CACI International Inc (CACI) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter FY2015 Conference Call. Today's call is being recorded. [Operator Instructions] A special reminder to our media guests who are listening in. Please remember that during the question-and-answer portion of the call, we are only taking questions from the analysts. At this time, I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead.

Thanks, Kevin, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. And we're very pleased that you're able to participate with us today. And as is our practice, we are providing presentation slides. So, let's move to slide number two. Turning to our written oral disclosures and commentary, there will be statements made 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 results. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I'd also like to point out that our presentation today will include discussion of non-GAAP financial measures. These non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. So, let's turn to slide number three and open up our discussion this morning. Here's Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Thank you, Dave, and good morning, everyone. Thank you for joining us to discuss CACI International's third quarter 2015 results. With me this morning are John Mengucci, our Chief Operating Officer and President of U.S. Operations; Tom Mutryn, our Chief Financial Officer; and Greg Bradford, Chief Executive CACI Limited, who is joining us from the United Kingdom. Please turn to slide four. Overall, I'm pleased with our performance. Our year-to-date contract rewards are at record levels for the company despite continuing delays from award decisions and award protests. Nearly 40% of our contract wins this year were from business new to CACI. Our funding orders were strong and our backlog remains above $9 billion. We continue ramp up the background investigations work that we perform for the Office of Personnel Management and it is on track with our expectations. In short, we have won and continue to win more new business but delays in award decisions and from protests mean that we have to wait longer to realize revenue and profit from these wins. The delays have had an impact on our results, and John will discuss the steps we are taking to offset these delays, later in the call. With the visibility we now have we have refined our guidance for the remainder of FY15. Slide five please. Since the current fiscal year appropriations have been enacted, our customer have had a more stable platform from which to plan, program and obligate funds. Overall, we are cautiously optimistic about the market environment. We see positive signs from strong award activity, a healthy Q4 exit rate and full OPM run rate contributing to FY2016. However, we must realistically balance that optimism against a continued backdrop of uncertainty inside the federal market. Pricing and run rate pressures on professional services remain; delays in rewards will continue; and protests on larger, most solution centric work will continue to push execution even farther to the right and we will likely see additional Afghanistan drawdown index. Based on our FY2015 performance and the ongoing market realities, I fully expect CACI to realize low single-digit organic growth in FY2016. We will have more details on that in our June conference call. Our customer priorities continue to be shaped by escalating global tensions and threats at home and abroad. U.S. forces remain engaged in combat against the Islamic State in Syria and Iraq. As vital national security interest are threatened across the Middle East and Africa, the U.S. is also supporting coalition operations in those parts of the world. The administration has decided to retain a sizeable military presence in Afghanistan, opening the door to a potentially longer term commitment beyond 2016. Russia's behavior has raised tensions in Europe to levels unseen since the cold war and in response, the U.S. is engaged in land, sea and air operations to reassure allies and to deter further regression. These diverse and increasingly sophisticated threats along with the growing Chinese assertiveness led the new requirements on our customers in the defense and intelligence communities. Slide six please. As part of our drive to support these national priority missions, we acquired in the third quarter, LTC Engineering Associates, a great complement to the capabilities we gave to our acquisition of Six3 Systems. LTC adds innovative security and communications intelligence specialists, further expanding and enhancing our penetration of high-end C4ISR and cyber markets. During this quarter, we won four C4ISR contracts where our probability of winning was greatly improved because of the sophisticated and proven solutions in electronic warfare and non-traditional cyber that Six3 brought to CACI. Going forward, we are confident that we will continue to capture market share, winning new business, delivering operational excellence and deploying our capital for long-term growth. With that let me turn the call over to Tom to discuss our financials. Tom?

Thank you, Ken, and good morning, everyone. Let's go to slide number 7. In the quarter, we generated strong cash flow and we had solid funding, awards and new business. The quarter results reflect the OPM program returning to a profit and we expect to achieve steady state profitability on this contract in our portfolio. Our third quarter also reflects a lower amount of work days due to normal timing. Revenue was down year-over-year driven by a continued decline in lower margin sub-contractor labor and other material direct costs. We continue to grow our direct labor base, the primary driver of profitability. Indirect cost in selling expenses decreased as a result of the ongoing cost control efforts. Net interest expense was lower as a result of reduced debt level and no longer incurring non-cash expense on our convertible notes which mature in May of last year offset by slightly higher effective interest rate. Our tax rate for the quarter was 35.8%, reflecting a reduction in our tax reserves for uncertain tax conditions. We are expecting a full year tax rate of 37.6%. Slide 8 please. Our operating cash flow in the quarter was $97 million and $190 million of year-to-date. DSO decreased six days during the to 61 days. We continue to issue in and work timely and work constructively with the various government payment offices. Trailing 12-month free cash flow is $226 million and our annualize free cash flow yield per share is 10.5% at an $88 share price. With just under $1.1 billion of total debt, our net debt to trailing 12-month EBITDA leverage ratio is at 3.5 times. Slide 9 please. We are nearing our fiscal year ‘15 guidance range. As Ken pointed, delays in the award process and protests and the significant amount of new work are the primary factors. We continue to expect that our fourth quarter will be favorably impacted by stronger award base, the increased work on a number of existing contracts including OPM, a modest amount of new business and extra building day. Slide 10 please. We now expect our full year direct labor to increase in the 3% to 4% range and our operating margin to be about equal to last year 7.2% level. With that I will turn the call over to John.

Thanks Tom, let's go to slide 11 please. Operations closed Q3 in comparable position to deliver FY15 within guidance. We remain focused on winning new business, flawless execution of our current contracts and securing contract funding. We won $687 million of awards in Q3 with 40% of those awards for new business. With that said, let me provide an update on our previously protested awards. We have $300 million protested in Q1 all of which have been adjudicated in our favor. On the $700 million protested in Q2, approximately $150 million has been adjudicated in our favor, leaving $550 million yet to be resolved. I'm confident CACI will prevail the majority if not all of the remaining protested awards decisions. As Ken mentioned, we partially offset award delays in protests in FY15 to remain within our original guidance. I am particularly proud of the organization who has successfully first ramped up background investigations for the Office of Personnel Management, grew work under our current book of contracts and won a higher percentage of our recompetes. These offset illustrate the value CACI continues to provide to its customers. Let's go to slide 12 please. We also received $965 million in contract funding orders in the third quarter. It's a 22% higher than a year ago that brings our total backlog to $2.1 billion at the end of March. Our book to bill ratio was 1.13 times for the trailing 12 months. Total backlog was $9.7 billion, up 32% increase from a year ago. This provides an estimated 36 months of revenue at the third quarter run rate, a very comfortable position. As we move into Q4, our FY15 revenue guidance consists of virtually 100% existing business with negligible amounts of recompete and new content. In addition with $965 million of funding orders received in Q3, we are now effectively 100% funded for the remainder of FY15. Opportunity pipeline remains strong; pending contract awards total $8.3 billion with 75% of that new business to CACI. In addition, we plan to submit another $14 billion of bids over the next six months, where half of those bids will be for new business. This pipeline reflects our focused strategy of pursuing larger contracts with higher financial and strategic value. All in all, I'm pleased with our performance through Q3 putting us in position to deliver within guidance in a challenging market environment. Awards and funding are strong and our tension to operational excellence continues to serve us well. I'm confident in our market driven strategy and CACI's ability to support high value in doing missions for our nation. With that I’d like to turn the call over to Ken.

Let’s go to the slide 13 please. Over the last 20 months, we have won record contract awards and successfully completed a value added acquisition. The solutions that we offer continue to be in high demand across all of our market areas. Through our strategy, we are committed to increasing the support that can be provide to our customers. Overall, I'm confident that we are positioned to finish FY 2015 strongly and well situated for the start of FY16. I would like to take a moment to say how proud I'm of the talent, dedication and good character of CACI’s 16,700 employees around the world and the work that they do in support of our customers’ critical missions and our nation's future. Thank you all for your hard work. With that I would like to open the call up to questions.

[Operator Instructions] Our first question comes from Bill Loomis with Stifel.

Just on direct labor, I mean we've seen it continuing to grow as a percent of direct cost and as a percent of revenue, or direct labor cost, I should say, and ODCs fall, and it's the highest it's been in 15 year. So, why aren't we seeing margin -- I know the business is turning and revenues are starting to turn up, so that's been a headwind. But why aren't you -- with such a higher level of direct labor versus ODCs in the mix, why aren't margins higher than they were a couple years ago? And if you could talk a little bit, maybe looking a year or two down the road, is there something systematically that's changed in terms of profitability of the space that will allow you to get back to the old margins? Because the direct labor, obviously, is much higher than what it has been in recent years.

Yes. Bill this is Tom, I'll take first stab at that one. Your observation is entirely correct. Yes, we have very virtual mix of direct labor versus ODCs; our gross margin and therefore our operating margin should be higher. Not all of our direct labor’s in the same flavor; some of our direct labor is on fixed price contracts which are generally more profitable. When we did the Six3 acquisition, this has greater percentage of fixed price contracts, more profitable contracts. But we still have direct labor on kind of the normal cost plus in the T&M contract. In some of the cost plus contracts, we’re seeing pricing pressure. As we go after kind of new growth as we protect our recent take, [ph] we do see some pressures. And so with somewhat of rate issue, while there mix is richer, we’re seeing some kind of reduced margin on our direct labor. Now going forward, what are we planning to do about that is some of the work that we are pursuing which is greater solutions focused into higher fixed price contract less LPTA, less commodity, less run rate professional services should help us have a greater margin on our direct labor.

Okay. So, other than near-term pressure we've seen with LPTA, if we do get some stabilization and the customers come back realizing that strategy isn't working, is there anything in the business mix today that shouldn't allow you to go back to much higher margins of a couple years ago?

Bill, you’re right. We build be able to increase our margins. We’re having a kind of richer mix of business. I mean that's consistent with what in our pipeline kind of works to be submitted and we’re focused on that. We’re focused on indirect cost control trying to ensure that our move -- be probably efficient on an ongoing basis. Those are constructor to margins. That being said, this year we have higher implementation expense associated with the Six3 acquisition kind of non-cash component of it. But if we did the right work, that will translate into higher gross margin and as we grow, [indiscernible] control in direct expenses, they just need to grow less than revenue and these things will happen. And that’s certainly kind of our aspirations to have a general rate -- greater net income. And one of the ways to do it is to focus on profitability. And I'll make one other point and John you may want to elaborate. We have the portfolio of business today at how do we ensure that existing portfolio of business continues to perform accordingly and that gets into our operational excellence program, the profitability of existing programs, how can we better and more closely monitor that base of business. That has been a focus of ours and will continue to be a focus of ours. And that will certainly contribute.

Our next questions comes from Steven Cahall with Royal Bank of Canada.

Tom, maybe first one for you, Tom. If I just look at the implied, kind of midrange guidance for the balance of the year, if I've got my numbers somewhere close, it looks like it's a very, very strong Q4 in terms of earnings, one of the best you've had in quite a few years. And then also, the implied operating margin is very, very strong. So I guess first, can you give us a sense of what the dynamics are that give you that confidence in that very strong Q4? And then is that sort of an operating margin, which I think is close to 9%? Is that a sort of run rate once OPM gets to steady-state that we can start to extrapolate going forward? Or do we have some specialties in Q4 that may not repeat?

Yes, there is a significant increase in our profitability from our third quarter to our fourth quarter. Four major factors, the first one is relatively easy to explain, it's a award fee. [ph] We have approximately $10 million more of work base in our fourth quarter than our third quarter. And that is simply do the winded nature of when we won contracts and when we get a award fee, typically we'll get those on an annual basis for every six months basis. And they just happen to be lumped in the fourth quarter. So, performance $10 million of award fee, which is pure profit, they fall directly to the bottom line. So that’s been very influential in that bridge. The second one is increase in existing work, one of them is OPM. We expect OPM to reach steady state in the fourth quarter that is kind of material. And we have a number of other programs which we won in our first and second quarters, which are in the process of ramping up. Some of those programs are not a step function of ramp up but there is slower ramp up. And we expect to see increases in profitability due to those existing programs, again OPM plus a handful of other kind of new wins that we had. The third factor is we have an extra billing day. It's not worth a lot but it is something. And we saw a little bit of new business in the fourth quarter and that’s the modest amount. So, it’s generally allowed us to bridge gap. The question is if the implied margin in the fourth quarter is sustainable. And if I exclude those title work base and kind of normalize it, you'll get a margin in the mid-sevens which is kind of more normal. And I think that would be at a better benchmark for planning purposes.

And then maybe as a follow-on, over to one for you, Ken, on growth. You mentioned the low single-digit organic growth possible in 2016. A, do you feel that that is almost certain at this point and it's just an issue of timing or is there a chance that that slips into the following fiscal year? And relatively, I think I heard the comment that now 100% of FY15 is funded. Is that 100% at the midpoint? Is that 100% at the bottom of the guidance range? So maybe just a little bit of clarification on that would be helpful.

We are in planning for ‘16 now but we thought it would be useful to give people a preview at least on the revenue side at where we are. We are going to have a more fulsome discussion about that. But I'll talk about a couple macro factors that are both on the plus side and then on the negative side. We do have the healthy base of awards; we do have the FY15 protest delays that build sort of bow wave that once those get clear, and Johns is going to talk about more about that a little bit later. That will contribute nicely into the FY16 picture, plus having OPM for a full year after the full run rate are really the positives going into the year. Challenges are going to be look, we have to face the facts that customers do have lower budgets generally speaking. We are seeing continuing impacts to our professional services run rates; that’s the easiest way for customers to save money as opposed to being on solutions contracts that’s harder. We believe there is still -- continue to be Afghanistan uncertainty. And as Tom spoke about a little bit earlier, there are still recompete and pricing pressures associated --recompete pricing pressures associated with some of the competitions. This year we had a relatively low amount of recompetes, we expect to have a more normal amount, in the 20% or so range next year. So, those are the factors that sort of go against the positive or at least be some headwinds against the positives. We will be clear as we get our plans filled out for our June call. Relative to the 100% funding. John, do you want to add to that?

Yes, sure. Steve, we’re 100% fully funded at our current midpoint today which is based on the revenue guidance narrowing. So, 100% at our current midpoint what we’re funded to.

Our next question comes from Cai von Rumohr with Cowen & Company.

So, a follow-up to Bill's question. If we go back a couple of years ago, I know Paul Cofoni was focused on growing the business, and with S3, I think strategy was to grow profits and not as much emphasis on margin. It looks like here you've had a strategy that's been quite successful in terms of take away business from other folks, but in a tough pricing environment. So essentially, did you consciously go into this bidding higher profit but lower margin, even though the mix is shifting toward direct labor?

I think what you see represented is a mix and as the business shows up in front of us and what I mean that is how the government procurements roll out on any particular period of time, we are favoring conditions oriented work with higher direct labor content and places where we believe customers are going to be looking for best value sort of determinations as opposed to LPTA. So, that's fundamentally the strategy. What happens though is any particular time, you have to depend on as we look at the markets and now the government procurement schedules come out, it will show up as the mix. We want to defend some of our work that turns to LPTA because we want to keep it that's where we see pricing pressures in other work. We've been high cost and very nice profitability. But that mix is going to take while for it to show it so. It's only been the last three to four quarters where we’ve seen a really significant uptick. We've had really nice growth or increases in our awards activity through 2014 but in 2015, it started to make a truly a large difference as we won larger, more complex jobs where we believe we will get a better return. We’re waiting for those to get into our base line before we actually can have a comment about where we see the ability to increase profitability. Does that help?

Yes, that helps a little bit. Maybe a follow-up. Tom, you'd mentioned that excluding awards, margins would be in the mid sevens. But basically, correct me if I'm wrong, but aren't award fees normally a recurring phenomenon? For example, approximately where would you guess award fees would be in fiscal ‘15 with your guidance and where were they in fiscal ‘14?

Okay. So, I think for the full year, on an annualized basis award fees should be normalized because they’re occurring throughout the year. So there is fluctuations on a quarterly basis but not many fluctuations on an annualized basis since you are observation Cai, it’s correct. I’ll elaborate on Ken’s point. So, fundamentally we wanted try to enhance shareholder value and believe that the driver of the shareholder value our share price in our case, primarily it is cash flow, net income kind of earnings per share. I mean that's kind of pace to build that is in our mind measure which is most highly correlated to spot price performance. And expectations there are, are we going to grow, are we going to not grow into those particular metrics. And as a result, we’re trying to increase profitability. Now an easier way to do it is to bid projects with higher margins than lower margins. If we’re using the same amount of D&T approximately. So that's after higher margin. But it’s not either worse situation. We have a portfolio business, more of d dialed than switch where we’re kind of moving directionally to higher solution business but we have a base of business which is important to us; it’s important to our customers; it's critical to some of your particular missing, and it's valuable in terms of allowing us to maintain our base of business and grow. And so we will continue to kind of defend that work. Some of that comes as lower margin levels because you’re expecting pricing pressure price to win kind of recompete situation. So, we try to both.

Could you give us a rough sense? You contrasted between higher-margin solutions and lower-margin kind of core recompetes. Roughly, approximately what percent are they of your revenues? And where do you see that mix going?

Yes. Cai, this is Ken. I think last year we looked at it in and it was about 40-60 solutions versus services; this year it's looking more or like as everything comes into our play at 45-55. So, it's a slow a slow sort of ramp up on that kind of work and I think it will continue to be that

And Cai, this is John, I'll add something and that as we’re just staring our FY16 plan, our history has been program by program, recompete by recompete; how this is contribute to the upcoming fiscal year. And I think it's safe to assume that on some of our professional services work, Cai, which is lower margin, as some of that work goes small business or some of our professional services work which is more commodity based, we will be making different decisions coming into FY16 that we may have made in previous years. We can now do that. We have a strong enough base to maintain our rates so that we can put greater investment into the larger, higher margin solutions business versus some of this lower margin work that is going towards small business. So we may make decisions to no longer pursue that type of work. Again, as Tom mentioned, it's not a switch; it's more of a dial how do we read some of that lowest margin work out of our business based in FY16 and beyond.

Our next question comes from Jon Raviv with Citi.

Just a clarification on OPM. I was wondering, do you characterize that as solutions or professional services or core in that 40-60 split?

We classify that as professional services. We're not actually building something which gets deployed that allows the customers to perform a specific missions, we're actually doing that work on their behalf. So, we have that on our professional services side.

And then for my real question, noticing on leverage, now that you're almost in your target leverage range, which I think is around 2.5 to 3.5, just where do you see the debt pay down trending from here? And more importantly, once you're in that range, how do you see cash deployment decisions coming out; any change to your strategy; any sort of milestone to think about in terms of when decisions might get made?

I'll start this off. We're at three and half times leverage. It's a comfortable of leverage, we publically stated that we're two and half to three and half times kind of range is a reasonable in type of range. Over the foreseeable kind of the near term at least, we'll generate our strong cash flow to delever, last quarter we were 3.7 times. And so we’ve done a good job of kind of repaying debt, paid down around $300 million of debt since the Six3 acquisition. So we'll continue to focus on that until we find acquisition opportunities which we will continue to pursue.

Our primary goal for this business is to grow it organically and I think we're on the curst of being able to do that again in FY16. But M&A has always been our primary use of our free cash flow and we use that to acquire new skills and customer capabilities and like. However that being said, we have had a balanced view over the past four years. Several years ago we purchased about 25% of our shares and management and the board regular review what we do for capital deployment. As of as of this time, M&A is our first priority for free cash.

And then just a quick follow-up on your cash flow guidance. It implies a pretty weak fiscal fourth quarter. Tom, do you see some potential upside to the 200?

Yes I do. We originally had a $200 million of operating cash flow guidance, a very strong first quarter. Our second quarter, if you recall was actually negative, materially increasing DSO. DSO has returned to a 61 day level; if we're able to maintain that level, we should have some positive cash flow and we will exceed the $200 million level. As I've mentioned in the past, a portion of the cash collection process is in our court. Timing, quality what is getting them approved and working contractually with payment of it. Those processes are largely unchanged over the past several years. I think we do a very good job in those arenas. The situation is kind of certain amount the unpredictability of randomness of behavior of people in the government payment office which has driven higher DSO in our second quarter, we were able to recover in our third quarter. So, there is a possibility DSO may increase in the fourth quarter. So as a result of that we’re being a bit cautious in our message to the investors.

Our next question comes from Robert Spingarn with Credit Suisse.

Ken, just on acquisitions. You just spoke on that. At this point, what would you say the largest type of deal you could consider would be, given all the leverage metrics and so forth that Tom just went through?

Robert, I don’t know. It really will depend on the opportunity. I think we have had internal discussions that said if we got into the four and half times that’s probably at the limit that we would comfortable on. So, I'll ask Tom to the math but…

So, what we guided comes, it continue comes with EBITDA and so that kind of makes it a little bit easier in terms of getting to a debt to EBITDA target that we’re comfortable with. The other possibility and we think what is had about it is that it's a very large opportunity. We have another currency called equity which we put kind of deploy kind of very carefully and judiciously for the right type of acquisition. And certainly those of types of decisions would get a careful review by our board of directors and management team as well. But that’s another option that we have and given the right set of circumstances, would we seriously consider it, the answer is yes.

That's interesting, Tom, because it sounds like there might be that $1 billion-plus opportunity out there. So I'm taking that as something you might possibly look at. Wanting to ask just a little bit -- just a couple quick fundamental things. The first was, you mentioned that the lower margin business was driving some of the sales decline in the quarter. I know there's been a lot of discussion around margin. Might have figured margin would rise as a result of that on a year-over-year basis but it didn’t. Was that simply OPM? And then as a last question I wanted to ask about Six3 and update for from Ken in terms of what its sales growth and directional margin was in the quarter and whether you expect that asset to outgrow the rest of business in 2016? Thank you.

It's all at the end of the March and what I mean -- Ken can talk about how it's kind of relative to what [ph] we are doing. You are absolutely right everything else being equal, one would expect the greater direct labor content as a percentage of our direct cost to be productive to margin. A few things have offset it this year, one is OPM. In our second quarter OPM, the way we account for OPM had a kind of material type of negative impact on the quarter and to less so for the year but it was still sizeable for the year. And we also have these dynamics that we have pressure in our kind of base business and our recompete in terms of pricing and that has offset some of the higher margin which we would expect; in other words, the margin on the direct labor is under some pressure as well. And Ken on Six3?

In Six3, the business is rock solid at this point. There are number of classified things going on there right now that I can't talk about. What I will say is that as a result of a variety of things going on throughout the world, there is a series of opportunities that have opened up that we will see latter part of 2015 and maybe in the 60 days into the early part of ‘16 that are in the sweet spot of Six3 would be bidding on. And so, we have to go through a bidding process; it's not some of the other activities. I will you tell you also -- but we have high expectations for being able to do that because we do have a unique set of skills for what some of those opportunities would be. I think you asked a question about whether it would outperform. I think that's going to be determined on in a narrow competitive field. But we really have high expectations. The one thing that I will tell you, over the past year that has really changed that we've seen the addition in some of the core business but such as the four C4ISR ones that I talked about. So, in third quarter where the addition of Six3 added some competitive -- added some scoring capability in our proposals and we ended winning those. So still have high expectations; I really do want everybody to have a longer term view of this. We are in a very complex electromagnetic warfare rule these days and Six3 puts us in a nice position to be able to help the United States in combating that.

Can I ask how it did in the quarter?

Yes, I mean we’ve put them together with the other business, so we’re not tracking this separately. I could tell you what they did for the year last year and they met our near term goals of being both GAAP and cash accretive at 5% and 13%.

Our next question comes from Brian Kinstlinger with Maxim Group.

The first question I had for the two large CACI awards where protest went against CACI, meaning they were either suspended or dismissed, what was the nature of the protest? Was it technicality or something more serious that could change the competitive landscape of the award? And then, are those procurements -- do you have to build a new proposal or they reevaluate the old proposals?

Yes. Brain, this is John. There is a lot of questions around, both our Q1 and our Q2 protest. So, it probably makes sense to sort of take a step up and then I'll address those two specific jobs. If we were to look at protest or overall, if I look at the timing of our Q1 awards and when they will begin generating revenue in orders, there is also some comments out there around the expectation that the order [ph] revenue starting in the third quarter versus now showing up in the fourth quarter. The 300 million of first quarter award CACI held in all of the protest on those awards. Those awards were made at the end of Q1 versus Q3 and early Q1 which was part of our plan. The GAO cycle that we've mentioned in both of our last two earnings calls, it's a 100 days cycle; after the protest has filed and in some cases that's two to three weeks after the award, once all the debriefs have been completed. So, if we looked at the anatomy of our Q1 protest on an award given at the end of the first quarter, we’re now looking at mid January, early February before the GAO decision comes out. In some cases the decision was to deny the protest and re-award that work to CACI. In other cases on our first quarter protest, the decision was to sustain the protest and required corrective actions. Those corrective actions in some cases took 10 to almost 30 days putting us to the middle of February and middle of March. All of those cases were re-awarded to CACI. And then what the customer does is they complete the funded expansion with the incumbent to expand all of the funds that they had on contract before they transition the work to us which puts us at a middle of March, April 1 date. If we looked at the $550 million of the Q2 awards that are currently still in protest, none of those Q2 contract awards are beneficially reversed. We were successful on about 150 out of the original 700 million, some are in the corrective action phase that you would have all read on, those will follow the same process. There will be the formal debriefs, GAO, corrective action, re-award, run out of the current contract funding and then CACI start. Brian, you talked about the two that were out there, both of those are what we would call are in the corrective action phase. I don’t want to talk too much on it but it's safe to they are both large solutions based work with very high level of direct labor. We have no reason to believe based on the corrective actions that we’ve seen that we won't prevail in the majority if not all of the remaining protest decisions that are out there.

The second question I have, a lot of people have talked about margins and obviously, there's a difference in the contract type versus direct labor or delivery type. So, I'm wondering, on the $2 billion of awards that were brand new work for you, how much -- what's the contract mix there? Is it heavily cost plus? And then on the recompetes, what percentage are companies in general losing? Is it 5%? Is it 10% in price?

On the $2 billion of awards, I don’t have here at my finger tips how we would split that based on contract type and how much percentage of the direct labor. But we can absolutely get that one to you. I mean it's pretty much the same mix as what our current portfolio has. So, we’re just going to ask to get that information for you Brian. Sorry about that.

But on recompete? Sorry.

Yes on the recompete side in our FY15 planning process, we assume some percentage of both top and bottom line reduction on our recompetes. Part of the protested revenue -- I’m sorry part of the new business revenue we expected to be in FY15 is actually replaced with better performance on our recompete than we had originally planned. So, as we go into FY16, on our LPTA type professional services work, we will take a top and a bottom line reduction, our FY16 plan and our other cost plus award fee work and our cost plus Six3 work, we traditionally do not -- we traditionally are able to hold the top and bottom line.

Our next question comes from Tobey Sommer with SunTrust.

This is actually Frank in for Tobey. Real quick, I wanted to ask about the cyber security environment; any changes in terms of opportunity set there or how are you feeling regarding opportunities and what are you also seeing in terms of pricing of that techno vertical?

This is part of the market where this additional money going in; it's not a -- traditionally this has been a market that’s been contained inside of information technology budgets. Now, it's beginning increasingly to be broken out as specific sets of capabilities. In our case, it's even more specific than that while we continue have -- we do provide computer network defense inside of high-end data networks. Our real interest, particularly through the acquisition of Six3 is too look at the -- a niche within digital single processing and how those singles propagate and how to do things with those signals to both protect and to be offensive. So for example, when I want to talk about the market for cyber as it pertains to us, I'm more interested in network platforms that I have about networks itself. How do machines communicate with machines; how do we protect them and if there is somebody else how do we exploit them. So that market is a very large one; it has a very large current base somewhat addressed by the OEMs, increasingly addressed by specialty companies that have a unique set of skills, talent and capabilities. And so, we see that part of the market growing. As I referred to a little bit earlier to one of the other questions. We see a series of much larger opportunities than traditionally Six3 has pursued in the next four to five months that are coming out that are directly related to that. As to margins, I expect those margins to remain double digit, if not mid ‘15 or something like that. I think that it command that time much.

And also I saw that the mix of client side commercial tick down a little bit this quarter. Can you talk a little bit about what your vision is for commercial and if there is any plans to grow that or particular areas that maybe opportunities?

If we were to look at year-to-date FY14 versus FY15, I believe we said that federal’s civilian revenue was up a little more than 20%. And I think the percentage decrease on the commercial was actually a large percentage on those small dollar amount. That was really connected to product sales that came in last year that are not in our FY15 plan but our in our FY16 plan. So that would have been driving some of that delta. I mean in general, last the DRGP [ph] said it's really more of delays in the awards, natural phase, project coming to an end and of course the majority of our war related effort is in our DoD numbers also. So that’s where you’re seeing a lot of the sub contract labor and our subcontract ODCs coming down that's just driving DoD down. So as we look at FY16, I'm going to look at where we are ‘14 to ‘15 as which portion of that market is more important. All three portions, federal civilian and DoD and commercial will play a very important role in FY16 plan.

And the majority of the work in the commercial is associated with our UK subsidiary.

Our next question comes from Jairam Nathan with Sidoti.

Thanks for taking my question. So, if I look at your comments and kind of look at fiscal 16 guidance of organic growth in the low single digits, it looks like civilian would be up on OPM and then you probably will see a flat to down DoD. Is that kind of a fair assumption?

I think in general, yes. I mean I think DoD certainly continues to feel the pressure to what degree, we won’t know that until we see the bottoms up estimates by our team later in June. But I think as a premise DoD is probably down a little bit more than some of the civilian agencies from a budget point.

So, OPM mean that is going to be constructive. We had won some new work that's renting up that would be helpful for the civil agencies. And so we've seen some of that. Some of the other large work is kind of DoD related as well.

Yes. In fact, the 550 million of protest is probably evenly split between DoD and fed also, so if that helps you model it.

And my other question was, have you -- if I kind of look at a total backlog or funded backlog, how much of that is new business?

How much of that is -- could you repeat the question?

Yes. Like how much of a total or even funded backlog is new business at year one?

By definition, our backlog, our funded and our total backlog is based on the work that we have. And so none of that is new business, if that answers the question.

Within there some, like you won some award six months back, and that's probably in your backlog. I'm trying to understand how much of that backlog is new.

Yes. So, the majority of our new business, when we win an award all of that value goes into unfunded backlog. And as we get funding orders, then that's where we move it from unfunded to funded. So I don't have the exact percentage but I’d say the majority, a material amount of our new business awards that we've experienced this year would be in our unfunded backlog area.

[Operator Instructions]. Our next question comes from Mark Jordan from Noble Financial.

Question relative to OPM. Is there any way you can size that for us in the fourth quarter when you achieve a sort of steady-state run rate? And moving forward into 2016, will there be any seasonality to that business? And is there any growth opportunity over the longer term from that steady-state fourth quarter?

I will try to provide some additional color for you. As for our a definitive number, I’m going to shy away from that, other folks doing this similar work. But it's safe to say we’re fully staffed today. We turned OPM to a profitable level as we closed out Q3 and that trend will continue to be to move forward. Is there seasonality in it? No, actually there is a tremendous backlog in trying to get the government’s backlog processes done. So, it's not seasonality. What's actually more of a factor Mark, is once the investigation has been completed; there is a quite a vigorous quality check. We've been working on how can we get more throughput, more quality delivered to our client. So once we became fully staffed and we’re beyond all of our investigator training windows, then the focus has been on how do we generate better quality sooner. So we are seeing some indications as we go over the fourth quarter that that quality number is coming up slightly; it's moving north versus south. So will that bring the run rate up in FY16? Yes. Does that enhance both top and bottom line measures on the program? Yes also. So I sort of gave you more qualitative directional things versus hard numbers but we really want to shy away from the street numbers.

As a follow-up, you mentioned the level of protested awards in the first and second quarter that had been -- you've been working through the process of settling. Do you have a number in terms of protests that were incurred in the third quarter?

Actually we've had no work that was awarded to us in the third quarter that has been protested. And since about 40% of our roughly $700 million of work was there for new business, none of that $280 million or $300 million has been protested as of this moment.

Our next question comes from Cai von Rumohr with Cowen & Company.

Just a quick follow-up. So, your guide for fiscal ‘15 of direct labor up 3% to 4% basically implies that it's going to grow low singles in the fourth quarter and ODCs are down again. If, in fact, you do grow the revenues low singles in FY16, should we assume that direct labor continues to grow faster than overall revenues next year?

We're in the kind of stages of rolling up plan. And I really do not have that kind of level of cut yet. Everything else being equal, we like go in direct labor that’s kind of more profitable. That being said, some of the work that we win by definition has some ODT contracts and so sub-contract labor, small business work, some of the solutions require software purchases, software licenses to put in some solution. So, more to come on that as we talk about FY16 in June.

Our next question comes from Jon Raviv with Citi.

Thanks for the follow-up. Just a really quick one. LTC, does that contribute anything meaningful here in the fourth quarter, or more importantly next year?

LTC had a run rate of around $16 million with kind of revenue. Given that it does not contribute materially in terms of earning. It’s slightly accretive but given the size of it is just kind of penny per share. That being said, very good acquisition provides augmented capabilities to us.

What it does is it strengthens our bench strength in digital signal processing and communications intelligence and that sort of thing. And it an absolute complement to the talent and skills that we bought with Six3. So, we're quite pleased with it and we think that gives -- there is another piece of the market that allows us to look at a little more deeply. And so it was a great acquisition; we are very happy with it.

I'm not showing any further questions at this time. I’d like to turn the conference back over to our host.

Well, thanks Kevin, and thanks for your help today on the call. We would like to thank everybody who dialed in or logged on to the webcast for their participation as well. We know that many of you will have follow-up questions. And Tom Mutryn, Dave Dragics and Jeff Christensen are available for calls later this morning and today. So, this concludes our call. Thank you for your interest in CACI International and have a very good day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day. Speakers, please stand by.