CACI International Inc (CACI) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the CACI International First Quarter FY ‘16 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, Chelsea. Good morning everyone. I'm Dave Dragics Senior Vice President of Investor Relations of CACI International and we're very pleased that you're able to participate with us today. And as is our practice, we are providing presentation slides so let's move to slide No. 2. Let's talk 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. I would also like to point out that our presentation today will include discussion of non-GAAP financial measures. These non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to slide no three and to open up our discussion this morning, here's Ken Asbury - President and Chief Executive Officer of CACI International. Ken?

Thank you, Dave and good morning, everyone. Thank you for joining us to discuss CACI International's FY'16 first quarter results. With me results are John Mengucci, our Chief Operating Officer and President of U.S. Operations; Tom Mutryn, our Chief Financial Officer; and Greg Bradford, Chief Executive CACI Limited, who is joining us from the U.K. Please turn to slide 4. Our performance this quarter indicates that we are on track to achieve organic revenue and net income growth in FY ‘16. We remain confident in our strategy to win business, deliver operational excellence and deploy our capital for growth opportunities. We’re reiterating our full year FY ‘16 guidance. We won over 1.9 billion in contract awards this quarter securing key new solutions business and a large amount of recompete business that reflects positively on our continued delivery of value to our customers. Our cash flow in the quarter was strong and we built our backlog to a record level. We had modest gains in revenue driven by growth on existing contracts and the new business we won in FY ‘15. Our net income was higher than expected largely due to favorable timing and our team delivering outstanding performance on several existing contracts. Tom and John will discuss these financial and operational highlights in their remarks. Please turn to slide 5. Looking at the market, we saw a normal award activity in the first quarter under the existing budget. Since then several new developments are contributing to increasing market stability. First as you know, a continuing resolution as funded the government through December 11 [ph]. Second, a new bipartisan budget agreement that would raise budget caps for both defense and non-defense spending in 2016 and 2017 government fiscal years has passed the house and is going to be considered by the senate in the next few days. We view this legislation as a positive development for our customer's ability to plan and increase stability for our industry. In addition, once it is passed, the recently vetoed National Defense Authorization Act would then be adjusted and passed by the Congress and sent to the President for his signature. Third and final, the administration has decided to alter the pace of the Afghanistan drawdown. Now we haven't assessed the impact of all of these recent developments on our business. As these events play out, we will continue to work closely with our customers to their understand their requirements, budgets and procurement schedules and the overall impact on our FY ‘16 plan. Let's turn to slide 6, please. We're coming up on the second anniversary of our acquiring Six3 systems. I've mentioned before that we've been looking to take advantage of the many opportunities arising from that acquisition and today we have one that I can actually talk about. Earlier this month, we entered into a co-operative research and development agreement with a federal agency to test a system we developed that detects, identifies and tracks recreational drones. We are very proud to be part of this research initiative which responds to escalating challenges from inadvertent or intentional misuse of recreational drones around airports. Our participation is also an excellent example of how our long-term thinking will drive our future success. We developed our drone detection identification and tracking system as a direct result of the highly specialized capability in cyber and digital signals processing we gained from the acquisition of Six3. And that overall positioned CACI in areas of increasing importance to our customers and to our nation. John will provide more color on our UAS solution [ph] and few of the other wins in his remarks. Overall, I am quite pleased with how we have started the year. Our first quarter results are consistent with our plan to grow organically in FY ‘16. We are confident in our position, in our strategy and in our ability to deliver long-term value to our shareholders. With that, I'm going to turn the call over to Tom for his comments on our financials. So Tom?

Yes, thank you Ken and good morning everyone. Let's go to slide No. 7. Our first quarter earnings per share net income were strong with net income 8.6% ahead of last year. These results were driven by solid performance on a number of programs in lower amortization expense. Earnings were also ahead of our plan in our initial expectations. The favorable variance was largely due to timing on certain programs, product sales [indiscernible] resulting in recognition of earnings earlier in the year than planned. Revenue in the quarter was up slightly over the last year's first quarter. Our direct labor increased just under 5% while our other indirect costs declined 4%. Indirect cost and selling expenses were around 2% above last year driven by the growth in fringe benefit expense tied to our direct labor increase which is classified as an indirect expense. Slide 8, please DSO or day sales outstanding was 58 days, an improvement of two days from the June quarter. Operating cash flow in the quarter was $78 million in trailing 12-month free cash flow is $171 million. In our annualized free cash flow yield is 8.2% per share at a $85 share price. Debt at the end of September was just under $1 million and our net debt to trailing 12 month EBITDA leverage ratio is now just under 3.2 times. Turn to slide no 9 please, we are off to a solid start for FY ‘15 in our reiterating our FY ‘16 guidance with revenue between $3.3 billion and $3.5 billion and net income between $130 million and $140 million. We also continue to expect operating cash flow to be greater than $200 million. With that, I'll turn the call over to John

Thanks, Tom and good morning, everyone. Let's turn to slide 10, please. Our first quarter results show we're off to a good start to FY ‘16. I'm pleased with our continued performance and especially our ability to deliver organic revenue and net income growth this quarter. Performance enhancements on some of our fixed priced programs, flight deliveries and better award fees were key elements our FY ‘16 fiscal year plan. As Tom mentioned in his comments, we saw shifts in the quarterly timing of some of these items but for the fiscal year, they are as planned. We're executing well on the record wins from FY ‘15 and I am proud of our team's ability to expedite delivery of program requirements and program financial commitments. We continue to win new and recompete business while growing our existing contract base. Our recompete success demonstrates the value our customer place on the work we currently perform, examples of some of these recompetes and new business wins are continuing work performed for the naval air warfare center in support of advanced communication systems for America's Special Operations Forces. Continuing a new work performed for military health customer to fuse and analyze critical data through the use of cloud based fig data, visual analytics and advanced algorithms which enhance the quality of treatment. Continuing and expanded work to enhance broadcastation [ph] reliability, cost efficiency, emission success for FEMA's national public warning system, the nationwide alert and warning system that issues emergency information to all Americans in the event of a national crisis. In new business for CACI providing technical and engineering expertise to the army's research, development and engineering command in the development of better night vision and infrared capabilities. Slide 11, please. As Ken mentioned earlier, we entered into a research and development agreement with the federal agency regarding unmanned aircraft systems . In addition to detecting, identifying and tracking commercial drones, our system has a unique capability to identify their ground-based operators in order to help protect national air space from inadvertent or unlawful misuse of drones within a 5 mile radius of airports. The government launched this research program in May, 2015 to help integrate commercial drones into the U.S. National Air Space. Our system will help ensure a safe, shared air space while supporting responsible UAS operations. We are extremely excited to participate in this effort to protect airports and other environments under temporary flight bans such as the California wild fires that ravaged the West Coast this past fire season. Beyond this R&D initiate our proprietary technology has wide applicability outside of airports and the protection of infrastructure or events. For example, anywhere drones could pose a potential risk to people or assets. Slide 12 please. As I look to the fiscal year, I'm confident in our teams ability to deliver within guidance and return to organic growth. Our annual revenue expectation now consists of 90% existing business, 8% recompete and 2% new business. Our existing contract revenue is 74% funded, very similar to prior years. This position is a result of a new and recompete business we won in Q1 and work added to existing contracts. The majority of these add-ons are additional scope being incorporated into our recent solution wins reflecting the value we provide and the importance of the missions these contracts support. Slide 13 please. Our pipeline remains healthy, we’re currently awaiting decisions on nearly $12 billion of submitted bids, about 40% of which are for new business to CACI. We plan to submit another $11 billion over the next six months, 75% of which are for new business. This pipeline attests to our organization's focus on critical missions in each of our market areas. We do still have two protests of FY ‘15 awards totaling $375 million that we’re awaiting resolution. As we said previously, we expect favorable determinations and plan to start executing by our third quarter. All in all, it's great to return to deliver revenue and net income growth in the first quarter. The team is performing well and gives me confidence in our ability to meet our plan and deliver organic growth this fiscal year. With that, I'm turn the call back over to Ken.

Well thank you very much for your comments, John and Tom. Appreciate it. Let's turn to slide 14 please. Our first quarter results demonstrate that we're off to a strong start and on track to achieve the organic revenue and net income growth that we planned for this fiscal year. I want to thank all of our employees for their hard work, innovation and great character that delivered all of this value to our customers and underpinned this first quarter performance. Thank you all for that. Going forward, CACI will continue to support critical national missions, helping our defense, intelligence and federal civilian customers counter emerging threats and respond to evolving requirements in new and innovative ways. We're focused on our long-term strategy and remain confident that by executing on that strategy we will deliver long-term shareholder value. Thank you very much and now I would like to open the call up to your questions. So Chelsea?

[Operator Instructions]. And our first question comes from Steve Cahall with the Royal Bank of Canada. Your line is now open.

The first question on the award fees. I was wondering, it would be great if you can break them out but if you're not willing to do that, would you give us a sense of what the margin did on a like-for-like award fee basis versus the quarter last year?

As we mentioned there were a few things which contributes to the strong quarter versus our expectation because one was award fees, probably the smaller of the three items. There was one recent award fee which was due in the second quarter that came in earlier than expected. We had some product sales in some number of programs that performed better than expected. In some instances we had some investment activity planned in the first quarter that was shifted to the second and third quarter. In other instances, we accelerated some work, some changes to contracts, fixed price [indiscernible] which we executed earlier than anticipated. So those three contributed to the greater than anticipated, you know, results and the greater than expected margins into quarter of 7.8% operating margin. I don't have - on a year-over-year basis what the like contribution would be. That being said, for the full year we are maintaining our guidance. Those three items were largely timing within the year. And we're still maintaining our operating and margin guidance for the full year.

Okay. And then if we think about the guidance for the year, there's a pretty sizable range in terms of your revenue growth and your earnings. So what are the kind of puts and takes that we could see throughout the year that would bring you in at the higher end versus the lower end of those?

Probably the biggest determinant of that is going to be the pace of government awards. The award activity was pretty reasonable in the first quarter. I mean sort of typical for government yearend. We certainly booked what we were looking for during that period of time. It's in the second, third and fourth quarters, if we saw a pickup in pace of awards, a couple things could be driving that. One, if this budget agreement does provide the stability and confidence we all believe it does, that could speed up the pace, but that is probably the single largest determinant right now. I think certainly speaking for ourselves and I think throughout the industry, everybody is doing a good job of writing good proposals these days. It's the speed at which the government wants to award them that I think dictates where we may end up at the end of the year

And I will add that in terms of the net income guidance range, you know, that's susceptible to various accounting reserves, it's got a DCA-related reserves kind of award-free timing tax rates, kind of interest expense and alike and so oftentimes one or two sizable items has a disproportionate impact on our net income.

Thank you. And our next question comes from Edward Caso with Wells Fargo. Your line is now open

This is actually Tyler Scott [ph] on for Ed. Obviously some pretty good bookings and seasonally strong quarter. I believe 50% were for new work. Could you just talk about how much of that new work is new, new work versus kind of takeaways and then maybe some of the pricing trends that you're seeing on new work versus the take away work?

Tyler, a clarification. In our press release we said that, over half of the awards were for recompete business. The other two categories are growth on existing work as well as new awards. Our new awards in the quarter were approximately 20%. I'll throw the rest of the answers over to Ken or John

Yes, Tyler, and the other characterization of that work I would say of that new work that we did win, a lot of it would be existing contracts that we were successful in convincing the customer that we would have a better value proposition.

You also asked about how the pricing environment works. We're not seeing anything materially different at this point as we have from previous quarters. It still remains very competitive out there. Critical solutions emissions work frankly still commands a premium over things that are more commoditized in nature. On the LPTA front, you know, still seems to be used but maybe one change there is it's being used more for commoditized professional services work rather than as broadly as it was used initially. So it seems as though the government's changing how they're using LPTA. I think better value power 3.0 is a step better than where we were at better buying power 1 and 2 and we are seeing best value acquisitions across both our solutions and our services markets.

And our next question comes from Cai Von Rumohr with Cohen and Company. Your line is now open

I've joined from another question but if it hasn’t been asked, of the 20% of the awards that are new work, do the margins on that business where are they in line with the corporate average?

As in past quarters, the 20% new, you know, very comparable to what we're looking for, just slightly north of the 7.5 range if we're talking operating margins. So there wasn't anything that stood out on a high end or on a low end.

And our next question comes from Tobey Sommer with SunTrust. Your line is now open.

This is [indiscernible]. Are there any health comparisons that we should keep in mind from recent quarters as we look out over the next several quarters? Thank you.

I'm not sure I caught the beginning of your question. What kind of comparisons are you looking for?

Changes in margins

I think we've talked in the past. We talked about how we're going to drive higher solutions content and fixed price content into our business when those opportunities present themselves. And we believe that's what's going to drive higher margins into our business over time. Where we can come up with unique solutions to solve particular problems, I believe that's going to command higher margin and that's going to draw more of our attention as we see those. The discussion that we had - that John - that I brought up and that John gave a little bit more color on with regard to drone activity, the detection of that, we think that's one of those problems where we may have a unique opportunity to do a large scale solution over time, and that would have better margins than some of the other bids that we've been doing more traditionally.

And our next question comes from [indiscernible]. Your line is now open.

So your bookings for new business were a little low compared to the last two September quarters. Is that a function of lower win rates or otherwise what other factors might help explain that?

Look, we've been working on shot selection now for quite some time and, to us, it is a game of the quality of the things that we're pursuing, not of the absolute quantity. If you look at and I appreciate you bringing it up because it's actually going to be part of what we thought about. We've had very good bookings the last three years in this quarter and so as we look forward, I'm not going to play a game where I'm looking at three, five times kind of book-to-bill ratios. I'm looking of being able to get the right kind of solutions work at the right time into our business. So we're very pleased with where we are and ask John if he wants to add couple things to that.

Yes, sure. As we've noted numerous, numerous times, awards are extremely lumpy. We do our best to try to predict award levels on a quarterly basis but it's just not prudent. What I can tell you, though, is based on our Q1 award results, 75% of our new business revenue was solved with both new-new and on contract mods and about 50% of our recompete revenue awards are in backlog now as well. So in addition, very healthy pipeline, pending awards are $12 billion, almost $11 billion we plan to submit in the next six months. We know how to win which was witnessed by our FY ‘15 record wins. This coupled with an appropriately timed factor plan really gives us plenty of confidence for us to achieve our FY ‘16 guidance.

And I'm not showing any further questions at this time. I would like to turn the call back to Mr. Dave Dragics, Senior Vice President of Investor Relations for CACI International.

We've been informed that the conference call provider is having problems with the issue on their bridges. And I know that a number of you have had difficulty dialing in. So I guess we can give it some time for other people to get through but everyone seems to be having a problem dialing in with the - through the current provider. So if you could just stand by, we'll check and see if we can get some of you through.

[Operator Instructions].