CACI International Inc (CACI) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Q2 Fiscal Year '18 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

At this time, I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Kate, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we're very pleased that you're able to participate with us today. And as is our practice, we are providing presentation slides.

So let's move to Slide #2. Now about our written and oral disclosures and commentary, there will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Now factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the company'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. And these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

So let's turn to Slide 3. And to open up, here's Ken Asbury, President and CEO of CACI International.

Well, thank you, Dave, and good morning to everyone. Thank you for joining us to discuss our fiscal 2018 second quarter results. With me this morning are John Mengucci, our Chief Operating Officer; Tom Mutryn, our Chief Financial Officer; DeEtte Gray, President of U.S. Operations; and Greg Bradford, President of CACI Limited, who is joining us from the U.K.

Last night, we released our second quarter results for the fiscal year 2018. We also raised net income and earnings per share guidance to account for strong profitability from operations and benefits from the recent tax reform. This morning, I'll provide an update on our results and strategy looking forward, Tom will give details on the financials and John will cover the operational aspects of the quarter.

Please turn to Slide 4 on our deck. We delivered a solid second quarter, now our fourth consecutive quarter of positive organic revenue growth. Profitability was also healthy with operating margins over 8%, and we booked more than $1 billion of contract awards in what is typically a seasonally light quarter. This gives us the confidence to reiterate our revenue guidance and raise net income and EPS before the benefit of tax law changes. Tax reform also contributed materially to our second quarter net income and has been incorporated into our full year guidance. Tom will lay out those details for you in just a few moments.

Let's turn to Slide 5, please. As you know, we are currently operating under the fourth continuing resolution for this government fiscal year and experienced a brief shutdown in January, which will not have a material impact on our financial performance. We remain optimistic that a budget agreement will drive increased defense and intelligence spending, which will be positive for CACI, our industry and our country. Before Tom walks us through the mechanics of tax reform, I'd like to spend a minute talking about what a great opportunity this is for CACI and our employees, customers and shareholders. On an annual basis, our operating cash will increase by more than $30 million. Given such an opportunity, we are looking at ways to invest in the long-term development of our people, through enhancements to our education and certification programs, career development activities and other benefits that we think are valued by today's talent pool. We are still working on the details of these options, and I look forward to providing you and our employees an update once we have more specifics. I want to make sure that I reiterate our commitment to our margin expansion goals of 10 to 30 basis points annually, despite using this investment. And we will continue to allocate the remaining cash to our stated priorities. I would be remiss if I didn't mention a recent accolade CACI received from Fortune Magazine. We were named as a World’s Most Admired Company and the fifth worldwide in the IT services industry. This survey identifies companies that enjoy the strongest reputations with their industries as business leaders who deliver valuable solutions and services with ethics and integrity. We are very proud to have been selected for this prestigious award.

To wrap up my opening, I'm quite pleased with our second quarter results. We continue to deliver with quality and value, driving revenue and profit growth. We are winning business and investing in innovation and strategic growth initiatives across several markets with an eye to the long term. All of this gives me confidence in CACI's prospects and our ability to achieve our long-term financial goals, while driving increased shareholder value.

Now here is Tom to discuss our financials. Tom?

Thank you, Ken, and good morning, everyone. Let's go to Slide #6. Our second quarter revenue was $1.09 billion, 2.9% greater than the second quarter last year with 2.4% organic growth. Operating income in the quarter was up 10% compared to last year. This was driven by additional gross profit from strong program performance. Indirect costs and selling expenses were essentially flat in the last year. And net income for the quarter, excluding the impact of tax reform, was $50.5 million, up more than 19%. GAAP net income for the quarter was $142.8 million. This includes the $94.8 million benefit derived from a revaluation of our net deferred tax liability under the new tax law. In addition, we incurred a one-time tax expense of $9.7 million associated with the cumulative profits generated by our U.K. subsidiary. Lastly, we realized a $7.1 million benefit in the quarter from the lower blended rate for fiscal year '18.

Slide 7, please. We generated $76 million of operating cash flow for the quarter with day sales outstanding at 61 days, down from 64 days last quarter. Operating cash flow represents over 150% of our net income, excluding the benefits derived from the new tax law. Net debt at the end of December now stands at $1.1 billion and our net debt to trailing 12-month EBITDA leverage ratio is now 2.9x.

Slide 8, please. Turning to guidance, we are maintaining our prior annual revenue range of $4.35 billion to $4.5 billion. And we are raising our net income guidance to reflect continued strong operating performance in the impact of tax reform. Driven primarily by operations, net income, excluding tax reform guidance, is now $177 million to $183 million, up from our prior guidance of $171 million to $179 million. GAAP net income, which includes the impact of tax reform, is now $277 million to $283 million. This includes an estimated $100 million tax reform benefit. Our updated earnings per share guidance reflects the same expectations as net income. We expect our net effective tax rate beyond fiscal year 2018 to be in the 24% range. And lastly, we are increasing our full year operating cash flow guidance to at least $300 million, reflecting strong cash generation and the impact of tax reform.

With that, here is John to provide operational highlights.

Thanks, Tom. Let's go to Slide 9, please. Operations delivered our fourth consecutive quarter of organic revenue growth with strong operating profit and margin. We continue to win business and our forward indicators remain healthy. This is a result of our market-based strategy, and reaffirms our guidance in CACI's ability to deliver long-term revenue growth of 1% to 4% above our addressable market and margin expansion of 10 to 30 basis points on average.

During the quarter, we delivered on our contracts with quality, value and high customer satisfaction. Positive organic revenue growth was driven mainly by new business we won in fiscal year '17. And margin growth was the result of efficient performance on several fixed-price contracts, in addition to high-quality delivery, resulting in strong award fees. This margin profile was expected and keeps us on track to deliver the implied margin expansion within our guidance. We won $1.1 billion of contract awards during the quarter. This is a healthy amount for the December quarter, which is normally light and keeps us on track to achieve our full year guidance. About 40% of our contract awards were for new business as we continue to take market share. We received $750 million of funding orders during the quarter, in line with last year. Our total backlog now stands at $10.9 billion, which represents well over 2 years of revenue on a trailing 12-month basis.

Slide 10, please. Two notable awards during the quarter were a $300 million contract to continue providing business systems support, including acquisition, finance and human resources to a classified customer. And a new $85 million contract to provide state-of-the-art operational, technical and fielding support to a DoD customer in the sustainment of equipment and systems.

In addition, CACI's cyber test -- Cyber Range test environment, which enables cyber exercises with realistic live fire scenarios was certified with the important ISO 27001 credential, confirming our adherence to cybersecurity best practices. This is an important differentiator and allows current and new customers to leverage this offering and test capabilities. We also invested in expansion of our Agile Solutions Factory, which has been recognized by the Defense Acquisition University as a DoD best practice. This dynamic facility is providing current customers results and serving as the best-in-class example of success for potential customers as they evaluate the benefits of Agile software development.

Slide 11, please. Looking at the remainder of fiscal 2018, CACI's forward indicators remain healthy. Our revenue composition now stands at 96% existing business, 2% recompete and 2% new business. This profile is very comfortable halfway through our fiscal year. Our pipeline of opportunities remains strong, with submitted bids pending award at $6.9 billion, 77% of those for new business to CACI. We expect to submit another $12.9 billion over the next 2 quarters, with 65% of those for new business.

In closing, we remain focused on executing our market-based strategy, which is driving our success. We will continue to pursue larger bids in our addressable markets, where our innovative solutions and services bring significant value to our customers enduring and emerging missions.

With that, I'll turn the call back over to Ken.

Well, thank you, John, thank you, Tom. I appreciate your help this morning. We delivered solid first half results and now a full year of organic revenue growth. Our operating performance is driving profitability upside, which is reflected in the new guidance. And we are investing in long-term strategic growth initiatives, including the development of our current and potentially future employees. The bottom line is, we believe our strategy is working, and we are well positioned for continued success.

Before we open the call to questions, I'd like to say how proud I am of the CACI employees. Their talent, innovation and dedication form the foundation that earned us the recognition I mentioned earlier, Fortune World’s Most Admired Company. And from the very first day I joined CACI, I've seen how much our customers acknowledge the value our employees provide. It might be that our teams respond rapidly to their urgent requirements or anticipate their needs and provide new capabilities. It might simply be that they can always count on our employees to solve their biggest problems. Across the company, we have people who are thinking big and thinking ahead. They contribute to our company's growth in so many ways and drive our success to delivering shareholder value. I thank them for all that they do.

With that, Kate, let's open the call up for questions.

(Operator Instructions) Our first question comes from Jon Raviv of Citi.

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

Jon, let me start, and I'll let John give you some of the particulars on it. So there were a couple of things that we were trying to accomplish in this. One is to make sure that we were prepared to be a much larger company as we return to organic growth, and as we continue to be looking across the horizon from an M&A perspective. So we had some institutional things we wanted to make sure that we got done, and that's part of John's responsibility. In addition, there are opportunities that, we believe, were in the 2 to 3, 4-year range, maybe some of them actually sooner that we wanted to not put the burden on our business groups, but ask John to take small, if you will, tribes of people and put them in front of those things and invest a modest amount of money to allow them to go out and build system integration laboratories or to go prove some concepts about how we might do things differently within some elements of digital signal processing, electronic warfare, machine learning, those kinds of things. And he has got more specifics here in a moment. So how is that turning out? I think what we're seeing is a much more disciplined approach to the kinds of things that we're looking at in the future to bid. And the quality of the kind of pursuits that we're making are being driven a lot by the work that John and his various teams are doing. So with that, I'm going to turn that over to him and let him comment.

Yes. Great, thanks, Ken. So as Ken mentioned, really looking at building additional market areas that we can focus this cooperation. And Ken mentioned a couple, both electronic warfare, which to us are both Title 10 and Title 50 solutions. Some of those being SkyTracker, some of those being other very discrete offensive and defensive cyber solutions. Also protection of the homeland, as we have heard with this administration wanting to better protect our borders and the like. Many technology solutions as well as Intelligent Services solutions that, as Ken mentioned earlier, within our core business areas they just didn't have the additional bandwidth to be looking at some of those areas.

John, you asked how we fund those. Every funding decision and every bid decision is a business decision across this company. We had planned coming in to this year to look at some of these additional areas. All of that investment, whether it's been in proposal money, indirect selling expenses as well as research and development funding were all put into this year's plan. So there's no additional investments we would need to disclose during this year that would in any way shape or form impact our commitment to grow margins 10 to 30 basis points.

Understood. And then just a follow-up on the margin question. I think, 1.5 years ago you guys talked about margins reaching the low -- 9% to 10% range over time. I think you talked about some fixed-price programs that are -- that could really pick that. Where are we on that journey so to speak?

Yes, John, I mean, we've been steadily focused on this 10 to 30 basis points growth year-over-year. I mean, we're -- this second quarter result is another data point as to where we are along that growth curve. If we look at the bottom line growth, we've done that in 3 different areas, firm fixed price programs, fixed unit price programs and then product sales performance. If you look at firm fixed price, we've been talking for the last 3 years or so more solutions-based business and performing that on a firm fixed price effort. This operations team is doing that extremely well. As we continually have been working on the efficiencies for our fixed unit price programs, where -- as we improve our delivery processes on those types of contracts that drives better and better profit, and we're starting to see that during the second quarter, we'll see that continue. And then product sales, and we spend a lot of time talking about SkyTracker. But frankly, there's other many, many cyber-based solutions and products. It's a very special groups across this Federal Government, both CONUS and OCONUS related that we've been delivering those to us -- sorry, we have been delivering those. Highly-specialized solutions in this market drive much higher margins. In the last 8 quarters, we've seen the steady-state of both requests for mods and also new sales. So I would tell you we're well on our path to achieve the 10 to 30 basis points. And as our mix of business changes, we will continue to see our bottom line margins grow.

The next question comes from Rob Spingarn of Crédit Suisse.

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

Yes, Rob, thank you for the question. Let me start with the second one. The book-to-bill -- we're actually quite happy with the book-to-bill because right now it reflects a discipline that we are trying to put into the things that we pursue to drive the kind of growth that we want to be in the higher end solutions and services business. So it would be easy for us to spend B&P and go chase $500 million of 1% business, but that ends up being somewhat dilutive, even though it's driving top line. And we believe that there is a market and we are positioned, and slowly, but surely, we'll be able to climb to a higher plateau in terms of the higher value areas of the business. So I'm not really worried about book-to-bill in the same way that we might have been 3 or 4 years ago because our strategy is fundamentally very different. With regard to seeing what we're seeing? We are seeing from a readiness point of view the kind of money we're seeing spent on is on Intelligence Services, it is on training, it is on things that have been supporting the fight against ISIS, some of the Africa work and the like. So if that's your context, then that's possible. We -- the training that we're doing is probably not fighter jet or helicopter training. It is training people to avoid or to learn about how to operate in austere environments and do so safely against the threat of IEDs and the like. So we have seen an increase in that kind of business. We've won a lot of that. We've both seen it grow as well as won a lot of that business over the course of the last 2 quarters.

The next question is from Greg Konrad of Jefferies.

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

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

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

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

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

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

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

Yes, Krishna, this is John. True up -- I mean, the awards, they continue to be lumpy, and it's tougher and tougher for us to be consistent and try to hit some more predictable book-to-bill number. And I'm going to tie in a little discussion around backlog as well because clearly awards drive this lumpiness within our backlog numbers as well. So as Thomas mentioned in previous calls, our backlog numbers are always going to be impacted by a certain number of adjustments that we continue to do as our long-term contracts expire. But it's also impacted by some of our short-term solution work because that work comes in, and it's too quick of a turn cycle for us to show any leading indicators. You asked about bridges. Look, the recent run of bridge recompetes our largest contributor to reduction in our backlog, yet you see that we just completed our fourth straight quarter of revenue growth. So a little color on the second quarter. I'm not trying to set the stage where we're going to be discussing this level of detail each quarter. But I thought it was instructive. We had 31 planned recompete competitions during the second quarter, of which 16 of those were awarded. We won a vast majority of those, as our recompete rates still remain north of 98 -- 90%, but the takeaway is 15 of those valued at over $450 million were bridged. Most of those bridges are going to be 3- to 4-year program that get bridged for a 3-month period or a 6-month period. So clearly, when you do that math, that doesn't support some satiable year-over-year comparables of either book-to-bill or backlog. If you add that to the nearly $500 million of bridges we had in Q1, if they had all been awarded, we'd be talking about a book-to-bill rate of around 1:4 to 1:5, and although that'd be a much nicer number for us to be talking on, it really wouldn't have any more impact on our near-term revenue growth. So it sort of gets us all back to awards were lumpy, but it is extremely important. As Kenneth mentioned, we're being much more selective, unlike -- we're out there bidding. But with our wins and program performance, we're very happy we're meeting our 1% to 4% revenue commitment.

The next question is from Cai Von Rumohr of Cowen and Company.

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

Well, I think -- Lucy, the ramp up, it really depends. I mean, if we're trying to ramp up a contract that we won in the Fort Meade area of Maryland, it's a very competitive labor market. If we're doing it in Tampa, Florida, it is much more readily -- there's a -- how should I say, a more readily accessible population of personnel with the proper skills and clearances. I think in general, it goes to why we want to invest in the careers of our employees? We want to create CACI as an employer of choice. And in a down labor market, we want to do things that are going to enhance the employee experience here at CACI, and we're looking at a variety of those things. So in general, we could always use more people, but it's in very -- it's probably 1/2 dozen programs that I think that we really -- and they're situational because of the high clearance levels and the fact that they're in places where not very many people live and not many people want to go and live there. So it's tough to get them to go and recruit. So we're dealing with a smaller thing. In general, with the kind of organic growth that we've been able to see, our hiring is meeting those needs. We would always love to see it higher and that's we are trying to make us -- that's why we're going to do things that accelerate our ability to hire folks into CACI. And not only hire, but make sure that the employee experience is such that people find that they're not just coming here for one contract, but they can come here for an enhanced career experience.

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

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

The next question is from Brian Kinstlinger of Maxim Group.

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

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

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

The next question is from Joseph Vafi of Loop Capital.

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

Yes, Joe, this is Ken. I think, as we've talked over the past year now that we've had JIDO. JIDO started as a consolidation of 14 major contracts. We brought that team together to be able to solution -- to rapidly solution for that customer. And while we had a great deal of revenue, our margins were low. But there was an option of probably $900 million, of which we do not have the same commitment to the teaming, and we expect to self-serve and self-deliver more of that work. So over time, we will see that develop, but that's going to happen over the course of 5 or 6 years that, that contract is going to go. In a bigger general sense, we are looking at opportunities for, as I said, solutions-as-a-service. There are those out there, particularly in the IT arena, where the government would like to turn over all of its infrastructure for to you and have you deliver it in a next-gen IT kind of way. So those are probably the other near-term ones. We continue to have a very, very nice and somewhat expanding base in the single-digit -- single-to-high -- single-digit in our world of digital signal processing and cyber and the like, which carries a higher margin profile. But I will tell you, it is not -- there's not a single large contract out there that we would do. We're looking at the mix of business that this takes to be able to do it. Ideally, we're going to be targeting 1 to 7 very large, but profitable contracts that would be part of the portfolio going forward that have extraordinarily -- maybe, it takes a little bit more risk at the beginning, but it also, over time, would allow us then to enjoy better-than-industry margins on it, which would be accretive to the whole company. So that's sort of the strategy that we're employing. I -- we picked 10 to 30 basis points because from where we were before that seemed to be a really -- that was a unifying goal inside the company. If we find that we can do it faster, we will adjust that. But right now, it's 5 or 6 quarters into making that commitment. And I'm happy that we were able to deliver on it this quarter.

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

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

The next question is from Jon Ladewig of Stifel.

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

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

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

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

Your next question comes from Joseph DeNardi of Stifel.

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

Yes, well, let me start off and Ken and John can elaborate on that. We operate in a competitive market. We're pricing our product to make the value proposition attractive to our government customers. We have what we consider competitive rates. And over time, there may or may not be pricing pressure but we'll be fine. But right now, we're happy with the way we price our products. And so we do not see the scenario you articulated playing out for us.

And Joe, I think you could see over -- there's -- there's probably a place where you want to decide where you want to be. If we're going to be a business that's only competing on the basis of price, then yes, we could flow all that down into our rate structure, and that would be helpful. And indeed, some of it may end up there any way that we don't reinvest. I think more importantly to our customers today, particularly in a labor market that is tightening the way that it is, is to figure out a way to attract more people into the national security or the Federal Government services business because frankly, things like Budget Control Act and sequestration drove a whole lot of talent out of this world into more commercial industries. And hence, that's our view. We could give out bonuses to our current employees. I would rather create a career experience that is really rewarding for folks inside of service to the Federal Government that is very distinct. And I think that's a better investment than just simply flowing it to lower rates. So thank you for the question. I hadn't thought about it in those terms, but that was a good question.

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

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

And now to mean to add, 2 more observations. One is, a lot of our contracts are longer term in nature, 1, 2, 3, 5 years. And so in the long run, we can have philosophical discussions about what will ultimately happen. But as a practical matter in the short- and mid-run, the majority of our work is kind of locked in, in terms of prices. And then secondly, if the government decides to outsource or not, I think whether our prices -- and our competitors prices are 1% to 2% lower, I don't think that's going to swing their decision. I think there's more kind of philosophical underpinnings to those types of decisions. And so on the margin, slightly lower costs to the government is not going to be material in their decision calculus.

The next question comes from Tobey Sommer of SunTrust.

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

Yes, Tobey. We are going to shy away from talking about specific margins on specific small slices. I'll give you a little bit more color on the bids that we submitted and the bids that are awaiting award. We find about 40% total of our awaiting awards in the Enterprise IT and Intelligence Services areas and other like 10% to 15% in our Business Systems area. Those 3 areas, a very nice mix of professional services, managed services and solutions. If we look at our expected submissions, pretty much in those same areas, our Enterprise IT, our Intel Services and our Intel Systems markets are driving that. And those areas for our expected submissions are going to be a little bit heavier in our solution-based. If we're looking at margins in each of these different areas, I mean, relatively speaking, margins in our professional services businesses are always under pricing pressure because it's tough to differentiate by delivering a single labor hour in the managed services and in the solutions area. The contract mix is more towards fixed price versus cost reimbursable, so that gives us a much better opportunity to be driving margin growth.

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

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

The next question is from Josh Sullivan of Seaport Global.

Can you just go over your view of the continuing resolution time line right now? And maybe with next year's fiscal budget coming up, are there early trends or themes you're expecting at this point?

Josh, I probably can't tell you my real views on the continuing resolutions on a open mic. What I will tell you is I think when we saw a change in administration, we saw a change in attitude towards National Security, Defense, Homeland Security and the like, which were all favorable trends towards companies like CACI and others that are in our space. What we haven't really seen with the exception of an additional $18-or-so billion last year, which came late, and was really hard for the acquisition people to place, we haven't seen much of a change. So that being said, we see a market that is responding to the call for improvement and readiness and that's where a lot of money has gone. That typically comes down through the O&M budget. In our case, we're not as involved with aircraft or vehicles or that sort of thing, so we wouldn't see it. But we have seen it in terms of intelligence, intelligence support, a lot of different kind of training elements for people that are going overseas in a variety of job assignments. So that's sort of where we've seen the benefit of where we are. Looking at where the budget is planned to go and what the President is asking for, I think it's significantly favorable. But we're going to have go through a few more steps to get Congress to get to a point where we will know specifically what that happens. And it's -- as far as what it portends for next year, we've heard what Secretary Mattis has had to say about how he wants to -- just using DoD as an analog for this at the moment. He wanted to spend FY '18 really focused on readiness and repairing some of those activities, and '19 getting back to really investing in next-generation technologies and capabilities in getting out of we don't want any more peers in the budget from '19 going forward. We want to accelerate our distance from them in many respects. That being said, some of that's going to come in the form of new hardware, new capability. But I think a ton of it's going to come in terms of making the things we have today more interconnected in secure ways, more responsive or have more capacity for dealing with speed and numbers. And finally, I think we're going to see a lot of money invested in human to machine and machine-only responsive capabilities in many of our defensive and offensive systems. I like -- I think 5 years ago we decided that we were going to take a chance and invest in a company like Six3, which was all about digital signal processing and that. What we're seeing now is the manifestation of having that vision because that world -- the world that we are entering right now is all predicated on the capabilities that are in that business. I would tell you the same, that there were some elements of the NSS acquisition that did the same.

The next question is from Brian Ruttenbur of Drexel Hamilton.

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

Yes. So thank you. Yes, when we put our annual plan together, we assume that there would be a steady increase in LIBOR, which was based on consensus views of the world. And so we have already factored those increases in our guidance. Right now, we have around $1.1 billion worth of debt. We have swaps in place for approximately $800 million. And so in the next kind of 1 or 2 years, we're pretty insulated from increases in interest rates. Our average interest rate in the quarter was 3.3%. So 3.3% on a little over $1 billion of debt is going to be very attractive. So don't see any risk associated with that. As some of the swaps roll off, we will naturally delever. And if we need to borrow additional money to fund acquisitions, we'll look at the fixed floating mix at that time.

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

Well, for the rest of the year, I don't think it'll be appreciably more than 3.3%. As I said most of the -- 80% is fixed and so it's not going to change materially. Kind of going forward, kind of '19, '20, '21, again, not to -- I'll turn it back to you, what do you think LIBOR is going to do during that time period? I don't think we have enough kind of foresight to estimate that. But that being said, today we have a very favorable borrowing environment. We have the ability to borrow fixed rate at a high yield bond, somewhere around 5.5%. And so if we chose to, we could lock in some very long-term 8-year rates in -- at those particular rates. So the bottom line, increases in interest expense, I don't think, is going to have a material impact on our ability to fund acquisitions or execute our M&A strategy.

The next question is from Edward Caso of Wells Fargo.

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

Yes, thanks. This is Ken. I think the security clearance environment makes it difficult, in general. There's an awful lot of work going on throughout the industry and throughout the administration to try to bring some help to the circumstance not to take shortcuts in terms of how we grant security clearances, but how to find ways to speed it up. In terms of your specific questions, I think we could probably find a dozen contracts where we're under -- that we are continually under in terms of the full allotment of billable positions that we have. And some of those are made difficult by the way the customer wants to conduct their work. They may have 3 people that they want for -- 3 people serving the same mission, or 3 contractors serving the same mission. They want to pick the best athletes, so you give them a variety of things, they all have to be cleared. And that just becomes a very difficult environment. And those are the most difficult of the contracts. We have not lost any contracts, to my knowledge, on the basis of clearances. And I am looking around the table here and to see if we won any. I don't think that's a -- I mean, it could be a competitive basis, but we have not won or lost anything on the basis of that.

My other question is on the small business set asides, have you -- has that headwind eased at all? Are you seeing contracts still being broken into pieces where pieces go into small business? Is there sort of any change on that front?

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

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

Just one on CapEx this year and CapEx going forward, any changes as you encounter this growth environment in the post-tax reform world?

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

(Operator Instructions) The next question is a follow-up from Joseph DeNardi of Stifel.

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

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

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

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

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