CACI International Inc
Q4 2020 Earnings Call Transcript

Published: 13 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the CACI International Fourth Quarter and Full-Year Fiscal Year 2020 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. 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.

[Daniel Leckburg:]

Thank you, Cole, and good morning, everyone. I'm Dan Leckburg and 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 fact and, as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated. Those factors are listed at the bottom of last night's press release and are described in the company's SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation will include discussion of non-GAAP financial measures. These should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. Let's turn to slide 3, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John?

[John S. Mengucci:]

Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2020 results, as well as our fiscal year 2021 guidance. With me this morning are

[Thomas A. Mutryn:]

Yeah. Thank you, John, and good morning, everyone. Please turn to slide number 8. Our fourth quarter was an excellent close to a successful fiscal year. We generated revenue of $1.5 billion, representing overall growth of 9% and organic growth of 8%. Net income of $94 million increased significantly from a year ago, driven by increased revenue and market expansion. Adjusted EBITDA margin in the quarter was 10.9%. Slide 9, please. For the full year, we generated more than $5.7 billion of revenue, representing growth of 15% with 8% organic growth, despite the COVID-19 impacts. We continue to deliver market expansion with an adjusted EBIT margin of 10.0%, up from last year's 9.4% margin. Net income of over $321 million represents close to 21%. The direct COVID-19 impact on our fiscal year 2020 revenue was around $68 million, with an $18 million impact to net income, in line with our prior results. Slide 10, please. Fourth quarter operating cash flow was $154 million excluding our accounts receivable purchase facility, reflecting continued strong cash collections and the positive impacts of the deferral of the employer payroll tax payments. DSO was at 57 days compared to 64 days at the end of fiscal year 2019. And we generated operating cash flow of $511 million for the full year, both excluding the AR purchase facility. The 41% increase in cash flow was driven by overall growth, margin expansion, efficient collections, as well as $40 million associated with the payroll tax deferral. We ended the year with net debt to trailing 12 month adjusted EBITDA of 2.3 times. Turn to slide 11, please. As John noted, yesterday, we announced the acquisition of Ascent Vision Technology, a successful and innovative company in well-funded priority areas of mission technology. For the remainder of our fiscal year 2021, about 10.5 months, we expect AVT to generate around $50 million of revenue and $20 million of adjusted EBITDA, excluding certain one-term expenses. AVT will provide modest GAAP accretion and generate about $0.45 of accretion, excluding noncash intangible amortization and one-time expenses. The purchase price of AVT was $350 million, which we funded with our revolving credit facility. We expect to realize the tax asset value that $40 million related to the acquisition. On a net basis, this equates to a multiple of less than 12 times next month's adjusted EBITDA. Post-transaction, our adjusted leverage is 2.8 times and we have over $700 million of unused capacity on our credit facility. Bottom line, we acquired a differentiated high-growth, high-margin company at what we consider an attractive price and we continue to have ample capacity for additional acquisitions. Slide 12. Now, let's turn to our fiscal year 2021 guidance. As in prior years, our guidance is based on a program-by-program bottoms-up planning process. This process provides significant visibility and confidence in our outlook. For fiscal year 2021, we expect revenue to be between $6.0 billion and $6.2 billion and net income to be between $347 million and $367 million. This implies organic revenue expectations of around 5.5% at the midpoint, including expected COVID-19 impacts. We expect adjusted EBITDA margins of around 10.4%, up 40 basis points, driven by both core margin expansion and the contribution from AVT. Our healthy growth and margin expansion are driven by our new business wins in high-valued areas of our addressable market, on-contract growth, excellent program execution, and efficiencies and enhancements in our infrastructure. We are expecting operating cash flows of at least $580 million in fiscal year 2012. This includes $55 million from continued deferrals of the employer portion of the payroll tax, which currently runs through calendar year-end. Capital expenditures are expected to be in line with last year at around $70 million, which includes growth-focused investments for mission technologies in specialized facilities for a number of direct programs. Slide 13, please. To help with modeling, here are some additional expectations for fiscal year 2021, which include the AVT acquisition. Depreciation and amortization are expected to be approximately $130 million. Interest expense should be around $44 million. We are expecting a full-year effective tax rate of 22%, with a materially lower tax rate in the second quarter due to the impact of vesting the stock awards which were granted in prior years. We are expecting a typical quarterly sequential increase in revenue and profitability, with year-over-year comparisons in our first half impacted by COVID-19-related revenue and profit reductions. And our fiscal year 2021 guidance assumes a revenue impact from COVID-19 in the range of $100 million to $150 million and a net income impact of around $20 million to $30 million. This assumes the impact of COID-19 continues through December and support under Section 3610 of the CARES Act is extended for at least that period. Slide 14. Turning to our forward indicators, prospects remain strong. For fiscal year 2021, we expect 83% of our revenue to come from existing programs, 11% from recompetes, and around 6% from new business. We have $9 billion of submitted bids under evaluation, with 80% of that for new business to CACI. We expect to submit another $13.7 billion through calendar year-end, with over 70% of that for new business to CACI. In summary, we are expecting another year of strong financial performance, with healthy top and bottom line growth, continued margin expansion, and robust cash flow. With that, I'll turn the call back over to John.

[John S. Mengucci:]

Thank you, Tom. Let's go to slide 15. To reiterate, CACI performed exceptionally well in fiscal year 2020, and we remain confident in our prospects going forward. We delivered record financial results for the year, including increased organic revenue growth, continued margin expansion, and robust cash flow. We won a record amount of contract awards. And we expect healthy revenue growth, continued margin expansion, and robust cash flow, again, in fiscal 2021. None of this is possible without our employees' talent, innovation, and commitment to our customers' missions. These are truly unprecedented times and I am proud of how our entire team, everyone, is stepping up, each and every day. Critical national security and modernization challenges remain, and CACI will be there to help our country to meet these challenges. And with that call, Cole, let's open the call up for questions.

[Operator:]

And we will now begin the question-and-answer session. And our first question today will come from Robert Spingarn with Credit Suisse. Please go ahead. Robert Spingarn - Credit Suisse Securities (USA) LLC Hi. Good morning. Nice numbers.

[John S. Mengucci:]

Morning, Rob. Thank you. Robert Spingarn - Credit Suisse Securities (USA) LLC I wanted to ask you a couple of product questions. First, you did discuss AVT in the prepared remarks. But how do their products differ from other EO/IR suppliers out there, like an L3Harris, in terms of capability, target markets, type of contracts that you'll be going after?

[John S. Mengucci:]

Yeah. Rob, thanks. So, a couple of pieces there. I guess first one, you know what? What differentiates us? I mean, I'm never going to comment specifically on what our competitors do or the way they see the markets. But the differentiation is vast. And it's so important enough that I don't want to go into too much detail here. But what we see in AVT going forward, very advanced digital EO/IR imaging technology that's based on proprietary software that processes imaging data on the platform itself. So, it doesn't have to come down to the ground to get processed. It's actually processed within the EO/IR system itself. That's a large differentiator. It also has advanced artificial intelligence, intuitive command and control, and exquisite machine-learning algorithms in it as well. So, very much like what we've been talking about as we've built this mission technology quadrant out, really looking at how do we find innovative technology that we can do software on any device we have. So, an EO/IR gimbal-based SIGINT imagery collection system is nothing different than a , which are two products delivered by Macedon (21

[John S. Mengucci:]

Yeah, Rob. Thanks. So, we are looking – the capabilities that SteelBox provides, which is secure mobile voice and mobile text as well as sending e-mails, we're seeing very strong interest in expanding user base, but it's not to the size, Rob, that we're actually talking about number of agencies and number of users yet. Capabilities are in very high demand. COVID had slowed the contracting process down some, as many priorities do exist on those agent agencies, but make no mistake. They have a high need and a high use for this type of mission tech. We've got a number of agencies across DOD and the federal civilian market. All of those customers have expressed interest in scaling up over the next six months. We've got about 1,000 users now, Rob. We're actually working on various subscription models with additional users that will better inform and support our growth. We'll be looking at something just under 20,000 subscribers by the time we get to the end of calendar year 2021. So another product-based mission tech. It's another unique solution where we invested ahead of need. We partnered with BlackBerry, who had some of the intellectual property. We combined some of our intellectual property with that and went out there far ahead of RFPs. And I'll never say as luck would have it when we talk about COVID. But, you know, we are a nation at times that, you know, doesn't buy something until something happens. So, we would look for the next six to nine months driving even increased more demand. And, of course, if it's a subscription base, it's going to come with much early higher margins than what the normal CACI type of contract earns us (24

[Operator:]

And our next question will come from Joseph DeNardi with Stifel. Go ahead.

[Joseph William DeNardi:]

Yeah. Hi. Good morning.

[John S. Mengucci:]

Good morning.

[Joseph William DeNardi:]

Tom, can you provide a little bit more, I guess, clarity around the cash flow outperformance for this year and then the sustainability of that the cash flow guidance for next year? Is that kind of the new run rate for the business going forward? Thank you.

[Thomas A. Mutryn:]

Yeah. Sure. So, if I turn to FY 2020 first, first and foremost, the strong net income, driven by 50% revenue growth and 60 points more kind of EBITDA margin is contributing, DSO with that 57 days at the end of this year versus 64 days at the end of last year, so a significant reduction in DSO. Each day of DSO is worth around $15 million, $16 million, so that's material in terms of operating cash flow. And the payroll tax deferral helped quite a bit. When we last gave guidance, we were concerned that there could possibly be a slowdown in various payment offices kind of related to COVID or invoices associated with the CARES Act would be delayed or held up. And it turns out collections have remained robust during this time period. Our team is performing admirably, focused on aged receivables, getting invoices out the door, and the government is paying those. And so, we finished FY 2020 quite strong. FY 2021 is a continuation of that, starting with strong net income, some relatively large noncash items, depreciation and amortization, stock comp, the value of the payroll tax, is driving a stronger cash flow. We're assuming that DSO will be comparable to the exit levels of this year and so that will continue to remain at a somewhat stable level and that gets us to the cash flow guidance of FY 2021. Hope that helps that.

[Joseph William DeNardi:]

Tom, can you grow cash in 2022 off of FY 2021 or does the tax relief make that more challenging?

[Thomas A. Mutryn:]

Yeah. So, the payroll tax relief, approximately $100 million, view this as a loan from the government showing up in operating cash flow in a way it should be kind of a source of financing, you know, from a practical perspective. So, we're able to defer close to $100 million. We'll have to pay the government back in FY 2022 and in FY 2023. So, that will be a headwind. And that's why we're trying to be transparent highlighting this. And so, it'll set the right framework and basis of underlying cash flow for 2020, 2021, (28

[Operator:]

And our next question will come from Edward Caso with Wells Fargo. Please go ahead.

[Edward S. Caso:]

Hi. Good morning. Congrats on the results.

[John S. Mengucci:]

Thank you.

[Edward S. Caso:]

Just curious about your ability to control a offering set now that is going into different areas

[John S. Mengucci:]

Ed, thanks. It's John. Yeah. So, let me try to frame this with the four quadrants that we deliver in, right? We have enterprise and mission and we deliver expertise in tech, technology into both. On the technology side, that's where we're seeing the majority of our growth. It doesn't mean that we still do not perform expertise business. It doesn't mean we don't go out there and win large-scale expertise programs. But the lion's share of our growth that we saw in 2020 and continuing into 2021 is going to be in that tech area. So, most specifically, we think about mission tech. It's really a focus on what technology do our military intelligence and fed civil customers need and how do we invest in a new way to deliver it, how do we use the agility of a company our size, how do we amass software and algorithms that we can use across multiple mission needs. So, then we get down to how do we manage it. To us, it's a portfolio of technology. We like to talk about products. But at the end of the day, it's everything which is foundational to that product. So, we can talk about Macedon, Beast and Crack and we can talk about LGS (30

[Edward S. Caso:]

My other question is with the election upcoming and the key government fourth quarter September for awards and what we're hearing is that there is no lack of RFPs, but we're also starting to hear some slowness in decision-making. So, can you talk about what you're seeing in the key September quarter, particularly in the context of the upcoming election? Thank you.

[John S. Mengucci:]

Yeah. Thanks, Ed. So, on what we expect for the September quarter, we have not seen a slowdown, to your comments, in RFPs for an awards (33

[Operator:]

And our next question will come from Matt Akers with Barclays. Please go ahead.

[Matt Akers:]

Hey. Good morning, guys. Thanks for the question.

[John S. Mengucci:]

Sure.

[Matt Akers:]

I wonder if you could touch just briefly on your latest long-term thoughts on margins, where they could get to. It looks like you – expecting pretty good pickup in fiscal 2021, even though there are some COVID impact in there. I guess can you continue to get kind of that 10 to 30 basis points uptick from there that you've talked about in the past?

[John S. Mengucci:]

Great. Thanks, Matt. I'll start and Tom may want to add something around margins. So, Matt, we are on a path. And we have been on a path to deliver revenue growth at a faster rate than our addressable market is going and then, second, ever-increasing margins. We used to talk about 10% to 30%. And thanks to you all – you guys have always asked me how did I come up to 10% to 30%, so I just settled at ever-increasing margins. What is our plan going forward? It's exactly the same thing. For myself and Tom to get on these calls and talk with our investors and talk about us having a resilient business, we have to prove that in what we deliver. Even with COVID, we are driving top line growth and we're driving margins. What gives us that confidence that we can continue to grow is even in our expertise area, we see margins moving slightly north. But in the technology area, that is where we always believed that there was far more margin. And as well as margin, there's far less risk because we can find longer-term contracts in those areas. We can step in repeat if we build a good arsenal with an intellectual property and a way to get all of those, all of the software, into any type of device. So, as long as we continue to grow on our technology side, that is what fuels our bottom line growth. I'll also add in there that as the government is moving more towards agile and getting solutions to the field faster, we are a world leader. And I rarely say that, but we truly are a world leader in agile software development. And how do we develop and deliver software quicker with less defects, which at the end of the day in an EW, RF, SIGINT world, where our war fighters need solutions quickly, the ability to do proven software development in a much more agile fashion allows us to bid work and allows us to request slightly higher margins because we're lowering the risk on our customer. And in any market on the planet, okay, lower risk to the buyer traditionally results in higher and higher margins to the seller. Tom?

[Thomas A. Mutryn:]

Yes. So, kind of 2017, four years ago, our EBITDA margins were 8.5%. This year, we're guiding to kind of 10.4%, including that COVID impact. Excluding it would be kind of north of, you know, 10.5%. So a 200 basis point shift in margin over a four-year time period, pretty significant in our minds to kind of turn the battleship kind of relatively, you know, quickly to do that. You know and as John indicated, you know, some things on a more tactical level, you know, making sure that we're filling positions quickly and driving efficiencies in our cost structure. But fundamentally, our technology business is coming at significantly higher margins than our enterprise business. And we are growing our technology business at a faster rate, both through acquisitions and organically, than our expertise business. Both businesses are important to us, but a disproportional growth in higher margin technology business. And that is a kind of underlying trend that we expect to continue. And if we continue to drive higher technology growth, both mission technology and enterprise technology, that will allow us to increase margins in the foreseeable future. So, that is the underlying kind of dynamic at play.

[Matt Akers:]

Got it. Thanks. That's really helpful. Thanks, guys. And then, I guess, one other one on just some of these new wins like TCS and BEAGLE, how should we think about sort of the pacing as we go through the year? Can you give any color on how those programs ramp up? And then, I guess if we do start the fiscal year under a CR, is there anything from kind of a new program start standpoint that that potentially could be at risk or, you know, how do you feel about your ability to kind of manage through a CR again?

[John S. Mengucci:]

Yeah. Matt, thanks. So, I think, the first program, you asked about TCS, and then it was around BEAGLE. So, TCS, a $1.5 billion award, about half was recompete work and half is new work, and additional taskings. So, it's an overall 10-year program. Thank you. I was – thank you, Tom. Yeah, 10-year program. So, you know, if I were to split that up, of course, the recompete work continues on at the same pace, and let's just use $75 million per year. It will be incumbent upon us to see the other half of the $1.5 billion award. I would expect in the next six to nine months, to see additional taskings coming. Again, it's the National Geospatial Agency's network. The customers on the intelligence side are, you know, rethinking how they do network build-outs and what kind of capabilities those need to have. I expect during COVID and then post-COVID, those requirements to grow. So, I would see the – a ramp-up gradually each and every year, Matt, for the new portion. BEAGLE, BEAGLE has already ramped. And I would say that we would expect BEAGLE again to hit their year-out run rate by the end of this year, and that's a five-year award, so very, very good work there. That team worked judiciously to get all of the staffing for that job. We're just about 100% staffed. Happy customer, great program relationship there, so off to a really, really good start. I think the last part was around operating under a CR. I mean, we don't see any impact to our business in the short term from the CR. I mean, we've seen many CRs over many, many years. And at the end of the day, they haven't materially impacted CACI's business. Our strategy is going to still be to focus on areas where US government needs to spend money and those usually come out of a CR perfectly well. So, we're going to continue to deploy capital to support growth there, and I don't really see a material impact whether we start under CR or whether we don't. Thanks, Matt.

[Operator:]

And our next question will come from Gavin Parsons with Goldman Sachs. Please go ahead.

[Gavin Parsons:]

Hey. Good morning.

[John S. Mengucci:]

Morning, Gavin.

[Gavin Parsons:]

I just wanted to ask about the drivers of the 5.5% organic growth in guidance and just how you get there, given

[Thomas A. Mutryn:]

Yeah. Gavin, thanks. Great question. So, look, let me start off by first saying I'm very happy to see healthy improvable (42

[Thomas A. Mutryn:]

Yeah. So, Gavin, what I would add to what John said is that we provided a range of impact of COVID for – in FY 2021, a relatively broad range $100 million to $150 million of revenue. There is some aspects of COVID where we don't see a higher degree of certainty what the impact is, lost fee on CARES Act hours and some have a higher degree of uncertainty of (47

[Gavin Parsons:]

Okay. Great. That's helpful. And just a quick clarification, the indirect COVID impact you talked about, is that encompassed in the $100 million to $150 million or is that on top of that?

[Thomas A. Mutryn:]

Correct. It's all encompassing.

[John S. Mengucci:]

Right.

[Gavin Parsons:]

Okay. Great. And then, obviously, it's really difficult to predict the longer-term trajectory of the budget, especially given that the fiscal deficit today. But John, I was hoping you could talk a little bit about maybe the factors that contributed to the – or decline in organic growth that you saw last time the budget declined and how maybe your positioning or exposures have changed today and especially how you could sustain your 100 to 400 basis points of out-growth target, no matter what the budget environment is.

[John S. Mengucci:]

Yeah, Gavin. So, from a how this looks in the 2011 timeframe, right, versus where we sit today, I mean, a lot of things are different. I guess to answer the last part of your question, first, as a company, we're a very different company. We have added a technology dimension on the mission side and we've expanded our enterprise technology to be a larger proportion of our business. CACI has been doing expertise and technology for decades. What you've seen in recent years is a focus all around EW and SIGINT and RF into this model where we, in fact, had a need, where we own the intellectual property and we're able to go forward. In the 2011 timeframe and every government shutdown, we were consistently talking about 12% to 13% revenue impacts, with our employees cannot get to the government office where they have to perform their work. We're not having that discussion today. So, a major material difference that I see is how we're differently positioned today than we might have been back in 2011. If I look at 2011 timeframe and talk about the government and the Budget Control Act, as a nation, we underinvested in defense and national security. The superior gap we had in the context of great power conflict shrank or nearly went away completely. It's not acceptable. And I believe that many on both sides of the aisle believe that it's not an acceptable solution. And I think even our lawmakers realize that that was a material mistake. So, I believe this (51

[Operator:]

And our next question will come from Cai von Rumohr with Cowen. Please go ahead.

[Cai von Rumohr:]

Super. Thank you very much. A quick follow-up on the COVID. Your COVID assumption is that COVID impact will be greater in the first half than the fourth quarter rate. And yet, you've talked of if the Section 3610 comes down, indirect is basically, you know, you'll see improvement by year-end. So, why is that number so big? And secondly, is it all lumped in to the third quarter, because most of the other companies we've talked to talk about Q2 as the biggest impact of COVID. Thank you.

[John S. Mengucci:]

Yeah. So, I'll start out, Cai. As I mentioned, there's certain things in our forecast process which we know with a high degree of certainty. There's other ones where we're trying to kind of risk assess kind of the impact. And we work very closely kind of throughout the enterprise, understanding what those indirect second order effects of COVID are, and we're trying to provide a range of outcomes. In the information that we've provided for FY 2020, the $68 million and the $18 million, those were those direct impacts that we spoke about. And there's probably some indirect impacts associated with our FY 2020 numbers which we did not articulate or enumerate. And so, the results would have been even higher if we went through that adjustment process. And so, based on a desire to provide a kind of range of outcomes, we've provided a relatively kind of a broader range of outcomes to, you know, help given the kind of unique set of circumstances that we're in given the ever-evolving situation.

[Cai von Rumohr:]

Thank you. And then, a quick follow-up on the cash flow. I think you mentioned payroll tax deferral, $40 million in the fourth quarter and $100 million this year. My understanding – and it may be incorrect – is that, basically, the first of this calendar year you defer and then you pay back the next two years. But given that your fiscal year spans both 2020 and 2021, is $100 million the net benefit of payroll tax deferral this year or is that the gross and then you have to pay some of that back in the second half?

[Thomas A. Mutryn:]

Yes. So, no, I'm sorry. You may have missed this. I could have misstated it. For fiscal year 2020, the payroll tax deferral was $40 million. For fiscal year 2021, which is really the time period from July 1 to December 31, the payroll tax benefit is $55 million. So, in total, over the time period, it's close to $100 million that we will need to pay back in future periods, FY 2022 and FY 2023.

[Cai von Rumohr:]

To pay it back in the second half of fiscal 2021?

[Thomas A. Mutryn:]

Fiscal 2022, in 2022, the first half of fiscal 2022. December 2022 and December 2023.

[Cai von Rumohr:]

Got it.

[Operator:]

And our next question will come from Jon Raviv with Citi. Please go ahead.

[Jonathan Raviv:]

Thank you. On the organic growth, just sort of following up on what Gavin was talking about, so the organic growth would be better if not for COVID in FY 2021. So, it's reasonable to expect some kind of acceleration in 2022 and then maybe just weave into there the longer-term thoughts around growth and really around what a post-coronavirus world looks like, how are customer needs shifting or even accelerating in light of the pandemic, and what is CACI doing to address those specific challenges?

[John S. Mengucci:]

Jon, thanks. I'm going to try to make it to the second month of fiscal 2021 first, but I will – I do appreciate that question.

[Jonathan Raviv:]

(56

[John S. Mengucci:]

Look, so this is how we see it. We've been through a lot of different budgets and a lot of different budget cycles since we've been on this drive to drive top and bottom line growth, two areas that I think investors watch as well as cash. For us to guide to the same level we guided to last year in spite of COVID, says that the awards that we have are beginning to deliver. Now, we do have some indirect impacts that are sort of slowing that ramp up. But make no mistake, we have revenue growth behind those awards. Over the last two years, how those ramp up are all different. We talked about TCS and BEAGLE earlier. Those both have different ramp-up points. Some of the programs that we have in the mission tech space result in a product delivery. So, we'll get the request. We'll get the award and within 60 days we're out there delivering product. And since products come at such a differentiated margin than the rest of our business, it does have a material impact for a $6 billion business. What's our ability to continue to ramp? It's very, very strong. We see a few things here. We've got one open protest out there that's probably worth another percent, just on its own, worth of organic growth that has slipped into this fiscal year. So, there's a lot of moving parts. We're very confident at the 5.5% organic and 7% overall at the midpoint being one month into our fiscal year. Things that we're going to do and things that we have done, we're investing ahead of need. We're filling the right gaps. We're a judicious and very experienced acquirer of capabilities and customer relationships where we need to fill those gaps. We've done over 80 acquisitions. It's not something that we look at. It's something that we consistently do. It's in the ethos of CACI to go look at how do we acquisitions or investments or use partnerships. So, we're very confident in our M&A strategy. We're very confident in the parts of the federal government where we're doing our technology work. We're very confident with the kind of margins that the operations team is actually bringing in. And as we continue to roll folks out and we continue to ramp some of these larger programs up when we get further outside of COVID, that will portend greater growth rates as we go forward.

[Jonathan Raviv:]

Thanks for that non-FY 2022 guidance, John. And then, just going back to the quadrants, I mean, in September, almost a year ago at this point, I mean, you guys did talk about growing in interest in each quadrant, but, of course, on this call, and what we've seen recently is a lot of growth is coming from technology and maybe mission technology. Could you update us on almost where sales stand by quadrant at this point? And then, also thinking about the enterprise side for a moment, how might activity there matter if the future is more marked with larger deals? I'm asking that question in the context of you guys not being noticeably involved in things like Gizmo or NGEN (01

[John S. Mengucci:]

Yeah. Jon, I'll take the last part first and I'll have Tom talk you through sort of how we look in that quadrant map. I mean, NGEN and Gizmo (01

[Thomas A. Mutryn:]

Yeah. I'll just mention a few facts about the quadrant. For FY 2021, we're expecting the expertise area to grow in the low single digits. In the technology, in the double digits. That is just the combined kind of growth that we've been talking about. So with materially disproportionate growth in technology, which is – and the technology is coming at margins anywhere between 300 and 400 basis points higher than the expertise markets. Makes a lot of sense. Some of the expertise, not all of it, but some of it is more commodity-like work kind of lower margin level and the technology is kind of differentiated and we can command higher margins. And so, that strategic focus on technology at higher margins is helping to drive that margin expansion, which I mentioned earlier in the call.

[Operator:]

And our next question will come from Greg Konrad with Jefferies. Please go ahead.

[Greg Konrad:]

Good morning.

[John S. Mengucci:]

Good morning, Greg.

[Greg Konrad:]

Just a broad question. I mean, you were awarded this contract for (01

[John S. Mengucci:]

Yeah. Thanks, Greg. So, yeah, (01

[Greg Konrad:]

And then, just one clarification question. I won't ask about fiscal year 2022 revenues, but you talked about some program roll-offs. When we think about at the midpoint, the $125 million of revenue pressure from COVID in H1, I mean, so we expect all those revenues to be recaptured in fiscal year 2022?

[Thomas A. Mutryn:]

I'm not sure if – I wouldn't use the term recaptured, but we would get to the normal steady-state run level. Envision a trajectory of CACI over the next five years, sort of what we kind of normally would be. What we're seeing is a dip in that trend line due to COVID, but COVID is a temporary phenomenon. Now, I'm not sure how I can define temporary, how many months are (01

[John S. Mengucci:]

Yeah, Greg. So think about ramp-up. If I've got to get 20 people overseas and I want to get them overseas in June. If I can get two over there in August and eight over there in September, I've sort of June and July, right? If it's getting (01

[Operator:]

And our next question will come from Tobey Sommer with Truist. Please go ahead.

[Tobey Sommer:]

Thanks. Could you comment on the due diligence process of an extensive acquisition (01

[John S. Mengucci:]

Yeah, Tobey. Thanks. So, yeah, well, I think we talked about it, right, when COVID started that we were going to take a short "hiatus", right, from executing acquisitions. But I think I might have jokingly said but good news is phones still work. So, we did take a little time off so we can focus on some of the operational challenges of COVID and really to allow some time for COVID implications to be better understood. And what that really means to us is better informed due diligence, right? Because what a company could experience pre-COVID, then during COVID and trying to guesstimate where they were going to be out of it is something different, right? So, but we had already identified them and working with AVT back last year late summer in the fall timeframe. So, we were able to quickly pick up on the transaction where we had left off. We worked with the senior leadership team at AVT to conduct due diligence remotely. And we limited travel to what was absolutely needed. We did take our management brief pre-COVID, so, knock on wood, that went well. Took a couple of other trips out there as well to meet Tim and his senior leaders. So, we were able to work through that well. And, frankly, it speaks really well, Tobey, to the experience that I mentioned earlier. We've got a streamlined process across every functional area and across every technical competency to make certain that when we're talking about our 80th and 81st, 82nd acquisition, we know how to do things very, very well, very, very streamlined. Data, data room still worked and the like. So, if we look forward, can we do a larger acquisition? Certainly, I mean, it's about understanding where our gaps are first, right? Strategy is a place where we come from. So, if we have gaps, let's say, in the enterprise area, both in expertise and the tech side, there's a company out there that could fill those, yeah. We will absolutely move forward. It's a little more complicated based on the kind of gaps that we're looking to fill. So, it's more about what we're looking to fill, not the actual revenue and net income values. It's more about how do they more fulsomely fill the gap. And also, are they going to be growing beyond COVID? And we like the laid out growth rates for – in AVT, we like what the ISR EO/IR market looks like to us. And we would see great things coming from AVT or any other acquisition that we do during this timeframe.

[Tobey Sommer:]

Thanks. Given the evolving portfolio of the business, what do you peg the organic rate of growth of your markets to be? And how does the 5.5% organic revenue growth guidance for this fiscal year stack up?

[John S. Mengucci:]

Yeah. So, 5.5% stack up in the year of COVID and one of a generational pandemic, I like where we're sitting. I like where we're sitting on our organic revenue growth, like we're sitting on our 7% revenue growth. As Tom mentioned, we have a lower range. We have an upper range, should COVID clear out sooner. Should we win more awards that we're expecting, that takes some of that opportunity and risk model and makes it different, allows us to sort of move this company forward. I think 5.5% from where we sit today is slightly below where we would like to have been, but I'd like to not be experiencing COVID also. So, to the extent that we can continue to work through this, I've got 65% of my workforce teleworking today. We have the 3610 out there covering us on the cost side. My absolute focus is making certain that we get into FY 2021 and then through FY 2021, very confident with the guide that we put out there. So, no excuses and no shame in a 5.5% organic growth world with two years of great awards. And I would fully expect us to continue to not only drive revenue growth, but be driving net income, earnings, cash and the like.

[Operator:]

And our next question will come from Seth Seifman with JPMorgan. Please go ahead.

[Seth M. Seifman:]

Thanks very much. Good morning.

[John S. Mengucci:]

Good morning, Seth.

[Seth M. Seifman:]

Good morning. So, just wanted to follow up on one – some of the earlier commentary you made about the different quadrants and enterprise IT. And I wonder just given the structure of that market right now, their return structure and the competitive structure, if it even makes sense to be pursuing big awards in that space, given your goal of growing margin at the pace that you'd like to grow it. I mean, I think it is – correct me if I'm wrong, but I think it's probably fair to assume that had you won NGEN (01

[John S. Mengucci:]

Yes. Thanks. Thanks, Seth. You know, I would – contracts, there are a multitude of different enterprise type contracts. There's a lot of different ways for customers to buy. There are some where it's more of a managed service. And those will start with lower margins and then you would hope, over time, grow. We see our business as four quadrants and that builds the portfolio of work that this company has. And some allow us to grow revenue. Some allow us to use our rates and our direct labor growth to be able to sustain higher levels of IR&D and bid and proposal funding (01

[Seth M. Seifman:]

Great. That was helpful. Thanks. And then, just maybe if you could touch on the hiring front, how that's been going with the pandemic going on and I was thinking about net head count growth in fiscal 2021.

[John S. Mengucci:]

Yeah. Thanks. So, yeah, I mean, our portfolio is part expertise and part tech, so there are some elements that are less or more dependent on hiring levels. Our hiring and onboarding has come out pretty much as expected, a little bit dulled, as you would expect, but definitely in line to support how we finished 2020 and how we expect to grow throughout FY 2021. And again, it's not so much today folks issue of talent acquisition, It's just more about getting people cleared and getting them into the right facility or into the right country. So, we continue to work through things. We are one of the only companies that actually saw ahead of need and built temporary skip space in our Chantilly facility that helped two Intel customers allow us to bring more folks back. So, we continue to work on more missions. (01

[Operator:]

And our next question will come from Louie DiPalma with William Blair. Please go ahead.

[Louie DiPalma:]

John, Tom, and Dan, good morning. Thanks for squeezing me in.

[John S. Mengucci:]

Good morning, Louie. You bet.

[Louie DiPalma:]

Of your $9 billion in pipeline-submitted bids, is there a skew towards ISR and signals intelligence? And are there many $100 million-plus opportunities available here? And have you seen the pipeline significantly expand for these types of AVT like Mastodon Design like 63 System Services (01

[John S. Mengucci:]

Yeah. Louie, so on the first part of the question around what we see in our $9 billion, I'll start off by saying awards are lumpy. But a nice mix between new and recompete, which is what we like to continue to see, and a larger amount of bids outstanding to be submitted in the technology area versus the expertise area. So, how does that drive growth in the future? It says that we'll continue to have more growth on the technology side versus the expertise side. On to the Counter-UAS side, sure, I mean, every action gets a reaction, right, and not just that kind of Counter-UAS incident. We have a number of folks who are stationed overseas in our mission expertise area that are – what most of us would say, they're on the wrong side of the wire from those forward operating bases each and every day, at really dangerous places around the globe. We get SITREP reports weekly from what bad actors are out there doing and UAS are starting to play a more and more major role there. We do just south of a couple hundred million dollars' worth of Counter-UAS today work and that's across the entire federal government. We expect to continue to do more when we bring additional technologies in from , when we get size, weight and power improvements from our folks out of Mastodon (01

[Louie DiPalma:]

Sounds good. Thanks, John.

[John S. Mengucci:]

Thanks, Louie.

[Operator:]

And our next question will come from Mariana Pérez Mora with Bank of America. Please go ahead.

[Mariana Pérez Mora:]

Good morning, everyone.

[John S. Mengucci:]

Good morning.

[Thomas A. Mutryn:]

Good morning.

[Mariana Pérez Mora:]

So, my question is about, do you mind reminding us what is the recompete risk for FY 2021?

[Thomas A. Mutryn:]

Yeah. Recompete risk for FY 2021 is very similar to prior years. The amount of work coming up for recompete is kind of the 15, kind of 20 percentage range, somewhere around there in terms of kind of awards. Now, in terms of composition of revenue, for FY 2021, earlier on, I said that 83% of revenue is under existing programs, 11% recompete and 6% for new business. So, there are some kind of recompetes that we'll need to kind of win. Our recompete win rate has been running in the 90% range for the last several years. We expect it to continue at those kind of levels as well, a relatively kind of stable portfolio.

[Mariana Pérez Mora:]

Thank you. The next one is related to the Section 3610. You have in your guidance an assumption that that will be extended through December. How large would be delayed (01

[John S. Mengucci:]

Yeah. So, question around if we get to December, we don't see 3610 extended. So, how we see that is – if we find that we get to October 1, frankly, and 3610 hasn't been extended, then we'll have to work through how we handle those employees of ours that are not going to be covered on the Reserve Act (01

[Operator:]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to John Mengucci for any closing remarks.

[John S. Mengucci:]

Thanks, Cole, 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 all available after today's call. Stay healthy and all my best to you and your families. This concludes our call. Thank you all and have a very good day.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. Participants may now disconnect their lines at this time.