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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fourth Quarter and Fiscal Year 2023 Conference Call. Today’s call is being recorded. [Operator Instructions] At this time, 1I would like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Daniel Leckburg: Well, thank you, and good morning, everyone. I’m Dan Leckburg, 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 2. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of 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 would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let’s turn to Slide 3, please. To open our discussion this morning, here is John Mengucci, President and Chief Executive Officer of CACI International. John?

John Mengucci: Thanks, Dan. And good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year ’23 results as well as our fiscal ’24 guidance. With me this morning is Jeff MacLauchlan, our Chief Financial Officer[Foreign Language] Last night, we released our fourth quarter and full year results for fiscal year 2023, and I’m pleased with our performance. Simply put, CACI 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 won over $10 billion of contract awards, which represents a 1.5x book-to-bill for the year and includes $7.4 billion of new work a CACI.

Slide 5, please. In fiscal ’23, CACI delivered strong awards and outstanding program performance. First, we won the $5.7 billion Enterprise IT as a service, or EITaaS contract, one of the Air Force’s highest priority IT modernization programs and by far the largest award in CACI’s history. We won EITaaS by leveraging our differentiated capabilities and extensive past performance. This next-generation program will enhance productivity and efficiency for more than 800,000 Air Force and Space Force personnel globally. Second, we won a $2.7 billion expertise contract to provide next-generation network exploitation analysis in support of foreign intelligence and cybersecurity missions. This award leveraged long-standing capabilities in both intelligence analysis and cyber.

In the government’s own words, after the second protest was denied, we won this work because, “CACI proposal was technically superior. ” That superior proposal provided for a consistent staffing concept, the opportunity to insert new solutions, continuous learning as threats change and a 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 for an important customer. Third, we won a $1.2 billion technology contract known as Spectral to develop and deploy the next-generation ship or weapon system for signals intelligence, electronic warfare and information operations for the U.S. Navy. We won Spectral by leveraging our M&A and internal investments in SIGINT 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 Agile development scale and DevSecOps.

Those are 3 marquee new contract awards, the result 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 4 examples of those today. First, we successfully deployed the U.S. Army’s Integrated Personnel and Pay System or IPPS 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 planet. Since going live, our 800,000 distinct users have logged into IPPS Army, and the system is currently supporting more than 100,000 users per day.

Second, on our Sapphire program, we went live with the NGA’s best generation imagery analytics platform. Our software uses AI-enabled computer vision and deep learning to enhance image identification and process more imagery than ever before. This is cutting-edge technology that supports mission 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 analysts’ ability to analyze and process geospatial data. This is expertise enabled by technology, technology which is real and tangible in use today and a great example of the synergy within our business. Finally, in Photonics, 16 of our optical communications terminals or OCTs were successfully launched and deployed in June above 4 DARPA Blackjack satellites.

And earlier this year, CACI was the first provider of OCTs to successfully complete verification testing for the space development agency. We continue to see strong demand for our OCTs, 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, deployed, operational and tested for various orbits. In fact, we have had optical terminals in orbit for more than 2 years, demonstrating successful, high-speed communication links. And our customer set is broad, with technology being deployed across programs with the FDA, DARPA, NASA and classified agencies. Slide 7, please.

Government fiscal year ’23 budget was supportive of CACI programs, and we believe government fiscal year ’24 will be no different. Overall, the external environment continues to provide favorable trends though we are monitoring the ongoing government fiscal year ’24 budget process. As you know, the House and Senate are still negotiating appropriations bills, similar to past years, we are anticipating the CR to start the next government fiscal year. Customer demand remains high, driven by the elevated global threat environment, the pacing capabilities of our adversaries and a significant opportunity for modernization in government to both capture efficiency and enhance security. Slide 8, please. Our strong fiscal ’23 contract awards, our exceptional track record of program performance and a constructive budget environment, all provide a great foundation to drive additional growth, profitability and cash flow.

With that in mind, in fiscal ’24, we expect revenue growth of 4.5% to 7.5%, EBITDA margin in a 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 ’24 and beyond, I want to be crystal-clear that 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 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, that deliver sector-leading margins and is supportive of continued investments.

We’ve efficiently managed our costs across the business while investing in our capabilities and our employees. We have 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 undertake an 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 growth in free cash flow per share and ultimately, shareholder value. With that, I’ll turn the call over to Jeff.

Jeffrey MacLauchlan: Thank you, John. Good morning, everyone. Please turn to Slide 9. Our fourth quarter results were in line with our expectations and represent a strong finish to a great fiscal ’23.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 ’23 was another year of healthy topline growth, strong margins and good cash flow. 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 ’22. Fiscal ’23 adjusted diluted earnings per share were $18.83, up 6% from the prior year, again, with 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’ll note that we were able to drive accounts receivable, days sales outstanding to 48 days in the fourth quarter, matching the record low 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 amounts related to the CARES Act, our tax method change and Section 174.

Fiscal ’23 had the largest cumulative headwind for these items totaling $222 million of cash usage, we expect a much smaller cumulative headwind in FY ’24, 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 30. The ASR was completed on August 4. We retired 678,000 shares when the program was first announced. And in August, we retired an additional 146,000 shares or a total of 824,000 shares at an average share price of just under $304. As part of the authorization, we also initiated an open market repurchase program. Under that program, we repurchased 45,000 shares at an average price of $283 per share.

We remain committed to driving shareholder value by deploying capital in a flexible and opportunistic manner based on business and market dynamics over time. The healthy, long-term cash flow characteristics of our business, our modest leverage and our access to capital continue to provide significant optionality. We ended the year with 2.2x 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 4.5% and 7.5% 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 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. About 2/3 of our debt is effectively fixed via interest rate swaps so we have 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 ’24, 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 ’24 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 and 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 ’23. Slide 16, please. Turning to forward indicators, CACI’s prospects continue to be strong. Our trailing 12-month book-to-bill of 1.5x reflects strong performance in the marketplace and our FY ’23 awards have a weighted average duration of about 6 years.

Fourth quarter backlog of $25.8 billion grew 11% from a year ago and continues to represent about years of annual revenue. Both these metrics indicate good visibility into the business. For FY ’24, we expect 84% of our revenue to come from existing programs, 10% from recompetes 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’d point out that this is up about $4 billion from last quarter despite a number of recent 0wins, including Spectrum. We expect to submit another $9 billion in bids over the next 2 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 in 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, efficient management of our cost structure and balance sheet as well as value-creating capital deployment. Share repurchases can be immediate contributors to free cash flow per share. Acquisitions and investments contribute to free cash flow per share over the longer term. Both are important tools to deliver long-term growth in free cash flow per share and share- holder 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 ’23 and expect another year of strong performance in fiscal ’24, 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 and generate additional shareholder value. And with that, I’ll turn the call back over to John.

John Mengucci: Thank you, Jeff. Let’s go to Slide 18, please. Closing out our prepared remarks, and I’m very pleased with our performance in fiscal ’23 and our prospects as we look to fiscal ’24. As I talked about our awards and execution, there was a concept common to all of them, next generation. CACI 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 and other photonics technology into operation and 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 and 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. To each and every CACI employee, thank you for what you do each and every day for our company and our nation.

And our shareholders, I thank you for your continued support of CACI. With that, Lisa, let’s open the call for questions.

Operator: [Operator Instructions] We’ll take our first question from Cai von Rumohr with TD Cowen.

Cai von Rumohr: 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?

Jeffrey MacLauchlan: I think that is the right planning premise. The business clearly is in 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 the right kind of planning premise for you to be thinking about.

Cai von Rumohr: And then when we look at your big new wins, FocusedFox and the background checks, our expertise, and so those should be off to a fairly quick start. But the other big wins, EITaaS 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, technology going to continue to grow faster? Or is it going to be balanced? How should we think of that?

Jeffrey MacLauchlan: I think it will be a little bit more balanced. The 2 programs – the 2 technology programs you mentioned, Cai, do have slightly slower ramps as they’re 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 it certainly is for EITaaS and Spectrum. John, maybe you want to add?

John Mengucci: Yes, Cai, look, Jeff answered that the way I would have mentioned it. And just the one thing I’ll talk about is on the EITaaS award and on the Spectral one. Those are both long- term technology programs, right? The new business that we have won over this past year goes into backlog with a 72-month contract duration. So these technology programs are actually going to – they’ve all been kicked off. We’re going to have that typical design phase that happens first and then we’re working in both of those cases with customers who are very eager to press or press forward. So I like what they’re going to contribute to FY ’24. But much more impactful as we get out over the next 3 to 5 years.

Operator: We’ll take our next question from Robert Spingarn with Melius Research.

Robert Spingarn: 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 that government fiscal ’24 could start on a CR with that funding capped at 99% of ’23 levels, if we get into a situation where that particular adjustment triggers? And maybe, Jeff, if you want to hop in here in the guide, are you assuming that we’re going to have a CR from just October through December, but that the budget will be passed before calendar ’24 starts. How are you thinking about it in the guide?

John Mengucci: So if you look at our range, right, on the low end, we’re assuming it’s a full year CR, right? And we have a really tough, tough time, slower and a real uneven pace at getting through the government fiscal year ’24 process. On the upper end, really focus at a much shorter CR 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’s going to turn out. We’ve got an expectation that the CR lasts for a quarter, Rob. And we honestly look at that from many, many angles. We also looked at the level of our contracting officers. Can they push this budget out to us and the requisite funding? And that is a strong yes from where we may have been 18 to 20 – 24 months back.

But what we are confident in with our recent awards is that the large intel program is ongoing work, very critical national security priority so we don’t expect any funding issues with that one. EITaaS, critical Air Force priority and is well funded at the government fiscal year ’23 levels. And then Spectral is a critical program for the Navy, particularly supporting the near — indiscernible — and the INDOPACOM region. So those 3 larger programs that are proiding a level of growth as we go through our fiscal year ’24, we look to be safe funded there

Robert Spingarn: Okay. 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 if 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?

John Mengucci: Yes, Rob. So a couple of pieces. First off, we’re looking at a recent report looking at the defense industry. And it’s sort of pretty much concluded that the Pentagon does not find a need to modify its way to guidance in sending profit levels. I would tell you that our general experience is that we see customers largely pursuing best value techno procurements and doing things as far reaching as putting in price floors. So on those times where we find ourselves rarely big in the job that has a rate table really trying to discourage against aggressive bidding. Look, we’re always going to have aggressive pricing and LPTA is still going to be out there. But we’re pretty disciplined about what we work on and what we pursue and how we pursue it.

I also think they are pretty different than others as 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, BEAGLE with our customs and border patrol customer, that’s still our price example where we won with a customer that appreciates best value. We brought efficiency via Agilent 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 they come back to us and frankly, driving even more work and in some cases, moving work from other contracts on to ours. So we sort of weathered 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 differentiated this business starting 7 or 8 years back where, yes, we do have a lot of software talent and engineering talent and analyst talent in our expertise side. But half of – 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, not a big watch item for us any longer. Thanks for the question, Rob.

Operator: We’ll take our next question from Peter Arment with Baird.

Peter Arment: Nice results. Just to follow up on just kind of the pricing environment. You do have industry-leading EBITDA margins because it’s obviously really strong this year, and your guidance kind of implies that at a minimum, you’re kind of sustaining that or maybe potentially 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 new programs ramping up about just sustaining those high-level margins.

John Mengucci: Peter, I guess I’ll start with sort of how we got to where we are, that really allows you to sort of see this. We didn’t lock out on those 3 large jobs. They’ve actually been a product how we’ve been focusing this business and making certain when wins like this come in that we understand how to operate those. It’s so much more about the vision of being different and really 7 years ago, setting out our long-term plan in 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, it provides clarity and you all know best, clarity – with clarity, you get focus. So our strategy was to create a new part of our business that was purpose-built for the future pipe.

Software-based receptible markets with large funding streams also helps you on the margin side. We acknowledge that the customer mission was going to be very critical but also, we could build upon our collection of 60-year plus relationships with a number of customers. So then we had to search out customers that had a bias towards leaning towards the art of the possible. Again, another margin hint there, which is if you find the right customers are looking to do things differently and they will jump on to our view and take great advantage of our investing ahead of customer need, then when those programs come up, frankly, we reshaped our business development process to not only modify how we pursue business, how we bid less and win more, and we bid larger with margin always in mind that we really got the customer to help us differentiate before the RFP.

You also saw customers or the jobs that we’re out there bidding on, asking less for LPTA and more for value creation and this expertise big you bring in more technology. And our long-term vision was, yes, as long as that begets higher margins, right? Because I’m investing ahead of need. So all of that plays into the programs that we have to join talking about. On the EITaaS program, that is a network development applications IT job. They really begs of additional work becoming part of our multiyear scope and with each one of those terms based on how we can set the model up with our customer, those are kind of programs that can not only continue to maintain margins, but actually push margins forward. So sort of right there and see if that answers.

Peter Arment: Yes. 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 opportunities to find technologies. This by nature, it implies a large expertise effort to start, but do you see over time to kind of see the technology insertion there also? A – John Mengucci Look, first off, we’re extremely pleased that war was reaffirmed after not only the first, but the second protest. Based on the fact that we’re providing the high-end network exploitation work there, it’s a $1.5 billion award. We’re on track and are 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 transition to us. We actually see the majority of that transition happening in the late October time frame. We’ll have some additional growth and we get out to the middle of 2025 based on some longer-term task orders. But at the end of the day, we did that job with a phenomenal staffing plan that guarantees us customer no gaps in coverage. We have their absolute support. And one other area, Peter, that we’ve worked on that’s been very unique is on some of these large expertise programs, where you have cleared folks, I have to be cautious, right? Because when people come off of those programs, you want them to lose their clearance. And what our customer has done greatly in a really great early sign of the tremendous partnership we have with them is that they rework their security process to support our onboarding of nearly 1,000 people on this program.

So on large expertise programs as you plan it right and have a great customer relation- ship, and they want you to perform that work, we’re perfect evidence on this large intel program that customers will make certain that we thought to speed quickly. So thanks so much for your questions.

Operator: We’ll take our next question from Matt Akers with Wells Fargo.

Matt Akers: I wanted to ask about debt paydown. I think you mentioned it 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?

John Mengucci: Look, I’ll start off. Look, we’re being very flexible and opportunistic based on the different dynamics that we see. You called out some of those. We’re always looking at our M&A pipeline, stock price and valuation, leverage and interest rates and the like. All options are always on the table. Jeff mentioned a little bit about our $750 million share repurchase authorization. We’ve got a lot of different levers here in capital deployment that will benefit our shareholders in both the near and the long term by driving growth in free cash flow per share. Jeff, do you want to share some of the details? A – Jeffrey MacLauchlan Yes. There’s a couple of things. A level or 2 into that, Matt, that you might find of interest.

You may recall that we put in place about $500 million of interest rate swaps, hedges earlier this year. We caught that at a nice time in the interest rate cycle about a week after the Silicon Valley Bank adventure which turned out to be pretty good timing for us. We added that $500 million to about $700 million of swaps that we already had in place which really puts us in a pretty good place and I think you’ll see – describe a little more fully in our K than I will do here. But we effectively paid about 4.6% 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 to calculus around the possibility of share repurchases in particular.

So debt paydown for us at this point is really probably one of the less appealing options and versus acquisitions or executing further on our share repurchase program. And you remember the $750 million authorization, we completed $250 million of that in 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 very quickly. So expect us to be more flexible and as flexible and as opportunistic going forward as we have been.

Matt Akers: Great. That’s helpful color. And then I wanted to ask about free cash flow, and thanks for all the color on the walk there. But I guess, maybe to come at a different way, just the free cash flow conversion of net income, if I add back the $35 million 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 levels that you guys have done historically?

Jeffrey MacLauchlan: Yes. There’s a reason that we characterize that as at least $400 million. So if you take that bar and tease it apart, where 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 they’re 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. So 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 us some opportunity. And also, if we’re able to sustain specifically our DSO performance, there’s 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 unfold, it’s possible we could see a little bit of improvement there as well. So I think there’s 3 areas. Those 3 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.

Operator: We’ll take our next question from Bert Subin with Stifel.

Bert Subin: Jeff, you mentioned in your prior remarks that $26 million 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 giving you conviction in future margin expansion? And then how do we think about investments related to winning some new contracts with tech side affecting that margin profile near term?

Jeffrey MacLauchlan: Well, look, I mean, we’re focused, obviously, as the evaluation of our pipeline and the pportunities are considered in our guidance. And we do believe that the revised business development and pursuit opportunity qualification parameters that John has talked about many times, will continue to give us programs that are appropriate margin and 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, those things we expect to result in ongoing volume with characteristics that are similar to – so what we’re – what we’ve developed over the last year or 2.

A – John Mengucc: Yes. Bert, I’ll add a couple of things to that. I guess, first off, the margins in backlog and in our pipeline support continued margin expansion. It’s sort of what we have the team out there looking at right, large topline growth without complementary bottom-line growth doesn’t really move free cash flow to share that quickly and it really hardens back to is just still room for us to expand our margins. And the answer is yes. It’s kind of a key focus of ours over the long term. But I’ve always been very, very cautious and 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 a quarter-to-quarter point. We’re going to make absolutely certain that when we say we’re on a new strategy to build a technology portion of our business that’s very connected to our expertise side.

I really can’t do that if I’m trimming CapEx and try and R&D is being spent. In this ’24 plan, there is adequate investment and what is required for us to continue to build out things like our photonics line continue to build out EW SIGINT. All those investments are in the guide that you all see. So 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 I appreciate the question.

Bert Subin: So John, maybe for my follow-up. It sounds like – I think you mentioned this before, but there’s some investment that goes into that, the payout period coming later. Photonics, Optics get some of that attention. And I think your expectation is you start to see more growth in that in FY ’25 and ’26. I guess, first, is that appropriate? Is that true that’s sort of what you’re seeing? And then second, what are you seeing across the other side of your Mission Tech business? It seems like EW SIGINT is obviously taking off of Spectral or some of the other categories nearing a potential inflection point.

John Mengucci: Look, spot on. Let me start with SIGINT EW, right, because sometimes we tend to not talk about that, which is settled in right sort stream of consciousness going. Make no mistake about it, SIGINT and EW, both the interim investments and the acquisitions that we did, those were the foundation to winning Spectral. Based on open architecture investments, making sure we have the right hardware and the right software tools, all the software that we’ll be delivering on Spectral is software that you would have seen in our counter-UAS buildup in all of our SIGINT Mission Tech deliveries and the like. As we continue to invest in the Photonics area, yes, you’ve got the right model. Look, as I think I said this quarter, this is a 5- to 10-year market opportunity.

We’re looking to complete some of our movement of production from Los Gatos, Orlando, making sure that we have the right production fascinating in place. We’ve won our fair share of jobs on STAs, Tranche 0 and Tranche 1. We’re looking for some Tranche 2 awards going out here shortly in the next quarter or 2. So yes, I mean, we are – we continue to invest heavily. You are going to see the output of our Photonics business late in our fiscal year ’24, that’s within our plan. And then ’25 and beyond, we’ll start to see volume that we are – in alignment that will continue to not only drive topline growth, but also push our bottom line going forward. So long story short, investment is in place, great acquisitions, what LGS did in Photonics and I think Photonics are inextricably connected and love what we’re seeing with the high-end tech pieces, especially our bespoke solutions we already have operating space really excited about the launch of the 16 OCTs, the first in space and operating at or above spec.

Thanks for the question, Bert.

Operator: We’ll take our next question from Seth Seifman with JPMorgan

Seth Seifman: Actually wanted to follow up quickly on that last part of your answer about Photonics and clearly, a great growth opportunity in proliferated Leo. What we’ve seen, I feel like among several contractors doing work with FDA is that the work for the time being seems to be margin-dilutive. So I guess when you think about how that ramps up in fiscal ’25 and ’26, I think you mentioned it would grow bottom line as well. Is there kind of a certain amount of fixed-price risk around whether it grows bottom line to the extent that you expect it to grow bottom line? Is it more like a product margin that’s accretive in that time frame? Or is it going to take much longer for that to become more profitable work?

John Mengucci: 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 communication terminals, right? So we’re a supplier to major satellite builders. So as for loss leaders and the like, we’re well within the range that we wanted to be at this point in our development cycle. Contrary to other suppliers, we had about a 15-year head start with the acquisition of LGS, we have real bespoke solutions that were already on orbit before we started talking about FDA, before we started talking about what we haven’t assessed yet are these proliferated Leos. It does to our plan, contribute to our FY ’24 top and bottom-line growth. It fits in nicely. We’ve got some more development work to do around producibility, which is well within the time line that we have laid out.

And we have some very – I guess, I just used the word nice bids in place for Tranche 2 and for other work. I’d also tell you beyond the satellite comms part, there are other domains that we’re looking at using Photonics, right? It is a perfect way to map the Earth. It’s perfect in the ELINT space. So when, in my opening remarks, I was talking about – I spent a lot of time in the space, clearly, but then in other domains is sort of code for ELINT and you can do ELINT from a number of places, you do from the air, you can do it from the space and the like. So it’s appropriately and tastefully part of our FY ’24 plan. And you’ll see it more prominently as we move forward to FY ’25.

Operator: We’ll take our next question from Tobey Sommer with Truist. Tobey Sommer Q – Tobey Sommer I wanted to ask 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 of pretty strong book- to-bill. Is there a – could you explain sort of the disconnect 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 6 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.

John Mengucci: So a couple of directions here. I guess, let’s start with the large recent awards, right? So part of our long-term strategy was so – we would be at the point that we weren’t talking about 3% annual organic growth rate, we will be talking about something around the mid-single digits. It’s a balancing act, frankly, making certain that we’re driving free cash flow growth per share. Then we’re looking at all different levels, right? So you can get that with a reasonable, predictable topline growth with margin expansion, you get there with really high topline growth. Specifically on the 3 jobs that we won, the EITaaS job is going to start with upfront planning and design, think lower volume, I think that, that ramps over time.

The expertise job, it’s going to take a little bit of time to transition that work as task orders turn. But clearly, we are providing expertise in that case. So that ramp’s going to be very fast and then it lives there for quite a long period of time, hopeful of growth as we go out. Then on Spectral, this is a large new technology program. It starts with a lot of upfront planning and design. So I think lower volume and there’s multiple paths for them to ramp over time. So what’s really important is not just the growth rate, we see this kind of money – this kind of awards going into our backlog in essence, why isn’t revenue growing faster. At the end of the day, our goal to building a differentiated company in this sector is to make sure that we have long-term predictable revenue growth.

Okay, 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, the sort of mantra of bid less and win more and bid longer term, is over the last 7 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 those millions of dollars I get to transfer that from BNP to IRAD for I’m building exquisite outcomes for customers I have and 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 warn again, and we’ve said this many times, don’t take the ceiling value it by the top because it gives you not the full picture of where we’re looking to grow.

So look, we came out of FY 2023 with 6% organic. We’re going into this year with 6% organic. Clearly, you don’t mean all of your recompetes. So there’s a bucker 2 worth of revenue we had last year, we no longer have this year, so we have to net that out. And the programs come to international end. So we’re going to model differently than what the most rest of the sector is because we are preserving sector-leading EBITDA margins and making sure that we’re growing in line with that. Tobey Sommer As my follow-up, I was going to ask about capital intensity and whether the strategy to focus on tech. But like you said, can prompt IRAD or development and investments – how does that interplay in any change to the translation for free cash flow conversion?

Jeffrey MacLauchlan 25 Yes. These are generally not capital-intensive businesses. I mean you see a little bit of CapEx and we’ve noted at a little bit of working capital growth. We have some very mod- est 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. Did that answer your question?

Tobey Sommer: Yes.

Operator: We’ll take our next question from David Strauss with Barclays.

David Strauss: 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?

John Mengucci: Yes. So our backlog is really representative of the book of business we have now. As Richard goes back to your earlier question around do the margins and the ramp of the programs in our backlog support future growth of both, frankly, right? The answer is yes, as Jeff mentioned, we would expect over time, our CapEx spend to come back down to a lower level once we made some of these technology-based capital investments. How the backlog on tax is sort of at our mix today, I think our mix is 53.47. What’s important for us is that 70% of our bids that we’re bidding and we’re looking to be awarded are on the technology side. So one would say that in some of HRs is sort of broken through that sheet, and we sort of – we’re now actually able to build more technology jobs than we have in the past.

How those come out of backlog can vary quarter-to-quarter and year-to-year, right? So 1 of expertise going in is going to unpack sooner and faster and $1 of technology is going to unpack slower and more with little time. So that’s about how we model it. But rest assured, the most important time to look at is, are we bidding things at the right mix of revenue growth. Are they core to the 5 markets that we serve? Are we doing the acquisitions in a strategic deliberate manner? 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’re really pushing on free cash flow per share growth because it’s so much more than whether by my technology and my backlog unpacks at $2 a year versus $1.

So probably not an overly satisfying answer, but it sort of is how we manage this business. David Strauss No, that’s helpful color. And then in terms of a follow-up, is there any capital deployment at all assumed in the guidance, whether it be debt paydown? I don’t think there is a share repurchase based on the assumed share count.

Jeffrey MacLauchlan: No. The guidance doesn’t assume any meaningful share repurchases. We have some limited number to kind of manage dilution of our branch at best, but no meaningful share repurchase and no acquisitions. So any capital deployment activity would be incremental.

Operator: We’ll take our next question from Sheila Kahyaoglu, Sheila Kahyaoglu

Q – Unidentified Analyst: Good year with good margin. But I just wanted to zone in on Q4. And John, I know you don’t – you said you don’t focus on a point in time, but 4% growth was respectable, but peers saw an acceleration and you guys saw deceleration. But it seemed to be particularly in your civil business, which is about 20% of sales. So can you talk about what happened there and how that improves?

John Mengucci: And I guess this isn’t aimed at you. To be honest, I said this so I don’t see the numbers until we disaggregate them to put the data in the back of our tables that are in the back of our release. I can probably take the time to 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 a comparison in the numbers that you’re talking about, but I can’t be 100% certain. At the end of the day, our leaders in each of our markets delivers the whole of government. So whether DoD is up 6% or down 4% or civil, and this is a response to everybody out there. Our customers love the fact that we’re aligned by what it is we deliver it, what it does [indiscernible] right?

They crave information. They love shared investments because we get to invest once and we get to blubber to many. So that’s a great win-win. They aren’t competitors or customers. They’re actually friends. And I sort of believe that we should meet customers where they’re at, which is I don’t want to impose my work structure or how I measure my financials on them. So what we do is we bring things up to expertise intact. My 3 presidents have the full rein to go all the way across the federal government. Whether it’s commercial ask, whether it’s Fed civil, DoD and Intel, so I really – I want to always be extremely transparent. I just can’t tell you what actually drove that. But I can tell you, it’s just as easily that next quarter, Fed sale will be up 9% and DoD will be down 4%.

And I wouldn’t tell anybody that, that’s good ore, but it just sort of is.

Q – Unidentified Analyst: And then maybe a bigger-picture question. You talked about sector a little bit and how that complements your abilities. And I think the other contract you mentioned was Feature Trace. They both seem to have an AI element. And then maybe if you could elaborate on that and how that capability over the medium term could be used for other customers?

John Mengucci: 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 is how we want to go about differentiating ourselves within the sector and also moving out forward, 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 a disciplined acquirer. We didn’t get distracted by buying revenue. We built each acquisition investment on the prior one, was the foundation, massive on hardware, more tactical LGS software, more bespoke solutions, ABT bringing in Gimbal and mobile kind of UAS and other tuck-ins. We didn’t bear from that goal. New technology markets with large funding streams, where we could differentiate, propose a 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 have done on Spectral. It’s noteworthy in that 3 aerospace and defense companies joined our team. And to me, that’s a sign that we differentiate across that entire very highly competitive space. In a market we’ve proven we can punch above our weight where long-term investments were absolutely needed and U.S. Navy is going to be a massive beneficiary for selecting us and our partners to be able to drive that. You talked about AI. And look, I’ve always said that you can’t spell CACI without AI, but a little bit of humor that 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’s a tool. And I think last quarter, I actually talked about 3 different places, right? I look at AI, I think about machine learning, RPA, and generative. On the computer vision piece that you related to, yes, that’s absolutely part of what we’ve done. One was on contract, our Sapphire NGA 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 to not replace what the analyst does, but allow us to create maps in a much more repetitive and much more efficient manner?

Broadly, we’ve got about 200 major programs across this company. And I have to tell you, in some way, in more than half of them, Sheila, we have been doing that for either years or months or days. It’s important that how I see AI is just to appreciate a 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 continually talk about that. Our technology drive and our vision was to have it be real tangible, you can touch it, you can see it, and a customer recognizes it in their outcome. It’s real, is deployed. It’s also revenue generate. So it’s not on the slide. It’s not aspirational. It’s so much a part of our technology work, which I call delivering versus the expertise side.

So we’re not advising, we’re not consulting, we’re actually doing. So we’re being very cautious, I’ve gotten a lot of questions 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’s an organization looking at how do I trust the AI coming out. DoD has a responsible AI guidance, we’re very familiar with it. They don’t build solutions. They 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 could be more efficient and more cost-effective? Absolutely so. So thank you for that.

Appreciate it.

Operator: We’ll take our next question from Mariana Perez Mora with Bank of America.

Mariana Perez Mora: So my question is about people. As you think about executing against that like really large backlog, how is hiring – how is security clears this environment? And what are the challenges ahead? John Mengucci Yes. So let me start with the last piece first. Since we have a large expertise-based contract with an extremely important Intel customer, I did cover that earlier were that our customer understands the importance of people retaining their high-end, long time to get clearance. So that has worked very, very well for us, and I expect them to continue to support us as we transition that job. Now having said that, right, demand for talent is always high, Mariana.

John Mengucci: I mean it’s – the high environment has been competitive for, I guess, since [indiscernible] maybe but it’s no different than it has been in the past. But we really strive to be the employer of choice in our sector, and that’s what we start off with. So what are 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. I’m quite happy to say that about 50% of our work are people that we hired to do work on behalf of our customers meaning that they are in RC stack facilities and they are creating technology solutions. Look, we’ve got three great programs within this company. Cascade making moves, enables mobility and helps retention, one of every 4 openings of this company is built by some- body else in this company looking to be promoted, looking to do something different.

That’s very unusual for what is usually a people-intensive, direct-label, reportable sector. Second is, we’ve improved our referral program and the incentives that nets about 40% of all of our hires, right? Great people know other great people. And then we just recently put a flexible time-off program in place, then I’ll spend a minute or 2 on – we also have continued to expand our internship program. That’s where we cultivate talent, we bring folks in from college at a freshmen level, at a software level introduced into national security space, talk about how their engineering degree, how that unpacks when they come to us, how they support so many eye-watering technologies that were out there delivering. And then frankly, we finished FY ’23 with attrition, a little over 1 point lower than what it was in fiscal year 2022.

We continue to win Best Places to Work awards, and we’re driving our time to accept the time to start metric. So that’s probably a 12-point answer to how we’re going to handle this large influx. But I would tell you the technology programs, I often get asked, revenue is coming up at x and we’re surprised that your headcount has it. In the technology space, headcount is not linear to revenue, okay? We have people working on multiple programs, taken their amazing engineering talent to bring that to other programs. If I may, a moment on our FTO program. Look, it’s a breakthrough program. We launched it on July 1 in our surveys that we do, 2 of the benefits that resonate most of our employees is time-off and flexibility. So it just seemed like flexible time-off is the right title for it.

At the end of the day, employees could take time-off as needed without a set number of maximum days. It allows our employees to better balance their work 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 4 years. So back to tie off what we’re going on in people. We know that this program works. We’re already seeing the impact of it and are already recruiting and I’ve been asked is that a headwind to revenue growth that I find puzzling. But at the end of the day, our work still needs to be completed.

So 4-gram leaders to the staffing and justice they need to make to support this outstanding program going forward. So buying talent is very, very tough. We put 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 divert the revenue because we can’t find the people. Mariana Perez Mora Great color. My follow-up on M&A. First, short term and then long term. In the short term, what are you seeing in terms of pipeline, areas of opportunity and pricing? And in the long term, what will M&A plays out in keeping the competitive advantage?

Jeffrey MacLauchlan: So on the M&A pipeline, I think we’ve done a pretty good job of acquisitions in the past and address a number of gaps. That really gets at your second question. We’re never doing an acquisition for revenue. We don’t buy shiny objects. We’re just there to fill fillable gaps. Look, where we are today, valuations, expectations of value have really been slow to adjust to the changing market dynamics, interest rates and other things. The pipeline is starting to build. However, we continue to pursue some of our preemptive M&A strategies, we’re hopeful we see the market shift back to a buyer’s market from a sellers’ market, and that may drive more opportunities in the future. We’re evaluating all options based on our current dynamics and again, M&A is an important use of capital, but it’s not the only one.

If we look at what we’re taking a look at, we continue to look at companies who do EW SIGINT, cyber, AI, data analytics and the like. Frankly, in all the other areas, Mariana, we’ve got the majority of our gaps filled and now it’s time for us to go grow and win larger and a bit less and win more. So we’re pretty good at doing moderate-sized acquisitions. We think we do those very well. It is our sweet spot. And so as the strategic needs arise, we’ll execute on that. If not, we’ll be sitting down with Jeff and look at other flexible and opportunistic ways to deploy our capital.

Jeffrey MacLauchlan: Yes. I mean, absolutely committed to buying things that are logical strategic fits at the right price.

Operator: And that concludes the question-and-answer session. I’d like to turn the call back over to John Mengucci for closing remarks.

John Mengucci: Well, thanks. Thanks, Lisa, and thank you for everybody who was joined during the call today. We know that many of you will have follow-up questions, Jeff McLauchlan and Dan Leckburg will be available after today’s call. So thanks again for joining us, stay healthy, and all the best to you and your families. This does conclude our call. Thank you, and have a great day.

Operator: Thank you. That concludes today’s presentation. Thank you for your participation. You may now disconnect.+