Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Conference Call to discuss the pending acquisition of Arca Group. 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. If you should need any assistance during this call, please press star, then the number one on your telephone keypad, and someone will help you. At this time, I would like to turn the conference call over to George Price, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.
Thanks, Kate, and good morning, everyone. I'm George Price, Senior Vice President of Investor Relations for CACI International. Thank you for joining us this morning to discuss our pending acquisition of Arca Group, which we will refer to going forward as Arca. 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 this morning'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, here's 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 pending acquisition of Arca. With me this morning are Jeff MacLauchlan, our Chief Financial Officer, and Jason Bales, our Chief Technology Officer. Slide four, please. Earlier this morning, we announced an agreement to acquire Arca, a leading technology provider to the national security space community. As we've said many times, we are a disciplined acquirer, and our M&A strategy is focused on finding attractive assets that are compelling strategically, financially, and culturally, which fill either capability or customer gaps in the markets we serve. From a strategic perspective, Arca represents a deliberate step in executing our market strategy for space and adds complementary technology and increased customer presence. That technology and presence will allow the combined company to capture significant future opportunities in an important and growing market and strengthen our leadership in this burgeoning domain.
It also aligns well with what we have been signaling for the past year about where our M&A focus would likely be: electronic warfare and space. From a financial perspective, the acquisition of Arca adds a business that is driving double-digit revenue growth and EBITDA margins in a low 20% range. Jeff will provide more details on the financials shortly, but I want to emphasize this transaction enhances our ability to drive longer-term growth and free cash flow per share, excuse me, and generate additional shareholder value. And culturally, Arca brings a highly technical and exceptionally talented workforce with decades of mission knowledge. Their people are focused on delivering innovation and driving customer success, which is perfectly aligned to our culture here at CACI. Together, we will continue to expand the limits of national security.
Arca truly checks all the boxes for our disciplined and proven M&A strategy and is just the latest proof point demonstrating both our flexible and opportunistic approach to capital deployment and the technology company the CACI has become. Slide five, please. Arca is a technology company that traces its heritage back for decades, and their business is focused in three areas. In sensing, Arca provides exquisite imaging and remote sensing technology to national security customers through prime satellite contractors and is truly a national asset. They are one of only a few companies able to provide the most advanced imaging technology payloads to support critical national security missions. In fact, their technology is deployed on satellites across all orbits and is the tip of the spear for a wide range of critical national security space initiatives, including Golden Dome and the support of INDOPACOM.
In sense-making, Arca brings software-based capabilities that enable the end-to-end generation of actionable intelligence through radar and image processing, mission management, and sensor orchestration. Additionally, Arca is a first mover in successfully operationalizing agentic AI-based systems to automate intelligence production and other mission management functions for classified customers. Finally, Arca provides other optical technology, specifically laser warning systems and directed energy components. Now, let me provide some details on how each of these areas complement what CACI is already doing and why we're excited about the prospects of the combined company going forward. Slide six, please. In their sensing business, Arca's space-based imaging sensors complement CACI's similarly strong portfolio of sensors deployed across land, air, and sea domains. Together, we are the company providing highly sought-after, exquisite sensors to national security customers across all domains.
In their sense-making business, Arca's geo ground processing capabilities complement our own signals intelligence processing or SIGINT production. Together, we become a leading provider of multi-source intelligence or multi-INT. In addition, as the number of satellites grows and the volume of raw data being collected explodes, the need for automating ground processing at scale to enable speed and efficiency becomes an even greater imperative. Arca's operationally proven agentic AI-based software is already doing this today, and there is a tremendous opportunity to scale that software across CACI's broader portfolio of ground processing programs to deliver enhanced value to our installed base of customers. This is exactly the innovation and investment ahead of customer need that we value at CACI, and Arca makes that possible almost immediately.
While sensing and sense-making are the two main focus areas, Arca's well-established laser warning and directed energy technologies represent new adjacent capabilities to CACI and provide some interesting optionality with our own optical technologies. Slide seven, please. As you can see, the breadth and depth of our combined capabilities are truly impressive. Together, we are a leading provider of sensors and multi-source intelligence across all domains, with a first mover in utilizing agentic AI-enabled software to automate and accelerate delivery of actionable intelligence to the war fighter. This is exactly what our customers need and exactly what this administration is asking for. Together, we sense. Together, we make sense. And together, we enable our national security customers to act with increased speed, efficiency, and lethality. With that, I'll turn the call over to Jeff.
Thank you, John, and good morning, everyone. Please turn to slide eight. As John mentioned, we're extremely excited about the acquisition of Arca. Before getting into the specifics of the transaction, I'd like to highlight a few details about their business profile as they underscore the attractiveness of the business and its fit with our strategy. Similar to CACI, approximately 90% of Arca's revenue is with national security customers. In addition, Arca's high fixed-price content is driven by their IP-based differentiation, which is well-aligned to evolving customer buying preferences. Finally, Arca's sought-after technology has created a unique competitive position in the space domain, placing it as a preferred provider on a number of long-term, multi-hundred-million-dollar franchise space programs. This is a natural complement to CACI's large backlog and proven ability to win and retain larger and longer-duration programs. Please turn to slide nine.
Now, let me discuss the financial highlights of the transaction. We're acquiring Arca for an all-cash purchase price of $2.6 billion. As a result of the structuring of the transaction, there's an ongoing tax benefit with a present value of $225 million. Net of the present value of the tax asset, our effective consideration is $2.375 billion, which represents a next 12 months' EBITDA multiple of 16 times. This is an attractive multiple for an established company in this market that has been deploying proven technology for decades, has a long track record of strong financial performance, and has an impressive customer presence and competitive position. In terms of expected financial performance, Arca is a growing and highly profitable company with a track record of driving double-digit revenue growth and EBITDA margins in the low 20% range.
Over the next 12 months, we expect Arca will deliver approximately $650 million of revenue and $145 million of EBITDA, making it highly accretive to CACI's revenue growth and EBITDA margin. Considering the impact of one-time transaction-related expenses, the combination is expected to be neutral to Adjusted EPS and Free Cash Flow in fiscal 27, which is the first full year, and firmly accretive in fiscal 28. We will provide updated guidance for fiscal 26 in our normal rhythm after the transaction closes. Now, let me provide some color on the financing details of the transaction. We've executed a committed bridge facility concurrent with the execution of the purchase and sale agreement. We expect permanent financing to be in place at closing.
Based on current market conditions, we plan to issue $1.3 billion of new transaction debt comprised of a new seven-year Term Loan B for $800 million and senior notes for $500 million. The remainder of the purchase price will be funded under our existing revolving credit facility. Finally, in terms of timing, we expect the transaction to close near the end of our third quarter of fiscal 2026. Of course, closing is subject to regulatory approvals and other customary conditions. Please turn to slide 10. Post-closing, we expect leverage of 4.3 times net debt to trailing 12 months pro forma EBITDA. While our target range is two and a half to three times, we have regularly indicated a willingness to go higher than that for the right opportunity, and Arca is exactly that.
The use of our balance sheet and strong free cash flow generation has been a key element of our portfolio evolution strategy. I'd also remind you we have a strong track record of successfully and quickly delevering after major acquisitions. This underscores our consistent financial performance, disciplined approach to capital deployment, and our demonstrated access to capital. In fact, we expect leverage to be back in the low threes within six quarters of closing based on the strong cash flow characteristics of the combined business. And with that, I'll turn the call back over to John.
Thank you, Jeff. Let's go to slide 11. To wrap up, Arca is a fantastic technology acquisition for CACI and yet another example of our strong and consistent M&A philosophy that has transformed the company over the last decade. The macro outlook continues to be very constructive with strong customer demand signals, surging space market activity, continued administration support, and healthy funding. Our significant business development and investment resources will enable us to accelerate more value to our customers and our shareholders. For our customers, we will be one company with an unwavering commitment to your national security missions and deep understanding of the importance of the speed and agility that software and software-defined technology deliver. The combination of CACI and Arca broadens access to our combined technology portfolio and enables us to deliver capabilities even faster.
We're positioned to help you address your biggest challenges and your most important priorities across the space domain and beyond. For our shareholders, this deal is consistent with our M&A strategy, which has served us well over many decades and will continue to deliver growth in free cash flow per share and long-term shareholder value. With that, Kate, let's open the call for questions.
At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We encourage everyone to limit yourself to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gavin Parsons with UBS. Your line is open.
Thank you, guys. Good morning.
Morning, Gavin.
Seems like there's a lot of classified work here, but you talked about several multi-hundred-million-dollar programs. I was hoping you could go into a little bit more detail on any of the specifics and the opportunity set for those if you're able to talk about them.
Yeah, Gavin, that's, given that a large percentage of Arca's business is in the classified segment, it'll be difficult to talk about specific programs. But what we can talk about is they're a national asset in providing imaging sensor payloads, and that's for EO/IR as well as hyperspectral. They have also done an outstanding job of building a path towards Multi-INT, partnered with us on the SIGINT side and they on the GEOINT side. We're in different customers across the IC, and even where we're in the same customers, we're in a slightly different vertical and also serving different missions. So there's very little direct overlap. The opportunities we have to bring the combined portfolio to a wider set of customers are very strong. And it goes without saying, they bring very strong past performance.
So we'll be able to share more post-closing, but a very strong company, multi-decade company, well-established within the market and a well-established business with a track record over many decades.
Great. I'll try one more. What are you guys assuming for Golden Dome and what's Arca's positioning there?
Yeah. I mean, they're a national security space imagery leader. So their sensors, Gavin, are going to be what we would call tip of the spear for priorities like not only for Golden Dome, but also in the INDOPACOM region. They're already engaged in almost all of the EO/IR and hyperspectral constellations. As you all know, we're bringing left-of-launch capabilities and a very strong counter-UAS protection layer. And again, I'm going to have Jason talk a little bit on this. Our ability to drive end-to-end multi-INT solutions for all potential intelligence-gathering missions, that is one of the major compelling reasons for this acquisition, and it also talks to future synergies as we get into running this business.
Yeah, this is Jason. The question on what they could do to contribute to these critical missions, right? They currently do radar and imaging processing for electro-optical IR sensors to do detection of threats where they're popping up in the world, right? That's an important left-of-launch capability for initiatives like Golden Dome and the capabilities we have out in INDOPACOM. Combine that with our ability to do signal processing exploitation on the SIGINT side, and we have a very strong multi-INT portfolio we bring to the table.
Your next question comes from the line of John Goodin with Citi. Your line is open.
Hey, guys. Congratulations on the deal, and thank you for taking my question here. I was hoping maybe you could just give us a little bit of maybe historical context on how this deal came about. Was it? Were there other interested parties? Were you part of a bidding situation? Was there a historical relationship with the company? Any useful context would be great just to add some color to the situation.
Yeah, John, thanks. I'll start at the strategic side. Look, our M&A strategy has always been and continues to be focused on filling gaps. We've always talked about capabilities, customers, past performance, culture, and Arca truly hits all of these. They've got decades of exceptional past performance, which only strengthens our past performance record. They also augment our growth of long-duration programs. We've talked for a number of years of bidding larger and longer-duration contracts. They have a number of long-term franchise programs that also bolster that backlog visibility that we've been very deliberate about. And then it's a very deliberate step in our strategy for the space market. We're pretty good at following a number of assets. This asset came up about five years back. The Blackstone Group picked this up.
They've done a phenomenal job of investing both CapEx and OpEx levels to continue to push this business forward, and we truly believe it'll expand our total addressable market and reach.
Yeah. John, this is Jeff MacLauchlan. The Blackstone Tactical Opportunities Unit did a really nice job in the five years or so that the company has been private in repositioning it and building some really important capabilities around it that leave it well-positioned to re-enter the public capital market area again, and we're really excited about some of the things they've done to set up the next things that we're going to be able to do here that Jason and John have been talking about.
That's excellent. Thanks, guys. And if I could ask one more. Looking at the slides that you expected to be neutral to adjusted EPS in fiscal 2027. I just wanted to sensitize that a bit. If we were to try to brainstorm scenarios where it's more accretive than neutral, what might cause that? What might that look like? Obviously, there's a positive backdrop for space here. I don't know if that could be part of it, but I wanted to just sensitize that comment and brainstorm around it alongside you.
Sure. T here are a couple of things that leave us well-positioned relative to the comments that we made here. First of all, we've not assumed any cost synergies in the first two years or so. There almost certainly will be some administrative ones, and we'll start to see some synergies, I imagine, a little bit ahead of our assumptions. But again, this is not a cost synergy-driven acquisition, but we have made very conservative assumptions relative to cost synergies, and we expect that will not be zero. Similarly, on revenue synergies, John and Jason have both talked about a couple of areas where we see real opportunities related to Golden Dome, INDOPACOM, and being able to apply some of the growing capabilities of their Agentic AI tools across our SIGINT community and data, and those franchises almost certainly will start to see some benefit.
Beyond that, we also may find that we have a slightly better situation than we've assumed in terms of the borrowing cost and the financing of the transaction, where we've also made relatively conservative assumptions. So we're planning on it being neutral, but I have every expectation that there's a much greater opportunity for that to improve than to deteriorate. And I would further add that in fiscal 2028, the second full year, both earnings and cash flow are solidly accretive.
Your next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.
Yeah. Hey, thanks, guys, and happy holidays.
Yeah, you too.
Two quick ones. Just curious, is there any recompetes of note to be mindful of here? Chunky recompetes over the next 12-24 months. And then I did want to just ask to Jeff's point on financing costs, what are you expecting in your model? Are you penciling in 6%, 7%? What should we use as a baseline? Thank you.
Yeah, sure. This is John. On the recompete side, virtually nothing for Arca as we look into 2026 and even forecasting into 2027. They're a calendar year company, so they're January to December. We would also share that greater than 90% of their FY26 financial position is locked and loaded. They're either currently executing on that today or it's in their backlog. So a very true technology business without any exposure. And as you all know, there's times where expertise for recompetes dwarfs anything we've seen on the technology side. The second part of your question, I'm going to turn it over to Jeff.
Yeah. For the interest rate portion of your question, we have assumed sort of current levels. So you ought to think in the 6%-7%. That will vary depending on whether or not there's obviously any rate cuts coming, which many of us think there are. It will also vary as we get closer to the market and entering the market between the Term Loan B and the high-yield bond. So obviously, those markets behave a little bit differently, but also obviously, the bond market will be fixed rates and the Term Loan B will be floating. So depending on where we think we are at that point in the rate cut cycle, in the anticipated rate cuts, the composition between those two securities could change a little bit. But you're in the right zip code, Gautam, in the premise of your question.
Thank you. Terrific.
Thank you.
Your next question comes from the line of John Siegman with CFIL. Your line is open.
Good morning. Congratulations on the transaction.
Thank you.
Thank you. Previously, Arca announced a fair amount of capacity expansions in Connecticut. I was just wondering if you'd be able to share anything behind the basis of that and whether there's going to be opportunities to invest more capital in those facilities? Thank you.
Yeah. John, thanks. So I'll actually answer that a little more broadly. When we went through the diligence process, we were really looking for platform and tech obsolescence. Where does their strength in intellectual property? What are the missions that they're part of today? And I won't say we were surprised. We were very pleased that they have been continually investing. And I would tell you at a macro level, investments to grow up the sensor stack, think about more complex missions, and also investments to move down the stack to "lesser capable but higher value sensors." I mean, those are the two movement points for a company that's been doing this in the space for five decades. There is a lot of proof points on both the CapEx and the OpEx investments.
Their production facility is extremely high-tech, and we're very, very pleased with how that business has been run. There's a lot of barriers to entry technically. Beyond their intellectual property, this technology, as I know you know, has to work under some of those challenging conditions, and they've made a lot of the right investments to both sustain and grow it.
Thank you.
Thanks, John.
Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.
Good morning, guys, and congratulations on the deal.
Thanks, Sheila.
Hey. Maybe a little bit more on the contract if you can. Any help you could give on just the performance over a period of time, just given 80% fixed price, how they perform, how they manage to generate such high margins? And if you could give us a little bit more detail also on the six contracts that are over 100 million in revenues, that'd be helpful too.
Yeah, so John may want to add to some of this, but they have a demonstrated track record over the last several years of growing in this range and this sort of margin performance. One of the things that was of particular interest to us here, and you'll appreciate that given the classification nature, we can't talk about this in as much detail as you might find more satisfying, but they are in the early ramping phase of a number of large programs that have sort of medium-term, easily visible growth for activities currently underway and under contract, so demonstrative performance though of the growth rate and of the margins.
Yeah, and I would say that their margins are typical of a technology company. You've seen a lot of the margin movement that we have done within this company as we have continued to build our tech portfolio. Jeff covered the performance. The other area though I want to spend a little bit of time on is talking about just what they've done in the Agentic AI world because that, Sheila, is a really nice growth area for both not only for Arca, but for us. So Jason, you want to share a little bit on that?
Yeah. This is Jason. Thanks, John. So one of the things that positions Arca nicely, right, is not only do they build sensors that are up in space, right, but once that data gets down to the ground, they also have the processing architectures that allow them to make actionable intelligence from that data. And they built an agentic AI workflow or architecture around the processing of that data that allows them to scale up very well for, like we talked about before, some of these important critical missions for national security. But they also understand how to do that in the complex classified environments for the intelligence community and the Department of Defense, which puts them in a really important position to allow us to scale that capability across our portfolio of processing on the ground as well.
So they're really a first mover, like we said, in getting the agentic platforms into classified environments to do processing for intelligence that feeds the warfighter.
Could I ask a follow-up related to the ramp in the programs? Is it fair to assume just 10% growth and that's what the company grew historically, or are these large programs helping drive that double-digit growth going forward?
The large programs are clearly contributing to the growth, if I understood your question correctly.
Your next question comes from the line of Noah Poponek with Goldman Sachs. Your line is open.
Hey, good morning, everyone.
Good morning.
Can you quantify for us or give us a range on where you'd expect your fiscal 2027 net interest expense to land relative to the $180-$185 that you currently have for 2026?
We're going to wait on that till we close, Noah, and relative to the earlier question about some of the variability around the rate environment and the actual composition of the securities, we'll have more to say about that later.
Okay. And then you highlight this being one of a few capable of delivering large complex optical systems. How many other companies can provide these EO/IR payloads in classified national security satellite imaging? And can you talk about how these positions are allocated? Are they decided by the satellite manufacturer versus the end customer? And what duration do you have on these platforms once you're on them in this market?
Noah, thanks. This is John, so there's very tight, challenging specifications that are issued by the customer, and the majority of the decisions are made by the customer, and their sensors get a ride on somebody else's satellite. This is high-end classified processing for some of the most critical missions. There may be one other company in a couple of areas, but that's not a discussion we're going to be able to have on this line. They are clearly very adept at bidding these programs. Many of them are going to be fixed-price bids. They have proven that by doing that, that discriminates them as well. They're not someone new trying to do this in a much cheaper and cheaper manner, so they are in a very discreet market. They understand their customers extremely well. There's a long record of trust because these assets need to be delivered.
When you combine what they do in the space area with what they're doing on the ground processing area, we can't overstate the combination of GEOINT information, combining that with the signals production work that drives a multi-INT solution. The other thing I'll say is that the barrier to entry in this market is extremely high. I mean, you have to have, John's comment earlier, you have to have world-class production facilities. You have to have world-class talent over a number of decades. There's 1,000 engineering folks there. Over a third are software engineers that are working on some of the ground processing work. So there's a multifaceted large barrier to entry within this market, and we're very, very pleased to own them.
Your next question comes from the line of Tobey Sommer with Truist Securities. Your line is open.
Thanks. With respect to the company's, Arca's backlog and contract awards, what does the recompete profile look like over the next year or two? And how does the company's optical technology fit, complement, and differ from your own existing? Thanks.
Yeah. So let me talk for a second about the backlog, and then I'm going to tip it to Jason to talk a little bit about the second part of your question. Backlog here is a little bit of a different animal. If you think a little bit about Noah's question a minute ago and John's response to it, the backlog in terms of what's under contract is about $600 million. In addition to that, there is over $2 billion in the five-year planning window of non-competitive franchise sort of revenue for named programs that are related to proliferated systems. They're budgeted. They're long-horizon franchise positions where you don't change in the middle of the program. So you have to think about it a little differently than the way we generally talk about backlog. It's a little bit different sort of environment.
I'll let Jason take the second part of your question.
Yeah. Thanks for that question. So how is their optical portfolio c omplementary with ours? And I would say that's the key there, right, is Optics deals with the domain of photonics, which is just how to use light and lasers to do good things, right? So they build really high-end, exquisite optical sensors up in space that allow us to image the world around us on the ground and get information that's there, right? They also do optical processing for networking down on the ground to make it's about making the information there. Where we build optical information is in the communication space. So we're using that same domain of technology, but to pass data to and from up in space versus imaging down on the ground as such. And that's just one taste of the differences between our portfolios and the optical domain.
Your next question comes from the line of Louie DiPalma with William Blair. Your line is open.
Hi, John, Jeff, and George. Good morning. I was wondering, what is the mix of space versus non-space revenue? And secondly, does Arca have significant content with SpaceX and the SDA's Proliferated Warfighter Space Architecture C onstellation, for which they just awarded several large contracts for? Thanks.
Louie, so space, I'll say space and the related space activities on the ground are about three-quarters of the business, maybe a little bit more, so it's the clear center of gravity. There is, however, a very meaningful part of the portfolio that is related to other optical technology, and that's primarily around directed energy and some of the related very state-of-the-art coatings that go with that, and those are not particularly competitive, long-duration engagements related to those other optical things, but the narrow answer to your question is about three-quarters of it is space and ground-related activities to space.
Your second question around SDA and other space, they have a small role in the SDA world that we can share more of when we get through closing. Yeah, their focus is really highly classified intel space assets.
We'll now turn the call back to John Mengucci for closing remarks.
Thanks, Kate, 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. Jeff MacLauchlan, George Price, and Jim Sullivan are available after today's call. Please have a safe and happy holiday season, and all my best to you and your families. This concludes our call. Thank you and have a great day.
Ladies and gentlemen, that concludes today's call. You can now disconnect. Thank you and have a great day.