senior Vice President of Investor Relations of CACI International and we are very pleased that you are able to participate with us today.

And as is our practice, we are providing presentation slides, so let's move to slide number two. Now about our written and oral disclosures and commentary, there will be statements in this call that do not address historical fact and, as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results.

Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the Company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.

Now I'd also like to point out that our presentation today will include discussion of non-GAAP financial measures, and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. So with that, to open our discussion this morning here is Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Thank you, Dave, and good morning to everyone. Thank you for joining us. With me here this morning are Tom Mutryn, our Chief Financial Officer; John Mengucci, our Chief Operating Officer and President of U.S. Operations; and Greg Bradford, joining us from the U.K., is the Chief Executive of CACI Limited.

Let's go to slide four please. Last night we released our first quarter FY 2014 results, and these results were in line with our expectations for this quarter. Furthermore they demonstrate our adaptability to the dynamics of the federal marketplace. We also secured significant contract awards and contract funding. All this reinforces our expectations for fiscal year 2014.

Please go to slide five please. We are executing a three part growth strategy; first, winning new business, driving operational excellence and focusing on our number one priority for capital deployment: our mergers and acquisition program, which culminated in the announcement in early October of our intent to purchase Six3 Systems. We expect the acquisition of Six3 will have a positive impact on the second half of fiscal year 2014 bringing to us new customer relationships and capabilities. Combined with CACI's existing products, solutions and services this positions us as a leader in signals intelligence and innovative cyber solutions that support our national security customers' missions.

Our market environment remains challenging. We continue to work closely with our customers who are operating without a stable planning horizon, under sequestration and with continuing resolutions. We have been adapting to this environment as demonstrated by our first quarter results and our strong contract awards and funding orders. As Tom will point out in a few moments the recent 16-day government shutdown did not have a material impact on our business, and as we said when we first issue our guidance in June, we continue to assume the U.S. Government will operate under sequestration as required by current law and CRs throughout the current fiscal environment.

Slide six please. With this as a backdrop, we continue to focus on the high growth areas of our addressable market. Those include business systems, cyberspace, healthcare and integrated security solutions. The addition of Six3 Systems to CACI expands our addressable market by approximately $15 billion. It will further enable us to leverage our cyber, C4ISR and intelligence capabilities to pursue new and larger opportunities in both our high volume and high growth market areas.

We are positioning CACI for the long-term. We believe the investments we are making in new capabilities and talent combined with deliberate steps to grow our market share such as our strategic campaign pursuits will position us for ongoing success in both the current environment and the longer term. Our solid start give us confidence to reiterate our fiscal year 2014 guidance.

With that, let me turn the call over to Tom for some insight into our financials. Over to you, Tom.

Thank you, Ken and good morning everyone. Yesterday we reported solid first quarter results along with contract awards in contract funding orders at levels comparable to last year despite a much tougher environment.

Slide number seven please. For the quarter the revenue decrease was driven primarily by an expected decrease in other direct costs as a result of lower Southwest Asia activities in budget related reductions. Direct labor held up reasonable well in the quarter declining slightly over around 1%. Indirect expense excluding fringe on direct labor was down $15 million primarily as result of the cost reduction actions taken in fiscal year 2013 in our ongoing efforts to ensure our organization is efficient and effective. Net income was $33 million for the quarter down by $2.7 million from last year.

On our prior calls I spoke about the impact of a sizeable fixed priced contract on our financials for the quarter. For this contract revenue is recognized evenly during the parity of performance while expenses reflect actual costs incurred. While the contract will provide a normal level of profits over its life, the year-over-year impact on first quarter net income was a negative $4 million.

In addition expenses for activity supporting the Six3 acquisition reduced net income by $1 million. For the quarter diluted earnings per share were impacted by an increase of 1 million diluted shares due to the impact of our convertible debt. This dilution will reverse itself when the convert comes due in May 2014 as our bond hedge offsets any dilution associated with a share price of $68.31 or lower.

Slide eight please. We generated first quarter operating cash flow of $27 million. Days sales outstanding increased from 57 last year to 65 days at the end of September. Furloughs at government payment offices in our first quarter associated with the sequester resulted in payment delays driving the higher DSO. On a trailing 12-month basis free cash flow was $196 million or $8.15 per diluted share. This translates to a free cash flow yield of 11.6% at the current share price at $70.

Slide nine. We are reiterating our fiscal year 2014 guidance we provided on our August call. This includes the net impact of the government shutdown, which we estimate to be $10 million in revenue and $4 million in operating income with the negative impact in our second quarter offset by positive impacts of making up some of the lost work in quarters three and four. This will make second quarter earnings comparables challenging.

We plan to issue revised FY 2014 guidance as we close Six3. As such this guidance does not reflect the impact of the acquisition in quarters two through four.

With that, I will turn the call over to John. John?

Thanks, Tom. Let's go to slide 10. I am pleased with CACI's ability to deliver in a challenging environment. Our results and forward indicators position us to continue delivering on our fiscal year 2014.

To start, we won over $1.8 billion of contract awards in Q1, slightly higher than in fiscal year 2013, with almost 40% coming from new business wins, about 20% of our Q1 contract awards were driven by our high growth market areas. Significant high volume contract awards were primarily driven by solution centric new and recompete contracts and our intelligence and C4ISR markets. This level of awards is a result of our focus on business development efforts and the valuable mission critical solutions we provide our customers.

Notable Q1 contract awards include two prime contracts with U.S. Army totaling $237 million to support the Warfighter Information Network-Tactical Program. This new work expands our growth in C4ISR and logistics and material readiness market areas. A $75 million five-year award with the U.S. Air Force to sustain Expeditionary Contingency Medical Materiel Support Services. This award continues wok in support of medical logistics services in the U.S. and in the Pacific, expanding our healthcare and logistics material readiness market areas.

And a $40 million two-year award to support the U.S. Army's Intelligence and Information Warfare Directorate's quick reaction capability to address emerging intelligence requirements related to our C4ISR market. We also booked over $1.3 billion of funding awards in Q1, bringing our funded backlog to $2.1 billion. In addition total backlog now reaches $7.8 billion, driving an estimated 27 months of total backlog at our current revenue run rate. This is a very comfortable position.

Please go to slide 11. Our fiscal year 2014 revenue guidance consists of 65% existing business, 25% recompete and 10% new business. I am pleased to report with only one quarter behind us our revenue guidance now consists of 84% existing contracts, 9% recompete and 7% new business.

In addition, with the $1.3 billion of funding orders received in Q1 our existing contract revenue is now 80% funded consistent with this time last year. This is a direct result of the important missions we serve and the level of funding those missions have received at the start of government fiscal year 2014.

Looking forward, I am encouraged by the more than 500 open staffing requisitions supporting our efforts to increase direct labor content. Our pending contract awards total approximately $8 billion; about 30% of those awards are in our high growth market areas.

In addition, we plan to submit another $8 billion of bids over the next six months reflecting our significant addressable markets. 75% of these bids will be for new business. A very robust pipeline.

We continue to execute with zero program cancellations in a challenged budget environment, a testament to the high value solutions and services we provide our customers today. While our customers are working through sequestration and shutdown impacts, we remain committed to supporting what will continue to be an enduring mission in support of our nation.

With that, I would like to turn the call back over to Ken.

That is great. Thanks, John and Tom. Thank you very much for your remarks this morning.

As an American citizen, I am naturally concerned with the budget uncertainty that exists in our market space in terms of its implication for our national security and the impact on our defense and intelligence industry. As a CEO, I am very proud of the progress we are making through the outstanding efforts of CACI employees in adjusting to this challenging environment. Our results in this quarter demonstrate their dedication and service to the federal government's most critical and most important missions.

Let's go to slide 12 please. To continue building and delivering long-term shareholder value we will remain focused on those factors that we can control. And those include strengthening an already strong business development capability, driving operational excellence, focusing on our high growth market areas, integrating Six3 and maximizing its value to the CACI Enterprise, delivering solid cash flow and increasing profitability.

Let me conclude my remarks by thanking our people for their character, talent and total commitment to our customers. CACI employees continually perform with integrating and excellence, remaining ever vigilant in support of our customers core missions while helping to build long-term value for our shareholders. With that, let's open the call up for questions, Nicole.

Thank you. (Operator Instructions). Our first question comes from Edward Caso, Wells Fargo. Your line is now open.

Good morning. You mentioned that 75% of that $8 billion in upcoming bids is for new work. How much of that is new programs, or is it all efforts to take away the work from another provider?

Thanks, Ed. This is John. The majority of that work is taking work away from other folks who are delivering that service. One of the areas that we have been focused on throughout the first quarter is taking the amount of new business revenue we needed to achieve down -- from 10% down to 7%. And the reason why we feel pretty strong about that this year versus where we finished last year is that a large amount of our recompete work this year was not bridged.

So this is unlike fiscal year 2013, the majority of our recompete work that was due to come due late in the fourth quarter 2013/first quarter 2014 did come to fruition, so we were bidding on their recompete work. It gives us a better feeling with our bids to be submitted that we will be actively bidding on other people's work throughout FY 2014.

Can you talk about the pricing both on what you had to do to protect your own work, and maybe your sense of where you are pricing in the next $8 billion relative to the incumbents' current rates? Thank you.

Sure, Ed. It remains a very competitive world out there. We did a couple things in fiscal year 2013 to better position us for some of that, for being able to hold onto our recompete work.

One, making the right investments to deliver and develop lower cost solutions. We are also learning that an LPTA solution is not always preferable of an acquisition strategy. If we looked at Better Buying Power 2.0 when it started there was an immediate rush on the commodity based things towards LPTA.

In my discussions with our customers, at least over the last two quarters, they are beginning to realize the use of LPTA as we move up beyond services and into solutions may not be where they would like to end up. So we are very, very focused on the pricing pressure. What is very important, Ed, is we continue to emphasis that we will continually bid responsibly and at a level that allows us to reliably perform the work with the skills that are required by the requisite tasking.

Thank you. Our next question comes from the line of Bill Loomis of Stifel. Your line is now open.

Hi, thank you. Good morning. Looking at the revenue by customer, the DoD business was down about 12% year-over-year. How much of that drop was OCO related if you will or support of Army Warfighter? And then if you could tell us what the S3 contracts is expected to run at this year, what is was in the quarter and for the year?

Bill, thanks for your question. This is John. If I look at the DoD decline the majority of that, Bill, I would say 80% to 90% of that was driven by the expected draw down that we were going to see in Afghanistan and the lower rates of other direct, direct costs. If I look at the federal civilian side, that was also up about 12% also.

That was really driven by strong wins and revenue growth in our healthcare area, some very strong work we are doing for the Veteran's Administration as we look to digitize a lot of the Veteran's health records so we can help drive the claim timeline down as well as some outstanding mega growth. I think also, Bill, you asked about S3. We are no longer tracking that at contractual level, but the level of work we are doing with the U.S. Army a very strong customer of ours, has maintained since last year.

Just following up quickly on the civilian, what was the organic growth on that 12% growth on the civil side?

Bill, this is Tom. In the first quarter we did approximately $16 million of revenue associated with the two acquisitions, and we expect that number to be $30 million for the full year. That said, let me make a point that we believe the right metric when we look at our businesses are overall growth, less so the component pieces. And recognize that organic acquired breakdown is somewhat imprecise given various integration activities and synergies and as such we decided to stop providing that acquired revenue going forward.

Thank you. Our next question comes from the line of Joe Nadol of JPMorgan. Your line is now open.

Thanks. Tom, just understanding what you are saying about the organic, could you help us in terms of the way you just did with the overall organic outlook, what you did with direct labor versus ODCs?

If I look at the organic revenue, that 16%, that was driven by the two acquisitions IDL and Emergint. They have relatively little ODC content, and so that revenue would be associated with direct labor; less so with ODCs.

Okay. On the fixed price contract, just so we are all on the same page, when do you expect-- I guess how long does the contract go, and what is the profile of the recovery of the expenses or the excess profit that you expect to book on that contract? When should we see it?

That contract extends into FY 2015, so we will see that contract over that extended time period. We had this accounting loss in the first quarter and for the remaining three or four quarters going into 2015 we will see positive earnings associated with that, such that over the life of the contract it generates a reasonable normal expected level of profitability, so it is implicit in the guidance for the rest of the year.

Thank you. Our next question comes from the line of Brian Kinstlinger of Sidoti & Company. Your line is now open.

Great. Two questions. The first one is a follow up on that fixed price contract. Can you give us a sense for the swing, what was the loss in the first quarter related to it and how will that swing and will it swing evenly over the next three quarters?

Yes, I can, Brian. This is Tom again. Last year in the first quarter it generated a pretax income of $2 million. This year in the first quarter it generated a pretax loss of $5 million. So the difference is $7 million pretax, $4 million after tax. So $4 million reduction in net income in the first quarter associated with that contract.

For the rest of the year, we are not providing quarterly guidance as you know. And it is suffice it to say that for the rest of the year that contract will generate a reasonable level of profit for the next few quarters rolling into the first quarter of 2015.

Okay. My follow-up is you talked about a majority your pipeline is bidding against incumbents trying to take away work. I'm wondering what your win rate is on that type of procurement?

Brian, this is John. Thanks for the question. We do not traditionally share specific win rates, but what I can try to provide you some color around is when we built our FY 2014 plan as we have in past years, we look for and overall 40% win rate. And that is also driven by a recompete win rate that is traditionally north of 90%. We just don't share anything on a specific pursuit basis.

That is helpful. Thank you.

Thank you. Our next question comes from the line of Steven Cahall of Royal Bank of Canada. Your line is now open.

Thank you. Good morning. Maybe first a quick question on your costs. So if we take out the fixed-priced contract, it looks like that the overall gross margin was pretty in line with the last few quarters. And then as you said, we had a step down in a lot of the indirect costs and selling expenses. Are those trends we can fairly extrapolate forward from here, particularly on the cost side or is there any reason to think that those are going to move around quite a bit over the next few quarters?

Again, this is Tom. In terms of our indirect costs, the SG&A line, we expect it to be somewhat stable. We took a series of actions in FY 2013, making sure that the organization is appropriately sized to the level of activity, and as long as we maintain that right level of activity we're in sync.

If the world changes, then we will do what's necessary to ensure that we have the right cost structure to support the enterprise going forward. We've guided, I believe, that our operating margin would be comparable in fiscal year 2014 to last year, fiscal year 2013, and we're reaffirming that operating margin guidance.

Okay. And then maybe just related to that, so we have the percentage of revenue from the DoD is as low as it's been in recent times, percentage of revenue from fed, civil, commercial is as high as it's been and the percent from fixed pricing is as high as it's been. Is there any connection of those dots, does more fed, civil, more fixed-priced result in lower cost? So if we see that trend, can we assume something on the cost side or are those separate independent actions, one on the BD side, one on the internal side?

Yes, this is Tom again, and I will elaborate, and John can add on. I do believe that is separate, independent activities, so little correlation between those. The DoD is matched by a good amount of ODCs, pass-throughs associated with equipment and material, those are coming down. That's driving some of the DoD characteristics both in terms of the revenue growth and margin behind the DoD.

A civilian agency has a different characteristic. But if I was comparing apples-for-apples direct labor in the DoD versus direct labor in the civilian entities, the profitability characteristics would be relatively same.

The same, yes.

Thank you. Our next question comes from the line of the Tobey Sommer of SunTrust. Your line is now open.

Thank you. I was wondering if we could get a little bit more color from you on the small impact from the government shutdown that you felt in the fourth quarter. In what areas of the business or in which customer sets would you say that most of that resided?

Yes, Tobey, this is Tom. As we mentioned, the net impact, so this is the lost revenue offset by the amount we believe we can make up, which is approximately $10 million in revenue. The government shutdown was interesting.

And the way I look at it is that a certain work is performed on CACI locations. And the work that's performed at CACI locations, people come to work, their contracts have not been terminated or altered and life went on as usual. The areas that were impacted was when our employees work at a government facility, that government facility was shut and there was no alternative workplaces, and so those folks simply did not have a place to work. That was somewhat spread throughout the organization. There were certain pockets of higher levels of activity, but I'm not sure if it's productive to share specifically what those were. Suffice it to say, we think we'll be able to recover a good portion of that.

Thanks. And what are your expectations and what did you see during the brief government shutdown relative to spending patterns and procurements related to cyber? Thank you.

Tobey, this is Ken. Did you say related to cyber or related to conditions all off?

I think he mentioned cyber.

Okay. We continued to receive awards during the government shutdown. We continued to receive funding. I don't know that we would discriminate one or the other over any market area. During the first quarter, we received awards in all 10 of our areas, and I'm not sure that I could count those 16 days, how to discriminate them. But we were continuing to receive -- there was continuing to be government activity.

Thank you. (Operator Instructions). Our next question comes from the line of Lucy Guo of Cowen and Company.

It's Lucy Guo, calling in for Cai. So the first question, I realize this is early in the year, but you had to absorb several one-time costs like the contract loss on the fixed-price contract and your acquisition expense and the additional severance expense. Why not consider, I don't know, updating your guidance for the year, given there's also these opportunities with Six3 acquisition?

Lucy, thank you for the question. This is Ken. Frankly, because our performance was that much better, and we don't see the need to update guidance at this point in time. We were able to absorb those items into our first quarter, and we see that being consistent.

We will obviously update our overall guidance once we close on Six3, which we assume some time in mid November. But we didn't see any reason to change guidance at this point in time based on 1Q performance.

All right. And the second question was just a follow-up on the SG&A. If you were to exclude the $1.7 million acquisition costs, it was around 21.5% of sales. Is that a sustainable level going forward?

Yes, it is. I think the (Inaudible) levels of spending, it's relatively fair to extrapolate that over the next 3 quarters. We do not plan to increase our indirect spending by any appreciable amount. And to the extent that the business grows during that time period, that statistic should actually improve.

Thank you. Our next question comes from the line of Mark Jordan of Noble Financial. Your line is now open.

Good morning, gentlemen. First question, what are the incremental closing costs you might realize in the second quarter relative to Six3?

Yes, Mark, this is Tom. They will be considerable associated with some M&A work, both from external advisers, some legal fees, bank financing fees, credit rating agency fees and the like. We will provide some more fulsome explanation of what those expenses are as we close the transaction and update our guidance.

Okay. Related to Six3, is there any integration expenses that you're anticipating or will this just be folded in and at normalized profitability day one?

Yes, Mark, this is Ken. We see taking a pretty good period of time of integrating Six3 in to make sure that we understand the nature of their business. They've had a really good run, double-digit growth, and we certainly don't want to do anything that would disturb that.

We didn't account for very much in the way of either sales or cost synergies in terms of building our business case, so we're going to take a very gentle approach. And we'll talk more about that, obviously, when we get to closure. But I don't foresee any added expenses associated with that integration, outstanding from what Tom just described from what it takes to finance it.

Thank you. Our next question comes from the line of Steven Cahall of Royal Bank of Canada. Your line is now open.

Steve, are you there?

Sorry. Can you hear me?

Yes, now we can, very good.

Thanks. Just a quick follow-up on the shutdown. Did I hear it correctly that that was $10 million in revenues that you don't think you will recoup, and $4 million in EBIT?

That is correct.

Okay. And then how come that EBIT is such a high percentage of the revenue? And then also, if we were to see another shutdown, say, in January, is this a reasonable amount of extrapolation based on the length of this shutdown vis-a-vis anything that happens in the future?

I'll take the second part of that. I think, if we have another shutdown in January, it's really going to depend on the duration, and I think the circumstances are changing every time. Certain agencies responded one way and others did it differently. And we'd have to see how that -- so I wouldn't be confident in predicting that this was a good way to predict the shutdown, if there was one in January. Let's just hope that there isn't. Tom, do you want to talk about the EBIT difference?

Yes, absolutely. Most of the loss was direct labor related, so certainly that's higher margin. And the best way to look at it is gross profit declines. So we lost gross profit on direct labor which is highly profitable, and we were unable to reduce any indirect expense for that short amount of time, so SG&A remained the same.

So on the margin, it was expensive business that we lost. But on the flip side, when we grow the business and we add direct labor and then we keep our indirect expense the same, we're going to have very high margin performance on incremental direct labor. That's why we have been touting the importance of focusing on direct labor, direct labor growth as a key indicator of our profitability.

And our next question comes from the line of Brian Kinstlinger of Sidoti & Company. Your line is now open.

I'm sorry. I thought I hit star two to get out. My question was on the government shutdown too. I apologize.

Thank you, Brian.

And our last question comes from the line of George Price of BB&T Capital Markets.

Hi, thanks very much. Most of my questions have been answered, but I did want to ask one. CACI has been among the most detailed and transparent, in my opinion, on disclosing organic versus acquired revenue over the years, and I was just curious, why change that disclosure now, particularly as you may be going after larger acquisitions? Thanks.

Well, George, I'll take the start. This is Ken, and let me flip it over to Tom. But as we looked at Six3 coming in, there could be some very interesting combinations going down, which will make it harder to track how we would integrate this business over a period of time. There may be components of CACI that fold into components of Six3 or vice versa.

And frankly, we didn't want to confuse anybody by some of those things. We're going to do what's right for the business strategically and take a long-term view. So that's my view on it. Tom, would you like to add anything more to that?

No. Ken, I think that summarizes it just fine. I think that's the key concept.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Ken Asbury for any further remarks.

Okay. Well, thank you, Nicole, and thanks for your help on the call today, appreciate it very much. We would like to thank everybody who dialed in or logged on to the webcast for their participation as well.

We know that many of you will have follow-up questions. And Tom Mutryn, Dave Dragics, Jeff Christensen are available for calls later this morning and into the afternoon. So this concludes our call, thank you and have a very good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day.