CACI International Inc (CACI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Conference Call to discuss the pending acquisition of ARKA Group. [Operator Instructions] Today's call is being recorded. At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Kate, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning to discuss our pending acquisition of ARKA Group, which we will refer to going forward as ARKA. We are providing presentation slides, so let's move to Slide 2. 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. Those factors are listed at the bottom of this morning's press release and are described in the company's SEC filings. 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 will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to Slide 3, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John?

Thanks, George, and good morning, everyone. Thank you for joining us to discuss our pending acquisition of ARKA. With me this morning are Jeff MacLauchlan, our Chief Financial Officer; and Jason Bales, our Chief Technology Officer. Slide 4, please. Earlier this morning, we announced an agreement to acquire ARKA, a leading technology provider to the national security space community. As we've said many times, we are a disciplined acquirer, and our M&A strategy is focused on finding attractive assets that are compelling strategically, financially and culturally, which fill either capability or customer gaps in the markets we serve. From a strategic perspective, ARKA represents a deliberate step in executing our market strategy for space and adds complementary technology and increased customer presence. That technology and presence will allow the combined company to capture significant future opportunities in an important and growing market and strengthen our leadership in this burgeoning domain. It also aligns well with what we have been signaling for the past year about where our M&A focus would likely be, electronic warfare and space. From a financial perspective, the acquisition of ARKA adds a business that is driving double-digit revenue growth and EBITDA margins in the low 20% range. Jeff will provide more details on the financials shortly, but I want to emphasize this transaction enhances our ability to drive longer-term growth and free cash flow per share and generate additional shareholder value. And culturally, ARKA brings a highly technical and exceptionally talented workforce with decades of mission knowledge. Their people are focused on delivering innovation and driving customer success, which is perfectly aligned to our culture here at CACI. Together, we will continue to expand the limits of national security. ARKA truly checks all the boxes for our disciplined and proven M&A strategy and is just the latest proof point demonstrating both our flexible and opportunistic approach to capital deployment and the technology company that CACI has become. Slide 5, please. ARKA is a technology company that traces its heritage back for decades and their business is focused in 3 areas. In Sensing, ARKA provides exquisite imaging and remote sensing technology to national security customers through prime satellite contractors and is truly a national asset. They are one of only a few companies able to provide the most advanced imaging technology payloads to support critical national security missions. In fact, their technology is deployed on satellites across all orbits and is the tip of the spear for a wide range of critical national security space initiatives, including Golden Dome and the supportive INDOPACOM. In Sensemaking, ARKA brings software-based capabilities that enable the end-to-end generation of actionable intelligence through radar and image processing, mission management and sensor orchestration. Additionally, ARKA is a first mover in successfully operationalizing Agentic AI-based systems to automate intelligence production and other mission management functions for classified customers. Finally, ARKA provides other Optical Technology, specifically laser warning systems and directed energy components. Let me provide some details on how each of these areas complement what CACI is already doing and why we're excited about the prospects of the combined company going forward. Slide 6, please. In their sensing business, ARKA's space-based imaging sensors complement CACI's similarly strong portfolio of sensors deployed across land, air and sea domains. Together, we are the company providing highly sought-after exquisite sensors to national security customers across all domains. In their Sensemaking business, ARKA's GEOINT ground processing capabilities complement our own signal's intelligence processing or SIGINT production. Together, we become a leading provider of multisource intelligence or multi-INT. In addition, as the number of satellites grows and the volume of raw data being collected explodes, the need for automating ground processing at scale to enable speed and efficiency becomes an even greater imperative. ARKA's operationally proven Agentic AI-based software is already doing this today. And there is a tremendous opportunity to scale that software across CACI's broader portfolio of ground processing programs to deliver enhanced value to our installed base of customers. This is exactly the kind of innovation and investment ahead of customer need that we value at CACI, and ARKA makes that possible almost immediately. While Sensing and Sensemaking are the 2 main focus areas, ARKA's well-established laser warning and directed energy technologies represent new adjacent capabilities to CACI and provide some interesting optionality with our own optical technologies. Slide 7, please. As you can see, the breadth and depth of our combined capabilities are truly impressive. Together, we are leading a provider -- we are a leading provider of sensors and multisource intelligence across all domains with a first mover in utilizing Agentic AI-enabled software to automate and accelerate delivery of actionable intelligence to the Warfighter. This is exactly what our customers need and exactly what this administration is asking for. Together, we sense -- together, we make sense. And together, we enable our national security customers to act with increased speed, efficiency and lethality. With that, I'll turn the call over to Jeff.

Thank you, John, and good morning, everyone. Please turn to Slide 8. As John mentioned, we're extremely excited about the acquisition of ARKA. Before getting into the specifics of the transaction, I'd like to highlight a few details about their business profile as they underscore the attractiveness of the business and its fit with our strategy. Similar to CACI, approximately 90% of ARKA's revenue is with national security customers. In addition, ARKA's high fixed price content is driven by their IP-based differentiation, which is well aligned to evolving customer buying preferences. Finally, ARKA's sought-after technology has created a unique competitive position in the space domain, placing it as a preferred provider on a number of long-term multi-hundred million dollar franchise space programs. This is a natural complement to CACI's large backlog and proven ability to win and retain larger and longer duration programs. Please turn to Slide 9. Now let me discuss the financial highlights of the transaction. We're acquiring ARKA for an all-cash purchase price of $2.6 billion. As a result of the structuring of the transaction, there's an ongoing tax benefit with a present value of $225 million. Net of the present value of the tax asset, our effective consideration is $2.375 billion, which represents a next 12 months EBITDA multiple of 16x. This is an attractive multiple for an established company in this market that has been deploying proven technology for decades, has a long track record of strong financial performance and has an impressive customer presence and competitive position. In terms of expected financial performance, ARKA is a growing and highly profitable company with a track record of driving double-digit revenue growth and EBITDA margins in the low 20% range. Over the next 12 months, we expect ARKA will deliver approximately $650 million of revenue and $145 million of EBITDA, making it highly accretive to CACI's revenue growth and EBITDA margin. Considering the impact of onetime transaction-related expenses, the combination is expected to be neutral to adjusted EPS and free cash flow in fiscal '27, which is the first full year and firmly accretive in fiscal '28. We will provide updated guidance for fiscal '26 in our normal rhythm after the transaction closes. Now let me provide some color on the financing details of the transaction. We've executed a committed bridge facility concurrent with the execution of the purchase and sale agreement. We expect permanent financing to be in place at closing. Based on current market conditions, we plan to issue $1.3 billion of new transaction debt comprised of a new 7-year Term Loan B for $800 million and senior notes for $500 million. The remainder of the purchase price will be funded under our existing revolving credit facility. Finally, in terms of timing, we expect the transaction to close near the end of our third quarter of fiscal '26. And of course, closing is subject to regulatory approvals and other customary conditions. Please turn to Slide 10. Post closing, we expect leverage of 4.3x net debt to trailing 12 months pro forma EBITDA. While our target range is 2.5 to 3x, we have regularly indicated a willingness to go higher than that for the right opportunity, and ARKA is exactly that. The use of our balance sheet and strong free cash flow generation has been a key element of our portfolio evolution strategy. I'd also remind you, we have a strong track record of successfully and quickly delevering after major acquisitions. This underscores our consistent financial performance, disciplined approach to capital deployment and our demonstrated access to capital. In fact, we expect leverage to be back in the low 3s within 6 quarters of closing based on the strong cash flow characteristics of the combined business. And with that, I'll turn the call back over to John.

Thank you, Jeff. Let's go to Slide 11. To wrap up, ARKA is a fantastic technology acquisition for CACI and yet another example of our strong and consistent M&A philosophy that has transformed the company over the last decade. The macro outlook continues to be very constructive with strong customer demand signals, surging space market activity, continued administration support and healthy funding. Our significant business development and investment resources will enable us to accelerate more value to our customers and our shareholders. For our customers, we will be one company with an unwavering commitment to your national security missions and deep understanding of the importance of the speed and agility that software and software-defined technology deliver. The combination of CACI and ARKA broadens access to our combined technology portfolio and enables us to deliver capabilities even faster. We're positioned to help you address your biggest challenges and your most important priorities across the space domain and beyond. And for our shareholders, this deal is consistent with our M&A strategy, which has served us well over many decades and will continue to deliver growth in free cash flow per share and long-term shareholder value. With that, Kate, let's open the call for questions.

[Operator Instructions] Your first question comes from the line of Gavin Parsons with UBS.

It seems like there's a lot of classified work here, but you talked about several multi-hundred million dollar programs. I was hoping you could go into a little bit more detail on any of the specifics and the opportunity set for those, if you're able to talk about them.

Yes, Gavin, that's -- given that a large percentage of ARKA's business is in the classified segment, it will be difficult to talk about specific programs. But what we can talk about is, they're a national asset in providing imaging sensor payloads, and that's for EO/IR as well as hyperspectral. They have also done an outstanding job of building a path towards multi-hardware with us on the SIGINT side and they on the GEOINT side. We're in the same -- we're in different customers across the [ IB/IC ]. And even where we're in the same customers, we're in a slightly different vertical and also serving different missions. So there's very little direct overlap. The opportunities we have to bring the combined portfolio to a wider set of customers are very strong. And it goes without saying they bring very strong past performance. So we'll be able to share more post closing, but a very strong company, multi-decade company, well established within the market. and a well-established business with a track record over many decades.

Great. I'll try one more. What are you guys assuming for Golden Dome and what's ARKA's position in there?

Yes. I mean they're a national security space imagery leader. So their sensors, Gavin, are going to be what we would call tip of the spear for priorities, not only for Golden Dome, but also in the INDOPACOM region. They're already engaged in almost all of the EO/IR and hyperspectral constellations. As you all know, we're bringing lots of launch capabilities and a very strong [ counter-UAS ] protection layer. And again, and I'm going to have Jason talk a little bit on this. Our ability to drive end-to-end multi-INT solutions for all potential intelligence gathering missions, that is one of the major compelling reasons for this acquisition. And it also talks to future synergies as we get into running this business.

Yes. This is Jason. The question on what they could do to contribute to these critical missions, right? They currently do radar and imaging processing from electro-optic IR sensors to do detection of threats where they're popping up in the world, right? That's an important left-to-watch capability for initiatives like Golden Dome and the capabilities we have out in INDOPACOM. Combine that with our ability to do signal processing exploitation in the SIGINT side, and we have a very strong multi-end portfolio we bring to the table.

Your next question comes from the line of John Godyn with Citi.

Congratulations on the deal. I was hoping maybe you could just give us a little bit of maybe historical context on how this deal came about? Was it -- were there other interested parties? Were you part of a bidding situation? Was there a historical relationship with the company? Any kind of useful context would be great, just to add some color to the situation.

Yes, John, thanks. I guess I'll start at the strategic side. Look, our M&A strategy has always been and continues to be focused on filling gaps. We've always talked about capabilities, customers, past performance, culture and ARKA truly hits all of these. They've got decades of exceptional past performance, which only strengthens our past performance record. They also augment our growth of long-duration programs. We've talked for a number of years of bidding larger and longer duration contracts. They have a number of long-term franchise programs that also bolster that kind of backlog visibility that we've been very deliberate about. And then it's a very deliberate step in our strategy for the space market. We're pretty good at following a number of assets. This asset came up about 5 years back. The Blackstone Group picked this up. They've done a phenomenal job of investing both CapEx and OpEx levels to continue to push this business forward. And we truly believe it will expand our total addressable market and reach.

Yes. John, this is Jeff MacLauchlan. The Blackstone Tactical Opportunities unit did a really nice job in the 5 years or so that the company has been private in repositioning it and building some really important capabilities around it that leave it well positioned to kind of re-enter the public capital market area again. And we're really excited about some of the things they've done to set up the next things that we're going to be able to do here that Jason and John have been talking about.

That's excellent. And if I could ask one more. Loud and clear in the slides that you expect it to be neutral to adjusted EPS in fiscal '27. I just wanted to sensitize that a bit. If we were to try to brainstorm scenarios more accretive than neutral, what might cause that? What might that look like? Obviously, there's a positive backdrop for space here. I don't know if that could be part of it. But I wanted to just kind of sensitize that comment and brainstorm around it alongside you.

Sure. I think there are a couple of things that leave us well positioned relative to the comments that we made here. First of all, we've not assumed any cost synergies in the first 2 years or so. There almost certainly will be some administrative ones, and we'll start to see some synergies, I imagine, a little bit ahead of our assumptions. But again, this is not a cost synergy-driven acquisition, but we have made very conservative assumptions relative to cost synergies, and we expect that will not be 0. Similarly, on revenue synergies, John and Jason have both talked about a couple of areas where we see real opportunities related to Golden Dome, INDOPACOM and being able to apply some of the growing capabilities of their Agentic AI tools across our SIGINT community and data. And those franchises almost certainly will start to see some benefit. Beyond that, we also may find that we have a slightly better situation than we've assumed in terms of the borrowing cost and the financing of the transaction, where we've also made relatively conservative assumptions. So we're planning on it being neutral, but I have every expectation that there's a much greater opportunity for that to improve than to deteriorate. And I would further add that in fiscal '28, the second full year, both earnings and cash flow are solidly accretive.

Your next question comes from the line of Gautam Khanna with TD Cowen.

Two quick ones. Just curious, is there any recompetes of note to be mindful of here in chunky recompetes over the next 12 to 24 months? And then I did want to just ask to Jeff's point on financing costs, what are you expecting in your model? Are you penciling in 6%, 7%? What should we use as a baseline?

Yes, sure. This is John. On the recompete side, virtually nothing for ARKA, as we look into '26 and even portending into 2027. They're a calendar year company. So they're January to December. We would also share that greater than 90% of their FY '26 financial position is locked and loaded. They're either currently executing on that today or it's in their backlog. So a very true technology business without any expertise. And as you all know, there's times where expertise for recompetes dwarf anything we've seen on the technology side. The second part of your question, I'm going to turn it over to Jeff.

For the interest rate portion of your question, we have assumed sort of current levels. So you ought to think in the 6% to 7%. That will vary depending on whether or not there's obviously any rate cuts coming, which many of us think there are. It will also vary as we get closer to the market and entering the market between the Term Loan B and the high-yield bond. So obviously, those markets behave a little bit differently. But also, obviously, the bond market will be fixed rates and the term loan B will be floating. So depending on where we think we are at that point in the rate cut cycle, in the anticipated rate cuts, the composition between those 2 securities could 0change a little bit. But you're in the right ZIP code, Gautam, in the premise of your question.

Our next question comes from the line of John Siegmann with Stifel.

Congratulations on the transaction. Previously, ARKA announced a fair amount of capacity expansions in Connecticut. I was just wondering if you'd be able to share anything behind the basis to that and whether there's going to be opportunities to invest more capital in those facilities? Again, I was just wondering if you'd be able to share anything behind the basis to that and whether there's going to be opportunities to invest more capital in those facilities?

Yes, John, thanks. So I'll actually answer that a little more broadly. When we went through the diligence process, we were really looking for platform in tech obsolescence. -- where is the -- where is the strength in our intellectual property, what are the missions that they're part of today. And I won't say we were surprised. We were very pleased that they have been continually investing. And I would tell you, at a macro level, investments to grow up the Sensor stack. Think about more comm complex missions and also investments to move down the stack to "lesser capable but higher value sensors." I mean those are the 2 movements points for a company who's been doing this in the space for 5 decades. There is a lot of proof points on the both the CapEx and the OpEx investments. Their production facility is extremely high tech, and we're very, very pleased with how that business has been run. There's a lot of barriers to entry technically beyond their intellectual property. This technology, as I know you know, has to work under some of those challenging conditions, and they made a lot of the right investments to both sustain and grow it.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Congratulations on the deal. Maybe a little bit more on the contract, if you can. Any help you could give on just the performance over a period of time, just given 80% fixed price, how they perform, how they managed to generate such high margins? And if you could give us a little bit more detail also on the 6 contracts that are over $100 million in revenues, that would be helpful, too.

Yes. So John may want to add to some of this. But they have a demonstrated track record over the last several years of growing in this range and this sort of margin performance. One of the things that was of particular interest to us here, and you'll appreciate that given the classification nature, we can't talk about this in as much detail as you might find more satisfying. But they are in the early ramping phase of a number of large programs that have sort of medium-term easily visible growth for activities currently underway and under contract. So demonstrate the performance though of the growth rate and of the margins.

Yes. And I would say that their margins are typical of a pure technology company. You've seen a lot of the margin movement that we have done within this company as we have continued to build our tech portfolio. Jeff covered the performance. The other area, though, I want to spend a little bit of time on is talking about just what they've done in the Agentic AI world because that, Sheila, is a really nice growth area for both -- not only for ARKA but for us. So Jason, do you want to share a little bit on that?

Yes. This is Jason. Thanks, John. So one of the things that positions ARKA nicely, right, is not only do they build sensors that are up in space, right? But once that data gets down to the ground, they also have the processing architectures that allow them to make actionable intelligence from that data. And they built an Agentic AI workflow or architecture around the processing of that data that allows them to scale up very well for like we talked about before, some of these important critical missions for national security. But they also understand how to do that in the complex classified environments for the intelligence community and the Department of War, which puts them in a really important position to allow us to scale that capability across our portfolio of processing on the ground as well. So they're really a first mover, like we said, in getting the Agentic platforms into classified environments to do processing for intelligence that feeds the war fighter.

Could I ask a follow-up related to the ramp in the programs? Is it fair to assume just 10% growth, and that's what the company grew historically? Or are these large programs helping that drive that double-digit growth going forward?

The large programs are clearly contributing to the growth, if I understood your question correctly?

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Can you quantify for us or give us a range on where you'd expect your fiscal '27 net interest expense to land relative to the $180 million to $185 million that you currently have for '26?

Yes. I think we're going to wait until we close, Noah. And until we -- relative to the earlier question about some of the variability around the rate environment, and the actual composition of the securities, I think we'll have more to say about that later.

Okay. And then can you highlight this being one of a few capable of delivering large complex optical systems. How many other companies can provide these EO/IR payloads in classified national security satellite imaging? And can you talk about how these positions are allocated? Are they decided by satellite manufacturer versus the end customer? And what kind of duration do you have on these platforms once you're on them in this market?

Yes. Noah, thanks. This is John. So it's a pretty -- there's very tight challenging specifications that are issued by the customer. And these are -- the majority of decisions are made by the customer and their sensors get a ride on somebody else's satellite. This is high-end classified processing for some of the most critical missions. There may be one other company in a couple of areas, but that's not a discussion we're going to be able to have on this line. They are clearly very adept at bidding these programs, many of them are going to be fixed price bids. They have proven that by doing that, that discriminates them as well. They're not someone new trying to do this in a much cheaper and cheaper manner. So they're in a very discrete market. They understand their customers extremely well. There's a long record of trust because these assets need to be delivered. And I think when you combine what they do in the space area with what they're doing on the ground processing area, we can't overstate the combination of GEOINT information, combine that with the signals production work that drives a multi-inch solution. There -- the other thing I'll say is the barrier to entry in this market is extremely high. I mean you have to have -- I think John's comment earlier, you have to have world-class production facilities. You have to have world-class talent over a number of decades. There's 1,000 engineering folks there. Over 1/3 are software engineers that are working on some of the ground processing work. So there's a multifaceted and large barrier to entry within this market, and we're very, very pleased to own them.

Your next question comes from the line of Tobey Sommer with Truist Securities.

With respect to the company's ARKA's backlog and contract awards, what does the recompete profile look like over the next year or two? And how does the company's optical technology fit, complement and differ from your own existing?

Yes. So let me talk for a second about the backlog, and then I'm going to tip it to Jason to talk a little bit about the second part of your question. Backlog here is a little bit of a different animal. And if you think a little bit about Noah's question a minute ago with John's response to it, the backlog in terms of what's under contract is about $600 million. In addition to that, there is over $2 billion in the 5-year planning window of noncompetitive franchise sort of revenue for named programs that are related to proliferated systems, they're budgeted, they're long horizon franchise positions where you don't change kind of in the middle of the program. So you have to think about it a little differently than the way we generally talk about backlog. It's a little bit different sort of environment. And I'll go -- I'll let Jason take the second part of your question.

Yes. Thanks for that question. So how is their optical portfolio kind of complementary with ours. And I would say that's the key there, right, is optics deals with the domain of photonics, which is just how to use light and lasers to do good things, right? So they build really high-end exquisite optical sensors up in space that allow us to kind of image the world around us in the ground and get information that's there, right? They also do optical processing for networking down on the ground to make -- it's about making the information there. Where we build optical information is in the communication space, so we're using that same domain of technology, but to pass data to and from up in space versus imaging down on the ground as such. And that's just one kind of taste of the differences between our portfolios in the optical domain.

Your next question comes from the line of Louie DiPalma with William Blair.

I was wondering what is the mix of space versus nonspace revenue? And secondly, does ARKA has significant content with SpaceX and the FDA's proliferated warfare space architecture constellation for which they just awarded several large contracts for?

Louie, so space, I'll say, space and the related space activities on the ground are about 3/4 of the business, maybe a little bit more. So it's the clear center of gravity. There is, however, a very meaningful part of the portfolio that is related to other optical technology, and that's primarily around directed energy and some of the related very state-of-the-art coatings that go with that. And those are not particularly competitive long-duration kind of incumbencies related to those other optical things. But the narrow answer to your question is about 3/4 of it is space and ground-related activities in space.

And your second question around SDA and other space, they have a small role in the SDA world that we can share more on when we get through closing. But their focus is really highly classified Intel space assets.

I'll now turn the call back to John Mengucci for closing remarks.

Thanks, Kate, and thank you for your help on today's call. We'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-up questions. Jeff MacLauchlan, George Price and Jim Sullivan are available after today's call. Please have a safe and happy holiday season and all my best to you and your families. This concludes our call. Thank you, and have a great day.

Ladies and gentlemen, that concludes today's call. You can now disconnect. Thank you, and have a great day.