Caci International Inc /De/ Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for joining us. Welcome to the CACI International Fiscal 2022 Second Quarter Results. This call is being recorded and currently, all lines are set to listen-only mode. We will provide an opportunity for questions later and instructions will be shared at that time. Now, I would like to hand the call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please, go ahead.

Thanks, Andrea, and good morning, everyone. I'm Dan Leckburg, Senior Vice President of Investor Relations for CACI. Thank you for joining us this morning. We are providing presentation slides so let's move to slide number two please. There will be statements in this call that do not address historical 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 three please. To open our discussion this morning, I'll turn the call over to 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 second quarter 2022 results. With me this morning is Tom Mutryn, our Chief Financial Officer. Slide four please. Our second quarter results represent solid financial performance, though candidly were slightly below our expectations. Organic growth was about 1%, reflecting some near-term dynamics we saw develop during the quarter, which I'll speak to shortly. Technology growth of 9% continues to be strong and profitability was healthy, with adjusted EBITDA margins of 10.6%. We generated a robust cash flow and we won $2 billion of contract awards, representing a book-to-bill of 1.3 times for the quarter and 1.6 times on a trailing 12-month basis. Slide five please. That said, we did see some headwinds develop as the second quarter progressed and I categorize these dynamics in a few ways. First, in the last few months we began to see an unprecedented increase in COVID cases. Many customers responded by stopping in-person meetings and reducing the number of people allowed inside their facilities. This has limited customer engagement and in some cases slowed the ramp-up of new work. Second, customer access and bandwidth, which was already a challenge, has been exacerbated by the increase in COVID cases. To be clear, this has not materially impacted RFPs and contract awards demonstrated by another strong quarter of awards. Rather, it is a slower pace of the underlying contracting and tasking activity required to ramp deliver and recognize our associated revenue. In particular, we're seeing this in some of our technology sales that rely on close customer interaction. Again, it's not a demand issue. This is all about customer capacity and access. The supply chain also remains a challenge. While we ordered ahead of need where we could, availability of key components is still tough. Again, this is not a demand issue. Factoring these dynamics into our outlook for the second half, we are modestly reducing our expectations for organic growth and EBITDA margin for fiscal year 2022, and Tom will provide more details shortly. It's important to note that we view these recent dynamics as short term. They do not change our customers' critical needs or the challenges arising from the heightened global threat environment. The simple reality is, we have a healthy and robust addressable market, with plenty of opportunities to continue winning business, growing organically, expanding margins, deploying capital for additional value and growing free cash flow per share to drive long-term shareholder value, all of which we are delivering on today. Slide six please. In addition to strong overall contract awards, Q2 was another quarter with healthy classified awards and nearly $600 million. This demonstrates continued leadership in our sweet spots of cyber, electromagnetic spectrum, and software-defined technologies. As an example, we won new work from an intelligence customer leveraging the capabilities and customer relationships of LGS and Next Century providing another great example of how our strategic M&A positions CACI to win new high-value work and take market share. Other classified awards this quarter include a multi-hundred million dollar sole-source renewal, several new business wins, and expansions of existing work. We also continue to see good demand signals for broad network and digital applications modernization. The pandemic has accelerated this need, including requirements for secure remote work capabilities and cloud migration. And with expanded access, additional cybersecurity requirements are a necessity. We are demonstrating to customers that modernization is not only achievable but also yields significant benefits. In addition, we are seeing a new generation of government leaders that expect and understand the benefits of modern technology. Recent examples include our $514 million award to modernize network infrastructure for the Army, and new and expanded work for DHS including CISA. Let’s turn to slide 7, please. With our strong cash flow and overall financial strength, we continue to have flexibility and optionality to deploy capital to drive long-term value for our shareholders. As we have discussed, our focus is on driving growth or free cash flow per share. In addition to organic growth and margin expansion, we generate this through share repurchases like our $500 million ASR last year and over the longer term through our organic investments and strategic M&A. On the M&A front, we acquired two additional technology companies during the second quarter, both of which enhance CACI's long-term growth prospects and address technology demands in the near and long-term. First, we acquired SA Photonics, a leader in the development and deployment of multi-domain Photonics technologies for free-space optical communications or laser communications. As we have previously discussed, Photonics is already an area of internal investment that is producing compelling results, including awards from NASA, multiple private contractors, and classified customers. We see significant long-term growth potential for Advanced Photonics Technology driven by the increasing adoption of Low Earth Orbit or LEO satellite constellations as well as the demand for faster and more secured communications capabilities. SA Photonics complements our existing Photonics business in several ways. They expand our capabilities by adding laser communications for airborne and maritime platforms. They add additional manufacturing capacity and they expand our customer and contract footprint. The combination of SA Photonics and CACI's existing business creates the leading US-based provider of Photonics technology. And second, we announced the recent acquisition of ID Technologies or IDT. IDT started as a value-added reseller and several years ago recognized a growing need for secure remote access by DoD and intelligence community customers. To fulfill this requirement, they invested internally and developed a software-enabled offering that allows out-of-the-box commercial devices to securely access classified networks. IDT's software-enabled end-user devices coupled with CACI's network modernization capabilities and contracts provide long-term growth and margin expansion opportunities. To the employees of SA Photonics and ID Technologies, I welcome you again to CACI and look forward to the successes we'll achieve together. Before I turn it over to Tom, our long-term market trends remain positive. We continue to see bipartisan support for national security spending and investments, and CACI's capabilities are very well aligned with our government's focus on broad modernization, and national security challenges, which depend on technology, speed and flexibility to deal with both great power competition and counter-terrorism. We will continue to execute our strategy that focuses on well-funded priorities with plenty of opportunities for CACI to drive consistent long-term growth, margin expansion, free cash flow per share, and shareholder value. With that, I'll turn it over to Tom.

Thank you, John, and good morning, everyone. Please turn to slide number 8. We generated revenue of $1.5 billion in the second quarter, representing 1.2% growth with around 1% organic growth. This included strong growth in technology revenue, which grew around 9% from a year ago. This was partially offset by lower expertise revenue primarily reflecting the impact of the Afghanistan withdrawal. Second quarter adjusted EBITDA margin was 10.6% and adjusted diluted earnings per share was $4.39, both down from last year given last year's benefit from higher profitability due to favorable fixed price contract performance and lower indirect costs under COVID. Slide 9 please. Second quarter free cash flow was $117 million excluding our accounts receivable purchase facility. Adjusting for the cash impact of the Cares Act, free cash flow was up $11 million or 7% from last year. This reflects healthy profitability and continued efficient cash collections. We closed the second quarter with net debt to trailing 12-month adjusted EBITDA at 3.1x after our two new acquisitions. As we've demonstrated in the past, our strong cash flow allows us to quickly delever, creating flexibility and optionality as we consider all capital deployment opportunities. In addition, during the second quarter, we extended the term of our credit facility to 2026, secured more favorable pricing, and improved other terms. We increased the size of the facility by $900 million and currently have over $1.1 billion of available capacity. Slide 10 please. As John mentioned, we acquired two companies during the second quarter. We invested a total of $500 million for these two businesses. For fiscal year '22, we expect SA Photonics to contribute around $25 million of revenue and IDT to contribute $95 million for a total of $120 million. These acquisitions are expected to be accretive to adjusted earnings per share over the next 12 months. Both businesses are in the early stages of their respective growth curves, and we are investing to position themselves to capture significant opportunities. This is consistent with our strategy to invest ahead of customer need and will position CACI to capture additional share in high-value, high-priority areas of our addressable market. Slide 11 please. We are raising our fiscal year 2022 guidance to reflect the two acquisitions as well as the near-term impact John discussed, which are expected to persist in the second half. We now expect revenue to be between $6.3 billion and $6.4 billion, with total revenue growth of 5% and an organic growth of around 2.5% at the midpoint of guidance. We expect our full-year EBITDA margin to be around 10.7% at the midpoint reflecting delays in the sales of some higher-margin technology and the investments being made by our two most recent acquisitions. As noted, SA Photonics and IDT are currently making investments to support future growth and these investments reduce our expected fiscal year '22 EBITDA margins by around 10 basis points. Accounting for these investments, our expected margins would have been 10.8% above last year even with the headwinds we already mentioned. For modeling purposes, we now expect fiscal year '22 depreciation and amortization to be around $142 million. We expect our fully diluted share count to be $23.7 million. Our other assumptions remain materially unchanged including free cash flow of at least $720 million. It's worth noting we have already realized $190 million of the expected $230 million cash benefit from the 2021 method change, virtually all of which was subsequent to the second quarter. Lastly, we are on track to deliver strong free cash flow per share. Our historical and expected free cash flow per share performance reflects growth margin expansion in the recent ASR which reduced share counts by close to two million shares. Slide 12 please. Turning to our forward indicators, we expect 92% of our fiscal '22 revenue to come from existing programs, 4% from recompetes, and around 3% from new business. We have $7 billion of submitted bids under evaluation, with around 80% of that for new business to CACI, and we expect to submit another $16.7 billion over the next two quarters with over 80% of that for new business to CACI. And with that, I'll turn the call back over to John.

Thank you, Tom. Let's go to Slide 13. CACI continues to deliver strong organic growth, strong profitability, and robust cash flow. The recent resurgence of COVID has created some near-term challenges, but these dynamics do not change our significant longer-term growth opportunities. We purposely aligned our business with critical national security and broad modernization priorities, and are executing our strategy of investing ahead of customer need both organically and inorganically and differentiated technologies. These capabilities continue to enable CACI to win new work in the marketplace and bring value to our customers. They also underpin our commitment to deliver growth ahead of our addressable market, margin expansion, robust cash flow, and ultimately free cash flow per share growth with the goal to drive long-term shareholder value. Finally, to our diverse and talented people, I'm immensely proud of you and your commitment to our customers, our shareholders, and each other every single day. Your dedication, talent, good character, and spirit of innovation is truly foundational to our success. With that Andrea, let's open the call for questions.

We will now begin the question-and-answer session. Our first question will come from Tobey Sommer of Truist. Please go ahead.

Thank you very much. Your bid activity on new work to CACI is impressive. How do bids look if you dig into it in that category and look at it from a perspective of takeaways or programs that are out there, but would be new to the company versus sort of new work? Thanks.

Yes. So, Tobey, this is Tom. So the majority of that is our takeaway from existing customers. As you know, the average cycle is either three or five years. And so we are kind of going after other people's incumbency. They're going after our incumbency. We do a good job of winning our recompetes typically over 90% on an annualized basis. And then as we get into new areas electronic warfare or cyber, there are some new work done. John?

Yes. Tobey also if you look at the acquisitions that we discussed today, that is a great example of new, new work, right? With this burgeoning space market with the billions of additional dollars that are going to be spent to provide more protected and secure comms at much higher bandwidth. Those are all new, new programs, right? As you look at where SDA is going with their Tranche 0 and their Tranche 1 as you look at the intelligence community building out CSFC solutions, which is the technology focus area that we have with IDT, both those areas are all going to be new, new work. So we'll be in the thick of that and frankly lengthy capabilities and those two acquisitions that we'll be coming to market with.

Thank you. And my follow-up question has to do with the continuing resolution. Could you discuss how the market and customers are responding to this CR versus recent experiences? And I know we have a lot of them in the last decade or so. And as well as comment on what your sort of house view is on when and if we get a budget as well as whether your assumption and guidance is for CR to extend for the rest of your fiscal year? Thanks.

Yes, Tobey, terrific question. Look, yes, we have probably been under a CR for one to 365 days. I don't know maybe it's the last 30 to 35 years less a couple. So, it's true. And as we mentioned during our guidance call, we've got a lot of experience operating under a CR. But what's different about this one is, it's a CR with the resurgence of COVID, with priorities in the middle of changing, with customers who have 25% of their buildings full, with contracting officers who are not in their office because of those warnings and because of COVID. It sort of makes it a little different one. What we've seen is during the traditional CR at the very basic building blocks, customers get one part of their funding each month just to make it simple and that's based on last year's budget. We are seeing people struggling with getting funding orders out. And as Tom mentioned during his earlier remarks, that's predominantly what's creating this short-term headwind for us, is not getting funding out there for the multiple of task orders that we need to continue to drive revenue in this business. It doesn't mean that that revenue is lost. It just means that it's somewhat disrupted by that. So back on the fuller view of the CR, we've put a guidance out there that is less about where the CR goes but more about when things return to a more normal situation. At the low end, we would be looking at COVID continues to wreak havoc, buildings stay at 25% filled, and funding orders continue at a slow pace or get worse. On the higher end, CR is cleared, funding shows back up, people start turning in full style, and we're able to get task orders sooner to after we win something versus longer term. So thank you for those questions, Tobey.

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

Hi, thanks for the question. Good morning. Can you talk about just hiring headcount trend? It looks like your headcount based on the number in the release was down a little bit even though you've closed on some deals. Or was there increased turnover that you saw at all, or is there any comments you could give around headcount?

Yeah. Sure, Matt. Thanks. Look hiring we've been talking about this for quite some time. The demand for talent is going to continue to remain high. It remains competitive and challenging. But again, as I've mentioned that's really been no different than it has been over the past several years. And when we look at STEM and we look at engineering software graduates and the like, we put a number of programs in place as I talked about last quarter. We continue to expand our internship program and we continue to invest ahead of need even internally where we've invested in locations across the country with the technology infrastructure, so we could better support an even broader dispersed workforce. And of course, the true test of that was when we entered into COVID. We have many of our own employees working from very remote locations. We continue to recruit from within. We continue to provide professional development skills and flexibility. We've enhanced our benefits numerous times. But at the end of the day what we're doing is not by accident. It's been a long-term focus of ours that the absolute value of our employees as we moved more into the technology realm that it became much more pressing on us to make certain that we had the right fungible workforce so we can move from project to project. The other thing that we've done that has worked out extremely well is coming into fiscal year 2022, knowing some of the headwinds but clearly not all of them, we expanded our bonus program to include an additional 500 folks in our overall bonus program and added 250 people to our long-term stock incentive plan. And that has been a great addition to what we're doing across this company. Net-net talent is very, very tough to find. But the portfolio that we have also changes some of our hiring numbers. Let me just spend a minute on that as well. The more we move towards technology solutions and the more we offer less expertise that expertise world is hiring person for person, the government asks for x number of people we have to hire x number of people. On the technology side we get to make the choice as to how we want to deploy people. And as we go more towards higher-margin cost-plus and firm fixed price development work, the higher level of talent that we bring in the more cost effective we're able to be and actually the less people we need to hire because we're not filling billets, we're actually hiring talent around the technology work that we're going after.

Great. That's really helpful. And then, I guess as a follow-up, could you talk about how you're thinking about the mix of M&A versus repurchase at this point? I mean, your stock is really cheap. What are you seeing for valuations in the M&A market? And how do you think about that balance?

Yeah. Look, it's probably the most asked question and something frankly that Tom and I and others in the Board spend a lot of time on and that's capital deployment and some of those trade-offs. I'm very proud to continue to say that our type of deployment strategy is going to be opportunistic and flexible and remains the key word. We've done a lot of internal investments between IRAD and customer recoverable R&D bid a proposal. We're investing ahead of need around $100 million a year today and that continues to grow. In the past year, you've seen us execute a $500 million ASR and make four acquisitions in the first two quarters of this year. M&A remains an important use of our own capital, but it's not the only one. And our $500 million ASR last year was a great example. And what were the terms that we looked at? Stock valuation was very attractive relative to our performance. The M&A pipeline was not robust near-term. So we did the ASR. We are actually living what we talked about which is an opportunistic and flexible model that does look at share repurchases and M&A and a number of other investments.

Yeah. Let me add. I'll cut in that. So with the four acquisitions John mentioned plus the ASR, we deployed around $1.1 billion of capital, approximately 50% share repurchase, 50% technology acquisitions filling gaps. With that kind of leverage at 3.1 times still a very comfortable kind of in our minds modest level of leverage. I mentioned that we received some sizable tax refunds since January 1. With those additional tax refunds which we were expecting, came a little bit earlier than we anticipated, we're probably leveraged at 2.8 times today. So a lot of flexibility to deploy capital appropriately using the criteria John articulated.

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

Hey, good morning.

Good morning, Gavin.

Following up maybe just a little bit on Tobey's timing question. I mean, are the revenue headwinds you've talked about improving? Guide still implies revenue accelerates through the rest of the year. And then into next year you don't have the Afghanistan headwind and hopefully, these headwinds don't exist either. So I mean, are we past the worst of it, or is it still kind of hard to tell?

Yeah. Gavin, thanks. Look as Tom mentioned, FY 2022 on the organic side, revenue growth will be around 2.5%. Excluding Afghanistan that would be around 4.5% organic and around 7% overall. We're not giving quarterly guidance, but to answer yours, we see sequential improvement as we go into Q3 and into Q4. The headwinds in Q3 are also offset a bit by more new work ramping up. On the EBITDA margin side, I know you didn't ask that Gavin, we're looking at 10.7% and that's going to track along with revenue growth. What I'd also like to share with you on these headwinds. Look we've updated our expectations. They're our best estimate for the remainder of this fiscal year. As you all know we do a bottoms-up program by program build. We're very confident in our view going forward. We have considered COVID trends, contracting officer shortages, supply chain challenges, spending hesitancy under this current CR as I mentioned earlier. But what I want to make certain is important for all of our listeners and our investors is to really separate the signal from the noise. The noise is short-term dynamics created largely by COVID. The noise is temporary. The signal remains a long-term opportunity for CACI and those trends are on our side. You all know we have a large and growing addressable market. We have strong awards and a growing backlog and we're investing in and aligned to spending in many of the technology priorities of our customer set. So, those factors and where we see revenue going throughout the year sets us up well for 2023.

Yes. And Gavin, I'll add a little bit. We're guiding to organic growth of 2.5% at the midpoint. The first half of the year was 1.5%. So, mathematically 3.5% in the back half. Some of that was driven by easier comps in the back half. Afghanistan headwinds and so we're going to kind of anniversary that so that will make it easier. And we did lose a relatively large end-of-life expertise program last year, and that year-over-year comparison is easier in the back half than in the first half. And so we feel pretty good about hitting the higher revenues in the back half due to those more singular events.

Okay, that's really helpful. I appreciate all that detail. Maybe just on M&A, I think it's clear these acquisitions are doubling down on the technology strategy. But I think traditionally you bought margin-accretive businesses. I mean is there a change in strategy here, or can you help us with some of the growth rates or longer-term margin opportunities of these businesses? And is it just the opportunity is so good here longer-term that it's worth making that investment?

Thank you for that question, Gavin. I appreciate your insights. We enjoy discussing the companies we incorporate into the CACI family as they enhance our customer relationships and our capabilities. From a broader perspective, SA Photonics and ID Tech are early-stage investments. We are investing in them ahead of demand. While they may reduce our EBITDA margins this year, they contribute positively to our EPS. Both companies have strong internal rates of return, consistent with our historical acquisition strategy. To elaborate on SA Photonics, they are a leading provider of multi-domain Photonics technology, which we announced a few weeks ago. As I mentioned in my prepared remarks, they enhance our Low Earth Orbit capabilities and provide laser communications for airborne and maritime platforms. Although the specific requirements are still being defined, discussions have begun due to the increasing need for data transmission as the defense department develops its Joint All-Domain Command and Control (JADC2) system. They also expand our manufacturing capacity and our customer base. SA Photonics is an early player in a growing market with significant potential for growth. We’ve noted the increase in spending on space initiatives, particularly by the Space Force and the intelligence community, which emphasizes the importance of our leadership in this area to sensitive customers who need secure data solutions. Regarding ID Tech, they began as a Value-Added Reseller (VAR) and have made significant R&D investments. We plan to continue investing in them as they complement our network operations. Their army program aims to modernize several army networks to handle classified information more effectively, while also meeting the National Security Agency's requirements for Commercial Solutions for Classified (CSFC). This requires a combination of commercial devices with software to protect data. To optimize costs and improve our offerings, we intend to leverage their VAR insights across our business. This project is worth $200 million, translating to around $95 million for six months of revenue. When you think about the deal, consider two aspects: a reasonable valuation for the CSFC capabilities—estimated in the mid-teens EBITDA—and a lower valuation for their legacy business, likely in the mid-single digits. We plan to continue investing throughout this year and into FY 2023 to ensure both CSFC capabilities are fully funded. We are confident that we are positioned well within the optical communications market for 2023 and 2024. Our commitment to investment remains strong, regardless of short-term financial targets, as we anticipate significant growth in optical communications. We believe we are the largest and best-positioned supplier of these technologies in the U.S. Thus, we will keep investing, and we expect our EBITDA margins to reach 11% or higher in the coming years, driving long-term growth for the company.

The next question comes from Colin Canfield of Barclays. Please go ahead.

Hey. Good morning guys. Just following up on that margin comment there, can you just talk us through the mechanics of how the government customers are pricing and wage inflation for fixed-price contracts? And kind of how those pricing resets or how that cost reimbursement or however you want to think about pricing those contracts in flows through over a multiyear period?

Thank you, Colin. Let me address wage inflation first and then we can discuss margins. Over the last few quarters, we have emphasized that investing in top talent, specialized technological skills, and necessary clearances is not new for us, and we are pleased to make those investments. Our growing technology initiatives allow us to be more efficient and flexible in our hiring practices. Therefore, revenue does not directly correlate with headcount. We have multiple strategies to manage wage costs. Currently, 60% of our revenue is cost-plus, meaning all our expenses are passed on to our customers. Our clients expect us to recruit the best talent, especially those who are adept in technology and committed to long-term careers in national security. Consequently, all these expenses will continue to be absorbed by our customer base, just as in the past. For fixed-price contracts, the costs are integrated into how we manage our operations. We believe our internship program enables us to attract top talent. For example, a project that traditionally took 45 hours to complete may now only require 35 hours due to the skilled individuals we are hiring. This benefits both the government and our margins, as it allows us to deliver increased capabilities more quickly, enabling them to acquire even more services from us. On the indirect side, we established our shared service center well before considering wage inflation, recognizing that wage dynamics in the Washington D.C. and Virginia area differ significantly from those in the West, which informed our investment decisions.

Yeah. And in terms of kind of overall kind of indirect expense in the quarter we were up around kind of 2% on a year-over-year basis with comparable revenue growth, absorbing kind of our annual merit increases which we give to our employees and absorbing some higher one-time expenses in the quarter associated with some acquisitions and kind of refinancing the debt as well. So despite those cost pressures we're able to drive efficiencies across the enterprise and actually realize in our minds kind of very efficient cost controls. And so that is productive as well for us.

Got it. And a follow-up on strategy, within the context of some of the recent competitions that CACI has been involved in, can you discuss the extent that DoD is splitting out software versus hardware bids? And how is that affecting the ramp of your growth?

Thank you, Colin. While I wouldn't say there's a significant separation between software and hardware bids at this time, we are observing some customers purchasing software in a much different way. For example, with our BEAGLE contract with Customs and Border, which involves hundreds of digital applications that they use regularly, they are seeking productivity improvements. They want to achieve more enhancements for the same budget. We've been making strides in this direction for around four to five years by adopting Agile software development and establishing multiple Agile software factories to meet this demand. The approach to software delivery has changed, and customers now have specific app modification needs, focusing on the costs associated with those modifications. This is reflected in the BEAGLE contract. Additionally, on the technology side, particularly for mission-critical tech, there's a shift toward software-based devices. Customers are looking for solutions that allow them to avoid purchasing numerous new devices when threats evolve. A relevant example is the iPhone, which has seen numerous software updates compared to the limited hardware versions. This concept can be applied to handheld and fixed site devices. When missions change, the requirement is often just a software upgrade rather than extensive hardware modifications. For a company like ours, we don't need a large number of customers to make this shift annually to foster both top-line and bottom-line growth.

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

Good morning, gentlemen.

Good morning, Mariana.

So my question is last week a US Court of Federal Claims found CACI ineligible to bid on an almost $800 million Army contract for an encryption device because of conflict of interest with some systems engineering work we do with the US Army. We know these type of conflicts were the ones that drive the services spin-off from the price at the beginning, right? But would you mind discussing how you plan to navigate or mitigate this overlap as you grow your technology offerings?

Hey, Mariana, I'm sorry, this is Dan. You're breaking up a little bit in your question. And I'm not sure if it's just the connection we have. If you don't mind just give us a quick summary of that question one more time.

Of course. Can you hear me better now?

Yes, it's better. Thank you.

So last week, the US Court of Federal Claims found CACI ineligible to bid on an $800 million contract for the Army for an encryption device because they found conflict of interest with some systems engineering work you do with the US Army. As you grow your technology offerings, how do you plan to mitigate this type of overlaps in the bidding?

Mariana, thanks. Okay. So what you're talking about is a recently awarded Army contract, which is still in an open protest window. So I don't want to talk specifically about that award and where we stand there. But the more broad question. We are extremely, extremely careful to make certain that we are not involved in any of the requirements processes as to how the army and any other agency for that matter is going to procure new equipment. So we don't have things like OCI and the like sort of catching us. Clearly, we wouldn't spend the dollars that we're spending in investing ahead of customer need and submitting proposals if we ever believe we have that issue. We've been very careful. In fact, we've got 100% track record of making certain that as we turn the knob down on some expertise business or in some parts of our expertise business we used to do a lot of assisting customer work. We're no longer doing that work. So, we're very, very careful. We have processes across this company to make certain that as parts of our business that are looking to bid expertise work we will not bid on that in favor of bidding on the technology work because that's right in line with the strategy for us to continue to grow CACI both top and bottom-line.

All right. Perfect. Thank you for the color. And then probably as a follow-up what makes you confident that these headwinds are short-term? The ones related to customer behaviors or capacity? And this is more like a new normal. How CACI or your customers could adapt to support this robust demand that you mentioned and actually convert it to contracts under the current operational restrictions.

Yes, Mariana, I’ll address that. We are facing a unique set of challenges, including the resurgence of the COVID Omicron variant, supply chain disruptions, changes in people's mindsets, and a reduced workforce in government. These are unusual circumstances that everyone acknowledges. It is reasonable to expect a return to a more normal level as people adjust to these changes. The demand is present, and government customers will eventually adapt, allowing us to continue contracting for the services and goods necessary to fulfill essential missions. I believe it’s logical to anticipate a return to a more normal situation. When we prepared our guidance earlier this year, we anticipated things returning to a more normalized state, but this resurgence was unforeseen. Thus, I think it’s a sensible perspective to view the overall situation.

And our next question will come from Scott Forbes of Jefferies. Please go ahead.

Hi. Good morning.

Good morning.

Just a follow-up on capital deployment. Tom, you mentioned you're at essentially 2.8 times leverage following the tax refunds, 3.1 times at the end of the quarter. How are you viewing capacity and the appetite for further deals from here?

Essentially the way we've always kind of viewed acquisitions we start with the strategy. Here is where we believe the demand signals are here is we want to go in the long-term and let's look for acquisitions to fill in gaps. They could be customer gaps. They could be technology gaps. They could be geographic gaps. And let's find companies with this right cultural fit, the right growth prospects at the right price to fill in those. And so we continue to look for opportunities. Those are somewhat episodic. The organization doesn't necessarily like to do two or three simultaneously. It puts stresses on the organization. But when they become available we need to act and we have the capability to act, kind of very choppy but that desire to drive long-term value kind of long-term increases in free cash flow per share in the long-term sustainable businesses can ever present. Yeah. So thank you. Yeah, as you know this impacts CACI in fiscal 2023 kind of based on the tax legislation. And at the end of the day, it will have no impact on our GAAP earnings and earnings per share. And as you note, if the legislation is not altered, it will have an impact on cash in the short run. We're in the stages of determining what that is and we'll be ready to disclose that as we get closer to releasing FY 2023 guidance. But make no mistake it will have an impact on the short-term cash. And I think it's worthwhile recognizing that, this simply is a timing issue. The tax benefits we will ultimately get instead of instantly maybe over five years, but in the long run the cash flow will be exactly the same.

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

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-up questions. Tom Mutryn, Dan Leckburg, and George Price are available after today's call. Stay healthy and all my best to you and your families. This concludes our call. Thank you and have a great day.

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