CACI International Inc (CACI) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Fourth Quarter Fiscal Year 2015 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 sir.

Thanks, Candice, 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. It’s about our written and oral disclosures and commentary and 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 results. Now 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 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, please turn to slide number three and to 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. We’re looking forward to the dialogue. 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 U.K. Let’s turn to slide four please. Yesterday evening we released the results of our fourth quarter and full fiscal year 2015. The quarter ended as we expected bringing us successful fiscal year to a close. We won a record level of contract awards, increased cash flow and built our backlog to our highest level in company history. We achieved these results despite the impact of contract award delays and protests. Our FY 2015 accomplishments and the foundation we have built give me confidence in reiterating our FY 2016 guidance. Let’s turn to slide five now, please. Throughout FY 2015 we focused on gaining a better understanding of our customer’s priorities and requirements. We made significant strategic changes to how we pursue business in our market. We sharpened our focus by aligning more closely to our market areas and throughout the year we demonstrated our ability to win new business and retain our current business by driving excellence, innovation and value into each one of our programs. These changes and achievements have helped us capture a larger market share and build momentum for our return to organic revenue and net income growth in FY 2016. We believe there is still plenty of room for us to grow in our addressable market. Let me highlight several examples of the highly relevant and innovative work that will contribute to our future growth. Let’s turn to slide six please. Federal agencies faced near constant threats to their data and IT infrastructures from both internal and external sources. CACI Solutions and people improve cyber resilience and keep valuable data secure. At one federal agency, our cyber defense systems injest, co-relate and analyse 80 billion events a day to detect and mitigate possible cyber attacks. [Indiscernible] networks, those with tens of thousands of nodes see that many events in a single day. Cyber events are not limited to desktop computers or service, increasingly, electronic warfare is conducted against platforms like cell phones, cars, or even planes and major weapon systems. CACI addresses this by combining traditional cyber security expertise with unique digital signals intelligence capability to defend and attack new and legacy platforms The number of sensors generating data that our DoD and intelligence customers have to process and analyze to keep up with emerging threats grows larger every single day. To help these customers, CACI developed and fielded the Fusion Analytics Development Effort or FADE in multi-intelligence fusion analytics platform that delivers unparallel performance in preparing and analyzing large volumes of data. Additionally, the FADE platform helps customers in counter terrorism and other strategic and tactical missions analyze and visualize data from all sorts of intelligence sources. Since FADEs deployment last year, 15 U.S. agencies and over 11,000 users have adopted FADE into their analytic tools suites. We also support national objectives to modernize the healthcare system by electronically managing health information and transforming the delivery of patient care. One of our healthcare solutions uses a combination of social media, open source data and satellite imagery to track and analyse outbreaks of pandemics, pandemics like Ebola. And like the epidemic that happened in Western Africa last year. These predicted analytic tools allowed authorities to focus on where the disease was likely to spread and allowed them to position resources to appropriately contain the outbreak. These are but a few examples of the sophisticated solutions that CACI is providing in support of our customers most difficult conditions. Switching topics, from a budget perspective, both the President and Congress have proposed budgets above the budget control act limits for the government 2016 fiscal year. This allows us to be cautiously optimistic about how the government will procure solutions and services during that period. Slide seven please. Going forward, we are confident that we will continue to capture market share by winning new business, delivering operational excellence to each of our customers and deploying capital for long term growth. Focussing and successfully executing these three strategy elements is vital to delivering long term share holder value. Now here is Tom to discuss the financials. Tom?

Yes, thank you Ken and good morning everyone. Let’s go to slide number eight. Our fourth quarter net income was well ahead of last year and consistent with our expectation. The year-over-year increase was driven by higher award fee, increases in existing work particularly the OPM contract and new ramp up on new work we won in FY 2015. For the full year, net income was $126.2 million below last year’s net income. As we discussed on prior calls, our second quarter was negatively impacted due to the ramp up in start up investments of the OPM contract. Adjusting for this in the associated increased OPM profitability in the back half of the year, net income for FY 2015 is roughly equal to that of the prior year. Slide nine, please. We continue to focus our efforts on cash flow and ended the year generating $223 million of operating cash flow with an annualized free cash flow yield per share of 10.3% at $82 share price. Another way to access our ability to generate cash return is to calculate earnings per share excluding non cash targets. We record two large non cash items in our operating expenses. Depreciation and intangible amortization and stock compensation expense. We exclude these and other non cash items as we report our diluted adjusted earnings per share which were $7.23 per share, $2.06 or 40% higher than our GAAP earnings per share. Slide 10, please. Revenue was down from last year’s fourth quarter as results will be continuing to decline in lower margin subcontracted labor and other material purchases. This was due to some contracts reaching the normal end of life, budgetary pressures and less [Indiscernible] activity. As has been the case to FY 2015, we continue to grow our direct labor base, a key driver of profitability. Indirect cost and selling expense in the quarter was slightly above last year as a result of higher fringe benefit expense associated with the growth in our direct labor. These expenses which grow with our direct labor base growth are included in indirect cost and selling expense. Adjusting for these, indirect expense for both the quarter and the year are approximately 3% lower than last year, this reflects our focus on ensuring we have the right support structure to allow us to be cost competitive and to drive bottom line results. With just over $1 billion of net debt, our net debt to trailing 12 months EBITDA leverage ratio is 3.5 times. Slide 11, we are reiterating our fifth FY 2016 guidance that we issued at the end of June. As we indicated on our June call, our first quarter net income is expected to be below that of last year. As the new business won in FY 2015 builds up and we begin to perform the new business which we plan to win in FY 2016, we are expecting favourable year-over-year earnings comparison in the second, third and fourth quarter. With that, I’ll turn the call over to John.

Thanks, Tom. Lets’ go to slide 12 please. Our Q4 results bring a successful FY 2015 to a close. I like to highlight two key accomplishments in FY 2015 which contribute directly to our performance and positions CACI while entering FY 2016. First, we made critical investments in our business development organization; refine our shot selection and focusing on larger, more solution centric pipeline opportunities. We also align the organization to our market areas, providing single investment points in delivery and capability. These changes continue to drive strong contract awards, $177 million in the quarter 11% higher than the same period last year and we won a record level of awards in our FY 2015 almost $5.8 billion, an increase of 46% from a year ago. These awards position us nicely to deliver on our financial plan in FY 2016. Let me provide a quick update on our previously protested awards. We await resolution of two remaining protest with a combined award value of $375 million. It is our belief, CACI will again be successful as the government works towards a final decision. We also received $871 million in contract funding orders in the quarter. This brought our funded backlog to 2 billion. Total backlog was 9.6 billion, a 35% increase from just a year ago. Let’s go to slide 13 please. Our fiscal year revenue guidance now consists of 79% existing business, 15% recompete revenue and 6% new business revenue. This means we are currently executing on nearly 94% of our planned revenue for the current year. In addition, as a result of the contract funding orders we received in the quarter, 53% of the existing business revenue was already funded, an increase from 45% at the time of our June call. Slide 14 please. As we head into FY 2016, our opportunity pipeline remains very strong. Pending contract awards now total $12 billion with about 50% of that new business to CACI. And we plan to submit another $13.7 billion in bids over the next six months, about 60% of those bids will be for new business. This pipeline reflects our business development focus across all of our market areas. All in all, I’m pleased with our full year results and our position as we enter FY 2016. We will remain focussed on the things that served us well in FY 2015 winning new business and delivering mission critical solutions and services to our customers. With that, let me turn the call back over to Ken.

Well thank you very much John and Tom. Let’s turn to slide 15 please. Over the past couple of years we’ve made fundamental strategic and operational changes to our business that has improved our competitiveness and allowed us to win a record $5.8 billion in awards for FY 2015, increased our total backlog to almost $10 billion and positioned us to return to organic revenue and earnings growth in the current year. The fact that we are in a position to grow again is credit to the hard work, innovation and its tremendous character of our more than 16,000 professionals who work tirelessly in support of our customers missions. They are the ultimate reason for our company’s success and I couldn’t be more proud of all that they have accomplished. So thank you all. I’d like to now turn the call over to your questions. So Candice, lets’ open up the line.

[Operator Instructions] Our first question comes from Ed Caso of Well Fargo. Your line is now open.

Good morning, Ed.

Good morning, everyone. I guess my question is around sort of the type of work that you are now pursuing. I’ve noticed that your funded backlog as a percent of total is shrinking, so I assume the contract you’re pursuing are getting longer and larger. Are the takeaway? Is any of it like new new work, and the takeaway work who you are taking it from and how is that, how would you change your sort of sales model to after that work? Thanks.

Yes, this is Ken. As we looked at the market places it was going to post Budget Control Act and post, frankly war, -- or in the process of drawing down from multiple awards. We saw that they were going to be enduring aspects in each of the different market areas that we wanted to target. We commonly call and John will talk about this later on – we were looking for a more solutions part of the business, where we actually trying to give a customer a different kind of set of processes that they work with, analyze data in a particular way but moving more towards giving them different capabilities and outcomes in the work that they do on behalf of their missions or whatever they support with the government. If you look at the cross section of wins that we had in FY 2015, we weren’t focussed on any particular area because we won across all of our market areas. You might have seen a bit more growth in the federal civilian area because there were some great opportunities there to do programs like its army where we are doing the pay and personal processing system for the army or we are doing additional work to do shared services on – you know as part of the government model to increase the shared services for doing financial management and frankly going into human capital. So you know over the long run we think those are going to be the enduring parts and things such as the support that we did for a war, they are temporal. They happened over a long period of time, we were obviously always going to be positioned to do it, but the long term business that the government is going to be our target now as we go into a period of relative peace. So I hope that helps you.

Great. My other question is a lot of chatter on cyber security. You brought it up. You’ve got the OPM contract which is OPM sort of the poster child for letting less friendly people into our databases. How does that impact your business, has it created more business, has it slowed down decision making, just flush it out a little bit more? Thank you.

Yes, this is Ken. I’m going to have John talk a little bit about OPM in just a second, but let me talk in general about cyber. Obviously and some have put this as the single largest threat to the country, depends on what your perspective is and we’ve seen a lot of high profile cases there. We are seeing the government fund this in an increasing way. I think the President has allocated some $5 billion additional money in the FY 2016 outlook to go and support a number of those things. So we expect that market to continue to rise and our position in that is going to be somewhat twofold. On one side, as a government IT services provider we need to have very very tough level cyber security expertise to help our customers in their day to day work. On the other side, the Six3 dimension brings us a more sophisticated platform level of cyber books from a protection as well as an offensive capability. Both of those markets are equally important to the federal government right now and how they play out overtime will be interesting. I’m going to turn it over to John and talk a little bit more about OPM.

Yes, sure thanks Ken. So, as many of you know we’re prohibited from discussing many of the details on the OPM program but we’re extremely pleased with the performance that we have achieved thus far. Our revenue and our profitability were at a steady state as we completed Q4 of FY 2015 and we believe that that’s going to continue through FY 2016. Now Ed you mentioned these security breach as well as the federal government e-QIP system being down. It was actually impacted new request for background investigations and not the background investigations that were already in process. So during the time if that system was offline we continue to perform case work on the cases that we had in process, albeit at a reduced level. It’s our expectation based on what we can see now that that level will increase back to the steady state level by that time we are back together again at the close of Q1, FY 2016.

Thank you. And our next question comes from Jon Raviv of Citi. Your line is now open.

Good morning, Jon.

Hey good morning thanks for taking the question. I’m just following up, or actually just asking a question really about margin. Talk about higher direct labor, more solutions right now we’re seeing some higher fringe offset direct labor. And then margin also seemed to come up slightly short of your FY 2015 guidance were flat. So what point with these new wins in higher DL base contributes to margin growth we saw on this quarter but you know should that continue through FY 2016 notwithstanding the cadence that Tom laid out for the year?

Yes Jon, this is Ken. We believe overtime that higher solution content in increasing our fixed price content will drive our margins higher over of attractive period. We also are trying to shift to a higher solution mix in those areas of the market where we see the customers continuing to buy that way. But let me clear that when we get into solution development, it’s not a linear margin curve. The way these programs start up is you typically -- once you win that, you sit down with the customer and you build a more executable player than an RP generally allows you to do in the competitive phase of buying. And so, you have a smaller ramp up at the beginning. Once you decide on what all the expectations are then you start ramping up your engineering staff, your software staff and that sort of thing in whatever period of time, that’s where we would see the increased margin coming. Keep in mind they are also a lifecycle to all these development, so we’ve got to keep winning solutions, we’re to keep moving that curve to the right, but because once we are finished with the development it tends to drop off again in terms of the volume. So, I think we will – you will see that at over a period of time the work that we won in 2015 is in that very early phase in many of these where we are sitting down with customers and making sure that we understand exactly what it is that needs to be built. Once that happens, once we are through that phase, we’ll start to see margin grow.

And then just how long is that kind of phase really talking like how long is the average duration of these builds right now?

I mean it’s really going to vary. Some of these are very complex and some could take a couple of years of just good engineering, it may be 18 months, some of them are in their second phase and so it’s pretty well known what expectations they have and so it will be a little shorter when you start with the new team.

And then just a quick follow up on that. You talked about the two protests worth $375 million; a record high backlog, almost related. How has the average duration of what's in your backlog changed along with these business development changes that you've made? And what does that say about how quickly your large backlog translates to top line?

Yes Jon, this is John. You know the mix of new business our – traditionally our professional services were -- is somewhere around a three to five year scale. Some of the solutions work is going to be pushing five years and even greater. That’s a long term value-add sticky type of work which has a very different layout, as Ken just mentioned, relating back to margins. If we will look at the record backlog today, a greater percentage of that is in the solutions areas. So, we would expect that backlog to remain higher over a much longer period of time than maybe our backlog would have been extended two to three years back.

Thank you. And our next question comes from Bill Loomis of Stifel. Your line is now open.

Hi. Thank you. Good morning everybody.

Good morning, Bill.

Now, just to be clear, is the $12 billion figure of bids out, that’s the same figure as the $8.3 billion last quarter, right?

Yes, Bill.

You won a lot in the quarter, and then you had a huge sequential jump. What changed there?

When we talk about pending contract awards and then plan to submit another, right, that’s – those numbers changed daily, right. As the things that were pending today, that were awarded come out of that pool, things that we were planning to submit over the next six months then pushing to that, that pending area. We’re at a pending of around $12 billion now, about half of that being new business and we’ve got another $13.7 over the next six months. So, day-to-day those numbers move. And as the customers award, that comes out of both the way we submit it as well as pending.

Okay. But I mean just looking at that specific number, just five quarters ago it was $7 billion; and it's never been over $10 billion. So I mean, it seems to me this is a pretty significant change in opportunities. Is there just a couple very, very large bids that are in that number or are you seeing -- is it quite a few? I am just -- it just seems odd to see such a big jump and breakout of what you've done in the past significantly still?

Hey, Bill. This is Ken. I think what you’re seeing is as we’ve adjusted to – we set a strategy that said, we were going to go after a smaller number of contracts, but they were going to be larger. You’re seeing that plays out, as our team adjust to that pattern or behavior. It’s also representative of how the customers – how the customers are buying or how they’re bundling. There are few big ID/IQ recompetes in there where they’re combining such as the S3 and the R2CSR competition. So those make up that – those are in that number two.

Thank you. And our next question comes from Steven Cahall of Royal Bank of Canada. Your line is now open.

Yes. Yes, thank you. Maybe just a first question kind of a reiteration of some of the discussion around margins. When we think about the recompetes and new business, I was wondering what's baked into the guidance in terms of margin for the year. And I guess my assumption here is that some of that business could come under incremental pressure as things remain tough out there. So are we factoring in that those revenues come in with margin pressure? Or how do we think about that phasing?

Steve, this is John. Let me try to answer that by maybe coming up one level. We’ve done a lot of discussions around professional services, and services and solutions and then tying that into what portion of business is our solutions and then that actually runs in nicely to our operating margin. If we were to picture something – a simple graph on the Y axis is professional services where the unit of time we deliver is ours. In services we’re delivering to a service level arrangement, maybe that’s a unit of output and then solutions. On the X axis we go everywhere from every acquisition type from cost reimbursable to cost-plus, fixed unit price all the way through firm fixed price. With higher risks comes higher margin and higher reward. So it’s really a journey moving from what I would say the lower left quadrant, whereas professional services delivering hours under cost-plus arrangement to larger scale systems and solutions being delivered under a firm fixed price arrangement. If we were to look at our market strategies, that really shapes our capabilities in the customers set. It allows us to shape our pipeline. It ties in to what Ken has been driving over the last 24 months, which is shot selection. It allows us to more efficiently drive biding proposal expenditures that also drive higher capture rates. So when we look at the mix of our business, duration of it and margins, it is a journey towards the longer term view of moving towards more service and solution work that can be awarded and won in a fixed unit price or a firm fixed price model, and/or by the way, stuff at the professional service to delivering hours at the cost-plus levels of being selected at an LPTA level. We want to go after more RFPs that are actually decided based on value, which is where we’re heading over the long term. So it’s really a mix of our business and how the government acquires it and the markets that we’re focus on, all and all over the long term, folks, that’s going to drive us to higher operating margins in longer period of performance programs. So I hope that captures majority of your question there Steve.

Yes. That’s helpful color and then maybe as we think about that journey, Ken clearly early on you did a lot of reshaping of the business development organization. The sense is that that’s now starting to come through on the booking side. So, where are we on the organizational side of that journey? Is the BD setup now largely, how would you like to see it? Or is there still a fair amount of work to be done to get that organization the way we want to it? I think you mentioned this in a little bit in a slide.

Yes. So, business development and the entire organizations are all organized around our market. So both the line organization as well the BD organization very much aligned around markets. If we were to look at margins and growth, we’re looking across each of those markets, I would tell you on the recompete side we have price pressure factored into FY2016 plan. I think we walk through that in the past, Steve, where we assume some level of top-line and bottom line erosion as we’re looking recompete work especially as it pertains to the professional services were procured under an LPTA. And our new work is appropriately plan for the type of project, whether it’s a professional service or service or solution and then how the customers buying to the extent that we can shape awards and that’s where we’re moving to now. The extent that we can shape larger solutions job and work with our government clients to want to procure that under a firm fixed price arrangement. We’d rather see development work on more fixed price than cost-plus that allows us to really shine. We’ve got 52 years of operational excellence delivering what customers need. We’d like to pick up slightly greater margin while we’re doing that work for them.

Thank you. And our next question comes from Cai von Rumohr of Cowen and Company. Your line is now open.

Good morning, Cai.

Yes. Thank you very much. So, first question is on your protested award, those $375, I believe you mentioned them on the guidance call. When do the protest period end and are those two awards included in backlog and included although on a factored basis in your guidance for the year?

Yes. Cai, this is Ken. These two protests, I think we them plan to show up in about the -- late into the second into early third quarter just depending on schedule. They are -- when we put the plan together, we thought the government would take a little bit longer period of time. What we have actually found is the government is initiated a limited corrective action on each one of them and we’ve already in that process, and they are re-evaluating them. So, if they showed up a little earlier that would be great. But right now our plan is reflective of late second, early third quarter revenue and net income coming from this.

Yes. Cai, this is John. They’re both in our FY2016 plan as Ken mentioned at a slightly reduced level, just trying to factor out finding issues.

Great. And then, in your guidance you seem to imply that revenues would be down organically in the first two quarters. And then, even to get to the midpoint of your range or the lower point, you really have to have a pretty sharp step up in the second half. I know that the Afghan and of the CONUS work were down, but maybe give us a little bit more color on why we have this much of a downward pressure in the first two quarters, and then what appears to be a pretty sharp ramp up in the second half? Thank you.

Thanks, Cai.

Thanks, Cai. So, Cai, let me take step at that. So, we are implying in terms of top-line revenue kind of down in the first and second quarter, but not materially so. In the second quarter kind of the one percentish type of range. And so for us to get to organic revenue for the full year we do need some organic revenue in the back half to overcome that, but it’s – in the high – in single digit level it’s not kind of beyond that. Given the ramp-up of FY2015 wins which are occurring as we speak and as they continue to mature in the second quarter, and the new business wins in FY2016 we think that is doable when we look out, when we kind of look at those particular program on a quarterly basis.

And Cai, this is Ken, if I may add on. If you look at the way we discussed planning 2016, it based on what we learned in FY2015. We added delays to the award cycle of most of the major procurements. What we did not do effectively was accommodate the protests of a lot of this. So our 2016 plan is much more reflective of protest delays in the later half. Should any of those not happen, should those awards comes earlier, should those awards not be protested that we believe that we should be able to win, everything moves to the left and we see an improvement, and that’s one of the features of the plan, but that what we did not plan in 2015 or plan it as effectively as the marketplace decided they were going to impact it.

Thank you. And our next question comes from Tobey Sommer of SunTrust. Your line is now open.

Good morning, Tobey.

Good morning. I had a question for you about both executive incentive compensation and incentive compensation below that. Given the change in the path and the journey that you’re on in the transitory effects that can happen during that on the P&L, are there any plan changes to either incentive or line, executive or line incentive compensation for fiscal 2016 and what are the metric that are driving incentive compensation for both cohorts? Thanks.

Tobey, it’s Ken. Our compensation is aligned with what we believe is our shareholders best interest in. Its three components to it, base salary, annual cash bonus plan and long term stock plan. The key metrics are and it varies depending on where we are and this will all be in proxy later this year. But their net income earnings per share, return on invested capital revenue and new business awards. And it depends on where you are. Your business group manager, we’re not as concerned about you having earnings per share or ROIC. You’re going to have net income and revenue and new business awards. For instance my self, I have a variety of metrics, but really it works this way, 33% of mine is earnings per share, 33% of mine on a cash bonus basis is net income and 33% are new business awards. So what we’re trying to do is make sure that we are managing a business from a capital deployment strategy as well as a growth component. We have been emphasizing net income as we went through, but now we were in a period of time where we believe we’re going to be able to grow organically again, we want to frankly put our foot down on the accelerator on that make sure that the whole organized is aligned around growing and producing – growing at the top and bottom line.

And I’ll add to that. As is typical of many companies, the top executives have a stockholding requirement. Those are outlined in our proxy. So, myself and other leaders of the organization have a significant amount of their kind of economic wealth tied up in CACI stock kind of which is very much forcing us or incentivizing us to focus on ways to generate kind of long term shareholders value. So, I don’t want – I want to make sure that we’re cognizant of that stock-based compensation element kind of which is – so much substantial. Then in addition, the annual incentive targets are based on targets that we believe, the compensation committee believes how we’re hardly influential in stock price.

Thank you for the color. Just to make sure I understand it, what would be the key kind of difference in emphasis of those metrics, Ken that you outlined this fiscal versus last year?

Yes. So, I would say, it’s going to be – it is getting the organization more aligned around the new business awards. And now that we’ve attend, we’ve sort of reach the level of operating competency at that level, we want to make sure that the entire organization is going to sustain that. So, new business awards and as that applies to the growth of the business top and bottom line are going to be a change for at least my executive, all my executives and then down into the line organization as well.

Thank you. And our next question comes from Mark Jordan of Noble Financial. Your line is now open.

Good morning, gentlemen. A question first on the interest rate assumption at the back of the package, it shows an interest rate expense expected in 2016 of $38 million. If you annualized the fourth quarter you’re at $34.4 million run rate. I was wondering what interest rate assumption you have baked in to get to this 38%, and when do you expect it to start to arise?

Yes. Mark, this is Tom Mutryn. So when we kind of forecast our interest expense, we’re looking at our outstanding debt level which should be coming down as we generate cash and so that should be positive reducing interest expense. On the other hand, half of our dept is floating-rate debt, and we need to sort of make sure an assumption with regards the interest environment. And when we put our plans together we generally assume that LIBOR is going to increase into 25 basis points, 30 basis points per quarter as we go throughout the year, and so that as to our interest expense. We also had some of floating to fixed swap for approximately $100 million that became effective on July 1st, so that will also add to our interest expense.

Okay. Second question, you mentioned that the FADE platform has been widely deployed, is that a technology that pulls incremental business for you or is that sort of a completed program?

Yes. Great. Nice question. FADE is – it’s obviously a software package works – let me just say, there’s a high-side version of it and we just came out with a uncleared or an open version of it that can be used by other customers. And it is – its typically when you bring FADE in your analytics suite, you also bring some people some of our people, so it is a way of getting into new customers and into new circumstances that they already have another analytics suite or another set of tools, and we’re now able to get into those environments as a result of if you will the introduction of this tool. The feature of this tool is it can work at any level of security, it has the appropriate ways to connect into all the different classified networks and pull all sorts of different data and they do it in the millions of data points in a very fast period of time. So its a – the people that are using I think its was last year one of our major customer stood up on front of any industry conference and said it may have been one of the more significant achievements in the last couple of years in terms of data analytics.

Thank you. And our next question comes from Jason Kupferberg of Jefferies. Your line is now open.

Thanks, guys.

Good morning, Jason.

Good morning, how are you?

Doing well. Thank you.

I just want to take a step back from a lot of the comments that you guys have made about how the end markets are developing right now, because it sounds like things are bottoming out and maybe getting a little bit better. I know it’s been a tough few years. But you talk about the FY2016 budget proposal being a little bit ahead of minimums. And you talk about, it sounds like pricing isn't necessarily getting worse. I mean is this a fair assessment? Because meanwhile your contract award activity and funded orders seem to be trending pretty well. So when you think about sales cycles on new awards, and you think about the cycle of converting awards to actual funding, and you think about rates of protests, et cetera., all the headwinds that have been pretty dramatic for a period of time, does it feel like we're coming out of this slowly but surely?

Yes. So, there’s about 16 questions in there, Jason. So let me see if I could – let me see if I do it more up. Look, we use to term cautiously optimistic. Part of that is around the discussion of the budget. If you look at the different budget request, their DoDs up not inconsiderably, some elements -- for instance in 2012 and 2013 we saw significant decreases in if you will intelligent budget, the MIP and the NIP. We’re seeing those come up in proposed double-digit fashion and so those are the kind of budgets that we like to see. The rest of it is generally speaking DoD is up 2% to 4%depending on where you want to be. And if that sustainable, if that’s going to be additional money in the environment above what we thought we were facing into at the end of Ryan-Murray and reimplementation of the Budget Control Act, I think that’s good news for the entire industry. For us, I like the fact that there is more money. They were wining – we’re winning at a pretty good rate of awards. We think there’s ability to improve upon that. It depends on where you look inside the market. Our work over the last couple of years on really understanding where the money is flowing into different sections of, for instance, the logistics and material readiness market, or in the Intel services market is beginning to payoff by focus. We can go and position customers with not only the right kind of solutions but we can get them to think about how their experiences could be different in using some of the tools that we have in place. All-in-all, I would say it’s easier now because I think customers have a – there’s a demand signal of needing to do more and what the last couple of years had put in place. So, that being said, there is still – we do not have agreement between the administration in Congress on how to spend the additional money that both have put in place. History tells us that when the President wants more money in the budget he generally gets more -- he or she gets more money. And so that’s what I think a lot of folks in industry are feeling at least from listening some of the other calls. Pricing pressures, I know you added that. I think we’re seeing a little bit of a movement away from LPTA. That was in vogue when we first got into reducing budget pretty severely as a result of BCA kicking. And we’re seeing – we still see LPTA, but there’s a generally more for commodity things. And I think as John maybe mentioned in his remarks earlier, we see a customer that’s going to use LPTA and only do it on the basis of price. The markets big enough that we can make a different choice and we can pick customers that are doing more value oriented things. So, I hope I hit number of the answers to your enquiry.

Yes. That was really helpful. Can you just say a word about M&A pipeline and expectations for any sort of government fiscal year-end budget flush? Thanks.

Yes. Fair enough. Let me deal with flush. We’ve been meeting a lot with customers. And we find them pretty comfortable inside their budget space right at the moment. And so, we know that there’s been a bit of reprogramming, $5 billion to $7 billion within DoD, so that might be a little bit of a change from what we would have – would look into. But we expect to see the normal seasonal increase. I mean, as we look at different customer sets here, they spend 40% to upwards of 60% of their annual discretionary budget during this period of time. And the fact that we have probably 20% more pending awards in this part of the cycle. I don’t want to predict how its going to turnout, but we don’t see a major impediment to the government spending, the way they would traditionally do at this period of time in a year. And frankly, I like our position going into that. I think you’re earlier comment, what was the first question?

M&A pipeline.

M&A pipeline, there’s a lot of M&A – there’s always a lot of M&A opportunities, probably more so right now, there are some very large ones there. I’m not going to comment on anything specific, but we – some of them that are in the market are interesting and some are not. As we’ve always stated, we’re pretty disciplined in how we try to use our capital and there’s a series of rigorous thresholds we’ve got to go through. We’re going to continue explore on that. We’re going to look for companies that have higher solution content or add new capabilities in those enduring parts of the market, and frankly get us into new customer sets and some new channel. Most importantly, we got to make sure that they’re going to produce long-term shareholder value.

Thank you. And our next question comes from Jon Raviv of Citi. Your line is now open.

Thanks so much for taking the follow-up. How do you guys see the competitive environment changing, such as your former colleagues over at Lockheed? How does their approached to the market change as a standalone versus a part of large primes? Because I suspect that some of these larger primes of not run their services business as well as they maybe they could have?

Yes. Jon, that’s hard to – it’s probably not appropriate for us to comment on things like that. Here’s what I’ll tell you what I think about the market in general. If we’re heading towards a consolidation, I love it. There is a lot of fantastic government IT and solution work yet to come. We’re at a very beginning of another revolution and how the Federal Government is going to incorporate IT, things like mobility and cloud and big data analytics and all of those are going to have impacts on how we service citizens and how we protect our borders and how we allow immigrants to come in place, because its going to be a much more cost efficient place. And I think there is a huge, huge place for companies like us that are really interested long term to be those mission partners to the new technology companies that are bringing this stuff into market on a global economic scale that we just couldn’t touch, trying to repeat it ourselves. And so for us it’s going to be about how we focus on individual customers or individual parts of the market making sure our capabilities to under they mission are aligned and looking for those areas where you can price it well and where you can get a decent return. So as this – as we consolidate the other part is the long term strategy is if there is consolidation there would be less competition, there will be more capable, they will keep us on our toes bit point.

Great. Thanks. And then just…

Thanks.

Great. Thanks. And just go ahead, sorry…

No. Go ahead.

Thanks guys, sorry about that. And just how do we think DoD versus fed-civ next year. Why is fed-civ outperforming such and are these new FY2015 deals that are ramping more DoD or fed-civ heavy?

Hi, Jon, this is John. Year by year, quarter by quarter that mix changes, what is certain is what you see in our FY2016 plan is a decline on a DoD side and that’s really driven by the Afghanistan related reduction. What you see in the gross side on the Fed Civil beyond OPM were some outstanding FY2015 wins, one was a DHS Desktop or Managed Service Desktop, that was a takeaway win and that’s an additional$20 million to $30 million in FY2016 plan. And a program to manage FDIC Bank closures has also added to our fed-civ areas. So couple of services wins, couple of solutions wins, but predominantly in FY2016 DoD down because of Afghanistan. We’ll have just as many solutions based wins on the DoD side as well as on the fed-civ and on the Intel side as well.

Thank you. And our next question comes from Bill Loomis of Stifel. Your line is now open.

Just a couple of quick ones on OPM, how exactly to that impact financials obviously you said it ran slower, I assume you still had all the peoples, the cost very higher to, but does that have a material negative impact on the June quarter?

Bill, I would say, not a material impact on it. We had to slowdown some of our work. OPM has thousand investigators out there across the nation working on a very different set of cases. So when that spigot slows down slightly, we have to adjust our staffing levels, so if you were to look at June, July, I’m sorry the July, August, September quarter you’ll see up to lower in July and then coming back up as the quarter closes based on what we’re aware of now.

Okay. And then also on the interest expense, you’d mentioned you’re expecting 20 basis points to 30 basis points LIBOR increase per quarter, but in fact since you gave guidance only a month or so go, the yield curves come down significantly, so I assume at least for the September quarter unless we have a dramatic change in the next month that interest expense is not going up on a run rate basis in the September quarter, is that right?

Yes. Fair enough. Absolutely.

So, there’s no schedule setup or anything, its purely related to market trend?

That is correct. So we put our plan together. I need to forecast interest expense and candidly I have zero ability to forecast interest expense. What I will do, what we typically do is kind of build in some kind of modest increased in LIBOR during the year, it kind of plugged in to just at point in time interest rates will rise and at some point in time they will. I have no clue as to when and we think that’s a reasonable planning assumption for us.

Okay. And just one, real last one. What is your war-related business you have in fiscal 2016? What’s in the guidance?

Yes, Bill, FY 2016 $140 million total.

Thank you. And our next question comes from Steven Cahall of Royal Bank of Canada. Your line is now open.

Hi, guys. This is actually Krishna on for Steve. Thanks for taking my follow-up here. I know you’ve already answered a little bit about what you’re seeing in the M&A pipeline, but can you just give us a little bit more color about what types of assets you’re seeing now on the market and what the valuations are looking like? And then just for you specifically what are your plans sort of after debt reduction with what your capital location strategy going to be going forward? Thanks.

Yes, Chris, this is Ken. Bill, our number one priority for growth of this business is always going to be organic growth and now we’ve gotten back to that. As we –our primary use of cash and our capital deployment strategy has been traditionally to focus on M&A because we think that position us with new customers and new capabilities. We’ll continue to focus that way. As to what we’re seeing in the market? Well there’s obviously there’s big, there’s small, there’s intermediate. There are a number of things that have come on the market and I think some of the expectations in terms of price may not be bearing out, I’m not going to be specific, but some of the properties that have been out there we would have – we think the expectation were little high. And it’s hard to tell with some of the things that have been spinning. They are spinning out of a company, what they ultimately will do. Their plans are not really definitive, whether they would do a piece or a whole or that, so we remain interested in looking at it and some of by the way would not just wouldn’t fit with our business. We’ll maintain that. We’re not interested in just buying services or buying revenue. We really want to buy something that takes us to a different part of the market and expands on our addressable market. So without getting into any specifics I hope that give you some color on what’s happening in the market.

That’s great guys. Thanks.

Thank you. And our next question comes from Jairam Nathan of Sidoti. Your line is now open.

Good morning, Jairam.

Hi. Good morning. Thanks for taking my question. Just I wanted to get some idea on a sequential new story as as well, so if I kind of look at it on a sequential basis, your DoD revenue was up March to June and was all of that award fees and is award fees, is it 100% margin kind of?

Yes. The award fees are 100% margin. There is no cost associated with it. We’re recognizing the costs of operating the program as we go along. The award fees in the fourth quarter were approximately kind of $10 million in total, predominantly a good portion of those are DoD business. And so that will explain a little bit about the kind of revenue trend, but certainly kind of not the entire kind of revenue trend in line that you reference.

Okay. Just on -- you set a leverage level which -- where you would like to be before you go aggressively behind acquisitions; or that is not a consideration right now?

Yes, you know thanks. It’s certainly leverage, here’s a consideration that is kind of gets the maximum out of leverage that we as a company in that or board would feel you know comfortable with and it’s hard for me to see us going over kind of 4.5 times and given the right acquisition I can see its being kind of 4 to 4.5 range in somewhere there in terms of kind of total leverage. You know all-in-all I think philosophically you know debt capital is what’s expected than equity capital and having a capital structure which has a reasonable amount of debt is going to make sense. In particular, when we are acquisitive and in particular when we have the very low kind of interest rate environment in which we do today if interest expense was materially higher, we may kind of rethink that in a particular level. In terms of or -- in perhaps in answer to your question on a broader basis, as we look to acquire companies historically we use debt but there is no reason that we cannot simultaneously use equity given the right type of acquisition. You know you clearly equity capital is more expensive than debt capital, we would kind of seriously consider it and make sure we have the right you know financial perspective on that. You know at the end of the day the key question is, will that acquisition add to a higher share price for CACI? Will it add to share holder value, and that is the ultimate lens that we used when we evaluate acquisitions in cash deployment.

Thank you. [Operator Instructions] And our next question comes from the line of Cai von Rumohr of Cowen & Company

Yes thank you gentlemen. Just one follow up. So you know you alluded to the fact that you know Lockheed Martin L-3 others kind of are putting properties on the market and that we may be kind of going into a consolidation phase. How interested are you guys in being a consolidator? And you know, given that John, you came from Lockheed Martin, are there pieces in there of interest to you so that you might go on a pre-emptive basis and try to buy them out because I – both of these companies Lockheed and L-3 appear to have kind of an open mind in terms of whether they sell it piecemeal or whether they spin the operation out. Thanks so much.

Hey Cai, this is Ken. Obviously we are not – we’re seeing this is something that’s what we are seeing now is something that’s almost been predicted by every investment banker we talked to in the last couple of years. And so, the – I’m not going to comment on any specifics. I think, I alluded in my answer a couple of moments ago that there may be some interesting pieces. I don’t know how some of the bigger companies are thinking about what they would do once they get through the spins, all we know to date is that they are interested in spinning and most of that is just from what we see in the press. I mean, I’m interested in what – how would any of that fit into the long term strategy of our business, if its strategic consolidation will do something for CACI and our place in the market place, then I think that’s -- then we would obviously be interested in looking. We’re more interested now in because there is just not a lot of clarity as to what capabilities really come with any of those, any of those the properties that you mentioned or any others that were in the market place right now. So, I would tell you we’re interested but we don’t know how to be – how to get to a closure point in any of those yet, because we would need to learn a lot more about it.

Thank you very much.

You bet.

Thank you. And I’m showing no further questions at this time. I like to turn the conference back over to Mr. Asbury for closing remarks.

Well thanks, Candice and thanks for your help today on the call. We would like to thank everyone who dialled 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. Thank you for your interest in CACI. So this concludes our call. Thank you and have a very very good day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day everyone.