Good day, ladies and gentlemen. Thank you for standing by. Welcome to the CACI International Second Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. [Operator instructions] At this time, we would like to turn the conference over to Mr. Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Phil, and good evening, everyone. I am Dan Leckburg, Senior Vice President of Investor Relations for CACI International and I thank you for joining us this evening. We are providing presentation slides, so let's move to Slide Number 2.About our written and oral disclosures and commentary, there will be statements in this call that do not address historical facts 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. Those factors are listed at the bottom of this evening's earnings release and described in the Company's SEC filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I would also like to point out that our presentation 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. Now let's turn to Slide 3, please. To open our discussion this evening, here is Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Well, thanks, Dan and good evening, everyone. Thank you for joining us to discuss our fiscal year 2019 second quarter results and our two most recent acquisitions. I'd like to thank you all for your flexibility in joining us tonight. With the acquisitions coinciding with our earnings call, we wanted to provide you all with an opportunity for a fulsome discussion and questions, as soon as possible this evening rather than waiting until tomorrow morning. And with me tonight 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. Earlier this evening, we released our second quarter earnings for fiscal year 2019 and announced two very exciting acquisitions. I'd like to take a minute to walk through the highlights related to our quarter, then turn to the acquisitions, which John and Tom will comment on as well. We delivered record revenue and operating income in our second quarter fiscal 2019. We continue to generate organic revenue growth while expanding margins at the same time. On top of that, we won $1.3 billion worth of contract awards with 70% of that business that is new to CACI. As you know, the government was partially shut down for much of January and now fully open. We saw no revenue or profit impacts as a result of that in our second quarter. In January, there was a very minimal impact to our outlook given the partial nature of the shutdown and the business concentration we have in defense, national security and other essential missions, which were fully funded. Lastly, we are remaining – excuse me, we are raising our revenue and net income guidance…

Thanks, Ken, and good evening, everyone. Let's go to Slide 8, please. As Ken noted, these two acquisitions are extremely exciting. LGS, an established provider of products and solutions with a unique array of relevant technologies, Mastodon is a disruptive technology company with a unique product portfolio and agile manufacturing capability, both are high-growth, high-margin companies acquired at an opportune time in their respective growth phases. We are confident these companies will drive significant shareholder value both near and long-term. The combination of CACI, LGS and Mastodon will accelerate our position to the forefront of high-value and sophisticated products and solutions in the areas of signals intelligence, electronic warfare and cyber operations. Together, we will deliver increased capability, functionality, mission flexibility and greater value to our customers. Let me spend a few minutes talking about the value this combination creates for our customers. The simple fact is, customers are looking to procure and deploy capability faster than ever before. They cannot afford to be handcuffed by long acquisition cycles and multi-year development efforts. That model is uncomfortably slow to counter new threats. It's also hardware-centric with upgrades to capability requiring platform downtime and pulling precious resources out of mission execution. This traditional model is just too slow, too costly and too cumbersome. What customers tell us they need and are budgeting for today is agility, flexibility, and speed. Capability must be deployed in near real-time as quickly as new threats emerge without platform downtime. This is where the value of these transactions really shine. Our combined software-defined expertise and agile manufacturing capability will push new SIGINT and EW capabilities out to our customers quicker than ever before. Slide 9, please. To understand the value of the combination, one needs to see what each company provides. Specifically, Mastodon brings radio frequency…

Thank you, John, and good evening, everyone. Please turn to Slide Number 12. As Ken mentioned, the transactions represent a total purchase price of $975 million. As part of the transaction, we expect to realize a $140 million net tax benefit on a present value basis. This benefit reflects our ability to deduct a portion of the purchase price from income taxes over a 15 year period, effectively lowering the economic purchase price to $835 million. Over the next twelve months, we expect these acquisitions to generate $480 million of revenue and $82 million of EBITDA excluding the one-time pre-tax transaction cost of $17 million. This represents an adjusted EBITDA multiple of around ten times. This multiple includes the value of the tax benefit in the expected net synergies. The acquisitions will have an adjusted EBITDA margin of around 17%, significantly above CACI's core margin, which is just north of 9%. Over the next twelve months, we expect $39 million of additional interest expense and $32 million of additional depreciation and amortization expense. We expect the combination to add $0.30 to $0.35 to GAAP earnings per share over the next twelve months, excluding one-time costs. These numbers include around $0.70 of non-cash, deal-driven amortization expense. All in all, these are high-quality properties purchased at the right time with substantial contracted growth already in hand. We borrowed under our recently expanded credit facility to finance Mastodon and we will also borrow under the facility for LGS. We expect to pay LIBOR plus 150 basis points post closing and we will have adequate remaining capacity to pursue additional opportunities. Pro forma net debt to trailing twelve month EBITDA is expected to be at 3.5 times at the beginning of March when the LGS transaction closes. In December, we entered into an accounts…

Well, thank you, Tom, and John. I appreciate your comments this evening. Let's all turn to Slide 18, please. I think you can tell by our commentary that we are pleased with our second quarter performance and our prospects for the rest of fiscal 2019 and we are very excited about the acquisitions of LGS and Mastodon. We delivered organic revenue growth, single-digit overall growth – high-single-digit overall growth, strong profitability and robust contract awards during the quarter. And the combination again of CACI, LGS and Mastodon will be truly differentiated for both our company, as well as the marketplace that we are pursuing. The acquisitions are a continuation of our strategy to invest in the products and solutions side of our business and to pursue our government's most complex needs. They are accretive on an adjusted basis for both the remainder of our year and over the next twelve months and we expect strong forward financial performance in the years thereafter. These are high-growth companies, adding valuable capabilities that are in line with our customers' most critical investment areas. Before I open the call up for questions, I'd like to welcome the employees of Mastodon to CACI, and we will look forward to welcoming the LGS team on or about March 1.We have a great deal of respect for both teams' cutting-edge innovation, their expertise and their unwavering commitment to their customers' missions. The combination of our three companies is going to be powerful and I look forward with great anticipation to the accomplishments I know we will make together. So welcome. Lastly, I'd like to thank the employees of CACI for another great performance quarter. I continue to be impressed by your ability to deliver quality for our customers and execute our strategy to deliver growth and margin expansion. Thank you. With that, Phil, let's open the call up for questions.

[Operator instructions] The first question comes from Krishna Sinha with Vertical Research Partners. Please go ahead.

Hi, thanks, guys. Ken, you alluded to this in your remarks a little bit. But can you kind of talk to us about the trajectory of your product mix, before Six3, how much of your revenue was what I would consider solutions or product-oriented and now, what will be pro forma once you include these new acquisitions? Like, what's the growth of your solutions business over the last five years and how much of your revenue is now from what you would consider solutions, compared to traditional maybe IT services work?

Yes, Krishna, this is Ken. Thanks for the question. So, if I go back six years, we were largely a professional services-oriented company and we did – we had some things that came as a result of acquisitions that still remain with us. We have several product lines like SystemWare and a couple others that have always been – they were part of another acquisition that we did, which were largely services-based. When we went through the Budget Control Act period of 2013, about six years ago, we decided that we really need to find a more enduring place to be in the marketplace. So we started looking for service - solutions and then seeing where they were attended products maybe associated with some of this solutions companies. I would tell you that Six3 was the beginning of that and that was a little bit of a mix of two very fine high-end solution companies with a little bit of product that they did and then a mix of services. Over time, that business has continued to grow at a high-single to low double-digit basis that core business, while some of – during the Budget Control Act period or 2013 through 2015, we saw some degradation in the professional services and overall services business. So that business has stayed steady and growing, which we have added some other things that we've not even mentioned, because they were smaller that continued to add to that and they grow at a higher rate than the normal business. As we look – we o back and forth on this on what the mix is, we sometimes want to measure it with cost plus versus fixed price, but you can't do that because we just added 84 or couple of hundred million dollars worth of largely naval engineering that was on a cost-plus basis. So, if we look at this going forward, we'll probably start to get closer to a 60-40 mix in terms of things that we can call overall services that would be 60% and solutions and products. We haven't differentiated the two of those quite completely. So we are going to keep them lumped together for now. But the characteristic of those is, we would expect to get a higher return because we are using either intellectual property or unique skill sets of our people to drive value to particular customer sets. And as we – how should I say it, as we bring in and fully integrate both Mastodon and LGS, we'll have a better picture of that going forward.

Okay and then just a follow-up there, I mean the margins of these companies are substantially higher than core CACI, I mean almost double. And it sounds like the capabilities that they are bringing on the solutions side are more in line with what we would consider like the electronics portion of a defense prime. So what's the kind of the comparable set of companies we should now be comparing you to, at least this portion of the business, this – the LGS and Mastodon piece. Is that more like a Harris? Or somebody that's kind of melding software and hardware together as an integrator or what's really the comparable set of companies that we should be looking at to look at that part of the business?

Krishna, thanks. This is John. I am not certain all the different products, companies out there and as you mentioned, some of the electronics parts of some of the larger A&D companies. But what I can share is what we believe will differentiate our offerings within those products and solutions domains. As Ken mentioned, we are not breaking up products from solutions, because both of those, in our terminology are actually solutions. We are really looking at disrupting what has always been a full-scale hardware marketplace with software-definable products and solutions, where we can add functionality and capability quickly. We are looking at multi-use devices, which will lessen the burden of carrying a device per function. Again, our business model is not to make margin on every hardware device sold, but it is very much looking at putting a device in the war fighter's hands. They can take on multiple missions with a simple software download with a very different pricing and go-forward business model. With the same devices, reduced training requirements, less devices make them easier to use and frankly, taken the high-level expertise of LGS and Mastodon in signals Intel allows us to utilize and create additional IP in this domain. So it's tough for us to take a look at trying to compare what we are going to do in the product solutions space to what some of the companies you mentioned are, because our business model isn't large-scale manufacturing. It's more smaller-scale assembly at test of very simple – simply constructed devices where the smart and the mission is really done in the software side. So, we actually think bringing these two companies together with what we've talked about within CACI actually provides a very differentiated and disruptive force to which was a predominantly hardware device market.

I'll jump back in the queue.

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

Hey, good evening, everyone, especially to Greg. I am sorry, Greg, if I don't have a question for you this time.

Thanks, Jon.

That happens. I hope you are well though. Sort of dovetailing on Krishna's point about this manufacturing idea, I mean, it sounds like you are adding a manufacturing facility. Do you have anything like that in the current business? And how much capacity does that – this kind of acquisition brings? And how many of your products that you currently create today, could you – I don't know, potentially insource, is that’s even the right word, from a manufacturing perspective? Thanks.

Yes, John, this is Ken. I'll start and John will probably want to add on to it. But we've been manufacturing things on a reasonable scale for quite some time. A lot of the work that we picked up from Six3 has a - sometimes a card-level sort of manufacturing. We have a couple of capabilities around that in the company. What we're talking about with Mastodon, for example, is not that. A lot of that is done with contract manufacturing and assembled in a – if you will, an assembly facility, not something that we are going to be creating a lot of things out of whole cloth other than the original design. The genius of the Mastodon people is they are really wonderful at designing. They are wonderful at fitting into certain form factors. We will have that stuff made for us. And then it'll be assembled, tested and then supported by the Mastodon team. So this is not – it's not – we are not straying into brand-new territory. In terms of this company, it actually is kind of strengthening a capability we already have and allowing us to do it across more of our, what I would call software, our software factories that are really coming up with either signals intelligence. They are coming up with counter-UAS. They're coming up with electronic warfare software solutions that now we can begin to give to a customer in a way that you don't have to always bring, for instance, your ship into shore to change out the firmware in order to upgrade your signals collection system. So, think of it as your iOS upgrade is where we believe we are heading with these kinds of technologies.

Hey, John, what I also would add is, so if we look at this from a pure cost spend, we don't believe that CapEx is going to materially grow here. The way to think about when we talk about products in this space is, what we are growing is the number of digital signal processor engineers we have, which is sort of a software factory kind of a model versus a large-scale unionized manufacturing facility. So, with the addition of both Mastodon and LGS, we are going to pick up hundreds of digital signal processor engineers and the good news is although some are in the Washington D.C., Northern Virginia area, we're going to pick up post in New Jersey and Colorado and Rochester, New York. As you've heard Ken and I mention over the last few years, the more we create these beachfronts of highly talented double Ds and software engineers and DIPFB that really transforms this model. So the "manufacturing" is in the software piece not in the actual bending of hardware.

Great. Thank you. And then, as a follow up, once these deals are done, you are going to put up a certain sales number and a certain margin number for the entire business. Is that the right base to use off of which to continue to hit those multi-year targets idea, Ken, you've always laid out between outperforming the market and also the margin expansion?

As we get into 2020, we will provide guidance, and we will kind of think about those in terms of kind of revenue expansion and margin expansion. But make no mistake about that, we plan to do this. These two acquisitions, they give us a step function if we made - operate it after deploying the higher basis, but we still want to continue to grow and expand beyond that step function basis.

The next question comes from Joe DeNardi with Stifel. Please go ahead.

Hey, good evening, everybody. I think this question is for Tom. Wondering if you could just talk about kind of during the due diligence process and the valuation process, if you could share with us what sort of longer-term assumptions you used on these businesses to get comfortable with valuation, whether it be sales growth or margin sustainability? Just how you thought about that over the next three to five years? Thank you.

Yes, well, good. So, when we look at our acquisitions, first and foremost, we look at a strategic fit in rationale consistent with our market strategy focus. So is this the right company for us to buy. And then once we hit that very important screen, the next step is what is the economics look like. And as part of that, we have extensive reviews of both historical financial performance, as well as pipeline reviews for the forecast for the next one, two, three years that the company provides. Typically, there is a good amount of fidelity in those particular forecasts. We will use those as a basis, and we will apply our own independent judgment to that. In many cases, we have internal expertise to understand the customers in the markets and the kind of demand for these various products. Based on that, we forecast the best we can, revenue and profit growth for years one, two, three, four, five, and after that, we undertake a present value analysis, what is the maximum we are willing to pay to generate sufficient return on capital for us and hopefully, we will pay something less than that so it actually has a positive present value that exceeds our internal rates of return. I can say that both these transactions have internal rates of return well in excess or comfortably in excess of our kind of weighted average cost of capital and we think the transactions, based on both past performance, LGS, in particular, and future prospects had funded backlog from orders in hand to support the growth which our models are based on.

And Joe, this is Ken. I think another thing for you to consider is, we've done this with a modest amount of synergies that are really associated with kind of reducing some of the back-office duplication that happens when you put extent organizations together. We have also not modeled in anything related to revenue synergies in terms of evaluating the value of this. But we believe very firmly because we've worked with -- for instance, with LGS. We've had an ongoing kind of prime sub-teaming relationship with them. We believe that strengthens some of the opportunities that we were pursuing jointly over the years and we expect that to also offset any potential risk of something we might have missed in due diligence, which I don't think we did because we've spent a pretty good period of time taking a look at that.

Yes, thank you Ken and Tom, thanks for the color on the process. I guess, I'll assume from your answer that you don't want to quantify what some of your assumptions were. Can you just talk about, whether you see these businesses as more of a benefit from a top-line standpoint? I guess, you could argue that it's hard for businesses with margins that high to grow as quickly as businesses with lower margin perhaps. So, could you just talk about that dynamic a little bit?

Yes. So I'll start off. So, both in terms of top-line growth, we expect these companies to grow greater than base CACI and these companies both have higher margins than kind of base CACI. And neither these companies are, I think you kind of implied in the question that it's harder for high-margin companies to grow and I am not sure if that's the case.These are high-margin companies, but there is a huge demand, increasing demand for the types of products and solutions that are – that the customers want. So I expect them to both continue to have strong margins and expand kind of revenue greater than core CACI.

Joe, and I would also add, as we tried to explain in some of our prepared remarks, some of the capabilities and the manufacturing knowledge of both Mastodon and LGS will also play into products such as SkyTracker that will allow us to sell that product and that solution into more customers at potentially a lower cost of goods sold level, which would help drive our margins as well.

The next question comes from Robert Spingarn with Credit Suisse. Please go ahead.

Hi, guys. Congrats on your two deals here. I wanted to ask a couple of things as well as on these. First, if we could get some sense of this relative sizes or contributions. Obviously, one company has got many more employees than the other, but three times the purchase price. So I wanted to reconcile that. And then, you mentioned that you're acquiring these two at a very opportune time. Maybe this is for you, John. What are the budget trends behind the products that these companies make and to that point, are these more primarily oriented toward Army and Marine Corps type products?

Okay. Let me start with the last questions first. So budget trend, yes, Rob, today – and I'll sort of put them in two different groups. If we look at LGS, well-established company. It has been out there. Their foundations are all the way back to Bell Labs and the capabilities that they have are going to look at the same type of customer set that our core CACI has across the DoD and across many of the Intel community customers. If we look more on that solutions that sells more like products side we look at Tusk, at Mastodon. Sort of gave you what our codename was there, Rob. And so, budget…

That's good to know.

Yes, great. So budget trends there are clearly any of the DoD or the Intel customers that are looking for signal Intel and where electronic warfare and where this electromagnetic spectrum sits today. And budget Army, Marine Corps, Navy, Navy Surface Ships, Navy Combat Destroyers, all of those programs are creating additional programs to bring the actual power of single intelligence into their large-scale products and small-scale form factor radios. So, where we see this market going is growing. We see the Army, all – I'm sorry. We see all DoD forces and most of the Intel communities spending quite a lot of money in these areas. This has been an area that has been neglected for decades within the U.S. You don't have to read too many global conflicts out there where electromagnetic spectrum is very important. We can talk about the Russians. We can talk about the Chinese and others, as well as lower-level nation-state actors. So Counter-UAS, Cyber, signals Intel, budgets are growing consistently there and we believe that we have a software-defined way to get capability out there faster, which should allow us to grab a larger share of those budget dollars.

And Rob, this is Ken. To take it up a chunk, if you look at almost what every service is talking about, it's the Navy, the Army, the Air Force, they are looking at how do they improve their multi-mission domain. How do they deal with air, land, sea, cyber, space and how do they bring those all into an integrated picture. We believe that there is going to be a lot of magic software behind that and it's going to become less about silos of very capable hardware that do things that have to be integrated in complex ways. We're going to see much more simpler devices. Think of everything that you have in your environment as a sensor and you use that software then to determine what's in your environment, analyze whether it's a threat, friend – or it's a friend, decide, give you courses of action that you can take and do all this on your wristwatch. Because that's the speed at which battle is going to be fought in the future and we are just getting to the point in – from a buying, if you will, from a buying priorities where all of the services are putting this as one of the – as the tip of where they need to be. We've been finding counterinsurgency, counterterrorism missions for a long time. If you go to a national security policy that is based on a large nation power again and potentially having a conflict either on land, on air or all the above, then you are going to need to integrate all of these lethality capabilities that we had in a completely different manner than we have today. So the notion of joint is driving all of this integration, and I think we are in a really good time to be having these kinds of companies – to have these kinds of companies in our portfolio.

Okay. And as of the questions for Tom, just the low 2% type organic growth, 2.4%, I think, it was in the quarter and it's been kind of that way for the last several quarters. We are seeing some of the peers and again, I am speaking about organic growth, more in that mid-single-digit neighborhood. When do you think you might inflect up into that direction?

Yes, thank you. So we are at the very, kind of mid-to-early stage process of looking at our FY 2020 plan and we committed to grow 1% to 4% greater than the addressable market and we said all along that we expect the addressable market to grow approximately 3.5% as we get into 2020. So at that point in time, I would expect us to have the market potential to realize those growth levels that we've committed to. Again, it's still early in the planning process and I will point out that when we look at both the awards that we've been receiving, kind of a 1.5 times book-to-bill on a trailing twelve month basis, as well as a very robust set of opportunities, bids submitted, kind of bids under review, those do support kind of what I spoke of.

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

Yes, thank you very much and exciting acquisitions guys.

Thank you, Cai.

So, what percent of the revenues of both of these companies are with DoD and Intel customers? And can you give us some specifics of who do they compete with?

Yes, Cai, let me start off with sort of the mix of business. If I look at Tusk, predominantly firm fixed price, predominant customers are going to be your special operations group and some of your special purpose teams. Our growth trajectory for that business over time is to reach more of those special units where they are the first groups who hit some of these very unique signals that they need to one, find and then two, defend against with a future growth strategy of getting into the green army and into that radio mix of multi-use devices. The work is predominantly firm fixed price, as you would imagine because they are more product focused. LGS, really across DoD, just about every Intel community customer, long-standing relationships. Some of them two and three decades long. About 60% of their business is cost, cost plus, Cai. But it's much more of sole-sourced work, which is based on their deep knowledge of the domains that they serve. So, when we talk about higher-margin business, even at cost, cost plus, that type of work in the past will continue to demand a higher fee than some of the lower-level CPF engagements. The rest of their business is a mix of firm fixed price and time material customers. The other way we like to talk about our business is professional services, managed service and solutions work. Very minimal professional services revenue. Some of it out in the field supporting products that they deliver. So just about all of the remaining revenue for both companies will, today and in the future, all be considered solutions work.

Terrific. Thank you. And then, so the second part of that question, who do these guys compete with? And I mean, are these guys – you mentioned that you worked with LGS. What do you guys – what do you view as the cultural fit? So, first question and I think a couple have asked it, is like, who are the guys you guys really go head-to-head with to win business at these two new acquisitions? And what is the cultural fit, because this looks like a step kind of even farther into a product business than you've done before?

Yes, so let me touch on the cultural fit first. I think Tom mentioned earlier, our M&A strategy and what we look for in companies that we are looking. We look at their capabilities, the customers that they serve and then is the company a "cultural fit." We believe both companies are. I can tell you Tusk is led by a management team with decades of creative and innovative leadership over a team that has the right stuff. They have a very innovative culture. The fact that they had many years working at other companies, solutions companies, product companies and really saw the future being software-defined devices in a much more agile and a much easier way to buy products. They are going to go in a path that beyond serving unique customers, going into the mainstream customers. LGS, from our view, is the go-to company for leading-edge wireless. Software solutions, long years of engineering excellence. A long history solving some of the nation's most challenging problems. Very similar to the culture set that we have today. When you mentioned this, this may – it's something that's going to get us further into the product side, we actually see this as the next step beyond where Six3 brought us into the solutions path. I think Ken mentioned that earlier, I mean, just the Six3 started up on our path to more highly differentiated solutions in the intelligence community. In the last five years, we've taken a lot of their solutions and put those into the DoD area and that actually created more commercial-like solutions like SkyTracker. We honestly believe that CACI's heritage platform integration, our development programs are perfect programs for both LGS and Six3 to be complementary in the signals domain and for Mastodon and Six3 to be very complementary in some of these higher-end products. So, pound-for-pound, we see the culture of both companies extending what we already began in the solutions space. Some of those solutions are going to be more FFP products and some are going to be more firm-fixed price solutions business.

Cai, this is Ken, on the competitive side, we are going to see – we will probably see Harris and Thales and some of the other smaller device manufacturers that we will go up against. The LGS business is very similar to the kinds of competitions that we would have had using – from our Six3 business. But in some smaller, very, very high-tech, very focused companies to some of the divisions and some of the larger businesses. We've been able to grow that side of our business at high-single, low double-digit pretty effectively for the last five or six years. We expect that and maybe even a little bit more because now we have little bit more bulk. We have a few more laboratories where we can do our own work in. We have both a geographic and a larger customer footprint. So I am excited about that prospect of LGS and Mastodon joining our business.

The next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Good evening. It's actually Greg on for Sheila. I just wanted to apologize ahead of time for not asking about the deal. But margins in the quarter trended up after having some pull forward in Q1. Was there anything unusual in the quarter from a margin perspective? And how should we think about that going forward?

Yes, there is nothing unusual. I think it was pretty kind of straightforward. So it was a nice kind of margin quarter. I think for the core CACI business, for the full year, we are sticking to the kind of original kind of EBITDA margin guidance, 10 to 30 basis points above 2018. 2018, I believe, was approximately kind of nine percent-ish. We had some one-time effects and so we adjusted for that. So we should be getting margins within those particular levels. The last couple of quarters were nice margin quarters.

Thank you. And then, just one follow-up. You mentioned that you don't include revenue synergies when looking at these deals, but can you maybe talk about the sales cycle? You talked about some of the synergies across the businesses. Is this something that can take effect fairly quickly or is the sales cycle a little bit longer?

Yes, Greg, this is Ken. The sales cycle is going to vary. Obviously, there is probably deals that we're already working on. I am not – I couldn't name them now and I probably wouldn't just for competitive reasons. But there is probably deals we are working on and then there is going to be things that as people get to know each other, things that may have looked a little too large or too complex or maybe beyond one group going and pursuing, that's what we've begun to see between – I mean, our whole – our entire thrust in electronic warfare has come out of sort of the brilliant engineers and scientists at the BITS side of Six3 and some of our traditional Army folks that have been working at Aberdeen. And those guys working collaboratively are now going after much, much larger deals and being very successful in bringing our technology into the discriminators in a variety of jobs, some of those which we won last quarter. So, I – not putting revenue synergies in this is akin to us having an honest appraisal on just the financials going forward and to tell you or to tell the investment community that we've done all – that’s one of our screens for taking a look at whether we want to do a deal or not doesn't make sense financially. And revenue synergies, they can make that look a little better. But we don't include them for that purpose. But I’ve mentioned them, because in a deal like this where we are already beginning to work together or have worked together, they could make a difference in reducing any forward-looking risk.

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

Hi, this is Joseph Thompson on the line for Tobey tonight. Thank you for taking my question. My first question is related to the shutdown. How has the shutdown affected the labor pool in the D.C. area? Are you seeing an increase in skilled laborers with security clearance and looking to push to the private sector?

Yes, Joseph, we've been at it a month and I don't know that we are going to observe anything like that. I think there is a concern. When we've been through the Budget Control Act, we drove a lot of really good talent into other parts of the industry, because frankly, the government being always dependable and then you go through something like this, something like that, I am sure that there's some folks that may have been on a cycle to go into a government job or an industry or maybe even coming to us. I haven't heard any of these before, but let's use it as a hypothetical. And then all of a sudden, that division is shutdown. In our case, it was less than 300 folks that were on again, off again and from a revenue impact, it was less – it was about 1 million to 1.5 million a week, depending on which week you were talking about. So, it was quite de minimis. I do believe we were on the ascendancy again as the budgets came back and as we had a kind of resurgence in interest in national security and there was a lot of spending there. So could that have an effect? I don't know one month is going to make that big of a difference. If it happens again and it lasts a long time, then maybe we ought to talk about it at sometime in the future.

Okay. Thank you. And then, just a quick follow-up to something you mentioned earlier. You guys mentioned that Mastodon and LGS both had employees in other regions. Do you have further plans to expand – excuse me, expand where you are locating employees in other regions or just for those specific companies?

Well, in this case, they had a footprint that are already there and we are not going to disturb that. We actually love that idea, to be honest. So we are not always fishing in the same pond here in the Delmarva region to trade systems engineers or digital signal processing engineers. Folks like to live in other parts of the country and there are also really, really smart people that love living in particular areas. And we like that, because that gives us another foundation to go recruit from a different set of universities rather than the ones that are always here. As to what CACI is thinking about, we are always thinking about that now as we want to diversify where the labor base comes from and we want to mine locations where there are pockets. We took our Shared Services Center to Oklahoma City and in less than two months, we hired just a fantastic group of people there that love to live in the Central United States and that helped us in a very large way. We see doing some of that with some of our technical resources in the future. I believe we've spoken about over the last couple conference calls about taking one of our agile software facilities, classified one, and moving it maybe into Colorado to where we can do things there. We have our network capability and the fact that we are living in the cloud now allows us to be anywhere. We don't need to be close to our servers or if any of that stuff, including for some of our development environment. So, geography is sort of a new strategy for us. It just got to make sense and we've got to have enough of a book of business there for it to – for us to invest in it.

And Joe, I would also add, with the connection to LGS, there is a company that's got two acres of land space in New Jersey, Ph.D., scientists and engineering folks and an ever-growing university relations program which actually we will infuse into the larger CACI to be able to give us access to even higher level of talent.

The next question comes from Josh Sullivan with Seaport Global. Please go ahead.

Good evening and congratulations on the deals here. Can you just give us a little background on the origin of the tax assets you are acquiring? Just trying to understand how they were created.

Yes. So, Josh, we are not acquiring a tax asset. So these companies did not have tax loss carry-forwards, for example. The acquisition is creating that tax asset. So, the kind of federal tax law allows companies, when they acquire S corporations or certain LLCs to depreciate a portion of the purchase price over time for federal tax purposes. That depreciation is kind of straight-line over 15 years. And so, with high degree of certainty, assuming tax laws do not have material changes, we are planning to realize additional tax depreciation, which turns into tax savings for 15 years and the present value of that is approximately $140 million. So, the structure of the transactions allow us to take advantage of those provisions of the tax code.

Okay, got it. And then just looking at the M&A strategy going forward, do you think you still have headroom to do any more deals? Do you want to bring down the leverage? And then, do you think this commercial model of owning the IP and taking advantage of some manufacturing leverage, will that be the focus of targets going forward, do you think?

Yes, Josh, this is Ken. I think when we are done with this one, I think we'll be levered at about, what, 3.5 times, 3.6, something like that. So we have a little bit of dry powder going forward. M&A is our first priority for the deployment of capital and that'll continue. That is not going to change. We are very active in the space. As to are we going to add onto this, the answer would be yes, if the opportunity presents itself. But we have other markets that we want to fill gaps and build capabilities in. If I look at what we've been doing with M&A over the past five or six years since John and I have been here, it is has been to evolve the company away from being a short cycle business where the business was more impacted by the changes in budget that we saw from the Budget Control Act. I mean, I came in eight days before that was enacted and it really had a major effect on the business and strategically, we have been moving towards a place where we wanted to be more mission-oriented, because nobody cuts a mission. They always cut the logistics. They cut training. They cut maintenance. But they are not going to cut a mission because that's the sole reason that they get there. So moving more into mission space, moving more into spaces where we are sitting side-by-side with the customer to make sure that their value proposition gets realized has been the strategy. So, there are other elements of our business where that is a resident. So if there is an opportunity, by the way, we like this space. We are by nowhere near capacity. What this does, it gives us more capability in our space business, our intelligence solutions business, our cyber and...

Our communications.

Our communications, sorry, and the whole notion of C4ISR. Sorry, John was mumbling and I couldn't pick it up. And - but if something presents itself in business systems that is really a good thing. We also see that as a big business and it's been a good business for us over the years. So, we will be acquisitive. Obviously, we've spent close to $1 billion or slightly less because of the tax features of this one. We are incredibly happy with the two companies that we bought here, but we will have our eye up.

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

Hi, congrats on your deal. Tom, thanks for the disclosure on Tables 12 and 17. But if I could parse it a little bit here, instead of the forward twelve month view, how much of that D&A and how much of that interest falls is implicit in the annual guidance that you gave on Table 17?

Yes. So, let me just pull up to Table into 17. I think I know which one you're referring to.

Yes, it's with the annual guide. I just want to know. You offered it on a forward twelve month basis. I was trying to figure out how much falls this year?

Yes. So it would just be relatively linearly pro-rated. So for one transaction, I would say approximately fourth-twelfths will fall into FY 2019.

Okay. Is there – all right. Because they are off in closing by about a month on the timing, that's why.

Yes. So four is probably close enough. So maybe it would be like 4.5 times. One company is smaller than the other. So we closed Mastodon $200 million or $700 million or $750 million for LGS. So, that's the preponderance of the interest and intangible amortization. So four-twelfths is I think, should be sufficient.

So you are offering – you are bringing on some nice higher-margin businesses here, meaningfully higher EBITDAs. But you didn't change the operating cash flow guidance. Does that – do you think the payment thing is going to last longer or is that a bit of a fudge for the partial shutdown? I am just sort of curious why you didn't increase the OCF number.

Yes, sure. What we did is, besides having the positive contribution of these two enterprises, we do have the transaction cost associated with the deal. The attorney's fees, banking fees, various employment-related kind of one-time costs and so kind of net-net, we increased our margin, but I think $5 million on the top and bottom-end of the range considering all the moving pieces and so that was not material enough to suggest that we would increase our operating cash flow guidance.

Great. Thank you.

[Operator instructions] The next question is a follow-up from Jon Raviv with Citi. Please go ahead.

Hey guys. Thanks for going late tonight.

You bet, Jon.

Ken or John, can you just offer some, or anyone, can you just offer some – just some background on the deal, how competitive, or proprietary and then also some just precedent from the last time you had two near simultaneous, sizable acquisitions to make sure that the integration of these two companies at the same time is something that you have had experience in and are well prepared for? Thank you.

Yes, Jon, your second question seems like you are now picking on us. So, I can't recall when we did two deals at once. It just so happened that, that was the way we have been working on these. I think on one, for close to two years. So, LGS we've started – I think, Kevin Kelly and I served on a panel at Suffolk two or three years ago and [Indiscernible] an interest. And with Mastodon, I think we've been looking at them for about eighteen months, nine months in very, very close detail. Neither was competitive. We were able to offer or have a discussion in both cases that made sense to them strategically for that being an option and so, that took a great deal of time. But it also afforded us a great deal of deep examination of each of the businesses, the individuals, any of the issues associated with both of them. And I think we have a deep, rich appreciation for how good these companies are and how good a fit they are going to be for CACI. Jon, I lost your – remind me of your first question.

No, no, you hit both of them. Thank you.

Okay, very good.

Okay. Seeing no further questioners in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Ken Asbury for any closing remarks.

Well, thank you, Phil, and thanks for all your help today on the call. We would like to thank everybody who logged in for the webcast for their participation as well. We know that many of you will have follow-up questions. Tom Mutryn and Dan Leckburg are available immediately after this call and throughout the day tomorrow given that it is getting to be the witching hour. We will do as many as we can tonight, but thank you all. This concludes our call. Thank you for your interest in CACI and we really appreciate the flexibly that all of you have shown to us tonight to make sure that we got this message out appropriately to each of you. So thank you for that. So with that, we are done. We'll see you again.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.