CACI International Inc (NYSE:CACI) Q2 2023 Earnings Call Transcript - InvestingChannel

CACI International Inc (NYSE:CACI) Q2 2023 Earnings Call Transcript

CACI International Inc (NYSE:CACI) Q2 2023 Earnings Call Transcript January 26, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CACI International fiscal 2023 second quarter 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 help you. At this time, I would like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Dan 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 No. 2. There will be statements in this call that do not address historical facts 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 those 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 discussions of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let’s turn to Slide 3 please. To open our discussion this morning, here’s John Mengucci, President and Chief Executive Officer of CACI International. John?

John Mengucci: Thanks Dan, and good morning everyone. Thank you for joining us to discuss our second quarter fiscal year ’23 results. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Slide 4, please. Last night, we released our second quarter results, and I’m very pleased with our performance. We grew revenue 11% with growth in both expertise and technology. Profitability was healthy with an adjusted EBITDA margin of 10.2%, and we had another strong quarter of contract awards, winning about $3.5 billion which represents a book to bill of 2.1 times for the quarter and 1.5 times on a trailing 12-month basis. About 70% of our contract awards were for new business to CACI and we had strong performance on our re-competes as well.

Overall, our execution in the second quarter and first half sets us up well to achieve our fiscal year guidance. Jeff will provide additional financial details shortly. Slide 5, please. Turning to the external environment, market and demand trends remain very constructive for CACI’s business. On December 29, the president signed the omnibus appropriations bill funding the government through September 2023. Budgets in general saw healthy increases, including defense spending which increased about 10% from last year. Below the top line numbers, we see healthy spending trends across both expertise and technology in key areas of focus for CACI, including C4ISR, cyber, digital solutions, enterprise IT, and mission support. CACI’s commitment to invest ahead of need drives differentiation and positions us extremely well to deliver innovation to our customers and value to our shareholders.

Slide 6, please. Let me update you on a key recent award. Last quarter, we announced the award of the Air Force Enterprise IT as a Service contract, or EITaaS, demonstrating our leading position in IT modernization. This enterprise technology award was protested and the Air Force subsequently undertook corrective action. Late December, we were notified by the Air Force that, after correction action, the award to CACI was reaffirmed. We were very pleased by our customer’s decision. Not surprisingly, that decision was protested again and now sits with GAO for resolution. Our team is ready to go and we look forward to beginning this important work for the Air Force, which we expect will be a positive driver of growth in fiscal ’24. This award is a great example of our strategy to bid less and win more, focus on larger contracts, and leverage our leading position in enterprise IT modernization.

Turning to second quarter awards, CACI won a sizeable mission expertise contract to provide network and exploitation analysis in support of foreign intelligence and cyber security missions. As you know, our work in mission expertise engages highly skilled employees who apply their technical and domain knowledge to support critical and complex agency missions. The work on this program will incorporate CACI’s deep, longstanding capabilities in both intelligence analysis and cyber. We won this competitive award and displaced the incumbent by leveraging our superior ability to understand and execute the mission thanks to our industry-leading talent. This award was also protested and the customer is currently taking corrective action. In the space domain, we continue to see strong demand trends and our photonics business continues to grow in scale.

As we have discussed before, we supply both government customers and defense primes with our photonics technology. In the second quarter, we received additional follow-on order from a defense prime. Our industry-leading photonics technology addresses the requirements of spacecraft operating in all ranges of space – low earth, medium earth, and geostationary orbits and beyond. CACI’s optical communications technology is the only U.S.-based offering operating in space today that meets DoD and intelligence customers’ stringent security and performance requirements, and we continue to invest in this technology to maintain our leading position as we see increasing demand for secure high bandwidth communications across all domains. I also want to highlight our strong re-compete performance, in particular our re-compete wins of our best private investigation work for DCSA and important cyber-related work for the intelligence community.

Our re-compete successes are driven by strong execution and the value we bring to customers. All of these awards, new business and re-competes are for high value, enduring work that addresses critical priorities for our customers and supports our ability to deliver long-term growth, margin expansion, strong cash flow, and shareholder value. Slide 7, please. As we have discussed before, we are committed to a flexible and opportunistic capital deployment strategy that includes internal investments, M&A, share repurchases and other capital deployment options, based on business and market dynamics. This morning, we announced that our board of directors has authorized a $750 million share repurchase program of which $250 million is expected to be executed imminently as our summary share repurchase.

Information tehnology, Office Photo by ThisisEngineering RAEng on Unsplash

With moderate leverage, ample borrowing capacity and confidence in generating strong future cash flow, we’re in a good position to deploy capital to drive additional shareholder value. In summary, we’re pleased with our performance and we remain confident in our long term prospects. We are successfully executing our strategy, making the right investments, hiring and retaining top talent, winning new work, managing the business efficiently, and leveraging our strong cash flow to deliver shareholder value. With that, I’ll turn the call over to Jeff.

Jeff MacLauchlan: Thank you John, and good morning everyone. Please turn to Slide 8. As John mentioned, we’re pleased with our second quarter results. We generated revenue of $1.6 billion in the quarter, representing year-over-year growth of 11%, including organic growth of 6.2%. Expertise revenue grew 8% and technology grew 14%, which is well aligned with our view of the year. Adjusted EBITDA margin was 10.2% in the second quarter and 10.4% for the first half of the year. Our strong first half performance is on track with our full year guidance. Second quarter adjusted diluted earnings per share were $4.28, reflecting the higher interest expense we discussed last quarter, partially offset by our higher operating profit. Slide 9, please.

Second quarter operating cash flow excluding our accounts receivable purchase facility was $22 million. This result reflects $93 million of unusual tax items we have previously discussed, namely the final repayment of $47 million of the deferred payroll taxes under the CARES Act, and a $46 million payment related to Section 174 of the Tax Cuts and Jobs Act of 2017. We have previously disclosed the full year impact of $95 million from Section 174. This quarter’s payment represents the half year effect on our quarterly tax payments. Cash flow also reflects the timing of ramping revenue recognized later in the second quarter and its attendant working capital. We ended the quarter with net debt to trailing 12-months adjusted EBITDA at 2.2 times.

As we have previously discussed, the strong cash flow characteristics of our business, modest leverage and access to capital provides significant optionality to deploy capital in support of future growth and shareholder value. To that end, we announced earlier this morning that our board of directors has authorized a $750 million share repurchase program. As John mentioned, we are in the final stages of deploying an initial $250 million of that authorization as an ASR. We expect to finalize and execute the ASR promptly and will provide you with additional details when we execute that repurchase agreement. Beyond the ASR, we expect to deploy the remainder of the $750 million authorization in a manner based on business and market dynamics over time.

This approach to capital deployment is a refinement of our strategy to be flexible and opportunistic in the management of our capital structure. We are now even better positioned to respond with agility to changing market conditions and investment alternatives. Slide 10, please. We are reaffirming our fiscal year ’23 guidance with the exception of free cash flow, which we are updating to include tax payments under Section 174. Let me also be clear that our guidance does not reflect any share repurchases under the authorization we announced this morning. We continue to expect revenue growth of between 4.5% and 7.5% with growth in both expertise and technology. As a reminder, all of our recent acquisitions have now anniversaried and so future growth in these areas will be organic.

We continue to expect our full year adjusted EBITDA margin to be in the mid to high 10% range, and we are reaffirming our prior adjusted net income and adjusted EPS guidance. We are updating our fiscal year ’23 cash flow guidance solely to reflect the previously disclosed $95 million cash tax payment related to Section 174, given no changes have been enacted. Lastly, I want to reiterate that our guidance does not reflect any share repurchases under the $750 million authorization we just announced. We expect to provide more information after we finalize the details of the $250 million ASR. Slide 11, please. Turning to our forward indicators, CACI’s prospects remain strong. We won $3.5 billion of contract awards during the quarter, driving our backlog growth of 10% compared to last year.

Second quarter backlog includes roughly $1.5 billion from our intelligence customer mission expertise award, as well as roughly $1.2 billion from our DCSA background investigation re-compete win. These reported amounts reflect current customer requirements. For fiscal ’23, we now expect 95% of our revenue to come from existing programs with the remaining 5% split evenly between re-competes and new awards. We have $6.6 billion of submitted bids under evaluation, approximately 65% of which is for new business to CACI. This is down from the first quarter primarily as a result of our strong second quarter contract awards, and we expect to submit another $15 billion in bids over the next two quarters with over 75% of that being new business to CACI.

In summary, we’re very pleased with our results, which demonstrate the successful execution of our strategy. Our team continues to perform well and we remain confident in our ability to generate long term growth and shareholder value. With that, I’ll turn the call back over to John.

John Mengucci: Thank you Jeff. Let’s go to Slide 12, please. In closing, the second quarter and fiscal first half keep us well on track to deliver our full year guidance. I’m pleased with our continued growth, profitability, cash flow and contract awards. Looking forward, we remain committed to delivering long term growth and margin expansion while compounding those returns with a flexible and opportunistic capital deployment strategy. All this is driven by a commitment to grow free cash flow per share over the long term. As is always the case, our success is driven by our employees’ talent, innovation and commitment. To everyone on the CACI team, I’m extremely proud of what you do each and every day for our company and for our nation; and to our shareholders, I thank you for your continued support of CACI. With that, Emily, let’s open the call for questions.

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