CACI International Inc ($CACI)

All right. Good afternoon, everyone. Thanks for sitting in. Pleased to have CACI with us. John Mengucci, CEO; Jeff MacLauchlan, CFO. I do you guys in this forward-looking statements.

We may make a forward-looking statement. I'd ask you to review our risk factors as outlined in our SEC filings.

Thank you. I got that out of the way. right John, I'm going to start you with the Zinger, not really Zinger, but I think what's kind of top of mind for me. What do you think the investment community might be missing about your portfolio is kind of not appreciated? And who do you as you look at your business today and kind of what it's become what do you see as the right comparables for CACI?

Yes. Thanks. So that is the zinger right off the rat the top. But it's a very fair question. Look, we've been a government services company for quite a long time. The folks who have been following us for a long time, they'd probably say since 2019, we stopped being a government services company we're continually getting compared against companies we have very little income in with. And we can go down the multitude of different paths of how you make that change. . This sector has gone through COVID and then dose and government shutdowns and the like. In the last 7 years, while all that was going on, we were beating and raising. We continue to grow the business. It's grown in a very different manner. We made a decision a number of years ago that when LPTA and sequestration, those kinds of things came mile, it was clear, the government had a bend towards buying services, buying labor hours at the cheapest cost price possible. And all of us have gone to business school in 1 shape, way or form and that's called a commodity. If you only differentiate on price. And so beginning in 2019 time frame, we started to exit all that type of business. we're still in Government Services GIC code, and that might be pertinent to this discussion. But what is not easily picked up on is the portfolio work that we do 90% of our revenue. are with national security parts of the federal government. Less than 10% is done with the federal civilian space. We like to talk about 60% of our deliveries are in the technology space and 40% are at expertise. We define technology and expertise in 2019 to actually be how the customer purchased if now talked about what it is we deliver, 80% of our revenue is in the area that would be consider space and defense company. So what you're seeing is this disconnect between having an aerospace and defense defense tech company in the government services area. So we continue to get hit with macro sector issues. I'm sure we're talking about AI. We can't talk about impacts on settling so how we see all the factors impacting government services are actually positive for our business as we continue to lead the entire sector in free cash flow generation, revenue growth, margin expansion and the like. So it's we are continually being called in and averaged in with companies that don't have very much in common with us. So defense tech delivering things at the pace of the mission, all software-based technology. Last thing I'll say is we built 8 years ago, we repositioned this company to be far Part 12 and far part which means we can respond to classic cost-plus programs through the cost accounting standard. We also have half of our business that is commercial based for Part 2, where we invest ahead of customer need. We build the technology we believe that the customer needs next. We work with them, we sign our OTAs, we get sole-source production contracts, and we go out and buy manufacturing services and the like. So all of that, what I've just said does not happen in a traditional government services company. So I'll pause there.

Great. So in you mentioned defense tech. I mean, you're doing a lot of things at this point, a large part of your portfolio is kind of defense tech like. I mean, I'd highlight space, EW, go on, UAS, cower UAS, which just memory I think you guys I wasn't even aware you were in counter UAS I mean that's part of the problem. Talk about like those different buckets, how big they are, how you participate in those different areas that are viewed by the market as defense tech, but most people don't realize that you guys do?

Yes. So when you talk about electronic warfare, we define that as anything in the RF spectrum that you can sense and you can take action on. So if I can find a switch going on and off and there are zeros and ones coming out of that device all over the globe. Our company has probably collected it at 1 time for 1 need or another. And that where the magic happens is how do you classify every 1 of those signals, so you know exactly what was cited. And then in times of conflict how do you make determination to nonkinetically know that source, whether it's a good source or it's a bad source. So electronic warfare, we can throw cyber payloads at a number of different devices, a large part or EW, was in Counter-UAS. You're all just starting to hear about that marketplace. We've been in it for 2.5 decades. We understand how to provide low no collateral counters to things that are flying overhead that don't have a human pilot in them because they all run in the RO spectrum. They all have electronic electronic signals coming off of them. And yes, even though you've all probably heard about dark drones at 1 part in their life, 1 point in their life, they were not dark, they were light, and then they went dark after that. So it's our exquisite technology, it allows us to build contra systems. We've got hundreds of systems and thousands of sensors deployed all over the world. They've been in operation for 2.5 decades now, providing nonkinetic protection against drones. So if you think about gold and golden Dome, you think about what DHS is going to spend $350 billion of reconciliation funds to protect the border from drones to protect all critical infrastructure from drones. Department of War protecting every base that they have in the U.S. for drones. And then building a counter U.S. layer that also finds everything from the small clatcopper. Those are called Group 1 drones, all through group in every way, shape and form, that's what we do. That's a $2 billion part of our business. We do between $1 billion, $1.5 billion worth of space. We're a merchant supplier for optical communication terminals and for large-scale exquisite got sensors right on stop me when it sounds like your government services company. We have we do well right on $1 billion worth of various network modernization work, really delivering software-defined networks across Department of War. And I'll say again, 90% of our revenue is with the intelligence community, the Department of War and the Department of Homeland Security. We put DHS in that, not in federal civilian because they're a per military-like organization. They traditionally have bipartisan support for their budgets. And that's the other first scan that we did when we made this company back in the early 2000 tons.

If you bucket all that I mean you threw out some numbers there, but if you bucket that whole defense tech like portfolio, I mean, how big of a piece of the business is it?

I mean, total, it's probably right now, it's around 60%, 70%. of roughly a $10 billion company, so $6 billion to $7 billion. .

So I'll remember what you just said about stop me when it sounds like a government service is coming in. I also remember from your Investor Day talking about software as a super power. I think we were starting to talk about AI then, but not that much. So have to bring up AI, how you guys are using? I mean clearly, AI doesn't seem to be a threat to the business but maybe to bump that view of things and how you guys are using AI.

Yes. So I did make that term. I comment that software is our superpower. And what we meant by that, we've been driving home for a number of years is that as the pace of missions quicken in every conflict that our forces have to go fight. The only way to stay ahead of the threats are to have software-based systems out there. It's really tough to bring a ship or a plane or satellite into port and put a hardware-based solution and upgrade on it and then send it back out there. Today's war fighters need systems that can over very dirty comm, which means not highly protected comms you can send software updates like you send to your phone in a real-time wartime manner to get those upgrades to the systems that we have put on ships and planes and ground sensors all over the globe. So software-defined technology when we moved towards investing in that type of tech, it was the demand of me that everything needs to be software-defined everything. It can run on hardware, obviously. They ask me software defined on where you're going to make changes quickly. So if you pull that string, we never said that software coding is our superpower. We said it's software defined. So we understand the mission, 40% of our workforce are veterans. We understand the mission better than most customers do because we're that continuous force out there at the point and to spare. 1400 people deploy it the majority of the commands out there. So we know every conflict there is before the conflict starts. We know every conflict in everything that the nation is seeing during that time. So software defined, yes, do we have to write all the software for it? No. In fact, AI is a perfect tool to take what I would say some of the grunt work out of delivering software-based solutions. So if you have like workforce understands the mission, you have software architects understand how to architect software in an open architecture manner that allows other people to bring their software and their solutions to build it into ours. That's what the customer set needs. We don't sell in a license model. I don't honestly believe there are 4, 3 years in this marketplace that a customer like the Department award, the intelligence community really, at the end of the day, desire is a licensed product because he who owns a license owns what goes into the next version of that software. How many of you use Windows, Anybody from Windows or on as you what feature you'd like? But if you owned the source code and you have someone like us continually modify that, now the customer gets to make that call. And believe me, if you're in a joint targeting center, the customer is never going to turn your next build over just to you because they know what features they need next. So we are very much focused on software-based AI allows us to build software in a much more cost-effective manner. If it's firm fixed price, we can build it faster and it's better margins for us. If it's cost plus, we get the work done sooner, the customers come back and buy even more functionality. So the customer wins as well as us win. At the end of the day, software when we used it was about delivering the ability to make changes quickly. And the fact that AI can do a lot of the cogeneration, that's a win-win for us. That is a way for us to deliver even more capability faster. It's not revenue dilutive okay? Government government services comment, if you are selling software developers by the labor hour to the federal government, AI comes up and says, I can wait to code for you, that would be a perfect example of revenue dilutive. But oddly enough, as long as AI has been around, we've been on a continued tear of beating and raising guidance even on top of AI on top of dose on top of a number of other things that came at the work anything else?

I think you got it. You hammered it your you've lived through a lot of budget cycles. What we're going through right now with reconciliation and I think something that's still DHS are still shut down or not funded. So what are your -- any thoughts on how kind of this year's budget process between big base increase, reconciliation? Any thoughts how this might actually play out?

Yes. What is particularly important to us, which we talk about routinely is not necessarily the headline budget as much as the segments of the budget. And if you think about the places that we work and you think about our TAM of about $300 million, and our revenue this year will be about $9.5 billion. That's the middle of our at our guidance range we have a lot of headroom, which is important. But what's also important is the headline budget usually ends up moving by big ticket platform kind of items rather than the places where we have deliberately positioned ourselves. So if you think about electromagnetic warfare, you think about space, think about the things we've been talking about, the places of the budget where we've positioned ourselves are those that have durable sustained demand impulse and support. So no 1 is saying that we don't need a counter UAS strategy. So the important factor for us about the budget is where that where those resources are being applied and both in the base budget and the golden Dome, where Secretary Hege recently acknowledged the Congress that I think you said less than 20%, high teens percentage of the 1 Big Beautiful Bill Act had been appropriated and that they expected to shortly be freeing up the balance of it. So those are really the budget areas that are consequential for us.

Okay. So in relation , maybe talk about your pipeline, your bid pipeline. And then Yes, it seems like there's kind of a bit of a disconnect between the bid pipeline and what's actually coming through and actually getting spent. I mean I would assume at some point, we start to see a large pickup in kind of the outlays right? Because it seems like the budget is way, way ahead of kind of where we are in terms of what's actually getting spent.

Yes, David, I think that's right. I think if you look at what we said in our last quarterly earnings call, I'm going to kind of go in time here from right to left. So we routinely shared the statistic about what we expect to submit in the next 180 days. That's grown now to $22 billion, which is larger than our average for that window. The amount that we have submitted and awaiting decision is about $4 billion, which is unusually small as much as the 22 is unusually large. And then, of course, once the decision is made, then it moves all the way to the award point. So I think you could reasonably expect at this point in the quarter that we've seen that '22 sort of some of that sort of be a bow wave into the amount that's awaiting decision and that ought to drive some awards tailwind here as well in the future. But that's really an artifact of the thing we've also talked about quite a bit, which is that the acquisition mechanism in the government is sort of returning to normal after the shutdown activities, but is not completely there yet. It's improving, but it's not really back to sort of preshutdown levels. And I think the pipeline and an award decision metrics, I was just sharing are evidence of that.

I'd also put in there to back to your earlier question, David, if you take the dynamics that Jeff mentioned, if you look at the last 3 quarters of the company's book-to-bill numbers, they've been below Okay. At the same time, we're beating and raising guidance. We're crushing the free cash flow estimate we had for over a 3-year period. We're hitting the already at the end of year 2 hitting the revenue growth numbers and the margin growth numbers that we believe it would take us 3 years to go hit. So it's another indicator that regardless of awards are coming out in a regular manner awards are lumpy. And a lot of our awards, the average duration of a contract we put in the backlog over the last few quarters has been 6 years. So that is not the makeup of a traditional government services company who's selling labor in a 3-year at best period of performance. Because right now, those companies are starting to talk about if the turnaround and awards don't happen, here's the bad things are going to happen going forward. We've lived through 3 quarters of beat and raise. Eventually, awards are lumpy awards catch up. So we're not living hand into mouth. We have much larger production type programs that we're out there delivering on today and multiple billion dollar jobs 1, 2 years ago, they're just starting to ramp up now because we're getting through milestones and we're getting to low rate initial production. So it's a very different build out model as to how you look at our backlog and what revenue growth that can throw off versus other more traditional government services companies.

And that backlog dynamic that John just expanded on really gives us a great deal of high confidence sort of 4- to 6-quarter horizon visibility into what the near and medium term looks like?

So keeping with that, you've won a number of multibillion-dollar programs over the last several years. Maybe refresh us on what those are and where they are kind of in their in terms of the ramp-up period for these various different programs?

Yes. So there are several [indiscernible] is probably 1 of the earlier ones where the first phase of the program involves designing the balance of the program. So we're actually in the beginning of that second acceleration period. Spectral, which was a really important win for us for the Sign collection suite on the Navy surface combatants, recently achieved their milestone C which let us move out of development into low rate initial production. And as we define the ship classes and the areas that it's been ready to be deployed, we can now start that deployment. NASA end caps, which I think we won 4 or 5 quarters ago, is in a situation similar to ITAS where we're consolidating all the application systems for NASA's 11 centers. And we're through the design phase now of that program and beginning to deploy it as well. TMS is another significant Transcom logistics system, where we recently emerged from protest. That's also ramping up and accelerating into the year-end. So for those of you that are sort of doing the algebra on what our fourth quarter must look like to make the annual guidance makes sense. A lot of that growth is in those areas that I just mentioned as we move into the fourth quarter or complete the fourth quarter at this point.

Yes. Want to pivot to margins. John, I think you said relative to your Investor Day, I think you're kind of already there, maybe even past at this point in terms of the margin progression you had talked about. I think some of it is driven by been driven by just the change in the portfolio to towards more tech, more fixed price, but also layered in some acquisitions that came in kind of accretive margins. So just talk about the margin improvement you've seen in kind of the road map from here because I mean, you're obviously generating margins well above government service, I won't say peers, government services. And a lot of games is you're ahead of your funds per.

Yes. I'll talk a little bit about margin, and I'm going to ask Jeff to sort of talk about how we look at margin and revenue growth because to us, we're a free cash flow growth company period. That's how we manage the company. That's how we bonus all the leadership in our company it's all around free cash flow and there's a number of multitude of knobs there. As David mentioned, we're also a highly acquisitive company. So we're in 7 markets. We do market strategies we're myopically focused on doing market strategies. We're doing twice a year, looking for gaps to where we think the future of the markets are going to go. And if there's a capability we need and we don't have the time to create it ourselves, we're pretty darn good at doing small to midsized acquisitions. We just did a rather large one. We proved to everybody, and we know how to do a large ones, so we can probably check that box with a green check mark. We figured out how to take 1,100 people and some 100 million of revenue annually and 20 or so percent margins and actually fold them into the company. But the message in how we've been doing our M&A program is around the kind of companies we've been looking for 9 straight years, we've looked at technology-based companies that could drive national security features in a more agile manner because I firmly believe that at some point, the aerospace and defense, [indiscernible] the companies within there are going to eventually bifurcate. There's going to be primes who do eye-watering phenomenal things and a mission platform layer. I used to work at 1 of their phenomenal companies. They provide a plethora of national security assets for this country, period, exclamation park, 2 bar none. But when the mission gets trickier and it's going to change every 4 hours. You're not going to change the outer mode line of the seventh generation fighter in 4 hours. Well, you will change our mission packages that are on all of those assets. So we, in our company, and we put the next course forward, we looked at our acquisitions are going to be very much technology-based. It's always going to be software to flying tech. We're not going to make any exceptions to that rule whatsoever we're going to go fill gaps in the markets that we're in. That alone says for a long number of years, we've been doing the technology side of what national security needs and less about the labor hour support of that operational support 1,400 people out across the 5 or 6 combat commands, that's rich for us. That is rich, you can call there ever you want. You can call that labor hour work, but that is rich because we're 1 of the only companies that are sitting in every single combat command so the investments that we make ahead of customer need by spending our own money, our own R&D to deliver products that we can commercially sell from a price list. We have the best class seat there is and watching every conflict to run the globe because we're right there. The glass is right here. We're looking at dots and bangles moving all over the place. So we know better, just about every other company out there, it's unfair advantage, but it's legal. You just have to win that business to make sure you know where we're going to invest. So from an M&A program, that's where we've done and a lot of those have been in the technology areas. A lot of those have been far part 12 where we can put price list out to the government. And we don't have this debate back and forth and I gave you 8% for your 10. It's so here's an item does 90% of what you need today not 3 years from now, and that should come at a premium, and the government is more than willing to go buy that. And that's what has been really responsible for driving a lot of the margin.

So let me talk a little bit about margin and expand on John's comment. Let me first say, John was not updating our ARCA annual revenue guidance of $650 million, when you said $700 million look, we margin is an artifact for us of solving for free cash flow. That's the way we run the business. That's the way we make decisions. So we're modulating each time we have 1 of these strategy reviews that John talked about or we go through and decide where we're going to apply resources and where we're going to divert them from 1 place to another. All those are free cash flow decisions. . So we're modulating investment driving top line growth and margin to solve for cash flow so if we can hold the margins and grow a little bit more quickly, generate more cash that way, that's the choice. In periods where we have circumstances where we may not have the investment opportunities that we want for the next quarter or 2, we'll let the margin drift up. So free cash flow is the buy work. That's the way we decide. Now having said that, we've also talked about the fact that in our current situation, our current view of the environment and our opportunities and circumstances give us some confidence to say that it's reasonable to expect some continued modest margin improvement in all that as we go through the process that I just described.

I think, John, you made a comment that 50% of your business is eligible for FAR 12, so commercial-based terms? Is that right? And how much of your business today is on commercial-based terms?

Yes. So I would say probably half of our technology business is based on far part 12 terms Okay and that ebbs and flows and sort of the mix, it's not in every exact quarter, but over a 3-year period. We continue to grow that part of our business, clearly because what else has helped us is the customer has changed their buying manner right? Our customer is saying, why is it that we, the government can't buy with commercial like terms. By the way, they never said can they buy just commercial goods. That's sort of been an extrapolation beyond with how they actually think about it but buying more commercially, what they mean by that is do we really need to take 7 years to write the requirements, 3 years to get the bids, the next 3 years to change the requirements because the world changed and never really get something out there that we can use in a quick kind of turn manner. . The government is commercialized being able to deliver things on a very quick cycle. Like I'm sure all of you in the last 18 months has spent $14.99, $1,499 for the latest iPhone not because you need it because you wanted it because the next version was out there, right? I don't think we'll get to that kind of speed across all of the defense items, but the customers have this insatiable need to say, when are you going to invest, right? Why is every dollar of IRAD, you companies want to do business with the government, you bill us for it. It's built into your rates. And I would contend it's built in your rates no matter what. whether it's in your billing rate or whether it's in your cost of goods sold, you're going to recoup that cost. But they want to buy in a more commercial-like manner, and that's when we put this type of business in place.

I think in many ways, the circumstance that John outlines is a really important proof point around this industry segmentation also because one of the reasons that the traditional primes have done that work the way they've done it is that the government actually ends up deciding very precisely what they want. So if you're buying an early burclass destroyer or you're buying the next lot of F-35s, you don't necessarily want the contractors to be -- you've got to well -- to be deciding what that looks like. You got a well-established requirements process. It's clumsy and cumbersome. It's not very fast, but it gets a reasonable outcome, and it's a proven one. The issue is that this next strata of the industrial base that we're starting to see separate can't work at that pace. And so to be able to participate constructively in the business at that level, we have to be doing this in parallel, which is one of the reasons that the market has sort of surfaced OTAs as such a great way to do this because it gives us an opportunity to work shoulder to shoulder and sort of solve these problems with a speed and a cost benefit analysis that the traditional process would not permit.

So I'm not going to update my model for Arc today. But I guess maybe, Jeff, if you could review kind of the expectations around a couple of things, accretion. I guess you had some transaction costs that you threw that was kind of in the cake that I don't think people fully kind of realized or because you took down your EPS guide partially on that. And I think people kind of didn't quite understand all that. But Yes, those couple of things and there's something else on that. synergies. Synergies and then I think you got a tax benefit that came along.

We did the deal. Yes, we did. Let me first, if I can, in the time we have left, let me start with the accretion dilution.

I've got a more so.

Okay. I'll be as fast as I can be. First of all, we did -- when we made the announcement, we said, look, in the first full year, which would be our FY '27, this will be neutral to earnings, neither accretive nor dilutive. In the second full year, it will be solidly accretive. And we'll have more to say about that as we get to our FY '27 guidance and our new 3-year targets and beyond. What I think in retrospect, we were not as clear about as I wish we had been was the impact on the remaining 4 months or so of FY '26. Clearly, you can't acquire a business of this size and scale with $2.6 billion and all the associated financing costs and have that be anything but dilutive in the first 4 months. So in retrospect, we may not have been quite as clear about that. We didn't say anything about it, but we probably should -- in retrospect, probably should have said something about it. The other thing that I think got lost in the call, and we say this from time to time, but I'm not sure it completely sinks in. We don't use adjusted EBITDA. Our EBITDA is our EBITDA. And as a result of that, we absorbed about $22 million of transaction costs this year, $17 million of it, I think, was the number in the quarter, which we talked about and we disclosed, but we actually delivered the strongest margins that we have in quite a while after absorbing those transaction costs. And in fact, the business was running at about 13% without those. We also absorbed $40 million of cash flow impacts related to the transaction and didn't change our cash flow forecast, which is tantamount to saying that the core business was actually operating actually $50 million better, $40 million for transaction costs and $10 million for increased CapEx investment. So I could say more, but I'll stop in the spirit of you having one more.

Because I caught of one more, too. So we'll tag team. So one, you mentioned the 3-year targets where they seem pretty stale even though we're in year 2. So do you revise those targets early? Or you wait until -- you wait to revise this until we get to the end of the 3-year period, even though you're kind of there? I guess that's question one. And then sorry to do this to you. The second question, obviously, you've levered up the balance sheet to do this deal. You've -- in the past, you've gone to the same kind of leverage levels and you've pretty quickly -- you focus on delevering and delever quickly. But how do you think about delevering -- the decision to delever today versus share repo, given what seems like a disconnect in your stock price relative to the numbers that you guys are putting up?

Yes. So let me first talk about the 3-year targets. We did not -- and we were clear about this, I think, never undertook to maintain or update the 3-year target the way we would a guidance number. We said, here's our view of what the next 3 years look like. We'll keep you posted. When we give our FY '27 guidance here on August 6, it will be pretty clear to everyone where we ended up or where we expect to end up relative to those targets. We will likely have another Investor Day sometime late this year or early next. And I would expect at that time when we announce that and the format for it, we'll have -- I would expect at that point, we'd have a new set of targets. I'm sorry, what was the second part of...

Second one is share repo.

Share repurchase.

Given where the stock...

So I think given where we are, as you said, our focus is on delevering interest rates probably have some upward pressure. We remain flexible and opportunistic. And I think if we saw a really compelling opportunity, we would consider share repurchases sooner rather than later. I'd really like us to get back down into the low 3s again. I would remind everyone that we bought $150 million worth of shares at $344 a share average over 10 days or so in the middle of the Doge storm. So I think it depends a little bit on how volatile we see the market reaction being. And at some point, the shares are they're a compelling value now. But at some point, it becomes so obvious that you can't ignore it. You have to make a leverage trade that you might not otherwise like to.

All right. So we're definitely out of time, John. Jeff, thank you very much.

Thank you.

Thanks, everybody.