CACI International Inc (CACI) 2002 Q4 法說會逐字稿

Good day, everyone. And welcome to the CACI International fourth-quarter year-end earnings results conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mr. David Dragics. Please go ahead, sir.

Thank you, Anne. Good morning, ladies and gentlemen. I'm David Dragics, Director of Investors Relations at CACI International. We are pleased you are able to participate with us today. For those of you who are with us for the first time via the telephone or the Internet, we welcome you to this call.

As you know, earlier this morning we released our fourth-quarter year-end 2002 results. We hope that most of you have had the opportunity to review our announcement and the results. As we have on recent conference calls, we are including exhibits with our presentation and hope you will find them helpful in reviewing our financial results and trends in the discussion of our operations. As we progress this morning, we will 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 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.

Our full safe harbor statement is on this slide, and will also be incorporated as part of the transcript of this call which we will post on our web site next week. I would 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 will find the call informative.

I'm extremely pleased with our record results for the fourth quarter and all of fiscal year 2002. It's a quarter and a year marked by sustained growth, performance, and great progress toward our goal of reaching a billion dollars in annual revenue by fiscal year 2005.

We ended fiscal year 2002 with very strong fundamentals. A strong balance sheet with a significant cash position, strong cash flow, increasing profitability, increasing organic growth, and a significantly increased backlog.

This past year completed June 30, 2002, CACI finished its 40th year in business. As a public company, though, since 1968, we believe CACI has flourished in the business community by combining visionary strategies, technology and services with a relentless customer focus. Throughout we have endeavored to maintain a corporate culture that places integrity and honesty above everything else. CACI continues this commitment today. I believe that our performance this year demonstrates the strength and strategic diversity of our operations and validates our business strategy.

More importantly, as our government customers continue to fight the war on terrorism, our performance demonstrates how we are continuing to meet the needs that they have in each of our major business areas: managed network services, knowledge management, systems integration, and engineering services. Information and communications technology is powering the ongoing transformation of our military, as well as the United States Federal Government overall. It is becoming the new front line for America's homeland security.

With the anniversary of September 11 just a few weeks ahead, we have witnessed the greatest national security dilemma since the beginning of the Cold War. In an era where we have enemies from within who can exploit vulnerabilities with devastating impact through asymmetric warfare, getting vital information on time is critical, but the problems are daunting, the databases and systems to collect, analyze and use that information effectively are needed today. We believe our strengths are an excellent fit with the new national priority, the collaboration of communications. We feel that CACI is ideally positioned in this new era of defense, and to continue its rapid growth and profitability.

Next exhibit, please. Now for our discussion of our current performance and what we expect as we move forward into fiscal year '03. First Steve Waechter, our Chief Financial Officer, will report on our financial progress. Then Ken Johnson, President of U.S. Operations, will discuss our domestic operations. Greg Bradford, President of CACI Ltd. in the United Kingdom, is recovering from some medical procedures and not able to be with us this morning. However, Steve and I will be able to answer any questions you may have about the U.K. operation. After these reports, I will have some additional -- additional thoughts to share with you.

So now here is Steve Waechter.

Thank you, Jack. Good morning, everyone.

Let's go to the next exhibit, which is page 6. As you know from our release this morning, we reported a record fourth quarter and full year of revenue in earnings. Revenue for the quarter increased 25% to $191 million versus $152.6 million a year ago. Income from continuing operations was $9.3 million or 32 cents per diluted share, up 47% over last year's $6.3 million or 27 cents per diluted share and for the last time I want to mention we adopted FAS-142, goodwill and other intangible assets, as of July 1, the beginning of our fiscal year that does not allow us to restate prior period earnings.

Next exhibit is page 7 here, our Federal Government business had another quarter of solid growth, up 31 per cent this quarter and represented 92% of our overall revenue. As was the case last quarter, the internal growth rate for our federal business was strong, up 20% in the quarter. We continued to see this growth being partially offset by lower commercial and state and local business and the Company's overall internal growth rate was almost 15% in the quarter. Like last quarter, the higher revenue relative to our street guidance, $191 million versus the range of $182 to $184 million was primarily driven by increase of the direct costs which were attributable to increased subcontractor support to our prime contract efforts and to equipment purchases. As we've indicated this pass-through revenue carries lower margins. The higher OBCs have the impact of lowering our EBITDA margins. For example in this quarter if you were to adjust for the approximately $6 million higher than anticipated subcontract revenue, our EBITDA margins would have been approximately 9.8% which is in line with last year. Overall, 90% of our revenues are from prime contracts and subcontractor revenues will vary from quarter to quarter. We anticipate EBITDA margins to range in the future from 9 and a half to 10%.

Our United Kingdom operation reported $10.3 million revenue in the quarter. About $2.1 million less than the fourth quarter of last year. The primary reason for this decline is the same as we noted on this call last quarter, the lower demand for commercial I.T. services in the U.K., particularly in the telecommunications industry. Our U.K. operations pretax margins were 13.5% this quarter compared to 17% a year ago. The decrease in the margin is due to lower levels of commercial I.T. time and materials work.

Moving to the next exhibit, which is page 8, let's take a look at one of our key metrics, cash flow as measured by EBITDA. EBITDA for the quarter increased 22% to $18.2 million or 9.5% of revenue compared with $14.9 million or 9.8% of revenue a year ago. I also want to note that our net cash provided from operating activities was approximately $26 million in the quarter putting us at about $39 million for the year versus $31 million in fiscal year '01, that's a 24% increase.

On the next exhibit, page 9, our backlog at the end of the year was $1.9 billion up from $1.1 billion a year ago. The funded backlog was $385 million compared with $292 million a year ago which is an increase of 32%. Debt of $35.2 million at the end of the quarter is related to a $25 million interest rate swap which is due to expire here in January of 2003, $7.2 million in notes payable related to our acquisition of DSIC, and $3 million in deferred payments related to our net federal acquisition from net.com. As a result of the secondary offering completed in March and the strong cash flows from operations during the quarter, cash and equivalents at the end of the quarter was approximately $151 million. Days sales outstanding at the end of June were 71 days compared with 79 days a year ago.

Now, let's talk a little bit about our revenue and earnings guidance. If you turn to the next exhibit on page 10, guidance from revenue and income and continuing operation and basic and diluted earnings per share for the first quarter fiscal year '03 and the full year. The guidance was also included in this morning's release and reiterates what we stated back on May 29. Revenue for the first quarter will continue to grow 25% to 26% consistent with our just reported fourth quarter and will range between $182 and $184 million. Net income from continuing operations will range between $8.9 million and $9.4 million, an increase of 32% to 40%. Our diluted earnings per share will be between 30 and 32 cents per share, up 7 to 14% [inaudible]. We estimate the diluted weighted average shares for the first quarter will be $29.5 million.

For all of FY '03, we estimate our revenues will range between $800 and $830 million and as indicated in our May guidance release, we expect 12 to 15% internal growth. Income from continuing operations should range between $40.7 million and $42.5 million, an increase of 28 to 34% over our just-completed fiscal year '02. Our diluted earnings per share should be between $1.37 and $1.43, up 11 to 16% respectively.

The tax rate for the year is expected to be approximately 37.5% and diluted weighted average share for the full year are estimated to be $29.7 million.

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 the 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. At this point, let me turn the discussion over to Ken who will discuss our domestic operations. Ken.

Thanks, Steve. Good morning, everyone.

To ensure that everyone looking at the exhibits over the Internet are on the same page as we are, you should be on exhibit number 11. The activity in our operations during the fourth quarter has continued at the hectic pace we noted back in April. Increased tasking on many of our contracts from the Department of Defense and from federal civilian agencies like the Department of Justice, the FAA, the Coast Guard, Customs and others that have added that increased -- contributed to that increased tasking. Similar to last quarter, the growth has occurred across the board with many of our clients in all of our service offerings.

Adding to that activity were two major recompete wins. The $500 million defense information systems agency, Global Solutions Network contract and $164 million naval tactical command support systems contract.

The next exhibit shows our revenue by service offerings for the year compared to FY '01. Managed network services accounted for 23% of our revenue this year. Systems integration which includes our UK operations was 42%. Engineering services 23%. And knowledge management, 12% of revenue.

Next exhibit. The domestic systems integration business was up 42% over the fourth quarter of last year and up 24% for the year overall. That growth, as we mentioned here last quarter, is being primarily driven by our C 4 ISR work with the army's communication and electronics command. Contributions from the DSIC acquisition and increased tasking from various national intelligence agencies and the FBI. Our managed network services business was up 16% for the quarter and 37% for the year. The growth there came from both managed network services and from our information assurance practice, where we are doing more work with the custom service, the FAA, and other agencies.

Engineering services was up 20% quarter over quarter and 16% for the year, reflecting not only the increased tasking we have mentioned but also some of the new business that we have been awarded.

Our knowledge management work is up 15% quarter over quarter and 15% for the year. Most of that increase has come from our continued support of the Winstar or Savings and Loans cases, tobacco litigation and our early efforts to provide support to the Securities and Exchange Commission as their workload increases.

Overall, we are very pleased with the progress we have made this quarter and for the full year and as Steve mentioned, the majority of this growth has been organic.

Let's move to the next exhibit. Our qualified pipeline of opportunities is about $2.8 billion. The approximate mix of what we are looking at is about 38% managed network services, 22% systems integration, 30% engineering services and 10% knowledge management. These opportunities are comprised of prime and subcontractor opportunities, that this pipeline remains around $3 billion given our increased proposal activity is very significant to our growth.

Next exhibit, please. Finally, I want to make a couple of comments about homeland security. As you know, this month, Congress is out of town until right after labor day. Before everyone left, the supplemental appropriations bill for about $28 billion was passed and signed by the President. About $6.7 billion dollars of that is for homeland security with about $3.9 billion for the transportation security administration. About a half a billion for the Coast guard, $175 million for the FBI and about $84 million for law enforcement agencies run by the Treasury Department, such as the Secret Service and the Customs Service. Given our current business with these agencies, we are obviously pleased with their budgetary successes.

Since we are on the UNISYS team, we are very encouraged with the speed of OMB's review of the subsequent award of the transportation security administration's new infrastructure contract which was made recently here last week. Most of you are also aware that the legislation for the new Homeland Security Department is tied up in the Senate due to proposed work rules and issues between the executive and legislative branches. Despite that situation, we believe that FYO funding for the agencies that make up the new department still have to occur regardless of whether the new agency is created before or after the elections. Their requirements do not go away. We can't envision a scenario whereby Congress is holding up critical funding of agencies that are considered key to the homeland security mission.

Overall, as I am sure you can sense from our comments, we are very pleased with our results and the pace of activity that we are experiencing. And we expect to continue to keep making a contribution to our government's efforts and to not only fight the war on terrorism but to also continue the upgrade of its systems and services.

Jack, that concludes my remarks.

Thank you, Ken. Thank you, Steve, for your updates and for those encouraging comments on current operations.

Ladies and gentlemen, clearly, this past year has been a hallmark for CACI. As we completed our 40th year in business and exceeded all of our financial goals, we also established CACI as a primary solutions provider for the Departments of Defense and Justice and the intelligence community. More than at any other time that I can remember, this year has been most successful in positioning CACI for future growth. This past year confirms we are in the right markets with the right capabilities, the right technologies, and the right team. And I am grateful to our employees for their hard work and dedication and I appreciate the work of our highly-experienced management team.

We also take pride in having a fully independent board with an independent qualified audit committee. And that we believe and we are going to have no trouble whatsoever in meeting all of the standards and requirements as set forth by the Sarbaines-Oxley Act as well as other requirements of other regulatory bodies. I might add that Steve Waechter and I have no concerns over certifying our financial statements.

We believe we are well on our way towards our goal of reaching a billion dollars in annual revenue by fiscal year '05 with proportionately enhanced profits and shareholder value. Our progress has come from implementing our growth strategy, sustaining internal growth by maintaining our current business base with happy customers. Accelerating new business development and opportunities through our technologies and offerings. And by making successful, strategic accretive acquisitions.

We have won every major recompete and achieved significant growth throughout our domestic operations. This includes one and a half billion dollars announced in federal contract awards. And as Ken mentioned we're in hot pursuit and in the hunt for new significant business opportunities going forward.

Our M&A program continues to play a major role in CACI's growth. This year we acquired DSIC and last month, announced our planned acquisition of the division of Condor Technology Solutions which is going fine and should be announced shortly. Our pipeline of M & A opportunities is robust and active.

CACI is positioned to continue growing in these areas that are critical to our nation's security, including intelligence community support, network services, information warfare and security and space systems. We have developed a business base that allows us to successfully pursue larger more technologically-complex programs that support our customers increasingly complex missions.

As we continue to build CACI and create enhanced shareholder value, we are truly enthusiastic about our listing on the New York stock exchange this coming Friday. The 16th of August. We believe the market quality of the NYSE will be of great value to CACI and its shareholders. Our symbol will be CAI.

At this point, we are ready for our discussion and to receive your questions. So, Anne, I will turn it back over to you to bring forth the first questions.

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

We will take our first question from Michael Legg at Jeffries.

Thanks. Two quick questions. One, you mentioned expecting to close an acquisition in your press release this quarter. Can you comment on that or is that the Condor acquisition?

And then secondly, the managed network services was up 16% for the quarter and 37% for the year. I believe that's one of your focused areas for growth. Could you just comment on what type of quarterly growth you expect on that going forward? Thanks.

We will be glad to address these. What I am going to do is ask Steve Waechter to pick up for the Condor, as well as the growth rate.

With respect to the Condor acquisition, we are in the final throes of completing that acquisition. We would anticipate very shortly here an announcement that that should be completed hopefully here before the end of the month, if not sooner. With respect to growth rates, managed network services, kind of anticipating in the future about 15% to 20% per annum is what we are looking for in that area. We had the acquisition of DSIC and other things that will fluctuate that growth rate that we have had there.

Okay. Thanks. Steve can you just -- you mentioned the adjustments from EBITDA from 9.5 to 9.8. Could you go over that again, I missed that.

Yeah, if you were to adjust for what we would consider a little bit higher-than-anticipated revenues from subcontractor, what we call ODCs, that revenue, if you subtracted that out of both revenue and direct cost, it will get you down to an EBITDA ratio of 9.8%.

Okay, thank you.

We'll take our next question from Brett Manderfield at U.S. Banks.

Hello Brett.

Hello, good morning, guys, congratulations on the quarter.

Thank you.

I guess to follow up on the question related to the ODCs, do you expect to see similar types of numbers in the first quarter for the rest of '03 on the ODC side?

Steve.

I think the pattern here for the last couple of quarters on a number of -- it's not any one area, Brett, it's kind of across many different contracts we are getting a little bit here and a little bit there. And you add them up and coming in a lot higher than what we anticipated. You know, our hope is that that will continue. We are there to support whatever our customers' needs are, and that's what -- that's what we are doing.

Steve, can you -- can you tell us what the prime versus sub mix was and whether that's changed over the last couple of quarters?

The prime amount of our revenues is about 90.4% in this fiscal year. That's up from last year. Last year we were about 87.9% of prime. So we are priming a lot more this year.

Okay, great. And finally, I guess gross margins, do you expect them to remain consistent? Kind of in the 37.5% range?

I don't see any change in that in the near term.

Okay, great. Thank you.

We will take our next question from Molly Sandusky at Friedman Ramsey.

Good morning, I was wondering if you could talk a little bit about the TSA contract and how you see maybe that impacting you guys?

Sure, Ken will address that for us.

The GSA contract, Molly.

I am sorry, the TSA contract.

The TSA contract. We are obviously anxiously awaiting the flow down of money, as is our prime contractor. We believe that it will be a plus to our -- we don't have it in our plan, so we will -- it will be a plus to the -- to the growth that we experience over the course of the year, but it's -- I would refer you to our prime contractor. It is a very, very difficult thing to forecast. We are not sure yet how fast the money is going to be -- it's all been appropriated but how fast it gets to dispense. There is an awful lot of prework that the customer, as well as the prime contractor, has to do to establish priorities out of TSA. So it will be good, that's without question, but I'm want to quantify what we expect out of TSA.

I think a good footnote I would put on that is there is urgency in these areas to get things moving into the -- into the society for the national protection. So there will be emphasis, I'm sure.

Okay, great, thank you.

We'll take our next question from Tom Mayher at DB&T Capital Market.

Good morning, Tom.

Good morning, congratulations on a good quarter. Actually a couple of questions, Steve, can you give us a breakout of the federal civilian work between DOJ and other federal?

Why did I know would you would ask me that, Tom?

You would save so much time, Steve, you wouldn't have to listen to my melodious tone as often.

It is about 50%, almost exactly here in the quarter.

Okay.

About $26.6 million.

Okay, great. I think you mentioned your funded backlog -- your total backlog was $1.9. How much of that was funded?

$385 million.

Okay. Finally, I know once a year you only breakout your contract mix. Since we are at the end of that year, I figured it was okay for me to ask the question what the breakout was between cost plus T&M and FFP [ph]?

I've got that right here, hold on one second, let me get the mix for you. It's about -- this year it was 61.4% is time and material. Cost reimbursable is 19.2%. And the fixed-price contracts made up 19.5%.

Do you have the comp numbers for '01?

A slight shift here. We had -- 59.7% was time and materials last year. 21% cost reimbursable. And $19.3 was fixed price.

Great. Thanks very much, I appreciate it.

You are welcome.

Take our next question from John Mahoney at Raymond James.

Hello John.

Good morning, guys. Nice quarter. A lot of acquisition. I know you made a Condor acquisition, kind of a smallish one. Everybody probably saw the Signal acquisition and the activity over at Mantech. Can you comment on the acquisition environment and what you guys are looking at? I mean, Condor was a relatively small acquisition in -- relative to what else has been going on. Just curious what size you will be looking at going forward and how the valuations seem to be shaping up?

I will offer a few thoughts, John, and I am sure Steve will have some ideas to offer as well. Condor is strictly a strategic positioning opportunity for not only the technical staff but the customer set and the kind of work that's being done there. Our goal is to move our acquisition profiles up, certainly to the $50 to $100 million dollar range. We think that the valuations there are very consistent to what we have been seeing and have been seeing. We are not going to be moving toward a posture of pursuing nonaccretive transactions, John. We've got a very successful formula that we work here, as you are probably aware. I think we've got 18 or 19 -- we've got at least two more in the back door right now that we are moving vigorously on. They've been accretive transactions. Very successful integrations.

Some of the things you have seen out there are rather lumpy and crumpy in terms of being able to integrate and fulfill the accretive considerations. You see some of these other organizations really leveraging up their balance sheets and you are beginning to wonder what the real game plan is. Ours is to enhance shareholder value, to provide a solid business base going forward and I think that we have been able to fulfill that very successfully. In terms of valuations, Steve, obviously, we have a thought or two in particular maybe with the Mantech's --

I think, John, we are seeing a little pressure in some areas on some of these fields, but there is a -- a nice supply, if you will, of opportunities in the marketplace today. We still believe that the 6 to 8 times trailing 12 months of EBITDA is a reasonable price range. We were seeing deals that we believe we can get done in that range. And some are clearly going for little bit more than that, as evidenced by the Mantech deal. But we don't see it as a hinderance to our plan or strategy to kind of grow where we are. Again, as Jack indicated, we won't do a deal unless it is accretive have to our bottom line and strategically fits in the areas we have focused on.

One other question. I guess with Condor closing near term, that could add $11 million or so to fiscal '03?

The revenue, annualized revenues, over the last 12 months on that were about $20 million, John. It would add, you know, $1 to $2 million this quarter, in the current year, and for the full year, we would anticipate north of $20 million.

That $20 million is you are only going to get it for a month and six months. Seven total months?

No, we will get it -- our fiscal year ends in June. So we will be some portion in our first quarter here. You will get 75% of it, you know, going forward.

Okay. And the guidance you have given for the full year '03, the -- the upper end of that I assume because of small acquisition, right?

The range of what we said on our growth, the overall $800 to $830 million included 12 to 15% for internal growth and 7 to 9% for acquisitions which would take you to a kind of $40 million to $50 million range from revenues from acquisitions. Some of that will come from DSIC.

Okay. Okay. Thanks a lot.

That piece is baked in, but I would add the further comment that our goal is to move past the Condor type of situation and move to the larger strategic fit opportunities that we see out there, John. This is a temporary move in a way, and we will be on our way for a larger opportunities as we go.

Thank you.

Thank you.

We will take our next question from Prakash Parthasarat at Banc of America.

Hi Prakash.

Hi, there. Congratulations on the quarter. A question on your win rates, could you give us an understanding of how much of this quarter's contract wins were converted out of the pipeline that Ken had spoken about last quarter?

We don't -- we don't -- you are looking for win rates on a quarterly basis, Prakash?

Just trying to get a sense of how much last quarter's pipeline that you talked about, Ken, was converted, any broad indicators toward that?

How much came out of pipeline, we had like $3 billion of pipeline qualified opportunities.

Prakash, that is a tough question, we will probably have to get back to you.

Prakash, I will have to get back -- we submitted proposals -- probably submitted proposals. In fact, we can get you this number, I just don't have it off the top of my head, $300 million to $400 million worth of proposals were submitted Q4. Last quarter, we indicated that our pipeline of opportunity was about $2.8, $3 billion. So the reason I made the comment I did in the text was even though $400 -- let's assume that the $400 million is an accurate number, assuming that that too was out of the pipeline, converted to proposals, the pipeline stayed about the same. That is very, very encouraging for us. Obviously it is from that pod of opportunities that we select programs that we physically submit proposals, and we don't want dollar-for-dollar to have that pipeline go down as proposals get submitted.

So we are maintaining the -- the quantity and quality of pipeline opportunities while at the same time submitting proposals at a far accelerated rate than we were over the course of last quarter and the quarter before that we reported on the two subsequent conference calls that there was a fairly slow level of proposal delivery activity. That has picked up considerably and the pipeline has stayed about the same.

[Inaudible]

I will get you a number but about -- I think we submitted proposals roughly -- I know of one off the top of my head that was $200 million. I think it was around $450 million worth of proposals last quarter.

Great. Regarding the pipeline that you have right now, is there a correlation to the conclusion of the federal budgeting process in the sense, are there any near-term kind of opportunities in terms [inaudible] that would you look for?

No, Prakash, not real -- not federal budget dependent at all. Obviously, when -- in that particular pipeline of opportunities, we are looking at programs that are anywhere from -- in some cases they are 30 days out that we have been tracking for a long time to some cases they are a year or a year and a half out. So when we factored these and we put them in this pipeline and we are qualifying programs, we have to be sensitive to whether or not they are dependent on this year's budget dollars or next year's budget dollars, but as we are -- as we are qualifying opportunities, the dependence -- the dependence is on a program-by-program basis.

So if we go into a continuing resolution, if, in fact, the budgets -- the appropriations don't get signed in a timely fashion, October ,1 or within a month, then some of those programs will start slipping to the right. At some point in time, they become jeopardized, but that has historically over many, many years, all of us have been doing this, that is not a problem. So the opportunities continue to stay the opportunities, just a question of when they rear their heads.

Thank you very much.

Thanks, Prakash

We'll take our next question from Cynthia Houlton at RBC Capital Markets.

Good morning, Cynthia.

Hi, how are you guys, great quarter. If you could just clarify quickly on the prime versus sub. Is that a percentage of federal revenue or a percentage of total revenue?

That was total revenue.

What was free cash flow for the quarter and is the outlook for the -- for fiscal 2003.

For the year, I've got the statistics for the year I can give you. The cash from operating activities was $38.9 million for the year. And the capital -- Cap Ex was about $8 million. So free cash flow would have been about $30 million.

For fiscal '02.

And that compares with $31 million last year and about the same Cap Ex, about $8 million. So, $31 million of free cash flow versus $23 last year, that's about a 33% increase.

And then what about -- what's the outlook for '03?

We would anticipate that it should continue at the same kind of rates we have been doing this year. It's a good cash-flow business, and we think it is consistent with what we have done over the last five years, if you go back and look, our operating cash flows have been very strong.

We have had a long, long record of cash-flow focus, and I think even our receivables picture has been enhanced, and we will maintain a strong emphasis on cash management in this corporation.

Okay Cap Ex -- what is estimated for Cap Ex next year, 8 or 9.

It should stay about the same, about $8 million is about what we have been running, Cynthia.

Okay. And then, the ODCs. Did you actually break out -- I know you said with the marginal would have been if you took out the top and bottom line, but can you give us a sense of what the actual revenue or percentage of ODC was in the top line this quarter?

I don't have a specific number. I can tell you on the direct cost line, about half of that is direct labor, and about half of it is ODCs.

Okay. And is that the trend that it's been since prior quarters?

It been a little bit of a cha -- I don't have the specific number and can get back to you with some more specifics on that. A think it's a little bit more ODC.

We have been pretty consistent in the past couple of years.

I think - it's fairly consistent. It might be a percentage or two different, but it is around 50/50 on that number.

Just as a final question on head count -- and I guess that's maybe the -- just to understand the use of subcontractors. Is it that your finding that you are -- the contracts that you have, have requirements for a percentage of subcontractors or is it an actuality that it's -- in terms of getting up -- ramping and getting up to speed, you need to use more subcontractors?

Cynthia, the speed with which the government requires you to respond to some of these requirements today, and the technical -- the kind of the technical diversity of the solutions demands that you have relationships with -- a diverse set of partners. So as we have spoken before, this work that we cited it in, in our discussions, the work the -- the work we do for C-COM, when they come and look for us to provide some war fight or support, it is not uncommon at all for us to pick and choose amongst -- I think we actually have 87 subcontractors on that particular program. So in order to get -- to get them a solution in a timely fashion and timely for us is a 30 to 60 days, it is mandatory that we -- that we select the best amongst a whole host of subcontractors and partners and even vendors who have some specialized kind of equipment. And that all goes to support this 50% ODC pass-through.

I think Ken is a little modest there. I think it is one of our absolute distinctions and discriminators is our ability to respond to these by our good relationships with a wide variety of highly specialized technical organizations I think it's a big value-added pieces that our business philosophy and style of operation brings to the marketplace and for which we are recognized quite frankly.

And just to follow up on that. Is it right to assume that maybe some of the acquisitions, though, that you would look at might decrease the amount of subcontractors that you need so corporate operating margins might improve or is that really not the goal in the acquisition process?

It's almost the opposite in some cases. DSIC actually brought with us more subcontract work than prime contract work. Two of their biggest contract engagements were subcontract to AMS on a large defense program and a subcontract with EDS on the NMCI contract. So over the course of time, that will increase what we reflect as our -- -- as our subcontract business versus our prime contract business. So, that is not one of the issues that we look at as we put a template over acquisition targets, but it does have that impact to us whether or not a -- whether or not an acquisition target has more or less prime contract versus subcontract work.

I would add a footnote on that also that we have had a longstanding relationship with American Management Systems where we are the prime contractor, and they are the sub. So this will market base, one of the things we do look at is who we are dealing with on a subcontractor basis just to emphasize the importance of it, but certainly everything that Ken related fits right in our model.

Thank you.

We will take our next question from Glen Guard from Legg Mason.

Hi, guys. Great quarter.

Thanks Glen.

Just a couple of questions. One a big macro question. At the economic forum yesterday, President Bush announced that he will refuse to release $5.1 billion in homeland security funds. Looks like most of that is not security -- is not guarding the nation, whatever that definition means. Have you guys, you know, heard anything about that inside the beltway? Is this going to affect CACI at all in the short term?

Yeah, Ken, can you handle that for us please.

Glen, I read the press release, and obviously we are very supportive of that. Basically what he asked for was $1 billion. What they gave him was $5.1 billion. And he said he would rather take -- he would rather figure out how to get that billion dollars that the country needs rather than take the $4.1 billion dollars that the country doesn't need. That will have little or no impact on us. We will -- we will -- he and we will find the kind of money that we need to get the things done that we are getting in. That's obviously a very macro question and beyond my pay grade politically, but -- you heard it here first. That is not going to affect our business.

Sounds good.

A lot of political play is the way we would read that.

Okay.

As opposed to a business issue.

Got it. Okay. As far as state and local and commercial outlook for fiscal '03. What's -- what are the plans -- what were your plans in those areas? What do you see? How does that look?

Ken?

Yes, Steve will talk to the commercial side I think because it really -- it's really a UK question. We are doing little or nothing in the commercial space. We have got a few information assurance engagements where people have selected us by name because of our expertise. So we will continue doing that, but our contribution to the commercial is de minimis.

On the state and local front, we are staying the course. We will continue to be very, very judicious in those opportunities that we select. We actually bid and won small job here that didn't get released because it is not material to the overall picture, but we'll continue looking at those opportunities that our marketing and sales team brings us to and occasionally we will make a commitment and hopefully be successful, but it will be to an very, very judicious basis, and it is clearly not in the sweet spot of where this Company is going.

With regard to the commercial side, it's primarily our UK operations. It is about a $40 million business. They have been running the last three quarters right around $10 million a quarter. It has been fairly flat. Our anticipation would be that we see some growth here as the year on rolls. They have shifted their focus from the telecommunications industry and trying to get more into some of the local government business in the UK. Recently, they had some stuff with the strategic rail authority and some of the national health systems over there, but there is a lot of other people chasing after that too. I would anticipate that business to be pretty much flat year over year, maybe up a little bit, 5 to 7% maybe on an upside.

Glen, I just came back from the United Kingdom and spent a week in business management meetings with the leadership. They are anticipating and looking for a turn in the business in the first part of '03, calendar '03. I think there is good enthusiasm. The fact that CACI's UK operation has been able to sustain its business base and maintain its very handsome profit margin it is a real kudo. There are any number of companies that are having much, much more difficult and quite serious issues including bankruptcies and so on and so on. We have done quite well in part also through shifting our business from some of the commercial into some of the more local business base, local government business bases. As Steve mentioned.

Okay. And I guess two more real quick ones. One, are there any significant recompetes that we should be watching out for I guess in the next couple of quarters?

All recompetes are significant, Glen. [ Laughter] Just ask my boss.

Right answer.

Good answer.

But financially, as we've dutifully reported here over the last two years, our average contract's about five years. We have recompeted about 65% of our revenue base here in the last 18 months to two years. So you are going to see recompetes that range in size from $20 million for a five-year contract to maybe as high as $35 million or $40 million for a five-year contracts. So financially, not significant.

Okay. And then final question, as following up on the subcontractor percentage of head count you are using there, are there significant hiring plans at CACI right now to kind of deal with this increase in demand? And also, what was employee turnover for the year?

Let me take number two first. It was a little over 13%, I believe.

No, 11%.

11?

We were down, yeah.

11% for the year.

Okay. So -- Very good.

It's unnaturally low. That's a -- hopefully -- hopefully we can keep it at or close to that, but that's exceptionally low, in light with what is a going on here in the defense industry.

That's a good sign.

To the first question was --

Significant --.

Pardon me?

Significant hiring plans.

Yeah, the hiring plans. Without question, if you were on this kind of growth curve, if you were trying to grow 20-plus percent compound annual growth rate, it's -- as we -- as I think we've dutifully reported again, if there is a delimiter to growth potential, it's hiring people. And, in fact, it is the most important thing that we do, aside from delivering the goods to our current customers. It has the focus of each and every one of our managers, of our human resource department. We're continually running different kind of contests and programs and identifying any kind of number of referrals from internal employees. So it's -- it's probably the second- or third-most important thing we do.

We've got about 225 open critical slots right now that we are trying to fill.

Okay.

Thank you.

Thanks a lot.

Thank you, Glen

We'll take our next question from Nick Trotman at Adams, Harkness, Hill.

Hello, Nick.

How are you? What is the receivables balance in the quarter?

Receivables in the quarter was -- billed was $137.3 -- that's million and then $10.5 million on the unbilled. About $147-plus million.

Okay and the allowance for doubtful accounts?

I don't have that broken out, down a little bit year over year, primarily as we've indicated previously, we sold off our MSG-US business and so that will have an impact of bringing it down slightly. We also reallocated reserves from a receivable to just a general reserve in one instance. So you will see it down slightly. I don't have that number handy here. About $3.3 million.

Okay. Okay, great. Next question, what percent of your contracts of your businesses in the quarter was through GSA scheduled contracts? And perhaps could you look at -- look at your backlog as well. What percent of the backlog is GSA?

Backlog, I have trouble with the backlog, but for the year, revenues from GSA schedules and we have a number of them was about 21, 22%.

Great. Thank you very much

We'll take our next question --.

Let me just follow up. One of the reasons I have trouble on the backlog, is we only put the funded part of our GSA schedule of contracts in the backlog. So we don't put it -- If Ken wins an award here that is a one base year four option years, we will only put the amount that's funded in for those GSA scheduled IDIQ [ph] type contracts.

Steve didn't mean he has troubles with it -- [ Laughter] -- we are delighted with the activity associated with our GSA schedules and the way that business is has unfolded. We account for it or keep track of it in a little bit different fashion than we do some of the other contracts.

Let me also make a correction on the accounts receivable reserve is $4.5 million. What we gave you was the U.S.-based, total about $4.5 million

We'll take your question question from John Emerich at Bright Color Capital.

Hi John.

Did the free cash-flow number -- was there any capitalized software in the quarter?

No.

Great. This is a follow-up to the question just asked. What were the long-term receivables? Yeah.

You know what that number is? Hold on just one second.

Sure.

They were about $8.2 million, that's down about $5 million from where we were last year.

Any specific reason this quarter for the rise in unbilled versus billed or sequentially?

No, none that I can think of. Just timing of how we get bills out and so forth.

Gotcha

I don't know anything unusual about that. Should be fairly consistent.

Can we get some decorum on that?

We will get back to you on that.

Great, thank you.

Nothing that we know with materiality aspect.

We'll take a follow-up question from Tom Mayher from DB&T Capital Markets.

Steve, you gave the receivable number, I was wondering what the payable number for the quarter was?

You guys want everything. Hold on a second.

Make you earn your money today.

Absolutely.

All right.

Accounts payable at the end of the year. This is accounts payable and other accruals. $26.9 million, that's down from a year ago of $35.8 million.

Great. Thank you very much

Once again, I would remind everyone if you have a question, press star 1 at this time. We will pause to see if there are any further questions.

We will take our next question from Matt Grossman at Sigma Capital.

Hi, Matt.

Hi, how are you? The DS business, how much did that contribute in revenues for the quarter?

Say that again, please?

Digital Systems, how much did that contribute in revenue?

About $15 million.

$15 million?

Probably $16 million.

Okay. And then, looking at your guidance next year of $1.37 to $1.43 and your guidance in the first quarter of 32 cents ballpark which is consistent with what you have done in the last two quarters, can you just discuss why -- you know, why the earnings are back-end loaded for next year and what's going to contribute to that ramp-up in the back half of next year?

I'll try it first and then Steve will give you probably a heck of a lot better accounting answer.

If you followed us year in, year out, now you are talking to a three-year veteran of this Company. Q1 for us, July, August, September, we always show a bit of a dip Q1 to Q4. The dip -- the dip is manifested largely because we are a people-driven Company, there are a lot of vacations, we've got a UK operation and a lot of Europe seems to shut down months at a time. And so that tends to contribute to less direct labor. So it's -- it's not that we present a hockey-stick approach, it's just the way our year almost always lays out.

That's right. The big impact, as Ken indicated is our first quarter does have a less billable hours, if you will, and then also, as you factor in the impact of acquisitions, they are going to hit more in the second half of the year.

Okay. And then, within your guidance, are you suggesting that gross margins should be flattish over the course of the year?

We -- I actually anticipate that they should go up a little bit year over year, we've been in that 37.5, 38%. I would hope we can get those up a little bit based on the current acquisition that we are doing and just the mix of some of our contracts and so forth.

Okay so --

I would like to add, it will be a focal point of some of our management activity this year we'll be working on our margins.

Okay.

We feel like the economy is operating at a larger business base. Our run rate is exceeding $700 million. So we think there are opportunities for some margin enhancements. We will be working on it.

The other thing that impacts that as we indicated earlier, the ODCs, depending on what that volume ODC could impact it.

Good point.

What kind of volume are you assuming in your numbers? I guess as we look through the numbers coming out next year, just to get a better sense of where margins are, could you give us some estimate of what type of quarterly run rate you are looking for in ODC volume?

ODC volume quarterly run rate.

Our rule of thumb, we don't give the ODC revenue volume out, but on a direct-cost basis, it typically runs about 50% of our overall direct cost. I don't anticipate any -- any wild swings on that.

I would hasten point out though that we have a couple of contracts where a customer sometimes relies on us to provision a significant amount of equipment. So if the Federal Aviation Administration comes us to and indicates that they have in the year money they need to commit and they are going to buy 15 or 20 Cisco Routers, we will dutifully do that for them and it may have an adverse impact on a margin percentage. Our job to serve this customer and we do that on a fairly -- it's routine, but not terribly forecastable.

I understand. Thank you very much.

Thank you.

We will take a question from Ray Murtins at Capital Research.

Hi, Ray.

Hi guys. A question for you on the free cash flow. I'm wondering where the $30 million comes from based on what you just said, [inaudible], where the balance sheet improvement came from to get you to that free-cash flow number.

For the year, the improvement came from -- let's see here -- primarily we had one -- we had a large contract that was -- we had a receivable that was outstanding. So we had significant improvement in that over the year. I don't know any one area -- it's kind of across the board here. It's improved collections just overall. We took our days down from 79 to 71. We do have a timing issue.

As you look through the first nine months of our fiscal year, we had a lot of ODCs, and the way -- the way the bars work here, we have to pay our subs within 30 days and get those bills and then turn around and we then bill them onto the Federal Government and typically get paid in 45 to 60 days from the Federal Government. A working capital issue and timing issue at times that fluctuates these earnings and so forth. And we had a significant increase, as you may recall, in the third-quarter of ODCs and again here in the fourth quarter and that has an impact on the timing of these cash flows.

One other question on the $40 million to $50 million expected acquisitions next year, roughly how much of that is DSIC?

It is very little. -- let's see, November -- a little piece of it -- you do the calculation.

You are talking about --

Yeah, the forward. More of that -- more of that expected to come from new acquisitions or from --

Primarily new acquisitions.

I think you are asking what are we anticipating -- baked into our projections for acquisitions, is that -- ?

Exactly, yeah.

The way we did the math is took 7 to 9% and multiplied it times the revenue that we are leaving this fiscal year with. And so, there's some -- there's certainly some DSIC remaining, but it's -- but -- but it is not material to the inquisitive growth that we expect.

Thanks.

We're going to be aggressive and active in the M&A market.

There are no further questions at this time. I would like it turn the conference over back to our speakers for any additional or closing comments.

Anne, thank you. We certainly he appreciate your help and thank all the callers for your questions and obviously for your interest. We thank you for your participation in our call today. We hope we have been able to provide a clear picture of CACI's performance and our expectations certainly as we go forward.

One further note, after we ring the bell on Friday at the New York Stock Exchange, we will also be making some visits in the New York area and later on the west coast areas among other places. Also know that some of you may be coming to the Washington area on tour, as they say, and we certainly would look forward to you stopping by and bring -- giving us the opportunity to bring you up to date on CACI, our operations and business plans.

As always, I would like to -- if you are interested, throw out the invitation, to give us a call, and set up through David, our investor relations department, he will be glad to set up any kind of appointments and meetings that may be appropriate and we are also going to be available here a little bit after the call, within about 10 to 15 minutes to take any other calls that you may have on some kind of special issues or whatever you may have on your mind. We are most eager to help you in your pursuit to understand the business plans of CACI. We think we have a solid operation going forward and fiscal '03 looks very exciting to us and we are most enthusiastic as we see the marketplace unfold. Thank you again, ladies and gentlemen, that concludes our conference call for this morning.

This concludes today's conference. We appreciate your participation. You may now disconnect.