CACI International Inc (CACI) Earnings Call Transcript & Summary

Great. Thank you for everybody joining us on the webcast today. I'm Joe DeNardi, Stifel's defense and government services analyst. We'll get started with CACI International. We have President and CEO, John Mengucci; and CFO, Tom Mutryn; also George Price and Dan Leckburg from IR on the webcast as well. So John and Tom, thank you for taking the time.

You bet.

John, and maybe, Tom, if we could just start with, I think, the question to share kind of the update on the business as it relates to COVID-19. And maybe if you could frame in terms of if you were operating at 100% prior to all this, where did you bottom out? Where are you now? And where do you think you will be in a few months just in terms of employee utilization and people who need to work, being able to work?

Yes, Joe, thanks. And on behalf of Tom and I thank very much for having us. If we start off talking about how we're all working through COVID and the like, we had mentioned during our third quarter call, about 70% of our people are working remotely and the remaining 30% of our folks are on customer sites or within CACI facilities. But probably a more meaningful metric is when we got to our third quarter call, about 10% of the hours that we invoiced, regardless of contract type, were actually impacted by COVID. So those are the hours that we're receiving cost for, but we're not receiving fee or profit dollars on those costs. Since our third quarter call, we are continually focused on employee safety. We're following all the right CDC guidelines. Social distancing, enhanced cleaning, pretty much what we hear each and every night on the local news is what a company like us is focused on. Yes, a little bit about of how do we see this playing out. We began about 7 weeks ago on a return to the work through the workplace planning across the CACI facilities, about 40 of our largest facilities, making sure we have things like temperature monitoring, we have the right cleaning devices, we labeled every floor within every facility, every 6 feet, sort of like going to the grocery store. But positive news is that our customers are now fully engaged in their return to workplace planning as well. So we would expect that by the end of June, that 10% number will calm down somewhat. We would like to believe that by the end of July, early August, that will come down materially. So all in all, I like the way this trend line is looking. It would be nice to be able to say, by the end of first quarter of next year, we're all back into the facilities that allow us for every employee to get 40 hours each week. That's my absolute first goal. And then second goal would be where they actually do that work from.

Yes. I guess, along those lines, do you have a sense for how many of your employees who were previously not working remotely and who are now will continue to do so?

Yes. We're looking at that one, Joe. And frankly, we're always looking at running a cost-effective organization. And I don't think it's lost on anyone. If we're -- if a company like us is able to do national security development work, 70% of our folks are working remotely, then you've sort of got to think, well, how does that change going forward, right? Productivity for everything that we measure in this company is actually slightly above what our pre-COVID rates are, and I'll leave that to the audience to think through that one. At the end of the day, will we have more people teleworking when we're all fully "are back to the new normal than we did in the past." I think that answer is absolutely yes. Is it going to be 70% working -- teleworking? Absolutely not. We've got -- today, we just have so many employees that have so many demands on their time, given schools closed, so on and so forth. But I think it's safe to say that across all of industries use commercial real estate, it's safe to say that we're going to take another look with a slightly different lens. So it doesn't mean we don't always look to reduce facility costs. But how we do that, how we build these temporary skiffs or classified facilities so that when and if this happens again, how are we able to sort of help reduce building density to make sure we can still get our secret, top secret and classified work done. I think those will continue to be things that we work on post-COVID.

And John, if I can add, recently, we started an employee survey. So let's understand what our employees think, how are they adjusting to the new work environment? And as we get those results, are you more efficient, less efficient? What additional functionality do you need, what do you need less off? And that will also help inform our judgment as to how we transition.

If your labor force is more productive, does that allow you to bill more? Or does your customer just benefit from the increased productivity?

Yes. Joe, if I looked at something like our shared service center, I don't know, Oklahoma City, that's an internal service center, we're seeing SLAs at or above the way they were operating. There's a multitude of reasons, right? Some of them good, some of them not so good, right? What that tells me is that people working from home, you don't have a natural break between your workday and your personal life day. So that doesn't portend for a good working relationship over a very long period of time. But all in all, on our development work for our customers, it would, in some instances, mean we're getting work done for less hours. That allows our customers to put change proposals in that allows them to get even more volume or more volume from us. And then in other areas, clearly, where those are firm fixed price program, to the extent that, that exists over a longer period of time, we're able to book higher margins.

Got it. And then, John, just maybe lastly on COVID. When you think about the impact of all this on your market kind of medium term, longer term, obviously, it's going to have pretty material effects on certain industries. When you think about that, what do you make of it? Is it your business is back to normal in 12 to 18 months? Or is this not a 9/11-type event, where you really have to think about your portfolio and positioning, but something more important than something that -- where the business recovers from? How important do you think this is kind of longer term?

Yes. If I had a crystal ball, I think what I would tell you is over the next 6 months, Joe, it's really getting things back to whatever that new normal is going to look like. Longer term, I sort of look at the macro things, right? The world's a really dangerous, dangerous place. Our adversary sure as heck haven't stopped doing things that they do around the globe. And to a certain extent, they're testing things or at least going back to retesting things, seeing if they -- if we're still watching. So I don't see the state of the globe and national security changing much, frankly. I think what will, at some point, have to change is how do we fund, how do we afford to create solutions and provide services for what will continue to be a very dangerous world. I mean at some point, CARES Act and HEROES Act and all of this large-scale government spending, eventually, we're going to have to find out what we, as a nation, can afford and what we can't afford. But then that always pushes you to somewhere different and different is sometimes better. I think as I shared on the call, I didn't remind my entire team talking about COVID being a major impact. And once they got that out of their system, we started saying, how is this an opportunity? Now that doesn't mean that we're belittling just what kind of havoc was actually wreaked, but as a business leader, when my business add on, how do we find things that potentially are very personnel intensive and we can make them less personnel intensive? How do we de-densify some of our buildings? It's often said that at times like this, it actually pushes a trend that was already started. And so -- and I do see that playing out across our company space in the kind of market that we're in today. So no lack of dangerous folks out there and adversarial nations. And clearly, what we at CACI do, those capabilities are always going to be needed. So some of this in a 12-month, 18-month period, it's more about budgets and how we'll all see that play out.

Yes. I think another -- one of the current investors have with the services space is just kind of what -- as you talked about the role that the stimulus spending will have on future defense spending. If you look back kind of post 2008 and '09, I think the stimulus there was a contributing factor to sequestration and LPTA. So what gives you confidence that the customer won't resort back to that type of behavior? Are there kind of legal impediments in place now that make that more difficult? Or do you think they just learned that that's not a good way to procure work?

Yes. I guess, if I think back to the early days of LPTA, right, Low Price Technically Acceptable and Better Buying Power 1.0, 2.0, I think what many of our customers learned, and we learned it with them, frankly, is that you can drive overhead rates so far down that the value you're getting from a dollar spent is far less than you would expect, meaning if you want to buy lawn-mowing services at Fort Hood on an LPTA, that probably makes sense. If you want to hire services companies and solution companies to put guidance systems on previously unguided missiles, probably not something you want to buy an LPTA. I think what else we learned is that drive to keep rates spiraling downward during the last crisis and during LPTA and when sequestration came up, frankly, we decided to be one of those companies who are not going to participate in a race to the bottom, so we could say we want all this low-margin work. Because when you do that to a workforce, it's really tough to convince that same workforce, now I'm going to become the company who wants to invest ahead of need. Now I'm going to become that company who's not going to be slashing training funds and health care offerings to our employees. So I think at times back in the '08, '09, '10, '12 time frame, a lot of needs at the bottom of the table, and we all learned that, that probably wasn't the way to handle it. At the end of the day, too, CACI is a very different company than we were then. We're much less dependent on pure services selling expertise. In many of our offerings, we have a very simple way to differentiate what it is we're going to deliver. In those areas, that will have more towards a commoditized kind of buying structure, which you would expect in my lawn-mowing example and some lower end expertise jobs, we're no longer in that those parts, parts of the market. Because we learned parts of those markets are better served by people with very low overhead rates and frankly, customers that don't have a high expectation of seeing anything done above and beyond what that specification says. So we're just -- it's sort of a combination of, we've all learned some lessons. And for us, personally and investors of ours, we're a very different company than we were in that '08, '09 time frame.

You all have recently announced some pretty big new awards that TCS, NGA contracting being one of them. Can you just talk about how you expect those to ramp-up going forward? Maybe what's been the driver behind the success you've had with some of these larger awards of late?

Yes. Thanks, Joe. I guess I'll start off with the last part of the question first. What has really provided the next level of growth for this company was -- were things that we put in place 5 and 6 years back, which is really retooling our business development organization, reworking processes and procedures, focusing on what customer outcomes our customers needed and then enhance that with investing ahead of need to make certain that we had a solution that was further down the fielding path than maybe solutions were in the past. So what would I mean by that is if we're having deeper discussions with our customer about where the threats are and where the marketplace is going, what capabilities are needed out there, we can be much better investors of our own discretionary funds and therefore, generate solutions products that are out there ahead of need that actually push our customers towards a CACI solution. The other part of that was to, frankly, bid less and win more. And that's just a simple theory of my pricing organization, quality assurance organization, proposal support organizations to me are pretty much fixed cost, and they can only handle so many bids coming through their organization. So you don't win more when you bid more because if I have a fixed set of assets, then the quality of the business is going to be lower. So let's go out there and bid less and win more. And then when we go after things, let's make sure that we've shaped them and then let's talk about size. I had a boss once who said "You can't feed an elephant a peanut at a time." Well, in our area, we want to win longer-term higher dollar value awards. And over time, that allows the efficiency of our bidding proposal and our research and development dollars to move asymptotically, which frankly allows us to recompete less because we're winning more longer-term business. It also gives us a great look and becomes much more transparent for us how we're going to grow in the future. Now you asked about some recent awards. BEAGLE was one. It's a $1.2 billion 5-year award, if I remember right. TCS, which is being a lead provider for NGA networks around the globe. BEAGLE has hit their first stage staffing plan that ended towards the end of May. We're on another phase, getting us towards the end of August, and I like what I'm seeing in there. TCS, of course, was a most recent award. It's one of our largest awards ever. And that's, frankly, going very, very well because a lot of the work was done pre award. It was a customer telling that they needed multiple network modifications over a long period of time. And how do we cut down that development cycle, but also how do we allow them, our users and their users at all different levels, to buy solutions and products and services at a predefined level. Well, you do that with an off-the-shelf product catalog, which allows -- frankly, it allows us to generate larger fees. Why is that? Because we invested ahead of need, and we took on that risk. And traditionally, in any market, the greater the risk, the better the award. So it's not as though customers are actually losing out. Customers are going to get service delivered to them 60 to 90 to 120 days faster than they would have previously in this kind of bid model. So -- and if I can say one more word. On TCS, about half of that, Joe, is recompete work. Another 20% or so is work that we've taken away from others. And then the rest of that is going to be orders on this fixed price catalog that will continue to expand the growth of the TCS award. I believe that's over a 10-year period, Joe.

Got it. John, I think one of the issues that some investors have is just kind of differentiating and understanding what exactly government services companies do. I mean it kind of amazes me, even folks that are pretty active in this space are still somewhat unclear on what company does and what one company does not do. So just maybe on the TCS contract, can you just maybe talk in a little bit more detail around, to the extent you can, what mission are you assisting that customer and addressing? Yes, and maybe just talk a little bit more about the capabilities that you bring to something like that.

Yes. Sure. On a program like TCS, that's going to be a mix of enterprise expertise and enterprise technology as we sort of frame our business in those 4 quadrants. What it does is it allows our customer to build their network out across the globe and around the globe as they expand their facility footprint. So at a macro high level, any customer who wants to expand network uses needs to, one, expand their network, expand bandwidth. They have to buy desktops. They have to buy different applications. They have to train folks. The way these contracts have worked in the past is that each time a customer needs something on these IDIQs, they write a task order, we provide a response, we negotiate that, we start work then we deliver. Imagine, [indiscernible] walking in to buy an Apple iPhone, and we spend an hour with our requirements and then we pick up the iPhone about 3 months later. What -- in this case, we take a look at many of the options that a customer needs to expand, invested ahead of need, work with some great engineering talent, come up with those solutions that the customer needs 20 additional people in the network that's just on a bandwidth. Here's the kind of additional circuits. Here's what those desktops should actually cost. Here's the applications that they should have on it. So it's sort of a pricing catalog that our customer can draw from. So that's an example of how the predecessor contract is going to work differently in the future. There were some also -- some support work being done by another government services contractor, and that's some of the work that we're going to be taking over, and we looked at how we could do that kind of work. Frankly, maybe not for less cost, Joe, but -- I'm sorry, not for less price, but maybe a different cost and margin model that also let that customer additional cost dollars to buy even more, so gave them much more efficient outcome. So that's something that someone like us does. On the macro level, I mean we can go on for hours, talking about how we differentiate across all 4 of our segments. But just one example on TCS.

Yes. Yes, that's very helpful. Tom, on the book-to-bill, I think you all have one of the best, if not the best, trailing 12-month book-to-bills in the industry. Some of that is duration but more so just kind of what you've been able to win. So in the context of having the industry's best book-to-bill, should we expect that, that translates into kind of industry-leading organic growth for a period of time as well? Or is there any way to kind of quantify the, I guess, the tailwind to book-to-bill just from the longer duration?

Yes. So we -- Joe, we spoke about the duration kind of previously. So some of the awards we are winning are longer in nature. John mentioned TCS, it's a 10-year award. The average duration of awards in the last couple of years, it's up around 18 kind of plus months. And so it changes the dynamic of taking the backlog and dividing it by 3 years or 4 years or 5 years kind of longer-term kind of nature associated with that. We also have kind of ramp up different programs. Each of the programs have its own kind of rhythm. Again, we mentioned BEAGLE. We're phase 1. We've transitioned BEAGLE, now we've got kind of more phases to get that ramping fully in place. Our stated goal is to grow greater than the addressable market. We've been able to deliver on in the last few years quite well, and we are continuing down that path. We'll be providing, at some point in time, guidance for FY '21. And the goal is to continue to provide organic growth.

Yes. Joe, let me add a couple of other points to that, too. We've got a lot of people watching the level of organic growth on the revenue side, and that is a very important measure. It just so happened to be about 5 years back, Ken Asbury and I looked at top line growth, but we also believed that we were an investor. Top line growth only gets you so far because at some point in our industry, we've watched across the board that when top line organic growth gets to a certain point, we start to hear about flattening and decreasing margins. So for us, every day we come into work, we've got strong awards. We've seen that for many, many quarters. We love the fact that we're bidding less and we're winning more. But what's equally is important to us is -- and what differentiates us is that we're driving organic revenue growth and expanding margins and strong cash flow concurrently. So we're not just showing higher single-digit growth. In terms of next year, we're right in the middle of working, as Tom mentioned, our FY '21 plan. We will continue to remain -- we will remain committed to outgrowing our addressable market and expand our margins and generating strong cash flow. And to us, it's those 3 measures that back the differentiation question, that's how we believe we differentiate ourselves that we're paying very much attention to the profit dollars that we're generating from the kind of wins that we have. The benefits of that, of course, are the things you've already talked about is that as I'm winning longer-term jobs, the amount of recompetes I have comes down materially. And the investment dollars I can spend on new capability comes up materially. That's why you're seeing some raises in CapEx in some of our R&D spending from our own profit dollars to make certain -- we own the intellectual property. It allows us to get in new business versus continually rewinning the kind of business that we have in the portfolio today.

Got it. Tom, I think a question for you. Can -- is contract mix alone shifting that enough to kind of drive the margin improvement? Would you need to continue to focus M&A on kind of the hardware side of things? What are your thoughts there?

Yes. So we believe we should be able to increase our margins organically. So if we do higher-margin acquisitions that add to the portfolio, that certainly helps. But we're able to kind of do that -- within our enterprise and mission space within our expertise and technology offerings, the objective is to grow kind of margins kind of [indiscernible]. I would tell you one determinant is contract mix. Generally speaking, fixed price kind of work comes at higher kind of margins than cost-plus work. When I say generally speaking, that is not always the case. LGS, for example, has a high amount of cost-plus work, given the customer nature. That being said, a good portion of the work is sole-sourced coming at nice high margins. So cost plus does not necessarily mean control margins kind of fixed price. So kind of within each program, the objective is to grow margin, focus on higher award fees, focusing on if it's labor based, kind of a richer mix of CACI labor, filling positions quicker, that helps the overall mix of the portfolio growing products or mission technology at a faster rate than other portions of the portfolio certainly help. And as we grow in size kind of top line and kind of gross margin, we will take our fixed overhead SG&A and spread that over an expanding basis, and that also will help our kind of margin as well.

Got it. One of the questions I got via e-mail was just how much of the TCS award will go into bookings? Do you have that? Is it the full value?

Yes. Joe, full -- yes, it's correct. The full value. It's a single award IDIQ. And as is our booking practice, it's -- again, it's -- very highly confident that we will realize that full value. As John mentioned, it was -- a good portion of it is existing work scope that we're currently performing on or another provider that we took -- a piece of that business was providing already. So highly certain in the overall value. And per our booking practices, yes, we -- it will be included in awards and backlog in the June quarter.

Okay. Got it. And then, Tom, maybe just on M&A. I think you think about capital deployment pretty kind of academically to understand why your strategy is what it is. But do you get to a point in terms of scale or capabilities where M&A becomes less relevant as part of the capital deployment strategy and there's a shift towards more of a balance? Like do you see that at all in the future or no?

Yes. Do I see that in the future? I'm not sure what the time right and kind of you're alluding to. Right now we believe the best way to drive shareholder value is to use kind of borrowed money/operating cash flow, free cash flow to grow the company through acquisitions. We have a series of kind of gaps in our portfolio. We're doing a strategic assessment, identifying those gaps and look to fill those gaps. That strategy has served us well. And kind of given what we see today, that strategy is the one that we believe will drive that shareholder value in the next several years. So I'm careful never to say never. But generally speaking, we do have those opportunities. We do have the ability to kind of move forward with acquisitions. We are able to do diligence efficiently, do very efficient integration and continue with that.

Joe, I would also add that from where I sit, we will always be an acquisitive company. I think it's a strategic differentiator for us. It's difficult to believe that any one company 20 years ago predicted where the market was going to be 22 years later and somehow found a way to organically create it. We're a very agile company. We've been pushing over the last 5 to 7 years, investing ahead of need, filling gaps, we believe our customers are going to be having next. Those are much more stringent than just bets. They actually are strategic plans, we review twice each year. We look for companies. We work M&A with some companies over 1- to 2-year period, so -- to make actually sure they have the capabilities and the customer relationships that we absolutely need. And that allows us to buy many, many companies outside of the typical option process, which gives us a nice financial story to tell for the first week, but also allows us to bring great capabilities and forward working booking and engineering folks to make certain that we are positioning ourselves in parts of the market we may not find ourselves today where we need to actually be tomorrow. So for the foreseeable future, whatever that term future means, there are a reasonable number of gaps that we want to continue to fill and there's some outstanding companies there that invested ahead of our investment ahead of need, and we're looking to bring them to be part of CACI. We honestly think that our M&A program is a way to deliver long-term growth.

Okay. I'm tempted to prove that a little bit more, but I'll let you guys stay on time. So John and Tom, thank you for taking the time. It was good discussion. Thank you, guys.

Thanks so much, Joe.

Thank you. Appreciate it, Joe.

Okay. All right. Take care.