CACI International Inc (CACI) 2002 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day everyone, and welcome to the CACI International Third Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions I'd like to now turn the call over to the director of Investor Relations, Mr. David Dragics. Please go ahead, sir.

Thank you, Debbie, and good morning ladies and gentlemen. I'm David Dragics, director of Investor Relations of CACI International. And we're pleased that you're able to participate with us today. For those of you who are with us for the first time, either by telephone or via the Internet, we welcome you to this call.

As you know, earlier this morning we released our third quarter 2002 results. We hope most of you have had the opportunity to review our announcement and the results. As we did on this call last quarter, we are including exhibits with our presentation, and we hope that you will find them helpful in reviewing our financial results and trends and the discussion of our operations. As we progress this morning, we'll make every effort to keep all of you on the same page as we are.

Moving to the next exhibit, before we begin our discussion this morning I would like to make our customary but important statement regarding CACI's written and oral disclosures and commentary. There will be statements in this call that do not address historical facts and, as such, do represent forward-looking statements under current law. These statements are subject to important factors that could cause actual results to differ materially from the statements made today. The primary factors that could cause actual results to differ materially from those anticipated are listed at the bottom of this morning's earnings release as well as in the company's Securities and Exchange Commission filings.

Now our full safe harbor statement is on this slide and will also be incorporated as part of the transcript of this call which we'll post our website later this week. I'd remind and refer those who might be listening to the replay of this call to view the full safe harbor statement there.

Let's turn to the next exhibit. And to open up our discussion this morning here is Jack London, chairman, president and CEO of CACI International.

Thank you, Dave, and good morning everyone. I also would like to welcome any of you who are new to CACI to our call this morning. We appreciate your interest and hope you'll find our call informative.

I'm quite pleased with our solid performance over the first three quarters of Fiscal Year 2002, particularly the results of this past quarter. We believe that CACI continues to be at the right place at the right time. Our strategic business plan is working and working nicely. We're especially pleased to report record earnings, and I believe that we are well on track to achieving our $1 billion in sales and revenue volume by the end of Fiscal Year 2005.

Next exhibit. As we all know, our country is facing challenging times. War on terrorism and homeland defense, top national priorities have prompted the largest proposed increase in defense spending in two decades. At CACI we are supporting national security objectives and responding to the challenges. We're deeply involved in supporting intelligence and defense communities and border security authorities. Our support includes secure communications systems and intelligence analysis for the war managers and electronic warfare and command and control systems for the war fighters. For homeland defense, we are protecting federal information networks from attacks while enabling departments and agencies to share critical data to support the war on terror.

Without question, the federal IT sector is a hot marketplace. Today our industry is front and center in the technology economy and is receiving a lot of attention. However, I would like to point out that the federal sector business is more complex than simply creating a federal IT division or catching a flight to Washington, DC. Longstanding relationships and trust and knowing your customer and being able to deliver on their evolving IT requirements means everything.

Next exhibit. We are truly living in the new defense era, and today more than ever IT Is playing a vital role in keeping our military strong and America safe. We at CACI pride ourselves on being a trusted partner to our federal government clients with four decades or loyal service and hard work in providing crucial IT expertise for national security. It's a role we relish and a role we will continue to pursue in our growth and profitability goals in creating shareholder value.

Next exhibit. With me today to discuss our results and expectations and to answer your questions are Ken Johnson, president of CACI; and Steve Walker, our chief financial officer. Greg Bradford, president of CACI Limited in the United Kingdom is also with us to answer any questions you might have about our operations over there.

As is our custom on these calls, we'll discuss three principal items. First, Steve Walker will discuss our financial results. Second, we'll discuss our operations and their outlook with Ken Johnson, updating you on our domestic businesses. Third, I'll have some closing comments. After that, we'll open up the call to your questions.

The first item on our agenda is our financial results. Here's Steve Walker, our chief financial officer, to discuss them with you. Steve, over to you.

Thank you, Jack, and good morning everyone. Let's go to the next exhibit which is on page 7. As was indicated in our release this morning, we reported a record third quarter in nine months of revenue and earnings. Revenue for the quarter increased 25 percent to $182.8 million versus $146.7 million a year ago. Income from continuing operations was $8.6 million for a $.33 per diluted share, up 58 percent over last year's $5.4 million or $.24 per diluted share.

We adopted FAS-142 goodwill and other intangible assets as of July 1, the beginning of our fiscal year. And as you may know, it does not require us to restate our prior year earnings. Our federal government business grew 33 percent this quarter and represented 92 percent of our overall revenues. More impressively, our internal growth rate for our federal business was up 21 percent in the quarter. This growth was partially offset by lower commercial and state and local business. The company's overall internal growth rate was up 14 percent in the quarter.

The higher revenue relative to our street guidance this quarter was primarily related to increase to other direct cost which were attributable to increased subcontractors supporting our prime contract efforts and equipment purchases. As we've indicated on previous occasions, these pass-through revenues carry lower margins. Our United Kingdom operation reported $10.1 million in revenue in the quarter, about $2.5 million less than in the third quarter of last year. This decrease in revenue is primarily from the lower demand for commercial IT services, particularly in the telecommunications industry. Despite that, our UK operations pretax margins improved to 14 percent from 10 percent a year ago as a result of success in selling its higher margin data and software products and tightly controlling its cost.

Moving to the next exhibit, page 8, let's take a look at one of our key metrics, EBITDA. EBITDA for the quarter increased 31 percent to $17.7 million or 9.7 percent of revenue compared with $13.5 million or 9.2 percent of revenue a year ago. In the next exhibit on page 9, debts of $32 million at the end of the quarter is related to a two-year, $25 million interest rate swap we entered into in January of 2001 and notes payable related to our acquisition of DSIC.

As a result of the offering, cash at the end of the quarter was approximately $129 million. Days sales outstanding at the end of March were 79 days compared with 76 a year ago.

The next exhibit on page 10 is our guidance for revenue, income from continuing operations and diluted earnings per share for the last quarter of FY '02 and the full year. The guidance was also included in this morning's release. We estimate that our revenue in the fourth quarter will range between $180 and $184 million and that income from continuing operations will range between $8.5 million and $9.3 million. That's an estimated 18 to 21 percent increase in revenue and a 34 to 47 percent increase in income from continuing operations.

Our diluted earnings per share should be between $.29 and $.32 per share, up 7 to 17 percent respectively, and reflects the additional 4.9 million shares outstanding as a result of our secondary offering. We estimated that diluted, weighted average shares for the fourth quarter will be $29.4 million and $25.8 million for the full year.

Apparently, some analysts have not yet updated their models for the secondary offering, so we believe the first call consensus that is out on the street today is currently too high for our first quarter and total years. Even though Dave mentioned the safe harbor statement at the beginning of this call, I want to again state that these projections are forward-looking and that listeners on the call and readers of the transcript should be advised that our actual results may differ materially from the statements we are making today.

That completes the financial overview. Let me turn the discussion over to Ken, who will discuss our domestic operations. Ken?

Thanks, Steve, and good morning everyone. My job at this point is to make certain we're all looking at the same exhibits, so if you're viewing them over the Internet we're on Exhibit No. 11.

Last quarter we indicated to you that once the federal budget was in place it would take up to 90 days before we would begin seeing increased tasking on many of our contracts. We also indicated that once the funds worked their way through the system the impact would show up quickly. Given the fact that we are significantly above the upper boundary on our revenue guidance for the quarter, coupled with the fact as Steve pointed out that a lot of that upside came from ODCs, you can conclude that those funds have arrived, especially in the form of increased tasking from federal civilian agencies like the Department of Justice, the Federal Aviation Administration, the Coast Guard, Customs and others.

Moving to the next exhibit. Most important to us is that our growth occurred across the entire federal sector with virtually all of our clients and all of our services offerings and has continued into this quarter. We recently announced the award of a $31.5 million contract with the Customs Service to provide continued support to their enterprise information security requirements. Our systems integration business was up 34 percent over the last year. This growth is being fueled by our support to the war fighters through an Army contract with the Communications and Electronics Command, contributions from the DSIC acquisition, and increased tasking from various national intelligence agencies and the Federal Bureau of Investigation.

Our knowledge management work is also up 34 percent compared to last year. Most of that increase has come from our continued support of the Windstar or savings and loan case, one that most of you know we've been involved with for many years -- as well as from the Department of Justice's increasing involvement in tobacco litigation. You combine that activity with the continued growth in our managed network services area where we were 24 percent above last year's third quarter, and with the growth in our engineering services business also up 14 percent quarter over quarter, and you can understand why we came in significantly above our guidance.

So it's important to note that with the '02 budget funds now released the increased activity we experienced in some parts of our business during the second quarter of this year has now spread to all areas.

Let's move to the next exhibit. A comment about our qualified pipeline of opportunities. Last quarter we told you it was approximately $3 billion. That figure has not changed much since last January. We are looking at approximately the same absolute dollars at roughly the same mix as last quarter. About 40 percent of those deals are in the managed network services, 30 percent in the area of systems integration, 18 percent in the engineering services area, and about 12 percent in that of knowledge management.

During the last three months release of full and open RFPs slowed down considerably. We believe however that this is a temporary occurrence, and to that end the first few weeks of April may have signaled the end to that log-jam. Despite the lack of brand new competitive opportunities, we have seen significantly increased procurement activity by our customers under what we call "GWAC" contract vehicles. That's clearly been a key driver behind our performance this past quarter. So in the larger scheme, this temporary slowdown is really positive, as those full and open RFPs are opportunities not yet tapped. They are still coming, and we remain poised to compete.

Overall, as we look to where we are early in the fourth quarter, we expect our current accelerated operating tempo to continue through this quarter and into the future.

Jack, that concludes my remarks.

Thank you, Steve and Ken, for your updates.

Let's move to the next exhibit. Ladies and gentlemen, I think you can draw your conclusions from our comments that we are executing on our plan to get to that $1 billion level in annual sales by Fiscal 2005. We're now moving full throttle into new opportunities made possible in the market niches we serve by the government's unprecedented ID demands and record federal budget increases.

Our path ahead is our unrelenting focus on customer satisfaction and strategic positioning as a preeminent federal IT provider, particularly in high demand areas like managed network services, defense and intelligence, and information assurance.

Our MNA program will continue to be a main element in our strategic plan for growth. Our new $185 million bank credit facility and the cash from our secondary offering are timely. Our pursuit of larger prime contracts is an important goal as we go forward. And our market niche capabilities and new business efforts will be focused on fine organizations where we are well-known -- the Department of Defense, the Armed Services, Department of Justice, the FAA, Department of State, the Intel community; and homeland security oriented organizations -- the National Guard, FBI, Customs, Secret Service, and others.

Next exhibit, please. Finally, most of you are aware that the federal budget for the next year proposes the largest increase in defense spending in 20 years -- increase in spending for defense and intelligence, and about $38 billion for homeland defense and an increase in government IT spending to $52 billion. As I have just said and as we indicated in our meetings during our road show, these are all areas where CACI is well-positioned and deeply entrenched. We're excited about what the future holds. We believe the future is very positive for CACI.

At this point, ladies and gentlemen, we are ready to open our discussion for your questions. So, Debbie, I'll turn it over to you for our first questions from our participants.

Thank you, Mr. London. Today's question and answer session will be conducted electronically. In the interest of time, we do ask that you please limit your questions to one and one followup. Anyone wishing to ask a question may signal us firmly pressing the star key followed by the digit "1" on your touch tone dial. We will call on you in the order that you signal us. If you find that your question has been asked and answered, you may remove yourself from the roster by pressing the star key followed by the pound key.

And we'll take our first question today from John Mahoney at Raymond James.

Good morning, guys. How are you doing? Obviously, the stock under some pressure today -- I think it reflects the guidance for the fourth quarter which is below some of the analysts' expectations, and obviously it's not the revenues. It's the margins that people are a little surprised about. Could you discuss where -- I think we're still, given your guidance we'd still assume some margin improvement in the June quarter, but could you give us some feel as to why the margins are a little less than maybe we had been expecting?

I think a couple things, John. Our guidance actually is higher than the guidance we've given previously for the total year. When you look at what we gave out our revenues are actually up 2 to 3 percent on the revenue line, and actually on the bottom line 1 to 2 percent is what we've given. I think there's some confusion on the Street in terms of a couple things. One, I think the number of shares calculations, there are a number of analysts who have not updated their models, and first call is picked up significantly higher calculations on that side of the house. I think that's one thing.

Our actual performance, if you will, in terms of return on sales and those margins are actually higher than what we're showing in the current quarter.

Well, your guidance was for 125 to 131, right?

125. I'm sorry?

End of the second quarter, your guidance for the full year was 125 to 131?

That's correct.

So if that was, say, 130 net of the 33 cents you've just done, that would be 39 cents, and of course with the dilution that's going to impact the fourth quarter. But I think --

That's about 20 percent dilution, John, on the 39 cents. We take about 8 cents off of that, which I think then puts you down into our range -- 31 cents. If you're 39 cents is what you're saying, what you calculate at the high end and if I take 80 percent of that, that's 31 cents a share. That's within the guidance.

We can talk about this offline, but I think most of us were a little surprised, given most of the analysts' communication. We'd obviously been expecting higher margins. For example, my own model has a margin assumption for the upcoming quarter that's very close to your own guidance now. I can tell you, my model for the fourth quarter had 29.2 million shares. I was at 33 cents.

Really, to get to your range I need to adjust my EBITDA margins down.

Our EBITDA, John, we have in the -- we did 9.7 this quarter. Our models and our range on EBITDA have us in the -- we're in the kind of the 9.7 to 10.1 range is where we're looking. That's certainly at the low end, right where we are now, and it is an improvement on where we are. I'm not sure where your model is, but we can talk --

Are you surprised by the stock's reaction today?

Yes.

But you were aware of where the estimates were, weren't you?

We had tried to talk to First Call about getting the analysts to change their estimates, but we can't force analysts to change estimates out on the Street. Clearly, there are some that do not reflect the secondary offering.

There's a few there in the 36, 37 cent range, but I think most of the others --

One last question. I think it would be helpful, given some of people's disappointment with that -- because your typical contract has multiple years associated with them, and we're getting one quarter of guidance here. I think it would be helpful if you could give us some outlook as to the next 12 months in terms of where the earnings are going. I know your longterm goal is to get to $1 billion in revenue, but I wish you could talk about that since you do have such great visibility.

I would say, the guidance we've given previously, John -- again, we're in the process of pulling together our plans. As you know, our fiscal year ends June. We're putting plans together right now. The guidance we've previously given is that we will try to grow internally 12 to 15 percent. We're going to try and supplement that growth with acquisitions that should add 5 to 8 percent of additional revenues throughout the year. Our goal is to get the EBITDA margins certainly north of the 9.5 percent was the target we'd set for ourselves awhile ago. We think we're there ow, and we're trying to push that up into the 10 percent kind of range. That's the guidance we've given, and I think that's all we know at this point in time that that's still very good guidance.

John, I want to add a few thoughts. The company's business plan is on as secure and sound a footing as it's ever been in my close to 30 years in the company. We're in a vital market right now. We're in a serious market. We are positioned in some of the most challenged niches in terms of the technology and the requirements that our clients have. We're a trusted organization. We see very open opportunities ahead of us. And if there's some blips because analysts are having some difficulties in keeping up with public announcements about share issuing and dilution, those things will shake themselves out. Our projections and our program and our pace to achieve our billing in sales I think we're well on- course, if not ahead of it, and I think there's nothing but bright future. And I think that some of these calculations and modeling issues have got to smooth themselves out and straighten themselves out. But we're very solid on the business plan, and that quite frankly is really what it all amounts to.

Dr. London, what type of margin would you assume you'd be at when you do a billion in revenues and earnings contribution?

We're going to be at these high-performance levels. We're going to stay right on those, John. That's been my goal all along, and we've been improving steadily as predicted, and as we've indicated. And there's going to be no change in our basic plan.

I think we're going to continue to do the acquisition opportunities as they emerge, as I've indicated. There's certainly a lot of opportunities out in the marketplace, but there's obviously some needs here for us to come back to the Street with some projections. We're going to do that as promptly as we can. We're in the midst right now, literally in the midst of putting together the detailed business plan for the next fiscal year. But I think the parameters that Steve sketched for you in terms of our growth objectives are certainly the -- I'll even put it as a minimum requirement to the minimum expectations.

I appreciate it. I'm sorry for taking so much time.

No, no. It's quite important obviously, and I'm glad to have the opportunity to discuss it.

And we'll take our next question from at BB&T Capital Markets.

Yeah. Good morning. Actually, Steve, I just have a housekeeping question to add. The break-out of the Federal Civilian Agency revenue between DOJ and the other non-DOJ agencies?

Hold on one second, Tom. I'll get that for you. For the quarter, DOJ we did $26.5 million. Compares to $17.9 million last year. OK?

OK. I can net out the rest. OK. Thanks very much.

And just a reminder, ladies and gentlemen. Please limit yourself to one question with one followup. And we'll go next to at U.S. Bankcorp, Piper Jaffray.

Good morning, guys. I think I have a good handle on the dilutive effect from the deal. I guess my question kind of relates to sequential revenues, and if I'm looking at this correctly I think your guidance is basically for flat, sequential revenue March to June. And obviously you're had great sequential growth over the last several quarters -- you know, $10, $15 million each quarter. Can you talk about why maybe we should look for a flat quarter? Is that due to less pass- through revenue or just the overall slowdown in RFPs that you mentioned earlier, or something else that we're not contemplating? Thanks.

Brett, there's two factors. I would say, one, as you recall we completed the DSIC acquisition in November. That clearly gave us an uptake in the current quarter earnings in the range of $15 on the revenue side. So that is part of it. We also as Ken mentioned and I mentioned, we had an unusually high amount of ODCs that flowed though this current quarter. Our current forecast calls for a more normal range of ODCs. If we were to experience what we had here in the third quarter, we would clearly be above the guidance that we're at. But our model includes right now a more normal profile, if you will, on ODCs that we've traditionally seen.

I think we've said this on any number of occasions. We have very good insight, especially when we're looking in a quarter -- to forecast direct labor, I will tell you we'll be within one digit percentages. But it's been our practice in the past, and I think it will continue to be in the future. To forecast ODCs just based on what we did in a previous quarter or two previous quarters, is not what our forecasting is all about. So we'll continue to be very conservative in forecasting these ODCs because there are lots of things that come into play on that. And once we start telling you through guidance that we're going to buy $10 million worth of equipment or hire 100 consultants to do some training work on a particular contract and for whatever reason it doesn't happen in the quarter, it just creates a huge penalty for us.

So the ODC forecasting is just a very difficult thing. And we'll continue to do very well I think, but we'll continue to forecast it very conservatively.

I appreciate that conservatism. Maybe my one followup question I guess, clearly very strong organic growth, 21 percent this quarter. Your guidance historically has been 12 to 15 percent. Is there anything to kind of point to macro-wise that would suggest that 21 percent would come in the June quarter, or -- especially given that the funding is starting to move through the system now?

The one thing that certainly helped in the current quarter with the ODCs did push that growth rate up somewhat. The 15 percent that we said we've asked Ken to get to is something he's been doing now consistently for the last three quarters, and I'd certainly think that will continue at that rate into the fourth quarter. If we get additional ODCs, that will push it up even higher. But again, the guidance we've given is 12 to 15 percent internal. We think that's a reasonable estimate of what we're going to be continuing to do over time.

That sounds good. Thanks a lot.

And we'll go next to at and Company.

You guys had raised a lot of money obviously. You got your cash balance up. You got your credit line up. We saw in the release that you decided not to pursue the acquisition that you had announced with the deal. What is your plans for acquisitions going forward? I know when I redid my numbers I did lower my numbers for next year by 15 cents. How do you expect to get that 15 cents back through acquisitions, and how long will that take?

I want to the strategy and objectives. Our objectives are to continue aggressively on the acquisition program like we indicated in our secondary offering. I would like to see us looking for companies in the $50 to $100 million in sales. We're looking for companies that continue to increase the strategic niche we have, and we're also looking for opportunities to expand our customer connection. So that's a basic plan, and I think that probably means a couple of acquisitions each year. But I want to tell you there's an increasing level of opportunities out in the marketplace these days. There's a lot of companies we're looking at right now and aggressively, quite frankly, in the midst of some dialog as we go.

Steve wants to amplify a little bit on the calculus.

Yes. To Jack's point, there are, and we have a very active pipeline of opportunities out there. It was unfortunate the one we were looking at just didn't pan out for us. I think again, points I think the discipline we internally have if we don't like something for whatever reason we'll walk from it. And we did. And again we've got a very active pipeline right now. It is our hope we'll complete certainly one or a few deals here in the foreseeable future.

What are you seeing on the pricing environment for those acquisitions right now?

I haven't seen a significant change from where we've been. The range of we've been looking at is in the .6 to .8 times revenues, 6 to 8 times EBITDA. That's been kind of the range of what we're seeing out there, and I haven't seen any significant up- tick up certainly the discussions that we've had with people here recently.

Thank you.

And we'll go next to Cynthia Holton at RBC Capital Markets.

Hi. You mentioned a little bit on slowdown of new RFPs and then, but an uptick in GWACs and I assume also on GSA schedules. Could you discuss a little bit more if you look at kind of the opportunities in front of you kind of how that's split, or if there's kind of a longterm shift in terms of where you're going to focus your opportunities? I guess just a little bit more detail on that trend?

Sure. Basically what I think the phenomena that occurred, and there are lots of opinions here and there are lots of people who have opinions on this issue -- but the phenomena that occurred is as a result of the continuing resolution coupled with this reprioritization of the federal government's emphasis over the course of September 11 through the appropriations approvals mid- January. There was a tremendous lack of attention, a great deal of inattention to issuing new opportunities. Those of you know the federal space know that continuing resolution indicates that you don't issue new opportunities, that you continue funding at the rate of last year. We have been and will be for some time on a war footing, so from an acquisition standpoint there was an awful lot of emphasis on getting support to war fighters. A lot of that was bullets and bombs, frankly; although some of it, it turns out, is work that companies like CACI does.

That bubble that was put in the line had an impact on us of slowing down full and open new RFPs to be issued. We have seen three brand new RFPs that we've been waiting for now for 10 months. We thought every month these things would issue. So I think, as I indicated in my comments, that the log-jam has clearly been broken.

What has happened and what has continued to happen as a result of this war footing is that -- and you can probably get this from almost any one of our peer companies -- the level of activity on the GWACS, especially the GSA family of contracts, has grown exponentially. I don't expect that to slow down at all. I believe you'll continue to see significant opportunity out of a GSA and some of the other GWACs.

In addition to that, however, if you believe my premise that this log-jam is broke, we will now start writing proposals against these large full and open kinds of bids. And I'm just hopeful, I don't know that it's fair in anything in the federal government that's gone on now for about 22 or 23 days to call it a "trend," but we're really trending in a nice way with the issuance of those brand-new solicitations.

So I hope that answers your question, Cynthia.

Yeah, it does. Thank you.

And we'll go next to Bill Loomis at Legg Mason.

Hi. As far as the analysts adjusting, I can tell you I certainly adjusted for the offering being a comanager. So I'd definitely like to talk to you offline about that. But can you comment about the fiscal '03 estimate? I think first call of that in 147, you implied on your comments that first quarter may be too high. Can you -- I know you haven't done your budget -- but just give some broad guidance about that number specifically?

And on the fourth quarter estimates, you say that operating income range estimate is 8.5 to 9.3 million. You reported 8.588, and usually you show pretty strong sequential growth from March to June. So this implies it could be slightly sequentially down. Even with ODCs I would expect some nice sequential improvement. Can you just comment on that?

Yeah. First to your -- we don't comment on the analysts' forecasts that are out there, Bill, other than the guidance we've given previously. Again, we're going to continue to try and pump this thing as hard as we can, and hopefully if we can grow the revenues on that top line as we said in the 12 to 15 percent internally, 5 to 8 percent through acquisitions, and get some leverage on that in the bottom line, we should have a nice year next year also. Again, we don't comment on the specific numbers on the Street, and we will give guidance in due course.

With respect to the current quarter and the guidance at the low end of that range, that's in essence our 8.5 million is fairly close to what we just did in the current quarter. That's just the low end. We put a range out there assuming we do exactly what we did in the last quarter that's where we're going to come in at. Our hope is that we're going to be at the higher end of that range, but it is what it is.

The Department of Justice business obviously have -- did I hear that right, $26 million in the quarter?

That's correct. We had a very good quarter.

Do you expect that to continue or was that kind of a one- time ramp-up on some work?

Oh, it appears as though we're going to be able to sustain that for the foreseeable future.

OK. Thank you.

And we'll go next to Gary Posner at AG Edward.

We'll go next to at .

Good morning. Could you, first of all, go through how you get 8 cents per share dilution from the 4.9 million shares issued? I mean, the analysts that we look at as on the pie side, they didn't use anything like 8 cents per share dilution from the issue. Where did that come from? How do you get to that?

Well, where we ended the second quarter, if you go back and look at the diluted shares we had at the end of the second quarter, 24.337 million shares is what we reported. The offering was for 4.250 million shares. In addition to that, the green shoe was exercised. That was 15 percent on top of that, another 637.5 thousand shares, which is an add of 4.887 million to the number. So if you take the 24.3 plus the 4.9 roughly, you get to a 29.2 million shares outstanding. That's where that comes from. It's about a 20 percent increase in the number of shares over the second quarter.

OK. Understood. But that would not per se explain most of the shortfall that you are now presenting us with. There must be something else. The commercial, state, local revenue component was way down from what the previous indications were, and you never at any time in the road show highlighted or signalled that that business, while it's relatively small it is also very profitable, the commercial business in particular. The fact that that was not performing up to snuff is a significant added factor which you did not stress or brought up.

We've been saying for some time that our commercial business has been sequentially quarter over quarter flat. And we expected it to be down for the full year. It still has maintained its profitability. Certainly the state and local business has been down. In our last conference call we clearly indicated that that was trending downward and has been that trend for awhile.

If you look at our, what we previously guided the Street to Ludvig, we gave a guidance of $650 to $665 million on revenues, and we gave $1.26 to $1.31 on the earnings per share. If you back into the numbers what you're looking at is a 30 point $3 million income from continuing operations up to a 31.6 or so. We've actually taken our guidance up. Our new guidance is 31.1 at the low end to 31.9. So we've increased both the revenue, and we've increased our earnings from continuing operations from what we've said previously. So I don't know how else to answer your question other than we think we're doing well, and we think we had a great current quarter and we're hoping to have an even better fourth quarter here.

Yeah, but you guys, you know. You've been around for awhile. You know Wall Street. The stock wouldn't be down $7 a share this morning if everybody had read your message correctly, assuming you gave the message the way you state it-- clearly and unequivocally. There would be not that confusion in the Street. The stock wouldn't be down $7. There's a message there that you didn't properly calibrate this and alert the Street to the fact that commercial, particularly, was not flat, was not slightly down, but was significantly down.

Well, I would disagree. I think we have been saying to the Street and everybody that our commercial business is down and sequentially quarter over quarter was going to be flat with where we were in the first quarter. That's the guidance we've been given since the first quarter of this year.

You can check the transcripts what we said in the first quarter conference call in October, January that commercial would be flat year over year. We did not expect it to be growth. Steve's remarks both in October and January.

I think we've been very consistent in reporting that. Greg, are you up on the line?

I am, Jack.

Greg, I'd like to ask you to talk to your current situation and particularly in the profit side and what you've been able to do to sustain your profitability regardless of the top line.

Right. Well, you know, our revenues for quarter 3 are down on quarter 3 of last year by about $2.5 million. And that's a combination of impact on operations from a downfall in telecommunications IT services and ODCs and exchange rates. But we're particularly proud -- we pushed our profits up from a pretax profit margin of 10 percent last year at this time to 14 percent this year. So that's an increase of almost $.5 million pretax profit quarter on quarter. And that was principally through two things -- selling our high margin data and software products and by trimming back our costs everywhere we could.

So though our revenue is down a bit because of the fall-off in the commercial IT services market, our profits are up significantly, and we think that's quite a success.

And I think the other point to make is that that is essentially consistent with the dialog and disclosures and the public releases and strips and so on that we've been providing to the community. Debbie? Do we have another question?

Yes. We'll go next to at .

Thank you very much. I must say that I wasn't privy to some of the same stuff as the comanagers were, but within your expectations for the fiscal year '02 my net income current estimate right now is $31.5, so right in the midrange. I guess I plead guilty to not raising the share count, but if I take that number to what you guys got it to I get to $1.22. So I guess I'm not -- I wasn't in the midst of all the confusion but according to your guidance my numbers are pretty much right in line. And I was at the higher end of current consensus before you guys did your offering. For what that's worth.

Thank you, Chris.

But one quick question regarding your employee, your hiring. You hired a fairly large number of people last quarter. I'm just kind of curious as to what you guys are doing now given kind of maybe the slow RFPs or if you're still hiring pretty aggressively.

Chris, we continue to hire in some sectors very aggressively. As you would expect, given the turn-down in the tel-com sector and now the aged dot-com implosion, there are lots of people available in the workforce. Having said that, there's a tremendous amount of competition. And I would be remiss, and I would have been remiss, all of us, had we not indicated this on the road show. I'm definitely not being an alarmist because what we're doing is good if not better than the average bear. But if there's a stifling to growth in any way, shape or form in our businesses it's hiring those people. And we continue to hire at a rate and pace that shows this accelerated revenue growth.

In those cases where we need to hire people in a consultant capacity which is representative of some of our ODC growth, we do that. But we continue to very, very aggressively interview and hire people at a fairly healthy rate, Chris.

With regards to the kind of the more senior level type areas, are you having -- is it harder to get people, granted given all the activity in the public markets for some of these government IT guys?

Actually, at the senior level one of the things that we tend to enjoy that if you're a company that's gotten the exposure, the positive exposure that we have gotten -- why you see a lot of this consolidation -- if you're a midrange kind of company there might not appear to be as wonderful a future. But at the senior executive level we don't suffer from a lot of quality candidates who might want to tie their star to our star.

OK. Thank you, guys.

We'll go next to at Lehman Brothers.

We'll go next to at Banc of America Securities.

Hi, gentlemen. I'm here for . You talked about some equipment pass-through numbers that revenues that hurt margins a little bit this quarter. Could you give some more color going forward on what you might expect in the fourth quarter and the second half of the calendar year on that type of revenue number?

Typically if you look at our direct cost, Larry, about half of it is our direct labor cost. The other half is either subcontractors or other passthrough. We are prime on about 80 percent of our work, so we have a lot of subcontract revenues that do flow through our revenues. I'd tell you that in the current quarter we probably had $5 to $7 million of unusual revenue activity associated with ODCs, if that helps you any. So if the fourth quarter, if we had the same level we would add about $5 to $7 million of additional ODCs if the third and the fourth quarters came in the same.

Great. Thank you.

Again, ladies and gentleman, star "1" to ask a question. We'll go next to at .

Good morning. I just want some clarity, Steve, if you could, on what we should be expecting on the interest expense/interest income line for the fourth quarter.

As you know, we have about $25 million of our debt is still outstanding because we have an interest rate swap that's out there, and the cost to break that swap is prohibitive at this time. We also have a $7 million note that is related to our acquisition of DSIC. That carries about a 4 percent kind of an interest. The swap is at 5.15 percent. So we'll have some interest expense associated with that in the current quarter. As to the funds, the interest rates are low. We were kind of hoping we'd be looking at a 3 percent kind of an interest income, if you will, on that money. Rates are actually closer to -- if you get 2 you're lucky. So be down a little bit. So I'd say the net of interest expense with interest income is about $100,000 a month of income is what I'd guide you to.

OK. I notice that interest expense is a little bit higher in the March quarter than I was modeling. Is there anything there you'd like to talk about or anything I should know?

No. I can't think of anything unusual.

OK. The other question is around revenue this quarter. I'm assuming the revenue you're reporting does not include reimbursable expenses?

No, our revenue does include reimbursable expenses.

OK What was that in the quarter?

We don't break it out specifically. Do you have a number? Hold on a second. I'm getting a chart here. Our total ODCs in the quarter, Sandra, were about $57.5, call it $58 million. That's higher than what we would normally run. Typically it's about 50/50 direct labor and to ODCs. It's a little bit higher this quarter.

Right. You did say that earlier. The last question is for Ken. You talked a little bit about the increase in activity in the first three weeks of April. You talked about the contract vehicles that are helping that. Can you talk about specific agencies or specific departments within the Department of Defense that are seeing an increase in spending or an increase in the flow of RFPs?

Obviously, we're about two-thirds of our business is with DOD, so when it slows down it hurts us the most out of DOD, and when it picks up it comes from DOD. So this log-jam that got broke here early in April I think each and every one of these three opportunities we've been waiting on for lo these many months all came out of the Department of Defense. Having said that, I think the log-jam is the log-jam. The one thing I didn't say when we talked about one of the issues that, to slow this process down, we talked a great deal about this federal workforce shrinking a bit. The part that shrinks fastest is the acquisition part of the workforce, the senior professional people, some of which we actually sell back to the federal government as civilian contractors. They just don't have the horsepower that they once had because these people wind up going to work for companies like us. So that's what's really slowed it down. And that's really happened across the federal landscape, not just DOD.

So I think we're actually going to see this log-jam broken through the entire federal sector, Sandra, as opposed to just DOD. It's just that the DOD log-jam certainly helps us considerably better.

Sure. And you cited three specific RFPs that you saw since the beginning of the month that you've been waiting on.

Yeah.

Is that good? How many are you still waiting on? Can you give us a sense of, put that number three in context?

It's good because we haven't had a lot of activity over the course of the last couple months, Sandra, so not only is it good but it's incredible cause for celebration. But in context, we're actually probably looking at things that have actually reached, that we have opined they've reached a gestation point probably in the dozen to 15 range. So it's more than the tip of the iceberg, but there's just a lot of activity that we believe is fully gestated. We just can't get them to get out of the acquisition shops in the federal customers.

And of that dozen to 15, are you involved in all of those, some of those?

Yeah. We have -- when I talk about "these numbers," these are not just RFPs that we're taking a look at for the first time. These are things we've invested lots of time and money in qualifying either as a prime contractor or as a partner to a large prime contractor. So we're locked and loaded. I mean, once they issue, assuming that there's no great surprise, we'll go to our next level of review which is the decision level of review, and we'll fire when ready as soon as they issue. We may get surprised on some of them, but when I talk about these things getting in this part of the queue, these are deals we're going to bid. These aren't deals that we're going to think about. We've been thinking about them for way too long. OK?

OK. Thank you.

You're welcome.

And we'll go next to a followup from Ludvig Weil at Unterberg Tobin.

Yeah. I'm still laboring on the same problems here. You're saying your press release income from continuing operations 8.5 million as high as 9.3 admittedly -- 8.5 to 9.3 range on revenues of $182 million midpoint between your range. That implies significant margin pressure relative to what had been kind of expected or guided, or whatever, in the detailed P&L statements that you see. Can you talk about the margin pressure, where it is? Is it just in commercial, or it is in the federal as well due to mix of contracts? What is happening, and when will it be corrected?

Ludvig, I maintain that the margins are improving quarter over quarter. You know, our high-end range if you look at the guidance we've just given, at the high end of $184 of revenues and $9.3 million of net income, return on sales is 5.1 percent. That's higher than what we did in the current quarter, so they're not deteriorating. They're improving. Again, they're in line with what the previous guidance we gave. If you look at the full year, we're pretty much in line with what we've been saying.

I'm not questioning you. I'm just saying there has, somehow or other, that you didn't get the message across through; one analyst seems to have been close on track. But clearly First Call would reflect just one analyst.

First Call -- I can tell you First Call is not accurate. We have tried to get them to -- I can't force analysts to change their estimates.

No, but you can alert them.

We have alerted First Call that it is --

No. You alert the analysts.

We have done that.

Every other company that I deal with when they see an analyst P&L statement is out of line or not sufficiently ready, gets sidetracked, they call them up and say, you better look again.

Our position with regard to analysts' estimates is, we're available to answer, but we are not proactive in going out and saying have you changed that? because there's case law where the FEC kind of gets after people about going out and doing that. We put the guidance out for that very reason so we don't get in problems with reg FD. So our position is, if we make the major change like a secondary offering or something like that, we're available to answer the questions of the analysts that they call in, but I am not going to put ourselves in liable position going out calling the analysts saying, why haven't you changed your estimates?

You're absolutely right on that, but --

Well, that answers the question. If I haven't received a call or Steve hasn't received a call from an analyst, we're not going to initiate and say, why haven't you changed your estimates?

Yeah, but don't you receive calls all the time from the analysts on the sell side? They call you. Did you take the opportunity when they call you to say, oops, you know?

Those who called, we did.

You did. So then they just, the analysts just didn't do their homework then. That's what you're saying.

Thank you.

One thing we will be focusing on that's obviously, given the activities of this morning, we take all this quite seriously, and we'll be looking at our business plan for the next fiscal year. I can assure you we're coming out as soon as we possibly can with board approval to make sure there's as much visibility as possible, notwithstanding the fact that I think the operating parameters that Steve Walker mentioned previously here about 15 minutes ago, still are valid and still will be our target operating performance levels for next year. Debbie?

We'll take our next question from Christopher Collins at Oak Ridge.

Yes. Gentlemen, thank you. Good morning. Are you running afoul of Reg FD if you don't alert analysts to the share count that's in their models?

We have gone out and we've told the Street that we did a secondary. We told the Street that the green shoe -- we sent out press releases. We've announced it. We've been in compliance with Reg FT on that because we put out the announcements through regular dissemination and all that. So it's a question of what are the analysts who put out research on us? Are they all keeping up with it?

These are the types of issues that come up that the investing public -- it shakes their faith in the bodies that run the systems here. How can we improve the situation that just presented itself this morning?

I guess you'd have to call the company directly.

You mean, I have to call the company directly?

Well, we put out a press release. I mean, that should answer the question. We're the source of information for both the buy and the sell side.

The news release information was published in consonance with the activity of the company. For example, the announcing our overallotment option for the underwriters was put out March 20. That was the extra amount known as the green shoe. So that was publicly released. We had public releases also having to do with the closing of the transaction overall. And we also put, for example, another news release that went out, one announcing the pricing was on March 7. So those news releases are out public and were fully announced, including the details of the number of shares to be incorporated. We even put out-- in consonance with our financial and capital structure management, we put out our new credit facility release as well February 7. I believe we've been quite consistent in providing information.

Obviously there's some discontinuities. I mean, it's obvious from this morning's dialog and the interest of the parties in terms of the, I guess it's the receipt of the information. Certainly I believe we've been quite consistent in responsible in providing the information. In terms of how it gets received, I guess we'll have to think about that and make sure we have more of a closed loop system, if you will. We'll certainly take your thoughts and viewpoints seriously.

We'll go next to at Sidoti and Company.

Thanks. Good morning, Guys. I just have a quick followup. Steve, did you say you expect $100,000 per month of income on the interest line?

Yeah. Roughly. I think it's about $115,000 or so. That's a net number. That's net of interest expense.

Right. I got you. And you expect that in Fiscal '03?

Well, Fiscal '03 -- again, it depends. You know, our hope is that we're going to continue to do acquisitions and put that capital to use.

Exactly. My other question is just sort of qualitative. With the deemphasis of the commercial side of the business -- and I mean, obviously, people have been listening to what you're saying because you've been talking about deemphasis of that side of the business for quite a while. My question is, when the defense business becomes a little bit less sexy than it is now, how will you shift back your focus toward the commercial? Or will you continue to deemphasize it and really become just a Defense pure play?

I'm going to present sort of a strategic perspective, Michael, and then Ken maybe you can augment that with an operational perspective. I've been going through these episodes for nigh these 20 odd-years that have been essentially running the major part of the business. And we are very tuned to our view of looking ahead. I mean, that's really essentially what the hell I do is to position the company and to reorient the company as the national priorities, for example, shift. And we will be looking at those situations from a strategic standpoint and from a bid opportunities standpoint as well as our acquisitions.

So rest assured that that will be a part of the intake, if you will, into our planning process. And the trick in this business -- I guess you've already figured it out -- is not looking at today's news release but, is the company positioned in the right sectors for the continuation in the foreseeable future? I think as I stated earlier in my report I don't think we've ever been better positioned.

We're in the absolutely the critical technical areas right now, the high need and high challenge areas, and over the last four or five years we've been repositioning the company and anticipating this sequence of events. I rest assured and you may rest assured that we will be looking at when that direction appears to be changing.

But the foreseeable future, national priorities are exactly as we've stated them here, and we're going to pursue them with great vigor.

Great. Thanks.

Gentlemen, at this time, we have no other questions standing by. Mr. London, I'll turn it back over to you for additional or closing remarks.

Thank you, Debbie. I want to thank everyone who called in this morning for your interest and your questions. We certainly appreciate your participation. We also hope we've provided you with a much clearer picture of our results, not only for the third quarter but perhaps even more importantly for our expectations going forward and our overall business plan as we move into this next fiscal year.

After the earning season includes, we anticipate making some visit to ares out in the west, West Coast, also up the Eastern Seaboard, Philadelphia, Boston, New York. We also look forward to seeing some of you as you come by the Washington area to give us a call and arrange a meeting. We certainly have been delighted to have you stop in and pay a visit on us. Those contacts can be arranged through our Investor Relations Department, and David will help you there.

We're also aware that some of you may have additional questions you'd like to follow up on, and we certainly ready and in position to respond to those. It will probably take 10 or 15-minute break and at that time the calls would come in and Steve, Ken and Dave certainly will be available to take those as you have interest.

So I want to thank you again for your participation. That concludes today's call, and best wishes to all. Thank you.

Thank you, ladies and gentlemen. That does conclude today's call. You may disconnect at this time.