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spk08: Thank you for standing by. Welcome to the CACI International Full Year 21 Results and Full Year 22 Guidance Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press star followed by zero and someone will help you. At this time, I would like to turn the conference call over to Dan Luckberg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.
spk12: Well, thank you, Andrea, and good morning, everyone. I'm Dan Luckberg, Head of Investor Relations for CACI, and we thank you for joining us this morning. We are providing presentation slides, so let's move to slide number two, please. 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 last night's press release and are described in the company's SEC filings. Our safe harbor statement is included in 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 three, please. To open our discussion this morning, here's John Miguchi, President and Chief Executive Officer of CACI International. John.
spk06: Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2021 results, as well as our fiscal year 2022 guidance. With me this morning is Tom Mutrin, our Chief Financial Officer. Slide four, please. Last night, we released our fourth quarter and full year results for fiscal 2021, as well as our guidance for fiscal 22, and I'm very pleased with our performance. Our fourth quarter results were in line with our expectations and kept another strong year for CACI. For fiscal year 21, we delivered revenue growth of 6%, adjusted EBITDA margin of 11.1%, and robust cash flow. Our organic revenue growth of 5% was ahead of our underlying adjustable market, and we delivered healthy margin expansion. We also won a total of $9.2 billion of contract awards with over 40% of that new business to CACI. That represents a 1.5 times book to bill for the year with a healthy mix of re-compete wins to preserve our base and new awards to drive future growth. And we delivered those results while navigating the persistent challenges of COVID-19. I could not be prouder of all of our employees who continue to support our customers while ensuring the health and safety of themselves and those around them. Slide five, please. Turning to the external environment, we are almost seven months into the new administration, and budget indications remain very constructive. The administration proposed an increase in overall defense spending of about 2%. and as the NDAA makes its way through Congress, there are indications defense spending could have further upside. Importantly, we continue to see bipartisan support to fund national security and IT modernization priorities, including offensive and defensive cyber, border security, C4ISR, electronic warfare, and space. As we think about cyber outside of DoD and the intelligence community, DHS's Cybersecurity and Infrastructure Security Agency, or CISA, will be a focal point for federal civilian cyber investment. CACI is well positioned at CISA and DHS more broadly with existing programs, customer relationships, and contract vehicles to address additional cyber requirements. In addition, the administration is focused on enabling technologies and methodologies like artificial intelligence and agile software development. areas where CACI is extremely well-positioned. It's all about an R&D-led agenda to develop capabilities and technology geared toward near-peer threats, great power competition, and ongoing counterterrorism. All this aligns very well with our strategy and capabilities. Slide six, please. Looking forward, it remains clear that the future is software-based. Many of our customers' most pressing challenges have common underlying needs, new capabilities at the speed of technology, increased agility, flexibility, security, and efficiency, all of which can be solved with software. CACI continues to address these needs and demonstrate industry leadership in software development with multiple pillars of success, agile software development at scale, DevSecOps using tool-based automation, and a focus on open software architectures. Different programs may emphasize one or more of these elements, but they are all present and key to our future growth. Our Agilent scale capabilities enable the industrialization of software development, which customers are increasingly asking for. Faster, more responsive to changing needs, more efficient, with materially higher quality. CACI is a leader. of Agile at scale, delivering on the largest Agile programs in the federal government. This includes our Beagle program with over 100 applications. Beagle and other CACI Agile programs provide important past performance and credentials to address the government's growing demand for Agile. In fact, we recently won new business at a classified agency to apply Agile software development to large-scale data analytics. This win also leveraged the capabilities and customer relationships of our next century acquisition. In addition, you've heard us discuss our 100-plus projects focused on AI. AI is ubiquitous across our business, providing customer speed, efficiency, and predictive analytics. AI was at the center of our recent $376 million NGA win, where CACI is building out the computer vision infrastructure, tool suites, and analytic environments for NGA analysts, providing an open, best-of-breed environment to users. Lastly, a key element of our strategy is to look further downfield and invest in differentiated software-defined technology ahead of customer need. Photonics, or laser-based communications and remote sensing, is a great example, which came to us via our acquisition of LGS. It is a technology we continue to invest in today. Notably, Aerospace and Defense Primes recently purchased our photonics technologies to include on their platforms. We have a nice pipeline of additional sales opportunities across the A&D primes. This is confirmation of well-placed investments in differentiated technology. Slide seven, please. Turning to our FY22 guidance, we expect another year of revenue growth above our addressable market, which we expect to grow at about 3% over the next five years. And we remain committed to ongoing margin expansion consistent with our stated performance goals. At the midpoint of our FY22 guidance, we expect revenue growth of 4 percent and adjusted EBITDA margin of 10.9 percent, which represents continued expansion off our normalized FY21 base of 10.7. In addition, we expect to continue to generate robust cash flow, and Tom will provide additional details shortly. We're seeing positive growth in technology and expect it to continue to outpace expertise growth. collectively offsetting the impact of the Afghanistan drawdown. I want to emphasize that all areas of our business are important and can contribute to growth and margin expansion. And there is a great synergy between expertise and technology. Expertise informs the technological requirements of the daily mission. And our technology capabilities are fantastic enablers and differentiators of our expertise, allowing us to deliver efficient and effective results to our customers. Slide eight, please. CACI's success driving growth and margin expansion continues to generate robust cash flow. Our cash flow and overall financial strength enable us to deploy capital to drive additional shareholder value through investments in growth, share repurchases, M&A, and other capital deployment options. We will continue to invest ahead of customer need to drive future growth and differentiation. Our commitment is to utilize CACI's strong cash flow to deliver the greatest long-term shareholder value. With that, I'll turn the call over to Tom.
spk13: Thank you, John, and good morning, everyone. Please turn to slide number nine. Our fourth quarter results were a solid finish to another successful year of growth and margin expansion. We generated revenue of $1.6 billion in the quarter, representing 5% overall growth and 4.3% organic growth. Adjusted EBITDA margin was 9.3%, and net income was $137 million. We are also reporting adjusted net income, which we defined as a gap net income adjusted for the intangible amortization expense associated with acquisitions. Adjusted net income in the quarter was $149 million. Let me remind you that the consecutive method tax change we discussed last quarter reduced fourth quarter revenue in adjusted EBITDA by $7 million. It increased net income by $51 million. Slide 10, please. For the full year, we generated just over $6 billion of revenue, representing 6% total growth and 5% organic growth, despite COVID-19 impacts. we continue to expand margins with adjusted EBITDA margin of 11.1%, up from fiscal year 20's 10.0% margin. The underlying margin in FY21, normalized for COVID-related head and tailwinds, the tax method change, and the strong performance on a fixed price program, which we noted on prior calls, was 10.7%, in line with our initial fiscal year expectations. This provides a base for an apples to apples comparison to our fiscal year 22 guidance. GAAP net income of $457 million represents growth of 42%, benefiting from the tax method change and the strong fixed price program performance, as well as revenue growth, margin expansion, and lower interest expense. Adjusted net income of $507 million represents growth of 39% from last year. Slide 11, please. Fourth quarter operating cash flow was $100 million, excluding our accounts receivable purchase facility, reflecting continued healthy profitability in cash collections. DSO was at 54 days and regenerated operating cash flow of $610 million for the full year, both values excluding our AR purchase facility. The 19% in operating cash flow was driven by overall growth margin expansion, and a three-day reduction in DSO. These items more than offset the $90 million of additional cash tax payments in the fourth quarter associated with the tax method change, allowing us to exceed our operating cash flow commitment. Recall we also benefited from a $50 million deferral of payroll taxes during the fiscal year. We ended the year with net debt to trailing 12-month adjusted EBITDA at 2.5 times, and this leverage reflects the $500 million outflow associated with the March accelerated share repurchase. Our strong cash flow and low leverage, the low interest rate environment, and our equity valuation informed our decision to repurchase shares to drive additional shareholder value. Slide 12, please. Now let's turn to our fiscal year 2022 guidance. As in prior years, our guidance is based on a program-by-program bottoms-up planning activity. This process provides a significant visibility and confidence in our outlook. We expect revenue to be between $6.2 and $6.4 billion, implying organic revenue growth of 4% at the midpoint. This is despite a 2% headwind going into the year driven by the withdrawal from Afghanistan, which we discussed last quarter. We expected adjusted net income to be between $430 and $450 million, with $50 million of after-tax intangible amortization expense. We expected adjusted EBITDA margin of 10.9% at the midpoint, up 20 basis points from last year on a normalized basis. Our organic growth and margin expansion expectations are driven by new business wins in high-value areas of our addressable market, as well as on-contract growth, excellent program execution, and overall business efficiencies. We expect free cash flow of at least $720 million in FY22. Capital expenditures are expected to be approximately $90 million higher than last year driven by several discrete growth and investment projects. With this, operating cash flow is expected to be at least $810 million. We will pay $45 million of the deferrals related to the employee portion of the payroll tax in December. And we expect second half tax refund of approximately $230 million associated with the tax method change. We are expecting incremental tax payments related to the method change of $40 million in both FY23 and FY24. As discussed in last quarter's call, the tax method change is expected to provide $60 million of cash tax savings over the four-year period, with the GAAP P&L benefited recognizing in FY21. Slide 13, please. To assist with modeling, here are some additional planning assumptions. Depreciation and amortization expense are expected to be approximately $135 million. Net interest expense should be around $42 million. We are expecting a full-year effective gap tax rate of 23.5% with a lower tax rate in the second quarter due to the impact of investing in stock awards, which were granted in prior years. FY22 tax rate is a bit higher than last year's rate prior to the tax method change due to larger R&D tax credits in fiscal year 21. And I will note we are using our full effective combined federal and state tax rate of 26.3% to tax effect intangible will amortization to calculate adjusted net income. We expect a typical quarterly sequential increase in revenue and profitability, but note that certain factors can skew quarterly trends, such as the timing of other direct costs and delivery of high margin technology. We also expect a sequential decline in revenue from fourth quarter FY21 to the first quarter of FY22, greater than the normal 1% to 3% due to timing of material buys, drawdowns in Afghanistan, and timing of some technology sales. And we are assuming there will be no material impacts related to COVID-19. Slide 14, turning to our forward indicators, prospects remain strong. For fiscal year 22, we expect 80% of our revenue to come from existing programs, 12% from re-competes, and about 8% from new business. These metrics are in line with historical ranges and also reflect an increasing amount of technology deliveries in our new business content. And as you know, these quick return sales come with high margin contributions. We have $7 billion of submitted bids under evaluation, with 85% of that for new business to CACI. And we expect to submit another $12.4 billion through calendar year-end, with over 70% of that for new business. In summary, we are expecting another year of strong financial performance with healthy organic growth, continued margin expansion, and robust cash flows. With that, I'll turn the call back over to John. Thank you, Tom.
spk06: Let's go to slide 15, please. CACI performed exceptionally well in fiscal year 2021. Despite a challenging environment, we did what we said we would do. We grew faster than our addressable market and also expanded margins. We generated robust cash flow and deployed that cash opportunistically to generate value for our shareholders. That capital deployment included a $500 million accelerated share repurchase, the acquisition of ABT and its exquisite ISR technology, and continued internal investment ahead of customer need. And we continue to have ample capacity for additional value-creating deployments of capital. We've positioned CACI for growth in fiscal 22 and beyond with strong awards, record backlog, and the capacity for ongoing margin expansion. With our continued investments, we are well aligned to budget priorities. We achieved this tremendous success because of our employees' talent, innovation, and commitment to customer missions, our company, and each other. I say it often because it's true. I am proud of the CACI team, each and every one of you, for what you do. Critical national security and modernization challenges remain, and CACI employees will be there to help our country meet these challenges. I also want to thank our shareholders for their continued support of our team and our company. With that, Andrea, let's open the call for questions.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And our first question will come from Robert Spingarn of Credit Suisse. Please go ahead.
spk11: Well, good morning.
spk06: Good morning, Rob.
spk11: Thanks for all the color before. Tom, when we think about 22, and we know there's no explicit COVID impact in the revenue and EBITDA guide, but if COVID were to impact, should we expect revenue to come into the lower end of the guidance range and maybe margins at the higher end? And what have you seen so far? in this fiscal first quarter, July, August, given the Delta variant?
spk13: Yeah, so Rob, I'll start out with that. It's such a hypothetical question, it's hard to speculate. If COVID impacts, what happens? A lot depends on the level of COVID impact, how it would affect customers, buying behaviors, award activity. our ability of employees to perform. So given that it's so speculative, I'm going to defer trying to answer that.
spk06: Yeah, Rob, this is John. Let me add something else. You know, three items. I guess first of all is if we look at COVID today versus where we were, you know, 12 to 18 months back, You know, it's our belief that both our customer set and CCI are much more prepared than we were a year ago to deal with this virus. So, you know, it's a known risk with a battle-hardened solution. We took the action years ago to build a technology infrastructure, as I've talked about in the past, to support a dispersed workforce. We actually did that focused on being able to get cleared employees across the nation. And, you know, it actually did a great job of supporting us through the core COVID period. And then lastly, providing choices to our employees on remote versus in building work locations. So, you know, it's those three factors, Rob, that going into the year, we really believe we're far better prepared to the extent that we can be, which is why we're issuing guidance without any additional COVID impact.
spk11: Okay. Okay. Fair enough. John, while I've got you, we're hearing a lot about zero trust cybersecurity and, you know, there's these mandates out there that federal agencies should switch over to that security architecture. So I wanted to ask if that's an opportunity for the company and do you have any commercial partners in zero trust?
spk06: Yeah, Rob, thanks. Um, uh, you know, we have a lot of, uh, many commercial partners, I mean, if you look at Zero Trust, we have a lot of... tool partners that we use on our own network as well as customer networks to monitor a large number of varying cyber attacks. What we specialize in is as that information comes in, how do we better defend? We are moving all of our networks much, much closer to zero trust. And for those out on the line, you have to assume people are going to get in. So, you know, how do you protect all of your information and, you know, how do you put different defense mechanisms in place? We are, as I mentioned, we are hardening our own networks here as well as networks across a number of federal civilian agencies such as DHS and others as well as a number of independent defense networks. We are very much read in on it. We are following all of the new executive orders that are coming out from this administration. And we're also very happy with the work that this administration and the focus that they have on doing a much better job. You know, now that we've had COVID and that attack surface has expanded greatly, we have so many employees working, you know, in our buildings, in our government buildings, and also from home. It's the right answer, and we believe that we have the right amount of funding, and there's more funding to be had with both the infrastructure bill and with others to come. So thanks very much for that question, Rob.
spk11: Is there any way to frame the size or the potential?
spk06: Rob, you know, sizing the potential is more directly in line with what we'll track in the enterprise IT modernization. It's sort of an overlay to it. So, you know, we'll see. we'll be able to provide more information when we start to see separate task orders come in on it, Rob, but every time we're out there selling enterprise IT, it most likely will be a CLIN or an additional sub-CLIN to all of the work that we currently provide. Okay, got it. Thank you. Yeah, thanks, Rob.
spk08: The next question comes from Gavin Parson of Goldman Sachs. Please go ahead.
spk02: Hey, good morning.
spk10: Two-parter on the organic growth and maybe the 3% five-year target. The first part, you're targeting 4% at the midpoint, including a 2% headwind from Afghanistan. Does that mean you're growing 6%, so 3% ahead of the underlying, or does that also have some COVID catch-up? And then the second part is, what's your framework for thinking about how much you can outgrow that 3% over the next few years, and what kind of book to go that you need to do that? Thank you.
spk06: Okay, Gavin, ready? All right. FY 2022 revenue growth 4%, which is ahead of our addressable market of three. So we can check that box saying, look, we are that company which is out there looking to grow better than our addressable market. And we're the company, frankly, that's focused on high-quality revenue. So we're going to grow nicely, but at the same time, we've got to be expanding margins. As I look at this, Gavin, I'll share a few factors that are in play when we set this guidance out. Tom mentioned a very major one. It's a bottoms-up approach, which is why it gives us confidence at 4%. But there are a few factors which are behind the reason why we're saying 4% today versus 6% or even slightly higher. Afghanistan reduction, level of churn in FY 2022, and average award duration. As you mentioned very accurately, we have about a 2% headwind coming into FY22 because of Afghanistan. We shared that over the last two quarters of FY21. So though it's no surprise when we take a look at that four, be it not for the administration policy change there, we would be soundly at six. You know, typical churn that happens every year. You know, each year we would show that step-up, step-down chart. And when we define churn, it's really work that comes to a natural conclusion or, you know, revenue from re-compete losses that aren't going to show up in the following year. You know, churn is usually about 10% of our revenue, plus or minus, but the churn this year is larger than the last couple of years because we did suffer one or eight complete loss. You know, as we said in the past, in the expertise portion of our portfolio, and it seems like every year we're reminded of this, We're very careful to ensure we bid the work we do at a fair price with an assurance that we can deliver successfully with an eye towards driving bottom line growth. And on one of those bids, we just were not successful. So we will say goodbye to some enterprise expertise work, and we'll move forward on that. The last part of it, Gavin, if you look at our backlog, our average reward duration has grown by about a year over the last three to four years. You know, what that does for us on a positive gives us a really desirable backlog. You know, longer-term duration work gives all of us much better visibility of revenue levels and we're a much longer period of time. You know, the downside is it's going to drive lesser revenue growth per year. But, you know, considering all those factors, I feel really good about our FY22 revenue growth. You know, net-net-net, without those couple of things, it would be a 6% to 7%. You also mentioned, is there any COVID catch-up? No. The COVID impact we had, if you remember, was from the folks we were trying to additionally deploy to overseas locations, predominantly in the Afghanistan area. Now, with the administration change, that has cleared that slate clean. So we were never going to make up COVID work going forward, but we were looking for that work, obviously, to have continued, and it didn't. Gavin, an awful lot of words there that I catch the majority of your questions or anything else and we can answer.
spk10: That's perfect. I appreciate all that detail. Maybe just following up on the technology and expertise mix, I think it was 50% tech for the year, maybe a little higher coming out in 4Q. Where do you see that going over time and what portion of the backlog is technology versus expertise?
spk13: Yeah, Gavin, we've stated that, you know, all four quadrants of our framework are important to us. You know, we have kind of resources. There's opportunities to kind of drive value in one quadrant informs other quadrants. So there is a synergistic aspect to that. For this past year, technology grew at 12%. Expertise was essentially flat. As we move into next year, we expect to see both parts of that hemisphere, if you will, to grow with technology growing faster than expertise. And that is supported by both our backlog and the bids to be submitted and the bids pending where we're going after some kind of expertise work associated with that. So, again, growth in both hemispheres.
spk06: Yeah, Gavin, I'd also add, on the technology front, we are going to continue to invest at a customer need, either in the enterprise tech area or in the mission tech area. We know we have what the customers are out there looking for. I spent a little bit of time in my prepared remarks talking about agile. You know, agile is a great buzzword. It's really hard to do. It's really hard to do repeatedly. It's really hard to do at scale. And, you know, we have future bids that are submitted and other bids coming up that are going to play exactly on top of that same past performance credential that our enterprise team has spent an awful lot of time on. So, you know, I would look for us to continue to drive tech, you know, higher than expertise. Now, having said that, if they all grew at 10% each year, I would be even happier. So thanks so much, Gavin.
spk10: Thank you both for all the detail.
spk08: The next question comes from Mariana Perez-Mora of Bank of America. Please go ahead.
spk01: Good morning, everyone.
spk03: Good morning.
spk01: So throughout your implied share count remains flattish, would you please describe and give us some color on how are you thinking about capital deployment, how is the M&A pipeline, and what's your appetite for more share repurchases in the future?
spk06: Okay. Thanks, Mariana. So, capital deployment. I'm going to call on Tom to add some comments to this as well. Look, you all have heard us both talk a little differently about capital deployment when we announced our ASR back in March. Look, that was purposeful and a commitment to a continuous evaluation of all deployment options. We've always talked about those deployments. What you're seeing is potentially a different level of execution than we may have had in the past. So additional repurchases, M&A, internal investments, debt reduction, you know, and other potential uses. And that order, just to be clear, is in no way intended to prioritize options. You know, I like to say that they're all on the table and considered when we leverage our robust cash flow. You know, M&A remains an important use of capital for us, but it's not the only one. And as a larger company going forward with greater profitability, greater cash flow, we can do multiple things. And you've heard me say in the past, I want our capital deployment strategy to be opportunistic and flexible. And I use that word and as a very key word. M&A and repurchase and internal investments and debt reductions and whatever else and whatever ideas we have going forward. So from the vision and the strategy of where we're going, that's where my head's at. Tom, can you add some more color?
spk13: Yeah. So, again, a couple of factors. The current ASR, the accelerated share repurchase, was executed at the beginning of March 2020. It is still ongoing, so the counterparty is still in the market completing the share repurchase associated with that. Once that is completed, we expect to have delivery of another 300,000 to 400,000 shares, which reduces our share count going into FY22. That being said, there is some equity-based compensation which would offset that, hence the flattest share count. for FY22. So once the ASR is done, we will evaluate the situation, as John said. The good news is we have low leverage, financial strength, access to the capital markets, so a lot of flexibility. Right now, we estimate that we have well in excess of $1.5 billion of capital to deploy for whatever in keeping leverage at kind of reasonable levels. This would be all cash. And as most people on the call recognize, Access to capital today is kind of very broad, and interest rates are at historically low levels. Right now we're spending LIBOR plus 125 basis points on our incremental revolver borrowing, with LIBOR being 10 basis points and spending 1%. interest expense. So until we determine what the best strategy is, we will kind of repay debt. The intent is to try to maintain zero cash balances and reduce debt for obvious reasons to reduce interest expense. And as we go forward, we will continue to look at that question, both in terms of our borrowing capacity, plus our very, very strong free cash flow this year.
spk01: Perfect. Thank you very much.
spk06: Thanks, Mariana.
spk08: The next question comes from Seth Feisman of J.P. Morgan. Please go ahead.
spk15: Hey, thanks very much, and good morning, everyone. I was noting the headcount numbers for our release, and I think it was 22,000 at year end, and that was down a bit from the last year end. Obviously, the company is growing. The backlog is growing. With the profile of the business and the increased growth in technology, does that mean, you know, does that kind of change the link a little bit between headcount and revenue, and we should think about, you know, a company with maybe higher sales per employee going forward?
spk06: Seth, thanks. This is John. That's a better answer than I was actually planning on giving, but let me share a couple of things here. Look, it's been a long time, frankly, that we've looked at our business in terms of headcount people. You know, tactically, to answer the move from 22 to 22,000, you know, that small change in total headcount, frankly, was due to the exit in Afghanistan, as well as some rounding. So, you know, tactically, that's what happened. But you're absolutely right, Seth. With technology growing faster, our growth is not as correlated to headcount as it was maybe five to seven years back. It's been a conscious road and conscious decisions that we have been making to make certain. that our growth was not predominantly based on our head count. You know, that does show its hand in our expertise type of work. You all have heard us talk, you know, over the last five, six, seven years about how we wanted to right-side that type of work for a number of reasons, you know, shareholder value, profitability, you know, some of the lower margins that were going to be coming out of that work and the like. And we're just at a point where we are large enough and capable enough for us to go win work, which we can differentiate on technology and our past performance and how we deliver, not on whether we were able to hire Susie, Julie, or Johnny. So, yeah, so this 2023-2020-2000, it's no leading indicator.
spk13: Yeah, and I will also add that, you know, throughout the organization, we're driving efficiencies. Even in the expertise area, to the extent that we can develop better tools to help people perform their jobs, we can get the work done with fewer people. Agile software development is another great example where prior to that, it would take X number of people to develop software. Now we can do it at materially lower headcount. And as a result of that, we're less concerned with kind of wage inflation. You know, let's hire the right people to do the job, drive efficiencies, and we can deliver attractive costs to the government customer in getting the work done very effectively.
spk15: Great. Thanks very much. And just as a quick follow-up, you know, as technology becomes a bigger part of the mix, How should we think about the trajectory of CapEx this year? We saw the guidance for fiscal Q. Is that kind of a steady state number that continues to grow?
spk13: Yeah, thank you. So last year, capital spending was approximately $73 million. This year, we're guiding to $90 million. There was... One sizable expenditure that we're planning on this year, which is a facility to do some manufacturing type of work, which is secured, which makes the facility expensive. program which has a eight to ten year life to it and the way the program is priced into the government ultimately will pay for that you know in capital spending will it be recovered in our you know for in pricing so that has driven a step-up function in capital spending hard to predict what's going to happen next year, but I would say that we're going to move more towards that 70-75 level with that 1.2% of revenue somewhere around that particular range.
spk15: Great. Thanks very much.
spk08: The next question comes from Matt Akers of Wells Fargo. Please go ahead.
spk04: Hi. Thanks, guys. Good morning. Good morning, Matt. I guess the The fixed price contract that was sort of driving margins higher last year, has that kind of reverted to normal? And I guess as we think of like sort of modeling the quarterly margins through this year, is there anything else sort of unusual that we should kind of keep in mind?
spk13: Yeah, so the program that we spoke about had some material benefit for the first, second, third, and fourth quarter of FY21. From what we see, we expect similar benefits going into the first quarter of this year, and that is built into these kind of guidance numbers. So that will help in the first quarter of FY21. kind of margin performance. Consistent with my prepared remarks, we do expect revenue in the first quarter to be down sequentially from the fourth quarter revenue, greater than historic trends. And margin should have increasing margins throughout the year, despite the fact that that fixed price program is contributing to the first quarter margin. So for modeling purposes, I would have an increasing margin, quarters one, two, three, four, and five. Full stop, recognize that there are fluctuations in both revenue and margin due to higher margin technology deliveries and the like. We guide to the full year. We're committed to the full year numbers, and there are going to be fluctuations among quarters.
spk04: Okay, thank you. That's helpful. And I guess one more, do you have any thoughts on kind of, you know, vaccinations? And I've heard some talk from DOD and, you know, Biden on maybe mandating that for government employees or contractors. And I guess, do you see any potential, you know, just risks that employees maybe may not be able to access facilities or do work if they haven't been vaccinated?
spk06: Yeah, Matt. You know, what I can share is what we know as of now, right? The administration recently announced, right, that everyone working in a federal facility will need to attest to their vaccination status. We're doing the same thing inside of our company. We're actually requiring folks to attest the same information, not so we can track individuals, but so that we can look at facilities and make certain we put the right protective measures in place. You know, the people in government facilities and as well as ours, any county that has one of our facilities in it using the CDC's measurement of severe and high or whatever those terms are, when it goes orange and red, they have to wear a mask. But in the government side, if they don't want to get the vaccine, they're going to have to comply with COVID testing requirement. What we've learned so far, potentially two times a week and also be subject to travel restrictions. So what we're going to watch, Matt, is as it impacts us, we have employees going overseas who are not vaccinated. to perform work on behalf of the government. There are countries that will have to be in quarantine anywhere between five to ten days, and we'll have to figure out how we're going to work through that. But having the vaccine out there is a positive thing for all of us, but we also respect the fact that every individual has different beliefs and will make a different decisions and what we're just asking people to do is be smart and if you're not willing to get vaccinated please make sure that we're being respectful of other folks in the business and let's just make sure that we're you know doing the right thing understood okay thank you yeah thanks matt the next question comes from toby summer of truest securities please go ahead
spk03: Hey, good morning, everyone. Good morning, Toby. Oh, Jessica. Yeah, no problem. Just some of your competitors cited some issues with testing delays in the Intel community. I was just hoping you could comment on your experience there and how did that impact your thinking around diamonds?
spk06: Yeah, I guess I'd answer that in a couple ways. $3.6 billion of fourth quarter awards, $9.2 billion during a COVID year, and trading 12-month book to bill at 1.5. So the simple answer is no. You know, we continue to see really good demand, a heavy pipeline of opportunities, and award flow consistent with normal customer behavior. Now, keep in mind, there are some customer behaviors that are typically slow. And, you know, in some customers, we see a higher level of awards slipping to the right. You know, with every customer set, we – have, we actually measure RFP date, proposals due date, job awarded date. And there are some agencies that at times and historically make award decisions later than what we've planned. In the old days, we used to put a 90-day window into our plan, if some of you remember, that would make up for delays in awards. What we've seen over the last year that we've talked about was slower tasking, which we really attributed to COVID and people being out and the like. But, again, this is something we've been discussing for a very long time. So I'll end with my simple answer, which is no.
spk03: Thanks. That makes sense. Are you seeing any impact on at least timing from the chip shortage related to some of the product deliveries in your mission technology business?
spk06: I think we discussed with you all during fiscal year 21 and throughout COVID that where we saw that where it's had the most is in our AVT business. We're pleased with that acquisition. They bring a lot of great high value differentiated technology. And they also have been working with our next century folks. But we have had supply chain issues. We have had customer delivery delays. You know, but we've had delays on both ends. You know, one is on, as you mentioned, on, you know, bill of material items that have gone from a 12-week delivery to a 24 to a 26-week delivery. We're working with our teams to make sure that we do some, you know, bulk buys of, you know, of some of our previous long lead items that are actually going to long, long lead items. You know, but at the end of the day, we also have customer delivery delays because throughout COVID, our customers weren't there to receive those items, right? We have to usually do, you know, final article testing with them. And throughout COVID, they were in every other week or every third week, ranges of had, you know, much less time. So there's a few factors there, but we will, you know, we are continuing to work that issue. It's a, you know, global issue today. You know, we have a modest amount of predictive actions that will happen during the year, but, you know, all in all, we're doing quite well navigating our way through it.
spk03: Okay. Appreciate the call. Thanks, guys.
spk06: You bet.
spk03: Thank you.
spk08: The next question comes from David Strauss of Barclays. Please go ahead.
spk14: Thanks. Good morning. Good morning, David. Tom, I just wanted to clarify on capital deployment. Have you assumed anything in the guide for capital deployment? Are you assuming you're taking an XX, you know, your free cash flow generation and using it to pay down debt?
spk13: Yes, that is what we have assumed. There is no assumption with regards to acquisitions and or other kind of share repurchases. Obviously, the normal CapEx and internal R&D investments are there, but that is what we assumed.
spk14: Okay. And then working capital looks like it was a slight tailwind in 21. What are you expecting from working capital movement in 22?
spk13: Yeah, so, you know, as you point out, we started the year with DSO at 57 days, ended at 54 days. That three-day reduction in DSO was worth around $45 million in increased operating cash flow. We are getting close to an asymptotic kind of level in terms of kind of DSO improvement. For, you know, the year, we're expecting a relatively modest, you know, improvement in kind of working capital, around $10 million. You know, typically growing companies need more working capital. You know, we think we can offset that and maybe get another day out of DSO somewhere around those particular levels. But essentially, flat issues are probably a good way to look at it.
spk14: Okay. And do you have any exposure to this R&D amortization issue?
spk13: No. It's not the type of work that we do, so that is not going to be material to us.
spk14: All right. Thanks very much. Thanks, David.
spk08: The next question comes from Scott Forbes of Jefferies. Please go ahead.
spk02: Hi, Scott. The normalized margin is in 21. We're at 10.7. You have 20 bits of expansion in 22. I guess what are the major moving pieces there around cost returning, maybe anything with COVID and then just generally technology expertise?
spk13: Yeah, so the major driver of the kind of margin expansion is kind of the mix of our business. We're expecting gross margins to improve, which flows down the gross margins being revenue less direct cost. That flows down to P&L. And some of that is driven by efficiencies on programs, which I mentioned earlier in the call. and a richer technology mix. Technology will be growing faster than expertise in technologies at higher margins, so that is helpful. At the same time, we should be driving some efficiencies in terms of indirect costs. Our indirect costs excluding fringe of kind of medical expense and also additional fringe on increased direct labor is growing around 1.5%, so we're doing a good job of maintaining efficiencies within the infrastructure. The Shared Service Center in Oklahoma City, which we spoke about in the past, is helping to drive efficiencies. We've been employing RPA technology internally to focus on improvements and other such initiatives.
spk14: Thank you.
spk08: The next question comes from Josh Sullivan of Benchmark Company. Please go ahead.
spk05: Hey, good morning. Good morning. How does the agile focus from customers change the traditional contracting cycle? You've got record backlogs here, but just by the nature of agile posturing, you know, the environment continuously changes. Does that make IDIQs more competitive, re-competes easier or harder or harder? I'm just curious how the agile focus and increasingly software-defined world just changes the historical dynamics on that backlog conversion or cycles.
spk06: Yeah, Josh, thanks. So, you know, when you think about Agile, you know, before Agile, the government would contract to have a, you know, system built, and it would be more of a cost plus or firm fixed price, and it would come in as a, you know, single award, right, and number of dollars, and we would, you know, book that up front. We're all still working through the challenges of contracting for Agile. You know, by its simple nature of the word, right, it's agile, which means it's fluid. It's going to change. And that's tough, you know, coming from the contracting world. What we have done, and we'll use Beagle as the example, you know, Beagle was a one-time award. It's a single award IDIQ where taskings get put on to that vehicle. And there's parts of it that are also cost plus. It is, you know, we want to make sure we have access to N number of people because we're going to have Y number of apps that need to be modded and pushed out to the field. So, Agile does a couple of things for us. One, it allows us to ebb and flow people on that program. What that means is it allows us to do a much better job of managing costs. It also helps us do a much better cooperative job of managing costs, not only on our side, but for our customer side. Tom made mention during the earlier question about 23,000 people to 22,000 people. What things like Agile does is the numbers I'm going to give you are illustrative. but do provide a real perspective you know we're delivering agile software development with about 300 people with incredibly low defect rates on a program that under the last provider used to employ over 500 people with far greater defect rate so what it what it does is allows us to deliver programs and agile applications at a lower price to our customer and a lower cost And if we do that right, the margins will be higher for us because we're taking on some of that risk. So all in all, you know, I don't see Agile going to multiple award IVIQs. I see them staying as either single award or as program items, but they want to buy what we're building in spirals. They want to build a little bit, test a little bit, try. And you've got to have the right methodologies in place because at any time you could be deploying to the field. So every one of those spirals, you have to have a complete solution you can put out there. Then you enhance that along the way. So it is very material to how we are driving margin growth. It's very big and very prevalent in both our enterprise and our mission tech work. And I think we'll all get better, both government and us, as we continue to try to make software development be as agile as we absolutely can.
spk05: Thank you for all that detail. And then just a question on your Iraq exposure. You know, you detailed the Afghanistan exposure here, but, you know, just given some commentary out of the Biden administration, how should we be thinking about your exposure to that environment?
spk06: Yeah, Josh, at least as of today, you know, we've watched the administration make the decision to completely exit Afghanistan by 9-11. And all I can say is they're executing on that decision. I'm not willing to share which areas still have folks and which are not for everybody's safety. But if we were to broaden that, you know, we have a lot of Ocona's presence. outside of Afghanistan, you know, throughout the Middle East, Africa, and Korea. Those missions are standing firm, Josh. There's no reductions in any other areas. You know, some of those folks that were exiting Afghanistan were brought into other missions in other parts of the globe, and that is, you know, fully baked in our FY2022 plan. And specifically, the Afghanistan withdrawal does not impact Iraq. or other locations. So there's a lot of focus on the missions in those locations. It's much broader than counterterrorism. We're talking about near or peer threats and the like. And the analytical services that we provide are actually provided with a much broader focus in some of those other areas. So we're going to continue to leverage customer relationships. We are very much embedded with customers doing some incredibly hard work around the globe. And where we can broaden our footprint and win new work, we absolutely will.
spk05: Got it. Thank you for your time. Yeah, thanks, Josh.
spk08: The next question comes from Louis DePalma of William Blair. Please go ahead.
spk09: John, Tom, and Dan, good morning.
spk14: Good morning.
spk09: John, can you provide more detail on the contract wins that you highlighted with the LGS innovations photonics portfolio and does CACI have exposure to both laser communications and laser products for directed energy slash counter drone effects?
spk06: Yeah, Louie, thanks. So a little bit about Photonics. Look, we've got a nice portfolio of differentiated tech and intellectual property, and as you correctly mentioned, LGS didn't create that, but they certainly supersized how we go about doing that and where we go about putting technology. investments in place. We have Todd Probert, who has the combination of a lot of our mission tech working. He's doing an outstanding job. He and his team understand what we want to invest in next. Look, in space-based photonics, it's all about size, weight, and power. And what discriminates our solution, frankly, is the combination of laser modem technology that we've developed. That's ours. And then on top of that, sophisticated software to control and point that tiny little laser at extreme distances so that we can enable assured digital communications. As I said in my initial remarks, we've had sales to aerospace and defense primes. We're looking to expand that. But what that tells me is that these are large platform providers and that illustrates our differentiate offerings and also demonstrates their trust in us to deliver. So this is not drawings we have of some of the smallest lasers and gimbals. This is actually products that you can touch. As far as the size of it and where we go next, Frank, it's not large yet. But it's got those four things I'm looking for. It's growing, it's profitable, it's differentiated, and it's highly relevant to where this nation, both commercial SATCOM providers and our intelligence and our airport satellite folks. It's got about a billion-dollar pipeline, Louie. We're very confident that we're on our way to go grow that even further. And I think your last question was around, you know, is it non-kinetic or is it kinetic? You know, we are very focused on laser comms. in our laser-based photonics work. But our counter UAS and our sky tracker and our Corian systems have all been modified and are all set up to actually tip and cue different kinetic laser solutions. So if we're not able to take a swarm of drones down, let's say, using RF and other means, You know, we do have partners that we're integrating our Corian solution with that also provide kinetic effects. So hopefully that provides the right kind of color for you.
spk09: Excellent. That was perfect. Thanks, John. You bet. Thanks.
spk08: The next question comes from Kai Von Rummer of Cowen. Please go ahead.
spk00: Yes, thanks so much, and good results. So, John... Your book to bill of 2.2 is the best you've done in 20 years. So it's a huge number. In a quarter where other people, as was noted, saw delays in Intel and, you know, sort of administration changeover issues. Was any of that a pull forward? Because normally your big booking quarter, as you know, is the first quarter. So should we see, you know, a good but not a great first quarter or, you know, Could the first quarter be in line with your 17-year record, something like 1.8 or 1.9?
spk06: Yeah, Kai, thanks. Okay, a couple things. I always start off questions on awards by saying awards are lumpy. You know, it's, yeah, the team did an outstanding job. You know, how these awards come in is so much more of a factor of things we've done in the last one or two years. It actually positioned us better. Our processes under Mike Gaffney and his great BD team, making certain we're not getting involved in bids that, you know, we'll do a great job of finishing second overall. Because that's my check. I don't generate a dollar revenue when I finish in a second. So, one, it's about shot selection. You know, two, the fourth quarter, you know, full disclosure, had our – our FSDE DITRA work, re-compete in it, where probably, off the top of my head, Kai, 85% of that was re-compete work. But there was a nice $300 million to $400 million worth of additional work because the mission continues to change. So there was no pull forward. There was no push late. You know, it sort of gets back to that fundamental question of, you know, we have not seen – material one time because of COVID or people being out, you know, massive delays in these awards. We have customers who have different award personalities, for lack of a better term, and they've kept those same personalities up. Would I love some customers to deliver closer to the, you know, RFP expected date? Absolutely so. But, you know, we've got, as you mentioned, we've got 60 years of information on how customers buy. And I can't point to something that says they're that far off. There have been years that they have been, and we've disclosed that, but we just have not seen that practice.
spk00: Thank you. And then, Tom, you know, you mentioned that the first quarter probably would be down sequentially a little bit more than the average of 1% to 3%. And you mentioned, you know, four kind of relative baddies for the quarter. Is this quarter likely, I mean, is there a chance this quarter could be down year over year? And secondly, can you put that in the context of 4% growth for the year? I mean, is this quarter like one or two and then, you know, each quarter has better growth as we go through the year? How should we think about that?
spk13: Yeah, so it's unlikely that our first quarter will be down year over year. We're expecting modest organic growth in the first quarter. We've completed the month of July. We have two months kind of left for mid-August. So if we have kind of modest organic growth in quarter one, in order to hit the 4% number, kind of mathematically, we'll need some higher growth in the subsequent quarters.
spk06: Yeah, Kai, I would also go ahead, Kai, finish up.
spk00: I was going to say, is that lumpy? Because you mentioned Afghanistan so that, you know, the 120 million or so hit from Afghanistan all is in the first and second quarter. So we get kind of a hockey stick in the second half.
spk13: Yeah, good observation. The Afghanistan, Southwest Asia work is disproportionate in the first quarter of the year.
spk06: Kai, I would also provide some additional color, too. When we have these start off low or grow, I want to make certain that we're very, very clear. That pattern is not due to difficulty in hiring. You know, we've been watching that, you know, demand for talent remains high and the hiring environment remains competitive and challenging. But, again, it's no different than it has been in past years. We've continued to try to strive to be the employer of choice. We put different programs in place, allow people to move around the company and, We've enhanced our referral program. We've got a great class of interns, even throughout COVID, just over 300 folks in our last class. We continually have worked on this over the years to make certain that You know, we always had the right kind of talent that we could source from, and that's coupled with the fact you go after more technology work where we get to decide the kind of talent that we need, and we want to bring those on. So I don't want to tie hiring issues that, boy, we've got a hard back end because we have to find all these folks. That's just not it. You know, we've done all the right things, and, you know, So I just wanted to make certain that that wasn't in anybody's calculus around, you know, can we get the 4% growth and is there going to be hiring issues.
spk00: Terrific. Thanks and great job.
spk06: Thanks so much, Kai.
spk08: This concludes our question and answer session. I would like to turn the conference back over to John Mangucci for any closing remarks.
spk06: Well, thanks, Andrea, 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-on questions. Tom Mutrin, Dan Lethberg, and George Price are available after today's call. Please stay healthy, and all our best to you and your families. This concludes our call. Thank you, and have a very good day.
spk08: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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