CACI International Inc (CACI) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fiscal 2022 Second Quarter Results. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. [Operator Instructions] At this time, I would like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please, go ahead.

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 is 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 opportunity 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 comps. 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 real capabilities 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 last night 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 software-enabled end-user devices coupled with CACI network modernization capabilities and contracts provide long-term growth and margin expansion opportunities. To the employees of SA Photonics and ID Technology, 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, 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 improve 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 the respective growth curves in our 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 reduced 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 start 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. [Operator Instructions] And 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 a kind of annualized kind of 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 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 asked 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 TAM 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 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 kind of last year and that year-over-year comparison is easier in the back half than the first half. And so we feel pretty good about hitting the higher kind of revenues in the back half kind of 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?

Gavin I like the last part of that answer. But let me -- first of all, thank you for that for the question. Sure. Look we love talking about the companies that we bring in to the CACI family that are always driving deeper and more broader customer relationships as well as just exquisite capabilities for us. Look at a macro level, SA Photonics and ID Tech are early-stage investments. We're investing ahead of need. And although they are EBITDA margin dilutive this year they're accretive to EPS. They both have strong IRRs because those are the kind of acquisitions that we had historically done. So, let me talk a little bit about SA Photonics first. Look they are the leading provider of multi-domain Photonics technology. So, we put those announcements out a few weeks back. And as I mentioned during my prepared remarks they expand our LEO capabilities. They give us laser comms for airborne and maritime platforms. Those requirements are not even defined yet, but beginning to be discussed because of the amount of information that's going to need to be passed sensor to sensor and sensor to ground as the defense department builds out JADC2 and other ways of sharing their information. They add manufacturing capacity for us and they expand our customer and our contract footprint. SA Photonics is an early mover in a burgeoning market with significant growth potential. We talked about the absolute dollar growth in space we talk about the space force focus on more dollars going to our space and most importantly the intelligence community is focused on space. Tom mentioned there's $275 million in consideration. There's $25 million for the FY 2022 revenue. So, full year that's around $50 million. And it's an asset with scarcity value. And combined with what we do, we are the US leader in that and that's important when you think about intelligence customers and sensitive customers' missions who are not going to search the globe to find other cross-link laser comm solutions to be pushing highly classified data. On the ID Tech side they started as a VAR. They've done some great R&D investments. We're going to continue to invest. They fill some great gaps, but they also complement what we're doing in our network area. That army program is looking at modernizing a number of army networks to make certain that they can handle better than unclassified data. And the other thing you need to meet the NSA's requirement of CSFC is to have commercial devices with a software wrap around them so that they can best protect that information. So, we have the networks out there a lot of the devices doesn't help. You have the devices out there without the network doesn't help. So, we're going to look to utilize their VAR knowledge to potentially reduce some of our off-the-shelf component costs in the rest of our business. But that's a $200 million job. It's $95 million for six months' worth of revenue right? I ask you to think Gavin the deal in two different pieces. A very reasonable multiple for the CSFC capabilities think about mid-teens EBITDA and a very low multiple for the legacy business think mid-single digit. So we are looking to build out investments in the rest of this year and throughout FY 2023 to make certain when both CSFC become fully funded. And we are right at the sweet spot of optical comm spending in the space market in the 2023, 2024 timeframe. We're going to continue to invest. I've made that statement numerous times. I'm not going to not invest to meet a quarterly point when the world changes. And the world is going to invest a lot in optical comms. We are the largest and the best-positioned U.S. supplier of that. So we're going to continue to invest. And those EBITDA margins will continue to get to 11% and beyond 11% for a number of years to come which drive long-term growth in this 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 is 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.

Yeah. Colin thanks. Well, look, taking a closer to home right around wage inflation. Let me talk about that piece first. And then, we'll talk about margins. Look, I've said at least over the last few quarters, paying up for top talent, specialized technology skill sets and clearances and the like is nothing new. And we're very happy to pay people for that. Our increasing technology work we're able to be more efficient and flexible in who we hire and how we leverage that talent. So revenue is not necessarily linear to headcount. So we have a number of ways to absorb wages. 60% of our revenue today is cost plus. So in a detailed manner all of our costs are passed on to our customer. And our customers want us to hire the best and the brightest. They want us to look at folks who are technology natives. And make absolutely certain that those people are going to focus the long-term careers in national security. So, 60% of our revenue all these costs will get passed on to our customer set as all previous costs have always, always been. On the firm fixed price side, that as well as some cost plus work gets pushed back to how we fish on our way. And we believe with our internship program we're hiring the best and brightest. So it may take 45 hours to get some job done. And based on the talent we're bringing in that now takes 35 hours. So the government wins. We win on our margin side. The government wins because we get more capability out to them sooner. It allows them to procure even more capabilities from us. And then on the indirect side, look, we put our shared service center in long before we talk about wage inflation because wage inflation of the -- I am sorry, wage inflation of the Washington D.C. or Virginia area is very different than what you'll see out West. And that's where we decided to invest in.

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 mirror increases which we give to our employees and absorbing some higher onetime expenses in the quarter associated with some acquisitions and kind of refinancing the debt as well. So kind of 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?

Yeah. Colin thanks. I wouldn't say they're splitting it out to a large extent today, but you'll see some customers buying software in a very different manner. So let me share a couple of things there. With our BEAGLE contract with Customs and Border where there's a hundred -- couple hundred digital applications that are out there that Customs and Border agency uses day in and day out, they were looking for productivity enhancements. So for the same dollar they could get more enhancements done to their digital apps. So we had already pivoted a number of years, four to five years back, moving towards Agile software development, building three different Agile Software Factory to make certain that we were ready for that need. So from sure the way software was delivered to the way it's being delivered today, we are seeing customers buy very, very differently, where I have these 10 number of apps that I need to have modified. What does it cost me to modify an app? And that's what the BEAGLE contract files. So they are beginning to contract differently. On the technology side, predominantly mission technology side, we are seeing customers move more towards software-based devices, which is that when the threat changes, how do I not go out and repurchase millions of devices. The perfect example is you all have heard me say this, I hate using the iPhone as an example, but it's a perfect example. There's been what 15 versions of the iPhone and there's been 55 billion apps. So one would say that software on those phones changes far more often than the hardware device itself. So take that model move that towards handheld devices, mobile, fixed site devices that are tough to get at, look at surface ship, systems that are out there. What they really need when the mission changes it's a software upgrade. To bring that into port and tear circuit cards out and wax of the equipment and change size weight and power issues that's where the DoD is going. For a company our size, we don't need that many customers moving towards that on a year-over-year basis to be able to drive not only top line growth but also 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 US Court of Federal Claims found CACI ineligible to bid on an $800 million contract for the Army for an encrypt 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 biddings?

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. So Mariana, I'll take a first stab at it. We do have an abnormal set of circumstances the resurgence of COVID Omicron, supply chain issues, change in people's psyche, reduced workforce in the government and the like. And so I think everyone recognizes these are kind of unusual events. And I think it's very reasonable to expect things to either get back to a more normative level where people learn to adjust associated with it. And the demand signal is out there and the government customer will eventually kind of come to terms with it and ensure that we have the ability to get things on contracting and purchase kind of services or goods to allow them to meet their essential mission requirements. And so I think it's very reasonable to assume that we will get back to a kind of more normative level. I'd expect that Omicron -- when we put our guidance together at the beginning of the year we did mention that we expected things to be a more normative level. This was something again unexpected. So I think that's a reasonable framework to look at the world.

[Operator Instructions] 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.

Thanks. And then a quick follow-up for Tom, there's been a shift around R&D expense recognition for tax purposes and there's some room for interpretation around, what's kind of included in there. How are you viewing the potential impact to cash in fiscal 2023, if we don't see a repeal?

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.