Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q2 Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. [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, Kate, and good morning ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we're very pleased that you're able to participate with us today. And as is our practice, we are providing presentation slides. So let's move to Slide 2. 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. Now factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the company 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 and 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 3. And to open up, here's Ken Asbury, President and CEO of CACI International.

Well, thank you, Dave, and good morning to everyone. Thank you for joining us to discuss our fiscal 2018 second quarter results. With me this morning are John Mengucci, our Chief Operating Officer; Tom Mutryn, our Chief Financial Officer; DeEtte Gray, President of U.S. Operations and Greg Bradford, President of CACI Limited, who is joining us from the U.K. Last night, we released our second quarter results for the fiscal year 2018. We also raised net income and earnings per share guidance to accomplish strong profitability from operations, and benefits from the recent tax reforms. This morning I’ll provide an update on our results and strategy looking forward. Tom will give details on the financials, and John will cover the operational aspects of the quarter. Please turn to Slide 4 in our deck. We delivered a solid second quarter, now our fourth consecutive quarter of positive organic revenue growth. Profitability was also healthy with operating margins over 8% and we booked more than $1 billion of contract awards and was typically seasonally light quarter. This gives us the confidence to reiterate our revenue guidance and raise net income and EPS before the benefit of tax law changes. Tax reform also contributed materially to our second quarter net income and has been incorporated into our full year guidance. Tom will lay out those details for you in just a few moments. Let's turn to Slide 5 please. As you know we are currently operating under the fourth continuing resolution for this government fiscal year and experienced a brief shutdown in January which will not have a material impact on our financial performance. We remain optimistic that our budget agreement will drive increased defense and intelligence spending which will be positive for CACI, our industry and our country. Before Tom walks us…

Thank you, Ken, and good morning everyone. Let's go to Slide 6. Our second quarter revenue was $1.09 billion, 2.9% greater than the second quarter last year with 2.4% organic growth. Operating income for the quarter was up 10% compared to last year. This was driven by additional gross profit from strong program performance. Indirect cost and selling expenses were essentially flat last year and net income for the quarter excluding the impact of tax reform was $50.5 million of more than 19%. GAAP net income for the quarter was $142.8 million. This includes a $94.8 million benefit derived from the revaluation of our net deferred tax liability under the new tax law. In addition, we incurred a one-time tax expense of $9.7 million associated with the cumulative profits generated by our U.K. subsidiary. Lastly we realized the $7.1 million benefit in the quarter from the lower blended rate for fiscal year 2018. Slide 7 please. We generated $76 million of operating cash flow for the quarter with day sales outstanding of 61 days, down from 64 days last quarter. Operating cash flow represents over 150% of our net income excluding the benefits derived from the new tax laws. Net debt at the end of December now stands at $1.1 billion, and our net debt to trailing 12-month EBITDA leverage ratio is now 2.9 times. Slide 8, please. Turning to guidance we are maintaining our prior annual revenue range of $4.35 billion to $4.5 billion. And we are raising our net income guidance to reflect continued strong operating performance and the impact of tax reform. Driven primarily by operations, net income excluding tax reform guidance is now $177 million to $183 million up from our prior guidance of $171 million to $179 million. GAAP net income which includes the impact of tax reform is now $277 million to $283 million. This includes an estimated $100 million tax reform benefit. Our updated earnings per share guidance reflects the same expectation as net income. We expect our net effective tax rate beyond fiscal year 2018 to be in the 24% range. And lastly we are increasing our full-year operating capital guidance to at least $300 million reflecting strong cash generation and the impact of tax reform. With that, here's John to provide operational highlights.

Thanks Tom. Let’s go to Slide 9 please. Operations delivered our fourth consecutive quarter of organic revenue growth with strong operating profit and margin. We continue to win business and our forward indicators remain healthy. This is a result of our market-based strategy and reaffirms our guidance in CACI's ability to deliver long-term revenue growth of 1% to 4% above our addressable market and margin expansion of 10 to 30 basis points on average. During the quarter, we delivered our contracts with quality, value and high customer satisfaction. Positive organic revenue growth was driven mainly by new business we won in fiscal year 2017 and margin growth was the result of efficient performance on several fixed price contracts, in addition to high-quality delivery resulting in strong award fees. This margin profile was expected and keeps us on track to deliver the implied margin expansion within our guidance. We won 1.1 billion of contract awards during the quarter. This is a healthy amount for the December quarter which is normally light and keeps us on track to achieve our full year guidance. Above 40% of our contract awards were for new business as we continue to take market share. We received $750 million of funding orders during the quarter in line with last year. Our total backlog now stands at $10.9 billion which represents well over two years of revenue on a 12-month basis. Slide 10, please. Two notable awards during the quarter were a $300 million contract to continue providing business system support including acquisition, finance at human resources to a classified customer and a new $85 million contract to provide state-of-the-art operational, technical and fielding support to a DoD customer in the sustainment of equipment and systems. In addition, CACI's Cyber Range test environment which enables cyber exercises with…

Well, thank you John. Thank you, Tom. I appreciate your help this morning. We delivered solid first half results and now a full-year of organic revenue growth. Our operating performance is driving profitability upside, which is reflected in the new guidance. And we’re investing in long-term strategic growth initiatives including the development of our current and potentially future employees. The bottom line is, we believe our strategy is working and we are well-positioned for continued success. Before we open the call to questions, I’d like to say how proud I am of the CACI employees, their talent, innovation and dedication formed the foundation that earned us the recognition I mentioned earlier. Fortune world’s most admired company and from the very first day I joined CACI, I’ve seen how much our customers acknowledge the value, our employees provide. It might be that our teams respond rapidly to their urgent requirements or anticipate their needs and provide new capabilities. It might simply be they think and always account on our employees to solve their biggest problems. Across the company, we have people who are thinking big and thinking ahead. They contribute to our company’s growth in so many ways and drive our success to delivering shareholder value. I thank them for all that they do. With that, Kate, let's open the call up for questions.

[Operator Instructions] Our first question comes from John Raviv of Citi. Please go ahead.

Ken and John, I wonder when if you could update us on the kind of the multi-year growth strategy that you've put in place to stretch with John’s somewhat redefined role? What sort of things are you pursuing? What sort of new products or capabilities are you introducing? And where is the money coming from to invest in those efforts?

John let me start, and I'll let John give you some of the particulars on it. So there are a couple of things that we were trying to accomplish in this. One is to make sure that we were prepared to be a much larger company as we return to organic growth, and as we continue to be looking across the horizon from a M&A perspective. So we had some institutional things we wanted to make sure that we got done, and that’s part of John's responsibility. In addition, there are opportunities that we believe were in the two to three, four year range maybe some of them actually sooner that we wanted to not flip the burden on our business groups, but ask John to take small, if you will, tribes of people and put them in front of those things, and invest a modest amount of money to allow them to go out and build system integration laboratories or to go prove approve some concepts about how we might do things differently within some elements of digital signal processing, electronic warfare, machine learning, those kinds of things. And he's got more specifics here at the moment. So how is that turning out, I think what we're seeing is a much more disciplined approach to the kinds of things that we're looking at in the future to bid. And the quality of the kind of pursuits that we're making are being driven a lot by the work that John and his various teams are doing. So with that I want to turn that over to him and let him comment.

So as Ken mentioned, really looking at building additional market areas that we can focus this core operation in. Ken mentioned a couple, both electronic warfare which to us are both Title 10 and Title 50 solutions. Some of those being SkyTracker, some of those being other very discrete, offensive and defensive cyber solutions. Also protection of the homeland as we have heard with this administration wanting to better protect our quarters and the like, many technology solutions, as well as intelligence services solutions that as Ken mentioned earlier within our core business areas, they just didn't have the additional bandwidth to be looking at some of those areas. John, you asked how we fund those. Every funding decision and every bid decision is a business decision across this company. We had plans coming into this year to look at some of these additional areas, all that in investment, whether it's bid and proposal money, in direct selling expenses, as well as our research and development funding we're all - put into this year's plan. So, there is no additional investments we would need to disclose during this year that would in any way shape or form impact our commitment to grow margins 10 basis points to 30 basis points.

And then just a follow up on the margin question. I think maybe a year-and-a-half ago you guys talked about margins reaching the low 9% to 10% range over time. I think you talked about some fixed price programs that are that could really fix that. Where were we on that journey so to speak?

John I mean we've been steadily focused on this 10 to 30 basis points growth year-over-year. I mean this second quarter result is another data point as to where we are along that growth curve. If you look at the bottom line growth, we've done that in three different areas, firm fixed price programs, fixed unit price programs, and then product sales performance. If you look at firm fixed price, we've been talking for the last three years or so more solutions based business and performing on a firm fixed price effort, this operations team is doing extremely well. As we continually have been working on efficiencies for our fixed unit price programs where as we improve our delivery processes on those types of contracts that drives better and better profit and we're starting to see that during the second quarter, we see that continue. And then product sales and we spent a lot of time talking about SkyTracker, but frankly there's other many, many cyber-based solutions and products to special groups across the federal government both congress and old congress related that we have been delivering those to us, I’m sorry we have been delivering those. Highly specialized solutions in this market drive much higher, higher margins. In the last eight quarters, we've seen a steady state of both we’ve seen a steady state of both request for our models and also new sales. So I would tell you, we're well on our path to achieve 10 basis points or 30 basis points, and as our mix of business changes, we will continue to see that our bottom line margins grow.

The next question comes from Rob Spingarn of Credit Suisse. Please go ahead.

I wanted to ask you, Ken, just add a very high level, two things, first of all, we've seen some readiness spending come through for some of the hardware contractors, and I wanted to see if - what you're trying - what your exposure is, some of this has been very strong. And are you seeing some of that funding, is that an opportunity for upside here in the next couple of quarters? That's question one. Question two is, with all of these plans, that you've made, when should we in your more traditional businesses start to expect a more significant inflection in book-to-bill. Thank you.

Rob, thanks for the question. Let me start with the second one. The book-to-bill, you know, we’re actually quite happy with the book-to-bill, because right now it reflects a discipline that we are trying to put into the things that we pursued to drive the kind of growth that we want to be in the higher-end solutions and services business. So it would be easy for us to spend B&P and go chase $500 million of 1% business, but that ends up being somewhat dilutive even though it's driving topline, and we believe that there is a market and we are positioned and slowly but surely, we will be able to climb to a higher plateau in terms of the higher value areas of the business. So, I'm not really worried about book-to-bill So, I'm not really worried about book to bill in the same way that we might have been three years or four years ago because our strategy is fundamentally very different. With regard to seeing what we're seeing, we are seeing from a readiness point of view, the kind of money we're seeing spent on is on intelligence services. It is on training, it is on things that have been supporting to fight against ISIS, some of the Africa work and alike. So if that's your context then that's possible. The training that we're doing is probably not fighter jet or helicopter training. It is training people to avoid or to learn about how to operate in austere environments and do so safely against the threat of IEDs and alike. So we have seen an increase in that kind of business. We won a lot of that but we've seen it grow as well as won a lot of that business over the course of the last two quarters.

The next question is from Greg Conrad of Jefferies. Please go ahead.

In the script you mentioned products, is there any way to kind of size that business and maybe as you change the bidding strategy, how big that business could become and how the impact to margins?

I mean can we say it's part of our solutions mix. Products come in and go. We’ve been pushing our customers more from providing dollars to create a solution to self-investing and then turning that into a product. So, I would say that’s at its infant stage today. We'd like to talk about margins within that business because that's much more of a positive impact to the 10 to 30 basis point metric versus the growing top line of 1% to 4%. So, you would expect us to see high double-digit margins for these product type sales. As the earlier questioner mentioned, UAS and cyber needs and solutions are needed both Congress and old Congress, we are in the right spot at the right time by a lot of market based planning to make sure that we had the right type of solutions there. And many of our solutions are software based. So, if you look at the traditional way to solve these solutions it's a hardware-based manufacturer type solution. We have been very focused on disrupting that market by having software definable solutions, which means you build the hardware once and as the threat changes, we're able to distribute new software there, makes it much easier on our customers, makes it much less additional training, but also drives higher margins for us.

I would also tell you that products one element of the business, it's relatively small, but it’s having a meaningful impact on our business now, just and it's really growing. Going forward and where I think the market is going to be going more anything as a service. And I think anything as a service becomes again a greater fixed price-based business where you control your ability to serve customers and I think you generate higher profitability as a result of being able to do that. And we are seeing opportunities today in some of the general IT arenas, but I think in the future it could be it could literally be anything. You could be doing border security as a service, instead of getting it through traditional government contracting. So we think this is a very different market that’s going to take some time to develop. But we think this administration is very amenable to those kinds of things versus just buying the entire technology stack themselves, try to manage it themselves and then hiring contractors on an hourly basis to do it.

The next question comes from Krishna Sinha of Vertical Research Partners. Please go ahead.

So just to dovetail off that last question, just if you could just focus on this quarter excluding the award fee lumpiness that I know you have in the second and fourth quarters. How much of the 8.1% margin was driven by product sales as opposed to direct labor contracts?

Take first stab at that and then John may want to embellish it up. Right now, I don't have that kind of level of specifics sitting in front of us and in for us, we don't kind of look at it in that way. What is driving the margin is performance, relatively cut broadly across the board within each of our market segments there are some increasingly fixed price types of work, fixed unit price work, some larger service activities outcome based which are fixed price. And those afford us the opportunity to kind of drive efficiencies and though these efficiencies flow to our bottom-line versus a cost plus contract were not necessarily flowing to our bottom line. So, relatively broad-based products we highlight because it is a exciting part of our business albeit small products we highlight because it is a exciting part of our business albeit small but growing. And if it dovetails quite nicely into the other electronic warfare intelligence work that we’re doing. So, hopefully that provides some color.

And then just on the awards, last quarter, you mentioned some slippage of the recompetes, and we’ve heard a lot of chat on disarray on the customer side that could be impacting when programs are awarded. What are you guys seeing with regards to that and what do you think is the potential future impact on the awards cycle and maybe the increase in lumpiness there?

True-up, I mean awards they continue to lumpy and its tougher and tougher for us to be consistent and try to hit some more predictable book-to-bill number. And I am going to tie a little discussion around backlog as well because clearly awards drive this lumpiness within our backlog numbers as well. So, as Thomas mentioned in previous calls, our backlog numbers are always going to be impacted by a certain number of adjustments that we continue to do as our long term contracts expire. It’s also packed by some of our short-term solution work because that work comes in and it’s too quick a return cycle, first to show any lean indicators. You asked about bridges. Look, the recent run of bridge recompetes are the largest contributor to reduction in our backlog yet you see that we’ve just completed our four straight quarter of revenue growth. So, little color on the second quarter, I’m not trying to set the stage where we’re going to be discussed in this level of detail each quarter, but I thought it was instructive. We had 31 planned re-compete competitions during the second quarter, of which 16 of those were awarded. We won a vast majority of those as our re-compete rates still remain north of 90%, but the takeaway is 15 of those valued at over $450 million were bridged. Most of those bridges are going to be you know three-year to four-year programs that could bridge for a three-month period or a six-month period. So you know clearly, when you do that math, that doesn't support some satiable year-over-year comparables of your either book-to-bill or backlog. If you add that to the nearly $500 million of bridges we had in Q1, if they had all been awarded, we'd been talking about a book-to-bill rate of around 1.4% to 1.5%, and although that’d be a much nicer number for us to be talking on, it really wouldn't have any more impact on our near-term revenue growth. So, it sort of gets us all back awards are lumpy, but it is extremely important, as Ken mentioned, we’re being much more selective on what we're out there bidding, but with our wins and our program for reform it's - we're very happy we're meeting our 1% to 4% revenue commitments.

The next question is from Cai von Rumohr of Cowen and Company. Please go ahead.

Lucy is on for Cai, good morning. So, a follow up on that question. As you see some slowness in the re-compete side of things, how do you see the ramp up on new contracts that you've won a good share of new business in your quarterly awards? How do you see that play out going forward as you continue to pursue organic growth?

Well, I think, Lucy, the ramp up it really depends. I mean, if we're trying to ramp up a contract that we won in the Fort Meade area of Maryland, it’s a very competitive labor market, if we're doing it in Tampa, Florida it is much more readily you know there's a - I should I say, a more readily accessible population of personnel with the proper skills and clearances. I think in general, it goes to why we want to invest in the careers of our employees, we want to create CACI as an employer of choice and in a down labor market, we want to do things that are going to enhance the employee experience here at CACI and we're looking at a variety of these things. So in general, we could always use more people, but it's in very - it's probably a half a dozen programs and I think that we really and their situational because of the high clearance levels and the fact that they're in places where not very many people live and not many people want to go and live there. So it's tough to get them to go and recruit. So we're dealing with a smaller thing. In general, with the kind of organic growth that we've been able to see, our hiring is meeting those needs. We would always look to see it higher and that's why we're trying to make us - that's why we are going to do things that accelerate our ability to hire folks into CACI. And not only hire, but make sure that the employee experience is such that people find that they're not just coming here for one contract, but they can come here for an enhanced career experience.

Keeping that in mind with new business versus the mix kind of shifting going forward, just a follow-up on the margin question trajectory earlier. How do you see direct labor versus other direct mix change going forward that may or may not help you get to that low 9% or may not help you get to that low 9% target in the long run?

As you probably noticed we did not include our ODC, DL mix in our press release this quarter and we do not plan to provide that information kind of going forward. And the primary reason is, it’s not a metric that we are using to measure ourselves. You know we're committed to growing margin and we believe we're going to grow margin through solution based, fixed price work which we've articulated in this call and several other calls. And the profitability is less of a function of direct labor than more of the type of work we're doing. You know a simple example is a fixed price piece of work assuming that we're meeting the customers’ needs, everything else being equal less directly brought on that, contract drives more profitability, not the other way around. Now that's different than the traditional time in material and cost plus contracts. And so as we're shifting our mix we are focusing less on that ODC, DL split than we have in the past and I'll leave it at that.

The next question is from Brian Kinstlinger of Maxim Group. Please go ahead.

Just one. I'm curious how you'd characterize the pricing environment? We haven't heard also much from CACI and its peers regarding protests, which was obviously hot topic maybe 18 months ago. So, maybe if you could just comment on both of those in terms of the market landscape?

On pricing environment, in where we're heading? We're seeing - that it's really more of a value oriented play, what is the engineering that you're putting behind the bids, how do your solutions stack up against other people solutions and ideas. So there's less of a - you know in the as Tom was mentioning a moment ago in the time and materials were or district staff augmentation world where there is a lot of pressure on individual’s benefits and on their labor costs, we don't have the same sort of thing in many of the solutions contracts. You still have to be - your cleverness is not in how you price the labor, it is how you decide you're going to deliver the solution. And that's changing a little bit for us, so and what I would say in general a more value driven selection world than cost selection world, but that's also a manifestation of we're not bidding as many of those things that are commoditized.

And Brian and you had a question around what level of protests. We haven't seen anything different. We still have one open protest, there is an award believe it or not it was awarded in June of 2017, it's still under a I think it’s - it’s under protest now, guys with $240 million. We previously disclosed that you know we're hopeful that one comes to a positive closure here shortly.

The next question is from Joseph Vafi of Loop Capital. Please go ahead.

I was wondering just as we are talking on margins here and the margin expansion goals, if we think of more fixed price work, more value versus lease cost technically acceptable. It seems like potentially that the margin lift that you're talking about could be a little conservative. So on the flip side, are there any particular large contracts perhaps or others that maybe more ODC heavy that may be perhaps that maybe perhaps headwinds versus some of the tailwinds we've been talking about on margin trajectory.

I think as we talked over the past year, now that we've had JIDO. JIDO started as a consolidation of 14 major contracts. We brought that team together to be able to rapidly solution for that customer and while we had a great deal of revenue, our margins were low. But there was an option of probably $900 million of which we do not have the same commitment to the teaming and we expect to self-serve and self-deliver more of that work. So over time, we will see that develop, but that's going to happen over the course of the five or six years that that contract is going to go. In a bigger general sense, we’re looking at opportunities for, as I said solutions as a service, there are those out there particularly in the IT arena where we’d like to turn over all of its infrastructure to you and have you deliver it in a next-gen IT kind of way. So those are probably the other near-term ones. We continue to have a very, very nice and somewhat expanding base in the single to high single-digit in our world of digital signal processing and cyber and the like which carries a higher margin profile. But I will tell you it is not - there’s not a single large contract out there that we would do. We are looking at the mix of business that this takes to be able to do it. Ideally, were going to be targeting one to seven very large, but profitable contracts that will be part of the portfolio going forward that have extraordinary if maybe it takes a little bit more risk at the beginning, but it also over time would allow us then to enjoy better than industry margins on it, which would be accretive to the whole company. So that's sort of the strategy that we're employing. We picked 10 basis points to 30 basis points, because from where we were before that seemed to be a really - that was a unifying goal inside the company. If we find that we can do it faster, we will adjust that. But right now it's we're - what five or six quarters into making that commitment and I'm happy that we were able to deliver on it this quarter.

And then just one quick follow-up, I know it's early, if you've been talking a little bit Ken about some - as a service and a lot of potential areas. Do you have a feel for, Ken, as a service offerings have a higher margin than perhaps your blended gross margin now? Thank you.

Joe, I believe it, I believe generally they would or we wouldn't pursue them because if we're going to invest in infrastructure, we're going to invest in training of people and that sort of thing. I love the idea that a customer would pay me for outcomes versus people or versus fee, versus some other measure. I love the idea of fixed unit price for outcome. And if there were more opportunities to do that, we're certainly going to gravitate towards those because we know how to manage them and we know how to extract value from them. As time goes on, it frankly is probably as a result of this tax law, we'll have more cash. It may put us in a better position from a balance sheet to be able to go and invest in some of these, in some of these things that would then produce a better than average profitability. But I think all of this is enabled by a government environment. Now once we get through this first cycle of how the budgets are going to play out, and that's a big fight right now. We're going in most likely to HCR, I hope that their hope is not a strategy, but I don't want to say anything more difficult than that. I hope that we get through this next budget. We don't have another issue. But once that happens, I think we find a customer set out there that are willing to try a lot of these things because frankly the acquisition forces are tired, they need to be they're having to deal with so many different ways in terms of conventional procurement that they be looking for alternative ways of conducting certain aspects of the business of the government as long as it wasn't inherently governmental that I think puts us in a really nice position, and several others in our industry in a nice position to be able to do that kind of work. So that's the kind of plan of attack that we have Joe and I hope that that helps you understand our strategy.

The next question is from Johan Ludwig of Stifel. Please go ahead.

Really the only question I have for you all is the discussion you had with the midpoint on SG&A, you've previously said that you saw it flat to being slightly below. Do you still see that happening for the rest of the year?

Yes, we do. That was our kind of initial guidance and we're committed to that. We were up a bit in the first quarter and we have some growth initiatives and some systems We were up a bit in the first quarter. We had some growth initiatives and some systems that we were kind of doing some slightly higher fringe expense. We were flat on a year-over-year basis this quarter and we expect flat for the full year. That being said, there's always kind of minor kind of fluctuations in various accounts and bonus true-ups, various reserves, DCAA or other auto reserves, medical or other expenses, periodic investment spend, facility costs and the like. But given all of that, we're comfortable with that guidance.

I asked that because when we think forward going, a lot of your peers, especially the larger aerospace and defense guys are sitting out there and reinvesting in their business, why now are you not seeing that type of similar investment at this point?

So, we've always been investing in our business, and so on a year-over-year basis, last year we made investments. This year we're making investments. So, we're not seeing a large kind of incremental increase. And what we're trying to do is drive efficiencies throughout our organization and those efficiencies would be earmarked towards investments. And so, if I save a little bit here by doing something smarter or kind of a new system or processes, we can use those savings to make those investments. So, it's kind of a balancing act. So, I don't think we're under investing by any constricted imagination. I think we're making the right level of investments that we thought about.

Your next question comes from Joseph DeNardi of Stifel. Please go ahead.

Ken, just to talk about tax reform a little bit, you can make the argument that you guys could use the benefits of tax reform to offer the customer a more compelling value proposition and grow the addressable market. Do you see that as an opportunity going forward or is this value not really kind of a gating agent for the market that you’re going after.

But let me start off, you know, Ken and John can kind of elaborate on that. You know, we operate in a competitive market, kind of, we’re pricing our product to kind of make the value proposition attractive to, you know, our government customers. We have what we consider you know competitive rates. And you know over time, there may or may not be pricing pressure, but will be fine. But right now, we’re happy with the way we price our product. So we do not see the scenario you articulated, you know, playing out for us. And Joe I think, you could see you know over there’s probably a place where you want to decide where you want to be, if we’re going to be a business that’s only competing on the basis of price. Then, yes, we could flow all that down into our rate structure and that would be helpful. And you know indeed some of it may end up there anyway that we don’t reinvest. I think more importantly to our customers today particularly in a labor market that is tightening the way that it is, to figure out a way to attract more people into the national security or the federal government services business because frankly things like Budget Control Act and sequestration drove a whole lot of talent out of this world into more commercial industries. And hence that’s our view. We can give out bonuses to our permanent employees. I would rather create a career experience that is really rewarding for folks inside of services to the federal government that is very distinct. And I think that’s where I think that’s a better investment than just simply flowing it to lower rates. So thank you for the question. I hadn’t thought about it in those terms, but that was a good question.

Yes, and can I guess, what I’m trying to ask is I guess the negative spin on this is that companies just compete more aggressively, the pie doesn't grow and the savings just end up getting pass back to the customer. The other argument is that again you make that outsourcing argument more compelling for the customer and now they are start outsourcing or contracting for services that they previously didn't. And I'm just wondering if you see that if you see kind of the tax reform as an opportunity to grow the pie?

Well, clearly it's put in as I think we - Tom's estimated for us real over $30 million more cash that will be producing on an annual basis notwithstanding the one-time thing that we have this year. There are certain things that we could invest in from an efficiency point of view that we are considering that maybe that may drive longer-term efficiencies, but we haven't perfected that, yes, so not willing to talk about it. I think the idea of where we want to go is not to get trapped into we've got to get rates lower, but we've got to get the ability to deliver outcomes higher and I think those are two ends of the spectrum in this marketplace and we're preferring to be on the upper end of that meaning that we want to get to a place where we can convince the government that it makes a hell of a lot more sense from a cost efficiency and from their efficiency point of view that that industry could deliver that better than they could do it inside the government.

And that means that two more observations. One is lot of our contracts are longer term in nature, one year, two years, three years, five years. And so in the long run, we can have you know philosophical discussions about what will ultimately happen, but as a practical matter in the short- and mid-run, the majority of our work is kind of locked in in terms of prices. And then secondly, if the government decides to outsource or not, I think whether our prices - and our competitors’ prices are 1% to 2% lower, I don't think that's going to swing their decision. I think there is more kind of philosophical kind of underpinnings to those types of decisions. And so on the margin, you know, slightly lower cost to the government is not going to be material when their decision is calculated.

Your next question comes from Tobey Sommer of SunTrust. Please go ahead.

Could you comment on the solution composition and margin profile of awards in the quarter in bids rather submitted or about to be submitted so we can get a flavor for how your strategy is influencing those? Thanks.

We are going to shy away from talking about specific margins on specific small slices, but I'll give you a little more color on the bids that we submitted and the bids that are awaiting award. We find about 40% total of our awaiting awards in the enterprise IT and then in intelligence services areas, and another like 10% to 15% in our business systems area. Those three areas are a very nice mix of professional services, managed services and solutions. If we look at our expected submissions, pretty much in those same areas, our enterprise IT our intel services and our Intel systems markets are driving that. And those areas are expected submissions is going to be a little bit heavier in our solution based. If we're looking at margins in each of these different areas, I mean relatively speaking, margins in our professional services businesses always under pricing pressure, because it's tough to differentiate by delivering a single labor hour in the managed services, and in the solutions area. The contract mix is more towards fixed price versus cost reversible, so that gives us a much better opportunity to be driving margin growth.

And a question about M&A as a follow-up? There was a private equity sponsored business acquired yesterday by a commercial firm. I was worrying wondering if you looked at that and kind of more broadly now that you we have tax reform behind us, do you see buyers and sellers in mergers and acquisitions but closer and able to come to deals more readily than perhaps in the waiting months of last year when a deal was forthcoming, but we didn't know the outcome?

Well I think the short answer is that we're very active. We're always looking for great opportunities. As you know we've acquired 67 plus companies over the past 25 years, and we plan to be a strategic consolidator through M&A. We talk to you all a number of times about how maintaining M&A as a priority as a - for both for capital deployment, and using it as a tool for growth. We look at a wide range of deals, and I'm not going to comment on any specific thing that we have looked at, but sufficed to say that we’ve very active and when and we will again - we’ll act as a strategic integrator at some point in time in the future.

Your next question is from Josh Sullivan of Seaport Global. Please go ahead.

Can you just go over your view of the continuing resolution timeline right now and maybe with next year's fiscal budget coming up? Are there any early trend or themes you're expecting at this point?

Josh, I probably can't tell you my real views on the continuing resolution on a open mike. What I will tell you is, I think when we saw a change in administration, we saw a change in attitude towards national security, defense, homeland security and the like, which were all favorable trends towards companies like CACI and others that are within our space. But, we haven't really seen with the exception of an additional $18 billion or so last year, which came late and was really hard for the acquisition people to place. We haven't seen much of a change. So that being said, we see a market that is responding to the call for improvement in readiness and that's where a lot of money has gone. That typically comes down to the O&M budget. In our case, no, we're not as involved with aircraft or vehicles or that sort of thing. So, we wouldn't see it. But, we have seen it in terms of intelligence, intelligence support, a lot of different kind of training elements for people that are going overseas in a variety of job assignments. So, that's sort of where we've seen the benefit of where we are. Looking at where the budget is planned to go and what the president is asking for. I think it's significantly favorable but we're going to have to go through a few more steps to get Congress to get to a point where we will know specifically what that happens. And as far as what it portends from next year, we've heard what Secretary Mattis has had to say about how he wants to - just using DoD as an analog for this at the moment. He wanted to spend FY 2018 really focused on readiness in repairing some of…

The next question is from Brian Ruttenbur of Drexel Hamilton. Please go ahead.

I am sure, I'm near the end of the queue. But interest rates, and I don't think anybody has talked to you guys about that. I know that you're talking about your plans for M&A continue, but how does the interest rate environment impact you and how have you hedged yourself and what are your plans, are you okay levering up even further with M&A given that we're probably going to have rate increases this year and that impacts you guys to the negative? And then finally, did you take that into account when you're talking about guidance?

Yes. When we put our annual plan together, we assumed that there would be a steady increase in LIBOR, which was based on the kind of consensus kind of views of the world, and so we have already factored those increases in our guidance. Right now, we have around $1.1 billion worth of debt. We have swaps in place for approximately $800 million. And so, in the next kind of one or two years, we're pretty insulated from increases in interest rates. Our average interest rate in the quarter was 3.3%, so 3.3% on a little over $1 billion of debt is kind of very attractive. So, I don't see any kind of risks associated with that. As some of the swaps roll off, we’ll naturally de-lever and if we need to borrow additional money to fund acquisitions, we'll look at the fixed floating mix in at that time.

And what kind of rate would we be looking as you're doing your modeling, going up to 4.5% or I was just trying to get a ballpark what you think or what you have modeled in, in your estimates from 3.3% to maybe the mix goes up to 4%, 4.5%, 5%?

Well, for the rest of the year, I don't think it will be appreciably more than 3.3% as I said, most of the 80% is fixed, and so it’s not going to change materially. Kind of going forward, kind of 19%, and 20%, 21%, again not to - I’ll turn it back to you, what do you think why we’re going to do during that time period. I don't think we have enough kind of foresight to estimate that. But kind of that being said, in today we have a very favorable borrowing environment. We have the ability to borrow a fixed rate at a high-yield bond, somewhere around 5.5%. And so, if we chose to we could lock-in some kind of very long term eight-year rates at those particular rates. So, the kind of bottom line increases in interest expense. I don't think it’s going to have a material impact on our ability to kind of fund acquisitions or execute our M&A strategy.

The next question is from Edward Caso of Wells Fargo. Please go ahead.

I wanted to ask about the security clearances your ability to get and retain people with them. Your ability to sort of execute on contracts in other words if you left sort of money on the table because you couldn't get people, have you lost any contacts or if you pick up other people's contracts because they couldn't staff them? Thanks.

I think the security clearance environment makes it difficult in general, there’s an awful lot of work going on throughout the industry and throughout the administration to try to bring some help to the circumstance to - not to take shortcuts in terms of how we grant security clearances, but how to find ways to speed it up. In terms of your specific questions, I think we could probably find a dozen contracts where we are under - that we are continually under in terms of the full allotment of billable positions that we have. And some of those are made difficult by the way the customer wants to conduct their work, they may have three people that they want for - three people serving the same mission or three contractors serving the same mission, they want to pick the best athlete, so you give them a variety of things, they all have to be cleared, and you know that just becomes a very difficult environment. And those are the more difficult of the contracts. We have not lost any contracts to my knowledge on the basis of clearances. And I'm looking around the table here to see if we won any. I don't think that's a - I mean, it could be a competitive basis, but we have not won or lost anything on the basis of that.

And my other question is on the small business set asides, have you - has that headwind eased at all, are you seeing contracts still being broken into pieces where a piece is going to small business, is sort of any change on that front? Thanks.

Not materially, I mean if anything, you know, some of these things ebb and flow, right. So, I think that you know, if you look at JIDO, JIDO is a perfect example of these new contract consolidations where we’re looking to bring much more work together. If I look at the small business work, we haven't seen anything materially change there yet. We would expect to maybe see a little bit less as you we move more towards managed services and product solutions. We still have kind of a small business mix in our professional services business. But point-to-point and I don't see any material changes there.

The next question is a follow-up from Jon Raviv of Citi. Please go ahead.

Thanks for filling me in for the follow-up. Just first one on CapEx this year and CapEx going forward any changes as you encounter this growth environment in a post-tax reform world?

Yes, CapEx this year about $35 million to $38 million somewhere in those particular ranges, most of our CapEx historically has been for you, IT equipment kind of infrastructures. The last couple of years, it was higher than normal due to some facility consolidation. We exited some facilities. We prepped the new facility to accommodate a kind of workforce moving from one unit facility to another. We did some work, Jon mentioned the Agile Factory that took some money to invest in that. Right now, we would think that going forward, CapEx in $30 million to $35 million for the next few years seems reasonable. The one caveat is, as we win more new business that may drive into additional unit facilities, but generally if that gives a sense of where we are.

[Operator Instructions] The next question is a follow-up from Joseph DeNardi of Stifel. Please go ahead.

Yes, I guess for John or Tom, you talked a little bit about the extension and bridging activity you're seeing and I'm just wondering if the rule of thumb is maybe 20% of the business falls away or is recompeted every year, is that still the right way to think about it? Or is this the bridging and extension activity actually making that more like 10%?

Yes. Joe, I truly wish I have that golden answer for you. But historically, we've been in that 15% recompete measure. We've got about 2% of that left. If the first quarter and second quarter continue, we’re - we'll probably be resetting our metrics in that 10% range. And I'm just doing that up the top of my head, Joe, I mean if you look at, we had about $900 million of recompetes in the first half of the year, we probably have about $1.6 billion for the entire year. And at this pace of bridging happens, we would see the percentage of our recompete in the future be far of less if this behavior continues to the next couple of quarters.

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

Well, thank you, Kate, and thanks for your help today on the call. We would like to thank everybody who logged onto the webcast for their participation as well. We know that many of you will have follow-up questions and Tom Mutryn, Dave Dragics and Dan Leckburg will be available for calls later this afternoon or into tomorrow. So, I would like to thank you for your interest in CACI. This concludes our call. Thank you and have a very good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.