CACI International Inc (CACI) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q3 FY '18 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] 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, Chad, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. 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. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. 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. Please turn to Slide 3. And now here's Ken Asbury, President and CEO of CACI International. Ken?

Well, thank you, Dave, and good morning, everyone. Thank you for joining us to discuss our fiscal year 2018 third quarter results. With me this morning on the call 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. Let's turn to Slide 4, please. Last night, we released our third quarter earnings for fiscal year 2018. We delivered very strong operating results with revenue growth of 3.5%, of which 2.7% was organic. This is now our fifth consecutive quarter of organic top line growth. And our programs continue to generate high levels of profitability, giving us continued confidence in our ability to deliver margin expansion of 10 to 30 basis points annually. In fact, we are on track to exceed that goal this year. Tom will take you through the details of that in just a moment. We also won $1.4 billion of contract awards with almost 40% of that as new business to CACI. Operating cash for the quarter was $99 million. All in all, I am very proud of our team that continues to deliver innovation, customer satisfaction and exceptional financial results. Their performance gave us confidence to raise guidance in March, which we reiterated in our release last night. Please turn to page 5. I'd like to mention two notable honors that we're particularly proud of this quarter. First, Chief Operating Officer John Mengucci, was named to the Federal Computer Week 2018 Federal 100, an elite list of government and industry leaders, who have positively transformed Federal IT. John was selected for his strategic leadership and insight, which were essential to CACI's record setting operational and financial performance and our positioning for continued growth. Congratulations John. And second, CACI Board of Directors member, General William Scott Wallace, was awarded the U.S. Military Academy's Distinguished Graduate Award, conferred upon those graduates whose character, distinguished service and stature reflect West Point's motto; Duty, Honor, Country. General Wallace embodies that motto in his service to CACI as well. Thank you, Scott, and congratulations on this unique award. Return to the external environment. The two year Bipartisan Budget Agreement and passage of the government fiscal year 2018 budget is positive for our industry and our customers. And with a relatively short amount of time to spend the additional budget dollars in FY '18, we expect to see healthy plus ups and contract awards in both the June and September quarters. And based on commentary and direction from Secretary Mattis, the Department of Defense is prioritizing government fiscal year '18 spending on readiness in area such as training and maintenance, while government fiscal year '19 investments will be focused on advanced warfighting capabilities. We are currently in the process of finalizing the budget and we'll provide our long-term addressable market expectations when we issue our guidance for fiscal 2019 in our call in June. Let's turn to Slide 6, please. During the quarter, we made a bid for CSRA, because the transaction met every element of our M&A strategy. It provided long-term strategic value, filled capability gaps, added new customers and at our bid price, we believe it would have created significant value for our shareholders. These are the qualities we look for in any potential acquisition, large or small, and as with any target we pursue, CSRA fit each of these beautifully. In closing, I'm encouraged by our prospects, both near and long-term. The budget environment is improving with customer demand signals that align extremely well with our capabilities and offerings. We have demonstrated our ability to strategically reposition, return to organic growth and at the same time consistently expand margins. Our financial performance over the past two years has been outstanding, and I look forward to closing fiscal year 2018 with excellent results. With that, I'll turn the call over to Tom, to talk about our financials. Tom?

Yes, thank you, Ken, and good morning, everyone. Let's go to Slide 7. Third quarter revenue was $1.12 billion, 3.5% greater than the same quarter last year with 2.7% organic growth. Operating income in this quarter was up 56% or $38 million compared to last year. This increase was driven by a combination of continued strong and improving program performance in one-type item. Out of $38 million, strong program profitability contract and product sales contributed $16 million. This is a sustainable profitability increase, which will carry forward into FY '19 and beyond and is reflective of our strategy to win and perform more solution in fixed price work. One-time items totaled about $22 million and consist of a $10 million of higher incentive fee, associated with program by which our customer came to us to access to help solve a tracking need to be reached at certain reserves in strength on several programs, which were more one-time in nature. Overall, the strong third quarter operating income demonstrates our ability to meet customer needs and generate high margins. Indirect costs and selling expenses were up modestly due to fringe on direct labor and incentive compensation expense. Excluding those, indirect expense was actually down indicative of efficiencies we are realizing. GAAP net income for the quarter was $64.5 million, up almost 60% compared to last year. Slide 8 please. We generated $99 million of operating cash flow in the quarter with day sales outstanding at 62 days, and we continue to pay down debt with net debt at $1 billion. Our net debt to trailing 12 month EBITDA leverage ratio is 2.5 times. Slide 9, please. We are reiterating the full-year guidance, which we increased in March. Based on the midpoint of our guidance, we expect fourth quarter net income to be around $39 million. This compares to $64.5 million in the third quarter. The $25 million difference or about $37 million of pretax is principally due to the $22 million of one-time benefit we recorded in the third quarter and about $10 million of additional fourth quarter expense associated with the startup of our Shared Service Center. Lastly, we are increasing our full year operating cash flow guidance to at least $310 million, reflecting continued strong cash generation. With that, here is John to provide operational highlights.

Thanks, Tom. Let's go to Slide 10 please. Our team delivered another quarter of organic revenue growth and strong operating profit margin. We want to help the amount of contract awards and our forward indicators and pipeline metrics remain very positive. This is a result of our market-based strategy, which is driving CACI's ability to deliver long-term revenue growth of 1% to 4% above our addressable market, and the margin expansions Ken already mentioned. This quarter saw continued execution with efficiency, high customer satisfaction, quality and value. Organic revenue growth was driven by new business win and on-contract growth. Operating income and margin growth was primarily the result of efficient performance on fixed price and fixed unit price contracts, product sales and one-time incentive fees. In line with our strategy to pursue larger opportunities, we won 10 contracts with a value of between approximately $50 million and $150 million during the quarter. Our market strategies are providing the focus to pursue opportunities that drive both organic revenue growth and margin expansion. In total, we won $1.4 billion during the quarter, with about 40% of those for new business to CACI. And our backlog now stands at $11 million representing well over two years of revenue on a trailing 12 month basis. Slide 11 please. Our forward indicators are healthy. Revenue composition now stands at 99% existing business, with the remaining 1% split equally between recompeting new business, so a very comfortable position at this point in our fiscal year. And our pipeline of opportunities is strong, with submitted bids pending award at $6.3 billion, 82% of those for new business to CACI. We are seeing high levels of submittals in our business systems, Enterprise IT and Intelligence Systems Services Markets. And we expect to submit another $14.1 billion over the next 2 quarters, with 57% of those for new business across all of our market areas. Slide 12, please. Let's take a few moments to talk about CACI's Shared Service Center in Oklahoma City, which we announced in March. Opening in July 2018, the center will optimize the delivery of company wide support services, as we involve to support continued organic and acquired growth. As Tom noted, we plan to invest $10 million in the fourth quarter fiscal year 2018. Additional investments will be completed by the first half of fiscal 2019. And after upfront investments, the center will create savings that we plan to invest in our people and technical capabilities. On the people front, we have evaluated our total benefits offering, using employee feedback and industry benchmarks, with the goal of creating an employee experience that makes us a leader in the tracking and retaining top talent. For upcoming fiscal year, we are observing increasing healthcare costs, such that most employees will see no increase in their premiums, some will even see reductions. We'll provide enhanced retirement benefits, drop our employees achieve their savings goals, and we are looking at new ways to provide flexibility and work like balance to attract today's top talent. Turning to the capability on solution side, we are making investments in several critical areas. First, our SkyTracker capability is now a suite of counter-AS product offerings, which includes both mobile and fixed location versions. We continue to invest in extending the features and usability of this differentiated product. We stood up in electronic warfare initiatives team, which is developing technologies to address the challenges of today's battle space, which increasingly relies on the use of electromechanical spectrum as a warfighting domain, an area where potential adversaries have developed significant capabilities. We are also advancing machine learning and AI to assist in the production of intelligence. This is speeding up output and increasing quality, allowing our customers to make faster decisions. In the space operations and resiliency market area, we are investing in solutions that enable real-time situation awareness in this key domain. It's important to note that we are making these people in capability investments, while maintaining our competitive rate structure and expanding margins. In closing, we are focused on executing our market-based strategy, which is driving success. We'll continue to pursue larger bids in our addressable markets, where our innovative solutions and services bring significant value to our customers' missions. With that, I'll turn the call back over to Ken.

Well, thank you, John. And Tom, I appreciate your comments this morning. Let's all turn to slide 13, please. Our fiscal third quarter results continue to affirm our long-term strategy. We delivered another strong quarter of organic revenue growth, profitability, awards and cash flow. There is momentum across the business that is delivering exceptional outcomes for our customers and gives us continued confidence in our ability to deliver on our long-term commitment to grow revenue organically and expand margins. In addition, improving budget backdrop should enhance our ability to grow and generate shareholder value. Before we open the call up for questions, I'd like to say how incredibly proud I am of our employees and the contributions they made to our success. It is their commitment and talent that drove another great quarter and position us to continue delivering exceptional financial results. I am confident we'll be adding more of outstanding professionals to our team in Oklahoma City, and I look forward to the contributions they will make to our organization. I thank everybody at CACI for supporting our group and driving shareholder value. With that, Chad, let's open the call up for questions.

Certainly, sir. [Operator Instructions].The first question will come from Krishna Sinha of Vertical Research Partners.

Hi, thanks guys. Can you talk a little bit about the award environment? I know you've posted a pretty good book-to-bill here, but just generally speaking, in the last couple of quarters, we've seen the customer go to more bridging contracts rather than recompete. Is that still something you're seeing or are you seeing the pipeline now flow a little bit better, a little bit smoother?

Krishna, thanks for your question, this is John. As we've always said, award, activity, continues to be lumpy. But we have had our, I think, our ninth straight quarter of greater than $1 billion worth of awards. You specifically mentioned bridges. And as I mentioned last quarter, in any given year about 10% to 15% of our current-year revenue is recomplete revenue. And I think last quarter we had nearly 50% of our programs bridged, suffices to say that the bridge activity has actually increased from last quarter, with about two thirds or about 450 million of our recompete programs. Now, as I continue to mention that activity does not impact revenue or earnings. So the bridging practice continues. And our bridges continue to be for a period of three to six months where we are seeing some being bridged for an entire year. So and as a reminder, the action of bridging clearly impacts our backlog number as well, but again, in assistance, both backlog and award numbers do not adequately provide clearly a lone indicator of our growth across the business as evidenced by our consecutive quarters of organic growth that we have seen while the government continues to bridge some of our recompete work. Ken?

Krishna, this is Ken. I think the other thing we should look at is during this - beginning of this government fiscal year, we had five or six or seven, I lost track of the number of CRs we had before refunding at budget authority. And I think that once we see that budget, even the increased amount of money flowing into the departments at the various acquisition offices, I think we'll see some return to normalcy. But I think there's going to be pressure here in the near term on getting that money placed onto current contracts. And we may see more bridging activity in the near term it will take us a while to get back to a normal flow of acquisition activity where we don't - we were not reliant on bridging as much as we've seen in the last couple of years.

Okay and then just a question on your pipeline - of the backlog that you already have. Have you seen an uptick in fix price in awards that you're winning and can you just - you talked about $16 million of improved performance on contracts that you've got already that contributed to your strong operating margin this quarter? Obviously, that's going to carry forward, but I'm just looking for a little bit of clarity on what we can expect your margin profile to be heading into the next year and beyond.

Obviously, we'll talk about the margin profile when we get there. I mean, our commitment to 10 to 30 basis points of margin improvement on an annual basis remains consistent. We'll have to take a look once we finish our '19 planning to see whether there is a change there. But right now, that's sort of the mantra. With regard to fixed price, I think we're flat year-over-year with fixed price, but that's going to add-in flow. Some of our fixed-price programs are delivered, some of our cost plus coming up, but I think it's within a percentage point. So we still have a healthy nice assemblage. I'd like to see that increased to 40%, 50%, 60% over time. But we have to wait until the market presents that to us. We can't go out and just pick fixed price contracts because of that. John, do you want to add anything?

Yes. I think Krishna, you also asked about performance. I mean, we could not be happier with the performance. We've had this long-term strategy of looking at higher margin work as well as more FFP work as well as more solutions work. What I think you are starting to see, are the results of that long-term strategy, frankly, and the type of work that we're pursuing, it's allowing us to both grab top line as well as bottom line growth. As Tom's remarks mentioned, we're very pleased with performance on our existing firm fixed price programs. It's not just one or two specific ones, but the majority of our programs across all of our customer sets. And I'm also going to make one more mentioned about something Tom mentioned, on the incentive fee. I mean, this customer has the ability to take their urgent and compelling need to any of three contractors on this large IDIQ contract. They selected CACI to perform a time critical and national security level of additional work, the team performed exquisitely, was able to capture the full amount of that incentive fee, again, focused on operational excellence is one of our key tenants of the long-term strategy.

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

Hey, good morning guys.

Good morning, John.

Can you all give us, as you mentioned in your prepared remarks, Ken, but give us a little more insight into the thought process behind pursuing CSRA, some of the lessons learned and while you think you might go to next in this process, not CSRA, but in M&A generally?

Fair enough Jon. Look, our first priority in doing anything is going to be to invest capital to grow CACI organically and then through acquisition. That's been our mantra for - and it's been our strategy for a very long time. So as we go to look at that, we think that's a very good way of delivering long-term shareholder value. In this specific case, we're pretty disciplined, I would say very disciplined in this particular case about how we want to look at feeling. We are an organization that is not consumed by the notion of scale. We are consumed by how do we feel gaps and capabilities and in customer communities in each of 12 of our markets. So when we took a look at CSRA, we saw a huge opportunity. There was very little overlap between the 2 businesses. There were things about their business that we thought were incredibly attractive given the growing market that we see, in particular, their business models around managed service and the amount of firm fixed price business, which is very consistent with everything we've said in our strategy. And then we saw about - then we looked very closely at how did the strategic capabilities complement, what we wanted to do going forward? How did that, where did that customer, and frankly, a very small amount of customer overlap would have expanded us both in debt and our ability to serve customers at multiple levels. Let's just describe it in terms of starting at their enterprise presence down to our broad and mission contracts, would have allowed a different value proposition in terms of delivering some of our offerings. Finally, we wanted to make sure that if it was consistent with our long-term growth, and it was, and financially, it had to be financially compelling. And we took it to the point where we - like we do everything. Once we make that decision, we are going to go all the way up to the point where it no longer makes sense. And as a consequence, we were not successful here, because we did not have some of the other things, but that's the way we're going to go after every single acquisition.

Do you feel, given the compelling - given what you described as a compelling opportunity, combined your capabilities with the next GEN IT platform provider, is that something - is that naturally proceed that as being the priority going forward, not in terms of all investments but in terms of your M&A strategy or we may be back to some kind of more small tuck-in, here and there opportunities?

Jon, it's - we look at the market now and there is sort of an increase in the number of properties come in the market. Some of them we like, some of them fit our strategy, at least in first look, but - and some of them don't. So it's - I don't really want to postulate. It's clear we have sent signals for a number of years that we're looking to do a transformational kind of transaction if it made sense across the board, particularly as it related to how we could deliver shareholder value. As we look at the market today, we're going to continue to be a strategic integrator, and we're going to look at - we're down to about 2.5 times net debt-to-EBITDA and so we're in a very good position and we have some dry powder. If the right opportunity presents and meets all of our criteria then we will execute on it. But I don't want to give you an answer that suggests we are going to emphasize one area over another. We have 12 markets. Each one of those, we have various strengths or gaps. And if we find the right combination of companies, or a company, to fill a number of those gaps, that's where we will pull the trigger and do something.

The next question comes from Cai Von Rumohr with Cowen and Company.

Yes, thanks and good quarter. So the Oklahoma Citi Shared Services Center, the $10 million of investment, is that all expense in the fourth quarter? And how does that compare with what you invested quote unquote in the second and third, and expect to invest next year?

Yeah, Cai, the $10 million I referenced, is all in our fourth quarter. In the first and second quarter, in third quarter this year, we invested probably $3 million in total spread, we brought that in a time period, so perhaps for the full year around $13 million. Kind of next year, we're going to do three things. We're going to continue to invest in kind of lingering into our first quarter as well as savings that will kick in. And so then on top of that, we're going to use some of those savings as we mentioned to make some investments both in, kind of, technology and in people, so all those numbers will be built in our guidance when we present our FY '19 guidance to you. I will mention that the economics of the Shared Service Center are going to be very compelling, with payback to approximately 1.5 year, so got a real strong financial profile.

Yeah Cai, this is John. I'd also add that this is another strategic venture that we're under taking as part of our long-term cost efficiency plan. And as Tom has mentioned, we are going to free up spend to invest in our employees and our technical capability expansion, at the same time, maintaining our bid rates, at the same time, driving overall profitability for the organization. We did begin planning the center. About 12 months back, we assessed about 50 cities across the U.S. and eventually selected Oklahoma City, which was really driven by amount of pool [ph] from their outstanding talent pool of experienced professionals and then several local colleges there, so that we could take advantage of the cost economics of the region, so all in all a wise investment at this point. And then reinvesting those cost savings to both our people and our technical capabilities.

Great, just a quick follow-up, so the $10 million investment is all - that's all expense, it's not partially capitalized? And secondly, you mentioned one year payback, should we assume, therefore, you are going to have about $15 million in ongoing cost savings to invest in other things?

Yeah, you kind of generally talk, 18 month kind of payback on the $10 million, it extends. Now in addition, we're going to do some leasehold improvement and those leasehold improvements will be kind of amortized over the lease firm. The nature of these one-time expenses, include some employee overlap. We will have people here in the Metropolitan D.C. area, and simultaneously performing work as we have people in Oklahoma City. There was a series of –state pay have retention bonuses for people here, some IT cost, some facility cost and miscellaneous travel, kind of training in the life. But there will be sizable savings, as you point out, and again we expect to use savings away [ph] John, kind of expected.

The next question will be from Edward Caso with Wells Fargo. Please go ahead.

Hi, good morning. I heard earlier, the mention of 1% to 4% growth, I believe that's the number you used a year or two years ago. Now with improved budget environment, should we be expecting it to increase that sort of market targets, and therefore, presuming you are going to continue the shame share gains the targets for the company? I'm sort of surprised you haven't sort of updated the target level.

Yeah, this is Ken. So the target level ups itself based on what we think the addressable market growth is going to be. That 1% to 4% is above what we think the addressable market is going to grow and that's consistent. We've said that now for I think about 18 months. So as we look and as we finish our planning, we expect to see addressable market growth. The budget's going to go up some 10%. I think some - I would say lower middle, single digit addressable market growth is probably a CAGR target. But I want to get that refined. The other thing I want to make sure that we have an accurate depiction of, is how fast is that going to ramp up if things are going on existing contracts versus new contracts and the like and what impression that's going to be. But we do see the base budget. When we looked at FY '17, we said we saw a five year CAGR of 1% to 1.5%. I think we will see that increase to mid-to slightly below mid-single digits as a result of the Bipartisan Budget compromise. We'll see what happens in '20 and '21. But our preliminary numbers are telling us that. We would then expect to grow 1% to 4% above that depending on how the contracts show up in any particular period.

My other question is around the influence of their product business. You mentioned SkyTracker a lot. I know there are other products as well. How important is it to your operating income? And should we be expecting sort of greater volatility in your operating margin going forward?

Ed, this is John. As we mentioned, on the revenue side of products, probably not at the material level yet, but on the operating income side, yes. So it's true to the awards for products and we just have been lumpy, but we are looking with some of the NDAA budget changes and learning, as it relates to the protection of DoD assets, both CONUS and OCONUS, we like to believe that that will drive additional product sales, but again, the level of product sales we have in the company today is more of a bottom line play versus a larger material top line play.

The next question comes from Greg Konrad of Jefferies. Please go ahead.

Commercial and other was up quite a bit in the quarter. I guess a two part question. What is happening there, anything specific, contract wise? And then are you seeing more opportunities outside of the U.S. government business?

Yeah, let me ask you, I'll answer the first part and then I think Ken can talk about the second part. The increase is primarily due to the strong performance at our U.K. operation. They had kind of both due to organic growth, very solid organic growth and then a couple of small acquisitions, which contributed nicely to their operations. So that would be the vast majority of the benefit of that important part of CACI. I guess the other part of your question is going forward there are other opportunities in the commercial arena.

Yeah and I would say, we're looking at the U.K. business now. There's a number of things - just for example, we have done well over the past seven or eight years in doing the work for both the Irish and Scottish's census. This year, we are taking a look at some components of the U.K. census. It's a step up for that business, and so we will see. In addition, I think, there's always an acquisition strategy on the part of Greg Bradford, to look at companies in either his digital design or in his enterprise IT business to add to what he's doing over there now.

Thank you, that's helpful and then just a follow-up. In remarks, you mentioned on-contract growth, is that a fiscal year '18 budget? And have you seen any discernible trends between DoD versus civil agencies?

Yes, I guess, I think, we are the - I'm going to say the mix of our business is always changing. As we support a large number of contracts, now it's true that in DoD, we're seeing some very nice growth, driven by recent awards, in addition to immaterial amount of on-contract growth. And that's really driven by the ramp-up of revenue in our space operations market. And then if you all remember, with the JIEDDO program win of last year, we mentioned we would continue to see revenue ramping up and growing on that contract to FY '18 and '19. When we look at the type of customer, we've had similar DoD, it's true that fed-civil is down slightly. But that's really driven mainly by the natural delivery lifecycle, some of our programs experienced. So I wouldn't do a direct extrapolation or make any broad market trend commentary, as we continue to see healthy opportunities across all of our customer set.

Greg, I would add to that, I think that if we were - if you were to look at the macro about how the budget played out, it is highly likely that DoD really had - they really had a list of what their priorities were going to be and felt very confident that they would see budget coming and knew where they were going to spend it. So we're likely to see - if there's on-contract, I talked about we expect to see plus-ups, we'll see those plus-ups sooner I think on DoD on existing contracts as a way to get that money committed for FY '18. Conversely, in some of the civil - the federal-civil markets, the expectation may not be have been the same. And while there may have been priorities, the way the Bipartisan Budget compromise came together was a bit of a surprise. If you went back to the earlier discussions about the FY '18 budget, there were going to be bill payers amongst the federal-civilian agencies in order to fund the defense upgrades. So how that plays out is, it could be that we may see a bit of a lag in the uptick of fed-civil spending, as they adjust to an increase in budget that they may not have been expected originally.

Our next question will be from Ben Klieve with NOBLE Capital Markets. Please go ahead.

Alright, thank you. A couple of questions, first, as a follow-up to your comment - your bridge commentary, I'm curious, do you get the sense that your customers are increasingly preferring using this and doing so out of self-interest rather than doing so purely as a function of continuing resolution environment?

Yeah, I think, one way to look at this, Ben, is the last couple of years, we've seen some increases. The increase in funding that comes late in the procurement cycle. And I think what that begins to do to acquisition organization, to try to have a finite number of people on their staff, they try to allocate their teams across what they think that budget is going to be at the beginning of the year. All of a sudden their - they get hit with $10 more billion dollars that they've got to get placed. I think bridging becomes a very real - necessary alternative, because they cannot turn it into new contracts at that point in time. I do believe that we're going to see that here. It is nothing more than a finite group of talent being able to absorb an increasing budget when they're not necessarily expecting it or the timings are. I think that's the principal reason behind it.

Yes, I'll also add, at a tactical level, our program leaders, being very focused on operational excellence, and where we are performing exquisitely of our customers, our customers have a choice as to when they must rate compete versus when they would like to. And I have to tell you, across this business, our program leads out of our professional services work are - have outstanding relationships with our customer set. And that is also driving some of this practice. So again, bridging to us when we are performing well is a positive measure.

Okay. Very good, thank you and just one more question here, regarding the CSRA bid. You mentioned not been consumed by scale, was I think how you phrase it, but I'm curious, how you believe the incremental scale that would have been provided by CSRA, would have impacted you? I mean, what opportunities do you think would have been available with that potential scale that aren't available today?

Well, just in the aggregate, we saw both businesses, certainly our own, and they were beginning to turn to organic growth. We saw that being one part of the strategy. And we also thought in our planning that two or three years into the acquisition, in addition to what we saw is about $165 million worth of cost synergies, we would have started to see revenue synergies where - a small amount, in terms of our planning, but it likely could have been larger than that. Because the probability of win and the ability to shape competitions differently from an enterprise all the way to mission point of view, there's not a lot of other companies in the marketplace that are able to do that. And that's the way we're viewing that combination from a strategic point of view.

Our next question comes from Joseph DeNardi with Stifel.

Yeah, thanks very much. Just one for me, Tom, you mentioned the margin performance in the quarter, kind of, building well for next year. I'm wondering if you could just quantify that in some way, you could just talk about the margin profile, you express work now and, kind of the sustainable large in rate as you see it?

Yeah, I've answered that, get indirectly or partially answer it. Our commitment is to increase our margin 10 to 30 basis points. And kind of this year, I mean, year-to-date basis, we are - certainly we are on the EBITDA margin for example, last year, at this point in time, we were at 8.5%. We are reporting 9.5% today, which improved $22 million of one-time item, excluding those, we're at 8.8%, so 30 basis points improvement is going for the first nine months. As we develop our plans going into FY '19, we will update the numbers and we'll provide that to you. But certainly, a good portion of that margin performance is underlying long-term sustainable activity. And we expect that to carry forward, compounded with the fact that as we bid higher solution content, that should also go well for margin in the future.

The next question comes from Tobey Sommer of SunTrust.

Thanks. Would you comment on the service, delivery changes and other kind of expense related things. I'm taking the shared services that you talk about early. In describing the importance of those service delivery changes to your long-term margin expansion goes?

I think the question was [indiscernible] on, so I think you're talking about changes in kind of service delivery, reference for Shared Service Center and how that would impact our long-term margin performance? I think there is two part to that question. One is we had an indirect infrastructure that we need to support in the people actually generating the profit in revenue in the business. And we continue to strive for improvement in those, in particular with the Shared Service Center was focused into the cost structure. As you can see in our third quarter, indirect costs were down despite the fact that we're growing, despite the fact that there's inflationary preference. So we continue to drive efficiencies even through that part of the business. And at the same time, John or Ken can talk about the drive to provide better program performing efficiencies on that side of the business.

Yeah, Tobey, this is Ken. We did not do this to drive it to margin. We did this to be able to keep our rates at where we are, which we think is quite competitive. But to invest more back into what it takes to be an employer of choice and what is going to take to fight for talent in an increasingly tighter labor market here in the United States. And moving to different geographic locations in this case, allows us to lower the overall cost of doing the identical service or improved service. And we can take that and reinvest it back into employee benefits and all those things that it takes to be a competitive employer in this - or actually better than a competitive employer in this kind of tight labor market. I will tell you that you probably ought to be thinking in the long term that we'll look at direct models for doing this in different geographic location. So we're not - our constraint seem to be around geography and particular times of talent. That talent exists in other geographic areas and it's not mind in the same appropriate way that we could be doing in the future. One example that I will give you is, we just consolidated the number of programs here in the D.C. area into an agile software factory out in the Virginia area. It is fully staffed and it probably had capacity already. And we're thinking about how we replicate that model in other geographic places, where we can source talent and integrate that well. We already have satellite offices of that that work very closely together on solving - on the same program, but they just happen to be in different geographic areas. And it's driving our efficiency up, our effectiveness in terms of delivering software on a timely - from a time point of few. And I see that being something that we want to continue to do since so much of our business is software in the future.

Can you describe the implications from a CapEx perspective overtime of your emphasis on growing the solutions business? And how you expect to manage that from a CapEx perspective?

Yeah, Tobey, this is Tom. A lot of the - there's couple of pieces here. One is some of the foundation aspect of solution business is to have in-depth in technology so we can offer about technology or capability into our customers. That's generated high R&D, independently funded research and development that typically is not actual related, but extended into period. Going forward, there may be some bids where we see CACI would invest in hardware and software, laptops, other types of equipment and indirectly provide those to our customers on a service delivery managed service model. As we look at those larger bids, or win those larger bids, we will update you accordingly with some larger capital spending needs.

Tobey, this is John. It's also worth mentioning, that when we talk about solutions, we're looking at solutions that utilize commercial hardware products. But the real secret SaaS to both our space-based and our EW solutions are that they are software-definable solutions. So if you are a customer, what you want is the lowest-cost hardware and then as your mission changes, or in the spectrum, as the signals you are concerned about changes, those are, as Tom mentioned, those are R&D investments of ours that are within our allowable cost structure and then we're able to deliver directly to the government in a packaged solution. So both in EW area and in the space area that's where our customers are also looking for. In the machine learning area, this is all about our algorithms. How can I process more information, both signal information and inventory data and have machines learn what some of that work is so that they can go to much more collected Intel on a faster - on a faster timeline. So again, more about IRM, less about CapEx and facilities, which folks who build Land Mobile Radios are very hardware intensive, very capital intensive, we're looking for very agile, software-based solutions in SOF. The DoD and the Intel customer sets are really craving for today.

The next question will be a follow-up from Jon Raviv with Citi. Please go ahead.

Hey, guys thanks for taking the follow up. Just a question on the - try to hit, again, on the underlying margin tower of the business let me ask it this way, when you talk about the 10 to 30 basis points extension, should we be excluding the one-time items, the $22 million in the support of $10 million next quarter from the base or just that's one all-in number that will grow off of kind of magnanimous some of the facility in the second half. So just was if you can write get us to a sense of what we're going off of what that basis is?

Thank you, John. Again, we'll provide guidance for FY '19 in future. Our business, like any business has its areas of one-time good guys and one-time bad guys kind of technical common term. $22 million of kind of goodness, which we articulated, but in our fourth quarter, we'll have $10 million was expect associated with it. So over time, some of those balance each other out. And as we go forward into FY '19, we would like to have 10 to 30 basis points improvement. And I would say, under the underlying ambient levels of EBITDA, there is besides lumpiness in awards, there is lumpiness in profitability. So let's try to get a smooth average of what EBITDA is and then use that as a bid. So I'm not being very precise and I didn't answer your question exactly, but that's conceptually how we kind of did action in it.

That's understandable. And then just a couple of years ago at the Investor Day, I think you guys talked about going to low 9, or 9 to low 10 EBIT margin over time. Can you talk about low double-digit margin, again I don't need FY '19 guidance, but is that still the right way to think about this business? And under what time frame or has it changed because of the growth dynamics?

Yes, Jon, good question. It's still aspirational, and I would tell you it's probably not in FY '19 number that I'll be counting on. But it is going to happen as time goes on. This really has to do with how we select the things that we want to pursue. And while there are still going to be more - there will be lower margin business that is important to do because it's part of our commitment to a particular customer sets or markets, it is also likely that we're going to, kind of, favor those pieces of the business where we can find business - where we can find contracts that are enduring, that are really appreciative of the value that we deliver and frankly generate higher returns. We're starting to see a little bit of that now. But I will tell you that it is incremental small steps and it is something that we're going to be - it's going to be a patient margin growth. But the potential for this business is low double digits over, maybe, the next five years.

The next question will come from Joseph Vafi with Loop Capital.

Hey, guys good morning, great results. I was wondering if we can get an update on JIEDDO, if that is - because it's such a large piece of business, if that's at all headwind to tailwind on the margin side at all for this year and in next year? And then also how do you kind of look at ups and downs of ODCs relative to committing that 30 points of margin expansions next year? Is that - do you have a good line of sight to ODC levels or is that something that still needs to be managed?

Yes, Joe, this is John. So I'll take the JIEDDO question first. Yes, we're very happy where that program ramps up. But wait for the first two to three quarters, after award. We went through that contract consolidation phase where the customer is bringing work from other clients and then putting that under our umbrella contract. We're very, very pleased with what the team has done. They are now in the mode of generating additional work to address this important customer's newly acquired requirement that is CACI self-perform work. And we've also seen growth with some of the prime work coming in as the customers are looking at solutions that CACI is uniquely qualified to deliver within that phase. As it pertains to margin growth, I think Ken and Tom will cover that one, extensively. But at the end of the day, 10 or 30 basis points EBITDA margin growth is very much supported by the level of firm fixed price work. And again, by the way we're executing on our current work. It ties right in with our long-term strategy. I think we're a little bit north of 9% margins of EBITDA now. And doing that math, 10 to 30 basis points growth year-over-year gets us to an achievable double digit EBITDA growth. I'll also remind folks that we are doing this at the same time where we're trying to grow top line. So we have - initial vision was bid less win more, bid larger jobs and make certain that they were providing value to both our customers and our shareholders as well. So as we're looking at margins that were out there bidding, we are being very, very careful about making certain that as some of this work is still in the LPTA mode that is - work that is not as attractive to us as it may have been. You mentioned ODCs, as there absolutely was a timely measured DL versus ODCs that we move more toward solutions where commercial hardware that we need is in ODC and it takes us less labor. As Ken mentioned in his agile solution facilities, DL and ODC in the levels in the mixes of those are less than less of an indicator of how we're working on bottom line growth.

[Operator Instructions] The next question comes from Brian Ruttenbur of Drexel Hamilton.

Yes, thank you very much. I want to hit on 1 point that was brought up earlier, but on the M&A side, because you definitely have the dry powder and the gun is cocked, if you will. What are you hearing in terms of assets? I hear about a lot of assets out there that would add scale to you, may be in SEDAR, maybe in space a variety of things, but nothing in Cyber. I want to know what direction you're thinking, is it going to be a scale acquisition? Is it going to be something that you are trying to carve out maybe on the smaller side because there doesn't seem to be anything large out there in the super high growth area? So I just want to hear what you had to say, and what kind of multiples you're willing to pay?

Yes, Brian, this is Ken. Look, there's always been M&A opportunities and we're continually scaling and being very active. When we when to the market-based strategies, and we've started looking at what skill sets, what customers, what solutions we needed to have, we became far more productive in terms of seeking out these things. So what's your hearing about is not the totality of the universe that we are talking to these days. There are conversations that we are having with companies that are not contemplated, trying to sell as a way of shaping. And I'll go back to the conversation that we had when we bought L-3 NSS. Tom and Mike - I mean Tom and John, made a trip to go visit. Mike's trainees and his team two years ahead of them coming out with that to say, we see the strategy of this - that something that we would be interested in, please give us a call, please let us have a chance to look. So we're going to remain a strategic integrator, so expect us to do something. We don't have a list of priorities related to big or small. I can tell you this, we're not going to buy scale for scale sake. We will not buy revenue. We are going to exercise inside of our market strategy, how to fill gaps, how to get into new customers and how to find the enduring parts of the market that we are not in there yet. But if I was to prioritize things we are doing, it is in the digital signal processing area, it is in agile software. We have a lot of Cyber assets today. We're manufacturing our own Cyber assets at the same time, so finding a Cyber business. Many Cyber businesses today are used to be in enterprise IT basis about three years ago. So we're conscious of that. In terms of what we're paying in multiples, the markets training picking over warning that pretty high. I might ask Tom to talk about that a bit.

Yeah, so compliant - the way we've look at it, kind of the economic is, we are firm believer in present value to project cash flow. So we will look at the future expected cash flow, discounted at appropriate rates. And as a result, we come up with a maximum amount we are going to pay. Then, if we want to, we can take that maximum amount divided by EBITDA to get a multiple. But that's simply an outcome of our thought process. And if the future cash flows are growing at faster rate than lower rates, then it is going to be worse more. And on an EBITDA multiple basis, it's going to be higher. So that is not - that is an outcome of our thought process, kind of versus implementing our thought process. And again, you did it probably that's going to grow kind of 20% a year over the next five years. It's going to trade out a very high valuation divided by to date's EBITDA is going to showing relatively high multiple versus the company that's going to have less luster growth. So that's a conceptually how we look at on kind of valuation.

Thank you very much.

Ladies and gentlemen, this concludes in our question-and-answer session. I'd like to turn the conference back over to Ken Asbury, for any closing remarks.

Well, thank you, Chad 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 Daniel Leckburg are available for calls throughout the day. I thank you for your interest in CACI. This concludes our call. Have a very nice day.

And thank you, sir, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.