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 on
the government contract procurement process (such as bid protest, small
business set asides, loss of work due to organizational conflicts of interest,
etc.) and termination risks;
• significant delays or reductions in appropriations for our programs and
broader changes in
• legislation that amends or changes discretionary spending levels or budget
priorities, such as for
COVID-19;
• legal, regulatory, and political change from successive presidential
administrations that could result in economic uncertainty;
• changes in
foreign events, or any other events which may affect the global economy,
including the impact of global pandemics like COVID-19;
• the results of government audits and reviews conducted by the Defense Contract
entities with cognizant oversight;
• competitive factors such as pricing pressures and/or competition to hire and
retain employees (particularly those with security clearances);
• failure to achieve contract awards in connection with re-competes for present
business and/or competition for new business;
• regional and national economic conditions in
including but not limited to: terrorist activities or war, changes in interest
rates, currency fluctuations, significant fluctuations in the equity markets,
and market speculation regarding our continued independence;
• our ability to meet contractual performance obligations, including
technologically complex obligations dependent on factors not wholly within our
control;
• limited access to certain facilities required for us to perform our work,
including during a global pandemic like COVID-19;
• changes in tax law, the interpretation of associated rules and regulations, or
any other events impacting our effective tax rate;
• changes in technology;
• the potential impact of the announcement or consummation of a proposed
transaction and our ability to successfully integrate the operations of our
recent and any future acquisitions;
• our ability to achieve the objectives of near term or long-term business
plans; 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.
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. This includes digital solutions (e.g., business systems,
agency-unique agency-enabling applications, investigative solutions) and
enterprise information technology (IT) including networks, infrastructure, IT
systems and support.
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• Mission - CACI provides capabilities that enable the execution of a government
agency's primary function, or "mission". This includes mission support,
engineering services, C4ISR (command and control, communications,
intelligence, surveillance, and reconnaissance) and cyber operations for land,
air, sea, and space domains.
• 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.
• Technology - CACI delivers Technology, informed by Expertise, 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; 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) and
5G 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. Defense spending has generally increased over the past several years, and indications are that will continue in government fiscal year (GFY) 2022. The Biden administration's initial GFY22 budget proposal called for an increase in aggregate defense spending of approximately 2% from GFY 2021. However, the recently-enacted GFY22 National Defense Authorization Act (NDAA), signed by the President onDecember 27, 2021 , authorizesDepartment of Defense (DoD ) funding of$740 billion , which represents an increase of 5% from GFY21 enacted levels of$704 billion . However, GFY 2022 appropriations bills have not yet been passed byCongress and signed by the President, which limits funding in the current GFY. 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). OnSeptember 30, 2021 , the President signed a CR, a temporary measure allowing the government to continue operations throughDecember 3, 2021 at prior year funding levels. A second CR was signed onDecember 3, 2021 that funds government operations throughFebruary 18, 2022 . 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. Impact of COVID-19 We continue to take steps to mitigate the impact of COVID-19 on our employees and our business. The impact of the continued spread of COVID-19 on our business will depend on future developments, which are uncertain and cannot be predicted, as well as other known factors outside our control. The recent surge of the Omicron variant of COVID-19, for example, has resulted in increased positive cases broadly, including within the employee base of some of our government customers. As a result, some of our government customers have limited in-person meetings, reduced access to customer facilities, and seen impacts to the normal operation of their business. We continue to work with our customers to implement appropriate risk mitigation efforts and alternative work arrangements, as necessary.
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$240 billion . Our addressable market is expected to continue to grow over the next several years. Nearly 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. 18 -------------------------------------------------------------------------------- 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 USG budget environment, particularly in defense and
intelligence-related areas;
• A shift in focus from readiness toward increased capabilities, effectiveness,
and responsiveness;
• Increased focus on cyber, space, and the electromagnetic spectrum as key
domains for National Security;
• Increased investments in advanced technologies (e.g., Artificial Intelligence,
5G), particularly software-based technologies;
• Balanced focus on enterprise cost reductions through efficiency, with
increased spend on network and application modernization and enhancements to
cyber security protections;
• Increasing focus on near-peer competitors and other nation state threats;
• Continued focus on counterterrorism, counterintelligence, and counter
proliferation as key
• Increased USG interest in faster contracting and acquisition processes.
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 Six Months Ended
The following table provides our results of operations (in thousands):
Dollar Amount Dollar Amount
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2021 2020 Dollar Percent 2021 2020 Dollar Percent
Revenues $ 1,485,778 $ 1,468,711 $ 17,067 1.2% $ 2,976,676 $ 2,928,217 $ 48,459 1.7%
Costs of revenues:
Direct costs 974,018 947,131 26,887 2.8% 1,948,189 1,887,065 61,124 3.2% Indirect costs and selling expenses 354,977 347,807 7,170 2.1%
712,083 702,811 9,272 1.3%
Depreciation and amortization 32,676 32,234 442 1.4% 65,268 62,378 2,890 4.6% Total costs of revenues 1,361,671 1,327,172 34,499 2.6% 2,725,540 2,652,254 73,286 2.8% Income from operations 124,107 141,539
(17,432 ) (12.3)% 251,136 275,963 (24,827 ) (9.0)% Interest expense and other, net
11,009 9,087 1,922 21.2% 21,407 19,067 2,340 12.3%
Income before income taxes 113,098 132,452 (19,354 ) (14.6)% 229,729 256,896 (27,167 ) (10.6)% Income taxes 22,799 25,974 (3,175 ) (12.2)% 51,321 56,774 (5,453 ) (9.6)% Net income$ 90,299 $ 106,478 $ (16,179 ) (15.2)%$ 178,408 $ 200,122 $ (21,714 ) (10.9)% Revenues. The increase in revenues for the three and six months endedDecember 31, 2021 , as compared to the three and six months endedDecember 31, 2020 , was primarily attributable to organic growth from existing programs and acquired revenues partially offset by the completion of certain contracts. 19 --------------------------------------------------------------------------------
The following table summarizes revenues by customer type with related
percentages of revenues for the three and six months ended
Dollar Amount Dollar Amount
Three Months Ended Six Months Ended
December 31, Change December 31, Change
2021 2020 Dollar Percent 2021 2020 Dollar Percent
Department of Defense $ 1,037,014 $ 1,012,875 $ 24,139 2.4% $ 2,037,141 $ 2,017,070 $ 20,071 1.0%
Federal Civilian Agencies 371,897 390,034 (18,137 ) (4.7)% 785,561 780,213 5,348 0.7%
Commercial and other 76,867 65,802 11,065 16.8% 153,974 130,934 23,040 17.6%
Total $ 1,485,778 $ 1,468,711 $ 17,067 1.2% $ 2,976,676 $ 2,928,217 $ 48,459 1.7%
•
single largest customer, where our services focus on supporting readiness,
tactical military intelligence, and communications systems.
includes contracts with the
• Federal civilian agencies' revenues primarily includes services and products
provided to non-
including intelligence agencies and Departments of
Agriculture,
• Commercial and other revenues primarily includes services and products
provided to
certain foreign governments and agencies through our International reportable
segment.
Direct Costs. The increase in direct costs for the three and six months endedDecember 31, 2021 , as compared to the three and six months endedDecember 31, 2020 , 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 percent and 65.4 percent for the three and six months endedDecember 31, 2021 , respectively and 64.5 percent and 64.4 percent for the three and six months endedDecember 31, 2020 , 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 six months endedDecember 31, 2021 , as compared to the three and six months endedDecember 31, 2020 , was primarily attributable to an increase in fringe benefit, conference, and travel expenses partially offset by reductions in indirect labor costs. As a percentage of revenue, indirect costs and selling expenses were 23.9 percent and 23.9 percent for the three and six months endedDecember 31, 2021 , respectively and 23.7 percent and 24.0 percent for the three and six months endedDecember 31, 2020 , respectively. Depreciation and Amortization. The increase in depreciation and amortization for the three and six months endedDecember 31, 2021 , as compared to the three and six months endedDecember 31, 2020 , was primarily attributable to intangible amortization from recent acquisitions. Interest Expense and Other, Net. The increase in interest expense and other, net for the three and six months endedDecember 31, 2021 , as compared to the three and six months endedDecember 31, 2020 , was primarily attributable to higher average outstanding debt balances and the write-off of unamortized deferred financing costs related to theDecember 13, 2021 Credit Facility amendment. Income Tax Expense. The income tax provisions represent an effective tax rate of 20.2 percent and 22.3 percent for the three and six months endedDecember 31, 2021 , respectively and 19.6 percent and 22.1 percent for the three and six months endedDecember 31, 2020 , respectively. The increases in the effective income tax rate were primarily due to decreases in excess tax benefits related to employee stock-based 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.
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-------------------------------------------------------------------------------- As ofDecember 31, 2021 , the Company had total backlog of$24.1 billion , compared with$22.4 billion a year ago, an increase of 7.6 percent. Contract awards were$2.0 billion for the three months endedDecember 31, 2021 . Funded backlog as ofDecember 31, 2021 was$3.1 billion , compared with$2.9 billion a year ago, an increase of 6.9 percent. The total backlog consists of remaining performance obligations (see Note 6) plus unexercised options. 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
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. Existing cash and cash equivalents and cash generated by operations are our primary sources of liquidity, as well as sales of receivables under our MARPA (as defined and discussed in Note 9) and available borrowings under our Credit Facility (as defined in Note 10) 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 ofDecember 31, 2021 , we had$896.5 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 ofDecember 31, 2021 ,$1,225.0 million was outstanding under the Term Loan. The interest rates applicable to loans under the Credit Facility are floating interest rates that, at our option, equal a base rate or a Eurodollar rate plus, in each case, an applicable margin based upon our consolidated total leverage ratio. The Credit Facility requires us to comply with certain financial covenants, including a maximum total leverage ratio and a minimum interest coverage ratio. The Credit Facility also includes customary negative covenants restricting or limiting our ability to guarantee or incur additional indebtedness, grant liens or other security interests to third parties, make loans or investments, transfer assets, declare dividends or redeem or repurchase capital stock or make other distributions, prepay subordinated indebtedness and engage in mergers, acquisitions or other business combinations, in each case except as expressly permitted under the Credit Facility. Since the inception of the Credit Facility, we have been in compliance with all of the financial covenants. A majority of our assets serve as collateral under the Credit Facility. A summary of the change in cash and cash equivalents is presented below (in thousands): Six Months Ended December 31, 2021 2020 Net cash provided by operating activities$ 308,765 $
382,287
Net cash used in investing activities (630,065 ) (387,000 ) Net cash provided by (used in) financing activities 358,849 (5,865 ) Effect of exchange rate changes on cash and cash equivalents (1,477 )
5,456
Net change in cash and cash equivalents$ 36,072 $
(5,122 )
Net cash provided by operating activities decreased$73.5 million for the six months endedDecember 31, 2021 , when compared to the six months endedDecember 31, 2020 , primarily as a result of a$52.5 million benefit in the prior year from deferrals of employer related social security taxes under the CARES Act compared to a payment of$46.5 million in the current year and a$18.4 million decrease in net income after adding back non-cash adjustments, partially offset by a$46.4 million reduction in cash paid for income taxes. Net cash used in investing activities increased$243.1 million for the six months endedDecember 31, 2021 , when compared to the six months endedDecember 31, 2020 , as a result of a$254.2 million increase in cash used in acquisitions of businesses partially offset by a$10.2 million reduction in capital expenditures. Net cash provided by financing activities increased$364.7 million for the six months endedDecember 31, 2021 , when compared to the six months endedDecember 31, 2020 , primarily as a result of a$366.3 million increase in net borrowings under our Credit Facility. 21
-------------------------------------------------------------------------------- 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$650.0 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 six months endedDecember 31, 2021 would have fluctuated by approximately$5.4 million . Approximately 3.2 percent and 2.8 percent of our total revenues during the six months endedDecember 31, 2021 and 2020, 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 ofDecember 31, 2021 , we held a combination of euros and pounds sterling in theU.K. andthe Netherlands equivalent to approximately$59.5 million . This allows us to better utilize our cash resources on behalf of our foreign subsidiaries, thereby mitigating foreign currency conversion risks.
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