CACI International Inc (CACI) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the CACI International fourth-quarter and year-end 2003 earnings conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to the Vice President of investor relations, Mr. David Dragics. Please go ahead, sir.

Thank you, David. Good morning, ladies and gentlemen. I'm Dave Dragics, Vice President of Investor Relations of CACI International. We are pleased that you are able to participate with us today. For those of you who are with 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, yesterday after the market closed, we released our fourth-quarter and fiscal-year 2003 results. We hope that most of you have had the opportunity to review our announcement and the results; and they are summarized on this exhibit. And once again 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. As we progress this morning we will make every effort to keep all of you on the same page as we are.

Moving to the next exhibit, before we begin our discussion this morning, I would like to make our customary but very 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. And the primary factors that could cause actual results to differ materially from those anticipated are listed at the bottom of yesterday's earnings release, as well as in the company's Securities and Exchange Commission filings. Our full Safe Harbor statement is on this slide and will also be incorporated as part of the transcript of this call, which we will post on our website. 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 the discussion this morning, here is Jack London, Chairman, President, and CEO of CACI International. Jack.

Thank you, Dave, and good morning, ladies and gentlemen. First let me welcome many of you who are new to CACI and to our call this morning. We appreciate your interest and hope you'll find this call informative. We're very pleased to report record fourth-quarter and record full-year results for CACI in fiscal year 2003. By all measures this past year has been an extremely successful one for the corporation. Our revenue increased 24 percent over fiscal year '02, reaching 843 million. Diluted earnings per share were $1.52, 23 percent higher than last year. We had record profits of 44.7 million, 40 percent higher than last year. Our margins increased at both the operating and the net income line. Operating cash flow was 76 million, 111 percent above last year's level. Internal growth for the year was approximately 15 percent, at the upper end of our objective range of 12 to 15 percent per year.

We augmented our internal growth by completing four successful acquisitions. They brought us new relationships and customers, and expanded our presence in the U.S. intelligence community. All are profitable and have been immediately accretive to our bottom line. In effect, our continued focus on national defense, homeland security, and the intelligence community has resulted in our delivering solid growth and record profitable performance. As we move into the 2004 fiscal year, CACI is well positioned to continue its rapid growth and profitability supporting our government clients.

Let's move to the next exhibit, please. With me today to discuss our operating results in more detail and to answer your questions are Ken Johnson, President of CACI's U.S. operations, and Steve Waechter, our Chief Financial Officer. Greg Bradford, President of CACI Ltd. in the United Kingdom is also on the line ready to answer any questions you may have about our UK operations at that time. As is our custom on these calls, we'll discuss three principal items. First, Steve Waechter will discuss some details of our financial results. Second, Ken Johnson will discuss our domestic operations and outlook. And finally I will have some closing comments. After that I'll open up the call to your questions. So 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. Good morning, everyone. Let's go to the next exhibit, number 6. Last evening we reported record fourth-quarter and full fiscal-year revenue and earnings. Revenues for the fourth-quarter increased 20 percent to $228.6 million versus $191 million a year ago. Net income was $13.3 million or 45 cents per diluted share, up 43 percent over last year's $9.3 million or 32 cents per diluted share. We had excellent operating leverage this quarter, with net income increasing at a rate more than twice the revenue growth rate. For the year, our diluted earnings per share were $1.52, 23 percent above diluted earnings per share of $1.24 last year. Income from continuing operations was $44.7 million, 40 percent higher than the $31.9 million reported a year ago. Revenue was $843 million, up 24 percent over fiscal year '02 revenue of %$682 million.

Now let me give you more detail on some of these results. Moving to the next exhibit, on federal government business grew 21.5 percent during the fourth quarter and represented 93 percent of our total revenue. The internal growth of our federal business was just over 9 percent, with approximately 14 percent growth in our higher-margin professional services-related revenue, offset by flat lower-margin revenue from subcontractors and other direct costs. For the year, internal growth of our federal business was 16 percent. And as Jack reported for all of CACI 15 percent, well within our goal of 12 to 15 percent per year.

Strong growth in our domestic operations was somewhat offset by our United Kingdom operation. Our international segment reported $9.6 million of revenue in the quarter, down approximately 7 percent from last year. Pretax margins were approximately 9.5 percent this quarter. As we've noted in past calls, our operations there are being affected by the lower demand for commercial IT services in the UK, particularly in the telecommunications industry. For the year, revenue was virtually the same as last year, $40.4 million; and pretax profit margins were 11 percent.

Moving to exhibit 8, let's take a look at some of the key metrics, most of which were included in the expanded financial exhibits in our press release. This was an extremely profitable quarter for us. Our operating margin was 9.2 percent, compared to 7.7 percent in the fourth quarter of last year. As we indicated in our release, the growth in our operating margin was driven primarily by contract mix, with a significantly higher fixed-price and time and materials worked during the quarter. Our acquisitions also concluded favorably to the improvement.

We experienced an extremely strong quarter of operating cash flow, over $34 million, compared to just over $23 million a year ago. This cash flow was produced primarily by the increase in net income and timing of cash disbursements. Operating cash flow for fiscal year '03 was $75.9 million compared with $36 million for fiscal year '02, a 111 percent increase.

Just a a couple other metrics. Almost 90 percent of the revenue this past quarter was earned as a prime contractor, about the same as the fourth quarter of fiscal year '02. For the year, we derived 87 percent of the revenue from prime contracts; and also for the year, 64 percent of our revenue came from time and materials work, 17 percent from cost-plus work, and 19 percent from fixed-price work. Last year the mix was 61 percent, 19 percent, and 20 percent, respectively.

Moving to the next exhibit 9, days sales outstanding at June 30 were 78 days compared with 71 days a year ago. The increase in days outstanding was driven partly by the acquisition of PTG in May, and higher UK unbilled receivables. This exhibit also shows our cash and marketable securities and debt at June 30th.

The next exhibit is our guidance for revenue, net income, and diluted shares for the first quarter. As you can see, we estimate that our revenue for the quarter will increase 24 to 28 percent over the first quarter of fiscal year '03. For next quarter, we expect operating margins to be in the 8.3 to 8.4 percent range. This compares favorably to last year's 7.8 percent. Compared to last quarter's margin of 9.2 percent, the rate will be lower, primarily as a result of a lower mix of revenue from fixed-price contracts in the first quarter relative to last quarter.

We anticipate that our net income will be up 31 to 36 percent higher than a year ago; and we expect diluted earnings per share to be up 29 to 34 percent over the year earlier period. We believe that our internal growth in the next quarter will be in the range of 10 to 12 percent. Finally, we estimate that diluted weighted average shares for the first quarter will be 29.7 million.

For the full year there is no change to the range of guidance for revenue, net income, and diluted EPS as reported on July 8. The company's guidance excludes results from any additional acquisitions, including that resulting from the announced signed Letter of Intent. For the year we anticipate revenues to be between 985 million to over 1,015,000,000. Net income will range between 53.1 and $54.7 million; and diluted earnings per share will range between $1.77 and $1.82. We will update the full-year guidance upon successful completion of the acquisition, which is anticipated to close in September.

The company continues to target its overall growth at a 20 percent or better compound annual growth rate, through a combination of organic growth rates ranging between 12 and 15 percent, and acquired growth rates between 5 to 8 percent. With regard to the target company, it complements our service offerings and expands our customer relationships. More importantly, it is in line with our previously stated acquisition criteria concerning accretion and valuation.

Even though Dave mentioned the Safe Harbor statement at the beginning of this call, I 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. Now here's Ken Johnson to cover our domestic operations. Ken?

Thanks, Steve; and good morning, everybody. Let's go to exhibit number 11, please. Steve spoke about how profitable the past quarter was; and I'd like to add to his remarks by giving you a feel for our operations during the quarter and, more importantly, talk about what we see ahead.

As we've already noted, our organic direct labor for the quarter was up an impressive 14 percent. Over and above that growth is the addition of some 200-plus people to operations staff during just the first six weeks of this fiscal year. The vast majority of that staff is revenue producing, I might point out.

This increase came from not only our core operations, but also from the acquisitions we have made over the last 12 months. In particular, our acquisition of PTG has increased our footprint in supporting tactical intelligence needs for many war-fighting units throughout the United States Army. We continue to be very excited about what this organization has brought to CACI, and the potential opportunities for continued expansion.

There were a couple of other noteworthy areas in our operations for the quarter, as well as for the year. Our C4ISR work, much of which we provide to the United States Army Communications and Electronics Command, was up 22 percent in the quarter and 37 percent for the year. Revenue from our intelligence community customers, both national and military intelligence agencies, was up significantly in the quarter and represents almost 20 percent of our business today.

I'd like to focus on our federal-civilian agency business. You might have noted from the information in our release that the revenue growth from those customers increased some 28 percent this quarter. A large part of that increase came from our support of the Department of Justice's litigation support requirements. We generated approximately $27.4 million in revenue as we continue to perform on a wide variety of task orders under the Mega 2 contract. This work is involved with major tobacco litigation, work for the Securities and Exchange Commission, and support for several other unnamed government agencies. Most important, however, is the growth in our business from several other federal civilian agencies. A year ago in the fourth quarter, work from our highly valued DoJ customer represented approximately 50 percent of our federal civilian agency business. This year, while our DoJ work has grown significantly, it now only represents approximately 40 percent of our federal civilian agency business. We have been able to not only expand the work we have been doing for years for our current clientele, but have added new ones, like the Department of Veterans Affairs, the Drug Enforcement Administration, amongst others.

In the next exhibit let me give you a quick recap of the revenue we generated from our federal, commercial, and state and local customers from our service offerings. These percentages are approximate. Systems integration work, as you know, includes our UK operation, grew to almost 50 percent of our revenue. Engineering services remains in the 20 to 25 percent range, while managed network services now represents approximately 20 percent. Knowledge management was in the 12 to 15 percent range of our revenue.

Let's move to the next exhibit. Take a look at what's ahead for our domestic operations. Our pipeline of opportunities today is about $4.8 billion. That is up from 4.3 billion when we spoke to you in April. More importantly, as we exited FY '03 proposal activity had increased significantly, leaving us with approximately $950 million in proposals outstanding being evaluated by customers. In the six weeks since that time, that number has grown to in excess of $1.2 billion; and we anticipate that several of these awards will be decided on or before September 30th, 2003.

Overall we are quite pleased with the current pace of our operations, as you might imagine. We are excited about the prospects ahead. for the reasons I have just covered. We continue to experience strong demand from our government customers that support the needs of national defense, intelligence, and homeland security. We are also involved with helping many of them focus on transformation initiatives, addressing the structural issues of improving the delivery of services by the federal government. Information sharing is one, as well as many other initiatives you have heard us talk about for the last several quarters. We believe this will be reflected in growth. Very profitable growth. And not just the coming quarter, but throughout the fiscal year. Jack, that concludes my remarks. Over to you.

Thank you, Ken; and thank you, Steve, for your updates. Let's please move to the next exhibit. We have concluded another successful year here at CACI of record earnings and increased revenue. CACI has again sustained its position as a leading provider of information technology services to the United States federal government. While the last year has been marked by world turmoil, the war in Iraq, ongoing terrorist threats, and the emergence of hot spots like Liberia and North Korea, what is certain is the gravity of these events and the ongoing emergence of new threats.

National security remains a top priority of this administration. Information technology continues to power the ongoing transformation of our military and federal government, and has become the front line for America's homeland security. CACI's advanced IT and network solutions are part of that front line and the forefront of today's new era of defense, intelligence, and e-government.

As we pointed out in our guidance release for fiscal year '04 in early July, we believe that we can achieve our earnings and growth objectives by leveraging our ongoing customer relationships. Our basic strategy is to successfully deliver mission-critical support to our current clients of many years and our many new potential federal clients involved with national security and intelligence. As Ken mentioned, we are expecting a significant part of our growth to come from our abilities to support our customers in the transformation of the DoD and civilian federal government operations. In fact, we are already doing so.

As we work to help secure the nation's future both domestically and abroad, CACI is committed to remaining ever diligent in providing innovative technology and solutions that will support our great nation's future. We believe the commitment will reward our customers and our shareholders. So at this point, we are ready to open our discussions to your questions. So David, I'll turn the mike back over to you for our first question, if you would please.

Thank you, sir. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Laura Lederman, William Blair.

A few questions. One, can you talk about the pricing environment for acquisitions out there? And how it has changed over the last several months? And also can you talk a little bit about about competition in the different segments? Who you are seeing more of, who you are seeing less of? And the final question is in terms of contracting, are you seeing consolidation of contracts from several to single contracts ?

That is a nice question with three important parts. Thank you, Laura. I think I will just talk to you in general here a couple minutes; then I think Steve and Ken will have some thoughts. Certainly we are still seeing an active M&A space. I would say pricing in that area is pretty much consistent. At least in the market segment we are looking at. May be pushing a little bit above what we've seen over the last year or two. But outside of perhaps some outliers in some of the larger transactions perhaps, we're seeing pretty consistent market pricing. There is always a give and take; a little bit of push back and forth, depending on what particular properties are looking better to certain companies. But that is our general impression of it.

The competition, I think, pretty much the ones we've seen in the space. I don't think we have had any new significant major surprises coming into the sector. But why don't we let me turn it over to Steve to address a couple of items; and then Ken will follow up I'm sure.

Just on the acquisition front. We still are seeing a number of properties out there. I think the valuations will range, depending on, one, if it's a big company, say north of 100 million in revenues, they are getting a premium. If you see an Intel kind of a company with a heavy concentration of intelligence-related work, it's also getting somewhat of a premium or step up in valuation.

There is also a core, in the kind of 35 to $75 million range, that fit very nicely with our managed network services within the systems integration kind of work and that; very similar work to what we do. We are finding good ranges. Last year we bought four businesses and paid kind of the 6 to 8 times trailing 12-months range. And we think that they can still be done in that range.

Competition maybe Ken would address that in more detail.

Laura, are you talking about competition in our bid world? Or competition for acquisitions? Bid world. Really no particular change. We continue to see the usual suspects. I think if there was one change I consider of consequence, and it's not a real time change based on your question, we are seeing a lot more of IBM. IBM has emerged again now as one of the large-scale systems integrators. IBM over the course of the last four or five years has not been as active with a recent award, recent like two years ago, of a big modernization contract down in Customs. We as seeing more and more of IBM. And we are partnering with them and competing against them. They are a real wanted competitor. But other than that there really have been no material changes in the space.

Cindy Shaw, Soundview.

Congratulations on a great quarter. One of the things I wanted to ask you, margin expansion. The guidance for next year suggests we are going to see a continuation, but fairly modest. I wanted to get your sense for where you see that going, where you think it could go over time?

I'd like to say first of all, Cindy, that margin management if you will, margin targets and cash flow, are two primary focal points for CACI. We pay a lot of attention to that. I want Steve to discuss it a bit of the detail here. But I just want you to know that from a strategic and senior management perspective, our goals always are shareholder-focused on the leverage from margin expansion and meaningful margins in our business space.

We did about 8.4 percent this year, and would anticipate somewhere in that, hopefully north of that range, maybe as much as 8.6 is kind of what we have targeted at this point in time. The drivers that are going to push that up are going to be the continued use of more time and material types of contracts; and also our acquisitions have also brought us a higher margin mix type of business. So if the stars and the moon all align here, we could have, as we did in the fourth quarter, a very nice alignment. Primarily also we had a very strong fixed-price contract mix that really helped us in the quarter. So we could get upwards of 9 percent here at some point in time in the future, if everything comes together. But the guidance we've given out, again, is somewhere in that 8.3 to 8.6 percent range is where we are.

Thank you and congratulations.

Julie Santoriello, Morgan Stanley.

Steve, I wonder if you can comment on the expectations for internal growth in the first quarter? It seems a bit light, compared to what your targets are. I am wondering if it's a seasonal issue, or an issue of comparisons versus last year?

Let me say to lead off with, we have a containing objective over the long haul to deliver a 10 to 15 percent internal growth performance. We want to do it, obviously, at good margins. A lot of the internal growth will ensue after acquisitions as we go along. So we encourage our investors to conceive and view CACI as an internal growing operation, augmented through our acquisitions. In terms of the lumpiness from time to time, quarter to quarter, those are going to be some variations. But let me turn it over to Steve or Ken who amplify, whoever would like.

Julie, a couple things I would like you to consider. Typically our Q1 over our Q4, -- I'm not the veteran of this crowd here; Jack knows better probably for the last 30 years. But our Q1 over Q4 typically has a little bit of a dip, largely because we are a labor-driven company; and is just an awful lot of vacation being taken. So the direct labor portion of our growth tends to take a couple of weeks off between July 1st and the end of September.

What you are seeing this year, however, is you are seeing not only a dip, but you are seeing some meaningful growth. I believe as you look at our organic growth for Q1, you are going to see a meaningful movement north of that organic growth that we offered in this quarter.

I further believe that one of the things, one of the points that we attempt to make about this difference between organic and acquired growth, that needs to be taken into account, and we try as hard as we can to convince each and every one of you, with our recent acquisition of PTG, that we believe is performing beyond our original expectation. We are comfortable that a lot of those new positions that we've spoken -- that I talked about in my text, and on a going-forward basis will be added to what was then PTG. But as we hire these new people, we are hiring them as CACI employees. And while we have to report that out as acquired growth, because that's the way we count the beans and we report the difference between organic and acquired, they really are new CACI employees. And my management team, I can assure, you works equally as hard at hiring new people at an accelerated rate in PTG as much as they do inside of our core operation.

So for us internally, the way we manage our business, we don't care about the difference. Because as far as we are concerned, they are on an equal footing. I hope I am making myself clear. I am using an awful lot of words to do it. We believe you're going to see a continued improvement through the first quarter and throughout the year on the organic growth line.

The other consideration, if you look at our fourth quarter, and I think it is going to continue into the first, if you look at the professional services revenue segment, we think the mix of that versus ODC types of subcontractor costs that flow through is going to be a little richer. And that is what drives the margins up. Last year we were 7.8 percent. And we think we will do between 8.3 and 8.4 as we go forward. So if you break the pieces out, the part where we make good money is growing actually at a higher rate than that kind of 10 to 12 percent we indicated earlier.

Okay, great. If I can get one quick follow-up on that. Would you be able to provide us with the headcount at fiscal year end? Also if you could discuss potential hiring numbers for this fiscal year? Especially knowing that it is an important leading indicator.

We are just a tick under 6,400; I don't have the exact number, Julie. But in the order of magnitude. And for next year we are going to have to add somewhere between 7 to 800 additional people, to hit the internal targets that we're looking at.

Thank you very much.

I would add that over the years we have moved more into a system integration kind of business, where you have subcontract activity and more and more ODC. I think that's a favorable feature of our growth plan, in the sense we have been able to take on larger jobs. So these ODCs and subcontractor values are going to have their peaks and valleys like any other outside vendor-related or contractually-related activity. But the internal growth in terms of our staffing, I think has been very good, the professional services. I think that is our overall trend line that we're going to be able to sustain. And that is our goal.

Joseph Vafi, Jefferies & Co.

Good morning and great quarter. Just a few quick questions here. First, following up on the previous question. Give us a little more color on Premier, and what might be going on there to be driving better-than-expected performance? And secondly, to the extend you can, on your L.O.I., maybe perhaps talk about the size of the transaction you might be considering? And third, just a housekeeping item. If we could get funded funded backlog ending for the year. Thanks.

It was Joe, was it? Joe Vafi. I would just say we are continuing, I think, to look at examining a number of these issues that you have related to. But I want to turn it over to Steve; he will have some comments. And then for PTG I am sure that Ken will.

With regard to the acquisition, we've given some general comments that we prefer not to give out numbers at this point in time, Joe. Only because people start rolling those into their forecasts. We are still in a very early phase of due diligence. I think it would be inappropriate to give numbers, because people start rolling them in. And we don't want to get people out ahead of us. I think as we get closer and when we sign a final definitive agreement, we will obviously come out with updated guidance and information regarding that.

With regard to the backlog, the funded piece is about $485 million here at the end of the year. And Ken, if you want to talk about PTG.

Thanks for the question on PTG. I was trying to figure out how I was going to get this answer in if nobody asked this question. Our delight comes in this PTG operation, as you know, when we advertised the closing of this, it provided us a presence inside the intelligence community, supporting what we describe as tactical intelligence. And those are the people that support the intelligence function down at the war-fighting level, whether it's a corps or a division or a brigade or a battalion.

PTG had a significant presence over in the European theater, both Western Europe and parts of Eastern Europe. What we've been able to do, as a result of situations that are occurring in Korea, and possibly with what is occurring over in the war zone, is we are addressing ourselves, through requirements that these customers have in both of those areas. And it appears as though there are substantive staffing requirements to help provide additional tactical intelligence support, additional support to the G-4 or the logistics/supply function. And while we don't have a great deal of lucidity on those requirements right now, the level of activity, given that these folks have only been with us for about a month and a half, two months, is peaking for us. And we're looking at a number of different opportunities. So we are very very confident that we are going to see continued top and bottom line expansion emanating primarily out of what we used to know as PTG.

Bill Loomis, Legg Mason.

Strong quarter, guys. Looking at the fourth-quarter operating margin, it was even more particularly strong, given the fall off in the UK, usually higher UK margins. What attributed that? I know you talked about some broader things that were driving that margin improvement. Was there any onetime contract true-ups? Or onetime events at the end of your fiscal year? And the second question on the UK business is, what is the outlook in the first quarter? How shall we be modeling it, thinking about that as far as revenue and profitability sequentially?

Good morning, Bill. Some good questions. I am going to ask Greg to discuss the UK side of it. But our business is full of interesting opportunities that pop to us. The idea of one-off, recurring, non-recurrings is part of this business. I think we had some interesting things that happened in the fourth quarter. For example some of our work in the Justice area. Some of the fixed-price contract work. I will let Steve talk to that. And then for the overall reflection on where we are in the UK, and the margin activity, and a little bit of the prospects, we will turn it over to Greg. Steve?

With regard to the fourth-quarter margins, Bill, we did have some tasking under one fixed-price contract which was a little bit out of the norm, a little bit heavier than what we would normally see. It was a very good margin kind of business for us. Additionally we did have a little bit of PTG in the numbers for the quarter; that also was a little bit of a positive for us. But other than that, it was just kind of an alignment of everything coming together very nicely for us. But nothing unusual if you will in terms of any kind of true-ups or anything like that.

In our first quarter here in the UK, we see that tracking pretty much in line with what we did in quarter four. Revenue profits remaining roughly the same. Historically it's the most challenging of the fourth quarters, in that summer holidays, clients out, and some of our staff out, of course. We've got a number of proposals on the table with government clients, which we are -- part of our efforts over here is to shift more of our business to the public sector. Including health, which is with nationalized health medical system here. And we see awards coming out towards the end of this summer, September, October time frame. So looking forward to the balance of the year, we see things picking up thereafter.

Molly Sandiski , Friedman Billings.

Good morning; thanks for taking my question. I was wondering if you could talk a little bit more about your proposal backlog? And maybe some of the specific programs that you might be focusing on; or just more specifics on what you are competing for your backlog.

I would just say we have been gaining momentum as we indicated in our statistics. We have got a powerhouse of bid opportunities out there; anticipating some awards we believe by the end of this quarter. Let me turn it over to Ken for a little amplifying detail.

Molly, as I am sure you can appreciate, we don't discuss individual programs that we are bidding on. To try to give you a little bit more granularity, basically at the April call and the call after the second quarter, and I can't even remember when did it, probably January, we were whining about the lack of opportunity in the form of requirements that were being issued out of the federal government. Largely due to that continuing resolution. There was a huge bubble in the line in terms of requirements issuance. That kind of all came together. Kind of the perfect storm, in the April May time frame. And we wound up writing several, many, hundred million dollar proposals in a variety of opportunities that are in the 40 to 60, $70 million range. So our bid backlog grew dramatically in the fourth quarter, and that momentum has carried over into our first quarter here.

I fully expect that we will sustain this proposal writing business through the first quarter into the second quarter; and then quite possibly see a little bit of a slowdown in that. But given the bid backlog that has been created, we are very bullish. Now, obviously, you get nothing in our business for writing these proposals, except tired. We are just quite hopeful that between now and September 30th, that, knock wood and we know you are rooting for us, that we will create a quality win/loss percentage. That is kind of where we are going.

Okay. Would you say, or would you say that it is fair to say that your backlog of this billion programs is kind of increasing relative to your DoD business?

DoD continues to grow at a little greater rate. As you know, two out of every three of our dollars come out of the Department of Defense. We identify a heck of a lot more, -- irrespective of how many there are that come out of the federal government, we identify and qualify a heck of a lot more requirements out of the Defense space, largely because we spend more time there, all day everyday. We're very conversant with those missions.

We are cautiously optimistic, however, that a number of these opportunities are emanating out of the federal civil. And that's why we took the time in the text and in the discussion to make sure you get an appreciation that this growth platform that we have put in place is happening nicely on both sides of that equation. We think that there is really nice balanced growth going forward, both in DoD, the intelligence sector, and the federal civilian sector.

Brett Manderfeld, Piper Jaffray.

My congratulations as well, especially on the free cash flow side. Steve, can you talk about the main increase in other current liabilities during the year? And then thoughts on free cash flow for next year; will that track EPS growth? Thanks.

Thank you, Brett. Steve, take that one, please.

Brett, the increase in the liability side is really just a timing issue, related to the payment of subcontractors and taxes and things like that. So it's really just a timing issue, in terms of increase, that you are seeing there. As far as next year, we would anticipate hopefully very similar performance on our cash flow, as far as CAPEX, somewhere probably between 10 to $12 million of CAPEX next year. And again hopefully in the same kind of numbers, $60 to $70 million of cash flow is what we would hope to do.

Tom Meagher, BB&T Capital Markets.

Good morning. Congratulations on the quarter. Let me start out, Dave, I see you have a new title here. Did you get a promotion?

Yes, I did. Thank you.

Congratulations. I know that big raise that Jack is going to give you, I hope it doesn't take a penny out of the estimates for next year.

There goes the quarter all over again.

Steve, since you finally anticipated my DoJ question, let me move onto the next one.

That was Ken that did that.

Ken that did that; okay. Although we really can't give a specific guidance, now that we are at the end of '03, obviously people are going to be putting '05 estimates out there. To that end, I was wondering if the organic growth rate of the 12 to 15 percent and some of the incremental margin improvement in FY04 is generally sustainable through '05 as well?

I would you say to you on that one, Tom, that that is going to be our mantra, if you will. Our set of goals and objectives going forward. It's a huge market space out there. It's a matter of having distinctions and the sharp edge on our delivery, philosophy, and cultures. I don't anticipate any reason that we should lower our objectives in the near-term; meaning the next couple of years or so. You were talking about guidance for '05, but generally speaking I would see those growth objectives sustaining themselves. We would like to think in terms of moving to a $2 billion platform within a few years.

Okay. Ken, maybe one question for you. Any competitive impact from ACS's impending departure from the sector, and Lockheed-Martin picking up that operation?

No, I don't think so. As we've spoken in the past, the big keep getting bigger. We've indicated to you and to everybody, bigger is better in this space. That is just going to make them a bigger better company. It gives them a broader footprint. It will make them a bit more competitive. On the real positive note, though, it'll make them a lot better partner on a couple of things we're doing, where we are doing business with them. But I don't think it will have any appreciative or material impact on what we do, Tom.

Cynthia Houlton, RBC Capital Markets.

Congratulations. Just a couple questions. I know you talked a little bit about ODCs. But did we get the percentage of ODCs during the quarter?

No; we generally don't give that out.

On PTG, I know it closed mid quarter. Would you be willing to separate that revenue out? Just so we have a sense for the current quarter, half quarter? Or should we think about -- I know you gave last year's revenue. Should we try to back into it that way?

I think we feel like PTG has a very robust future. We can talk a little bit perhaps about some of the attributes when we acquired it. But we are eager to see a significant growth profile from that part of our business, as it integrates with the other lines and activities. But Steve, maybe you can talk a little bit about the financial profile as we saw when we consummated the transaction.

PTG, Cindy, did about $43 million in their last fiscal year. We are anticipating they are going to be up significantly over there; more in the kind of 50 to $55 million range. And hopefully, as Ken indicated, certainly there are some signs here that they might even exceed that. Again, as we get better clarity on that, we will get back to you on it. Right now, again, they're 50 to 55 million. And that is up from their kind of 43 million last year.

I might just add that we know that some recent reports of the key executives in the field coming back, and after some customer visits, indicating some perhaps significant stacking up, augment opportunities. And I think Ken mentioned some of those a little bit earlier. We are enthusiastic about the opportunities of PTG.

John Mahoney, Raymond James.

I don't know if you are going to -- Steve mentioned he didn't want to talk about the exact amount of ODCs in the quarter. Can I ask question a different way? What was the growth year-over-year sequentially in your direct labor costs?

If you hold on a second; for the quarter?

In the quarter, possibly; and maybe if you can break that down organically.

We may be able to do that.

I gave the organic. John, the organic DO was 14 percent.

In the quarter?

Let me rephrase it a little differently. It is kind of the revenues on the labor side, on the direct cost, grew about 19 percent year-over-year in the quarter.

And that really speaks to the big margin improvement?

Yes.

Could you give us some feel about, historically, I guess there was always a lot of fourth-quarter ODCs going on. Your fourth-quarter gross margin was one of your lowest. We've been talking on the operating margin. On the gross margin line, what is that going to look like throughout a seasonal basis in '04?

If you look over the last three years, John, we have been doing about in the 37.5 to 38 percent range. I think it's going to stay there. I don't know of anything that's going to significantly change that. I think we have been fairly consistent. After we acquired Net.com, it came down a little bit, and that was due to the mix of that business. But I don't think that's going to change dramatically.

David Garrety , American Technology Research.

Congratulations on your quarter. Nice job on the mix there. Quick question. Can you review for me what the new order bookings were in your fiscal fourth quarter? I was sort of taking your number of new order wins of about 1.1 billion for the year; and kind of backing into a number of about 164 million.

I don't know if we mentioned that one, David. Steve, are you positioned to address that?

It was $140 million, David.

That was just on kind of down year over year and quarter over quarter?

We won't go down that road, David. We actually don't control the schedule of the issuance of these requirements or the award. One of the things I think you would take away from the 140 awards and the increase in the bid backlog is there was just a slowdown in awards. The fact that all of those opportunities are still out there to be decided upon, the take away for you would be that we haven't lost a huge slug of work, in that there is significant opportunity. But on a quarter to quarter basis, year-over-year it's very difficult to compare the number of awards. Because it's just a very lumpy business.

I would emphasize that. A long time in this business; looking at the quarterly flow of bookings is always lumpy; it's not even seasonal. I have had people that have tried to correlate it to the seasonality. About the only thing in this business that I have been able to discover over the years, and our business is reasonably seasonal in its feature, is the first quarter each fiscal year. And it is because of the reasons these chaps have just laid out. That is primarily customers taking holidays and a lot of our employees. We're a revenue-generating organization based on our labor base. So when labor is off, so does that seasonality taken down.

The other thing I might mention is that the subcontract and vendor content and ODC content has steadily risen over the last, I'd say six or eight years; because we have moved into a different business platform. The system integration business is now a significant showcase piece of what we do. And in that market space, you're going to be doing a lot of acquiring of other equipment and materials and so forth, and putting them together in these deals. You're going to see some continued involvement in that line. That again is going to be a lumpy thing, because it depends on the flow of the jobs, when the deliverables are due, when the equipment is delivered, and so on.

So I wouldn't calculate too much correlation on these parameters of the ODC part of this thing. I think it is the overall trendline, which has been very sustainable, as you can look back over history of the performance quarter over quarter, year-over-year. I think those are the kind of things that seem to me to be more interesting things to keep in review. Steve?

The other thing I might add is you look, and we had 140 million in new contract awards during the quarter. We also get significant funding on existing contract vehicles. You don't really see that. We don't report that out every quarter. But you can see it from the backlog statistics that are up; and also the funded backlog of the 485 million. If you look at that relative to last year, you will see significant growth in that. That is what really drives the overall growth for us. Again, we don't report that every quarter, and we don't come out with a press release on every tasking order that we get under an existing contract vehicle.

I have another comment, actually, in this area. That is that the contact base that we announce is very conservative. We've been very conservative on our award announcements and values that we put out, for the obvious reasons. The trendline, though, is that those values have been expanding. Those ceilings have been moving up in a great variety of our contracts. We don't make it a custom to announce those kinds of things, because we know what those values are going to reach to. So there is a variety of ways that we are bringing revenue into the company that isn't always just simply announceable through our news release process.

Michael Coady, Sidoti & Company.

Very nice quarter, guys. All of my questions have been answered. Thanks.

(OPERATOR INSTRUCTIONS) Tim Quillin, Stephens Inc.

Good morning. Couple questions here, first, your DoJ business appeared to be up about $5 million quarter to quarter. I'm assuming that's related to this tasking you are talking about that was fixed-price. I was wondering if you could shed a little bit more light on that?

You want to speak to that a bit, Steve, or Ken? Either one. Ken?

It certainly had to do the fixed-price tasking, just the overall level of activity on that particular contract had increased significantly. So it was really across the board with the support that we were providing for that particular customer. There are a couple, as I indicated, unnamed agencies that we provide support for, who were increasing their requirements; and we were responding to those in real time, Tim. So it was across the entire platform for that very important customer of ours.

The most recent quarter, is that a sustainable level of revenue?

I don't know that the growth is sustainable, because of the drama of the growth. But I believe that the revenue in the near-term is in fact sustainable. We see an increased level of activity. And as we have indicated to all of our shareholders and prospective shareholders, if there is a deal of some consequence, where it's a sizeable piece of litigation, we get a very good, long hard look by the customer. We are sort of a go-to customer, and we value that relationship greatly. And we are very very responsive, and go that extra mile to make sure that we can help them support the variety of litigation that they are involved in.

Joey McCurchy , AG Edwards.

I'm stepping in here for Mark Jordan. Question on, you mentioned that in the last six weeks you've seen an increased flurry of contract activity going on; and you expect that to continue probably through the first quarter end. It seems reasonable to expect that those would probably translate into revenues beyond the first quarter. I was wondering how much of that you've already baked into your guidance that you developed sometime in July?

Let me make sure I clarify. The first six weeks, the flurry of activity has been the continued proposal-writing activity, that we saw a huge uptick in the fourth quarter of FY03. Basically our bid backlog in the first six weeks grew from the approximate $950 million to a little over $1.2 billion. So basically, we've written more proposals. There are more opportunities being out there being evaluated.

As you would expect, if we're writing a proposal, and we are continually doing deration kinds of forecast on a success profile, many of those in fact have been baked into our requirement. Now, it's very rare for us to write a competitive proposal and put that into the stylus and say we've got 100 percent chance. In fact, it is so rare that it's never happened. We have all of those opportunities baked into our forecast at some probability. If we win a little more than our fair share, life will be extremely good. If we lose a little more than our fair share, I am the one that has to go tell Jack, not you. And life will not be very good around here. But we are cautiously optimistic that of that $1.2 billion that we have evaluated that we're going to win more than our fair share.

That's fair. Another housekeeping question. What should we model in terms of D&A and tax rate for 2004?

On the tax rate side, 37.5 percent, in line with where we are this year. We going to be reviewing that, but I think for right now that's a good assumption. And as far as D&A, I would use pretty much the same rate we had this past year.

David Garrety, American Technology Research.

A follow up question I had from earlier. The question I had was the win rate that you've had on your bidding.

Ken, you want to go ahead and take that one?

Sure. I hate to even give you this number here in front of my Boss. But our win rate has been north of 40 percent; and that doesn't count incumbent contracts. That's new new stuff. That's kind of what we look to establish on a going-forward basis. That's kind of the marker that we've set up for ourselves.

Thank you.

I wanted to chime in and emphasize what Ken says about the recompete, the incumbency situation. We have a wonderful track record over the years of being able to sustain and retain our business. In fact, one of the records I think in this town; certainly north of 95 percent on the re-win on the dollar level. I just would amplify that, as opposed to the new initiatives which Ken addressed.

Showing no further questions, I'd like to turn the call back over to Dr. London for any additional or closing remarks.

Thank you, David. Thank you very much. Ladies and gentlemen, we certainly appreciate your participation here; and, David, we thank you for your help on our call. Certainly thanks to everyone for your questions and your interest. We want to thank you for your participation certainly today.

We believe and we hope we have provided you with a clear picture of our results for this last year and our expectations for the coming year. The quarter, we obviously will be participating in at least two more conferences out in New York and the Midwest and the West Coast among other places. So we will be on the road seeing many of you, I'm sure.

On the other hand if you have the opportunity to be in the Washington area, we certainly invite anyone of our investors or security analysts or organizations also indicated to stop by. Give us a call; come buy and visit with us. We are interested in the opportunity to meet people that are interested in CACI.

We also know that there may be a few other questions that you've had, some of you might have. If you would like to follow up with, as is our custom and tradition here, within about fifteen minutes of this call, at a quarter after ten, we will open up the lines to Steve Waechter and David Dragics, if there are any special issues that you'd like to call in and check on, that you might have missed or otherwise information you would like to get.

So, again, thank you for your interest. We appreciate your tuning in; and we wish everyone a very fine morning. Thank you very much, ladies and gentlemen.

Thank you for your participation in today's conference. You may disconnect at this time.