CACI International Inc (CACI) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter FY 2016 Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. [Operator Instructions] At this time, I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Richard, and good morning, ladies and gentlemen. I am Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we are 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 2. Let's turn to our written and oral disclosures and commentary. 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. 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 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. And I would also like to point out that our – during our presentation today we'll 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. Let's turn to slide 3 and to open up our discussion this morning, here is Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Well, thank you, Dave, and good morning, everyone. Thank you for joining us to discuss CACI International's FY 2016 third quarter 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 of CACI Limited, who is joining us from the U.K. Let's turn to slide 4, please. I am pleased with our performance this quarter. Our revenue and net income were both higher year-over-year due to strong contract execution by our team and the performance of our National Security Solutions acquisition during the quarter. Cash flow, contract awards and contract funding orders were all quite strong as well. We are narrowing our revenue and net income guidance for the year to reflect the clarity we now have as we approach the end of the year. Tom will discuss the financial results in greater detail in just a few moments. At the beginning of February, we closed on our acquisition of NSS. This acquisition, the largest in our history, is performing brilliantly. We bought a great company at a great price. And we continue to see NSS bring strong financial and strategic value to our business through substantial high-level past performance credentials and deeper, broader relationships with key customers. NSS's integration into CACI is also proceeding well as John will discuss momentarily. The success of this acquisition is an excellent example of why we see M&A as a vital part of our corporate group strategy. Let's turn to slide 5, please. Looking at the market environment, we experienced slow pace of contract awards and delays during the middle five months, the October to February time period of FY 2016. If we focus for a moment on DOD Operations & Maintenance spending which is one of our primary sources of revenue, the FY 2016 O&M spending in January and February of 2016 was almost 15% lower as compared to the prior year. That being said let me share a couple of observations that mainly indicate the spending situation is improving. First, there was a notable increase in both total and O&M spending in March of FY 2016; and secondly, our own third quarter awards increased significantly year-over-year. We believe these are positive leading indicators for the market environment as a whole. I'd also like to highlight a couple of key accomplishments for this quarter. I'll start with the $180 million contract we won to support geospatial intelligence for the U.S. Special Operations Command. SOCOM is a very important customer to us and it's been terrific to put this contract [ph] in moving COM (9:33). We were also pleased to have revalidated and expanded our CMMI Maturity Level 3 systems and software engineering evaluation across all of our U.S. operations. Delivering operational excellence is a key part of our growth strategy and a vital element of CACI's culture. It is fantastic to have earned this credential broad commitment to the highest standards of quality in all of our value delivery systems. And finally, we have been into an exciting partnership with Virginia Tech to support its Hume Center Cyber and Physical System Security program with a focus on unmanned aerial systems. This positions CACI to help develop the cyber security employees of the future through vendorships, research collaboration and curriculum support. Again, I am pleased with our team's performance this quarter in an environment that remains highly dynamic and competitive. Our results were in line with our expectations and indicate that our strategic deployment of capital for M&A continues to make a substantial contribution to our performance. We are confident in our market focus strategy and we will continue to deliver long-term value for our customers and our shareholders. Now, I'll turn it over to Tom to discuss our financials. Tom?

All right. Thanks, Ken, and good morning, everyone. Let's turn to slide 6, please. Our third quarter results reflect the NSS acquisition closed at February 1. During the two-month period, NSS generated $172 million in revenue and $5.6 million in net income. The net income includes $1.7 million of intangible amortization and $3.2 million of before tax acquisition expenses consisting largely of severance. NSS margins are in line with CACI as we have realized a number of synergies. In addition, we incurred another $5.7 million of before tax acquisition related expenses and about $3 million of additional interest expense, both of which are not reflected in the NSS numbers. Legacy CACI performance for the quarter and year-to-date were driven by solid performance on a number of programs and contributions from business awards within the last year. Legacy CACI's net income excluding all acquisition and additional interest expenses would have been up to close to $34 million in the third quarter, up materially from last year. Indirect cost and selling expenses increased due to the additional NSS indirect expense, as well as the various acquisition expenses realized in the quarter. Legacy CACI indirect expenses up modestly from last year, reflective of our ongoing efforts to operate efficiently. Slide 7, please, we generated $54 million of operating cash flow in the quarter, trailing 12 months free cash flow with $204 million. Our annualized free cash flow yield is 7.6% per share at a $109 share price. DSO, or days sales outstanding, were 64 days, a modest increase from the prior quarter due to normal fluctuations of receipts and some higher receivables from NSS. The tax rate for the quarter was lower than normal due primarily to certain prior year state tax credits we were able to realize in the period. We previously expected these credits in the fourth quarter. In addition, we have some favorable tax benefits associated with our deferred compensation plan. Debt at the end of March was $1.5 billion. Our net debt to trailing 12 month pro forma adjusted EBITDA leverage ratio is now at about 3.9 times. Our borrowing rate currently is at LIBOR plus 200 basis points and we now have interest rate swaps in place for $900 million with maturities as far out as January 2022, in with swap rates between 1.25% and 2.1%. Let's go to slide number 8, please. Turning to our annual guidance, we expect our revenue to range between $3.7 billion and $3.8 billion. We expect that our net income will range between $133 million and $140 million. This includes about $9 million of after-tax acquisition-related one-time expenses. With the acquisition and the strong year-to-date performance, we expect our cash flow from operations to be in excess of $225 million. With that, let me turn the call over to John.

Thanks, Tom, and good morning. Let's go to slide 9, please. I'll start by saying I am quite pleased with the performance of U.S. operations in our third quarter both legacy CACI and the newly integrated NSS. In particular, we booked a significant amount of contract awards and record funding, reflecting the value our customers place on CACI solutions and services. We are hopeful the pace of awards we saw at the end of our third quarter is a sign government spending under the FY 2016 Appropriations Act is beginning to flow at expected levels. With two months remaining in our fiscal year, our risk profile is a comfortable 99% of our expected revenue is now on contract with no expected new business and very little recompete revenue still yet to win. Our pipeline of quality opportunities remains strong and was further bolstered by the addition of NSS. Let's turn to slide 10 to provide some additional color on NSS. I am thrilled at what our combined organization accomplished in just two short months. The team is well integrated culturally and operationally. It runs on a common set of systems and processes, no small feat for an acquisition of this size. We are already enjoying improved competitive positions, driven by enhanced capabilities delivering methodologies, past performance qualification and a competitive cost structure. NSS is performing well and meeting its financial, synergy and margin targets. I'd like to thank both the CACI and the NSS teams for their success in creating an even stronger combined CACI. I will note that the operating metrics I'll provide this morning now include the contributions from NSS. Slide 11, please. Turning to contract awards, we won $1.2 billion, a 35% increase over our third quarter last year. About 25% of those awards are for new business of CACI and about 40% of our contract awards were modifications to existing contracts. This is something I'm particularly proud to note: our ability to grow existing contracts reflects the quality and value solutions and services we provide to our customers. Overall, our awards to revenue ratio was a very healthy 1.2 times for the quarter. Looking at funding orders, CACI booked $1.3 billion in the third quarter. This is an increase of 37% over the same quarter last year and resulted in a funding to revenue ratio of 1.3 times. Our backlog now stands at a record $12.9 billion, an increase of almost 34% over the third quarter last year. All in all, CACI continues to win business, build its backlog and maintain a very well-funded position. Slide 12, please. Looking into the future, our pipeline of pending awards and upcoming bids is also very healthy. We have $12.3 billion of submitted bids, with about 75% of those for new business to CACI. In addition, we plan to submit another $15.6 billion in the next two quarters, with 75% of that for new business to CACI. All in all, the integration process – progress and financial performance of NSS is exceeding our expectations, and we are very happy with our combined awards this quarter, our record backlog and our prospects for the future. With that, I will turn the call back over to Ken.

Well, thank you very much for your comments, Tom and John. Let's now turn to slide 13, please. If I look at our performance year-to-date, I see many reasons to be pleased with how our team has done. And I would like to thank the CACI employees for their ingenuity, their innovation and their commitment to our customers' most critical missions. It's because of them that CACI was named the Fortune magazine's Most Admired Companies list for the third consecutive year. Our being named to this prestigious list is a reflection of the innovative entrepreneurial spirit of our people and a testament to our companywide culture of excellence and good character. Thank you all for your hard work and dedication to our company, to our customers and to our shareholders. Before I turn the call over to your questions, I'd like to note that we are very excited to be hosting an Investor Day at the end of June in New York City. We'd like to invite you to join us for strategy and operations presentations from our leadership team as well as demonstrations of some of the CACI's most exciting and compelling solutions, such as SkyTracker. We'll share some more details on our Investor Day in the very near future. So, thank you very much. And I'd like to open up the call to your questions. Richard, I am turning it over to you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question online comes from Bill Loomis from Stifel. Please go ahead.

Good morning, Bill.

Good morning. Just on the guidance for the year on EPS, so the guidance includes the impact of the $13.5 million pre-tax acquisition charges, correct?

That is correct, yes. In the script, I said $9 million of after tax, so that is correct, yes.

And what is in the fourth quarter, if any, that's also in the full year guidance implies?

The fourth quarter is less than $0.5 million.

Okay, good. And then on the acquisition related intangibles, what were they for the quarter and what's the full run rate for the June quarter also?

Yes, so we had some $1.7 million for the two-month period and so it's pretty often annualized from there. So for the five months, a little less than $1 million a month.

I meant for the whole company, so not just with NSS, but also the old Six3 and the other intangible acquisition?

Yeah, the intangibles are – on an annualized – for the fourth quarter, it's approximately $11 million.

Okay, great. And then finally on the – in terms of the bids outstanding that were to be submitted, the jump to $15 billion and the $1.2 billion in the quarter, how much of that was NSS contributions?

Yes, Bill, this is John. It's about a third of that total amount and I'd also like to share that the other benefit of NSS providing additional new business for us is the fact that in the short time we've already been operating as one unit, we've already utilized their test for performance work. They have also been able to utilize their new rates as well. So when we look at where we are today, we would expect that the percentage of the new business that that new entity brings to CACI to continue to grow quarter-over-quarter.

Okay, great. Thank you.

Thank you. Our next question online comes from Edward Caso from Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Ed.

So, the award activity is terrific, NSS is going great. So my question is you had negative organic growth in the quarter, you trend in the high end of your revenue guide and in the bullet point on NSS when you listed financial performing well, you didn't say revenue. So why is the sort of the early indicators very strong but we're not seeing it in the P&L numbers?

Yeah. Ed, this is Ken. Narrowing our revenue range, all that's driven primarily by the delay in spending. We removed NSS. We'll – of course, CACI would be at the lower end of our revenue guidance for the full year. As I mentioned in my remarks, we saw a lot of delays in spending, late Appropriations Act and the O&M, but overall, we are pretty pleased with how this perform. If you step this back to the strategy that we've been – we've been going after much larger targets and I think what we are beginning to see is a change in award schedule. I will give you one example. We have an award team come in this week that was scheduled to come in January and that was a fairly substantial one. It will show up in our fourth quarter but it was scheduled to come in, in January. Had we received it then, we probably would be having a different conversation about revenue generation for the rest of the year. So I think these big jobs are going to do that. Now, we do continue to win business and I appreciate the fact that we are noticing, but that – but the awards for third quarter came in very late. I noted that the O&M spending which is one kind of sign of government – a government spending activity, but very important to us was down in January and February and certainly we surely saw that reflected in the lower amount of awards. We've got the third quarter and now at the beginning of fourth quarter, we are starting to see a much more healthier flow of that award activity. There's some more here on the – the other note while I am not happy, if you will, about being showing this delay were the negative revenue guidance, so I am very pleased that we are going to show net income growth organically for the full year and that's a really good measure. When I start to look at cash and net income, we think those are really great measures. We'll catch up – the timing will catch up to us because I believe we position ourselves to do the right thing. John, I think you've got some comments about profitability at the program level that you should share with Ed.

Yes, sure. Thanks, Ken. And I guess to provide some additional clarity and maybe it's more of an operational perspective on both our narrow revenue guidance as well as maybe a couple of insights on our organic revenue growth. As Ken mentioned, delayed awards, the later than expected protest resolutions did put pressure on the new business revenue that we were expecting as well as expanding growth on our re-compete programs. What we are starting to see, Ed, is some of our re-compete programs are actually looking like hybrid new business. Customers are taking what we have customers a few other people have and it becomes a re-compete of our work plus somebody else's new work. Some of those re-compete programs we were looking for additional revenue from and the awards of those were delayed. So positive news, we get to operate on the current scope of work, negative news we don't get that additional bump. Now, those were offset to some extent by the stronger than expected on contract growth. We're now starting to see customers with more budget clarity up scoping some of our larger contract sort of the behavior that we used to enjoy maybe three years to four years prior. As Ken mentioned, program performance on those and other contracts drove increased profitability, leading to net income growth of about 10% quarter-over-quarter. So while it's true we are operate at the lower end of our revenue guidance, one, we are still within our original guidance range; and two, we continue to deliver net income as expected. If I were to change gears and just spend an extra minute around organic revenue growth, we set out in FY 2016 to return to organic revenue growth and we see what we are today frankly as a tremendous achievement. If I were to look back seven quarters, when our trailing 12 months organic revenue growth number was around negative 13.8%; we are very pleased that we are somewhere in the 1.5% range at the end of the third quarter and I think we will most likely end the overall year at around the same level. So although we are not at our point estimate of returning to our organic growth, we all believe that it's a trend in the right – it's a trend in the right direction by any measure, so thanks.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Jon Raviv from Citi. Please go ahead.

Good morning, Jon.

Hey, good morning, guys. Just on the reference to net income being a bit higher, I mean it looks like you've got some from the guidance, at least you've got some benefit on tax already, can you talk about what the other moving pieces are there such that the EPS midpoint actually moves down?

Yes. So, Jon, this is Tom. There is really nothing that I would like to highlight, basically, the business is performing in the normal course of events, so there is no singular kind of one-time activity that I would like to note in the quarter besides the tax rate which I already articulated. So we have revenue with a kind of net income guidance range and the upper end of both of those were adjusted not necessarily at a one-for-one basis, but both are point estimates are within those guidance ranges.

Okay. And then full year EPS guidance range implies about $1.50 for fiscal fourth quarter. Do you suggest that the NSS acquisition costs are pretty much behind this? So, is it fair to think about that as a fair full year run rate or is that more of a floor that $1.50 – that $1.50 more of a floor since NSS accretion should only pick up and you've said that it's exceeding our expectations?

Yeah. So I would caution taking any one quarter and multiply it by four, our business although it's somewhat stable, there is some fluctuations due to award fees and oftentimes we have to book reserves or kind of release reserves associated with kind of various legal matters or government contracting, auditing matters and the like. But certainly from an expense perspective, the one-time expenses associated with the acquisition are largely behind us. I think the fourth quarter will be relatively clean as far as expenses are concerned. And as we develop our FY 2017 plans, we will be providing some insight into those at the end of June as is normally done.

Thanks. I will stick with two and hop back in queue. Thanks.

Thank you.

Thank you. Our next question comes from Krishna Sinha from Royal Bank of Canada. Please go ahead.

Good morning, Krishna.

Hi, guys. So just a quick one. Can you just tell me sort of your trailing 12 months book-to-bill is fairly strong even excluding whatever awards you are getting from NSS? Can you lay out how quickly book-to-bill flows through to the revenue?

Yeah. Krishna, I think that's clearly variable. I mean on programs that are predominantly labor oriented where we are providing professional services and they need 50 of this and 100 of that. I think that happens pretty quickly particularly in this environment where it is very heavily competition oriented. If we take something away, we generally hire the majority of those people. We see that convert more quickly. On programs where – that are more solution oriented, we will see a slower ramp-up in terms of revenue recognition. There's a delay in terms of getting all the engineering and the early parts of setting expectations of what the program is really going to be and reality after it comes out of the acquisition phase and we will see a slower ramp to that. That's one of the things John was referring to a little bit earlier. We've seen a very healthy increase on on-contract group on a couple of key development programs this year that may have started with a little bit of contribution in FY 2015 but now we're ramping up staff because we're through the PDR stages of it, and now we are starting to generate really nice revenue and profitability.

I think the other comment I'll make is, yes, the book-to-bill in my calculation is about 1.3 times, so healthy trailing 12 months book-to-bill. So we are happy with that. A lot has to do with the nature of awards. If it's a one-year award, we are going to realize that revenue relatively quickly because it's a one-year award. If it's a five-year award, the most we're going to recognize is 20% in the first year. So with the nature of the type of work we're bidding – some work we're bidding are 10-year periods of performance. So that is another dynamic to looking at how that book-to-bill gets translated into near-term revenue.

Okay. And then on NSS, is there any – can you – you have talked about some new capabilities or anything you can point to at NSS that allow you to bid on contracts but is there any situation where you – know that you have NSS, you can bid on things using combined CACI and NSS capabilities that you were not able to view for? Sort of like one plus one equals three.

Yeah, sure. This is John. As I alluded to earlier, in the short three months that we have been operating as a single company, there is a couple of now real life examples that we have come together to really show the absolute power of having NSS as part of CACI. In our enterprise IT area, we had – we, heritage CACI, had some ongoing bids that are now part of the $15 billion of awards that we're waiting on the decision on. During the bid process, we were able to bring in some additional enterprise IT capabilities as well as – and almost as important talented folks to help us do the final right and the final proposal solutioning and the final submittal of those proposals that we had opened. So the way we see that with those additional capabilities and the talent on two enterprise IT bids, we believe we were able to deliver much stronger bid and much stronger past performance which is what you've heard us mention, very key strategic product of this NSS acquisition. On the opposite end, we also talked about, during our last call, around getting 3% synergies or about $30 million by July 1. We did that through reduced corporate flow-downs, program performance and other operational efficiencies. The reason why it's so important for us to realize that we're at that point earlier rather than going into FY 2017 is we were able to form new rates for NSS which has allowed them already to re-price some of the large bids that they had already submitted that were at the phase of giving our best and final offer. So two real life examples: one, the enterprise IT area, one, in the intelligence services area that we believed has already shown that the overall strategic and financial value of this NSS acquisition to us.

That's great. Thanks, guys.

You bet.

Thanks.

Thank you. Our next question online comes from Amit Singh from Jefferies. Please go ahead.

Good morning, Amit.

Good morning. Thank you for taking my question. So as the end market is improving and you guys are starting to see strong bookings, I want to get a little bit sense – your sense on the supply side when it comes to employees. Are you able to find the right talent to deploy on all these projects that you are winning because the general sense in the industry is there might be strong competition in the space to hire employees and the rate inflation might go higher than average, just wanted to get your sense of that?

Amit, great question. Over the last 15 years, 20 years of this business if you look at, there is always a period of time when there is a rarer breed of employee that you need to bring on board and that's where we're going to see the company. That's where we're going to see the competition. Today, it would be in realm of cyber security and the like. I think the pressures are a couple fold. One is just the amount of money that's flowing into this. This problem is exigent. It's something that the – we've had some pretty bad experiences throughout the government. There is a lot of interest in solving this problem and the supply – the supply is probably below the demand curve right at the moment. So those folks are in high demand and certainly from us and probably all of our competitors are stealing them back and forth from each other and making them all wealthier with each one of those iterations. On the other hand, we're doing an awful lot to begin to grow our own. There is a piece of this industry right now that we need to be very circumspect about and we talked to the government at length and that is we need to make sure that we are leading the defense industry or the intelligence industry in a way that we don't drive everybody over the commercial industry because cyber is pretty ubiquitous and both the skill sets of the same very similar for a lot of the different high-end software developers that we are going after. So I think many of the companies such as ourselves are trying to do things to attract and retain folks in our industry and I think being named to Fortune magazine's Most Admired Companies and last year we had the privilege of being one of the Washington Post's employees selected top places to work. Those are all things that we are trying have as part of the – well, we just want to be more attractive than the other guy. So that – those are the things that we are doing. But in general, there are certain areas where the supply is there but it's not changed really dramatically other than sort of the flavor of the kind of skill sets that we need. And as always, we'll figure out a way to either grow them ourselves or put ourselves in a position that we are going to be more attractive than somebody else.

Great. And just a follow-up and that leaves you maybe in terms of margin pressures going forward and then a completely different question related to the end market. As the end market is improving, are you seeing the protest activity going down as well?

Yeah. This is Ken again. I'll let – let me answer the last one. Protest activity has definitely come down a bit from what we saw in the first couple quarters of FY 2015. That being said, I think if you look at the industry at least and how it is reflected on us, if you look at the industry, I think there is an indicator that it's up overall but we haven't experienced it in the same manner. I think John referred to earlier, we finally got the three – over $375 million to us that were first quarter and second quarter FY 2015, they were finally adjudicated in our favor this year, later than what we plan but they are now in-house. So that's the good news. And we may have some smaller things that are running around but not a whole lot. In terms of the margin pressure associated in, what we are seeing in certain customer sets is jobs that we bid a couple of years ago, we are – it was hyper competitive and LPTA was prevalent. We are seeing customers sit down now and say, okay, let's be honest about what it's going to take to get talent into this business. And so we – had we been successful in a couple places or being able to adjust rate structures in a way that allow us to bring people on board more readily. So in general, we have seen a swing back from LPTA but let's be really clear, this market has reset itself from a cost point of view just as a result of the Budget Control Act, we are not going to see – it's going to remain competitive but I think it's going to become more rational as time goes on and we're starting to see those signs now.

Yeah, John. [Indiscernible] I'm going to also add as an example, we are in the midst of two recompetes, right, now and both of these are those, what I would call, those hybrid ones. Where we have current work, it was awarded under best value and other work was awarded, LPTA to someone else. We are seeing the customer move the LPTA work into re-compete for our work but it's going best value. So two different things, right, best value versus LPTA. But as Ken mentioned, what the customer is willing to pay for that, the market has reset itself. So although we are seeing some things go from best value LPTA, now back to best value, the market has reset not only on people's salaries but on what the value the government is assigning to that. So we like more best value than LPTA. We've just gotten ourselves ahead of potentially others understanding that best value does not mean a return to higher prices.

Thank you. Our next question online comes from Brian Kinstlinger from Maxim Group. Please go ahead.

Good morning, Brian.

Hey, this is Josh Seide in for Brian. Thanks for taking the question. We haven't heard much regarding award delays from others in the peer group lately. So I am curious if the delays in awards you highlighted were specific to a few large procurements, so do you think delays were broad based?

Well, I think their funding base and I think they had to do with the kind of the answer that the – or the Appropriations Act was signed just after Christmas and it took several months. The example we used a little bit earlier was just looking at O&M as a surrogate for how the government was spending year-over-year, that was down 15% in January and February and overall about 2% for the year. We saw it spiked up again in March, increased by about a 9% plus up in March. Too early to look at April but I am sure that there could be some variability in what end markets that we are looking at. I mentioned earlier that we are looking at much larger opportunities in our space and I think there is a lot more care and feeding that goes on, on the part of the government to try to avoid protest. We had one recently – I talked – I referred to earlier one that we thought we'll be getting in January that we just won earlier this week. That was a very sizable program and had an impact on revenue generation. We have another that we expected, that John talked about, a bit earlier. Even larger than that, that was a hybrid program where it was combining our re-competition with other things. That has been – shortly after February or our February call, we found out that the customer is delaying the award for a year. Now, the good news is that we get to keep our recompete, but we don't get a hell lot of – and we may get some additional funding on it, but it's not going to replace our ability to have won that program. So I think there probably is some variability and we have been concentrating on the higher end of the solutions market lately on some of these bigger jobs and that maybe where that variability lies.

Great. Thank you.

Thank you. Our next question comes from Cai von Rumohr from Cowen & Company. Please go ahead.

Good morning, Cai.

Good morning. It's Lucy Guo on for Cai. He is on another call. So to just follow up on the questions about bookings translating into revenues, just to be clear, do you think low single digit type organic growth has the potential to ramp up in the next fiscal year 2017 directionally speaking? Is that what you are looking at?

Lucy, obviously, we're still going through FY 2017 building our plan for that which is our normal practice. But that being said, let's talk in general about how – some of these things. It's going to be variable depending on the nature of the program, but if you look at the environment going forward, we are behind the Appropriations Act and that's signed and that's put more money and play about $80 billion over the next year or so. It happened later than we would like and we've already referred to that. But that's in place for going into 2017. Secondly – and with a kind of two-year bandwidth, as John referred to earlier, we are seeing customers being comfortable in putting more money into important critical missions today. And we didn't see that the last couple of years, that notion of on-contract growth. So that feels better, that feels like a more normal practice from our confident customer about where the budget's going to be. If we look at the potential for a CR and I think that the CR was at least be set at FY 2016 levels and there is a higher amount of funding associated with that. So once again, the environment is a little bit better. Now, I don't want to get in front of our planning process because there is puts and takes and all of that sort of stuff. But in general, it feels like we are reaching a more normal state even though it took longer to get the appropriations out of – the Appropriations Act of 2016.

And as just a rule of thumb, would you be factoring in any of the potential revenue synergies being your outlook for next year?

Well, that's a great question and I am looking at John right now and I am not getting any answer from him. But I would think – yes, we should be able to start to look at. It may be towards the end of the year. I mean some of these things that we are working on are take – are now in the 18 – 12-month to 18-month gestation period for how we are pursuing and we just came together a couple months ago with NSS. So there are several that we are collaborating on that we think make it stronger. John, do you want to give any more color on that?

Yeah. Definitely, during FY 2017 we will begin to see some of these opportunities that because one plus one equals something greater than two, we should be able to go after an additional pipeline worth of business. I will sort of temper that by as we are moving to larger, longer term solutions based jobs, those are the types of programs that take a 12-month to 18 month shaping, getting with new customers, moving – showing them our combined capabilities and the like. So we are quite to the left where we would be looking at these, doing our FY 2017 plan but if the current indicators of how we have been able to help each other on the current tactical bid we have in front of us today is any leading indicator. I like where we're at right now and I like where the short and the long-term future are.

Thank you. Our next question online comes from Tobey Sommer from SunTrust. Please go ahead.

Good morning, Tobey.

Hey. This Ray Leong filling in for Tobey. Morning. Just a quick follow-up on that last question. I guess just on the cost side, you guys have already done a lot of the legwork in integrating the business and what's left to be done and any color on the progress of those initiatives and the timing?

Yeah. Ray, this is John. Yeah, we have gone through some of the initial synergies that we were looking to target as we go into FY 2017. But beyond that, we are going to continue to look at longer-term synergies. Things like facilities, things like common infrastructure that we just haven't seen enough of yet, we signed this deal towards the end of calendar year 2016. We closed down to February 1. So things like those area, just in general operating expenses that we can buy cheaper together, be it supplies and the like, we have done that with some of our larger acquisitions. Traditionally, those will take months to couple of years for us to one recognize and then actually operationalize those. Most of our processes have come together but in a short couple of month how NSS runs some of their programs and how we run some of ours, we always pick up lessons learned. And we would hope that getting those experientials across the entire business would help us perform better both on our managed services program as well as our larger solutions base. So, a terrific start but there's always things that we can continue to look at. So thank you for the question.

Okay, great.

Thank you. We have a follow-up question from Jon Raviv from Citi. Please go ahead.

Hey, thanks very much for taking the follow-up. In the prepared remarks, you talked about NSS pacing ahead of your expectations. Do you care at this point to offer any color on potential upside to what you said is above 10% accretion in FY 2017, any refinement to that number and expectations heading into next year?

So, this is Tom. For the first two months, very strong performance and if one took their two month number and did the arithmetic and annualized it for the five-month period, you will see that it is getting north of 10% accretive. Happy with the performance of the organization and performing at or below – above our expectations. So as we build our FY 2017 plan, we'll provide more color there, but I think that gives you a flavor of where our heads are at.

Okay, great. Thanks.

Yeah. And...

Sorry [indiscernible].

They are meeting the revenue and profit expectations and quarter three performance was quite encouraging for having – going through the change. You expect some things to get dropped on the cutting room floor and it didn't. They were extremely, extremely professional. As John mentioned earlier as well, the synergies are done, the integration is going well, they are a lot like us, so there really wasn't a lot of translation that needed to happen. There is a few things about the variability in the program, style and all that, but that's around the margins. The core of that business is very much like us. And they are winning business. And that's really cool. I think we put them in a position now with a little bit lower rate structure on some of these very key jobs. Their final price reviews are much more competitive than what they would have been had they stayed where they were. Overall, it's just a great acquisition and we still like what we paid for it.

Got it. And then a quick follow-up as long as I have, maybe a quick minute here, a question for Greg. Ken just talked about how NSS is a great fit and Six3 historically has been a great fit. Wondering how does your U.K. business benefit by being part of CACI?

Thanks for the question, Jon. We've been in the U.K. for 30 years now and we trade quite heavily on our U.S. reputation and size of whatever. We are moving close – we're – I don't know if you know much about the U.K. business but we are a diverse business, about 40% of our work is government and 60% commercial and our run rate is about $150 million a year and we've got 900 people. In terms of moving closer to our U.S. operation, this past quarter we acquired a company called Purple Secure Systems. It's our stepping stone into the defense and the Intel world which we have not played in to date. A small company, about 80 people, $10 million revenue, excellent reputation, growing 20%, 25% a year and they seem to have significant business opportunities, the challenge being as it is in the States, Ken talked about it earlier, is to recruit qualified people and get them cleared. We were confident that we can grow that business on our own but we are especially excited to try to leverage our U.S. Intel/cyber skills and knowledge and technologies to accelerate the growth of this business. So over time, that business will grow and we'll move this closer to our core work in the U.S. Hopefully that gives you a little bit of a sense about the U.K.

Thank you. We have a follow-up question from Cai von Rumohr from Cowen & Company. Please go ahead.

Hi. It's Lucy again. So I want to follow up on the question of once NSS combined with CACI, where – do you see any meaningful mix shift in terms of contract type or direct labor versus indirect going into next year and maybe tie that into a discussion of the margin run rate going forward and you – where is that NSS margins today and how do you see that change going forward?

Yeah, so Lucy, let me take a crack at it. The NSS business is comparable to ours in terms of ODC, deal, content, prime sub type of mix. If anything, they're a little bit heavier on civilian side in the Departmental of Defense side and that is driven by the fact that one intelligence agency is classified as civilian agency versus the DOD agency. So as we combined NSS, we don't see any appreciable shifts to the type of business that they have. Prior to the acquisition, NSS margin was quite a bit lower than ours, 200 basis points, 300 basis points lower than ours and we stated when we did the acquisition that we could take certain actions to bring their margins in line with ours and lo and behold, those have been reflected in our third quarter results so – success there and yeah, I think that's what we are thinking about NSS.

Thank you. Our next question online comes from Edward Caso from Wells Fargo. Please go ahead.

Hi. Tom, can you just remind us in the FY 2016 guidance what the growth rate assumptions are for organic growth and then the split between direct labor and other? Thanks.

So, for the FY 2016, at this point in time, we would expect given the three quarters performance and the fourth quarter performance to have slightly negative organic growth for the full year, I think, John referenced 1% and 1.5% negative in organic growth for the full year. Our direct labor is – will be somewhat flattish, up slightly versus last year and somewhat reflective of where we are for the first three months of the year which have been included in our press release. And for direct labor only – excuse me [ph] OD (51:00) fees – a decline in [ph] OD (51:02) fees approximately 5% in the legacy CACI.

Great. And finally, I just wanted to thank John for asking the question of – for Greg. I always wondered if he was actually out there on the line.

I'm here alive and well.

Thank you. [Operator Instructions] And at this time, I see we have no further questions in the queue. I would like to turn the call over to your presenters for closing remarks.

Well, thank you, Richard, 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 may have follow-up questions and Tom Mutryn, Dave Dragics and Daniel Leckburg are available for calls later today. So this concludes our call. Thank you so much for your interest in CACI. We look forward to seeing you at our Investor Day at the end of June and have a good day. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please standby for your post.