CACI International Inc (CACI) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Second Quarter Fiscal Year 2017 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] 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 over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Zelda. And good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we’re very pleased today. And as is our practice, we are providing presentation slides. So, let’s move to slide number two. Now, about 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 also described in the company’s Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I’d also like to point out that our presentation today will include discussion of non-GAAP financial measures. These non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. So let's turn to slide number three and to open up our discussion this morning here’s Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Well, thank you, Dave, and good morning to everyone. Thanks for joining us to discuss CACI Internationals FY '17 second 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 UK. Let's turn to slide four please in the deck. Last evening we issued results for fiscal year 2017 second quarter and also raised guidance for the full year. Strong first-half performance and very healthy contract awards give us the confidence in our new guidance and in our return to organic growth as we exit this fiscal year. We continue to successfully execute our market-based strategy with the right blend of solutions, capabilities and talent to address the current and emerging needs of our federal government customers. During the quarter, we won $1.6 billion worth of contracts awarded with the majority of that being new business to CACI. We're winning larger, more enduring contracts in addition to a number of key IDIQs which will allow us to capture future task orders and respond to demand signals and critical market areas. Over the last four quarters our awards our total $6.3 billion. We have made great strides in our business developing capabilities and outcomes over the last several years. CACI's commitment to operational excellence continues to enhance performance as we deliver with profitability, quality and high customer satisfaction. We retained a significant amount of business this quarter and added key industry credentials and certifications to continually distinguish ourselves within the market. As our remarkable employees bring innovation thought leadership and commitments to our customers each and every day. Our second-quarter was also a strong one for cash generation. We continue to be said to pay down debt and increasing arts capacity for strategic acquisitions. At the same time we are achieving our margin goals white we continued to invest in cutting edge capabilities, business development and the infrastructure needed to support future organic and acquire both. Let's turn to slide five please. Before I turn the call over to Tom I would like to talk briefly about some current market dynamics. We start with the US government remains under continuing resolution until the end of April, 2017. It is our hope that the new Congress and next 2017 federal budget fully and expeditiously and returns to a regular order of budget of budgeting in government fiscal year 2018. Second, several of the incoming administrations initiatives resonate well with CACI core competencies and capabilities. An increase in national security spending will no doubt be favorable to CACI and our industry at large. New border protection initiatives would require extensive monitoring and surveillance in line with solutions we develop and deploy today. Space has become an increasingly contested domain and a key to America's future. This aligns well with our new pursuits and capabilities that 63 and the recent award of the U.S. Air Force CAMMO for this. Cyber will continue to grow and this is another highly relevant unfavorable area for CACI. And last, but not least, regulatory and corporate tax relief would be of benefit towards the entirety of our industry. Let us turn to page 6 in the - or slide six in the deck. While these indicators generally bode well for our entire industry, it's going to take some time for them, for us to be able to feel their impacts. In the meantime, we remained focused on and highly confident in the health of our current underlying market and in CACI's ability to deliver on our stated longer term goals, 1% to 4% organic top line growth above our addressable market and margin expansion of 10 to 30 basis points annually starting in FY 2018. With that I’m going to turn the call Tom to discuss the financial results of the quarter. Tom?

Yes. Thank you, Ken, and good morning, everyone. Let's turn to slide number 7 please. Our second quarter results continued strong performance we reported in the first quarter, reflecting the contribution of the NSS acquisition in solid program performance. Our revenue at $1.06 billion was up 27% year-over-year driven by the $260 million revenue contribution of NSS. Operating income was up $25 million or 45% driven by the profits from the NSS acquisition. In last year, we incurred $12 million of acquisition related expenses in the second quarter making the year-over-year comparisons easier. We continue to drive efficiencies in the organization which helped drive margin and profit. Indirect selling expense increased 19% with indirect labor expense of only 13% both much less than the 27% increase in revenue. Net income was $42.4 million with earnings per share at $1.69, up 38%. Diluted adjusted earnings per share, which excludes certain non-cash expenses were $2.13, to 36% higher than GAAP earnings per share. Slide eight please. We generated $78 million of operating cash flow in the quarter for 183% of our net income. We now expect to generate at least $250 million of operating cash flow in this fiscal year. With the strong cash flow, we continue to reduce our debt. Net debt at the end of December was slightly less than $1.3 billion and our net debt to trailing 12-month pro forma adjusted EBITDA leverage ratio is now about 3.4 times. Our average interest rate in the quarter was 3.2% with about two-thirds of our debt fixed. Slide nine please. As Ken mentioned our strong operating performance resulted in work have resulted in our increase guidance. We now expect our fiscal 17 revenue to be between $4.15 billion and $4.3 billion in our net income to be between $155 million and $162 million with our current net come forecast near the midpoint. Third quarter earnings are expected to be below that in the second quarter due mostly to the timing of work fee in one-time expense associated with NSS related facility. These two items resulted in a $10 million sequential decline in pretax profits. With that, here is John to provide additional operational highlights. John?

Thanks, Tom. Let's go to slide 10 please. First, I would like to say how proud I am that the organization delivered its fourth consecutive quarter of awards above $1 billion. This is a result of the laser focused on our market strategies and the efforts we undertook to address emerging margin requirements over the past several years. In addition, we continue to realize the benefits of our commitment to operational excellence as we deliver complex programs with profitability and high customer satisfaction. And with the one-year anniversary of the NSS acquisition just a day behind us we're demonstrating the value of our M&A program provides, not only financially but also capabilities of past performance that enhance combined ability to win new business. Lastly, given our first half performance year-to-date awards and healthy pipelines, I too am confidence in our ability to deliver on our updated guidance and organic growth expectations as we exit the fiscal year. Slide 11 please. To provide additional details let me start with contract awards in the quarter. We booked $1.6 billion with 85% of that for new business. This includes the $876 million single award Joint Improvised-Threat Defeat Organization or JIDO contract to provide the deployable analytical operations integrated intelligence and training services. As a reminder, we felt it prudent not to book the almost $900 million of remaining potential JIDO value as it is associated with surge work that may or may not be exercised depending on global requirements. However, this does represent the potential for CACI to sell additional solutions and services to JIDO over the contract period under this single-award IDIQ contract. On a trailing 12-month basis our awards to revenue ratio now stands at 1.5 times which is very encouraging. We also booked $752 million of contract funding and our total backlog now stands at $11.6 billion. Turning to operational excellence, we continue to demonstrate our commitment to quality and process rigor with the addition of enterprise-wide certification for the international organization for standardization for ISO 27001. This confirms our adherence to information and security policies and industry best practices and further confers to our customers our vigilance in cyber security. CACI was also selected for the MSN Web services public sector program. This builds upon our work providing our customers with comprehensive, rapid and agile call solutions and services and enhances our presence across all of our markets. With the combination and integration of NSF and CACI, we enhance our position, offerings, pipeline and past performance in valuable market areas such as enterprise IT, intelligence services in cyber. These are areas of opportunity where we can apply disruptive solutions and support of our customer’s missions. The combination is also expanding our overall adjustable market into new areas like space. The Air Force Consolidated Satellite Control Network or CAMMO award stands out in particular. This greatly enhanced our position in the evolving space arena, a fast-growing national security priority. In short, our combined successes demonstrate the reason we deploy our capital for growth. Slide 12 please. Looking forward, I'm confident in our ability to deliver an increased guidance and long-term financial goals. As of today, 96% of our annual revenue will come from existing contacts, about 4% will be driven by re-compete wins and less than 1% depends on new business awards. This is a very comfortable position at this time in our fiscal year. Turning to our pipeline, we have $14.9 billion in submitted bids awaiting award with almost 90% of those for new business at CACI. And over the next two quarters, we expect to submit another $9.4 billion of bids with about 65% of that for new business to CACI. All-in-all, I'm very happy with our performance and position as we look to deliver organic growth and achieve our long-term revenue and margin expansion goals. With that, I'd like to turn the call back over to Ken.

Well, thank you, John and thank you Tom. Appreciate your comments this morning. I'll turn to slide 13 please in the deck. Over the past several years, our industry has faced some significant headwinds. We, CACI, recognize the changing environment and the new buying behavior. And we responded by reshaping our business to address areas of our market we believe would be fundamental national priorities. This kind of change required us to be agile. We had to have insight into emerging trends. We made strategic acquisitions to position us for those new areas that gave us technical capability. We brought a new partnerships and development over a variety of innovation solutions. As a long-term budget outlook improves we expect increasing demand for cost effective, high-end mission driven solutions. CACI is well positioned to support our customer’s missions in support of their enduring needs in the most critical challenges that are nation faces. None of this could have been possible without the dedication, the innovation and the integrity of our almost 20,000 employees. And I think all of them for our collective success. With that, Zelda, let's open the call for questions.

Thank you, sir. We will not begin the question-and-answer session. [Operating Instructions] Our first question comes from Edward Castle with Wells Fargo. Please go ahead.

Yeah. Hi. Good morning congrats on putting together some string of good quarters here. My question is around a regulation or regulatory reform or less pressure on complaints. Can you give us some concrete examples where CACI would benefit from actions to the current administration? Thank you.

Yeah. Ed, its little too early to tell on a number of those things but let’s - let me take you down a couple things that we found ourselves needing to respond to. A lot of pressure on discussions around regulations around sustainability had been developing and we were developing strategies for which to deal with that. And what does it mean to us? Whenever we have that kind of requirement levied on the business that above for reporting we have to add staff and we have to add tools that allow us to collect that information, process and report on an ongoing basis. So that's sustainability happens to be something that we're working on? But we felt that it was going to and we were going to spend more and more time on it. It is too early to tell what a lot of these things may impact. We were seeing a lot of information around how you would report differences in labor categories and that sort of thing inside of our workforce, pre-standard stuff for us, but the way we will have - so we’ll kind of have to take a wait-and-see attitude as to what some of those regulation release make give us and we’ll report on that as we them. John, did you want to add something?

Yeah. I would also add, if you think about our SkyTracker product. I think we’ve mentioned during prior calls that we've got a lot of federal government agencies out there that are still having to work through. It’s a different regulation and who has authority and to what extent different entities can act on the man threat. So I - we’re looking at how this new administration looks to better protect what we recall domestic critical infrastructure. And the different reviews and the various provisions of law with some regulatory changes there we could see a potential market expansion for our unique offer to provide protection against unwanted and unmanned drones.

Thank you.

The next question comes from Jonathan Raviv with Citi. Please go ahead.

Hey, good morning guys.

Good morning, Jon.

Can you guys talk about the interplay of margin growth and sales growth? For example, your sales to go-to-market is by 100 basis points, 400 basis points and grow margin by 10 basis points to 30 basis points annually. Can you hit the high-end of both those ranges simultaneously or is it more likely that we see higher sales growth by the expense in lower margin expansion?

We believe there is a higher intrinsic value associated with providing this kind of outcomes to customers and we believe over time that's going to drive margin growth. That gives us the goal of 10 basis points to 30 basis points on an annual basis starting next year. We started to see a little bit of that. You'll also see that over time as John just mentioned in his answer to the regulatory question. If we are able to expand our product offering particularly using SkyTracker as an example, a little bit faster that's also going to contribute more margin to the business as time goes on, again in that solution product category. From looking at how we plan to generate revenue in the future, it is a mix. It will be a mix. The government buys about 50% of everything they buy these days on IDIQ or MAI, kind of contract. So we’ve got to keep our strong basis in that pass-through [ph] business. But given a choice between doing a 100% labor contract or $100 million solutions contract that likely has a 15-year or 20-year life cycle then we're going to increase and we pick that on the other side. But why we feel confident being able to do that I think you're starting to see the results of all the efforts of talent the modifications that we made to our business development process and how we sort of positioned CACI to be more effective and going after larger, more complex, more enduring contracts.

Got it. And then what’s the basis for the targeted 10 basis points to 30 basis points of annual margin expansion and that’s why it’s in - in other words is I think you guys are doing 8.8% in the first half thus far. Is that fair assumption for rest of the year to grow off of starting in FY 2017?

Yes that's about right. Again - the first half of the year EBITDA margins were on 8.5% on. For the full year they will be within that range as well and so that seems to be a reasonable - basis for that expansion that Ken mentioned.

The next question comes from Cai von Rumohr with Cowen and Company. Please go ahead.

Good morning. This is Lucy Guo for Cai. Why don’t you…

Good morning.

Why don’t you add on - just on - into your guidance - EPS guidance it was raised by 14% at mid-point but - you know, you had very good performance this quarter and you beat by more than $0.20. Can you just talk about your thoughts there? And are there any awards that could be protested [ph] or in the process of being protested that - in your award backlog?

Yes Lucy. This is Ken. We have no protest. Every protest that we have faced has been adjudicated in our favor. So there is nothing in our future or in our outlook that is - that needs adjudication. Let me talk about the forecast going forward and what our guidance is. I continue to have high expectations for FY 2017 confirm by our prior first-half performance. We have won a number of significant contracts, focused on solutions and fixed price. They’ve been larger than we typically have seen and that is something that we want to make sure that is a continuing part of our repertoire in the future. I think as John mentioned, if you look at the next, we have about close to $15 billion worth of contracts in evaluation right now, which I think is probably our all-time highs for contracts under evaluation. Our market strategy is going to continue to be focused on where our customers have emerging demands and what the problems are, in other words, mission-critical type of things. We're not going to spend as much time looking at the lower end or lower margin services, which frankly is subject to a lot of small business pressures these days, and frankly a heightened level of competition. So, we've been upping our game to make sure that we’re competing with less people on more complex things and that’s what's going to drive the future of our business. Now, as I mentioned our pipeline is strong. We continue to attract talent and we still have a goal going into 2018 of growing 1% to 4% organically better than the growth of our addressable market. And if I look at what the second half looks like we have very little new business to win, a few re-competes. But I would also remind everybody that we are continuing in ACR under a new administration where it is not clear how that budget reconciliation is going to happen. And so we do a month - every single month we do an extremely detailed forecast and we look at our risks and opportunities and based on where we sit right now, we believe we have given you our best judgment as to what - how we will finish FY 2017. What are the factors that could have an impact on that? It's always right now about awards. The further we get into the end of the year, the less likely we’re going to convert awards to revenue. It's just simply because of timing, so it has less of an impact. That will have an impact on FY 2018. So with a few re-competes remaining worth a little bit of new business, we believe we’re really right where we need to be for the second half of FY 2017.

The next question comes from Mark Jordan with Noble Financial. Please go ahead.

Thank you very much. Good morning. Question relative to the second quarter earnings level, absolute level and the balance of the year. As an exceptional quarter if you analyze this 676, if you look at your guidance, the implication would be the average quarter in this third quarter and fourth quarter would be below the earnings level of the third to come into the earnings range picture forecasting. And I guess there is two point questions. One, are there any specific factors that really abnormally favorite the second quarter performance? And then secondly are there any factors that you're looking for two in the second half that would be of higher than normal expenses a startup cost of larger contracts or things of that sort?

Yeah Mark, this is Tom. I remind kind of you and other listeners that our award fees are subject to discrete and choppy and our award fees are driven by when the contract was first awarded. The award fees are effectively given on the 6 months or 12 month anniversary of the contact. And just due to some kind of randomness we have high award fees in both the second and the fourth quarter of the year. To give you some more specifics, in the first quarter, our award fees were approximately $5 million, in the second quarter they were approximately $16 million, so a significant increase. In the third quarter, it will drop down to around $8 million. So we're going to see that kind of seasonal decline. So that is the singular larger event in associated with some of the quarter-over-quarter comparisons. The other factor I want to mention which is not as large but in the third quarter we're planning to take approximately $3 million charge associated with a facility consolidation. We inherited one facility from NSS and we have the ability to contract the footprint in that facility. It will cost us approximately $2.5 million to $3 million in the third quarter due to some acceleration of leasehold improvement in a termination fee that we need to pay. It will save us $13 million over the next five years. And so this is another example that some of the synergies we have been realizing from the NSS acquisition.

The next question comes from Amit Singh with Jefferies. Please go ahead.

Hi, guys. Thank you for taking my question. If you could start-off by providing sort of the organic revenue growth in second quarter and as you are looking at the guidance increase for the full year. I know before this quarter, you guys are expecting around a negative 5% organic growth for the year, and NSS was, I think, incrementally supposed to provide around $600 million of revenues, so the guidance increase, is that more of an upside from the NSS side or the core business side?

Yes, so let me start out, in the second-quarter, again, revenue down around 4.7%. We initially guided through organic revenue for the full year down approximately 5%. Right now at the midpoint, the guidance, organic revenue is down around 3.5% and we initially guided to NSS at about $6 million for acquisition. We're a little bit north of that at this point in time. NSS is performing well, but the majority of incremental revenue that we added to the guidance was organic.

All right. Great. And then quickly on organic growth beyond fiscal 2017. So if I look at your book-to-bill on funded orders, the first half this year is pretty similar to first-half last year, little variations. So if you're expecting organic growth to be down around 3.5%, what gives you confidence that the similar level of book-to-bill, are you going to be able to sort of drive organic growth at a much higher rate next year?

Yes, Amit, this is Ken. So, you know, if you look at the way we laid out this year, we started with basically taking out some of the older business and some of our lower value re-competes where customers were frankly only valuing it for how low you could bid and that was not going to be a sustainable business model for us. So that’s what contributed to the guide to negative organic issue. What we're biding now is not the kind of work and the bids that are coming in are, I would say, average or in some cases above average because they are fixed price or they are more highly complex development or product businesses. That’s where we expect to see at least at the bottom line, the 10 to 30 basis points improvement as we go forward. The other thing I would add is while the performance is, if you look at second quarter, we have extraordinarily good quarter for winning new-new business. And the outlook for that new-new business is also very strong for the next, I would say, 9 months to 12 months. We will see what 18 after 18 looks like. So honestly we’ve got rid of some of the things that were hurting our business at the bottom line while we were continuing to win business and now that’s re-baseline, I think everything is growth from now on.

The next question comes from Joseph Vafi with Loop Capital. Please go ahead.

Hey guys, great performance here in fiscal Q2. I was wondering if we could talk a little bit about the JIDO contact. I know that you mentioned that full amount wasn’t put into the base more on search. I was wondering if there is any competing vehicles out there versus JIDO that may compete for maybe some of that search revenue if it indeed it ever occurs?

Yeah, Joe. Thanks. This is John. I guess, first off, we are extremely happy with this award. It is a great example of the larger enduring contracts that were out there pursuing in this market and also the result of working this capital for a very long period of time. And I would also want to add that one of our main differentiators in this competition was the specialized capabilities and past performance that was brought by our Wexford acquisition which was done several years back. Although we don't discuss individual programs in detail this is a very sensitive program. What I can tell you is that we planned on contribution from JIDO and our initial FY 2017 guidance and expectations are really not changed materially. There is a consolidation of a number of pieces of business which we will roll into this contract at different times over the next couple of years. So as you're looking to models this, I would not expect a straight line ramp up to a full burn. Rather it’s going to have a sort of lumpy ramp up over the first 18 to 24 months. Our estimate for remainder of FY 2017 is really based on customer requirements that we know of, but as you mentioned Joe, there's about $900 million of a search clean [ph] and that represents additional solution in services volume based on our customer needs and that is solely to CACI as this was a single award IDIQ contract. So we're solely in the position to generate revenue on the initial award as well as this additional $900 million search clean.

Hey, Joe, this is Ken. Let me add to that. This was a consorted effort on the part of this customer to reduce the variety of contracts and go to a central management of a lot of the capabilities that they were doing. So while there maybe some other contracts out there this has been a consolidation of a number of efforts. If we perform the way we traditionally performed and all of our partners do as well then I would say that this customer is going to depend on this vehicle. If results matter and this is an area in particular where results matter, so we will be focused on that. But I'm not as worried as I am on other IDIQs that there are a different vehicles that could be brought to this customer. This has been their strategy for quite some time.

That's helpful. And then just one follow-up. Is there anything we should be thinking about in terms of mix of direct labor, ODC is on the ramp of JIDO over time? Thank you.

Yes, Joe this is John. I would say, initially no, I mean, this IDIQ is going have a good mix of solutions work as well as some level of professional services work and from a margin standpoint, this is going to fall in line with pretty much what our current operating margins support today.

The next question comes from Brian Ruttenbur with Drexel Hamilton. Please go ahead.

Yes. Thank you very much. So I just want to talk about future acquisitions plans for cash. I know you're going to be paying down debt and where is the magic number where you are going to start executing on additional acquisitions and are there some big acquisitions out there that you can still execute on?

Yes Brian this is Ken. So, we are inquisitive company. We have done 67 transactions. We believe that that is besides organic growth that is one of the principal ways that we choose to position our business and it’s served as reasonably well over the years. With that being said, we don't have a magic number. What we do have is we look at the magic of the companies that are out there that could add new customers, new capabilities, new places to be in the marketplace. And as we transitioned over the past three to four years to a market based strategy where we are looking at things not so much to our customers wins but we are looking for instance in the cyber market or in the business solutions market. We’ve done a great deal of detailed gap in capability analysis of where we are versus where we would need to be to be able to serve certain parts of the customer. That inasmuch is anything else is going to feed how we built the market from an acquisition point of view and try to buy new skills and new capabilities. As far as size, size is not the determining factor for us. It is really more - is it a strategic fit? Does it make financial sense to us and does it allow us to strength - this allow us to add strength into particular end markets that we think are particularly attractive. And what we have done recently, we're starting to see - and I spoke about in my remarks the emergence of space. Space has become a place where the U.S. government is going to invest a lot. 63 brought us a lot of space related capabilities. We're starting to see those begin to foster now. As well as the NSF acquisition with a lot of their modernization through sustained capability and CAMMO contract that they had did and we’ve won. So just one example of how we are beginning to think about acquisitions in the future.

Thank you.

The next question comes from Tobey Sommer with SunTrust. Please go ahead.

Thank you. Thinking about your transition towards a larger proportion of business coming from solutions, how should we think about whether your customers are driving that in the way they are looking to procure services versus sort of CACI's proactive shift in the business? Thank you.

Tobey, Ken. That's a great question. Here's the way I would frame that. We work inside of an addressable market that has a great number of opportunities. Some customers are going to be at the higher end of wanting solutions, and it is industry's choice about where they choose to put their strategy, put their talent, put their energy into resourcing pursuing something that the high-end or at the lower-end. And it’s - frankly it's a matter of effort. When we look at we’re $4.2 billion, $4.3 billion company now in an addressable market, it's probably closing back on a couple of hundred billion dollars. It is really about short selection. Where do we want to go, where do we want position and how do we make sure that every single person in the company is align to being able to do that. You don’t do it overnight, so I try to park an aircraft carrier. You got to do it slowly but surely. As a consequence, that’s why we’ve said in terms of margin improvement - we believe that’s the key to our margin improvement. And you do see customer pull in this area. Let me give you some examples. Increasingly, we see customers in the IT domain wanting to go to buying solutions as a service, buying managed services as opposed to going out and owning their own infrastructure, owning their own applications architecture, when you can go out - when somebody else is probably doing that in a more effective basis. Those are the kinds of jobs we want to find ourselves in. In fact, of the $14.5 billion we have in front of us, several billion dollars are for jobs just like that. And the margin potential for those over jobs that are cost plus award fee or cost plus fixed fee is frankly why we get the confidence that we are going to see a margin lift. Operating - if this - taking this strategy over time and as we examine this market, we don’t see it shifting in this new administration. I would tell you that we would probably see a shift. There has already been a discussion at least of maybe bringing back a 1976 kind of contracting which allowed some competition between government and industry to see where the best value could come. That would also be interesting to everybody in the industrial base. So I hope that gives you some insight into - it’s a push. It’s a push our part, but it is also a pull on the part of a number of customers.

Thank you. That’s helpful. And then, as you look at future acquisitions, should we expect a greater proportion of solutions revenue and firm fixed price contracts in those prospective properties. Thanks. A - I think the way we look at acquisitions is, yes, we would look to see - that would be a favorable thing but it wouldn’t be the sole determinant. It wouldn’t be the only recently we did it. We are finding that culture makes such a difference but what we’re looking for his overall capability. There are still places where we are going to be a services company. And if somebody brings us a new customer or a really refined services capability, then we’re going to look at that appropriately. And then we will put into the filter of the great financials, great cultural fit. I can't say any more about what a wonderful acquisition NSS has been to us just in the level of talent, the scale that they brought to us and the many gaps that they helped us to fill. And already we’ve seen their commitment to coming to us was that they had some big jobs that they had in their pipeline. Well, they won most of them. And now, we're able to look at even bigger and bigger things because of the level of talent, the level of leadership, the level of technical delivery people. All that was really a cool - that was the kind of acquisition that we look difficult to find again. Some of their work was solutions, some of it was products. But great deal of it was service and it was actually bought with a higher level of cost plus. That in fact, I think there is - if you look at our gross margin for this quarter, it comes down a little bit. It's really because of the nature of the way their business was set up with a higher percentage of cost plus. That being said, that gets adjusted over time as these contracts morph into more managed service or fixed unit price.

The next question comes from Brian Kinstlinger with Maxim. Please go ahead.

Great. Thanks. First, I'm looking at the JIDO were, I’m trying to understand the margin profile as in fixed price cost plus or income and then $15 million in proposal are awaiting adjudication. How many awards like JIDO are in the $12 million to contract work bucket?

Brian, this is John. I guess, specifically to the JIDO awards, once we get disdainfully wrapped. And as I mentioned to Joe’s question over the first couple years, once we get to that run rate, this is going to be margins are very similar to the operating margin that we have. Today, there's going to be some portion, task force are going to be lower and some that are going to be higher based on solutions, whether some of that is passed through and alike. As for the bids awaiting award, Ken, you want to say a couple of things on that.

Yeah. Brian, there is several large ones in the $1 billion plus category that are in the waiting award now. There is probably half a dozen that are also in the $250 million to $750 million range and over the next six months we should see those adjudicated.

Great. Then, finally, $3 million charge for the NSS facility, is that already contemplating your previous guidance that offset your strong fundamentals that you're expecting in your guidance?

Yeah. Good question. It was not contemplated in our previous guidance.

The next question comes from Jonathan Raviv, a follow-up with Citi. Please go ahead.

Hey, thanks for the follow-up. Ken, John, I wonder if you could provide some color on the government small business policies, how they evolved over the years, how do they impact your strategy and profitability? And where do you think these policies are going?

Yes, John. Good question. Let me start and then I will let John show you what’s going on at the sort of the level, down at the tactical level of this. We've seen over the course of the last probably four, five years an increase in the desire on the part of the government to do more contracting with small businesses. And frankly, we need that kind of an echo system inside of the company. Where we see it most is on our professional services kind of business where it is really around hiring the right kind of talent. And we've seen a lot of pressure on that over the years. I think our strategy has been taking that into effect by moving more towards a solution based where we're delivering outcomes in less hours. It will happen slowly but it will happen surely as we have discussed in the kind of business that we've been making. So what do I expect to happen going into the future, it's really uncertain. We did see the President I believe on Tuesday of this week, have a meeting with small business leaders. But I believe they were small business is not just necessarily out of the government contracting arena, those were small businesses throughout the United States and with the major push bringing back a lot of jobs, I would not be surprised that there is not a lot of emphasis on all businesses to be able to do that. So, John, do you want to talk about what we have seen in technical?

Yeah, Sure. I guess from an operational standpoint, John, a little bit of background. A few years back we had the overhang of sequestration and budget pressures and it was then that we recognized the move of professional services worked that some of that was going toward LPTA and two different breakouts of small business, right. Small business either at the prime or small-business set-aside or higher small business sub-contracting levels that were being levied on us. Some of this worked, frankly has a very low barrier on entry. If you think about it does not make a lot of sense. The government is striving to meet small business goals in some of this type of work is more about resumes and staffing rather than a core technical capability. What we saw was very limited small business requirements when it comes to as Ken mention is mission centric and enduring solutions type work as well as some professional services work awarded on best value versus being awarded based on LPGA. So this is one of the main reasons, we reshaped and we focused our business a few years back towards higher-end solutions where small business partners are offering real niche capabilities and technologies that we can leverage. So small business to us brings great value to some of work and we partnered consistent we provide best solutions to our customers but frankly in areas where customers want lowest cost and lowest price which only stands to provide increased revenue but also put a real harm our margins. We just don't see it as awards enduring source of business for a company like us.

[Operator Instructions] Our next question comes from Robert Spingarn with Credit Suisse. Please go ahead.

Good morning. I will just jumped on I know that last answered and that’s what I wanted to ask about so this might be little repetitive but on the small-business set-of side clearly one of your competitors had unexpectedly lower margin and I suspect these driven to some extent by pass-through revenue. And I think you just said you're not going to do so much of that so the question is: will CACI avoid the margin pressure that comes from an increase being able to do small business set of side?

Hi Rob. This is Ken. So avoid the margin pressure. I should think we are going towards I think our strategy fundamentally set this up to go towards the margin improvement. As we look to increase the fixed price content of our business again in a marketplace that is increasingly are going that way. It is easier for government takes less work for the government to administer a fixed price contract once the baselines are understood as opposed to constantly having the solicit input to work fees, or incentive fees and do all of that. Where we find those opportunities we're certainly going to take them because we do have the delivery mechanisms. John spoke quite nicely about the investments that we’ve been making in delivery certifications, whether it be supply chain, security to a lot of the ISO and CMMI level kind of command media that we put in place to focus our delivery. So, I believe our strategy puts us in a position where increasingly we will be going towards a higher margin profile. I know that there are other components of this business where depending on the mix of your business, you can deliver low double-digit margins on this identical kind of work. That’s the goal that we would have over a longer period of time. It doesn’t happen, it's not going to happen overnight because the market doesn’t present itself to you that way, and you don't want to take on 10 tons of complexity in a short period of time. You want to do in a measured way to make sure that you deliver exactly what customers are doing. But what you described is, I mean, our strategy is fundamentally to get to the higher ground from a margin and a mission contribution standpoint.

But does that mean, Ken, that you target less or fewer contracts with set-aside business? Do you do need to do that in order…?

Rob in general, yes. I don't know what the percentage is and I don't - I think the percentages really are dependent on how we - in any quarter that we're looking, the markets going to present itself, the opportunities present themselves differently. There could be, for instance, a couple quarters ago, we had a high number of re-competes and - but not so much new business, because we were focus there. This quarter it was mostly new business that we were targeting and what we - and our awards were reflective of that. So on an ongoing basis, if we have a choice between a solution's bid or a services bid or a labor hour bid, we are going to more favor the solution's bid. But that's going to really depend on how well we’re positioned to go and pursue that. The takes a lot more work, a lot more investment to be able to prosecute and win those kinds of jobs.

Ken, I think this is an important discussion because right now what we're hearing from investors is there’s a relative level of comfort that the top-line is growing and under this new administrations there will be more funding for all of you. But there’s been some question over whether the how profitable that business is going to be and whether margins can trend up with that increased revenue, or are we going more toward an LPGA environment with set-aside et cetera, a lot of pass-through profits - pass-through revenues, so that there is an offset from lower margins. And when we look at some of the peer results, that seems to be the case, although in your case your margins are up here in this latest quarter. But on the other hand, in the last half of the year, I think, they go back down a little bit. So I just want understand what the trend is going to be for CACI?

Yeah. Rob, I mean, what we have said is over the next three years based on what we see in the addressable market and where we are, it will see 1 to 4% top line above our addressable market. And let me be definitive about that. We did a five-year analysis of the budget independently last year. And when we did our investor meeting last year, we saw compound annual growth in the federal budget before the selection of approximately 1 to 1.4% depending on which year it was over a five-year period. That’s the first time we have seen that sort of positive indication in the addressable market that we support, which is think about it as government IT and it’s a big - it’s a fairly - it’s more than that, but that’s what we saw. Our goal is to grow 1 to 4 above that. At the bottom line, we are going to make our choices about what we did invest in to bid and win only where we can increase the bottom line as well 10 to 30 basis points. So we think those are attainable goals. We believe we're already on track to be able to do that once we sort of exit some of the passthrough work that has been so important to our customers and important to CACI, but not important to the future of the country right now, because that’s the biggest fundamental change we have seen in defining behavior of our customers.

This concludes our question-and-answer session. I would like to turn the call back over to Ken Asbury for any closing remarks.