Q4 2023 CACI International Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the CACI International fourth quarter and fiscal year 2023 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 zero and someone will assist you.
At this time I would like to turn the conference call over to Dan Lekberg Senior Vice President of Investor Relations for CACI International. Please go ahead Sir.
Well, thank you and good morning, everyone I'm, Dan Lekberg Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning.
We are providing presentation slides, so let's move to slide number two.
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 on this exhibit and should be incorporated as part of any transcript of this call I.
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 so.
To open our discussion this morning, Here's John <unk>, President and Chief Executive Officer of CACI International John .
Thanks, Dan and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2000, <unk> results as well as our fiscal 2014 guidance. Let me just wondering as Jeff Mclaughlin, our Chief Financial Officer.
Before please.
Last night, we released our fourth quarter and full year results for fiscal year, 2023, and I'm pleased with our performance.
Simply point.
Had a great year.
For the full year, we delivered revenue growth of 8% in line with our revenue guidance, which we increased last quarter.
We delivered a sector, leading EBITDA margin of 10, 7% consistent with our guidance, we generated free cash flow of $282 million and we went over $10 billion of contract awards, which represents a one five times book to Bill for the year and includes $7 $4 billion of new work.
For CACI.
Slide five please.
In fiscal 'twenty, three CCI delivered strong awards and outstanding program performance first we won the $5 $7 billion enterprise it as a service alright, Josh contract what are the air Force's highest priority it modernization programs and by far the largest award in <unk> history.
We wanted to cast by leveraging our differentiated capabilities and extensive past performance.
This next generation program will enhance productivity and efficiency for more than 800000 Air Force and space Force personnel globally.
Second we won a $2 7 billion expertise contract.
<unk> next generation network exploitation analysis in support of foreign intelligence and cyber security missions.
This award leverage long standing capabilities in both intelligence analysis and cyber.
And the governments own words after the second protest was denied we won this work because well.
CACI Caci's proposal was technically superior.
Yeah. So Julian proposal provided for a consistent staffing concept the opportunity to insert new solutions continuous learning as threats change in our program management concept that puts support of the customer and their mission first.
The program is ramping up as planned and we look forward to delivering this critical mission.
Customer.
Third we won a $1 $2 billion technology contract known as spectral to develop and deploy the next generation shipboard weapon system, where signals intelligence electronic warfare information operations for the U S Navy.
One spectral by leveraging our M&A and internal investments, it's again and spectrum operations across the electromagnetic spectrum.
Our unique approach to open architectures that are truly open without vendor lock.
And our industry, leading software development capabilities, including the actual development at scale and Dev ops.
Those are three marquee new contract awards the results of our business development strategy of shaping customer preferences, offering differentiated solutions, providing a compelling value proposition and investing ahead of customer need.
As I mentioned earlier, we also performed with excellence across our portfolio and I'll share four examples of those today.
First we successfully deployed the U S Army's integrated personnel and paste system or its army.
This is the largest and most complex peoplesoft implementation in history.
The Army now has a single integrated next generation system of HR Records for over 1 million soldiers across one of the most complex organizations on the plan.
Right.
Since going live or 800000 distinct users have logged into Ifs Army and this system is currently supporting more than 100000 users per day.
Second on our Sapphire program, we went live with the NGA as next generation imagery analytics platform <unk>.
Our software uses AI enabled computer vision and deep learning to enhanced image identification and process more imagery than ever before this is cutting edge technology to support submission outcomes.
Third for the same NGA customer, we created and are leveraging our internally developed technology called feature trace.
Which is AI based software that enhances our analyst's ability to analyze and process geospatial data.
This is expertise enabled by technology technology, which is real and tangible and used today and a great example of the synergy within our business.
Finally in photonics.
16 of our optical communications terminals are ocg's, where sexual successfully launched and deployed in June our board for Duckworth Blackjack satellites and.
And earlier this year CACI was the first provider of <unk> to successfully complete verification testing for the space Development Agency.
We continue to see strong demand for our one <unk> one of the only options designed and built in the United States.
Prime contractors and other customers come to CACI, because they view, our optical communications technology as the most mature and lowest risk in the industry.
Our technology is proven.
<unk> operational and tested for various orbitz.
In fact, we have had optical terminals and Robert for more than two years, demonstrating successful high speed communication links.
And our customer set is broad with technology being deployed across programs with the SDA DARPA NASA and classified agencies.
Slide seven please.
The government fiscal year 'twenty three budget was supportive of CCI programs, and we believe government fiscal year 'twenty four will be no different.
Overall, the external environment continues to provide favorable trends. So we are monitoring the ongoing government fiscal year 'twenty for budget process.
As you know the house and Senate are still negotiated appropriations bills similar to past years.
We are anticipating a CR to start the next government fiscal year.
Customer demand remains high driven by the elevated global threat environment.
Pacing capabilities of our F series, and a significant opportunity for modernization and government to both capture efficiency and enhanced security.
Slide eight please.
Our strong fiscal 'twenty three contract awards, our exceptional track record of program performance and a constructive budget environment, all provide a great foundation to drive additional growth proper in profitability and cash flow.
With that in mind.
Fiscal 'twenty four we expect revenue growth of four 5% to seven 5%.
EBITDA margin in the high 10% range and healthy free cash flow.
Jeff will provide additional details on all elements of our guidance shortly.
As we look to fiscal year, 'twenty, four and beyond I wanted to be crystal clear.
And our value creation model is one that is built to drive free cash flow per share growth.
Over the last number of years, we have been focused on all elements of free cash flow per share growth.
First we have taken a long term approach to providing predictable organic revenue growth focus.
Focusing on areas of the federal budget that provide long term funding streams.
We have been committed to building a portfolio of expertise and technology programs across our markets to deliver sector, leading margins and are supportive of continued investments.
We have efficiently managed our costs across the business.
Investing in our capabilities and our employees.
We are focused on all elements of working capital and Capex, while continuing to grow our business.
We have taken steps to proactively manage the interest on our debt and.
And undertaken efficient tax strategies.
And lastly, we have taken prudent and value, creating capital deployment actions to include M&A share repurchases and debt reduction.
It is the totality of these actions that we will continue to manage in order to compound value creation, which will enable us to drive three to drive growth in free cash flow per share ultimately shareholder value.
With that I'll turn the call over to John .
Thank you John Good morning, everyone. Please turn to slide nine.
Our fourth quarter results were in line with our expectations and represent a strong finish to a great fiscal 'twenty three.
We generated revenue of $1 $7 billion in the quarter, representing year over year growth of 4% essentially all of which is organic.
EBITDA margin was 10, 9% in the quarter consistent with our previously discussed expectation of a stronger second half of the fiscal year.
Fourth quarter adjusted diluted earnings per share were $5 30.
Up nearly 17% from a year ago with strong operating performance and lower share count more than offsetting $13 million of higher interest expense.
Fourth quarter tax rate was down slightly versus a year ago, driven by higher R&D tax credits.
Fiscal year 'twenty three it was another year of healthy top line growth strong margins and good cash flow for.
For the year, we generated $6 $7 billion of revenue, representing 8% of total growth and 6% organic growth.
EBITDA margin of 10, 7% was in line with our guidance and represents 40 basis points of expansion from fiscal 'twenty two.
Fiscal 'twenty three adjusted diluted earnings per share were $18 83.
Up 6% from the prior year again was strong operating performance and lower share count offsetting a $42 million increase in interest expense from the prior year as well as a slightly higher tax rate.
Slide 10 please.
As John mentioned, our margin performance is sector, leading when looking at EBITDA on a comparable basis and we provide some context here on slide 10.
Slide 11 please.
Fourth quarter operating cash flow, excluding our accounts receivable purchase facility was $125 million, reflecting continued healthy profitability and strong cash collections.
You will note that we were able to drive accounts receivable days sales outstanding to 48 days in the fourth quarter matching the record level, we achieved in the first quarter.
Fourth quarter free cash flow was $102 million.
For the full year, we generated operating cash flow of $346 million, excluding our AR purchase facility and free cash flow of $282 million again, consistent with our guidance.
For the last several quarters, we provided details on extraordinary tax items that have influenced cash flow in fiscal years 2020 through 2023, specifically.
Specifically amounts related to the cares act our tax method change as section 174.
Fiscal 'twenty three has the largest cumulative headwind for these items totaling $222 million of cash usage.
We expect a much smaller accumulative headwind in FY, 'twenty, four which I'll discuss in more detail shortly.
Slide 12 please.
As you know earlier this year, our board authorized a $750 million share repurchase program and we announced the deployment of an initial $250 million as an accelerated share repurchase or ASR on January 30th.
The ASR was completed on August 4th.
We retired 678000 shares in the program was first announced and in August . We retired an additional 146000 shares for a total of 824000 shares at an average share price of just under $304.
As part of the authorization, we also initiated an open market repurchase program.
That program, we repurchased 45000 shares at an average price of $283 per share.
We remain committed to driving shareholder value by deploying capital and a flexible and opportunistic manner based on business and market dynamics over time.
A healthy long term cash flow characteristics of our business, our modest leverage and our access to capital to continue to provide significant optionality.
We ended the year with $2 two times leverage of net debt to trailing 12 months, EBITDA, making us well positioned to drive future growth and shareholder value.
Slide 13 please.
Now I'll turn to our fiscal year 2024 guidance as is our practice, we undertake a bottom up program by program forecast plus our expectation for new business by specific opportunity.
For fiscal 2024, we expect revenue between 7 billion and $7 2 billion for growth between four five and seven 5% balanced across expertise and technology.
EBITDA margin is expected to be in the high 10% range.
We expect adjusted net income to be between $440 million and $465 million and.
And we expect free cash flow of at least $400 million.
Slide 14 please.
To assist with modeling here are some additional planning assumptions.
Depreciation and amortization are expected to be approximately $145 million.
Net interest expense is expected to be approximately $100 million up around $16 million compared to last year.
Two thirds of our debt is effectively fixed the interest rate swaps. So we are further mitigated our interest rate exposure.
We are expecting a full year effective tax rate of between 23% and 24%. This is up about 300 basis points over last year.
And we expect quarterly sequential increases in revenue and profitability through the year, but I would remind you that certain factors can skew quarterly trends such as the timing of material purchases and deliveries of higher margin technology.
Slide 15 please.
In fiscal 'twenty, four we expect operating cash flow, excluding our AR facility to be at least $490 million with capital expenditures of approximately $90 million, resulting in free cash flow of at least $400 million.
A few other items to note regarding FY 2000 and for cash flow.
There is no longer any impact related to the cares Act.
We expect to receive the final $40 million tax refund associated with our tax method change with the timing likely later in the year.
Can we expect to pay approximately $75 million in cash taxes related to section 174, which is about $20 million lower than our payment in fiscal 'twenty three.
Slide 16 please.
Turning to forward indicators caci's prospects continue to be strong.
Our trailing 12 month book to Bill of one five times reflect strong performance in the marketplace and our FY2023 awards have a weighted average duration of about six years.
Fourth quarter backlog of $25 $8 billion grew 11% from a year ago and continues to represent about four years of annual revenue.
Both of these metrics indicate good visibility into the business.
For FY 'twenty four we expect 84% of our revenue to come from existing programs, 10% from re competes and about 6% from new business.
These metrics are very consistent with our recent experience at the beginning of a new year.
In terms of our pipeline, we have $11 billion of submitted bids under evaluation over 70% of which are for new business to CACI.
I would point out that this is up about $4 billion from last quarter. Despite a number of recent wins, including spectrum.
We expect to submit another $9 billion.
Bids over the next two quarters again with approximately 70% of that for new business.
Slide 17 please.
I'd like to add to John's comments on our long term financial objective of driving growth and free cash flow per share.
This metric lets us build on durable sector, leading margins, while further incorporating the benefits of sustained organic revenue growth.
<unk> management of our cost structure and balance sheet as well as value creating capital deployment.
Share repurchases could be immediate contributors to free cash flow per share acquisitions.
Acquisitions and investments contribute to free cash flow per share over the longer term.
Both are important tools to deliver long term growth and free cash flow per share and shareholder value and we will continue to critically examine all options as we consider broader dynamics over time.
To wrap things up we delivered great results in fiscal year 'twenty, three and expect another year of strong performance in fiscal 'twenty, four with healthy growth strong margins and increasing cash flow.
We remain confident in our ability to continue to drive long term growth increase free cash flow per share to generate additional shareholder value.
And with that I'll turn the call back over to John .
Thank you, Jeff Let's go to slide 18. Please.
Closing out our prepared remarks, I am very pleased with our performance in fiscal 'twenty, three and our prospects as we look to fiscal 'twenty four.
As I talked about our awards and execution. There was a concept comment to all of them next generation.
CCI is on the cutting edge delivering innovative technology and differentiated expertise enabled by technology to a critical customer set.
We are providing the air Force's next generation it infrastructure, our intelligence community customers next generation support around critical SIGINT and cyber.
And the Navy's next generation shipboard SIGINT EW weapon system.
We delivered to the army the most complex HR system in the World, we are leveraging AI and other enabling technologies to increase productivity and deliver actionable insights to our customers.
And we are putting laser communications, another photonics technology into operation in space and other domains to address critical national security needs.
We're doing all of that while delivering predictable revenue growth sector, leading margins healthy cash flow and opportunistically deploying capital through M&A and share repurchases all of which drives growth for free cash flow per share.
As I always say our success is driven by our employees talent innovation and commitment and supported by our culture of integrity and ethics.
Each and every <unk> employee. Thank you for what you do each and every day for our company and our nation.
Our shareholders I. Thank you for your continued support of CACI with that Lisa let's open the call for questions.
Thank you. Thank you would like to ask a question today. Please press star one on your telephone keypad.
Yourself from the queue that is star one again.
Ask that you please limit yourself to one question and one follow up.
We'll take our first question from Cai von <unk> with TD Cowen.
Yes, thank you very good quarter so.
Jeff You mentioned, you expect revenues and margins to increase sequentially. Do you also expect organic growth to increase sequentially as you go through the year.
Yeah, I think that is the right.
Planning premise the business.
Clearly isn't an accelerating mode.
And we see the distribution of the year somewhat as we did last year with a slightly stronger second half in revenue growth and margin, but yes, that's that.
That's the right kind of planning premise for you to be thinking about.
Got it and then.
When you look at your big New wins.
Focus Fox and.
Background checks.
Our expertise and so those should be off to a fairly.
Quick start but.
The other big wins task and spectral.
Basically have a slower start I think you've talked about so as we look at your business mix between expertise and technology technical.
Technology is going to continue to grow faster or is it going to be balanced how should we think of that.
Hi.
Right.
I think it'll be it'll be a little bit more balanced the two programs the.
The two technology programs you'd mentioned.
I do have slightly slower ramps tests. They are both characterized by the preliminary phases being.
Related to design and planning the balance of the program, that's not necessarily true of all technology programs and sales, but as certainly as before.
It Hasnt spectrum, John May want to.
Yes, Hi, Jeff Jeff.
I'll answer that the way I would mention.
You mentioned that I guess, the one thing I'll talk about.
Is on the Eye Test award and on the spectrum of one <unk>.
Are both long term technology programs right.
The new business that we have won over this past year. It goes into backlog with the 72 months.
Contract duration.
So these technology programs are actually going up.
They've all been kicked off.
We're going to have that typical design phase.
It happens it happens first.
And then we're working in both of those cases with customers who are very eager.
To price to press forward, so unlike what theyre going to contribute to FY 'twenty four but a much more impact impactful as we get out over the next three to three years to five years.
Thanks, so much.
We will take our next question from Robert Springer with Melius research.
Hey, good morning.
Good morning, Ralph.
John you talked a little bit about the budget earlier and that you expect the government to start the year on a CR.
How are you thinking about the possibility of that government fiscal 'twenty four could start on a CR that funding capped at 99% of 'twenty three levels, if we get into a situation where that particular adjustment triggers.
So and maybe Jeff do you want to hop in here in the guide are you assuming that we're going to have a CR from just.
The October through December , but that the budget will be passed before calendar 'twenty for starts.
Are you thinking about it in the guide.
Yeah, Rob So if you look at our range on the low end.
We're assuming it's a full year CR right in.
And we haven't really tough tough times slower under real uneven pace at getting through the government fiscal year 'twenty four process.
On the upper end really focus it at a much shorter.
And that budget gets passed sooner.
We always look at the budget, we always try to do our best at sort of predicting how that is going to turn out.
We've got an expectation that the CR lasts for a for a quarter Rob.
And guy.
We honestly.
Looked like the bathroom for many many angles.
We also looked at the level of.
Our contracting officers can they push this pushed this budget budget out to us and the requisite funding and that is a strong yes from when we made event.
2024 months back.
But what we are confident in with our recent awards is that the larger and so our program is ongoing work very critical on National security priority. So we don't expect any funding issues that one ipass critical Air force priority and is well funded at the government fiscal <unk>.
Year 'twenty three levels and then spectrum is a critical program for the Navy.
Particularly supporting.
The near purify and the <unk> regions. So those three larger programs that are.
Providing a level of growth as we go through our fiscal year 'twenty four we look we'd like to be safely funded there.
Okay. Thank you and just as a follow up I wanted to ask you about pricing because if we do get into this.
I don't want to call it a constrained budget, but we have these caps and so on.
It might be your competitors or some of them start to get a little bit more aggressive now your margins are rising, but how do you think about the pricing environment and the aggressiveness of the peer group as we go forward.
Yeah, Rob So a couple of pieces.
First off.
We're looking at a recent report.
You know looking at the defense in this industry.
And it's sort of pretty much concluded that the Pentagon does not find the need to modify its way to the guidance.
And savi profit levels.
I would tell you that our general experience is that we see customers largely pursuing best value type of procurements and doing things as far reaching as putting in price floors. So on those times, where we find ourselves rarely big of a job that has a rate table really trying to discourage guests aggressive.
Bidding.
Look we're always going to have.
Aggressive pricing in an LPTA is still going to be out there, but we're pretty disciplined about what we work on in what we pursue and how we pursue it.
Also things are pretty different than others is our strategy frankly is built on the ability of technology, enabling the most cost effective solutions.
Sort of the replacement with some of that lower priced expertise with technology solutions and I guess as an example.
Vehicle.
With our customs and border patrol customer that's still our price example, where we won with a customer. They appreciate the value we brought efficiency via agile at scale, we're doing far more with far fewer people and that really gives the customer the optionality to sort of take that.
Savings at the price level, and then come back to us and frankly.
Driving even more work.
And in some cases moving work from other other contracts onto ours, so we sort of whether some of those pricing pressure.
Items I'd also leave it with.
About half of our workforce is fungible to us.
That's the beauty of having differentiate this business starting to seven or eight years back where yes, we do have a lot of.
Software talent in engineering talent and analysts talent.
And our expertise side, but half of that.
The rest of the folks the other half of the direct bills are working across a number of different programs, which is.
What our customers have told us is much more important because they get to understand what we're doing for other.
Customers out there, so pricing pressure or not I'm not a big one.
Right and for us any longer thanks for the question Rob.
Thanks for the color I appreciate it.
We'll take our next question from Peter Arment with Baird.
Yes, good morning.
John Jeff Nice results, Hey, John just.
Just a follow up on just kind of the pricing environment you do have.
You know industry, leading EBITDA margins, obviously really strong this year your guidance kind of implies.
But at a minimum you're kind of sustaining that or maybe potential a little a little upside to where you are today and just kind of wondering what your puts and takes around that just given that you've got a lot of there's a lot of new programs ramping up.
Just sustaining those high level margins.
Yes. Thanks.
Peter I guess I'll start with.
Sort of how we how we got to where we are that.
You know really allows you to sort of see this.
We didn't lock out on those three large jobs they have actually been a product of how we've been focusing this business and making certain win wins like this come in that we understand how to operate those.
It's so much more about the vision of being different it really seven eight years ago setting out on a long term plan.
And an investment plan to really differentiate from where we are I've always said strategy is a place where we come from and with a good strong strategy provides clarity in it.
You all know best clarity with clarity you'll get focus.
So our strategy was to create a new part of our business that was purpose built for the future quite software based or flexible markets with large funding streams. Also helps you on the margin side, where knowledge of the customer mission was going to be very critic critical.
But also we could build upon our collection of 60 year plus.
<unk> relationships with a number of customers. So then we had a search out customers that had a bias towards leaning towards your out of the possible again another margin hit there, which is if you. If you find the right customers looking to do things differently and they're willing to jump onto our view.
And take greater advantage of our investing ahead of customer need than when those programs come up you know frankly, we reshaped our business development process. So not only modify how we pursue business, how we bid less and win more than we bid larger with margin always in mind that we really got that customer to help us differentiate before the RFP.
Pete.
You also saw customers of the jobs that were out there bidding on.
Asking less throughout PTA and more for value creation and this expertise can you bring in more technology, the technology and our long term vision was yes as long as that gets higher margins right because I'm investing ahead of need.
So all of that plays into the programs that we have the joy of talking about.
On the on the <unk> program.
That is a that is a network development applications. It job, they're really bags of additional work, becoming part of our multiyear scope.
And with each one of those turns based on how we can set the model up with or.
With our customer and those are kind of programs that did not only continued to maintain margins, but actually push margins margins forward, so sort of right there and see if that answers yes.
Again, I appreciate all that color and just on the large expertise Cyber award that you booked.
It was mentioned before that you're inserting a lot of our opportunity to find technologies.
By nature it implies a large expertise effort to start but do you see over time.
See the technology insertion there also.
Yeah, Ross Thanks Luke.
First off we're extremely pleased it was reaffirmed after are down in the first but the second second protest.
Based on the fact that we're providing the high end.
Network exploitation.
<unk> work there.
It's a it's 1 billion five.
Award.
You know we're we're.
On track and are ramping up ramping up it's exactly 100% in line with our expectations as well as our customers.
It's including both the staff transition and our hiring plan.
Work will continue to ramp up as different task orders transitioned to us.
We actually see the majority of that transition happening in.
In the late October time timeframe, we will have some additional growth and we get out to the middle of 2025 based on some longer longer term task orders, but at the end of the day.
We bid that job with with a phenomenal staffing plan that guarantees us customer no gaps in coverage we have their absolute support the one other area Peter that we worked on this been very unique as.
On some of these large experts expertise programs, where you have cleared folks.
You have to be cautious right because when people come off for those programs, we want them to lose their clearance. So when a customer has done greatly in a really great early signs of the tremendous partnership we have with them is that they we work their security process to support our onboarding.
Of nearly 1000 people on this on this program so.
On large expertise programs, which are planet right and have a great customer relationship and they want you to perform that work.
Where appropriate governance on this large engine a program that.
Customers will make certain that we've got to speed.
Quickly. So thanks, so much for your questions. Thanks. Thanks, Thanks, Thanks, Dan.
We will take our next question from Matt Akers with Wells Fargo.
Good morning, Good morning, guys. Thanks for the question.
I wanted to ask about.
Debt pay down I think you mentioned in the prepared remarks.
Interest expense is up a fair amount this year.
Could that be more of a focus here in terms of capital deployment and is there sort of a leverage ratio that you have in mind that you'd like to get to.
Yes, Matt Thanks, Doug I'll start.
Start off.
Look, we're we're being very flexible and opportunistic based on the different dynamics that we see you called out some of those.
You know we're.
We're always looking at our M&A pipeline stock price and valuation and leverage and interest rates and the like all options are always on the.
Table, Jeff mentioned, a little bit, but our some of our $50 million share repurchase authorization.
We've got a lot of different levers here.
Our capital deployment a.
That will benefit our shareholders in both the near and the long term by driving growth and free cash flow per share. Jeff do you want I wanted to share some of the details there there are a couple of things.
Level or two into that.
Matt that you might find of interest.
You may recall that we put in place about $500 million of.
Interest rates swaps hedges.
Earlier this year.
We caught that at a nice time of interest rate cycle.
About a week after the Silicon Valley Bank.
Adventure.
Which turned out to be pretty good timing for us.
<unk> added that $500 million of about $700 million of swaps that we already had in place.
Which really puts us in a pretty good place.
And I think Youll see.
Described a little more fully in our K that I will do here, but we effectively paid about $4 six.
As an interest rate last year, so I think we're pretty well positioned.
In terms of the cost of our debt, which is another factor that we consider in the capital deployment, so that changes a little bit the calculus around.
The possibility of share repurchases in particular.
Debt pay down for us at this point is really probably one of the less appealing.
One of the less appealing options.
You know versus <unk>.
Versus acquisitions or executing further on our share repurchase program.
And you will remember the $750 million authorization.
We completed 250 of that and the ASR that we announced at the end of January we further did about $13 million in an open market repurchase program that ended in May So we have about $487 million of existing authority.
That we could execute on.
You know very quickly.
So.
Expect us to.
Be more flexible.
Flexible as opportunistic going forward as we have been.
Great no. Thanks, that's helpful color and then I wanted to ask about free cash flow.
Thanks for all the color on the walk there, but I.
I guess, maybe to come at it a different way just as a free cash flow conversion of net income if I add back. The 35 this year, you're still a little bit below 100% I think historically, you've been kind of well above 100%. So.
Maybe if you could talk about if there's something else in there that's.
Pressuring that a little bit this year and if there's opportunity to get back up to the levels that you guys have done historically.
Yes, there's a there's a reason that we characterize that as at least $400 million. So if you take if you take that are in tease it apart.
When we talk about the incremental income and the working capital growth.
As well as taxes and interest you ought to think about the additional.
Working capital growth and the incremental income being about offset so there about.
They net out to about a push and really what we have there is about $39 million in total of incremental interest expense and cash taxes.
So the interest expense.
We have one more increase forecast this year and then basically flat for next year.
No.
I'll, let you I'll, let you factor that with your opinion of what the fed may do.
But we basically are not counting on any cuts next year at all.
So that may afford may afford us some opportunity.
And also if we're able to sustain.
Specifically, our DSO performance this is probably a little bit of upside in there as well.
And then finally, we are very aggressively managing the timing of our Capex spend and you may as the year unfolds.
It's possible, we could see a little bit of improvement there as well so I think theres three areas those three areas afford us some opportunity to.
Kind of be on the right side of our cash flow guidance as we move through the year and as the year develops.
Got it that's helpful. Thanks for the color.
Sure.
We will take our next question from Bruce <unk> with Stifel.
Hey, good morning.
Pardon.
Hey, John .
You mentioned the near paired remarks at $26 billion backlog was up 11% can you give us any sort of way to think through how margin accretive your backlog is I E. The work you've been winning given your conviction and future margin expansion and then how do we think about investments related to winning some new contracts with <unk>.
Syed affecting that margin profile near term.
Yeah.
Well look look I mean, we're focused obviously in the evaluation of our pipeline.
And the opportunities are considered in our in our guidance.
And we do believe that the revised business development in pursuit.
Opportunity qualification.
Amateurs that John's talked about many times.
We'll continue to we'll continue to give us programs that are appropriate margin.
Sort of satisfy our objectives, John may want to add to this a little bit but.
The focus on differentiated opportunities in the pipeline longer term programs capitalizing on relationships with customers you know those things.
We expect.
To result in an ongoing volume with.
Characteristics that are similar to so what we're what we've developed over the last year or two but I'll add a couple of things to that you know I guess.
First off the margins in backlog and in our pipeline.
For continued margin expansion and sort of what we have the team out there looking at right now.
<unk> topline growth without complimentary bottom on our bottomline growth doesn't really move free cash flow per share of that.
Quickly.
And it really harkens back to or is there still room for us to.
And our margins and the answer is yes, it's been a key focus.
Of ours over the long term, but I've always been very very cautious or very very transparent about that I'm not going to short arm investments that are going to drive future long term growth.
I'm not going to watch it quarter to quarter point, we want to make absolutely certain that when we say we're on a new strategy to build a technology portion of our business. It's very connected to our exterior expertise expertise side really can't do that if I'm trimming capex in <unk>.
R&D and <unk> spend.
Spend in this 24 plan there is adequate investment and what is required for us to continue to build out things like our photonics lines continue to build out ew's against all.
All of those investments are in the guidance.
Are you all small seats so.
You know.
It's important it's an important part of the value creation model margins are.
But as are all the other levers that I mentioned in my prepared remarks, right. They collectively drive growth in free cash flow per share. So.
Great question.
So John maybe for my follow up.
It sounds like I think you've mentioned this before but you know there is some investment that goes into that the payout period coming later photonics optics to get some of that attach it and I think your expectations as you start to see more growth in that in FY 'twenty five 'twenty six.
Well I guess first is that appropriate is that true that sort of what youre seeing and then second.
What are you seeing across other sides of your mission Tech business. It seems like EW SIGINT is obviously taking off the spectral are some of the other categories either nearing a potential inflection point.
Yes, Bert thanks.
Look.
Spot on.
Let me start with a SIGINT and EW acres, some sometimes though we tend to not talk about that which is settled in right at that sort of adds a stream of consciousness going.
Make no mistake about it SIGINT and EW, both the internal investments.
And the acquisitions that we did that was where the foundation to winning spectrum.
Okay based on open architecture investments, making sure we have the right hardware and software tools all the software that will be delivering on.
<unk>.
Spectrum.
Is software that you would've seen in our counter UAS buildup in all of our SIGINT mission.
<unk> mission Tech deliveries and the like.
As we continue to invest.
In the Photonics area, yes.
<unk> got the right model look as I think I said last quarter. This is a five to 10 year market offer an opportunity we're looking to complete.
Some of our movement of.
Production from Los Gatos.
Orlando, making sure that we have the rights up production capacity in place.
One <unk>.
Our fair share of jobs on.
On S D A's trial zero in tranche, one we're looking for some trucks to awards.
It went out here shortly in the next quarter or two.
So yes, I mean, we are we continue to invest heavily.
We're going to see.
The output of our photonics business late in our fiscal year, 'twenty, four and thats within our plants.
And then 25 and beyond we will start to see volume.
That we are in alignment that will continue to not only drive topline growth, but also.
Push.
Our bottomline going forward. So long story short investment is in place great acquisitions, what lgs did in photonics and epic with Amex are inextricably connected.
What we're seeing with the high end type pieces.
One of the spokes solutions, we already have operated space, we're really excited about the launch of the 16 Oc.
Yes.
The first and in space.
And operated at or above above spec.
Thanks for the question Bert.
Yes, Thanks, John and thanks, Kevin Thank.
Thank you.
We'll take our next question from Seth Sigman with J P. Morgan.
Hey, Thanks, very much good morning.
Morning.
Actually wanted to follow up quickly on that that last part of your answer about.
Photonics, and you know clearly great growth opportunity.
You can proliferate as Leo.
What we've seen I feel like among.
Several contractors doing work with with SDA is that.
The work for the time being.
Seems to be margin dilutive.
I guess when you think about how that ramps up in fiscal 'twenty, five and 'twenty six I think you mentioned it would grow bottom line as well is there.
Is there kind of is there.
The amount of fixed price risk around whether it grows bottom line to the extent that you expect it to grow bottom line is it is it more like a product margin that's accretive in that timeframe or is it going to take much.
Much longer for that to you too.
To become more profitable work.
Yes. Thanks.
Look the way I would characterize it is as follows first off to the first part of your question.
We're a supplier of optical community community <unk> terminals rights were supplier to major satellite builders.
So as for you know loss leaders and the like we're well within the range that we wanted to be in at this point in our <unk>.
Moment cycle.
Contrary to other suppliers, we had about a 15 year head start with the acquisition of all Geos, who have real bespoke solutions that were already on orbit before we started talking about SBA before we started talking about what we haven't assessed yet are these.
Both proliferated leos.
It does to our planned contribute to our FY 'twenty for top and bottom and bottom line growth it fits in nicely.
We've got some more.
Development work to do around produce ability.
Which is well within the timeline that we have laid out and we have some <unk>.
I guess I'd just use the word nice.
AIDS in place for tranche, two and for other work I'd also tell you too.
You know beyond me beyond the satellite Comms part there are other domains that we're looking at using for <unk> is a perfect way to map. The Earth is perfect in the event space. So when in my opening remarks, I was talking about I spend a lot of time and space clearly.
In other domains in other domains as sort of you know.
A code for <unk> and you can do wieland from a number of places you do from the air and you can do it from this space and like so it's appropriately and tastefully part of our FY 'twenty four plan and you'll see it more.
Prominently as we move forward to FY 'twenty five.
Great. Thanks, I'll stick to one this morning.
Okay. Thanks, so much.
We'll take our next question from Tobey Sommer with twist.
Okay.
Thank you.
Wanted to ask.
A quick question about the interplay between contract awards and book to Bill, which has been strong for a number of quarters not just the one reported.
And organic growth and I understand that from previous Q&A, there's an interplay between some contracts that are slower to ramp, but we're talking several years, a pretty strong book to bill.
Is there a.
Could you explain sort of the disconnect.
Connect or how why organic growth isn't sort of stepping up faster and I noticed you had a weighted average contract duration of awards of six years in the quarter. So I wonder if there's any kind of underlying trend towards longer or shorter awards that could be influencing the impact on organic growth.
Yeah Tobey thanks.
So a couple of directions here I guess, let's start with.
The large recent awards right. So part of our long term strategy with so that would be we would be at the point that we weren't talking about 3% annual organic organic growth rate, we would be talking about something around the mid mid mid.
The mid single digits.
It's a balancing act frankly, making certain that if we're driving free cash flow.
<unk> per share.
Then we're looking at all different levers right. So you know you can get that with a with a reasonable predictable top line growth with margin expansion you can get there with really high top line growth.
Specifically on the three jobs that we won.
The ipass job is going to start with upfront planning and design think lower volume I think that that ramps over over time.
The expert expertise job is going to take a little bit of time to transition that work as task orders turn, but clearly where we are providing.
Expert expertise in that case, so that ramp is going to be very fast and then it lives. Therefore quite a long period of time hopeful of growth as we go out and on spectral you know this is a large new technology program starts with a lot of upfront planning and design, So think lower volume and there is multiple paths for them too.
Ramp over time, so what's really important is not just the growth rate. We see this kind of money just kind of awards into our backlog you know in essence, why isn't revenue growing faster.
The other day, our goal to building a differentiated company in this sector is to make sure that we had long term predictable revenue growth and I'm not big on spikes I'm big on continuous improvement.
I'm really big on full year numbers not highly motivated by.
Quarter end points.
So if you look at why we're winning this kind of business to sort of mantra of bid less and win more and bid longer term is over the last seven years I'm spending materially less on winning business that I have already had in my book of business. So my Recompete rate comes down over time all of those.
Tens of dollars I get to transfer that from BNP to Iran. Brian building exquisite outcomes for our customers I have customers that I don't have yet so it's much more complex than you just put $7 4 billion into it I'd also warned again and we've said this many many many times.
Don't take the ceiling value divided by by buying the pop.
Because it gives you.
Not the full picture of where we're looking and looking to grow. So look we came out of FY 'twenty to 'twenty three with 6% organic we're going into this year with 6% or organic you know clearly you don't want all of your re competes.
So there's a there's a it was a.
Theres, a buck or two worth of.
Revenue, we had last year, we no longer have this year. So we had a net that out and then programs come to international and.
So you know so we're going to model differently than what the most restaurants of the sector is because we are preserving sector, leading EBITDA margins and making sure that we're growing in line with that.
Thank you and as my follow up I was going to ask about capital intensity and whether the strategy to focus on tech.
Like you said can have Kim.
Prompt, Iran or development and investments how does that interplay in any change to the translation for free cash flow conversion.
Yes. These are generally not a capital intensive businesses I mean, you see a little bit of of Capex and you and we've not is it a little bit of working capital growth.
We have some very modest.
Capex associated with the move from California to Florida of our photonics facilities.
But these are not in the traditional sense.
At all capital intensive businesses I mean, these are very modest.
In terms of capital intensity.
Yeah.
Right.
So.
Does that did that answer your question.
Yes, yes, thank you very much thank.
Thank you.
We will take our next question from David Strauss with Barclays.
Good morning, David.
Hey, good morning, Thank you.
So following up on that.
Someone's margin question and the trajectory from here how does the.
Can you give us an idea of how the backlog breaks out between expertise and technology as well as your board bid pipeline.
Okay.
Yeah. So.
You know our backlog is very representative of the book of business. We have we have now you know.
Which goes back to the earlier question around to do the margins and the ramp of the programs in our backlog support future growth of both frankly right.
The answer is yes, as Chuck mentioned, we would expect over time, our capex spend to come back down.
To a lower level once we've made some of these technology based capital.
As investments.
How the backlog on taxes sort of in a mixed data I think our mixes.
$53 47, you know what.
What's important for us is that 70%.
Of our bids that we're bidding and we're looking to be awarded or on the technology side. So one would say that in some or HR as we sort of broken through that she and we sort of.
We're now actually able to bid more technology jobs that we have in the past how those come out of backlog can vary quarter to quarter and year on year to year right right. So so a dollar of expertise going into is going to impact sooner and faster and a dollar of technology is going to.
Unpack slower and more will decline so that's about how we model it but you know rest rest assure the most important time to look at is are we bidding things at the right mix of revenue growth are the core to the five markets that we serve are we doing.
<unk> and our strategic deliberate matter are we are we buying shiny objects that drive revenue or are we buying things that fill in gaps for long term growth. It's why we've we're really pushing on a free cash flow per share growth because it's so much more than you know whether by my technology and my backlog on Unpacks. It.
$2 a year versus once so you'll probably not overly satisfying answer.
But it sort of is how we manage this business.
No that's helpful color.
And then in terms of a follow up is is there any capital deployment at all assumed in the guidance, whether it'd be debt pay down I don't think there are share repurchases based on based on the assumed share count.
So the guidance the guidance doesn't assume any meaningful share repurchases. We have some limited number to kind of manage dilution of off.
Grants that vest, but no meaningful share repurchase and no acquisitions.
So any capital deployment activity would be.
Would be incremental.
Right, that's what I thought alright, thank you.
Thanks.
We'll take our next question from Sheila <unk> with Jefferies.
Hey, good morning, guys. Thank you.
Sure.
You know Goodyear with good margin, but I just wanted to zone in on Q.
Q4, and John I know you said.
On a point in time, but.
First of all congrats on your respective all but curious on exploration and you guys saw deceleration.
And it seemed to be particularly in your step up business, which is about 20% of sales. So can you talk about what happened there and how that improves.
Yes, Sheila thanks and.
I guess.
This.
This is aimed at you.
To be honest I've said, assuming I don't see the numbers until we just aggregate them.
To put the data in the back of our tables that are in the back of our release.
I could probably take the time to invest investigate that in detail. Prior to these calls I will tell you that everybody is well aware, we lost TSA impact.
Last year, it was probably in the third to fourth quarter.
So if we're looking at.
Sheriffs in and the numbers that you talk you're talking about but I can't be 100% certain at the end of the day our leaders in each of our markets deliver it to the whole of government. So whether D. O D is up 6% or down four or civil and this is this is a this is a response to every every everybody out there.
Our customers Love. The fact that we're aligned by what it is we deliver it and what it isn't a need right. They crave information they love shared investments because we get to invest once when he gets some deliberate to many so that's a great win win.
Our competitors are customers that are actually friends.
And I sort of believe that we should meet customers, where they are at which is I don't want to impose my org structure of highway measure my financials on them. So what we do is we bring things up to expertise in <unk>.
My three presidents have the full range to go all the way across the federal government, whether it's commercial ask whether it's fed civil D O D at Intel so.
I really I want to always be extremely transparent Sheila I just can't tell you what actually drove that but I can tell you. It's just as easily that next quarter fed said will be up 9% EOD it'll be down four and I wouldnt, Tony what is it that's good or bad and just sort of sort of is.
Thanks for that color and then maybe bigger picture question you talked about.
And how that complements your ability then I think the other contract you mentioned with E trade.
They all seem to have an.
And then maybe if you can elaborate on that on how that capability.
Over the medium term could be used for other customers.
Yeah. Thank you so I guess first off spectral right.
I think.
What makes spectral special.
Is that it really is.
Proof positive of the investment thesis that we've had for a while as to how we how we wanted to go about differentiating ourselves within the sector.
And also moving forward.
Yeah.
We know we're successful on the vision we had.
A number of years back, but if I were to just.
Go back over that we've been disciplined acquirer.
You didn't get distracted by buying them or Avenue, we built each acquisition and investment on the prior prior 163 was the foundation mastodon hardware more tactical Lgs software.
More bespoke passions, a btu, bringing gambles in mobile counter UAS and other and other tuck ins.
We didnt veer from that goal, new technology markets, where large funding streams, where we can differentiate propose.
No.
Business, that's actually purpose built for where the future goes spectral is the first step in that.
I think it's quite noteworthy of what we've done on spectral.
It is noteworthy in that three aerospace and defense companies joined our team.
And to me, that's a sign that we differentiate across that entire <unk>.
Highly competitive space in a market we have proven we can punch above our weight, where long term investments were absolutely needed in the U S. Navy is going to be a massive beneficiary for selecting us and our partners to.
And be able to drive to drive that.
You've talked about.
AI.
And.
Well look I've always said that you can't fault CACI without AI, but.
So little bit of humor, there I have to have that.
Look to US AI is a technology very similar to cyber Sheila it is becoming inherent in everything that we do.
It's more about the outcomes so to us AI is important but it is a tool and I think last quarter. I asked you talked about three different places right I look at AI, I think about machine learning or P. A generous.
On the computer vision piece.
You relate really to yeah, that's absolutely part of what we've done one was on contract.
Our SaaS, our SaaS fire MGA customer the other one was self funded.
It was all our own intellectual property, which is really how can we help NGA.
Basically produce digital maps faster.
So this is a house. This is a tank. This is a missile silo how to use machine learning over a number of years. So do not replace what the analyst does but allow us to create maps and a much more repetitive.
Repetitive and much more.
Efficient manner.
Youll broadly we've got about 200 major programs across the company and I have to tie in some way and more than half of them. Sheila we have been doing that for three years or months or days.
It's important that how IC AI is just to appreciate.
Couple of things.
One is it is an important capability and differentiator for us.
And it has been for a long time.
And the second piece is our AI is real I can certainly talk about that are our technology drive in our vision was to have it be real tangible you can touch it you can see it in our customer recognizes it in there in their outcome.
It's real it's deployed it's also revenue generating so it's not on the slide it's an aspirational. It's so much a part of our technology work, which I call delivery.
Versus the expertise side. So we're not advising we're not consulting we're actually doing so we're being very cautious.
And a lot of you know.
The question is how does AI support the financial growth of the company and my answer is it always has.
But we're being very in line with our customer right. There as an organization looking at highlight trustee AI coming out.
D O D has a responsible AI guidance, we're very familiar with it we don't build solutions that go beyond that.
Look I think it's an enabling technology just as cyber was 10 to 15 years back will it have an impact.
In the space that we serve absolutely so but have we already helped to impact ourselves. So we can be more efficient and more cost effective absolutely. So so thank you for that I appreciate it.
Thank you.
Yeah.
We'll take our next question from Mariana Perez Mora with Bank of America.
Good morning, everyone.
Good morning.
So my question is about people I think about executing against that.
We know arch backlog hobbies hiring how is security cleared environment.
What are the challenges ahead.
Yeah. So let me start with the last piece first.
Since we have a large expertise based contract with.
Extremely important Intel customer I did cover that really aware of that.
Our our customer understands the importance of people retaining their high end long time to get clearance soon.
That has worked very very well for us and I expect them to continue to support us.
As we trans.
Transition that that job.
Now, having said that right that the rain for talent.
It's always high Marianna I mean, it's the hiring environment has been competitive for.
Since movie ticket with them it was a minimal maybe.
But it's no different than it has been about in the past, but we really strive to be the employer of choice in our sector and that's what we will start off with one of the things that we can do to make sure that we're.
Attracting the right talent that does then support our programs, which then supports our growth.
Quite happy to say that about 50% of our work our people that we hired to do work on behalf of our customers, meaning that they are in our <unk> facilities and they are creating.
Technology solutions.
Look we've got three great programs within this company cash tag, making moves enables mobility and helps retention one of every four openings. In this company is built by somebody else in this company looking to be promoted looking to do something different and that's very unusual for what is usually a people intensive direct label reportable.
Sector.
Second as we've improved our referral program and the incentives that's about 40% of all of our hires right great people no. Other other great people and then we just recently put a flexible time off program then.
Place then ill spend a minute or two on we also have continued to expand our in internship program, that's where we cultivate talent we bring folks in from college at a freshman level at a sophomore level introduced them to national security space talk about how their engineering degree.
How that unpacks when they come to us how they support somebody eye watering technology that were out there.
Right and then frankly.
We finished FY2023.
Christian a little over a point lower than what it was in fiscal year 2022.
We continue to win Best places to work awards and we drive in our time to accept the time to start metric. So you know that's.
That's a that's probably a 12 point.
Answer.
So how we're going to handle this large influx, but I would tell you on the technology programs.
I often get asked you know revenue was coming up at X and we were surprised that your that your head count hasn't.
In the technology space.
Head count is not linear to revenue.
We have people working on multiple multiple programs taken their amazing engineering talents are bringing bringing that to other.
Programs, if I may a moment on our on our <unk> program.
It's a breakthrough program in Washington on July like first.
And our and our and our surveys that we do two of the benefits that resonate most of our employees.
Is time off and flexibility.
So it just seemed like flexible time off was the right title for it at the end.
Employees can take time off as needed without set number of excellent days allow.
Our employees to better balance their work and their and their personal commitments.
It differentiates and strengthens our positioning as a highly sought after employer and I can tell you we didn't do this.
With revenue in mind, we actually took us quite a while to assess this program we actually use data from a prior acquisition that had a similar program in place for about for four years. So.
Back to <unk>.
Tie off where we're going on people.
You know we know that this program works, we're already seeing the impact of it in our recruiting.
And I've been asked is it a headwind to revenue growth.
Puzzling, but at the end of the day, our work still needs to be completed so program leaders know the staffing adjustments they need to make to support this outstanding.
<unk>.
Program going forward so.
Finding talent is very very tough we've put on many many programs in place over a long number of years and we continue to be that company that when we win work you won't hear US say, we won the work we can't give birth to revenue because you can't find the people.
Thank you.
Dallas really grateful color great color Mike.
Not a lot on any money first short term and then long term. The short term where are you seeing in terms of pipeline areas of opportunity on pricing.
Long term what does the M&A trace out keeping the competitive advantage.
Yeah. Thanks, so on the M&A pipeline I think we've done a pretty good job of acquisitions in the past that address a number of gaps that really gets into your second question. We're never do an acquisition for revenue we don't buy shiny objects. We were just there to fill some gaps.
Look where we are today valuations X expectations of value have really been slow to adjust to the changing market dynamics and in interest rates and other and other things.
Yeah. The pipeline is starting to build however, we continue to pursue.
Some of our preemptive and M&A strategies.
We're hopeful we see the market shift back to a buyers market from a seller's market and that May drive more opportunities in the future.
We are evaluating all options based on our current.
Amex.
And again M&A is an important use of use of capital, but it's not the only the only want even if we look at what we're taking a look at we continue to look at companies, who do Itw's again, cyber AI data and analytics and the like.
Frankly in all of the other areas Marianna, we've got the majority of our gas Bill.
And now it's time for us to go grow and you know when you know larger in a bid less and win more.
So you know.
We're pretty good at doing moderate sized acquisitions, we think we do those very well it is our sweet spot.
So is this strategic needs arise we will execute on that if not we will be sitting down with Jeff and looking at other flexible and opportunistic ways to deploy our capital.
Yes, I mean, absolutely committed to buying things that are logical strategic fit at the right price.
Okay.
Thanks, so much.
And that concludes the question and answer session I would like to turn the call back over to John Mclaughlin for closing remarks.
Well thanks, Thanks Lisa.
Thank you for everybody who has joined joined the call.
Today.
We know that many of you will have follow up questions, Jeff Mclaughlin Lekberg and George price are available after today's call. So thanks again for joining us stay healthy and all my best to you and your families. This does conclude our call. Thank you and have a great day.
Thank you that concludes today's presentation. Thank you for your participation you may now disconnect.
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You.
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