Bush's War Spending Bill Veto Torpedos CACI International's Guidance

CACI International (CAI) announced earnings:

For the third quarter of Fiscal Year 2007 (FY07) the Company reported record revenue of $473.1 million, up 8.7 percent over third quarter of Fiscal Year 2006 (FY06) revenue of $435.4 million, driven by acquisitions made in FY06. Operating income for the quarter was $34.5 million versus operating income of $36.8 million in the year earlier quarter, a decrease of 6.4 percent. The Company’s operating margin in the quarter was 7.3 percent compared with 8.5 percent in the year earlier quarter. This decrease was driven primarily by higher other direct costs as a percent of revenue during the period. The effective tax rate for the quarter was 37.6 percent versus 34.2 percent in the third quarter of FY06. Net income for the third quarter was $18.4 million, or $0.59 per diluted share, down 13.6 percent from $21.4 million, or $0.69 per diluted share, for the third quarter of FY06. Operating cash flow for the quarter was $50.3 million, compared with $46.8 million in the year earlier quarter.

Analysts were expecting the company to earn $0.59 on $471 million in revenue. What they were not expecting was that President Bush’s war spending bill veto would torpedo the company’s guidance:

The Company issued its revised guidance for its fourth fiscal quarter of FY07 and all of FY07. This guidance excludes the revenue or earnings from future acquisitions that may be completed prior to the end of FY07.

- Revenue $465 - $495 million in Q4, $1,883 - $1,913 million for the full year
- Diluted earnings per share $0.60 - $0.68 in Q4, $2.44 - $2.52 for the full year

Commenting on the updated guidance, Paul Cofoni, CACI’s President of U.S. Operations, said, “Our guidance for the fourth fiscal quarter of FY07 reflects many of the factors of the challenging market environment. With the continuing uncertainty of the passing of the FY07 supplemental, actions are being taken within the Department of Defense and, specifically, the U.S. Army to slow spending. At this time, we cannot precisely estimate the specific impact these actions will have on our operations. We will update our guidance if there is any material change between now and the end of the June quarter.”

“While we anticipate that a supplemental for FY07 will ultimately be signed into law, we expect uncertainty surrounding the level of DoD funding will continue into our next fiscal year as the FY08 defense appropriations and supplemental are considered by Congress. As a result, we have less visibility into our next fiscal year than we normally would have at this point in the year.

Analysts were expecting $481 million in fourth quarter revenue and $0.65 in earnings per share. The lack of “visibility into [the] next fiscal year” may prove even more troubling. For the first nine months of the current year, the company has done a good job managing working capital, resulting in a nice improvement to free cash flow.

CAI 1-yr chart: