Caci International Inc (CACI) Q3 2022 Earnings Call Transcript

Thank you all for joining us. Welcome to the CACI International Fiscal 2022 Third Quarter Results. This call is being recorded. I will now hand it over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please proceed, Dan.

Well, thanks, Seth, and good morning, everyone. I’m Dan Leckburg, Senior Vice President 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 #2. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to 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 also point out our presentation this morning will include a 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. With that out of the way, let’s turn to Slide #3, please. To open our discussion this morning, I’ll turn the call over to John Mengucci, President and Chief Executive Officer of CACI. John, over to you.

Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our third quarter 2022 results. With me this morning is Tom Mutryn, our Chief Financial Officer. Slide 4, please. Let’s start off with our third quarter financial highlights. We grew revenue by 2%. Profitability was healthy with an adjusted EBITDA margin of 10.2%, and we generated robust free cash flow of nearly $300 million. We also continue to win new and recompete work with $1.2 billion of contract awards, $568 million of those classified, representing a book-to-bill of 1.5x on a trailing 12-month basis. Our results reflect the short-term headwinds we discussed last quarter, albeit a bit more than expected with funding delays being the key driver. Slide 5, please. While market trends remain positive in the medium and long term, the short-term headwinds I discussed last quarter still exist, including slower issuance of task orders, supply chain challenges, delayed funding, and restricted customer and facility access due to COVID. What changed during our third quarter is the process of getting funding on contracts has been much slower than in past years. In fact, our third quarter funding orders are down over $300 million or 20% compared to the same quarter last year. As a result, we are reducing our outlook for fiscal year 2022, which Tom will discuss in more detail shortly. Slide 6, please. Looking past these short-term funding issues, we have a large and growing addressable market, and the budget environment is even more constructive today than in the recent past. For example, we see increased spending across Defense, where we have a robust footprint, the intelligence community, where approximately 30% of our revenue is generated, and important non-DoD customers like DHS, where we provide cyber and applications development. From a capability perspective, we see increased spending in IT modernization across the federal government, the space domain, including photonics and space situation awareness, and continued strong spending across the electromagnetic spectrum, including SIGINT, EW, and cyber. Slide 7, please. With those spending priorities as a backdrop, I’ll cover recent investments we have made in IT modernization and space. First, on the IT modernization side, we continue to invest in Commercial Solutions for Classified, or CSFC. You’ve heard us talk before about our subscription-based Software as a Service SteelBox application for secure communications. We continue to invest in new capabilities and are seeing successes with recent deployments within the intelligence community. And our recent acquisition of ID Technologies expands our portfolio of software-based CSFC for classified networks. Combining these CSFC offerings with our existing network modernization capabilities provides a compelling end-to-end solution to capture increased spending and IT modernization. Second, we continue to invest in the increasingly important space domain. SA Photonics in partnership with DARPA and SDA recently demonstrated the connection of an optical link and data transfer between satellites in orbit. This success is an important step in establishing space-based communications to transmit greater amounts of data in a more secure modality. We also recently completed an important milestone for two mission payloads that will launch into lower earth orbit early next year. These upgradable software-defined payloads will demonstrate APNT as an alternative to GPS and tactical ISR from space. These space payloads are great examples of taking exquisite terrestrial capabilities and investing internally to deploy them in space. Slide 8, please. The bottom line is, our business is performing well on the things under our control. We are delivering with quality, winning new business, driving profitability, generating robust cash flow, investing ahead of need in relevant and differentiated technology, hiring great talent, and being recognized in several surveys by our employees as a Great Place to Work. Before I turn things over to Tom, I want to make it clear that our business is performing well and long-term prospects are positive. While we are still going through our FY ‘23 planning process, our preliminary assessment indicates healthy organic growth, profitability, and cash flow. We have the capabilities, the contracts, a robust backlog and a track record of winning business to continually deliver shareholder value next year and beyond. With that, I’ll turn the call over to Tom.

Thank you, John, and good morning, everyone. I’m still on Slide #8. Let me start off by providing some additional color around FY ‘23. As our customers begin to execute on what is a fully appropriated budget and get funds on contract to meet critical needs, we expect funding to revert to more normal levels in early FY ‘23. As is our practice, our fiscal year plan and guidance is based on a program-by-program bottoms-up process. This activity is well underway and has provided enough insight for us to be confident that we will be able to generate healthier organic growth, profitability, and cash flow in FY ‘23. We will provide formal FY ‘23 guidance with full details in mid-August. With that, I’ll turn to our third quarter results and FY ‘22 outlook. Please turn to Slide #9. We generated revenue of $1.6 billion in the quarter, representing 2.1% growth with organic revenue down approximately 2%. Third quarter adjusted EBITDA margin was 10.2%, below our expectations due primarily to fewer high-margin mission technology sales as a result of the funding issues we spoke of. Our 17.9% tax rate benefited from increased R&D tax credits of approximately $9 million related to FY ‘20 through FY ‘22, which we recognized this quarter. Slide 10. CACI continues to generate strong cash flow and free cash flow per share. Third quarter cash flow from operations, excluding our accounts receivable purchase facility, was $314 million, and free cash flow was $297 million. This includes $160 million of tax refunds related to the FY ‘21 tax selection we have previously discussed. Excluding the tax benefits, free cash flow for the quarter increased by 26% from a year ago. Our continued focus on working capital management drove DSO to 51 days, demonstrating the consistent and efficient performance of our business. We closed the third quarter with net debt to trailing 12-month adjusted EBITDA at 2.8x. Together with our recently expanded credit facility and continued access to capital, we have flexibility and optionality as we consider all capital deployment opportunities. Slide 11, please. We are updating our fiscal year ‘22 guidance to reflect the short-term funding headwinds, which impact both our third and fourth quarters. When we reported results last quarter, we anticipated that 3% of our revenue would come from new business. A good portion of that was related to material and technology revenue, which did not materialize due to funding issues. While we now have a full year appropriated budget, it is unlikely that funds will be received soon enough to enable us to deliver and recognize any associated revenue by the end of our fiscal year. For fiscal year ‘22, we expect revenue to be between $6.2 billion and $6.25 billion with total revenue growth of 3% on an organic revenue growth of around 1% at the midpoint. Adjusted EBITDA margin to be around 10.5% at the midpoint, reflecting the delays in funding associated with higher-margin technology. CapEx of about $80 million in an effective tax rate for approximately 42%. We are maintaining our free cash flow guidance of at least $720 million, and our other assumptions remain materially unchanged. Year-to-date, we have realized $190 million is expected $230 million cash tax benefit from the 2021 method change. We anticipate the remaining $40 million to occur in the fourth quarter, but the timing of the tax refund is dependent upon the IRS. Slide 12, please. Turning to our forward indicators. We now expect virtually all of our FY ‘22 programs. We have $10 billion of submitted business under evaluation with around 90% of that for new business to CACI. And we plan to submit another $20 billion over the next two quarters with about 90% being new business. And with that, I’ll turn the call back over to John.

Thank you, Tom. Let’s go to Slide 13. Before we transition to Q&A, I want to leave you with a few important takeaways. The short-term funding headwinds are just that. They’re short term, and they do not change our large addressable market nor positive demand signals. We continue to see bipartisan support for national security and modernization, and CACI is well aligned to these key spending priorities. Near-peer adversaries continue to develop capabilities that we will need to counter, regional tensions remain, and counter terrorism requirements have not gone away. Domains like cyber, space, and the electromagnetic spectrum are increasingly important, and broad-based modernization across the federal government is essential. To our 22,000 talented employees, thank you for everything you do in service to our customers and our nation each and every day. Your dedication, your talent, your good character, and your spirit of innovation are truly foundational to our success. With that, Seth, let’s open the call for questions.

The first question today comes from Gavin Parsons from Goldman Sachs.

John, you mentioned the constructive budget environment FY ‘22 was plus ‘23 as growth across the board. We actually have a fit up. How does that translate back to the level of confidence spending at your customers? What does it take for them to get comfortable in actually spending at these higher levels?

Yes. Gavin, thanks. As we mentioned in our prepared remarks, it really comes down to the issuance of funding. The way our third quarter played out, it’s not that the government didn’t have that funding; it was getting those funding orders out. So bottom line up front, we are very confident about things going forward. From a big picture and from a budget standpoint, I think the FY ‘22 budget and the planned FY ‘23 budget have further proved that the world is a really dangerous place, and I believe that Ukraine was a wake-up call. But China and other near peers and counterterrorism threats are all still there. We’re hearing of a potentially largest DoD budget in history as we get into government fiscal year ‘23, potentially greater than $800 billion. We’re working through a $14 billion multiyear supplemental spending for Ukraine, which includes operational and intel support for the U.S. European Command, which is a combined command that we support broadly. As I shared in my prepared remarks, we’re going to see increased spending in the intelligence community, where we provide a wide range of advanced cyber and intel analytical technology and expertise. We’re going to see increased spending by DHS that really supplements what we do with DHS CISO organization as well as our large customers through our BEAGLE program. We’re going to continue to see increased spending on IT modernization. So when we look at our addressable market greater than $240 billion, we continue to invest in differentiated capabilities and the like, and we’re in the right areas of spend. We’re in space, we’re in cyber, we’re in AI, we’re in mission tech solutions. So we are even more confident as we go into FY 2023. And again, I want to close this question off with the understanding that our FY ‘22 struggles in the second half of this year are short-term and absolutely an issue with funding.

Okay. I appreciate all that color. So maybe just following up on that. If you expect the funding to revert to normal levels in early ‘23, have you started to see that yet? Or is that still a wait-and-see from the customer?

Yes. Gavin, thanks. Yes, it’s a fact that our contract funding orders in the third quarter were down about 20% versus last year. These are temporary, and we do believe funding is going to begin to flow. What I can share is through the 25th of this month, which is the first month of our fourth quarter, funding orders are up about 8% from the same period last year, but clearly not in time to support our FY ‘22 efforts with only 60 days remaining in our current fiscal year. So we’re going to continue to assess our FY ‘23 plan. But in light of what we saw in April, we would expect May and June to show that same level of reversion back to the normal, which will support FY 2023 reverting back to strong organic growth, great margins, and increased cash flow. Thanks, Gavin.

Our next question is from Mariana Perez Mora from Bank of America.

Could you give us some details on when we should start seeing some upside from these improved trends in Defense spending?

Yes. We’re looking for positive impact to the FY ‘23 budget spending during our FY 2023 year as well as increased funding coming up during our fourth quarter. I mean we are continuing to focus on high-quality revenue, and as I mentioned to Gavin, we’re in the right places. Our technology continues to be more profitable and grow faster than the expertise portion of our business. We are continuing to focus on high-quality revenue, and we want to be able to grow and expand margins within that tech sector. We’ve got very healthy awards. We’ve got a great healthy backlog. We are committed to driving growth above our addressable market, which today is $240 billion, Mariana. When we get a chance to assess the full FY ‘23 plan going forward, we’ll have a new addressable market, but the goal of the acquisitions that we have done over the last couple of years has really been focused on growing that addressable market. We’re a $6 billion company today. We’re in a $240 billion addressable market. There’s no reason why, with the appropriate funding, we cannot continue to grow as we have year-over-year.

Perfect. And then as a follow-up. How large is your space exposure today? And how large could it be like 5 years from now?

Yes. So what we do in space today is really, really focused in our Mission Technology area. We were very focused on the SA Photonics acquisition because we believe that our role in space will not be in building satellites, but actually by both doing mission payloads that ride on all LEO GEO MEO satellites as well as optical communications. We were very successful this past month, as I mentioned during my prepared remarks, to be able to close an optical link in space, which is a great step forward for CACI for our satellite partners as well as DARPA and SDA. I would also tell you that these two experimental payloads that we have being launched, I believe it’s January 23, is very important and worth spending a couple of minutes on because it’s very germane to what our space strategy has been. We’re looking at an alternative PNT solution that will work in a contested space domain. And it won’t completely replace GPS, but it will greatly support systems out there when GPS signals are jammed or when they’re attacked. Our plan for our solutions is to be more resilient and less vulnerable to jamming, and there are billions of dollars that are going to be spent over the next 5 years within space to continue to ensure non-contested GPS to the warfighter. The second area on the tactical ISR area is really about taking our Mastodon-type terrestrial solutions today for tactical ISR since they’re very low size, weight and power, and very low cost and making certain that we can space qualify those boxes and those assets to continue to prosecute our growth strategies within the space domain.

Our next question comes from Tobey Sommer from Truist Securities.

This is Jasper Bibb on for Tobey. I was just hoping you could comment on your experience with recruiting and retention of existing staff. Some of the private companies have described issues with staffing up new contracts. Has that been an issue for you at all in these past few quarters?

Yes, thanks. Look, demand for talent still remains very high. As I’ve said many, many times, the hiring environment remains very competitive and very challenging, but it’s no different than it has been over the last several years. I’m a big trend line person, and looking at trend lines of STEM graduates out there, we can throw this great resignation wave in the middle of that as well as wage inflation, we’re doing an outstanding job with it. But we strive to be the employer of choice within our sector. We’ve got two great programs: one’s #MakingMoves, and one is our highly successful referral program. #MakingMoves is really about ensuring that as people want to do different work within the company that they have the ability to, in fact, do that and that reduces attrition. We’ve invested a lot internally. We are very focused on exciting and important work not only on the expertise side of our business but in the technology side, and that very much differentiates just within our sector. We make certain our employees know how much we value diversity and inclusion. And just to share a few points, attrition for us continues to be lower even post-COVID, which is an outstanding signal that we are doing something right. One in four of our job requisitions is filled internally, which is significantly better than it was just a few years back. Our positive referral trends show that one out of three hires is a referral, and that’s great for retention. It’s also great for filling some new roles out there. So I’m not going to end this without saying that it’s really, really tough. I mean our talent acquisition group and our HR organization does a phenomenal job. At the end of the day, we’re not immune to it, but I like the position we’re in so that we don’t find ourselves in a dire talent shortage because of the great resignation wave as well as wage inflation.

And then I just wanted to ask about customer exposure from the initial O&M request. It seems like Navy and Air Force might be relative winners at the expense of Army. Can you just talk about how your positioning stacks up with each of those customer accounts?

Yes. Let me take Air Force first because when I think about Air Force, I think about the intelligence community. I quickly tie myself back to space. So we are very well positioned within where the Air Force is going to be spending money throughout 2023 and beyond. We like to focus on space there. Within the Army, whether it’s battlefield comms or SIGINT, those types of collection technologies continue to be very well funded within the Army’s budget. We are not as major of a Navy player but in one very important area where we are, we are responsible for the majority of the system engineering that’s done on all surface ships. So as the Navy shipbuilding program continues to be greatly funded, we are in a sweet, sweet, sweet spot there. At the end of the day, we’ve been very focused to ensure that we are in those swim lanes where the customers are going to spend money in AI, cyber, IT modernization, and the like. One example in IT modernization is using the acquisition that we did with LGS; their network design team won the Army OSP job, about a $0.5 billion job that is going to be transforming all of the Army’s networks here and abroad, making certain that they can handle faster data rates in a much more secure manner. This is another great example of CACI, one, investing ahead of need, and two, investing in those areas that are going to have long-term funding streams as we move forward.

Our next question comes from Matt Sharpe at Morgan Stanley.

John, new business as a percentage of contract awards, I think dropped off pretty materially this past quarter, I think, 45%. Whereas the long-term average is north of 60%. I believe last quarter, it was 70%. So my question is, how did your win rates fare in the quarter? And more broadly, what’s the competitive environment look like right now? Are your peers getting more aggressive as the end market has tightened? Or is it sort of par for the course?

Yes, Matt, thanks. I’ll start, and Tom will probably have something to add. Look, I guess my simple answer to every awards question is awards are lumpy. It’s why we don’t get really high on a great book-to-bill quarter and why we don’t get low on something which is lower. The numbers that you mentioned relatively sound in range, but the new business we have versus recompete—those numbers bounce around. If I talk a little bit about competitive pressures, I really take it back to our framework, which is we put in place a plan that looks at the dynamics of the expertise pursuits we have out there and the technology pursuits we have. It’s exactly that aggressive bidding stance and trying to drive very low rates and trying to be the most cost-competitive provider out there, which is a strategy that CACI moved away from a number of years back. Better Buying Power 1 and 2, 2.0 and LPTA really opened the market up for people providing expertise to the federal government. You can call them consultants or the like, which is why we have been very judicious about what we want to bid in within that space. If you look at some of our recompete work, the majority of the recompete work that we haven’t been successful on in the last 36 months has predominantly been in the enterprise expertise quadrant because, frankly, at the end of the day, we want to be a growing company, both top and bottom line. We want to be generating profit dollars to invest in the technology side of our business where we see much greater funding streams. It’s become more aggressive in an hourly pricing rate area, absolutely so. And you can see that because we are one of the few companies that, although it’s tough to find talent, as someone asked earlier, 50% of our business is pure technology, where we direct the efforts on our people each and every day, where our people can take the training classes they need to make us a much more productive company, and that is the one differentiator that we continue to point out is that we aren’t that company out there talking about we can’t find talent because we haven’t been an overly aggressive bidder. And again, back to what we can control, we’re going to continue to bid work that we can responsibly deliver on. Tom, anything?

Yes. I would just add that if I take a step back and look at our business development activities, I feel positive about those. Our total backlog of $23 billion is a significant amount of backlog for us. We’re winning some large contracts, and durations have increased materially over time. This quarter, we had $1.2 billion in awards. There are some lumpiness in awards. So we look at it on a trailing 12-month basis, kind of 1.5x book-to-bill. Looking at capture rates for both new business and recompete business, they’re quite respectable. We’re happy with those. So all in all, we feel positive about our ability to do work. Consistent with my prepared remarks, we have a significant amount of activity under evaluation or to be submitted, so it’s an opportunity-rich environment.

Got it. Okay. That’s very helpful. Maybe just as a follow-up, Tom, looking at the implied 4Q revenue guide, it looks like about 6.5% or so growth at the midpoint and around 2% on an organic basis. That’s a fairly large step-up relative to 3Q, and even if I look at it on a sequential basis, a significant jump. How much of 4Q is already in backlog? And should I think about the quarter as having any sort of catch-up from 3Q disruptions? Or is there anything else going on in the background to consider, maybe Afghanistan headwinds fading a little bit?

Yes. So if I look at the fourth quarter, here we are in April, so we’re 1/3 done, and we feel pretty good about that. The funding issues which impacted us in the third quarter are turning to a corner, but it’s going to take some time for that. Even if you get the funding to translate it into revenue, we have a lot of visibility as to where we stand between now and the end of the year. So we feel positive about that. We have a strong line of sight on where we stand. There are some product deliveries which we’re tracking very closely. There are some material sales which we’re tracking closely, but we feel pretty comfortable about those. So all in all, again, we’re confident in the guidance that we’ve provided.

Our next question comes from Scott Forbes at Jefferies.

Margin guidance came down 20 bps on these short-term funding items. Is there any way to sort of frame the margin bridge into FY ‘23? I mean what are the major moving pieces as we move into next year? And what’s the right way to think about the underlying margin base for fiscal ‘22?

Yes. So a very good question. We’re spending some time looking at that as well. The margin did decline from our prior guidance of 10.7% to 10.5%. That was primarily due to the slippage or the reduction in high-margin technology sales. Some of the technology we sell that we disclosed previously with the Mastodon and ABT acquisitions in the 30%, 40% EBITDA margin range have a material impact. One of the questions is, will those rebound? Will there be a bow-wave, etc.? So we’re having discussions internally as we build the plan to try to assess that. Right now, we’re seeing an ever-increasing margin, and we still have yet to think about what the appropriate takeoff point is. 10.5% is lower than we anticipated, so let us spend some more time after we prepare our FY ‘23 plan with some degree of fidelity to kind of be more specific regarding that.

Scott, let me also add. On the revenue side, there will be questions around whether the revenue didn’t show up in the fourth quarter. Is that going to be delayed, or is it lost? I think it’s very helpful to share a couple of comments on the revenue side as well because we’re looking at that as we start to assess our FY 2023. On the expertise in the enterprise tech side, our new business wins and any contract modifications—think of additional work that the customer has given to us—those that are experiencing funding shortages are going to cause delayed starts and ramp-ups. So that work will be recouped over time when we look at the lifecycle of that contract. It could be one year, three years, or as long as five. The mission technology store cycle deliveries that Tom mentioned will, in most cases, be looked at as delayed because of the funding issues. We’ll have more on that as we complete our FY 2023 assessment. And I really want to get a good handle on the next two months’ worth of funding orders, whether that trend line continues to move forward. On the material sales, those are a mix. Just as an illustrative example, if a customer typically buys 100 units of something each year and they didn’t buy it in FY ‘22 because of funding delays, they are going to buy 200 units next year? Are they going to buy 100 or some other number? Again, that’s an ongoing assessment. As much as we’re looking at margins, we’re looking at revenue that can drive those margins as well. It’s sort of a mixed bag, more delayed than lost. But again, it’s going to be the element of time.

Yes. And the last comment I’ll make on that is, as we look to FY ‘23, both John and I in our prepared remarks expressed confidence in FY ‘23. We certainly have the backlog. We have demand signals by the customer. We have the technology, the capabilities, and the people in place. When we put all that together, that bodes well for FY ‘23.

Our next question comes from Colin Canfield from Barclays.

Just crystallizing the growth conversation a little bit. Organic guidance walked down 3% through the year. In multi-sense, R&D, cyber, IT all growing 10%. And you just said funding orders were growing at kind of 8% through the month, which probably should accelerate through the year. So then if we think about looking out to FY ‘23, what are the kind of pain points that stop you from achieving high single-digit organic? Is it more a program exposure perspective or a supply-side perspective?

Yes, Colin. I’m not going to break my 11-year track record. I’m not talking about ‘23 until August. But being respectful of your question, look, we do expect our customers to begin to execute on their fully appropriated budget that finally went through the appropriations process in the middle of this month. We do expect funding to revert to normal in early 2023. Again, we’re going to watch it the next couple of months. A $300 million, 20% dip in the third quarter, as you would imagine, causes us some level of pause. We really want to watch where these funding orders go. Supply chain is still going to be an issue, but consensus is that should get better in the back half of our fiscal year. We’re not trying to give guidance, per se. What we are trying to do, though, to the point of your question is to convey the confidence that the headwinds we’re seeing are short term. We have plenty of backlog. We have plenty of ongoing growth on our current program. There’s nothing more frustrating than having everything we absolutely need: having a well-run business, a very cost-effective business and not getting a funding order, which allows us to generate revenue clearly. We will provide formal guidance with all those details in mid-August because I do think it’s still prudent for us to review the funding picture through the fourth quarter. But having said all of that, this is more funding than it is customer demand signals.

Got it. And then in terms of the demand signal environment, what sort of demand signals are you seeing that you’re investing in lower earth orbit constellations? And kind of how does your capability sit within the framework of high-end classified stuff versus some of your commercial peers?

Our main focus is on our Department of Defense and Air Force customers and their use of space. In the commercial sector, many constellations will be launched in low Earth orbit, which is why we acquired SA Photonics. LGS, along with its photonics business, is exceptionally well-managed and is delivering high-end, custom solutions that require precision, handling both unclassified and classified data over high-bandwidth connections. The acquisition of SA Photonics allows us to enhance our algorithms and offer these optical solutions at a lower cost and higher volume. I appreciate how combining SA Photonics with our work at LGS enables us to provide both high-end custom and high-volume low Earth orbit solutions, ultimately aligning them on a common baseline which will make even our bespoke offerings more cost-effective. A great example of this is our current work in that space. While there are others in the market developing optical crosslinks, as I noted during the SA Photonics acquisition, we anticipate improvements in volume and margins as the market grows in the fiscal year 2024 timeframe. This acquisition was well-timed, and we entered the market at a lower point on the growth curve, allowing for four to five more quarters of robust investment. Our recent success with the Mandrake 2 mission has been impressive and positions us for greater long-term growth. We must maintain our focus on the years 2023, 2024, and 2025.

Our next question comes from Matt Akers with Wells Fargo.

I wonder if you could put maybe a finer point on some of the slowdown in Q3 and Q4. I mean it sounds like the technology product kind of shifted out. Was that the biggest part? Or any color you can give on how that broke out kind of by customer or end market.

Yes. So thank you, Matt. This is Tom. There are two major impacts of that short-term funding. Some of the longer five-year programs, we get funding on a regular basis. We have a large number of people working on either expertise or technology programs, and that is somewhat immune from the short-term funding fluctuations. The funding impacted some of the shorter-cycle activities in two categories: one are material buys. Sometimes the government, DoD customers, Army customers will ask us to procure not necessarily commodity-like materials, but specialized capabilities. Think a satellite dish with special features and technology embedded upon it, where we would procure it and drive our contracts provided to the government. Then we have our own technology; think Mastodon, EBT and the like. The former category, materials, are higher revenue but lower margins since we’re getting a material handling fee on those. So that slowdown in funding impacted revenue. On our own products, which are very high margins, those were also impacted and had a discretionary impact, not on revenue but on margin. So those were the two major components of that.

Got it. That’s really helpful. And also on the free cash flow. So you’re able to maintain the free cash flow guidance despite some of the slowness? Was there an offset that helped you to still get to the $720 million?

Yes, absolutely. A few things. Operating cash flow, if I go excluding the kind of tax issues, is down a little bit around $10 million, driven largely by some of the reduction in our net income from where we initially had a peg, but that’s offset by some better collections and DSO at 51 days. That’s an extremely low number for us among our peer group, so we’re proud of that. Slightly lower CapEx as well. The lower operating cash flow was offset by lower CapEx. The collections have certainly improved, so we were able to maintain that free cash flow guidance.

Our next question is a follow-up from Gavin Parsons of Goldman Sachs.

I just wanted to ask if you can give us a sense of your total product revenue in a normal year and what that looks like this year?

Yes. Gavin, we’re going to keep our disclosures around technology and expertise, and that’s clearly just due to competitive reasons. We do believe that you all can measure how the mission tech sector is going. We do show what those growth rates are. Highly respect your question; we’re just not going to provide too much additional information there.

Totally fair. Totally fair. And this might be a little nitpicky, but what was the cadence of the 3Q funding decline? Is that pretty concentrated in January as a result of Omicron? Or was that kind of more widespread as a result of the CR?

Yes. So Gavin, good question. To be candid, we did not look at it on a month-by-month basis; that’s why I do not have that insight. The triggering event, or one of the triggering events, was the passage of the budget on March 15. So I would guess— and we can get back to you—that once the budget was passed through, there were probably some more positive trends.

Gavin, I’ll add one other item, frankly, around that second question. We’ve been trying to study what the most likely reason was for that because, as we mentioned, when we got to the second quarter, we were pretty much flat with where we were last year. Our assumption and probably best well-founded reason is that when the Ukraine crisis started, it just became yet another compounding factor on a government customer that was already spending below what their CR budgets were and sort of like throwing another ball in that juggling act of how am I going to fund everything that I have. That’s frankly where we believe that funding issue starts after the specifics by month-to-month. I’m sure Dan and George can get to the rest of the information. But as we talk about funding, I want to continue to reiterate, funding to us is a very short-term headwind. The national security priorities are important as ever. The FY ‘22 and FY ‘23 planned budgets are very constructive. We’ve got a large and growing addressable market. We’re investing in and aligned to all of these key strategy plan areas. What we can control is being run exceptionally well, and we’re looking forward to closing on FY ‘22 with our updated guidance and then driving future growth in FY ‘23.

We also have a follow-up from Colin Canfield of Barclays.

Just going back to the low earth orbit constellation narrative. So you mentioned producing the subcomponent optical lengths, but at the same time, you’re cutting your CapEx guide. So then how do we think about how that LEO narrative interacts with CapEx? And when do we—or kind of what sort of CapEx inflection should we assume from CACI kind of on a year-on-year basis or a percentage of sales?

So let me start off with CapEx. Generally speaking, it’s three major buckets for capital spending for CACI. One is facilities. We continue to look at our real estate portfolio and make appropriate investments. Sometimes we’re doing some consolidation, which requires some good long-term CapEx to support that activity. The second major bucket is internal IT spending. Some of it is the simple replacement of laptops and desktops and audio/visual equipment. We do make investments in some enterprise capabilities—think budget systems, contract systems, and other data repository systems—which drive capital spending. The third bucket is capital spending associated with the program, and we have a series of laboratories; they’ve required very sophisticated test equipment, manufacturing capabilities, and the like. That’s the piece you're looking at and so with that, I’ll turn it back to John, and he can talk more specifically about some of the requirements for some of the space activities.

Yes. So Colin, actually beyond space. Everything we do in that mission tech quadrant, the first nine months, CapEx was around $40 million, which tells you that it’s sort of timing. The slower funding environment is slow. Some of the ramp-up of some of that work, nothing slowed down what we’re doing in SA Photonics, nothing slowed down what we’re doing in the Mastodon business. Some is just normal delays. But let me be very, very clear: we’re not backing off on investments for growth because of these very, very short-term headwinds. Headwinds are near term; investments drive long-term results. We will not cease any of those investments as we continue to support new and growing customers, especially when it’s backed by very strong funding streams. Our mantra of investing ahead of customer need does not take time out because of the one- to two-quarter short-term funding issue, which is predominantly the majority of the issue why we had to take down guidance to close our FY 2022. Unfortunately, our fiscal year is sort of falling out that for others who have a January through December fiscal year. As many of you have already written, you all are expecting growth starting in those companies’ third quarters. That happens to be our first quarter of FY 2023. There’s nothing alarming; there’s nothing shocking; there’s nothing going on inside the company overall. We’re going to continue to invest ahead of customer need in that mission tech quadrant, as well as in the enterprise tech area because that’s what’s going to fuel future growth and expansion.

We have no further questions on the call. So I will hand the floor back to John.

Thanks, Seth, and thank you for your help on today’s call. We would 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. Please stay healthy, and my best to you and your families. This concludes our call. Thank you all, and have a great day.

Thank you. This concludes today’s conference call. You may now disconnect your lines.