CACI International Inc (CACI) 2003 Q2 法說會逐字稿

Please stand by for real time text. We are about to begin. Good day everyone and welcome to the CACI international second quarter 2003 earnings conference call. Today's call is being recorded. For opening remarks and introductions I'd like to the turn the call over to the director of investor relations Mr. David Dragics. Please go ahead.

Thank you and Good morning, ladies and gentlemen. I am David Dragics, director of investor relations for CACI International and we're very pleased that you're able to participate with us today. For those who are with us for the first time either by telephone or via the Internet we welcome you to this call. Let's go to the first exhibit. As you know earlier this morning we released our second quarter first half fiscal year 2003 results.

We hope that most of you had the opportunity to review our announcement and the results and they are summarized on this exhibit. As we have on recent conference calls we're including exhibits with our presentation and we hope you will find them helpful in reviewing our financial results and trends in the discussion of our operations. And as we progress this morning, we'll make every effort to keep all of on you the same page as we are. Moving to the next exhibit, and 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 are listed at the bottom of this morning's release, as well as in the company's Securities and Exchange Commission filings. Now, our full safe harbor statement is on this slide and will also be incorporated as part of the transcript of this call, which we will post on our web site.

I will remind refer those who might be listening to the reply of this call to the safe harbor statement there. Let’s turn to the next exhibit, and to open up this discussion this morning here is Jack London, chairman and president and CEO of CACI International.

Thank you, Dave and good morning ladies and gentlemen. Let me welcome everyone especially those who are new to CACI and to our call this morning. We appreciate your interest and hope you'll be following us and the company as we go along. We're very pleased to announce again record results for the second quarter and first half of our fiscal year 2003. For the first time our revenue exceeded 200m for the quarter.

A significant amount of the year-over-year increase came from organic growth. And for the first time our operating margin exceeded the eight percent level and our net margin exceeded the five percent level. Revenues from our federal customers, which is about 92% of our business was up significantly. Not only quarter over quarter, but sequentially as well, reducing record profits for CACI in the quarter. CACI fundamentals remain strong and key trends continue with growth in all areas, increasing profitability, solid internal growth, strong cash flow and a strong balance sheet. CACI's business growth also comes at a pivotal time for our country. From the worldwide ELQUADI threat to the war zone in Afghanistan, the rising tension in Iran, and now the nuclear weapons issue in north Korea. .

We face the certainty of these threats. What's also certain is that technology has an increasingly vital role. We must arm ourselves with technology to defeat the terrorists, create an unparalleled info structure for protection through the department of new Homeland Security. CACI will continue to work side by side with our government clients to deliver the critical technical capabilities that they require. In this new defense era, a new national priority is being placed on information integration. The integration of information. Federal government IT spending is at unprecedented levels. CACI continues to be a go-to partner for the government's mission critical IT needs. Our work is a primary solutions provider to the Department of Defense, the Department of Justice, the Department of state and the agencies that comprise the new Homeland Security Department and the intelligence community helps these clients fulfill their missions quickly and efficiently.

The success of the nation's security programs will require solutions for the collaboration of communication and the management, evaluation and protection of vast amounts of information. These are capable abilities CACI’s been providing to the federal government for more than 40 years. Now with me today to discuss our operating results and to answer your questions are Ken Johnson, president of CACI incorporated and Stephen Waechter our chief financial officer. Greg Bradford, president of CACI Limited United Kingdom is also on the line ready to answer questions that you may have about our UK operational activities. And as is our custom on these calls we'll discuss three principal items. First

First, Steve Waechter will discuss our financial results then Ken Johnson will discuss our domestic operations and our outlook, and third I'll have some closing comments and what we see ahead. After that we'll go to your questions and so then the first item on our agenda is the financial results. Steve, over to you.

Thank you, Jack and good morning everyone. For those you following along on the web let's go to Exhibit No. 6. As you know, this morning we reported a record second quarter and first half of revenue and earnings, revenue for the quarter increased 26% to 204.5m, versus 162.3m a year ago. Income from continuing operations was 10.6m, or 36 cent per diluted share, up 45% over last year's 7.3m or 30 cents per diluted share. Moving to the next exhibit, our federal government business had another quarter of solid growth, up 27% this quarter, and represented 92% of our overall revenue.

As has been the case the last several quarters, internal growth rate for our federal business was strong. Up 23% in the quarter. Commercial and state and local business was up 19% collectively from a year ago, primarily as a result of increased UK revenues, which were driven by favorable exchange rates and commercial business acquired in the Condor acquisition. The company's overall internal growth rate was 22% in the quarter. This rate is a combination of growth we are experiencing from the acquisitions we've made over the last five years, and the operations that we had in place prior to that. Our United Kingdom operation reported 10.9min revenue in the quarter, a nine% increase from last year. This increase was primarily the result of favorable exchange rates. As we noted in past calls, our operations are continuing to be affected by the lower demand for commercializing services in the UK, particularly in the telecommunications industry. Our UK operations pretax margins remained at approximately 12% this quarter.

Moving to exhibit 8 let's take a look at one of the key metrics, cash flow as measured by EBITDA. Our EBITDA of 19.7m was up 28% from the prior year. The EBITDA margin rate this quarter was 9.6%, slightly higher than last year's 9.5%, primarily as a result of lower relative indirect costs and selling expenses. In the next exhibit you'll see our debt of 34.7m dollars at the end of the quarter, which is related to a two-year, 25m dollar interest rate swap of 25m, which expires this month and has just been paid off and notes payable related to our acquisitions of DSIC, N.E.T. Federal and active Burnell. Cash equivalents at the end of the quarter were approximately 121m and our days outstanding at the end of December were 77 days compared with 80 days a year ago. The next exhibit, as you can see, we've increased our earnings guidance for the full year FY '03 and issued initial guidance for our third and fourth fiscal quarters. The guidance was also included in this morning's release and I should point out excludes the impact of any potential acquisitions. We estimate that our revenue in the third quarter will range between 209-217m.

And that income from continuing operations will range between 10.6-11.4m. That's an estimated 14-19% increase in revenue, which approximates our internal growth rate and at 23-33% increase in income from continuing operations. Given the uncertainty related to the timing of the passage of the federal budget, we have taken a conservative approach to forecasting our pass-through revenues, which we believe is appropriate at this time. We have maintained these revenue projections at more historical rates. Our diluted earnings per share should be between 36 cents and 39 cents per share, up 9-18% respectively, and we estimate that the diluted weighted average shares for the third quarter will be approximately 29.7m. For all of FY '03 we estimate that our revenue will range between 815-835m, which is no change from what we indicated in October. That's an estimated 20-22% increase in revenues. As we've indicated previously, this guidance does not assume any additional acquisitions.

We do, however, continue to remain optimistic that we will complete one or more acquisitions before our fiscal year-ending in June. We've increased our estimate for income from continuing operations from previous guidance to between 42.2-43.6m an increase of 32-37% over fiscal year '02 and our diluted earnings per share should be between a $43 and $48 up 15-19% respectively with diluted weighted average shares for the year estimated to be 29.5m. For the full year we continue to estimate that our gross margins will range between 38-40%. EBITDA margins will range from 9.5-9.8%, and EBIT margins of 7.8-8.2%. Even though Dave mentioned the safe harbor statement at the beginning of this call, I want to again state 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. Let me turn the discussion over to Ken who will cover our domestic operations.

Thanks Steve and good morning everyone. Please go to Exhibit 11, if you would. The increased demand on many of our contracts from the Department of Defense and federal civilian agencies that we spoke of last quarter continued through our second fiscal quarter. As we forecast, money from DOD appropriations bill signed by the president mid-October is now getting to our customers. And in particular, we experienced increased tasking on our PEM POEs contract with the United States armies communication and electronics commander CCOM. We also experienced increase tasking from a variety of DOD clientele thru various GSA schedules. On the federal civilian side we experienced similar activity via GSA schedules used by a number of our client agencies. The trend we're seeing here underscores the reasons our clients utilize this schedules. [Inaudible] are accomplished. Requirements are fulfilled in a much more timely manner than through traditional acquisitions. You will also recall that we remarked that our first fiscal quarter was one of the fastest paced quarters we had seen in many years. We attributed that pace to the fact that many of our clients across the government were doing a lot of preparatory work in the government's fourth quarter of FY ’02 to set up the first quarter and subsequent quarters of the government's FY '03. That foresight has certainly paid off. As you can see from our results, the second quarter's outstanding performance is a reflection of the acquisition pace of the government's FY '02 Q4. The next exhibit shows our revenue by services offerings.

For the quarter compared to FY '02, systems integration which includes our UK operations -- excuse me -- accounted for 45% of our revenue. Managed network services, 22%. Engineering services, alike 22%, knowledge management, 11%of revenue. Moving to the next exhibit, the domestic systems integration business was up 42% over the second quarter of last year. That growth continues to be driven primarily by our C4ISR work and increase tasking from various national intelligence agencies. Our C4ISR work most of which falls in the systems integration area continues to shows substantive growth it was up almost 38% in the quarter compared to a year ago. Engineering services was up 22% quarter over quarter, reflecting the increase tasking being generated from DOD's emphasis on readiness and preparedness. Additionally our recent Acton Burnell acquisition has had a positive impact on this line of business. Our knowledge management work is also up 18% quarter over quarter.

Most of that increase continues to come from our supported Department of Justice and the Securities and Exchange Commission. Our managed network services business was up 11% for the quarter. The growth there continues to come from increased readiness requirements and managing networks and providing information assurance solutions to customers such as the U.S. Customs service, the Federal Aviation Administration and a variety of other agencies. As Steve mentioned and as was the case last quarter, the majority of this growth has been from the organic side of the house. Our DOD business grew about 19% internally. Our federal civilian agency business grew 34% internally. So we're very pleased with the contribution from all parts of our operations. Let's move to the next exhibit.

Our qualified pipeline of opportunities is about $3.7b. These opportunities are comprised of prime and subcontractor opportunities. That pipeline is up primarily resulting from the effects of the continuing resolution which tends to slow down the release of new RFPs. Additionally, the creation of Homeland Security and the go to war activities is also adversely impacting the release of these new requirements. On the [re-competed] side of our business, we continue to successfully defend all of our incumbents. Next exhibit, please. Finally, we received many questions about what's going on with the government budget process. As we speak, we are under a continuing resolution that funds the non-DOD agency of the government through January 31st. As it stands, it appears that both houses of congress will eventually vote on a $385b fiscal '03 appropriations omnibus bill, one that combines the 11 unfinished fiscal '03 appropriations bills. Once that happens, and the president signs it into law, and as was the case with the DOD appropriations last fall, it should take about 60 days for the '03 money to get to our customers. Overall, we expect the pace of activity we are experiencing to continue into the third quarter. We'll continue to focus on business opportunities related to mission critical areas of departments and agencies with key roles in national defense, intelligence and Homeland Security. Jack that concludes my remarks. I'll turn it back over to you.

Thanks, Steve and Ken for your updates. Let's move to the next exhibit. You can tell from Steve and Ken's remarks, our second quarter was a strong one. We believe the momentum we established in the first half of this fiscal year will continue into the second half and beyond. And it will provide us with a fiscal '03 record year of revenue and earnings. Our revenue continues to grow at a pace well over our 20% objective.

Our operating in net margins have expanded. The companies we have acquired are making solid contributions and dividing excellent returns on our investment. The high rate of internal growth of our operations underscores we believe the success of our acquisitions program. We continue to look at acquisition opportunities and expect to complete at least one other accretive acquisition before the end of our fiscal year. We received approximately $300m in contract awards last quarter. Good results in a very slow government award cycle. Our business with the intelligence community continues to grow nicely. We have revenue now approaching 20% of our total business. We're very proud of that growth and our significant contributions in this area. As President Bush and his advisors remind us we're engaged in a long protected war on terrorism. In a recent visit to [Inaudible] in Texas, President Bush stated that “our country is in a great contest of will and purpose.

We're being tested. Times of crisis we will act decisively”. Worldwide trend of the radical Islamic terrorist and [Inaudible] rogue nations arsenal and the weapons of massdistruction is a trend line of exculpating danger. In this [Inaudible] setting I believe the government and defense IT sector will remain robust as the military ramps up its intelligence and training to combat terrorism and as it prepares for the potential of war. CACI is well positioned to respond to continue responding to these challenges, we support key activities in the Middle East and Southeast Asia. We're poised to provide solutions for the emerging needs of the new department of Homeland Security and the war on terrorism. We're stronger than ever in our core capabilities of systems integration, managed network services, engineering services and knowledge management.

We continue to strengthen our board as evidenced with three of our new members with extensive military and government background we see this as another step in addressing the challenges we see ahead. Our core growth strategy remains the same. We believe we're in the right places at the right time. We believe we have the right capabilities and the right people to support our federal customers. We'll continue to build shareholder value and we believe we're on track to surpass our growth goal of $1b in annual revenue by the year fiscal 2005. So at this point we're ready to open our discussion to your questions. I'll turn it back over to the operator for our first question.

Our question and answer session is conducted electronically. If you would like to ask a question, please press the star key followed by the digit 1. Again, that's “star 1” to signal to ask a question. If you're using a speaker phone, please make sure you're not muted. That will block your signal. Also initially we're asking you to limit yourselves to one question and one follow-up to allow everyone to ask a question. So again that's “star 1” and we'll pause for a moment to assemble our roster. Our first question is going to come from Mike Leg. He's at Jeff Fridays.

Great quarter. Couple questions. Could you, one talk about the strong civilian growth up 34% and what you saw contributing to that? Second, you mentioned 121m in cash, does that not include the short-term investments and what are the short-term investments and the third piece, you mentioned the acquisition, letter of intent in your press release, could you just elaborate on what stage you are at with that acquisition I know you said you expect to close [Inaudible] at the endof the year. When you mentioned it in the letter of intent does that mean you discussed valuation with them?

We'll start with the last issue first.. It's a three-part question, Michael here this morning. We have moved to a letter of intent stage with our candidate acquisition target. We're in the extensive dialog and in the details. We at this point don't feel that we're in a position to discuss anything further in terms of the transaction, that being obviously proprietary at this time. I would mention that we have not projected or put into our projections any financial aspects of the transaction. So obviously if that, when that deal does come down, we will more than likely be out revising our guidance, depending on the timing. We'll go to the other question on the cash, if you want, Steve.

I'm not sure I understood your question on the cash. We do have some short-term marketable securities. It's really just the short-term investment of that cash.

Right. I think the line item I was looking at from last quarter's balance sheet was 141m for cash and short-term investments I just wanted to reconcile that to the 121m cash.

It's down slightly as you you'll recall we did the acquisition of Acton Burnell in October. We had cash related to that on the outflow side. That's the big element that changed it.

The other question was the federal sector growth.

Civilian agency.

On the federal civilian side, the primary contributors to our growth in that particular space first was our growth on the safeguard contract. It's a large GWAC that we're in companies like ourselves provide security solutions to mostly federal civilian agencies. We experienced some substantive growth in that on that contract over the quarter. We also enjoyed the benefit of significant growth and revenue from Acton Burnell and Condor, as we indicated when we announced both of those acquisitions, they gave us a real nice footprint, Department of Veterans Affairs. So now we've got a bit of a launching pad at the VA.

Great. Thanks. Great quarter.

Next question comes from Chris Penny. He's at Friedman billings Ramsey.

Thank you for taking my question. On your, you added about $300m in your pipeline obviously in your bookings, can you talk about the business mix and what areas you added that 300m? , as far as systems integration, managed network services, engineered services.

The 300m we booked for the quarter? It was largely defense. It came out of -- it came out of our C4ISR business. It came out of a large contract that we bid on that subsumed a small incumbency that was new work for the United States Navy. Then as we announced, we're one of the primary subcontractors on the rescue 21 program supporting the Coast Guard, with general dynamics as our prime contractor.

My question kind of leads to managed network services from an operating margin standpoint, is number one. You show nice margin improvement over the last couple of quarters I'm trying to get sensitivity going forward as to how much more that can move.

In terms of upside on the actual margin delivery, I wish I could tell you that we've got substantive growth there. I think that issue on the managed network services where we see some meaningful growth occurring is as we win new business and add a new network or two to our network operations center, we'll see some movement on the plus side to the growth. But I think in terms of physically managing these networks, I think we've optimized the management of any individual network from an SLA standpoint, Chris. So I don't see significant growth over the kinds of margins that we generate there. It's more a scale issue.

The overall picture of your overall margins as your managed network services becomes a larger component of revenue has more of an influence on your operating margin. I guess that's where my question is leading to.

Managed network services will clearly have an increasing, from a percentage standpoint, a greater impact on margin, because of the margin ability of that business, both from an economy standpoint and the fact that they just are by their nature more profitable.

I'd like to, Chris I like to like to chip in on that. I think that would certainly be one of our expectations. We certainly like to see that kind of a result come about, because the margin opportunity, if we can expand that business base, obviously it would be an enhancer on the profit performance. That's sort of out in the column of we'd like to make it happen that way. We certainly can point it in that direction, but obviously that will be something that will unfold as time goes by here.

Thanks very much.

Next question comes from Brett Manderfeld at US Bancorp Piper Jaffray.

Good morning. Great quarter. Steve Can you give us what the past due revenue in the quarter was please?

We haven’t really given the past due revenue in the past, but I can tell you that on the direct cost basis the ratio of our direct cost labor to other direct costs was up. It swung a little bit. Historically we see more like 52% direct labor to 48% ODC. This quarter it was the inverse of that. It was 48 direct labor, 52% ODC. So that had some impact. That's why we were slightly ahead of the guidance we had previously given.

So a little more direct costs. And as we look out for the next couple of quarters, I think you mentioned that you were being conservative on the pass-through from a revenue standpoint. But it looks like the top line tempered off, we'll come in a little bit according to your guidance relative to the December quarter. Is there anything else we should be looking into there? Is it just the conservatives in pass-through or is conservatives in general or anything else?

The models we put together are more in line with that direct labor ratio, kind of the 52-48%. Should we get what we kind have seen here in the first half, which is a higher pass-through, you're going to add certainly some more revenues to that. But we think that because of the status of the federal budget and that, it's prudent to be a little bit conservative on that at this point.

Thanks a lot. Just the funded backlog in the quarter.

We haven't given that out in the past. The last we gave was at the end of the fiscal year, which is about 2.1b. It was 385.

385.

At the end of June.

David Garrity at American tech research.

Congratulations on your quarter. I was noting that the acceleration you had in terms of your internal growth rate. That just reflects the fact that you were going past the anniversary of the acquisition to close back in November of last year or can you go in and talk about any specific programs that might have ramped up and what visibility does that give you for the balance of the fiscal year?

Probably the primary contributor as we indicated in the discussion, one is [inaudible] And we do a fair amount of the C4ISR work for the Army and some of the other uniform services. As we talk a great deal about our at the [moment post work up fort mammoth] we got about 80 to 100 partners up there. So as we built solutions and provide services, it's not uncommon for us to take in partners to provide some specific technology device or technology solution added to that which we do. So that's clearly, we're finding that the growth there has been on the upswing for the last several quarters. So that's been a contributor to that growth, and additionally with a couple of these new acquisitions that we made, Acton Burnell and Condor, we've actually acquired some pass-through revenue that are a part of the solutions in the services that they provide to their customers as well.

I might simply add to that that we've had very good luck with the continued growth of the acquisitions over time, though, in addressing your comment about transitioning from dropping reporting off on the acquired companies. I think it's been a good story overall of continued internal growth on the acquired entities.

One other question. With ridge being confirmed yesterday people talking about interoperability only what 12 out of the 50 states have stated IT platforms, state and local, do you see much of an opportunity for you in terms of doing work on that side, trying to support interoperability between the states and the department of OEM security?

I think we'll continue to keep our eyes open for opportunities in the state and local market. It is a much more complicated market to address from a cost of sales and a market penetration standpoint. But we'll keep our eyes open for it. But I don't see any particular movement in the near term in that area...

The one thing I would add to that is that both through acquisition and internal growth, we've created a pretty handsome footprint supporting the National Guard. So I think what you'll find us doing is you'll find us supporting some of those information sharing and interoperability issues through our guard relationships and that is in fact supporting the state and local governments but it's more from a federal perspective.

Next question comes from Cindy Shaw at sound view.

Nice quarter, guys. Couple questions. One getting some mixed signals here in terms of revenue over the next couple of quarters, hearing some very positive comments, but then the specifics in terms of what you're shooting for, for the coming quarters are much more conservative if you can help understand that behind your prepared comments and also the acquisition, I know you can't talk a lot in terms of details, but we've been hearing for several quarters now that multiples are up, are multiples on some of these acquisition targets coming back in?

Let me address your first one. If we were to have again pass-through revenues similar to what we've had in the first half of our year, you could add somewhere between three to five percentage points of revenue growth in the next couple of quarters. If it comes in like that. Given the uncertainty, though of where we see the continuing resolutions and what have you, we [Gap in audio] [Inaudible]. With respect to the acquisitions, we have seen some increase in valuations relative to intelligence, community related companies. But we believe there's also significantly other companies out there that we can acquire in the range of what we think are reasonable prices and are very accretive to our bottom line.

Can you give me a sense what you think the organic revenue growth is going to be in the March and June quarters?

Yeah, I think Steve actually mentioned it. He said it approximated at the 14-90% level in the commentary. We're sticking with our 12-15% percent organic growth and our, what does that make it, five to eight percent from an acquired growth in this 20%. I think for all the reasons Steve said, just we have to be careful not to suffer from a rational [XUBBRANS]. That was our guidance going into this quarter. We over delivered on that guidance. We're sitting here at a time, we still don't have budgets for the greatest part of the federal government, and we're on the brink of war or perceived to be the brink of war. So we're going to -- I think we're just going to stick with the guidance that we had proposed before. If we're fortunate enough to over deliver on it as we have the past several quarters, I think that will be good on us and good for our shareholders.

Next question comes from John Pitak from William Blair and company.

Can you give me the free cash flow number for the quarter and then what the outlook would be for the remainder of the year?

Free cash flow for the quarter, cash from operating activities for the year-to-date was about 16m. I want to say it's about six million for the current quarter. The cap ex was about year-to-date about 3.7m. We've run about two million a quarter on that. For the year I would tell you we would be probably cash from operating activities close to 50m, with cap ex probably in the around eight million.

Then what was the prime versus sub mix for the quarter?

We were about 85% prime and 15% sub.

Next question comes from Cynthia Houlton, RBC Capital Markets.

Could you discuss in terms of DOJ revenues, percentage of total. I know you said DOJ had a big impact on knowledge management, just what that number was, specifically on that contract. And then is there any risk that as there's more talk about spending more money on defense programs and some civilian agencies may get squeezed a little bit, any concerns or thoughts on what might happen to DOJ?

In terms of the overall pattern, I think that it's not truly clear yet. I think our logical expectations would be that for our forward business opportunities, the defense sector, the intelligence community sectors, we would anticipate relatively strong compared to perhaps other sides of the federal government. In fact, there's some discussion out, public discussion in that realm already. In terms of the cash position I'll give that to Steve.

I think your question was with regard to the Department of Justice, Cynthia, if I'm not wrong here. 21m is what we did in the second quarter, which is up from about the 18 eight that we did a year ago.

So at this point I mean you've been running at a pretty nice growth rate in the DOJ. I mean any, are you getting any signs that that might be trailing back a little bit or are there any concerns on what type of work you're doing there?

Certainly not DOJ specific at all Cynthia. I think your instincts are probably on point. The president has come out and you've read in the regs, looking at the '04 budget and he's indicated that there's going to be possibly flat lining of some number of federal civilian agencies at the expense of the Homeland Security, the intelligence community and this overall state of readiness that we're in. Fortunate for us, we don't happen to provide much service in any of those, in any real appreciable way in any of those agencies, but it's certainly something that we look at as we look at acquisition targets, because that's, I think it's an issue that all of us in the federal IT communications space have to address ourselves to.

Next question comes from Mark Jordan at AG Edwards.

Good morning gentleman. Could you talk about what potential dislocations may occur to your business models as we tend to deploy more and more resources to the Persian Gulf in terms of either accelerating revenues or delaying revenues because of deployments? And secondly, related to that, in your department of defense revenue base, can you break down what is more mission oriented versus support/infrastructure?

I think I'll start from the second part of your question. We do have obviously some operational forward deployment support. We've had those kinds of jobs in our portfolio for many years. We also have I would call it more the back office type of information technology support efforts. It's very difficult at this time to put a projection on how that might change. I do want to reflect, though, that we also have discussed in the script and a dialog earlier, prepared remarks, our involvement in the Middle East and Southeast East Asia and the forward deployment activity. I don't see how we can particularly project how this is all going to come down on our business space. We would tend to think and anticipate supporting an accelerated fashion areas of the AS C4 ISR intelligence aspects of it. Other aspects of our business may throttle back a bit. I'd like to reflect by emphasizing that our guidance contains our best projections and viewpoint of the mix of all these different factors that are playing all at once here as we proceed in this very interesting period to the next six months, let's say.

Next question comes from Tom Meager he's at BB&T capital markets.

Good morning and congratulation on the quarter as well. Can I start with more of a policy question. Ken this may be for you. You know we now have Tom Davis running the house government reform committee. I have heard rumors he may merge the IT sub committee that he use to run into the full committee to maintain control of the formulation of the IT policy on the hill, I was just wondering if you see any impact on you as a company or on the sector as a whole in having a guy like that that's been the point man on these issues running the whole show for the committee?

Yes, no question about it. That's an issue that all of the companies in this space are watching very carefully. I think it's great news for us. Tom has been a, not just a friend of the industry but he's very, very conversant with the issues and with the missions that we deal with. He doesn't sell himself as a technologist but he understands the business model. He understands he's got a great deal of business acumen. And so I'm pleased and I think it's going to have -- I think it will have a very positive bright line effect on companies like CACI. So as much altitude as he can get in that space I think is good for us.

Secondly, as far as the acquisition policy going forward, given some of the multiples that have been paid for some of the intelligence related properties that have come onto the market recently, I was just wondering if your acquisition policy has changed at all either in terms of what kind of multiples you're willing to pay, are you looking at other areas? Financial services or financial systems I should say. Has there been any change in your policy related to some of the other stuff that's gone on here?

We're not prepared; I don't think to discuss sort of our internal business mechanisms. We're competitive in the market space. We see a lot of target opportunities out there. There's nothing that I have seen in terms of pricing or multiples that gives us any particular problem. We think there are plenty of opportunities. So I think we're going to continue to be very aggressive in this space, looking for significant acquisition opportunities. We've been able to see through the mis I think to pick out the ones that have been extensive value propositions value add to our business space that's going to be our driving criteria.

Next question comes from Bill Loomis at Legg Mason.

Great quarter, guys. Steve, can you on the DSO, increased to 77 sequentially, and typically at least for the last four years you've had that big sequential increase from the September to December quarter on DSOs. One, just what was the build and unbilled dollar amounts and two why do we see it this quarter and in past quarters?

This is current receivables on the bill side it's about 160m on the unbilled it was nine and a half million. And then in the long-term assets, we've got about 8.3m. We're up a little bit this quarter. One of the, probably a day of that increase relates to the Acton Burnell acquisition, when we bring in the receivables but we don't have the revenue to obviously roll back. That's a small part of it. And I think it seems to be seasonal. Seems to be somewhat related to how the government pays. But I would tell you that we have no receivable issues at this point and we're very bullish on collecting, getting those days down. I'd like to see them in the low 70s and see no reason why we can't get there before the end of the year.

Once again we're asking you to limit yourself to one question and one follow-up. We'll now go to Michael Coady at Sidoti.

Can you give us more specifics on the impact of foreign currency exchange with UK operations?

If you look at the local currency of our international operations, they were basically flat year-over-year on a local currency basis. The impact of the exchange was really the nine percent swing in the pound versus the dollar.

Okay. And then to limit myself to one follow-up, this is kind of follow-up on somebody else's question. What do you see the potential EBITDA margin or operating margin going out a few years some of these higher margin lines of business continue to increase as percentage of total revenue?

I think as you look out a few years, certainly we like to get north of 10%. Right now our guidance is in that 9.5-9.8%. We feel very comfortable about our current mix of business as we continue to grow in some of the more profitable lines and through our acquisitions that we think we can get that north of there.

The area of guidance for the near term but it's certainly my goal to expand those margins through productivity enhancements and efficiencies and operation and scale as we go forward, as we pass-through the billion dollar sales revenue level.

We'll go to Sandra Notardonato at Adams Harkness and hill.

Two quick questions, the breakout of the contract mix this quarter.

Give me two seconds. It's about -- I'll give you -- let me give you on year-to-date basis. That's probably a little bit better. The time and materials, it's about 68%. Cost reimbursable, 17%. And the fixed price, about 15.

Okay. And you mentioned sounded like 100% rates on recompetes. What was the win rate on new contracts. If you're not going to get the specific number, any trends you could provide there would be helpful?

We obviously don't report on a quarterly basis or even on an annual basis about win rates. But the trend is about where it's been. We continue to win; I think we indicated to everybody when we went into the year that we feel that in winning new business, if we stay north of 40%, we can satisfy the organic growth objectives of the organization. We're more than accomplishing that. And from a trend standpoint we believe that it's going to stay north of that 40%

Next question comes from John Mahoney at Raymond James.

Nice quarter. Could you give, what was the number of employees at the end of quarter.

59 hundred.

How many of those were kind of support and how many were more on the revenue line?

Most of that is billable. About all of it I would tell you. Very little G&A other than some we may have acquired via acquisitions that's just a handful. Can you count them on both hands, probably.

And in terms of improving efficiencies and I guess leverage on the model, you guys, how have you done recently in terms of the revenue per employee? I know that gets mixed around with ODCs and pass-through, but maybe EBITDA per employee, can you give us some trends in that direction? Focus area.

We've looked [inaudible] On the value of trying to carve the business up in that fashion. And the differential of the kinds of work, we have several different dimensions to our portfolio. The most changing dimention right now as you're well aware is the OCD part. As we provide a value proposition to our customers on technology pass, material contracts and so on, those stats just are not ones that I particularly focus on. I think perhaps you can do the ratios if you wish to do so, but certainly nothing that we're focusing on right now, because it just doesn't give us the metric in the visionary perspective of where our business is going.

Next up George Price at Legg Mason.

Good morning. At this point most of my questions have been answered. Thanks.

To take yourself out of the queue if your question has been asked and answered can you take yourself from the queue by pressing the pound key. Pound key will take you out of the queue. We'll go with William Hamilton at Persian LLC.

Jack, could you talk a little bit about the Homeland Security market. It hasn't really up and down panned out as many had hope from the start here I was just wondering if you could discuss that in your outlook going forward.

I'll be glad to, others may have a thought or two. I would say basically the Homeland Security Department and the merging of the 22 different organizations and the six major players in the organization is still a work in progress. Our focus has been to pay a lot of attention to what's happening in our existing customer organizations, like as Ken mentioned the FAA, the [inaudible] Summit. The part we had to do with the Customs service. We have a new subcontract pertaining to some of the work for TSA. We have work with the Coast Guard. But what we're going to be doing is maintaining a perspective and viewpoint with the agencies, the sub agencies, if you will. It's certainly been a slower process than most of us had anticipated. But we are very much poised to respond to the, what I think are the technology information collaboration, for example, the integration of information. These issues which we know are going to be drivers going forward.

Thank you.

Our next question will go to Brian [inaudible] At US Bancorp.

I wanted to dig into the 3.7b in pipeline. Maybe if you could talk to the opportunities in terms of functional service as well as end markets that that comprises.

Ken.

Basically the way we reported that and talked about that in the past is we've talked about it with respect to our lines of business. And I'm going to give you some numbers off the top of my head. But it was like a little over a third of that was network managed services operations, about 35% about a quarter was systems integration. 20% in the engineering services area, then maybe 10% knowledge management. It's pretty close to what it's been. These things don't go in and out of this, in and out of this pipeline of opportunity at any speed at all, Brian. So it pretty much stays in a pretty comfortable model within four or five percent in any of these opportunities. And that roughly looks at the kind of, at the way our business is broken out.

Great. One follow-up would be looks like you've had a lot of success on the GSA schedules and the GWACs. Do you have a percentage of sales that was in the quarter?

It's about 27% of our revenues came off of GSA scheduled vehicles.

Once again if you would like to ask a question, “star 1” on your touch tone phone. “Star 1” if you're using a speaker phone. Please make sure you're not muted. We do have to him to take some follow-ups so again “star 1”. Gentlemen we do have a follow-up it comes from Tom Meager at BB&T.

Just a couple quick housekeeping items. Steve my favorite question as always the breakout of the federal nonDOD versus the DOJ.

DOJ I think we gave you earlier it was right at $21m.

And also I think you listed out the receivables number what was the total there again?

I gave the pieces. The bill piece was 160.2m, unbilled 9.5m and then the long-term accounts receivable we carry is about 8.3.

The other payables number as well?

Payables, account payable about 10.7m.

Thanks very much. Good quarter.

And gentlemen we do have another follow-up it's from Sandra Notardonato Adams Harkness and hill.

The questions on the competitive landscape, are you seeing any of the more traditional commercial IT services firms like AKSENCHUR and former KPMG trying to compete in the areas of home land defense, security, etcetera?

The two that you named, without question, no, Sandra. We are seeing a little more activity from Perot systems. As you know they announced an acquisition here in town about three or four months ago and in fact all the news stations have them rumored as buying another company here in town. So we expect on a going forward basis to see the introduction of Perot into the federal landscape. But frankly that's the only one we've seen that I would recognize as a commercial IT entity.

Are you noticing Perot being more aggressive on pricing?

No, as a matter of fact. We actually haven't seen him on the fields of friendly strike. We've seen him in the M and A space. But we haven't seen them bid on any jobs over the course of the last, well, forever, actually. But we will in fact see them. They're not buying these companies for nothing. We'll see them on a going forward basis. We anticipate.

I might add interesting enough I had a few calls from some of the more commercially focused organizations, exploring around. And we have not seen, I think, anything significant anywhere close to what we might have anticipated. I'm speaking and Ken is speaking, I think from the federal IT space, not the equipment or technology areas per se.

That is a function of the fact that these companies don't have the relationships they need to compete or what do you think it is?

That's a great question. I mean they're obviously a much better -- certainly AKSENCHUR has a number of very high quality relationships in terms of what they do. Their focus historically has been in the financial community. They don't seem to have branched out in any significant way and they just spent a significant amount of money buying a part of Anderson. I'm sorry, that's barren point. Their focus has been on a different market niche. But a relationship is certainly an issue. I think the biggest issue, the thing that we out not just about CACI, but those of us that we think have a meaningful place in this industry, is you really are required to have functional expertise you have to have people that understand the mission and the function of the particular customers you support. And we just have a lot of retired military people in our company. We have a lot of X government civil service people in our company. We have a lot of people conversant with the kinds of systems that we support and those are the things that bode success, almost not to the exclusion of the technology offering, but aiding and abetting the technology kinds of capabilities that we have.

I think it's a significant barrier to entry is the legacy relationship. In a word that's what Ken was talking about.

Thank you.

We'll now go to Cindy Shaw again at sound view.

You made a comment earlier about knowledge management and the SEC. I know you've been trying to develop that area. Can you add some color for us?

You're asking the wrong guy for color but let me give it a shot. Department of Justice obviously from a knowledge management standpoint, we continue to be their kind of go-to contractor. Any growth of consequence there at least historically, we knock on wood that it will stay that way, as new trials represent themselves as major pieces of litigation that the customer gets involved with, we do in an area of knowledge management, effectively what we're doing is in addition to pushing and moving and managing large numbers of resources and documents, we continue to help them come up with more technologically sophisticated ways of dealing with these trials because the attorneys on the civilian side of the equation are in fact well heeled very wealthy and technologically very savvy. We're seeing a fairly healthy amount of growth come out of the SEC. It certainly pales in comparison the work we do directly for the Department of Justice, but it's a new space for us and we're cautiously optimistic that they'll continue to come to us for opportunities.

Good luck.

Now we'll go to Colin Gillis at RBC Capital Markets.

Just a quick follow-up from Cynthia Houlton. Can you talk about spec takings for UK pretax margins going forward will that be able to stay in the 12% range?

That's what we're forecasting, Colin, at this point in time, is that they will stay fairly flat and so that's where I would stay at. Greg and his team over there work very hard and a very tough market. When they see things heading south they adjust head counts what have you to try and stay in that range of profitability.

Do you have any footnote to add to that?

No, I would just confirm what Steve has said that I think going forward we can maintain our good profit margins of around 12%. But no, I think in a state of current play in the market, in the UK I don't think expanding those margins for the foreseeable future.

When we talk about the 59 hundred employees, we have a percent that have security clearances?

I'd say roughly about 75%.

The number we've used is generally 70-75%. That includes the security clearances from special work we do for the Department of Justice as well.

And then finally I know we don't historically give out contract data but we did on the September quarter. Do you have that contract revenue by mix?

We did. We gave that out earlier.

Great.

Steve, do you have it.

6817 and [inaudible] T and M cost plus, fixed price respectively.

Thank you.

Gentlemen, we have no other questions remaining, so Dr. London, I'd like to turn it back over to you for any closing comments, sir.

Thank you and we certainly appreciate your help. I want to thank certainly all the callers for your interest in the questions today. We certainly want to thank you for your participation in our call. Frankly we hope we've provided you with a very clear picture of not only the company's results here in the second quarter, first half, but hopefully also our expectations as we're going forward into this very interesting time in this industry. This quarter will be participating in a couple of major conferences I might add as well as visiting New York City, Boston and the west coast among other places. We look forward to seeing some of you and bringing that up-to-date on our company if the opportunity emerges. If you're coming to the Washington area, we'd certainly like to invite you to stop by and arrange a meeting or whatever is appropriate. Please contact David at investor relations department. He'll certainly help you out. We're aware some of you maybe have other questions you'd like to discuss so the team is going to be available in about 10 to 15, 20 minutes or so to take any other calls you might have or any other areas of interest. So again, thank you ladies and gentlemen for your participation and your interest in CACI. This concludes our second quarter conference call.

Thank you, you may now disconnect. Thank you very much.