CACI INTERNATIONAL INC /DE/ Q3 2026 earnings call

Thanks, Jeanine. Good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning. We are providing presentation slides, so let's move to slide two. 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 three, please. To open our discussion this morning is John Mengucci, President and Chief Executive Officer of CACI International. John.

Thanks, George, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal year 2026 results, as well as our updated fiscal 2026 guidance. With me this morning is Jeff MacLauchlan, our Chief Financial Officer. Move to slide four, please. Before turning to our results, I want to start by reminding everyone that CACI is a fundamentally different company than it was 10 or even five years ago. This evolution is the result of a clear and consistent strategy, intentional leadership, and disciplined execution over many years. It did not happen by accident. The key elements of our strategy are, first, we operate in seven markets where we possess decades of deep mission knowledge. We know and understand what our customers need. Second, we focus on enduring priorities. We are a national security company that targets narrow, deep funding streams. Third, we're a software-defined technology leader.

We differentiate ourselves by using software, excuse me, to address critical needs with the speed, agility, and efficiency our customers demand. Fourth, we invest ahead of customer need to show the art of the possible. We're not waiting for requirements. Fifth, we deploy capital in a flexible and opportunistic manner to create value for our customers and our shareholders. Executing this strategy has enabled us to expand our portfolio, increase free cash flow per share, and generate additional shareholder value. Slide five, please. Turning to our third quarter results, we delivered another quarter of outstanding performance on our way to another exceptional year. Revenue for the quarter was $2.4 billion, up 8.5% year-over-year. We also generated a strong EBITDA margin of 12.3% and robust free cash flow of $221 million.

In addition, we won $2.2 billion of awards, which represents a book-to-bill of 0.9x for the quarter and 1.2x on a trailing 12-month basis. These awards were driven by our exceptionally strong recompete performance, an important indicator of customer confidence and a key enabler of long-term growth. While award activity improved in the quarter, it is not yet fully recovered from the multiple government shutdowns and acquisition organization changes. As we said before, quarterly awards can be lumpy, but we continue to have excellent visibility, a strong pipeline, and see a very constructive macro environment. Our results continue to reinforce that CACI is differentiated and well-positioned. With that said, we're raising our fiscal 2026 revenue and EBITDA margin guidance driven by the addition of ARKA and the strength of our organic margin performance. Slide six, please.

On that note, let's discuss our recent acquisition in a bit more detail. During the third quarter, we closed the acquisition of ARKA, a leading technology company focused on national security missions in the space domain. ARKA brings exquisite space-based imaging sensor technology with high technical barriers to entry, agentic AI-based ground processing software, and deep customer relationships built over decades of strong performance. ARKA is a powerful addition to CACI. We now have sensors deployed across all domains. We can provide multi-source, actionable intelligence and bring operationalized agentic AI capabilities to classified customers across the national security apparatus. In fact, we already have agentic AI efforts underway with our shared customer footprint, and we see significant additional cross-selling opportunities. ARKA positions us for opportunities including Golden Dome, INDOPACOM support, future ground architecture, and space superiority missions.

To fully leverage our combined capabilities, we have integrated ARKA and CACI's existing space portfolio under the leadership of ARKA's former CEO. ARKA exemplifies the type of acquisition that investors should want us to make. Wide competitive moat, unique capabilities and technology, exceptional execution history, and strong financial performance. All-in-one of the most strategically important domains in national security. It's our flexible and opportunistic capital deployment strategy in action, positioning CACI to drive long-term growth in free cash flow per share and additional shareholder value. Slide seven, please. CACI is a national security company. That focus continues to be a powerful differentiator in the marketplace. We have more than 1,400 people embedded in mission spaces across all combatant commands, performing planning, intelligence analysis, cyber, and operational support. We are involved in every operational headline you read, as well as the many operations you will never read about.

This proximity to mission gives us an advantage that is hard to replicate. We understand the mission and the threats because we see them every day. This creates a feedback loop that sharpens our business development, strengthens our reputation for execution, and informs our decision-making, allowing us to confidently invest ahead of customer need. These are meaningful discriminators that create competitive advantage and help drive our financial performance. For example, CACI recently received multi-year extensions on several contracts in critical mission-focused areas as a direct result of our exceptional delivery. Slide eight, please. Our strategic investments, informed by the mission proximity I just described, that position CACI as a leader in software-defined technology in key warfighting domains that are receiving significant attention and funding from our customers. These investments also demonstrate a repeatable strategy that will drive future growth and shareholder value.

A great example is our Spectral program, where we are developing the next generation of shipboard signals intelligence and electronic warfare capabilities for the Navy surface combatant ships. We initially invested ahead of customer need to show them the art of the possible and to demonstrate our differentiated solution during the bid phase. Now we are actively investing ahead of need during execution to accelerate delivery of capabilities to the field, a key ask of the current administration. During the quarter, the program continued to progress as we achieved Milestone C, marking the start of Spectral's low-rate initial production and deployment phase. This was a defining step towards ramping up the program and delivering this critical EW technology to the fleet. Because Spectral was built using software-defined technology with open architectures, another key administration priority, we see significant additional opportunities across the Department of War and internationally.

Another example is in Counter-UAS, where we are seeing accelerating demand, increasing orders, and a growing pipeline driven by Merlin, our commercially sold Counter-UAS system. Merlin leverages nearly two decades of our Counter-UAS investments and work across the Department of War to deliver a system that sees further, detects more, provides more critical decision-making time, and delivers more effective low to no collateral damage capabilities than any other available system. Merlin is a software-defined system that can be rapidly updated and provides a nearly unlimited magazine of economically sustainable non-kinetic effects, including unique cellular detection and defeat capabilities. From concept to deployment in under a year, we are not only providing the Department of War with the capabilities they are asking for, but we are also delivering them at the speed demanded.

We are proving this in real time with a Merlin system that our customers deployed on the southern border. A final example is our strong positioning for Golden Dome. CACI's have been investing in, developing, and building many of the capabilities this mission requires across many critical layers. First, our Counter-UAS systems. Defending the homeland is not just about ballistic or hypersonic threats. It's also increasingly about threats from unmanned aircraft systems. CACI's technology is ideally suited for this mission, where extended detection range provides critical time for decision-making, and low to no collateral damage effects are critically important for mission success. Second are our exquisite left-of-launch capabilities. These include sensitive cyber activities as well as our worldwide set of embedded sensors, which can detect and defeat threats before they are deployed. Third is our space-based sensing.

ARKA significantly expands our capabilities in the space domain, including technologies such as hyperspectral imaging for missile detection. Spectral, Merlin, and Golden Dome are three significant proof points of how CACI creates value for our customers and our shareholders. They demonstrate where we identified an enduring need early, invested well ahead of award, and have established differentiated positions through years of disciplined execution and continued innovation. Slide nine, please. Turning to the macro environment, we continue to see constructive budgets and demand signals. While the government fiscal year 2027 budget is still evolving, the proposed spending looks very positive in many key areas for CACI, including electronic warfare and Counter-UAS, space, especially classified space and counterspace programs, C5ISR, and IT modernization, including AI and the digital backbone.

We are in the right markets that are aligned to enduring, well-funded priorities, and we're providing the right capabilities to address our national security customers' most pressing needs. With that, I'll turn the call over to Jeff.

Thank you, John. Good morning, everyone. Please turn to slide 10. As John mentioned, we're very pleased with our third quarter performance, despite some modest disruption from the ongoing DHS shutdown. Our revenue and awards reflect our strong market position in a recovering but still sluggish award environment. While our strong margins and cash flow demonstrate the high-value differentiated characteristics of our offerings and our operational excellence. In the third quarter, we generated revenue of $2.4 billion, representing 8.5% year-over-year growth, of which 6.8% was organic. Despite the modest DHS impacts that I mentioned, we still saw the expected acceleration in organic growth moving into the second half of the year. EBITDA margin of 12.3% in the quarter represents a year-over-year increase of 60 basis points, even after absorbing $17 million of ARKA transaction costs.

Adjusting for these expenses, our strong third quarter profitability was driven primarily by overall mix and strong program execution. Third quarter adjusted diluted earnings per share of $7.27 were 17% higher than a year ago. Greater operating income, along with a lower share count, more than offset higher interest expense, including $11 million related to ARKA, a higher income tax provision, and the transaction costs I mentioned earlier. Finally, we delivered healthy free cash flow of $221 million in the quarter, driven by strong profitability and good working capital management. Third quarter cash flow was reduced by approximately $20 million due to transaction costs and other acquisition-related financing fees. Days sales outstanding, or DSO, were 55 days, two days lower than the prior quarter. Slide 11, please.

Turning to our balance sheet and capital structure, our pro forma leverage at the end of Q3 was 4.2x net debt-to-trailing 12-month EBITDA, slightly better than the expectation we provided when we announced the ARKA acquisition. We continue to expect leverage to return to the low threes within six quarters based on the strong cash flow characteristics of our business. I'll remind you again that we have a strong track record of successfully and quickly de-leveraging after major acquisitions, which underscores our consistent financial performance, disciplined capital deployment, and demonstrated access to capital. As we have previously indicated, ARKA is accretive to both growth and margins. The acquisition of ARKA is just the latest example of our flexible and opportunistic capital deployment strategy and the evolution of our portfolio, which positions CACI to deliver long-term growth and free cash flow per share and additional shareholder value.

Slide 12, please. We're pleased to increase our fiscal 2026 revenue and EBITDA margin guidance driven by the addition of ARKA and the strength of our organic margin performance. You'll notice on the right-hand side of the chart, we've provided a breakdown of costs associated with the acquisition for transparency and your modeling purposes. We now expect revenue to be between $9.5 billion-$9.6 billion. This represents total growth of 10.1%-11.3%, which includes about 3.5 points of growth from acquisitions, including $150 million from ARKA. We're increasing our fiscal 2026 EBITDA margin to the 11.8%-11.9% range, underscoring our strong execution and evolving portfolio as well as contributions from ARKA. Our full year margin outlook includes the impact of approximately $22 million of transaction costs related to the acquisition. Our updated FY 2026 adjusted net income guidance is between $615 million-$630 million.

Adjusted net income reflects the after-tax impact of approximately $60 million of pre-tax transaction costs and higher interest expense, largely offset by stronger organic margin and ARKA's earnings contribution. This yields full year adjusted EPS guidance of between $27.70 and $28.38 per share, which represents growth of 5%-7% even as we absorb these costs. Finally, we are reaffirming our free cash flow guidance of at least $725 million, even after absorbing nearly $50 million of transaction costs, interest expense, and an increased investment in capital expenditures. As we consistently say, we see free cash flow per share as the ultimate value creation metric, and our FY 2026 guidance represents 65% growth in free cash flow per share over FY 2025. Slide 13, please. Turning to forward indicators, all metrics continue to provide good long-term visibility into the strength of our business.

Our third quarter book-to-bill of 0.9x and our trailing 12-month book-to-bill of 1.2x reflect good performance in the marketplace, even with the multiple shutdowns and slow rebound in award decisions. The trailing 12-month weighted average duration of our awards in Q3 continued to be just over six years. Our total backlog of $33.4 billion increased 6% year-over-year, while our funded backlog increased 19% over the same period. Both metrics reflect healthy organic growth. Even when normalizing for ARKA's contribution of $835 million to total backlog and $422 million to funded backlog. Additionally, ARKA has another $2 billion of non-competitive franchise programs from which we expect to recognize revenue over time, but that don't yet meet the regulatory criteria to be added to backlog. For fiscal year 2026, we now expect 98% of our revenue to come from existing programs, with 1% each from recompetes and new business.

Progress on these metrics reflects our continued strong operational performance and yields increased confidence in our outlook as we close out the year. In terms of our pipeline, we have more than $4 billion of bids under evaluation, over 80% of which are for new business to CACI. We expect to submit another $22 billion in bids over the next two quarters, with over 75% of those being for new business. We continue to have excellent visibility, are well-positioned in a very constructive macro environment, and remain very comfortable with our outlook, including our three-year targets. In summary, we delivered another quarter of strong results. Our performance continues to demonstrate our differentiated position in the marketplace, which is further enhanced by our acquisition of ARKA.

Our ongoing investment ahead of customer need enables us to win and execute high value, enduring work that drives long-term growth, increased free cash flow per share, and additional shareholder value. With that, I'll turn the call back over to John.

Thank you, Jeff. Let's go to slide 14, please. In closing, I want to emphasize what truly differentiates CACI. While others talk about adjusting to the changing market, we're already delivering. We anticipated years ago that speed, software-defined solutions, and mission proximity would define success for the long term in national security. We positioned the company accordingly through deliberate investments and disciplined execution of our strategy. This is all about expanding the limits of national security. It isn't about chasing trends, understanding where threats are evolving, where our customers' hardest problems will be, and building the capabilities to address them before they ask. That's what's allowed us to compete and win against a broader set of competitors. Our third quarter and fiscal 2026 results to-date demonstrate this differentiation in action.

Strong organic growth, expanding margins, robust cash generation, and the strategic addition of ARKA to further strengthen our position in the space domain. We're executing our strategy, delivering for our customers, and driving long-term shareholder value. Before I turn the call over for questions, I want to congratulate NASA and the Artemis II crew on their historic achievement. I also want to recognize that both CACI and ARKA contributed critical technology that exemplifies the caliber and mission impact of our offerings. CACI's optical communications technology enabled high-definition video and data transmission throughout the entire mission, while ARKA provided essential sensing technology on the SLS rocket to ensure a safe crew ascent. To both teams, thank you for your exceptional work on this landmark achievement for our nation's space program.

As is always the case, our success is driven by our now 27,000 employees, who are ever vigilant in expanding the limits of national security. To everyone on the CACI team, I am proud of what you do every day for our company and for our nation. To our shareholders, I thank you for your continued support of CACI. With that, Jeannie, let's open the call for questions.