CACI International Inc
NYSE:CACI
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CACI International Inc
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Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter Fiscal Year 2020 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, I would like to turn the conference call over to Dan Leckburg, Senior Vice President of Investor Relations for CACI International. Please go ahead.
Well, thank you, Andrea. And good morning, everyone. I'm Dan Leckburg, Senior Vice President of Investor Relations for CACI. Thank you for joining us this morning.
We are providing presentation slides, so let's move to slide number 2. 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. Those factors are listed at the bottom of last night's press release and are 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 should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.
Please turn to slide 3, please. To open our discussion this morning, here's John Mengucci, President and Chief Executive Officer of CACI International. John?
Thanks, Dan. And good morning, everyone. Thank you for joining us to discuss our fiscal year 2020 third quarter results. With me this morning are Tom Mutryn, our Chief Financial Officer. Excuse me. And Greg Bradford, President of CACI Limited, who's joining us from the UK.
First and foremost, I hope you and your families are healthy and safe during these unprecedented times. Our hearts go out to everyone impacted by the COVID-19 pandemic. Know that our team at CACI is doing all we can to ensure the health and safety of our employees, to continue our unwavering commitment to our customers, to continue to operate the company in a fiscally responsible manner, and to support the communities in which we work and live.
The format of our call this morning will be a little different than prior quarters. I'm going to spend the bulk of my time on our responses to COVID-19 after a brief overview of our third quarter results. After that, Tom will provide additional insights into our third quarter results and importantly specific COVID-19 impacts in the third quarter and our expectations for our fiscal fourth quarter and full year.
Slide 4, please. I am very pleased with our third quarter performance and results for fiscal 2020. CACI delivered total revenue growth of 16% with about 10% of that organic, and our profitability, cash flow and contract awards were all robust. These results were very much in line with our expectations for the quarter and keep us on track to deliver a great fiscal year 20. Given the timing of the COVID challenges in the latter part of March, we saw minimal financial impact in our third quarter.
Slide 5 please. As I noted, CACI is doing all we can to proactively address risks associated with COVID-19 for all of our stakeholders, employees, customers, shareholders and our communities. For our employees, our focus is on ensuring their continued health and safety, and the health of their families at home. Our people are a national asset, delivering some of the most advanced technology and expertise to some of the most important customers in the world.
Today, approximately 70% of our workforce is working from home. The rest of our employees are largely working from a CACI or government facility. For those in CACI facility, we are adhering to the CDC recommendations for social distancing and the use of masks and gloves where appropriate.
We have also implemented enhanced cleaning procedures for normal business environments and specialized procedures for our laboratories. Thus far, we have had very few employees infected by COVID-19, and all are recovering well or have already recovered. For our customers, we remain as committed as ever to support their national security requirements.
We are flexible, dedicated and agile as we deal with COVID challenges together. Like CACI many of our customers have moved to work remotely, and for customers requiring classified secured facilities, many have moved to shift schedules to allow critical national security work to continue while reducing personnel concentrations.
We also recently converted 30,000 square feet of previously unclassified office space to a temporary SCIF, or classified environment. With authorization and coordination between two government agencies, we connected two classified networks through a methodology that had never been done before. This allows 330 employees to provide mission-essential support to a National Security program while still adhering to CDC social distancing guidelines.
This temporary SCIF was stood up in nine days, a testament to our employees' and our customers' capabilities, commitment and agility. And some of our work is directly contributing to the COVID-19 national response. On one program, we helped send equipment to the Puget Sound area of Washington State for a 250-bed Army Hospital. We have also prepared ventilators and other medical equipment for FEMA to ship to hard hit areas of the country including New York and New Jersey, and several of our medical communications teams have deployed to set up communications and logistic systems in places like New York City, Seattle and New Orleans.
Needless to say, we remain committed to our customers' missions and fighting COVID-19 however we can. CACI has always supported on the front lines, and now we are doing so with heroes on a new front line, our nation's nurses and doctors in the communities in which we live and work, battling COVID-19. Our CACI CARES program launched an initiative to support hospitals across the country and those who are dealing with economic challenges that limit their ability to put food on the table.
In a number of communities in which we operate. We are sending 6,200 hundred meals directly to hospitals and providing financial support to food banks, which will provide more than 280,000 meals for those in need. Our communities need this, and it's just the right thing to do. For our shareholders, we continue to ensure CACI's balance sheet remains strong. Our customers are predictable payers providing consistent and reliable cash flow.
We hold long-term contracts, providing high levels of visibility. Our leverage levels are appropriate. We have ample access to additional liquidity to our current credit facility. We are still investing in future growth, paying down debt and ensuring CACI remains positioned to deliver on our commitments, outgrowing our addressable market and expanding margins. Our business strategy is enduring, standing the test of time, and our prospects remain bright.
Slide 6, please. Resiliency is a foundational characteristic of our business. The National Security and modernization priorities of our customers are enduring, well-funded and procured under long-term contracts. In fact, over the last six weeks since, the government implemented remote operations, we have submitted nearly $2.5 billion of proposals. In several of those bids, the government customer replaced the traditional in-person proposal presentations with online virtual presentations in order to avoid procurement delays for those critical national priorities which CACI serves.
The bottom line is demand for our expertise and technology remains, and our customers continue to procure. We also continued to actively recruit and hire. Our talent acquisition process already included virtual interviews, so we are seamlessly adding talent to deliver on our consistently growing backlog.
The US federal government has also put several protections in place to ensure our continued support during this time of disruption, including the CARES Act passed on March 27 and several department and agency level memos that have since been issued, implementing those protections. The CARES Act provides a mechanism for our customers to reimburse CACI for our workforce that is ready and available, but may not be able to work or have reduced hours due to maintaining social distancing guidelines under COVID-19, while these provisions allow us to continue supporting our customers, we are still working through details at the individual program level, on invoicing guidelines and return to workplace details and plans. Tom will provide additional details on this shortly.
Given these unprecedented times, I'm extremely proud of all of the genuinely good things being done across our business and our own ongoing performance. We are keeping our employees safe, we continue to deliver critical expertise and technology to our customers. We are supporting our communities across the nation, and we remain in a position of strength to continue delivering long-term growth, margin expansion and shareholder value.
With that, I'll turn the call over to Tom.
Thank you, John. And good morning, everyone. First, I would like to echo John's sentiments around COVID-19. To everyone on our call or listening to the webcast, I hope you and your families are healthy and safe, and I too am incredibly proud of the employees in our company's collective response to the pandemic.
Please turn to slide 7. Our third quarter revenue was $1.5 billion, 16% greater than last year, with 9.9% organic growth. Note that the LGS and MacDon acquisitions anniversaried during this quarter. Organic growth accelerated from last quarter as we execute on our increasing backlog and grow existing programs. The effects of COVID-19, including access limitation for CACI employees and subcontractors at secure facilities, negatively impacted third quarter revenue by approximately $10 million.
Net income for the quarter was $80.6 million, up 18% from a year ago, driven by the higher revenue in operating profit. We did book a $5 million benefit from a prior year's R&D tax credits, partially due to a successfully concluded audit, which led to a lower tax rate for this quarter. COVID-19 factors negatively impacted operating profit by $6 million and net income by around $4.5 million.
Slide 8 please. As John discussed, over many years CACI has implemented a robust business model and we are very comfortable with our strong financial position. As you can see on slide 8, we have an established track record of generating strong cash flow with relatively modest capital expenditures. In the third quarter, we generated $125 million of operating cash flow, excluding our Accounts Receivable facility, up 10% from a year ago.
Our strong and dependable cash flow was driven by the stability and strength of our US federal government customer and by our efficient building and collection processes. Day sales outstanding was 57 days, excluding our AR facility down three days from last year and nine days from a year ago. CACI has a healthy balance sheet with significant liquidity available, appropriate debt levels and supported by the robust cash flow I just discussed.
We ended the third quarter with net debt to trailing 12 months adjusted EBITDA at 2.8 times. This is about three quarters return lower than last year after we funded the LGS and MacDon acquisitions, demonstrating our ability to quickly delever after making acquisitions. We have readily available access to significant liquidity with $835 million of unused capacity on our revolving credit facility as of the end of the quarter.
The credit facility has four more years of remaining life and contains the normal provisions. The two financial covenants are up 4.5 times leverage ratio and a 3.0 times interest coverage, both of which we are well inside of. In short, our strong cash flow supports continued deleveraging and investment and we have ample debt capacity to weather unforeseen events and undertake additional strategic acquisition as they present themselves.
Slide 9, please. Despite the uncertainty created by COVID-19 our environment remains attractive. CACI has a stable and diverse base of government clients focused on our nation's most important national security priorities. All the agencies are fully funded for the current government fiscal year and spending is expected to remain healthy in the next government fiscal year.
We performed a vast majority of our enterprise and mission of work under long-term contracts, and the government recognizes the importance of the contract community and has taken steps, including passage of the CARES Act, to support our industry as we navigate the current challenges. Bottom line, our business is quite resilient and our forward indicators remain healthy.
As John mentioned, we have solid contract awards in the third quarter of $1.4 billion, which translates to a trailing 12-month book-to-bill of 2.1 times. Our total backlog of $20 billion grew 34% year-over-year and represents almost 3.5 years of revenue. Our pipeline metrics continue to be healthy. Submitted bids pending awards are $8 billion with over 70% of that for new business to CACI, and we expect to submit another $17.4 billion worth of bids during the June and September quarters with over 70% of that for new business to CACI.
Slide 10, please. Turning to our outlook, we are pleased to reiterate the guidance we provided last quarter. Given what we know today, we are highly confident we will be within our guidance ranges and reasonably certain we will be at or close to the midpoints. Our underlying business remains robust and growing, and our guidance includes known COVID-19 impacts. The two most significant are, first, many customers are providing direction to exclude profit on the reimbursable labor billing rates under the CARES Act for employees ready and available, but unable to work due to COVID-19. Second, we expect the timing of some product sales will be delayed to our next fiscal year. Our production capabilities remain intact, but some customers will likely be unable to perform testing or simply accept deliveries.
For the full year, we estimate the revenue impact of COVID-19 to be around $65 million, and the net income impact to be around $15 million. Approximately one-third of the COVID net income impact is timing related and is expected to be recovered in future periods. The remaining impacts are unique to the pandemic response and as such are not expected to have any long-term impact on our business.
With all this, we now estimate full-year adjusted EBITDA margins to be around 10%. Our FY20 guidance now assumes an effective tax rate of approximately 20%, down from our previous expectation of 22%, driven primarily by higher R&D tax credits from prior years.
Turning to cash flow, while we will benefit from the CARES Act provisions related to the deferral of the employer portion of payroll tax, there is complexity related to invoicing under Section 3610 of the CARES Act as well as potential COVID-19 related impacts to government approval of invoices and disbursement of filings. If we do see any invoicing or payment delays, cash collections may be impacted temporarily but ultimately collected as complexities are resolved.
Given all this, we are pleased to be able to maintain our operating cash flow guidance of at least $430 million. All in all, we delivered a great third quarter with strong organic revenue growth and profitability, and we are pleased to be able to reiterate our full year guidance. Our business is fundamentally strong, and if it were not for COVID-19, we likely would have finished the year at or above the high end of our current net income guidance range.
With that, I'll turn the call back over to John.
Thank you, Tom. Let's go to slide 11 please. These are no doubt unprecedented times. Our thoughts and best wishes go out to everyone affected by COVID-19. We all know someone who has been impacted by this virus. The nation has seen significant job losses and economic impact. During these times more than ever, I'm incredibly grateful to be leading CACI. We are a strong and resilient company, fiscally relatively unimpacted by this pandemic, putting us in a position to continue supporting our customers' critical missions, continue to grow, and continue to support our affected communities.
As we continue to navigate this time under COVID-19, you have my commitment. CACI will continue providing transparency and valuable insights. And Tom and I are humbled to be serving alongside the most talented leadership team in our industry. You all have met many of them. Day in and day out, they are leading this business with courage, providing care and safety for our employees, and making the right long-term decisions in the best interest of our company, customers, and nation. I thank you all for that.
And our 23,000 employees, you demonstrate bravery and commitment each and every day in support of our customers. Your resolve during these challenging times is truly inspiring. As always, I thank all of you for the incredible expertise and technology you deliver each and every day. Know we are here for you should you need anything.
With that, Andrea, let's open the call for questions.
[Operator Instructions] And our first question comes from Robert Spingarn of Credit Suisse. Please go ahead.
Hey, it's Scott [ph] on for Rob. Tom, just - question. The COVID-19 costs that you weren't able to recover in the current quarter, are you able to invoice those out in coming quarters and get those reimbursed such there might be a benefit in the future? Or since you kind of build them out this quarter, or they just lost and not recoverable?
Yes, So, for the third quarter, some of the costs prior to March 27th could be recovered through an REA request for equitable adjustment process. The cost after March 27 we know will be recovered in the normal courses building after this.
Yes. Scott, I'd also add that if we look at the full amount of expertise and technology delivered, around 10% of hours are actually - will be considered CARES Act recoverable hours. The rest of the company and the rest of our building hours are fully invoiced with fees, profits and the like. So, I hate to say an immaterial number of hours but a - 10% of our hours are actually covered by the CARES Act. The rest of this business is running businesses usual.
Got it. That's helpful. Thank you. And John, just as a follow-up. Outside of the government, there is this kind of big discussion about how COVID-19 will accelerate different secular trends, particularly trends, leverage, the internet and the cloud in particular. Just wondering, can you talk a bit about that as it relates to your customer and particularly as it relates to the enterprise IT space. Are there any kind of silver linings there long-term or- there's greater digital adoptions, so you see some may be accelerated funding and that part of your business? Thank you.
Yes, Scott. Thanks. So yes, they're going to be what we believe are a fair amount and number of secular kind of growth areas for us. What I've been talking to our team on is we hear so much about the impact of COVID-19, and it is a tremendous impact across this nation. But with our business hats on, with every impact comes opportunity, and when the time is right, we'll be moving to the opportunity side of this. But based on the estimates that I've seen, there is about $330 billion of government fiscal year 2020 funding that is contract-adjustable in the $2 trillion CARES Act. Now, that funding is above the original budget request and really does have the potential to address systems and infrastructure, some of those that you mentioned. Scott.
As we look at those funds and we look at how we can change mostly how we interact and how we deliver the outcomes that our customers are asking CACI to deliver, we're going to play to our strengths. As you all know, we've been investing in areas like to secure mobility, electronic warfare, counter UAS, enterprise, IT and others. The post COVID landscape is going to put even more emphasis on areas where we're already market leaders in.
So I think we're really aligned - very much aligned to secular growth areas. We see even more opportunity to gain market share in the medium term, and I'll give you just a couple of examples because they've already risen to the level of us beginning to shape, and also look at ways that we can better enhance how we interact with each other. "Us" meaning customers and those of us who are supporting them.
We've had, we've seen enhanced user take-up rate, an increase in briefings for our steel box solution. what that does, it allows agencies to encrypt their voice and text communication and share files in a secure environment. The addition to that is, while tele working were deployed and responded to COVID-related activity. So, to think about secure mobility and more of us being out of the office, how do we continue to deliver at the rates we delivered prior to COVID-19 post COVID-19.
We've also been looking at how do we do something which is distributed, classified development in an unclassified manner. We've had great pilots with our - with a couple of intelligence agencies. They went very, very well prior to COVID-19. I talked about setting up a 330 person SCIF in nine days. That's the kind of thinking that I think we're going to see be much more discussed and customers much more open to figure out, number one, protect national security assets and the way we go about protecting this nation.
Number 2, we need to find ways to do it in a manner that are not so building square foot eccentric as they are today, and I think those opportunities right now are very much limitless, the way we said here today. So, Scott. Thanks for the question.
That's very helpful. Thank you, John.
Our next question comes from Matt Akers of Barclays. Please go ahead.
Hey, good morning, guys. Thanks for the question.
Sure.
I was wondering if you could comment just on the M&A market, how active are you there at this point? How do you balance sort of maintaining liquidity at this time, versus doing deals? And also, are any sellers kind of capitulating in terms of prices they're asking for or is it kind of too early for that right now?
Yes. Matt, thanks. Look, first of all, thank you for that, for that question. Our M&A program, as you all know, is very strategically driven. Where we need to fill gaps enhance our capabilities and - or improve or create new customer access points. If there is a fit, we're going to get a financial model and then the business has to be a good fit with our culture. None of that is changing. Our process remains the same. The gaps that we decided to fill through acquisitions, those are always there. We're in the middle of these, you all know. Our FY21 planning, we're looking at all the different markets that CACI has strengthened. We're looking for some of those weakness areas we can fill the gaps. The difference to the process is we'll also be looking over the long term to make investments where post COVID-19 technologies may make better sense or get a better ear from our customers. It's a bit too early to discuss that today, but I can tell you leading this company and the rest of our business leaders, it is clearly at top of - top of mind.
In the near term, we're more operationally focused, as are companies we might be looking at. So, for us, M&A has taken a temporary hiatus as a result, and when I say the word "hiatus", 60 to 90 days at really doing financial modeling and the like, our company's going to look slightly different coming out of this. Other potential companies well as well. But don't take that to mean we're not looking at potential acquisitions and pursuing relationships. We still have the phone, we still have webcasting. We're able to meet and go out there and still continue to touch companies that we were already out there touching prior to COVID-19. That will help us to better understand how they're hoping with it, how resilient are they and the like.
I think you mentioned on the equity side. I mean, I'll let Tom talk a little bit about that, but we've done an awful lot. You know that our priority first is to invest for growth. and secondly, pay down debt. So, Tom.
Yes. So, kind of going into this, we had a credit facility with a large number of major US and kind of international banks. We believe fundamentally, as stewards to the company, to make sure that we had access to liquidity in the event of the block the [ph] type of event, and certainly the COVID-19 and the subsequent shutdown qualifies as that type of very - three or four standard deviation event. And the good news is we have the liquidity to survive that. Early on, we did an assessment to see whether we had - liquidity in both of our banks to see whether we wanted to increase that and made the decision that we were happy with where we are and feel that we didn't - certainly weathered the storm. So, significant liquidity, that has always been first and foremost in my mind. Protect the long-term viability of CACI.
And if we did additional acquisitions, we would do that borrowing additional money, whilst at the same time ensuring that we do have that reserve capacity.
Great, thanks. That's really helpful. And I guess just one other one on LGS and Mastodon. Can you just update us on how that - those companies are progressing? I think you had sort of planned for a little bit of a ramp up kind of in the back half of this year. I think you alluded in the prepared remarks to maybe some product sales could be delayed a little bit, just any color you can give us there.
Yes. Yes. Sure, Matt. So across the company, we have product deliveries and product development going on, especially retail, LGS and Mastodon. We're through our first year. Both teams have done an outstanding job. I'm extremely proud of both Kevin, Kelly and Mark Benoit in their leadership of bringing their companies into CACI. It's very, very seamless today. We'll always have little bumps and bruises but for the most part, very, very happy. As it pertains to some of the product deliveries, yes. Some of the products that we deliver across the company, you may say a more material amount from both LGS and Mastodon, they're very specialized products. And as Tom mentioned during his prepared remarks, some of those need to go either on a test bench or go into a test situation prior to approval, so it's just not as simple box packed in ship and we take revenue at our dock. They have to be tested. They're very specific types of equipment in the realm [ph], cyber realm and the like.
So, we'll see a slight perturbation of them as Tom mentioned. A lot of these products are already built. Some are going through production now. They will all be delivered. Timing, probably later in the fourth quarter and into our first quarter.
Great, thanks a lot.
Thank you.
Our next question comes from Gavin Parsons of Goldman Sachs. Please go ahead.
Hey, thanks, good morning.
Good morning, Gavin.
Appreciate all the color on the immediate COVID-19 impact, but if we think about the longer term. I mean, is there any possibility that two years from now, we look at margins and there's a hit because you missed some performance milestones or something was delayed and you weren't able to book profit recognition. I appreciate it's still early on in the process, but any thoughts on whether or not this might have a lasting impact on margin recognition?
Yes. Gavin, thanks. Look. Yes, I'm actually trying to get myself to look out 12 months from now. Let me give you a little more fulsome answer, and I promise that I will hit margins. The short answer to that is no. I mean, we'll submit the appropriate REAs. Where we have scheduled delays due to COVID, customers are allowing for that, clearly. So we'll - we will submit schedule REAs. When those are approved, we'll come up with cost REAs as well. And every program is going to have a little different story based on customer and government funding. At the end of the day, what I've been telling folks is COVID is a period of time. It's not the beginning of something completely new that is ever-existent from a business person's mindset. So, we will come back, and although different normalcy will be out there, that different normalcy is how we work, where we work, how we get worked on. You would've thought that we just adverted tele-working, but there's lot of folks out there who, in the March time frame, even folks in my own company. I was asking about some facility space. "Is it possible for us to work-" "No." I didn't even get my question out.
So, now I think we've all recognized just how much will be can do with the technology that we have. As you look at margins going forward, we have been firmly committed to growing better than the addressable market and ever-increasing bottom line margins. I think Tom stated correctly during his prepared remarks, had it not been for COVID, Tom and I and the rest of the company would have been delivering to the high side if not beyond where we were on the net income, which parlays into margin. So, no, I don't see any long-term impacts here.
That's helpful. Appreciate it. And then maybe just in as far as that growth and margin balance or trade off if you will, going forward, if you have some product deliveries that hit next year, maybe that's a tail end to the margins, I know it's too early to talk about specific next year, but I mean, your long-term target, right, is 10 to 30 basis points a year. If you head towards the high end of that, if some of those product sales come through, is that something that you would instead kind of invest towards IR&D or bidding proposal activity to try to put a lever on growth? How do you think about that trade-off?
Yes, thanks. So, my answer while we're in COVID would be just like it would be if not. We are working on our FY20 plan. Probably still too early to tell. With COVID, it's actually really too early to tell. We're really waiting for customer directions to sort of settle out. Let us understand what the new normal is. We have a lot of invoices we have to submit. We need to still work through with fee, without fee. Today we're making the assumption, FY20 guidance, that those CARES Act hours will not have fee. But there is going to be bill number 4 and 5, and a 6 coming up here.
As it pertains to how our business looks at this going forward, we are always going to make investments in the areas that are squarely in front of where our government customer is providing funding. And our shift to more mission technology areas and our investments there will not cease. We will invest in areas that will drive growth. Secure mobility will be something you'll hear us talk more and more about. We did release in the February time frame a steel box, which is more of a SaaS kind of service. But we're already getting additional requirements there, how do we not handle just unclassified work. Can we go to classified work versus secret? Clearly that's going to be at our attention. Where we invest is going to have to support both top and bottom line growth. But overall, we've got 1100, 1200 different programs out there for very able and willing sector presidents that are putting their FY21 one plans in place. I haven't found one that isn't looking for additional investment, and we'll try to fit that in. Tom, any other color?
Yes. So, Gavin, you try to give - should we focus on margin expansion or growth. And for us, it's not an "or", it's an "and". We believe we can do both. Clearly, we need to invest, which will drive growth. The framework which we have, looking at our enterprise in technology, providing expertise and providing that mission support, provides that framework for us to grow across those kind of various quadrants, if you will, of our business. And doing simultaneously, expanding margin and growing revenue is something that we feel very doable, and it's in our DNA.
Still comfortable in the 10 to 30 [ph]?
Yes, sir.
Thank you very much.
Yes. Thanks, Gavin.
Our next question comes from Tobey Sommer of SunTrust. Please go ahead.
Hey, good morning. This is Jasper Bibb on for Tobey. I was hoping you could update us on the company's experience ramping some recent larger awards in this environment.
Yes, Josh. Thanks. We have continued our recruitment and our hiring of folks. One of the larger contracts that I think we referenced last quarter was the BEAGLE contract, which is with the customs and border. $1.3 billion multi-year award. We are slated to have a full transition of that contract in May. That means that all of our deliverables are in line, how we're going to execute that program, and we have the program fully staffed and we are absolutely 100% on track. We have folks starting each and every day. Some are coming to our facility, some are going to government facilities, some are out there teleworking. We're bringing them up to speed and the like. So, on that program and on others, we continue to ramp those programs up. Will we see some that are going to be a little longer ramp up than others? Absolutely so. And if that drives some early REAs, we'll be sure to submit those.
But overall, I'm very, very pleased with our talent - acquisition team and our line folks for making certain that we are, that we are up - that we are ramping up our schedules.
Thanks. And then while it's early, I wanted to ask how you anticipate future federal spending priorities maybe evolving at this point given the large stimulus measures and associated deficit implications of those?
Yes, Josh, I sort of look at spending and where the government is going to go in four different areas. I think I touched a little bit on an earlier question around sort of COVID-19 CARES Act and additional stimulus spending, whether it's DHS, the Army National Guard where we've been delivering a lot field hospitals, or things in the critical response interoperable command and control kind of work that we lead in. We're already seeing some increased funding there and I think I gave you some color on that.
If I look at government fiscal year 2020, our fiscal year is coming up into our last quarter, agencies are fully funded through government fiscal year 20. The CARES Act is going to add incremental funding, so I don't expect any impacts to any of our existing programs. If I were to look at fiscal year 21, I sort of look at closing off fiscal year 2020 as sort of putting some sugar in your tea, and I look at FY21, now you put a couple of drops milk in there. Gets a little bit more cloudy. But what we do know, last budget deal established discretionary funding caps for defense and non-defense spending, so I believe those are going to remain large and very healthy markets for us. National security priorities I think are as important as ever, and if we had more time, we could probably talk about some of those threats.
We have been watching, and somehow those folks have become actually more prevalent bad actors as this nation's been going through COVID. So, I see no lack of funding or lack of priorities national security space. I've been looking with our [indiscernible] affairs folks, government fiscal year 21 appropriations. They did - they are past the regular order or will we start with the CR, I think that's still early to tell. But suffices to say, many of you have been in this marketplace for many of the years. We have a lot of experience at operating under a CR environment. Congress has a lot on their plate with COVID-19, but bipartisan support for the security of this nation has never wavered. Whether it was 9/11, whether it was the financial crisis, whether it was what we suffered through today within COVID. Beyond that, Josh, longer terms, and how the higher deficits impacted and how the health care spending, I don't have that clear of a crystal ball, but I'll tell you is it's probably early to say what kind of large level - large or high level macro level change is going to be out there, but I can tell you that we've repositioned this company.
First of all, we are in the sweet spot of spending today and we didn't reposition the company and we got lucky once. It's actually based on a large, very much involved strategic plan. And should we have to do that again, we will continue to do that. We're a very agile and very adaptable company and we would expect CACI to be right in the forefront of where the customer spends if it's two or three years out.
Thanks for taking the questions.
Our next question comes from Edward Caso of Wells Fargo. Please go ahead.
Good morning. Thank you. I was hoping, Tom could spend a little more time talking about the puts and takes on the cash flow side. How much of it is a shift to the right? What could possibly be lost? The timing around REAs, how long that may take. And then what - how big the REA nut is. Thank you.
Okay, good. I can add a few things there. Generally speaking, we're very comfortable with our operating cash flow. The government is obligated to pay your bills. They pay their bills. At this point in time, the government payment offices and the government pool processes are intact. I just got some numbers with regards to cash collection for the month of April. Today's the last day of April. Very much in line with our expectations. $440 million, which is where we would expect it to be. And so the money continues to come in. In terms of some of some of the COVID-related impacts, some of those impacts, as I discussed, were timing related. Shift of product sales. And so, when we recognize the revenue, when we deliver the products, you will get the associated cash flow.
Some of it is kind of permanently lost. Our expectation right now in terms of lost fee on reimbursable hours, and so that decrements profit and it decrements cash flow. That's all within the guidance ranges that we have and we are reiterating those particular guidance ranges. REAs typically take a while to prepare and send it to the government and have them adjudicated, so that is a slower process. But I would say that's probably a minority of the impacts that we're talking about, so that is not a large concern. And the last item I mentioned was the deferral list or employer payroll taxes, and we were able to defer those as virtually every US company per the CARES Act, and that will provide a cash flow benefit to us between now and the end of the calendar year.
Hey, Ed. Let me add one other thing to that, too. We're just trying to provide much insight as we can. When we think about hours that will invoice now, basically if you can envision folks in an operation center, just like when the government closes down or we have weather delays, that time's difficult to make up because the time has already gone by. It's not as though we put 600 people in an operation center. We can support those networks better. So that kind of work will be invoiced. Now, there is some of our work that has been under minimal what I'll call COVID hours. Picture we have 45 people in a lab. They can all work 35 hours a week but they can't work 40 because we're doing shifts and trying to implement social distancing. That's 5% of their hours that could most likely be made up to go ahead and get scheduled delays back. So, for every program we have, there's a different REA cost and REA schedule area.
I would say the majority of our programs during the cost plus arena. And on the RVA front, I'd be looking at probably 15% to 20% of our programs. Ed, will have the ability to submit REAs they get incremental cost.
And my other question is, since we have Greg Bradford on the phone here, if he could give us a sense on what's happening in the United Kingdom, given their shelter and place rules and so forth and how it's impacting that business. Thanks.
Yes, sure. Greg, could you come on and address that.
I'd be happy to, Ed. Maybe to put in context, how is the UK Government reacting to coronavirus and then what is our business over here and how has it been impacted, which is the question you've asked. UK has been locked down, and that's the term they use, since about mid-March, which was about same time most of the US did it. All business has been ordered to work from home if they can, so that's pretty much all business. Only essential stores are open, grocery stores, pharmacy, gas stations, not even home improvement or garden [indiscernible] are allowed open, and people are told to stay at home and only come out once a day for no more than one hour for exercise, or in my case walk the dog. As a result of all this, we have closed all nine of our UK offices and our one office in Amsterdam in Holland, and virtually a 100% of our employees, around 1000 people, are now working remotely from home. So that's kind of state of play here. In terms of our UK business…
Go ahead, Greg.
In terms of our UK business, it's a very diverse business by design. It's a mixture of government, commercial, proprietary data and software products and services. And we have that. We originally developed a strategy to give us protection because you can have one sector down and one up at the same time, so if we're multi-discipline, that gives a greater safety and that's certainly seems to coming into play now,. About 40% of our UK business is government and 60% is commercial. Our government business is holding up extremely well, particularly our defense and national security business, which are mission-critical industries.
Half of our commercial business is also holding up very well because we work with industries like grocery change, financial services, utilities, and they're largely unimpacted by Coronavirus, but about half our commercial business, which is 30% of all the company, is involved in sectors, retail, shopping centers, leisure which includes pubs and restaurants. And as we all well, those business are effectively out of business today and the immediate future. So, our quarter three performance was excellent and well above planned. We experienced minimal impact from Coronavirus. Our quarter four performance will be impacted because of the challenges I just outlined on the commercial side. However, that said, we've had a great year so far, and we still expect to achieve our full FY20 plan, and we're now sitting down and working hard on our plans for FY21.
Greg, thank you very much. Appreciate it.
Our next question comes from Seth Seifman of JPMorgan. Please go ahead.
Hey, good morning. This is actually Ben on for Seth.
Morning, Ben.
I was hoping if you could touch on the top line momentum we've seen. Things have really accelerated the last couple of quarters, and kind of how we should kind of think about this moving forward.
Yes. Thanks, Ben. Yes, we are extremely proud by the growth and by our - the FY19 plan that we put in last June. We expected when we started this year to double our level of organic growth to around 5.4% if I remember those numbers right. Ben. We're currently north of seven and believe, should things stay on the path to Tom shared, we will stay in that general 7 to 8 per sec growth rate. Given our book-to-bill ratios, given the backlog that we have, given the success of being able to staff so far through this COVID environment, we would expect to continue to drive growth rates at greater than the addressable markets that we're out there serving. We're going through all that information now to look at what those growth rates are and then sort of set where our marker is for the organic portion as well as our overall growth.
But given our backlog and given how the business is continually ramped up quarter-over-quarter. We believe we are nicely positioned as we go into FY21.
Great, thanks. And then can you may be touch on any big recompetes to watch in FY21 or some meaningful competitions for new work that should be on our radar?
Yes. Thanks, Ben. We traditionally have a recompete rate around the 15% range. We're not looking to give too many details on FY21 but that one fact, that's a good planning number, at least for now. We'll come out with more specifics as we get closer to the fiscal year.
Okay.
Thanks, Ben.
Our next question comes from Louie DiPalma of William Blair. Please go ahead.
John Tom and Dan. Good morning.
Good morning.
John, you referenced secure mobility/cloud to protect national security assets and targeting opportunities when the timing is right post COVID-19. Related to this topic. on your first quarter earnings call you revealed that CACI has moved more applications to the Amazon C2S intelligence community cloud than the next five service providers combined. There have been reports of a successor version to that contract called C2E in the works. that's potentially worth $10 billion, and given your dominant market share for C2S and your recent momentum in winning large contracts, do you think that you would be one of the favorites to win the systems integrator component of that future contract?
Yes. Louie, thanks. So, the way we look at things like what AWS provides and what Microsoft Azure plans and somebody's system in greater contracts, that's not the level where we operate. We look at those as being a service to us and great partners of us and others in our industry as we move customers applications to a cloud-based solution. It is still true that we moved more intelligence apps to the cloud than the next five companies combined. That statement is still true. It's not one of those facts that I go out there and continue to check, but I can tell you that is still true. But my comments related to COVID and the like were really around how do we do the business of supporting our national security needs in the intelligence space potentially in a slightly different manner. Today, there is classified work being done in SCIFs, and there is unclassified work being done. There is unclassified work being done in customers facilities that could just as easily be done in one of our facilities or actually done with people teleworking as well. But to be able to support that on a larger scale, we've done it in the past, you need to have networks, you need to have what we would call secure mobility.
If I'm in my home and I connect to my local network, I have a bank connection, my corporate network, the bank's connection to the government's network. That's a lot of gaps and that we have to make absolutely certain that we are protecting. A lot of solutions out there allow us to do that. Clearly, we've implemented a bunch of them in the last 6 weeks. So how do we take what we're using today as a temporary network kind of topology, and how we make that more permanent so that when we come back around to the next as Tom likes to say black swan event, where we can't be socially near each other, how do we continue the mission of delivering government services and protecting this nation. So, it's not so much about where we see a specific contract going. All my comments are more around the much broader use of how we're working today and how do we make that a more repeatable portion of how we work tomorrow.
Sounds good. Thanks, John.
Yes. Thanks, Louie.
Our next question comes from Josh Sullivan of The Benchmark Company. Please go ahead.
Good morning. Just a question on the hiring environment. Do you have better access or are you seeing better access to maybe some of those technology personnel who have migrated to the commercial technology world? You mentioned you've got some nice backlog wins here over the last year. Does the current environment help you staff some of those contracts that you otherwise might not have access to?
Yes. Thanks Josh. I would say, without COVID-19, in general we have been drawing more technology folks from the commercial side. A couple of reasons there. One, pre-COVID, we do an employee survey every other year to understand how we're doing. Tom and I and other senior leaders can have an idea where we are but reality only comes from surveying 23,000 employees and allowing them to tell you exactly where we are and what we need to do better. We've talked about that many, many times on these calls. What we do is we score ourselves against the high tech workforces and corporations out there. So we put in the right benefits, the right working environment, the right kind of challenging working place that will draw folks who traditionally believe they had to go to the commercial high tech side to be able to have that experience.
So, on that regard, we are making progress, albeit slow. It's tough to turn some of these ships. We've had great responses there. If we look to COVID, this is an area where frankly because of the foresight of our federal government in all - and leaders at all levels, for them to pick up on the fact that we hold the majority of the classified and top secret base of employees in this nation, that to have those folks become people who were claiming on unemployment, take that person's ability away to continue to do cleared work. So, is there was there in the near term, close term better job security perhaps in the natural security realm? Yes. Is that a sustainable reason for somebody to switch? No.
But at the end of the day, we are winning more and more mission and enterprise technology jobs and those are the type of jobs that you software engineers and your digital signal processor engineers and all are looking to be a part of. I'd also add, we're going to bring in just short of 250 interns in the middle of all this. That's the largest incoming intern class that we've had, and the percentage of college hires that we have coming in the company has risen as well. So that would also portend to the fact that we are doing and we're still providing expertise, but adding large technology components, some of our major wins is drawing a very different type of potential employee to us.
I appreciate that. And then just one on the recompete conversation. Are you seeing any increased preference for the incumbent contractor? Just given some of the reduced resources or time that customers to evaluate contracts. Is there any - do you think there'll be any preference for the incumbent?
Yes, I mean on all those awards that I'm recompeting, I'm hopeful of it. And all those jobs that we're going have to work, I'm hoping that that doesn't work, right? But no. Seriously speaking, we may see some short-term extensions for contracts that all of the companies hold just to minimize the amount of churn and the like. But for the most part, be it not for COVID, and when we come out of COVID. it's going to be business as usual. So from where I sit, I don't see that changing greatly. Tom.
Yes. I think the other factor is the government is required to follow the federal acquisition regulations, which provides a - an impartial determination of how contracts are awarded and there's nothing to suggest that the government will deviate from their kind of mandate to have that kind of impartial contract determination.
Got it. Okay. I appreciate. Thank you.
Yes, you bet. Thank you.
Our next question comes from Greg Konrad of Jefferies. Please go ahead.
Hi, good morning. I just wanted to follow up a little bit on the last question. I think in November, you got a task order that kind of involved the Agile Solution Factory. What type of opportunities are you seeing with that? How big is the opportunity and maybe how you expect that to grow?
Yes, thank you. Thanks a lot, Greg. Yes. So, the Agile Solution Factory, a relatively large investment we made four or five years back. It's located in Ashburn. We built that out following a US Army National Guard award and that set us up well to win this program which is known as BEATLE in the customs and border area. Roughly a five or six year $1.3 billion, that's a couple hundred million dollars a year when we get to full run rate. The ability to grow that is more growing the concept and having somewhere to perform that work that it is than it is anything else. So let me take a minute to explain that.
If you think about putting the word "factory" against software and calling it agile, picture a production facility building cars. There's a well-established way how you can build cars. What we believe there is a well-established way to do agile software development versus waterfall type environment, and with a different [indiscernible] customers can get seven or eight releases per year. Think about your iPhone operating system downloads versus one each year or one every X number of months.
We have the processes, the procedures. We teach the majority of the NDU classes coming in, the National Defense University classes. We're looked as a benchmark for a lot of that teaching and lot of that training. So it's a repeatable factory. So then the question that we're looking at now is, if that's running well and we have the BEAGLE program and the Army National Guard program running, what other work we go out and talk to our customers about and say, "Instead of doing a traditional software development RFP, tell us what applications you need built and we'll run them through our factory." So to us it opens up a whole new era of how do we help the United States government move more towards agile because requirements are continually changing, and that allows them a more cost effective way. It allows us to better staff, and to tie it to the earlier question, attract more software engineering and measuring balance to CACI. So, it's a win for us. It's a win for our customers as well.
Thank you. And then just to follow-up on margins, you kind of pointed to 10% EBITDA for the year, but it still looks like you exit the year at a higher rate despite some of the slips and program deliveries. What's happening in Q4 and then just how should we think about a baseline for fiscal year 21 when we think about 10 to 30 basis points of margin expansion.
Okay. Yes. So, in terms of margins [ph], we'll continue to focus on improving those. As John said, it's a bit premature to talk specifically about in FY21 as we're in the midst of the planning process. And some of the COVID activities certainly have impacted our expected fourth quarter EBITDA margin. But that being said, we expect it to be kind of north of 10%. If you just do the arithmetic, that would suggest where we are trying to get you to the full year set of numbers. So, a lot of positive momentum, that margin expansion is driven by a whole host of factors. Focusing on the right types of programs, getting high award fees, self-performing direct labor versus subcontractors, performing direct labor, controlling indirect costs, introducing higher margin, kind of product into our mix, mission technology products and the like. And so, we're comfortable with those kind of margin trends that we've been discussing.
Thank you.
Our next question comes from Marianne [ph] of Bank of America. Please go ahead.
Good morning. So, a lot of Coronavirus details. Thank you very much. And my question is, you mentioned the customer efforts to maintain an active RFP and work environment. Could you please discuss if the RSPs you are seeing lately and ultimately the ones you are interested to explore are related to COVID-19 expected contracts or they show an incremental demand for IT services?
Okay. Marianne, thank you. So, let me start with where we see contract awards and RFPs today. Government's still running. We're seeing award decisions. We are seeing RFPs coming out. Several bids, as I mentioned during my prepared remarks, are going to include virtual presentations as we and our customers adjust to this new operating environment. We're very pleased with our award performance. I've always said that awards are lumpy, so our trailing 12-month book-to-bill, still very strong at 2.1 times.
And I'd also share that at this point, even early in our fourth quarter, we are very much on track to exceed what we did in the third quarter and very happy with where we'll finish this overall year. As for where we're seeing RFPs, it is very much balanced between expertise RFPs and mission RFPs. There has been no change in that. What you'll see change and our fundamentals as we go forward is clearly as we built up the right capabilities on the mission side and some of our technology offerings, we'll be able to address more technology RFPs than we would have done in the past. I don't have any current breakout and the like. We do try to provide that information as we win new business. But in our new business area, really looking at a mix of expertise RFPs and technology RFPs, and that blend of both of those will - we are very focused on will allow us to continue to grow top and bottom line.
And is there are any particular technology that you are focused on are particularly levered up on the submitted bids you have currently?
Yes. I don't have that level of detail. I can tell you in general, anything to do in the electronic warfare, cyber counter, counter UAS, secure mobility or anything that allows customers and folks out in the field to detect signals and geo-locate those and understand how do they prosecute their missions in and around those enemy signals is really where our longer-term focus is, and those are the kind of RFPs that we have been responding to and have been quite successful in over the last 18 to 24 months.
Okay, thanks. And last one on the competitive environment. Can you discuss current competitive environment post-Coronavirus and also the appetite from the non-traditional defense IT services provider to get improvement?
Yes. Under this period of time, under COVID, I haven't seen any changes whatsoever to how we respond RFPs and those folks that are either entering or exiting this market.
I agree with giving very much of a status quo environment. The competitive environment, like most industries, is kind of robust. A lot of kind of well-respected providers in this space and if there is a certain amount of work that we're all kind of going after. We're trying to differentiate ourselves on a number of fronts, making sure we have competitive cost structures, making sure that we have high level of technical solutions in our proposals and we believe we've been winning a disproportionate share of the work, hence our is very strong trailing 12-month book-to-bill rate. But no expected change in the competitive environment.
Well, thank you very much.
Thank you.
Our next question comes from Cai von Rumohr of Cowen & Company. Please go ahead.
Thank you very much. So, why was the decremental margin as high as it was on the COVID revenue, ahead of 10 million, 6 million or 616%? And second, particularly given your cost-plus mix and looking forward, given that COVID really started to impact results here starting in March, should we expect a bigger negative impact in the fourth quarter, which is what Greg Bradford suggested for the UK?
So, in terms of the margin in the third quarter related to the COVID impact, at that point in time, although the CARES Act was passed, our third quarter results do not reflect any recovery of the CARES Act just because of the time again when we close our books per GAAP rules. And what happened was we lost our labor-based work, TNN in cost plus. We lost the revenue associated with that labor-based work, but we maintained the cost structure. So, losing revenue flows directly through the P&L, with the cost structure being intact, such that it was relatively high incremental margin for those kind of lost hours.
As we move into the fourth quarter the phenomena is slightly different. There are some shift in product sales, temporary, which are higher margins but the major impact is the lost fees on those CARES Act recovery hours, which we spoke, about which are less impactful on a margin basis.
So it is the net impact more or less in the fourth quarter?
I think we provided a bit - So, in the fourth quarter, I think we provided that information. Revenue impact, it's approximately - Let me get my notes here. 65 million for the full year, so 55 million in the revenue in the fourth quarter and net income $11 million in the fourth quarter is what the implied numbers are. Greg's impact is fully incorporated into the numbers that I discussed.
Yes. I guess, Cai, I would also add, back to a signal versus the noise kind of thing. I think how we look at where we are is the reiteration of our guidance shows that we have the confidence to - and the ability, frankly, to pivot in this COVID environment that we're in and when we get - when the dust settles on the CARES Act and the like and we're able to relay out some of our facilities that will allow us to bring more folks back to work, this problem, problem - this current phase we're in sort of runs its course. So, and believe me, we're doing everything we can. Looking at in a very safe manner is how do we bring folks back? They need access to secure data links, and I've been working with the directors, deputy directors of all the intelligence agencies looking at how do we slowly bring folks back, and clearly, we want to bring those folks back that don't have access to the secure comms that they need today.
Thank you. Last one. When do you expect to hit your run rate on BEAGLE [ph]?
Towards the end of - Well, while we finished transition end of May, so at some point during early 21, Cai, is what our best estimate is now.
Thank you.
You bet.
Our next question comes from Jon Raviv of Citi. Please go ahead.
Hey, thanks for the time here. And I might just have to say, it was really wonderful hearing Greg this morning, we really appreciate your credit. Good to hear from you. But my question's for John, and I'll keep it to one because I know we're way over time. Just building on your previous answer, John, you've been around this industry for a couple of years I think, and as you mentioned you tend to pivot to where the national priorities are. 9/11 made you pivot one way, the last several years have been this very thought-through pivot by you guys towards an adjacent direction. Where do you see - what does the industry generally do, what has your company generally done during these times of pivot and how are you preparing for a potential pivot over the next, say, the next five years?
Yes John, thanks. We're - I think I mentioned earlier, I sort of see where we are in a few different phases. Let me be a little tactical first and then be a little more strategic next. Look, over the short term, what I call the short term is Q3 and Q4 of FY 20, we're going to have an impact because of shift work and reducing staffing levels and labs and SCIFs and operator centers, and with the current facility layouts, we believe this - those are all going to be temporary. We're going to continue to remain focused on protecting employees and working with our customers and getting steps towards the new normal. And I can tell you, all that's going well. Generate - Opening one key SCIF, bringing 330 people back from having to bill against CARES Act hours and fully recoverable with fee ours is a major step forward.
As we get 6 to 12 months, the impact is going to continue to lessen. I believe the nation's response are going to turn into more and more opportunities. So how would we go about the next pivot? I don't think we require a large pivot. Corporation wise, the use of the term pivot in the previous answer was around pivoting from being underneath COVID-19 back to some kind of new normal. What excites me the most is how do we look at how we perform our work today and how do we do that in a much more separated, segregated manner that really plays to the strength of the last three to four years of investments we put into our IT network for us to be able to work in multiple cities, so that we could be able to recruit and hire in different areas. That plan and that network configuration we put in place clearly was also there should we find ourselves in the kind of opportunity space that we are today.
So from a capability side national security needs today, that we have today, will not go away. I do believe from the actions of some major countries out there, military action specifically, that they have been exercising different regions around this world while the US is going through COVID is another indicator that there's even more growth out there in areas that the nation will need those kinds of expertise and technology solutions that CACI provides.
Thirdly, domestic and intelligence budgets have always been a bipartisan Act, and I'm well informed to understand that when you move the federal deficit up by X trillions of dollars beyond where the press is at but where our business leaders are understanding how does the budgeting cycle change. I frankly don't believe that in a period of time that we are today, and even in the three to five year future, which was a focus of your question, I believe there will be more demand for ways to protect this nation.
This was a COVID virus impact, and look at the national security implications of that is placed on us. I think there is only more growth in the space that I and Mike and my [indiscernible]. I believe the CACI is very well positioned to go and take advantage of those. And of course our strong track record of doing mergers and acquisitions to quickly fill gaps in those areas that we believe are going to grow even faster or new areas that we didn't have capabilities for where the right kind of company that can pivot quickly to go after additional wide space opportunities of which I believe there is a number of them out there.
Thank you very much for that. Extensive answered. Thank you.
Thanks, Jon.
This concludes our question-and-answer session. I would like to turn the conference back over to John Mengucci for any closing remarks.
Thanks, Andrea, and thank you for your help on today's call. Before we close, I would like to take a moment to wish our Executive Chairman and Chairman of the Board a very happy birthday and thank him for his guidance and support across the many, many, many years. We would like to thank everyone who dialed in or listen to the webcast for their participation. We know that many of you will have follow-up questions. Tom Mutryn, Dan Leckburg and George Price are available after today's call. Please stay healthy and all my best to you and all your families. This concludes our call. Thank you, and have a great day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.