CACI International Inc (CACI) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the CACI International First Quarter 2003 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Mr. David Dragics. Please go ahead, sir.

Thanks Joseph, and good morning, ladies and gentlemen. I'm Dave Dragics, Director of Investor Relations of CACI International. And we're very 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 first quarter 2003 results; and 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. We hope that you will find them helpful in reviewing our financial results and trends and the discussion of our operations. And as we progress this morning, we'll make every effort to keep all of you on the same page as we are. So 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. Primary factors that could cause actual results to differ materially from those anticipated or listed at the bottom of this morning's earnings release as well in the company's Securities and Exchange Commission filings. And our full Safe Harbor Statement is on this slide will also be incorporated as a part of the transcript to this call, which we will post on our website. And I would remind and refer those who might be listening to the replay of this call to view the full Safe Harbor Statement there. Now, 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.

J.P. London, PhD: Thank you, Dave, and good morning, everyone. I also would like to welcome all of you to our conference call. We know that many of you are new to CACI and to our call this morning. We appreciate your interest and hope that you'll find the information we provide on the call informative to you. We're very pleased to announce record results for the first quarter of fiscal year 2003. It was a very active quarter across all our business areas and core capabilities. These record results validate that we are in the right markets and reinforce that we are on the right track to achieve our strategic growth plan for surpassing 1 billion in sales and revenue by 2005. We're meeting growth targets with strong internal growth, an outstanding record of winning re-compete contracts, and an aggressive mergers and acquisition program with a continuing emphasis on customer satisfaction as the foundation for our success. CACI is strategically focused on core areas that are showing high levels of contract activity by the federal government. Our strategic business plan is to aggressively pursue managed network services, support for the intelligence community, information assurance, engineering services, and knowledge management. CACI is well positioned to continue to support our national security with solutions for improved intelligence and threat warning, information analysis, and the better application of better information, as well as weapons systems engineering support efforts. These are all national priorities, and CACI is deeply involved in providing solutions that support these priorities, the war on terrorism and homeland security. Our fundamentals remain strong, and the trends we noted on our fiscal 2002 year-end conference call in August continue, increasing profitability, continued trending up on internal growth, strong cash flow, and a strong balance sheet with significant cash position. So with me today to discuss our results and expectations and to answer your questions are Ken Johnson, President of CACI, Inc.; and Steve Waechter, our Chief Financial Officer. Greg Bradford, President of CACI Limited in United Kingdom is available if you have any questions. As is our custom on these calls, we'll discuss three principle items. First, Steve Waechter will discuss our financial results. Then, Ken Johnson will discuss our domestic operations and our outlook. And then, third, I'll have some closing comments about the quarter and what we see ahead. After that we'll open up the call to your questions. The first item on our agenda is our financial results. So here is Steve Waechter, our Chief Financial Officer, to discuss them. Steve, over to you.

Thank you, Jack, and good morning everyone. Let's go to the next exhibit, which is number five. As you know from our release this morning, we reported a record first quarter of revenue and earnings. Revenue for the quarter increased 29 percent to 188 million versus 145.8 million a year ago. Income from continuing operations was 9.4 million or 32 cents per diluted share, up 39 percent over last year's 6.7 million or 28 cents per diluted share. Moving to the next exhibit, number six. Our federal government business had another quarter of solid growth, up 35 percent this quarter and represented 92 percent of our overall revenue. As was the case last quarter, the internal growth for our federal business was strong, up 21 percent in the quarter. We continue to see this growth being partially offset by lower commercial and state and local business, which collectively were down 12 percent from a year ago. The company's overall internal growth rate was just over 16 percent in the quarter. The higher [indiscernible] to our street guidance of 182 million to 184 million was attributable to the acquisition of Condor, which was approximately 2 million in the quarter and revenue related to increased other direct costs, or ODCs, from increased subcontractor support to our prime contract efforts and equipment purchases. As we've indicated, this pass through revenue carries lower margins. For those of you new to CACI and the government contracting sector, other direct costs are costs that include outside consulting subcontractors, travel and equipment purchases required by our customers. Our United Kingdom operation reported 10.3 million in revenue in the quarter, a 3 percent increase from last year. This increase was primarily the result of favorable foreign exchange rates. As we noted on our August call, our operations there continued to be affected by the lower demand for commercial IT services in the UK, particularly in the telecommunications industry. Our UK operations pre-tax margins remained at a healthy 12 percent this quarter. Moving to exhibit seven, let's take a look at one of our key metrics, cash flow as measured by EBITDA. Our EBITDA of 17.5 million was up 25 percent from the prior-year, while the lower EBITDA rate of 9.3 was impacted by the previously mentioned ODCs. Net cash provided from operating activities was approximately $10 million this quarter. In the next exhibit debt of 35.2 million at the end of the quarter is related to a two year 25 million interest rate swap due to expire in January 2003 and notes payable related to our acquisition of DSIC and N.E.T. Federal. Cash at the end of the quarter was approximately 141.5 million and day sales outstanding at the end of June were 74 days compared with 78 days a year ago. The next exhibit is our guidance for revenue and income from continuing operations and basic and diluted earnings per share for the second quarter of fiscal year '03 and for the full year. The guidance was also included in this morning's release. We estimate that our revenue in the second quarter will range between $195 million and $200 million, and net income from continuing operations will range between 9.7 million and 10.4 million. That's an estimated 20 to 23 percent increase in revenue and a 33 to 42 percent increase in income from continuing operations. Our diluted earnings per share should be between 33 and 35 cents per share, up 10 to 17 percent respectively. Our guidance includes approximately $6 million in revenue from the recently acquired Acton Burnell. We estimate that the diluted weighted average shares for the second quarter will be 29.6 million. For all of fiscal year '03 we estimate that our revenue will range between 815 million and 835 million which is slightly higher that our previous guidance. That's an estimated 20 to 22 percent increase in revenue. And, as we've indicated before, we expect our internal growth to be between 12 to 15 percent. Our new guidance does not assume any additional acquisitions. And while not included in our guidance, we remain optimistic that we will complete more and more additional acquisitions before our fiscal year end in June. As is our policy, if there is any material change due to an acquisition, we will update our guidance at that time. Income from continuing operations should range between 41.3 million and 42.7 million, an increase of 29 to 34 percent over fiscal year '02. And our diluted earnings per share should range between $1.39 and $1.44, up 12 to 16 percent respectively, while diluted weighted average shares for the year are estimated to be 29.7 million. For the full year, we estimate that our gross margins will range between 38 to 40 percent and EBITDA margins will range from 9.5 to 9.8 percent. 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 to discussion now over to Ken who will discuss our domestic operations. Ken.

Thanks, Steve, and good morning everyone. Please go to exhibit number 10. We continued to experience increased demands on many of our contracts from the Department of Defense and from federal civilian agencies like The Department of Justice, The Federal Aviation Administration, the Coast Guard, Customs and many others. Our first quarter, which is the fourth quarter of the government's fiscal year, has been one of the fastest paced quarters that we have seen in many, many years. As Jack mentioned in his comments and as I'll shortly explain, much of this activity is related to mission critical areas of departments and agencies with key roles in homeland security, national defense and intelligence. The growth that Steve pointed out pointed in his comments continues to occur across the board with many of our clients and in all of our services offerings. We experienced a significant increase in work we do for the war fighter that helped boost the growth in our systems integration and engineering services lines of business. Our managed network services business experienced strong quarter over quarter growth due to our work on the defense information systems agencies global solutions contract. Higher levels of information assurance work and for managed network services work from various other government agencies both DoD and non-DoD. And growth in our knowledge management area came from increased levels of tasking from the department of justice and in particular the Federal Bureau of Investigation. The next exhibit shows our revenue by service offerings for the quarter compared to FY02. Managed network services accounted for roughly 23 percent of our revenue, systems integration, which includes our UK operations with approximately 44 percent, engineering services 22 percent and knowledge management approximately 11 percent of revenue. Moving to the next exhibit. The domestic systems integration business is up 42 percent over the first quarter of last year. That growth, as I mentioned, is being primarily driven by our C4ISR work and contributions from the DSIC acquisition as well as increased demand from various national intelligence agencies and the FBI. Our C4ISR work alone, of which most falls into the systems integration area, is up over 51 percent compared to a year ago. Our managed network services business was up 32 percent for the quarter and the growth [AUDIO GAP] increased requirements in managing networks and providing information assurance to customers such as customs, federal aviation administration and other agencies. Engineering services was up 16 percent quarter over quarter reflecting increased C4ISR demand we've mentioned in some of the new business brought to us by the DSIC acquisition. Our knowledge management work was up 16 percent quarter over quarter. Most of that increase continues to come from our supported Department of Justice and the Securities and Exchange Commission. Overall, we continue to be very pleased with the progress we are making. And as Steve mentioned and as was the case last quarter, the majority of this growth is been from the organic side of the house. Let's move to the next exhibit, please. Our qualified pipeline of opportunities is about $3.4 billion, up modestly from last quarter. The mix of what we were looking at is about 35 percent management work services, 25 percent systems integration, 30 percent engineering services, and about 10 percent knowledge management. Next exhibit, please. Finally, I'd like to make a couple of comments about the federal government budget process. As you know, our government is running on a continuing resolution, or CR, through November 22nd. We believe that these CRs will not have a material effect on our operations this fiscal year. We believe the operational pace that we've talked about here for the last few calls will continue. What we won't see right away, however, are the new opportunities that are dependent on the 2003 budget that our customers will put out for bid. So while no one knows exactly when the final budget will be passed by Congress and signed by the President, we continue to be very pleased with our results and the pace of the activity we are experiencing. We believe we are in several strong niches, which are expanding; and we intend to take advantage of that increased spending being proposed for in those markets. Overall, we believe that this will be another outstanding year for CACI as we continue to support the critical missions of our customers throughout the federal government. Jack, that concludes my remarks.

J.P. London, PhD: Well, thank you, Steve and Ken, for your updates. So ladies and gentlemen, as you just heard, we believe our first quarter is a very positive start for our fiscal year 2003. CACI is meeting its growth objectives, making strong and steady progress; and our goal is to pass that $1 billion sales level by 2005. We're growing in several ways. In our M&A, mergers and acquisitions program, we completed one acquisition and announced another, which we just closed last week. These acquisitions are accretive to our bottom line, and they will add to our presence with the Navy, Department of Veterans Affairs, and the National Guard Bureau. We're also looking at several additional opportunities that fit into our growth strategy. We expect to be able to complete at least one other accretive acquisition before the end of our fiscal year. We are growing internally, keeping our organic growth rate above our objective of 12 to 15 percent annually; and we are winning all of our re-competes. We're in the right areas of federal support offering in-demand technologies for the Department of Defense, civilian agencies, and the intelligence community. We're retaining and winning the type of business that fits into our growth strategy, as well as more profitable business that continues to build shareholder value. I want to thank our employees for their fine efforts in serving our customers well. CACI people take pride in going about their business with integrity and dedication. We are well poised with the right people, the right resources, and the right strategy to support national defense and homeland security. We continue to meet with the investment community, and we appreciate the interest of many of you who've come to the Washington, DC area to visit us at our corporate location or at our Vision and Solution Center in Chantilly, Virginia. Overall, we are very excited about what the future holds for CACI. Our acquisition pipeline remains robust. We expect to meet our growth objectives and enhance shareholder value. At this point, we are ready to open our discussion to your questions, so Joseph I'll turn it over to you for the first question.

Thank you. Today's question and answer session will be conducted electronically. In the interest of time, we do ask that you please limit questions to one, and there will be one follow-up question permitted. Anyone wishing to ask a question may signal us by firmly pressing the "*" key followed by the digit "1" on your touchtone phone. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach us. We'll call on you in the order that you signal us. If you find your question has been asked, you may remove yourself from the roster by pressing the "*" key followed by the "#" key. Our first question comes from Chris Penny with Friedman Billings, Ramsay.

Hi, good morning guys.

Good morning.

Hi, Chris.

A couple of questions -- do you have a number for your backlog right now?

J.P. London, PhD: Yes, let me turn that over to Steve.

We ended the fiscal year in June with about 1.9 billion. In the quarter, we added about 380 some odd million of new awards. And, if you subtract out kind of the revenue, you'd come up with a couple hundred million that you would add to the backlog.

Okay.

It's a rough number, Chris. As you know, we only really report that...

Right.

...on an annual basis.

Yes, in our news release we had 381 million.

Right. Okay. And can you give us a sense of any major re-competes you've got coming up in the next six months?

Ken?

Yes, Chris, we indicated, when we entered the year, that this year we found that there was nothing of any consequence. [Indiscernible] caution everybody by saying that every re-compete is consequential here. But in terms of financial materiality there is nothing that we expect to occur over the course of the reminder of this fiscal year. There are several jobs that will occur between now and the end the year. But that will all be in the, I would tell you, $5 million to $6 million a year range. And more often than not they're four or five year contracts, Chris.

Okay. And one last question regarding the Homeland Security Bill in the Senate right now -- I'm wondering if you guys can give us a little sense of your thoughts. I mean it looks like it might come up to this next election whether or not that bill gets passed quickly or not. Certainly, that's going to be the next area of spending once that bill gets passed, but I'm just wondering if you can kind of go over your thoughts on the current status of the bill right now?

J.P. London, PhD: Well, let me give you a little bit of reaction I have to what's happening out in the marketplace. I think a number of these things have political motives in the election period we're in right now. On the other hand, I think the Homeland Security Department creation is a major driver in the Administration's plan. I don't think they will push it to the extent of jeopardizing the opportunities to taking over the House and Senate. So I think you're going to see continued movement. I think it's a coin toss as to whether it'll come down. I would, however, address something more to the issue, and that has to do with the funding associated with the Homeland Security Department. I think what you're going to find for the seeable future and what we are focusing on is the funding opportunities in the individual departments and bureaus and agencies we deal with. So, that's where the real payoff is going to be in the short run, meaning the next year, which is 6 to 12 months. As far as we're concerned, we see, I think, continuing activity in those areas. And that's where we'll be putting our emphasis in terms of the contracts. Anybody want to add to that? Ken, do you have a thought or...

The only thing I would add, Chris -- and I don't really think I'm adding, I think I'm just going to be restating it in a different way -- the creation of the department itself will have little or no adverse or positive impact on what happens here in our company, and I would have you believe, in the industry. The smart money here in town is that it won't happen until a new Congress gets installed, at which time they'll probably going to have to restart this thing all over again. Having said that, the mission is critical to the point where the money will continue to flow through the various departments and agencies without the creation of a homeland security department. So, we see no material impact on our business plans on a going forward basis.

We'll go next to Brett Manderfeld, U.S. Bancorp Piper Jaffray.

Good morning guys, and very nice quarter.

J.P. London, PhD: Thank you very much.

Thanks, Brett.

My question relates to the $380 million in contract awards. Can you talk about any new awards specifically that are notable? And I know you've mentioned in the release systems integration and engineering services. Were there other contracts in the other parts of your business most about mentioned managed network services, were there new contract awards in managed network services as well? Thanks.

J.P. London, PhD: Okay. I would say that in terms of awards, we had -- the impact was very de minimis or minimal in the managed network services area, although we have significant business opportunities emerging in that area. In fact, I think Ken gave you some of the better opportunities we're looking at as we go along. I don't know. Does anybody have anything that will add to that response? The 381 he talked about. We have a variety of contracts quite frankly that we will list in terms of in the aggregate, but for various reasons we are not in a position to necessarily announce them, quite frankly. And you are going to see this trend I think for a while in our business.

Fair enough. Thanks. May I have one other question? The federal civilian revenue is up nicely. I know, typically, seasonally it's down in September. I probably will answer my own question here. But I know Condor added a couple of million dollars. Was the DoJ also driving the increase there? Thanks.

The DoJ was up about 25 percent in the quarter.

We'll go next to Tom Meagher, BB&T Capital Markets.

Yes, good morning. Once again, congratulations on a good quarter.

Thanks, Tom.

J.P. London, PhD: Thanks, Tom.

Guess, what I'm going to ask, Steve.

22.

22?

Yes, sir.

Okay. Thanks other asset, all right, or is that DoJ?

That's DoJ.

That's the DoJ.

For those of who don't know, Tom always asked me how much our DoJ revenue was for the quarter. It was 22 million compared with 17.9 last year.

Okay. You can tell those who have been on this call for a while. Actually just two other questions, if I can, real quick - one, we do have the defense appropriations bill being sent to the President, however, we don't have an authorization bill. My understanding is you don't necessarily need the authorization bill to spend on DoD. And the other question I had is with Congress out of session we're probably not going to see appropriations bills on the federal civilian agencies till probably, you know, first quarter of next year or whatever. I was just wondering if that had any impact on your business plan going forward as well?

Ken, you want to take that one?

Yes. The first answer is yes, Tom. Only in the sense when in the appropriations bill there is specific language pointing at the authorization bill is there an issue that we'll face, and we don't see that there are any material issues there. The second answer is that we too -- I think the smart money here is town is that all the other appropriations bills aside from defense, although, we believe before the Congress adjourns, the defense bill will be signed by the President. The impact that that will have is that it will slow down new starts until they get this thing briefed to the new Congress and they get it signed out, which is probably not likely now according to the smart money here is town until early second quarter calendar year '03. So I think you're on the money on both those points, Tom.

Okay. Thanks very much. Once again, a good quarter.

Thanks, Tom.

We'll go next to Cynthia Houlton, RBC Capital Markets.

Hi, congratulations on a great quarter.

J.P. London, PhD: Thank you.

I guess something that's been mentioned in terms of the pace of activity that you saw in government fiscal Q4, could you just give us a little bit more color on what -- you know, a little bit more granularity or anecdotal information in terms of what was driving that pace of activity? Was it clearly just kind of a result of the late appropriation bill from last year or were there're other factors driving it?

J.P. London, PhD: Cynthia, you said quarter four

I think government Q4.

J.P. London, PhD: Was it government Q4?

Yes.

Okay.

J.P. London, PhD: Ken, you want to talk about it?

Yes, a couple of issues, Cynthia, anecdotally. The one that we point to would certainly a great deal of pride is that we talk every quarter -- and I think everybody in our space -- talks about the volume of business now being driven to the GSA vehicles. I think in the last week of the fiscal year we signed about a little over $12 million in new orders for that week alone. That's certainly anecdotal information. We'd like to do that times 52, although that's not likely to happen any time soon. Secondly, there are any number of very sizable awards and as you recall, OMB put out this circular where they were going to not necessarily freeze but they were going to delay the awards of those contracts where there was some potential for redundancy in the Office of Homeland Security as they were rolling out the program. Well it turns out that even with that freeze -- I shouldn't say freeze -- even with that delay there were a number of sizable awards. TSA being one example, the award for now it's referred to as Rescue 21, the Coast Guards 911 system, that we actually have not announced yet but that has been announced by our prime contractor, General Dynamics. There was a substantive rush to get major programs issued before the end of the fiscal year. That is another indication on the level of activity. And then less anecdotally, but more subjective, there was any number of instances where we saw customers moving money to various GSA schedules in GWACs wherein the money would stay current through the transparency of the fiscal year. So the money would stay available on October 1st exactly the same way it would be available on September 30th. And that kind of activity we saw -- I would have you believe that's -- we got reports from our program and department managers that it's good as it's been in the last 10 years. And I would tell you that it was largely as a result of concern on the government's part, on our customers' part, for having to deal with CR until the first quarter of next calendar year.

Great. And then, Steve, may be if you could address just as the follow up the M&A environment, just what you are saying in terms of there has been some discussion that perhaps prices are a little rich for some of the private companies out there, but then other sources seem to say that there's plenty of companies that are attractive. I mean, what do you think in terms of the different areas that you have an interest in from an M&A prospective?

Well, clearly there is a -- I would say the supply side there are a lot of companies that we are seeing. We have a list of probably 10 to 12 companies that we're actively looking at in various stages of either meetings with management, discussions, what have you. There have been in some cases some increases of expectations in valuations, I think, on the part of some. I think we've been able to to date conclude our acquisitions in that kind of six to eight times trailing 12 months EBITDA. And we still think that we can get things done close to that range. And I guess we don't have an appetite for going much higher than that.

J.P. London, PhD: I think, I'll add, Cynthia, that from my perspective -- I've been in this game many years -- I still see this, right now as a buyers market. Quite frankly, there's a lot of properties out there that are touting money to go out, and I don't think there's that many buyers, I don't think there's that much capital come into it. So I think we are going to be able to control our destiny through our basic strategy of accretive acquisitions at the multiples that Steve was indicating.

We go next to Michael Coady, Sidoti & Company.

Thanks. Good morning, guys, very nice quarter.

Hey, Mike.

Thanks, Mike.

Just a quick question on the margins -- you mentioned the ODC's for the reason for the decrease in the EBITDA margin. Could you talk about the ODCs relative to the June quarter and a kind of a level there? I mean you had the gross margin improved nicely but the EBITDA margin come down. I just want to figure what the dynamics there?

Yes, quarter over quarter what we saw, Michael, was our ODC level came down about $6 million, which helped on the gross margin side of the house. We still did -- relative to what our expectations were we got about 4 million more than what we thought. Our traditional ratio of direct labor, when you look at our total direct cost, the ratio of direct labor to total direct cost has been a little bit more than 50 percent, if you will. In this quarter, came in closer to that, and we anticipate that kind of holding. Last quarter it was significantly different. But when you back out the kind of $4 million that was extra two this quarter, it gets our EBITDA margins up into the 9.5 percent range, which is kind of the low end where we would like to see it.

Okay, thanks and I just one other thing - I know there's no real seasonality in the business, but there appears to be some kind of in the margins in terms of the first quarter gross margin appears to be high and kind of you are down through out the year and then pop back up again in the September quarter. Is that just coincidental, or is that an actual pattern?

I can't speak to any kind of pattern. We do have that -- the revenues do tend to go down a little bit in the first quarter primarily because people take vacation holidays in that early July summer time period. So that's why we tend to be down sequentially a little bit on the revenue because we just don't have...

J.P. London, PhD: Our margins...

...as many billable hours, but that margins are. . .

J.P. London, PhD: ...the margin rates are not cyclical in any sense at all. I mean it's the nature of the business that they wouldn't be. The volume of the business tends to be affected somewhat by the proclivity of people to take holidays and vacations and so forth and summer tends to be little bit of impact on us, but otherwise not the case.

All right, thanks a lot.

Thanks, Mike.

We go next to Prakash Parthasarathy with Banc of America Securities.

Thanks.

Hi Prakash.

J.P. London, PhD: Hi Prakash.

How are you?

Good.

Ken, a question on the pipeline of near term opportunities that you have out to bid. If you could, you know, give us a data point there, I think, and contrast to that with total opportunities in the pipeline? And second, an open ended question -- if there is an Iraq war, which service lines would kind of gain beneficially, and would there be any other reprioritizations that, you know, we should be kind of careful about?

Okay, let me take the first, and then I'll have you -- we'll go back to the second one again. The $3.4 billion in pipeline opportunities, we've gotten now in the habit of reporting that on a quarterly basis. That's up a little bit. I think we talked about $2.83 billion last quarter. You'll actually see this thing grow, fortunately or unfortunately, to give you -- everybody on the call probably knows the business as well as I -- but you'll see this grow because, as a result of the continuing resolution, these pipelines of opportunities won't turn into proposals outstanding. They'll be delayed in terms of the government taking a proposal on. So, as we continue to qualify opportunities, they'll continue to fill up the pipeline. And then at the point in time when we finally get all the appropriations bills signed, we'll see a big rush, and we'll start seeing final RFPs in the submission of proposals. And then we're quite likely to see that thing get considerably smaller and then see the actual proposals outstanding grow considerably in size. And now, as far as the open-ended question, if you'd run that by me again, Prakash.

Yes, the question was, I mean, should there be an acceleration on the Iraq situation, is there any particular service line that would gain beneficially or is there -- I mean would we have to kind of think about a reprioritization in the government's budget priorities that could impact any service line?

Certainly our lines of business, the C4ISR work, the work that we do directly for the war fighter feeds the engineering services line and the systems integration line most directly. So my guess would be -- and it's just that; it's just a guess -- that we would see volume increases in that kind of business. A lot of it depends on the length of the engagement or the war, if and when it happens. And that makes it a little bit more difficult to answer the reprioritization question. Almost everybody would have you believe that this is not going to be a long sustained ground campaign. But that's way too far above my pay grade, Prakash, to comment on. Other lines of business in terms of supporting the support to the war fighters is our simulation and modeling business, our logistics work. But even some of that fits inside the engineering services and C4ISR business. So, we have not gotten any indicators of any downturn in the business, and we see some positives, as a result, unfortunately. And I think Jack wants to...

J.P. London, PhD: Yes, Ken, I would add -- and I've had an opportunity this last week to do a little bit of customer contact up in the marketplace-- the one thing that I would think that could move with some speed, acceleration, if you will use your term Prakash, in the case of a declared situation in Iraq, and that would be in the intelligence evaluation analysis side. That's an area that we could see some acceleration in the work we're doing. We're well positioned with several agencies in doing intelligence review and analysis. So that's a possibility. All again, I think Ken hit only a good point and that is the duration of this thing could have some effect one way or the other. We don't which way necessarily on our business lines, but clearly it would be a defining moment for the industry.

Thank you very much.

We'll go next to Bill Loomis, Legg Mason.

Hi. Thank you. Good quarter. Steve, can you give the DSOs in dollar amounts for billed and unbilled?

The billed current receivables, was about 141.4 million and the unbilled 8.3 million.

What was the long-term benefit?

Long-term piece is about 8.6 million.

And on the UK, usually, you know, it's pretty rough quarter sequentially from fourth to first, and like last year, I think, you guys were up a little bit sequentially. What's going on there specially given the weak news we're hearing from Europe from other IT service companies?

J.P. London, PhD: I think, let me address that, Bill, and we've also got Greg here available. I would say you're seeing sort of a flat sideways type of a market right now in the UK. I think that post the Internet and the telecom demise there, Will, with the retrenchment in that business, we're going to see the similar kind of a situation. My prognosis on all of this in the commercial sector is that the next year we ought to begin to see some increased activity. Fiscal '99, when we were doing Y2K issues, there was a lot of business bulge, if you will, in some of those areas followed by the Internet stuff. People have been hiding and restraining themselves on the buying in the commercial end. I think you're going to see some emergence as the technologies begin to move forward in the next year or so. And that certainly would be a potential of a situation for the UK. But, Greg, take a minute because we haven't talked too much about this segment of the business. Would you provide a little bit of input for us from the UK.

Yes. I'd be happy to Jack. I mean, our business over here is kind of split between products and services. The products business is held its own and is actually grown over the past year. That's because we have a well installed base of clients who have our products as recurring revenue stream. Plus we sell our products heavily, kind of, into the retail sector, you know, typical retail stores that also are building society type operations. And consumer spending, like the US, in the UK has remained strong. On the services side, which is mostly systems integration, we have been hit there. We've historically done a lot of work with the telecommunication sector, and we all know what's happened to that industry across the world. But we do believe things have bottomed out. Gardner just came out with a report that they see an upside on IT spending systems integration work starting about mid 2003. So we think we can certainly hold our own till then. And we are optimistic that we will see a good upturn in systems integration work about half way through next calendar year.

You basically are looking for a sequentially flat type performance there then?

Well, I think flat in terms of client demand, but no, we're, you know, pushing hard on the sales side and being as aggressive as possible to win more business. And we are a tiny player in the huge marketplace, s we think we can get more than our fair share of business, and that's our intent.

Okay. And finally on the Acton Burnell, 6 million in the December quarter, how will that be broken up between defense and civilian?

I don't have the exact figures, Bill. I want to say, it's about half and half. Bill, I can get that later to you.

We'll go next to John Mahoney, Raymond James.

Hi, guys nice quarter.

Thanks John.

J.P. London, PhD: Thanks John.

Glad to hear about the pace picking up very quick. I have a couple of questions. First of all on the depreciation amortization drop sequentially, could you talk about what drove that?

Yes, hold on one second let me grab a report. John, I don't have it with me right now. Let me get that to you off line.

Okay, with that -- okay, I'd just like to, you know, figure out what drove that. And secondly, just as a follow up to somebody else's question, given the higher level of you said ODC -- and I don't mean relative to your expectations, just say, September versus June, you know, the gross margin was up 150 basis points sequentially, which wouldn't really necessarily tend to make me, you know, expect that it was a big ODC increase driving it. At the same time the EBITDA margin was down sequentially 20 basis points, so how do I -- help me understand that. I'm just talking June to September we went up from 37.5 to 39 on the gross line, but the EBITDA line went from 9.5 to 9.3.

You know, John, we can get you some more detail here and perhaps I haven't focused a lot on the last quarter numbers versus this quarter. But the ODCs were down about $5.6 million this quarter versus last. And that's going to have a, you know, fairly significant impact, probably about a 150 basis points on gross margins.

You mean June to September?

June to September, yes.

Okay. So the ODCs were down how much?

About 5.6 million, almost $6 million on around.

Okay. And then the...

J.P. London, PhD: I might emphasize, John, those are going to vary due to client requirements and needs. That's a...

And contract mix too.

J.P. London, PhD: . . .reaction type of activity to a great degree. And then, of course, there's a subcontract element as well.

Okay. And then I guess that, you know, $2.5 million sequential increase in indirects and selling expenses, was that driven by the acquisitions? Is there any saving opportunity there?

Yes. Clearly, there is a little bit that comes with the acquisition side of the house. But you also have some seasonality related to our fringe costs that would also be reflected in there.

Okay. Thanks a lot and congratulations.

J.P. London, PhD And thank you.

Thanks, John.

We'll go next to Sandra Notardonato with Adams, Harkness & Hill.

Hi. Thanks for taking my question. Really, quickly, can I get the breakout of revenue by contract type?

Yes, for the quarter about 68 percent was time and material, about 14 percent was fixed price, and 18 percent would be cost reimbursable.

Okay. And what percentage of revenue was under GSA schedule in the quarter?

It's about 25 percent or so.

Okay. And Jack, I believe you said that you won all of your re-competes in the quarter. What was your win rate on new program awards -- on new contracts that you competed for?

J.P. London, PhD: For the first quarter? I don't know if we have that.

Somebody may have it. Hold on a second, Sandra.

Okay.

Sandra, we'll have to get back to you, when we have it.

Okay.

We actually have that Sandra. We'll get back to you.

No problem. And the last question I have -- you broke out revenue by business segment. I was wondering if you can talk at all about the margins you're seeing in those business segments, if there is any change from last quarter to this quarter, maybe actually if you look at the last several quarters and this quarter?

J.P. London, PhD: Steve.

Sandra, we don't break out the margins by the business segments, but I'd tell you that they're reasonably consistent from period to period.

Okay. Great. Thank you very much and nice quarter.

J.P. London, PhD: Thank you.

Thank you.

We'll go next to Michael Legg of Jefferies.

Thanks. I just wanted to go over -- the guidance you gave out this quarter does not include the acquisitions where I think the previous guidance did include acquisitions. And when we look at what Jack said during the call that you would expect to complete one more acquisition during the course of the fiscal year, which goes to next June, is that a de-emphasis on the acquisition magnitude that you may do, or is it just a more conservative approach?

J.P. London, PhD: I thank you for indicating the options on your question. It would be the latter, I think, as a general proposition; I'd rather be a little bit more conservative. It doesn't have anything to do with the aggressive posture with which our M&A team is moving forward. We see lots of opportunities out there. It's just a little less clear as to when that might occur. We did, I think, indicate in our talk that given an event of that nature, especially the materiality of it, we would be coming out with a revision to our guidance as we have done in the past. So that would be sort of the play, you might say.

Okay. And when we look at the new guidance, it is up from where it was before, but before, we had the acquisitions in there. How much of that increase in the guidance is from the accretion from the acquisitions you've completed, and how much is just from strong business trends?

Michael, with the two acquisitions we did, Condor and Acton Burnell, that actually filled the wedge, if you will, for the acquisition guidance that we gave previously. So any of the up tick or the increase here really is coming from the internal growth from our domestic business here -- from Ken's federal business.

Okay. Thanks.

J.P. London, PhD: I think this gives a clear picture of how we see the potentials for the future. And the acquisitions significantly will be an additive activity, and we'll come out with a revision to our guidance on that occurrence.

Okay. Great. And I missed the answer to John's question on depreciation. What level do you expect depreciation to continue for the rest of the year?

J.P. London, PhD: I don't know if you have that.

It should be flat.

J.P. London, PhD: Yes.

Flat with the first quarter?

Right. It should be quarter over quarter about the same.

Okay. Thank you.

We'll go next to David Garrity [ph], American Technology Research.

Yes. Hi. Congratulations on your quarter.

J.P. London, PhD: Thanks, David.

Thanks, David.

Okay. After the acquisitions that we've had, can you just update us on what your headcount is? And how many people have security clearance, and if there's anything that you might be able to provide with respect to utilization levels on your workforce and whether given the volume of business you've got coming in you're going to go out and hire more people, and how long does it take to bring them up the curve?

J.P. London, PhD: Well, let me start off by talking about our staffing. CACI International is around 750, 800 in that headcount. We have -- in the area of billing ratio we do probably something up clean 80 and 90 percent. And we don't...

[indiscernible] the number of classifieds.

J.P. London, PhD: Yes. Well, the number of classified people, I think, the total is very high in the company right now, around 84 or 85 percent. We have, I think, about 700 or so people that are cleared in the TSSI area -- SCI area.

Okay. And I have one follow-up question. In terms of the work that you've got in your backlog now, how much of that's prime and how much is subcontracted? And then you raised the issue earlier with the Rescue 21 contract where you're a sub prime to General Dynamics. Is that number in the backlog as well?

This is not in the backlog, yet. The prime business was about 84 percent in the quarter.

Okay. And then in terms of the backlog?

We don't have that broken out that way. I don't have a number for you on that, I'm sorry.

All right, can I follow up with you offline.

Sure.

J.P. London, PhD: I have got a number on the clearances. We have a total in CACI International of some 3,000 cleared positions.

Thank you very much.

J.P. London, PhD: And [indiscernible].

That doesn't include the DoJ, I don't think.

J.P. London, PhD: This is the clearance is associated with the Defense Department, yes

Okay.

J.P. London, PhD: And the TSSI, as I said, is approaching 700.

Thanks.

We'll go next to John Emrich [ph] of Reikolar [ph] Capital.

Thank you I got on late. I apologize if this was asked already. It's kind of a 10-K question. In the prior Q there was a line item in the cash flow statement called capitalized software costs and other. In the K there is no such line item. Did it get lumped into a different line item?

I don't have that in front of me, John. We can follow up with you later on. I'm going to guess you probably got it lumped together with something else. It is not a material number on the balance sheet anymore.

Okay, but I guess for the year it was -- well it was 3.2 million in nine months ended March. So it was something north of that for year, I'm guessing. Do you know what...

It's not -- I would say it's probably less than that.

You uncapitalized software?

No, it's just being amortized off. We're not adding to that.

Oh, I see, okay. So we didn't capitalized any in this period either.

There is no new capitalization software in this period or in the last quarter.

Okay.

What you see there in the balance is amortized off.

Okay, super. Thank you very much.

Our next question comes from Tom Meagher, BB&T Capital Markets.

Yes, just one quick follow up question -- Steve, what tax rate should we be using going forward for modeling purposes?

I'd use the 37.5, Tom, for right now.

Okay. Great. Thanks very much.

Again that is "*" "1" if you do have a question. We'll go back to Chris Penny with Friedman Billing.

Hi, thank you -- one follow up question. If I look at the middle of your range for fiscal year '03, I think I come up with a margin from continuing operations of around 5.1 percent. You did 5 percent this quarter. Can you just -- obviously, the earnings growth is coming primarily from, you know, some acquisitions and just the strong pipeline. Can you talk a little bit about the sensitivity of, you know, just may be improving that margin longer term and what do you think you might be able to get to in, let's say, the next two to three years?

J.P. London, PhD: I'd like to say that we're going to be continuing to focus on our margin rates. I would say that we can see continued opportunities especially in the M&A side for increasing margins. But again, that's going to be a function of the market space itself. Right now I think we're in a buyers' environment for the most part. There probably should be a few exceptions sector wise in the intelligence community, for example. But I would like to think that we could move that up a bit above the range it's in now. Moving toward maybe as high as 5.3 to 5.5 would be a longer-range target of reasonable expectation.

Okay. Thank you.

At this time there are no further questions. Dr. London, I will turn the conference back over to you for any additional or closing remarks.

J.P. London, PhD: Okay, thank you, Joseph. I certainly appreciate your help. And thanks to all the callers for the questions and your interest. Obviously, we certainly want to thank you for your participation. We had a lot of active questioning, and we appreciate the chance to provide information to you. We hope it's providing a clear picture of our operations and how we see our expectations going forward. In terms of where we stand with our shareholders, our fiscal 2002 annual report was mailed out last week. It's also posted on our website. I invite you to take a look at that. If you wish to receive a copy, please contact David in the Investor Relations Department and they certainly be prompt in sending you one. Our recently filed 10-K and proxy statement is also available on the website and I invite you to take a look there as well. Beginning in November after earnings release season concludes we'll be making visits to New York, Boston, Chicago, among some other places. We look forward to seeing some of you and bringing up to date on our company and making new introductions. And as always, if you're coming to Washington DC area and you'd like to arrange a meeting, I'd like to invite you to contact Investor Relations Department, and we'll see what we can do in terms of setting up some meetings. We are also aware that you may have some other questions. We had a few that we weren't able to respond to on the spot, so our team is going to be available within the next 15 to 20 minutes to take your calls and any questions you may have at that time. So I think we are seeing a good robust future for CACI. We very aggressively are looking toward the second quarter and to the fiscal year here moving toward our overall new term goal of $1 billion in sales. And we'll be moving past that I am sure as we goal too. So, again thank you, ladies and gentlemen, for your participation and your interest in CACI. This concludes our quarter one conference call. Thank you.

Thank you for your participation. You may disconnect at this time.