Caci International Inc /De/ Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Full-year 2021 and Full Year 2022 Guidance Conference Call. Today’s call is being recorded. At this time, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. Operator provided instructions. At this time, I would like to turn the conference over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Well, thank you, Andrea, and good morning, everyone. I’m Dan Leckburg, Head of Investor Relations for CACI. And we thank you for joining us this morning. We are providing presentation slides, so let’s move to Slide Number 2 please. 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 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 up our discussion this morning, here is John Mengucci, 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 2021 results, as well as our fiscal year 2022 guidance. With me this morning is Tom Mutryn, our Chief Financial Officer. Slide four please. Last night we released fourth quarter and full year results for fiscal 2021, as well as our guidance for fiscal 2022. And I'm very pleased with our performance. Our fourth quarter results were in line with our expectations and capped another strong year for CACI. For fiscal year 2021, we delivered revenue growth of 6%, adjusted EBITDA margin of 11.1% and robust cash flow. Our organic revenue growth of 5% was ahead of our underlying addressable market, and we delivered healthy margin expansion. We also won a total of $9.2 billion of contract awards with over 40% of that new business to CACI. That represents a 1.5 times book-to-bill for the year with a healthy mix of recompete wins to preserve our base and new awards to drive future growth. And we delivered those results while navigating the persistent challenges of COVID-19. I could not be prouder of all of our employees who continue to support our customers, while ensuring the health and safety of themselves and those around them. Slide five please. Turning to the external environment, we are almost seven months into the new administration and budget indications remain very constructive. The administration proposed an increase in overall defense spending of about 2% and as the NDAA makes its way through Congress, their indications to fund spending could have further upside. Importantly, we continue to see bipartisan support to fund national security and IT modernization priorities, including offensive and defensive cyber, border security, C4ISR, electronic warfare and space. As we think about cyber outside of DoD and the intelligence community, DHS's Cybersecurity and Infrastructure Security Agency or CISA will be a focal point for federal civilian cyber investment. CACI is well-positioned at CISA and DHS more broadly with existing programs, customer relationships and contract vehicles to address additional cyber requirements. In addition, the administration is focused on enabling technologies and methodologies like artificial intelligence and agile software development, areas where CACI is extremely well-positioned. It's all about an R&D-led agenda to develop capabilities and technology geared toward near peer threats, great power competition and ongoing counterterrorism. All this aligns very well with our strategy and capabilities. Slide six please. Looking forward, it remains clear that the future is software-based. Many of our customers' most pressing challenges have common underlying needs: new capabilities at the speed of technology, increased agility, flexibility, security and efficiency, all of which can be solved with software. CACI continues to address these needs and demonstrate industry leadership in software development with multiple pillars of success: agile software development at scale, DevSecOps using tool-based automation, and a focus on open software architectures. Different programs emphasize one or more of these elements, but they are present and key to our future growth. Our agile-at-scale capabilities enable the industrialization of software development, which customers are increasingly asking for—faster, more responsive to changing needs, more efficient with materially higher quality. CACI is a leader of agile at scale delivering on the largest agile programs in the federal government. This includes our BEAGLE program with over 100 applications. BEAGLE and other CACI agile programs provide important past performance and credentials to address the government's growing demand for agile. In fact, we recently won new business at a classified agency to apply agile software development to large-scale data analytics. This win also leveraged the capabilities and customer relationships of our Next Century acquisition. In addition, you've heard us discuss our 100-plus projects focused on AI. AI is ubiquitous across our business providing customers speed, efficiency and predictive analytics. AI was at the center of our recent $376 million NGA win where CACI is building out the computer vision infrastructure, tool suites and analytic environments for NGA analysts, providing an open best-of-breed environment to users. Lastly, a key element of our strategy is to look further downfield and invest in differentiated software-defined technology ahead of customer need. Photonics or laser-based communications and remote sensing is a great example, which came to us via our acquisition of LGS. It is a technology we continue to invest in today. Notably, aerospace and defense primes recently purchased our photonics technologies to include on their platforms. We have a nice pipeline of additional sales opportunities across the A&D primes. This is confirmation of well-placed investments in differentiated technology. Slide seven please. Turning to our FY 2022 guidance, we expect another year of revenue growth above our addressable market, which we expect to grow at about 3% over the next five years. And we remain committed to ongoing margin expansion consistent with our stated performance goals. At the midpoint of our FY 2022 guidance, we expect revenue growth to 4% and adjusted EBITDA margin of 10.9%, which represents continued expansion of our normalized FY 2021 base of 10.7%. In addition, we expect to continue to generate robust cash flow, and Tom will provide additional details shortly. We're seeing positive growth in technology and expect it to continue to outpace expertise growth, collectively offsetting the impact of the Afghanistan drawdown. I want to emphasize that all areas of our business are important and can contribute to growth and margin expansion. And there is a great synergy between expertise and technology. Expertise informs the technological requirements of the daily mission. And our technology capabilities are fantastic enablers and differentiators of our expertise, allowing us to deliver efficient and effective results to our customers. Slide eight please. CACI's success driving growth and margin expansion continues to generate robust cash flow. Our cash flow and overall financial strength enable us to deploy capital to drive additional shareholder value through investments in growth, share repurchases, M&A and other capital deployment options. We will continue to invest ahead of customer need to drive future growth and differentiation. Our commitment is to utilize CACI's strong cash flow to deliver the greatest long-term shareholder value. With that, I'll turn the call over to Tom.

Thank you, John, and good morning everyone. Please turn to slide number nine. Our fourth quarter results were a solid finish to another successful year of growth and margin expansion. We generated revenue of $1.6 billion in the quarter, representing 5% overall growth and 4.3% organic growth. Adjusted EBITDA margin was 9.3% and net income was $137 million. We are also reporting adjusted net income, which we defined as GAAP net income adjusted for the intangible amortization expense associated with acquisitions. Adjusted net income in the quarter was $149 million. Let me remind you that the change in the tax accounting method we discussed last quarter reduced fourth quarter revenue and adjusted EBITDA by $7 million, and it increased net income by $51 million. Slide 10 please. For the full year we generated just over $6 billion of revenue, representing 6% total growth and 5% organic growth despite COVID-19 impacts. We continue to expand margins with adjusted EBITDA margin of 11.1%, up from fiscal year 2020's 10.0% margin. The underlying margin in FY 2021 normalized for COVID-related headwinds and tailwinds, the tax method change and the strong performance on a fixed price program, which we noted on prior calls, was 10.7%, in line with our initial fiscal year expectation. This provides the base for an apples-to-apples comparison to our fiscal year 2022 guidance. GAAP net income of $457 million represents growth of 42% benefiting from the tax method change and the strong fixed-price program performance, as well as revenue growth, margin expansion and lower interest expense. Adjusted net income of $507 million represents growth of 39% from last year. Slide 11 please. Fourth quarter operating cash flow was $100 million excluding our accounts receivable purchase facility, reflecting continued healthy profitability and cash collection. DSO was 54 days and we generated operating cash flow of $610 million for the full year excluding our AR purchase facility. A 19% increase in operating cash flow was driven by overall growth, margin expansion and a three-day reduction in DSO. These items more than offset the $90 million of additional payment for the fourth quarter associated with the tax method change allowing us to exceed our operating cash flow commitment. Recall, we also benefited from a $50 million payroll tax deferral during the fiscal year. We ended the year with net debt to trailing 12 month adjusted EBITDA at 2.5 times, and this leverage reflects the $500 million outflow associated with March accelerated share repurchase. Our strong cash flows, low leverage, the low interest rate environment and our equity valuation informed our decision to repurchase shares to drive additional shareholder value. Slide 12 please. Now let's turn to our fiscal year 2022 guidance. As in prior years our guidance is based on its program-by-program bottoms-up planning activity. This approach provides significant visibility and confidence in our outlook. We expect revenue to be between $6.2 billion and $6.4 billion implying organic revenue growth of 4% at the midpoint. This is despite a 2% headwind going into the year driven by the withdrawal from Afghanistan, which we discussed last quarter. We expect adjusted net income to be between $430 million and $450 million with $50 million after-tax intangible amortization expense. We expect adjusted EBITDA margin of 10.9% at the midpoint, up 20 basis points from last year on a normalized basis. Our organic growth and margin expansion expectations are driven by new business wins in high areas of our addressable market as well as on contract growth, excellent program execution and overall business efficiencies. We expect free cash flow to be at least $720 million in FY 2022. Capital expenditures are expected to be approximately $90 million, higher than last year driven by several discrete growth and investment projects. With this, operating cash flow is expected to be at least $810 million. We will pay $45 million of the deferrals related to the employee portion of the payroll tax in December. We expect a second-half tax refund of approximately $230 million associated with the tax method change. We are expecting incremental tax payments related to the method change of $40 million in both FY 2023 and FY 2024. As discussed in last quarter's call, the tax method change is expected to provide $60 million of cash tax savings over the four-year period with the GAAP P&L benefit recognized in FY 2021. Slide 13 please. To assist with modeling here are some additional planning assumptions. Depreciation and amortization expense are expected to be approximately $135 million, net interest expense should be around $42 million. We are expecting a full year effective GAAP tax rate of 23.5% with a lower tax rate in the second quarter due to the impact of vested stock awards, which were granted in prior years. FY 2022 tax rate is a bit higher than last year's rate prior to the tax method change due to a larger R&D tax credit in fiscal year 2021. And I will note, we are using our full effective combined federal and state tax rate of 26.3% to tax-effect intangible amortization to calculate adjusted net income. We expect a typical quarterly sequential increase in revenue and profitability, but note that certain factors can skew quarterly trends such as the timing of other direct costs, and delivery of high-margin technology. We also expect a sequential decline in revenue from fourth quarter FY 2021 to the first quarter of FY 2022 greater than the normal 1% to 3% due to timing of material buys, drawdowns in Afghanistan and timing of some technology sales. And we are assuming there will be no material impacts related to COVID-19. Slide 14. Turning to our forward indicators, prospects remain strong. For fiscal year 2022, we expect 80% of our revenue to come from existing programs, 12% from recompete, and about 8% from new business. These metrics are in line with historical ranges and also reflect an increasing amount of technology deliveries in our new business content. And as you know, these quick-return sales come with high margin contributions. We have $7 billion of submitted bids under evaluation with 85% of that for new business to CACI. And we expect to submit another $12.4 billion through calendar year-end with over 70% of that for new business. In summary, we are expecting another year of strong financial performance with healthy organic growth, continued margin expansion and robust cash flows. With that, I'll turn the call back over to John.

Thank you, Tom. Let's go to slide 15 please. CACI performed exceptionally well in fiscal year 2021. Despite a challenging environment we did what we said we would do. We grew faster than our addressable market and also expanded margins. We generated robust cash flow and deployed that cash opportunistically to generate value for our shareholders. That capital deployment included a $500 million accelerated share repurchase, the acquisition of ABT and its exquisite ISR technology and continued internal investment ahead of customer need. And we continue to have ample capacity for additional value-creating deployments of capital. We positioned CACI for growth in fiscal 2022 and beyond with strong awards, record backlog and the capacity for ongoing margin expansion. With our continuing investments we are well aligned to budget priorities. We achieved this tremendous success because of our employees' talent, innovation and commitment to customer missions, our company and each other. I say it often because it's true. I am proud of the CACI team, each and every one of you for what you do. Critical national security and modernization challenges remain and CACI employees will be there to help our country meet these challenges. I also want to thank our shareholders for their continued support of our team and our company. With that Andrea, let's open the call for questions.

We will now begin the question and answer session. Operator provided instructions.

Well, good morning.

Good morning, Rob.

Thanks for all the color before. Tom, when we think about 2022, and we know there's no explicit COVID impact in the revenue and EBITDA guide. But if COVID were to impact, should we expect revenue to come into the lower end of the guidance range and maybe margins at the higher end? And what have you seen so far in this fiscal first quarter July, August, given the delta variant?

Yes. So Rob, I'll start out with that. It's such a hypothetical question, it's hard to speculate. If COVID impacts what happens? A lot depends on the level of COVID impact, how it would affect customers' buying behaviors, award activity, and our ability of employees to perform. So given that it's so speculative, I'm going to defer trying to answer that.

Yes. Rob, let me add something else. Three items. First, if we look at COVID today versus where we were 12 to 18 months back, it's our belief that both our customer set and CACI are much more prepared than we were a year ago to deal with this virus. So it's a known risk with a battle-hardened solution. Second, we took the action years ago to build a technology infrastructure, as I've talked about in the past, to support a dispersed workforce. We actually did that focused on being able to get cleared employees across the nation. And it actually did a great job of supporting us through the core COVID period. And then lastly, providing choices to our employees on remote versus in-building work locations. So, it's those three factors, Rob, going into the year. We really believe we're far better prepared to the extent that we can be, which is why we're issuing guidance without any additional COVID impact.

Okay. Fair enough. John, while I've got you, we're hearing a lot about zero trust cybersecurity. And there's these mandates out there that federal agencies should switch over to that security architecture. So I wanted to ask if that's an opportunity for the company? And do you have any commercial partners in Zero Trust?

Yes, Rob. Thanks. We have a lot of commercial partners. I mean, if you look at zero trust, we have a lot of tool partners that we use on our own network as well as customer networks to monitor a large number of varying cyber attacks. What we specialize in is as that information comes in, how do we better defend. We are moving all of our networks much, much closer to zero trust and for those out on the line, you have to assume people are going to get in. So how do you protect all of your information and how do you put different defense mechanisms in place. We are—as I mentioned—we are hardening our own networks here, as well as networks across a number of federal civilian agencies such as DHS and others, as well as a number of independent defense networks. So we are very much read in on it. We are following all of the new executive orders that are coming out from this administration. And we're also very happy with the work that this administration and the focus that they have on doing a much better job now that we've had COVID and that the attack surface has expanded greatly, because we have so many employees working in government buildings and also from home. That is the right answer and we believe that we have the right amount of funding and there's more funding to be had with both the infrastructure bill and with others to come. So thanks very much for that question, Rob.

Is there any way to frame the size or the potential?

Rob, sizing the potential is more directly in line with what we'll track in the enterprise IT modernization. It's sort of an overlay to it. So we'll see—we'll be able to provide more information when we start to see separate task orders come in on it, Rob. But every time we're out there selling enterprise IT, it most likely will be a new or an additional subtask to all of the work that we currently provide.

Okay. Got it. Thank you.

Yes. Thanks Rob.

The next question comes from Gavin Parsons of Goldman Sachs. Please go ahead.

Hey, good morning.

Good morning, Gavin.

Two-parter on the organic growth and maybe the 3% five-year target. So, the first part, you're targeting 4% at the midpoint including 2% headwind from Afghanistan. Does that mean you're growing 6%—so 3% ahead of the underlying? Or does that also have some COVID catch-up? And then the second part is, what's your framework for thinking about how much you can outgrow that 3% over the next few years and what kind of book-to-bill you need to do that? Thank you.

Okay, Gavin. FY 2022 revenue growth 4% which is ahead of our addressable market of 3%. So we can check that box saying, look, we are a company which is out there looking to grow better than our addressable market. And with the company frankly that's focused on high quality revenue. So, we're going to grow nicely, but at the same time we've got to be expanding margins. As I look at this, Gavin, I'll share a few factors that are in play when we set this guidance out. Tom mentioned a very major one. It's a bottoms-up approach, which is why it gives us confidence at 4%. But there are a few factors which are behind the reason why we're saying four today versus six or even slightly higher. Afghanistan reduction, level of churn in FY 2022 and average award duration. As you mentioned very accurately, we have about a 2% headwind coming into FY 2022 because of Afghanistan. We shared that over the last two quarters of FY 2021. So, though it's no surprise when we take a look at that, without that four would be nearer six. Typical churn that happens every year. Each year we would show that step up, step down chart. And when we define churn, it's really work that comes to a natural conclusion or revenue from re-compete losses that aren't going to show up in the following year. Churn is usually about 10% of our revenue plus or minus. But the churn this year is larger than the last couple of years, because we did suffer recompete loss, as we said in the past, in the expertise portion of our portfolio. We're very careful to ensure we bid the work at a fair price with an assurance that we can deliver successfully with an eye towards driving bottom line growth. And one of those bids we just were not successful. So we will say goodbye to some enterprise expertise work and we'll move forward on that. The last part of it, Gavin, if you look at our backlog, our average award duration has grown by about a year over the last three to four years. What that does for us on the positive is it gives us a really desirable backlog, longer-term duration where it gives all of us much better visibility of revenue levels for a much longer period of time. The downside is it's going to drive lesser revenue growth per year. But considering all those factors I feel really good about our FY 2022 revenue growth. Net-net without those couple of things would be a 6% to 7%. You also mentioned is there any COVID catch-up? No. The COVID impact we had, if you remember, was from the folks we were trying to additionally deploy to operational locations predominantly in the Afghanistan area. Now with the administration change that has cleared that slate. So, we were never going to make up COVID work going forward, but we were looking for that work obviously to have continued and it didn't. So, Gavin, a lot of words there—hope that catches the majority of your questions.

That's perfect. I appreciate all that detail. Maybe just following up on the technology and expertise mix. I think 50% tech for the year maybe a little higher coming out in 4Q. Where do you see that going over time and what portion of the backlog is technology versus expertise?

Yes, Gavin. We've stated that all four quadrants of our framework are important to us. There is synergy between the areas—opportunities to drive value in one quadrant inform other quadrants. For this past year technology grew about 12%, expertise was essentially flat. As we move into next year, we expect to see both parts grow with technology growing faster than expertise. And that is supported by both our backlog and the bids pending; we're going after some expertise work associated with that. So again growth in both areas.

Yes. Gavin, I'd also add. On the technology front we are going to continue to invest ahead of customer need, either in the enterprise tech area or in mission tech. We know we have what the customers are out there looking for. I spent a little bit of time in my prepared remarks talking about agile. Agile is a great buzzword. It's really hard to do. It's really hard to do repeatedly. It's really hard to do at scale. And we have future bids that are submitted and other bids coming up that are going to play exactly on top of that same past-performance credential that our enterprise team has spent an awful lot of time on. So, I would look for us to continue to drive tech higher than expertise. Now having said that, if they all grew at 10% each year, I would be even happier. So thanks so much Gavin.

Thank you both for all the detail.

The next question comes from Mariana Perez Mora of Bank of America. Please go ahead.

Good morning, everyone.

Good morning.

So, the outlook implies share counts remains flattish. Could you please expand and give us some color on how you are thinking about capital deployment? How is the M&A pipeline? And what's your appetite for more share repurchases in the future?

Okay. Thanks Mariana. So capital deployment. I'm going to call on Tom to add some comments as well. Look, you all have heard us both talk a little differently about capital deployment when we announced our ASR back in March. That was purposeful and a commitment to a continuous evaluation of all deployment options. We've always talked about those options. What you're seeing is potentially a different level of execution than we may have had in the past. So additional repurchases, M&A, internal investments, debt reduction, and other potential uses. And that order just to be clear is in no way intended to prioritize options. I like to say that they're all on the table and considered when we leverage our robust cash flow. M&A remains an important use of capital for us. But it's not the only one. And as a larger company going forward with greater profitability, greater cash flow, we can do multiple things. And you've heard me say in the past I want our capital deployment strategy to be opportunistic and flexible. And I use that word as a very key word. M&A and repurchase and internal investments and debt reductions and whatever else and whatever ideas we have going forward. So, from the vision and the strategy of where we're going that's where my head's at. Tom, can you add some more color?

Yes. So, a couple of factors. The current ASR, the accelerated share repurchase was executed at the beginning of March. It is still ongoing. So the counterparty is still in the market completing the share repurchase associated with that. Once that is completed, we expect to have delivery of another 300,000 to 400,000 shares, which reduces our share count going into FY 2022. That being said, there was some equity-based compensation which would offset that. Hence the flat share count for FY 2022. So once the ASR is done, we will evaluate the situation as John said. The good news is we have low leverage, financial strength and access to the capital markets, so a lot of flexibility. Right now, we estimate that we have well in excess of $1.5 billion of capital to deploy while keeping leverage at reasonable levels; this would be all-cash. And as most people on the call recognize, access to capital today is broad and interest rates are at historically low levels. Right now, we're spending LIBOR plus 125 basis points on our incremental revolver borrowing with LIBOR being 10 basis points and spending kind of 1.35% incremental interest expense. So until we determine what the best strategy is, we will kind of repay debt. The intent is to try to maintain zero cash balances and reduce debt for obvious reasons to reduce interest expense. And as we go forward we will continue to look at that question both in terms of our borrowing capacity plus our very, very strong free cash flow this year.

Perfect. Thank you.

Thanks Mariana.

The next question comes from Seth Seifman of JP Morgan. Please go ahead.

Hey. Thanks very much and good morning everyone. I was noting the head count number released. I think it was 22,000 at year end. And that was down a bit from last year end. Obviously, the company is growing the backlog, is growing. It's a profile of the business and the increased growth in technology. Does that mean—does that change the link a little bit between head count and revenue and we should think about a company with maybe higher sales per employee going forward?

Seth, thanks. That's a great question. It's been a long time we've looked at our business in terms of headcount. Tactically to answer the move from 23,000 to 22,000— that small change in total headcount was due to the exit in Afghanistan as well as some rounding. So tactically that's what happened. But you're absolutely right, Seth. With technology growing faster, our growth is not as correlated to headcount as it was maybe five to seven years back. It's been a conscious set of decisions that we have been making to make certain that our growth was not predominantly based on headcount. That does show its hand in our expertise-type work. You all have heard us talk over the last five to seven years about how we wanted to right-size that type of work for a number of reasons—shareholder value, profitability and some of the lower margins that come out of that work. We're at a point where we are large enough and capable enough to win work which we can differentiate on technology and our past performance—how we deliver—not on whether we were able to hire Susie, Julia or Johnny. So yes. This 23 to 22,000 change is not a material trend beyond the factors I mentioned.

Yes. And I'll also add that throughout the organization we're driving efficiencies even in the expertise area to the extent that we can develop better tools to help people perform their jobs, we can get the work done with fewer people. Agile software development is another great example where prior to that it would take an extra number of people to develop software. Now we can do it at materially lower headcount. As a result of that, we're less concerned with wage inflation. Let's hire the right people to do the job, drive efficiencies and we can deliver attractive cost to the government customer in getting the work done very effectively.

Great. Thanks very much. And just as a quick follow-up. As technology becomes a bigger part of the mix, how should we think about the trajectory of CapEx here? We saw the guidance for CapEx. Is that kind of a steady state number to continue to grow?

Thank you. So last year capital spending was approximately $73 million. This year guidance is $90 million. There was one sizable expenditure that we're planning this year, which is a facility to do some manufacturing-type work, which is specialized and makes the facility more expensive. This supports a program which has an eight to ten year life to it. And the way the program is priced the government ultimately will pay for that and capital spending will be recovered in our pricing. So that has driven a step-up in capital spending. Hard to predict what's going to happen next year, but I would say that we're going to move more towards that $70–$75 million level, with that one discrete investment in that particular range.

Thanks very much.

The next question comes from Matt Akers of Wells Fargo. Please go ahead.

Hi. Thanks guys. Good morning.

Good morning, Matt.

I guess the fixed-price contract that was sort of driving margins higher last year. Is that—has that kind of reverted to normal? And I guess, as we think of modeling the quarterly margins through this year, is there anything else unusual we should keep in mind?

Yes. So the program that we spoke about had some material benefit for the first, second, third and fourth quarter of FY 2021. From what we see, we expect similar benefits going into the first quarter of this year and that is built into the guidance number. So that will help first quarter margin performance. Consistent with my prepared remarks, we do expect revenue in the first quarter to be down sequentially from the fourth quarter greater than historic trends. And margin should have increasing margins throughout the year despite the fact that the fixed-price program is contributing to the first quarter margin. So, for modeling purposes I would expect increasing EBITDA margin quarters one, two, three, four. Recognize there are fluctuations in both revenue and margin due to the higher-margin technology deliveries and the like. We guide the full year and we're committed to the full year numbers. And there are going to be fluctuations among quarters.

Got it. Okay. Thank you. That's helpful. And I guess one more. Do you have any thoughts on vaccinations and I've heard some talk from DOD and beyond maybe mandating that for government employees or contractors. And I guess, do you see any potential risk that employees may not be able to access facilities or do work if they haven't been vaccinated?

Yes, Matt. What I can share is what we know as of now. The administration recently announced that everyone working in a federal facility will need to attest to their vaccination status. We're doing the same thing inside our company. We're requiring folks to attest to the same information—not so we can track individuals, but so that we can look at facilities and make certain we put the right protective measures in place. For people in government facilities and ours, using the CDC's measurement for community transmission, when it goes to more severe levels they have to wear a mask. In the government side, if they don't want to get the vaccine they're going to have to comply with COVID testing requirements, potentially twice a week, and also be subject to travel restrictions. So what we're going to watch, Matt, is how it impacts us—we have employees going overseas who are not vaccinated to perform work on behalf of the government. There are countries where they'll have to be in quarantine anywhere between five to ten days. And we'll have to figure out how we will work through that. The vaccine is a positive thing for all of us. But we also respect that every individual has different beliefs and will make different decisions. What we're asking people to do is be smart and if you're not willing to get vaccinated, please make sure that we're being respectful of other folks in the business. And let's just make sure that we're doing the right thing.

Understood. Okay. Thank you.

The next question comes from Tobey Sommer of Truist Securities. Please go ahead.

Hey. Good morning everyone.

Good morning Tobey.

First, some of your competitors cited some issues with award delays in the Intel community. Just hoping you could comment on your experience there and how did that impact your thinking around guidance?

I guess I'd answer that in a couple of ways. We had $3.6 billion of fourth quarter awards, $9.2 billion during a COVID year, and a trailing 12-month book-to-bill of 1.5. So the simple answer is no: we continue to see really good demand, a heavy pipeline of opportunities and award flow consistent with normal customer behavior. Now, keep in mind there are some customer behaviors that are typically slow, and in some customers we see a higher level of awards slipping to the right. With every customer set we have, we actually measure RFP day, proposal due day, and award day. There are some agencies that historically make award decisions later than what we've planned. In the past we used to put a 90-day window into our plan to make up for delays in awards. What we've seen over the last year was slower tasking, which we really attributed to COVID and people being out. But again this is something we've been discussing for a very long time. So I'll end with my simple answer which is no, we have not seen material delays affecting our guidance.

Thanks. That makes sense. And then, are you seeing any impact on timing from the chip shortage related to some of the product deliveries in your mission technology business?

I think we discussed during fiscal year 2021 and throughout COVID that the most impact was in our EVT business. We're pleased with that acquisition. They bring a lot of great high-value, differentiated technology. They have been working with our Next Century folks. But we have had supply chain issues and customer delivery delays. Build-of-material items have gone from a 12-week lead time to 24–26 weeks. We're working with our teams to make some bulk buys of previous long lead items. But customers have had delivery delays too because during COVID they were less available to receive items. We usually do final article testing with them and that has been harder to schedule. It's a global issue; we have a modest number of predictive actions happening during the year. All-in-all we're doing quite well navigating our way through it.

Okay. Appreciate the color. Thanks guys.

The next question comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning.

Good morning, David.

Tom, I just want to clarify on capital deployment. Have you assumed anything in the guide for capital deployment? Are you assuming you'll stay in excess your free cash flow generation using it to pay down debt?

Yes. That is what we have assumed. There is no new assumption with regards to acquisitions and/or other share repurchases. Obviously, the normal CapEx and internal R&D investments are there, but that is what we assumed.

Okay. And then working capital looks like it was a slight tailwind in 2021. What are you expecting from working capital movement in 2022?

As you point out we started the year with DSO at 57 days and ended at 54 days; that three-day reduction in DSO was around $45 million in increased operating cash flow. We are getting close to an asymptotic level in terms of DSO improvement. For the year, we're expecting a relatively modest improvement in working capital around $10 million. Typically growing companies need more working capital. We think we can offset that and maybe get another day out of DSO somewhere around those particular levels. But essentially flattish is probably a good way to look at it.

Okay. And do you have any exposure to this R&D amortization issue?

No. It's not the type of work that we do so that is not going to be material to us.

All right. Thanks very much.

Thanks David.

The next question comes from Scott Forbes of Jefferies. Please go ahead.

Hi. The normalized margin in 2021 was 10.7, you have 20 basis points of expansion in 2022. I guess what are the major moving pieces there around cost returns, maybe anything with COVID and then just generally technology versus expertise?

So the major driver of the margin expansion is the mix of our business. We're expecting gross margins to improve—gross margin being revenue less direct cost flows down the P&L. And some of that is driven by efficiencies on programs which I mentioned earlier in the call and a richer technology mix. Technology will be growing faster than expertise, and technologies are at higher margins, and so that is helpful. At the same time we should be driving some efficiencies in terms of indirect costs. Our indirect costs excluding fringe of medical expense and additional fringe on increased direct labor is growing around 1.5%. So we're doing a good job of maintaining efficiencies within the infrastructure. The shared service center in Oklahoma City which we spoke about in the past is helping to drive efficiencies. We've been employing RPA technology internally to focus on improvements. That all supports margin expansion.

Thank you.

The next question comes from Josh Sullivan of Benchmark Company. Please go ahead.

Hey, good morning.

Good morning.

How does agile focus from customers change the traditional contracting cycle? You've got record backlogs here. But just by the nature of agile posturing the environment continuously changes. Does that make IDIQ more competitive, recompetes easier or harder? Just curious how the agile focus and increasingly software-defined world changes the historical dynamics on backlog conversion or cycles?

So, when you think about agile—before agile the government would contract to have a system built and it would be more of a cost-plus or firm fixed price and it would come in as a single award. We're still working through the challenges of contracting for agile. By its nature, agile is fluid and that's tough coming from the contracting world. What we have done—and we'll use BEAGLE as the example—is BEAGLE was a one-time award. It's a single-award IDIQ, where taskings get put on to that vehicle. There are parts of it that are cost-plus; we want to make sure we have access to people because we're going to have many applications that need to be modified and pushed out to the field. Agile does a couple of things for us. One, it allows us to ebb and flow people on that program which allows us to do a much better job of managing costs. It also helps us do a much better cooperative job of managing costs with our customer. For example, we are delivering agile software development with about 300 people with incredibly low defect rates on a program that prior providers used over 500 people for with far greater defect rates. So, it allows us to deliver programs and agile applications at a lower price to our customer and a lower cost. If we do that, margins will be higher for us because we're taking on some of that risk. I don't see agile moving to multiple-award IDIQs broadly; I see them staying as either single-award vehicles or as program items, but customers want to buy what we're building in spirals. They want to build a little bit, test a little bit, try. You've got to have the right methodologies in place because at any time you could be deploying to the field. So every one of those spirals you have to have a complete solution you can put out there and then enhance it. Agile is material to how we are driving margin growth. It's very prevalent in both our enterprise and mission tech work. We'll all get better—both the government and industry—as we continue to make software development as agile as we can.

Thank you for all that detail. And just a question on your Iraq exposure. You detailed the Afghanistan exposure here, but just giving some commentary out of the Biden administration how should we be thinking about your exposure to that environment?

At least as of today we've watched the administration make the decision to exit Afghanistan and they are executing on that decision. I'm not willing to share which areas still have folks for safety reasons. But we have a lot of OCONUS presence outside of Afghanistan throughout the Middle East, Africa and Korea. Those missions are standing firm; there's no reductions in other areas. Some of those folks that were exiting Afghanistan were brought into other missions in other parts of the globe. That is fully baked in our FY 2022 plan. Specifically, the Afghanistan withdrawal does not impact Iraq or other locations. There's a lot of focus on missions in those locations that are broader than counterterrorism; we're talking about near peer threats and the like. The analytical services we provide are provided with a broader focus in other areas. So we're going to continue to leverage customer relationships and are embedded with customers doing important work around the globe where we can broaden our footprint and win new work.

Got it. Thank you for the time.

The next question comes from Louie DiPalma of William Blair. Please go ahead.

John, Tom and Dan, good morning.

Good morning.

John, can you provide more detail on the contract wins that you highlighted with the LGS Innovations photonics portfolio? And does CACI have exposure to both laser communications and laser products for directed energy/counter-drone effects?

A little about photonics: we have a nice portfolio, differentiated technology and intellectual property. LGS brought scale to those efforts and helped us invest where we wanted to next. Todd Probert and his mission tech team are doing an outstanding job. In space-based photonics it's all about size, weight and power. What differentiates our solution is the combination of laser modem technology we've developed and sophisticated software to control and point a tiny laser at extreme distances enabling assured digital communications. We've had sales to aerospace and defense primes and we're looking to expand that. These are large platform providers and that demonstrates trust in us to deliver. These are actual products, not drawings—items you can touch. As far as the size and where we go next, it's not large yet but it's growing, profitable, differentiated and highly relevant to commercial SATCOM providers and our intelligence and Air Force satellite folks. We have about a $1 billion pipeline. We're confident we're on our way to grow that further. Regarding directed energy and counter-UAS, our counter-UAS and our sky-tracker and CORIAN systems have been modified and set up to tip and cue different kinetic laser solutions. If we're not able to take a swarm of drones down using RF and other means, we do have partners integrating our CORIAN solution with kinetic effectors. So both laser communications and integrations for counter-drone effects are part of the portfolio and the roadmap.

Excellent. That was perfect. Thanks John.

The next question comes from Cai von Rumohr of Cowen. Please go ahead.

Yes. Thanks so much and good results. So, John, your book-to-bill of 2.2 is the best you've done in 20 years. So it's a huge number in a quarter where other people saw delays in Intel and administration changeover issues. Was any of that a pull-forward? Because normally your big booking quarter is the first quarter. So should we see a good, but not a great first quarter? Or could the first quarter be in line with your 17-year record or similar?

Cai, a couple of things. Awards are lumpy. The team did an outstanding job. How awards come in is a function of work we've done over the last one or two years—positioning, shot selection and not bidding work where we’re likely to finish second. The fourth quarter included our FSDE DTRA recompete; about 80%–85% of that was recompete work, but there was $300–$400 million of additional work because the mission continues to change. So there was no pull-forward or push-late. We have not seen massive delays in these awards. Customers have different award personalities, but we have many years of data on how they buy and we have not seen a systemic shift that would cause us to change the guidance.

Thank you. And then Tom, you mentioned the first quarter probably would be down sequentially a little bit more than the average of 1% to 3% and you mentioned a few drivers for the quarter. Is there a chance the quarter could be down year-over-year? And secondly, can you put that in the context of 4% growth for the year? Is this quarter one or two percent and then each quarter has better growth as we go through the year—how should we think about that?

It's unlikely that our first quarter will be down year-over-year. We're expecting modest organic growth in the first quarter. We've completed the month of July and are mid-August now; if we have modest organic growth in quarter one, in order to hit the 4% number mathematically we'll need some higher growth in subsequent quarters.

I was going to say, is that lumpy, because you mentioned Afghanistan. So the $120 million or so hit from Afghanistan is all in the first and second quarter. So do we get kind of a hockey stick in the second half?

Your observation is good. Afghanistan and southwest Asia work is disproportionate in the first quarter of the year.

I'd also add that when we have these start-low-then-grow patterns, I want to be clear that it's not due to difficulty in hiring. Demand for talent remains high and the environment is competitive, but that's consistent with past years. We've continued to strive to be the employer of choice, put programs in place that let people move within the company, enhanced our referral program, and have a strong intern class, over 300 folks in the last class. We continually work on this to make sure we have the right talent. That coupled with going after more technology work, where we get to decide the kind of talent needed and timing, reduces hiring as a limiting factor. I just wanted to make sure that wasn't in anybody's calculus around getting the 4% growth.

Terrific. Thanks and great job.

Thanks so much, Cai.

This concludes our question and answer session. I would like to turn the conference back over to John Mengucci for any closing remarks.

Well thanks Andrea, and thank you for your help on today's call. We'd like to thank everyone who dialed in or listened to the webcast for their participation. We know that many of you will have follow-on questions. Tom Mutryn, Dan Leckburg and George Price are available after today's call. Please stay healthy and all our best to you and your families. This concludes our call. Thank you and have a very good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.