CACI International Inc (CACI) 2005 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen. You are online for the CACI International 3rd Quarter Conference Call. At this time, we are gathering additional participants, and the call should begin momentarily. Thank you for your patience. Please continue to hold.

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Good day, everyone. And welcome to the CACI International 3rd Quarter Fiscal 2005 Earnings Conference Call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to the VP of Investor Relations, Mr. David Dragics . Please go ahead, sir.

Thank you, Sylvester. And good morning, ladies and gentlemen. I’m Dave Dragics -- VP of Investor Relations of CACI International. We’re pleased that you’re able to participate with us, today.

For those of you who are with us for the first time -- either by telephone or via the internet -- we welcome you to this call. For those of you who are joining us again -- as always -- welcome back. We appreciate your continuing interest in CACI.

As has been our custom on these calls, we are including exhibits with our presentation. We believe they’ll be helpful in reviewing our financial results and trends, and with the discussion of our operations. As we progress this morning, we’ll make ever effort to keep all of you on the same page as we are.

As you know, yesterday after the market closed, we released our 3rd quarter fiscal year 2005 results. We hope that most of you have had the opportunity to review our announcement and those results.

Moving to the next exhibit -- before we begin our discussion this morning, I’d 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 fact -- and as such, constitute 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 last evening’s earnings release, and are described in the Company’s SEC filings. Our Safe Harbor statement is included on this exhibit, and should be incorporated as part of any transcript of this call.

Moving to the next exhibit, to open up our discussion this morning, here is Jack London -- Chairman, President and CEO of CACI.

Thank you, Dave. Good morning, ladies and gentlemen. First let me welcome you to our conference call, this morning. I’d like to extend a personal and special welcome to those of you who are new to CACI, and to our call this morning. We appreciate your interest, and invite you to join us on future conference calls, as well.

With me today to discuss our results and answer your questions are Steve Waechter, our CFO -- Bill Fairl, COO of our US Operations -- and by phone from the UK -- Greg Bradford, CEO of CAI Limited, UK.

You’ll note that the word, “Acting” was removed from Bill Fairl’s title. I’m pleased to report that this very important role of overseeing the day-to-day operations of our domestic business was made permanent by Bill’s promotion. As you know, when we introduced Bill on our October call, he brings a wealth of experience to the position. We are very fortunate and pleased to have Bill continue in this key role at CACI.

Now as is our custom on these calls, we’ll handle this call in segments. First, I’ll give an overview of our financial results and operational trends. Steve Waechter will follow me, to discuss our financial results in more detail. Following him will be Bill Fairl, who will provide more detail on our domestic operations and their outlook. Finally, I’ll have some closing comments on the business environment and our expectations going forward. After that, we’ll open up the call to your questions.

Ladies and gentlemen, we have good news to report. Last evening after the market closed, CACI reported record results for the 3rd quarter of our fiscal year 2005 -- continuing our progress toward another record year for CACI. CACI’s performance was fueled by the ongoing demand for mission-critical IP solutions from our DOD and Intelligence customers that have key roles in the global war on terrorism.

Revenue for the quarter was up 44 percent, to $414.9 million -- versus $288.4 million a year ago. Approximately 60 percent of that growth, or about $76 million, came from the acquisition of the Defense and Intelligence Group of AMS. Our operating income was up 52 percent, to $38.3 million versus $25.2 million a year ago. Our net income was up 38 percent, to $21.6 million, or $0.71 per diluted share -- versus $15.8 million or $0.53 per diluted share a year ago. Funding from all contract sources was up 17.5 percent. Organic growth for the quarter was 14.7 percent -- at the upper end of our 12-15 percent growth [bowl] range.

Please go to Exhibit 5.

For the first 9 months of our fiscal year, revenue was up 52 percent. Operating income up 61 percent. Net income up 44 percent. And diluted EPS up 42 percent. Funding from all contract sources was up 29 percent. We are very pleased with our continued strong performance, as shown by these financial results and operating metrics.

Please go to the next Exhibit -- Number 6.

CACI had an exceptionally strong quarter, with regard to operating cash flow. We reported $45.3 million for the quarter -- our strongest 3rd quarter, ever. Through the first 9 months, operating cash flow totaled $75.9 million -- approximately equal to our operating cash flow for all of our fiscal year 2004. This strong cash flow has allowed us to reduce our debt by almost $65 million this fiscal year. Additionally, we filed our $400 million Universal self-registration in this quarter.

Our current cash position and our $200 million credit facility -- coupled with the self-registration -- gives CACI significant capital opportunity for larger acquisitions. Operationally, our growth was driven by the increasing demand for our National Defense, Intelligence Community, Homeland Security and transformation of Government Services market.

Our Department of Defense revenue was up 54 percent -- to $302 million. Federal Civilian Agency revenue rose 22 percent, to $90 million, producing strong growth in our systems engineering, engineering, integration and network services markets.

Next exhibit, please -- Number 7.

As we discussed on our last call in January, we did see the temporary delay of RFP opportunities end during the 3rd quarter. While we noted new contracts awards of $142 million, we want to emphasize that our funding -- which is the single most important factor in driving our revenue and earnings growth -- is at an all-time high.

Furthermore, during the 3rd quarter, CACI’s bid-and-proposal activity increased dramatically. We currently have submitted proposals on over $1.9 billion in contracts. We anticipate submitting an additional $4 billion in new bids by the end of September of this year. Of that combined $5.9 billion total, we expect more than $3 billion to be awarded and announced by September 30th.

We’ve also raised our guidance for our 4th quarter and full fiscal year 2005. We expect revenue for the year to be approximately $1.6 billion, and diluted EPS to range between $2.74 and $2.78.

We’re extremely pleased with CACI’s quarter 3 and year-to-date performance. As a result of our peoples’ vigilant services to our clients’ missions, we are performing well. We will continue to deepen our capabilities through our strategic focus on National Defense, Intelligence, Homeland Security and the transformation of government. The foundation of CACI’s success has always been and remains our value-added mission-critical support to all of our customers.

Let me now turn the discussion over to Steve Waechter, who will provide you with more details on our financial results. Steve, over to you.

Thank you, Jack -- and good morning, everyone. Let’s go to the next exhibit, on page number 8, and I’ll give you details on the results that Jack just discussed.

As Jack mentioned, our revenue in the quarter was up 44 percent. Our Federal business grew 45 percent during the 3rd quarter, and represented 94 percent of total revenue. We exceeded the upper end of our revenue guidance by approximately $10 million. This increase was driven by rapidly-growing customer requirements.

The organic growth rate of our federal business was 14.9 percent, and for all of CACI, it was 14.7 percent during the quarter. At $0.71 per diluted share, CACI net income was ahead of the upper end of our guidance of $0.70.

Moving to the next exhibit on page 9, let’s take a look at some of the key income statement, balance sheet and operating metrics during the quarter. Most of these were included in the financial exhibits in our press release.

Our operating margin expanded during the quarter to 9.2 percent, compared to 8.7 percent in the 3rd quarter of last year. The strong performance was moderated slightly by costs associated with expensing of restricted stock units, Iraq-related costs and Sarbanes-Oxley implementation expenses.

This operating margin improvement was driven primarily by our recently-acquired higher-margin businesses and economies of scale related to the successful integration of our 4 acquired entities from last year. We continue to look for ways to increase our operating leverage, by driving economies of scale and leveraging our acquired business relationships into new opportunities.

Moving to the next exhibit on page 10 -- we had an exceptionally strong quarter, with respect to our operating cash flow, which was $45.3 million. Through the first 9 months, operating cash flow totaled $75.9 million, and for the year, we estimated operating cash flow to range between $115 million and $120 million.

We continue paying down our debt -- reducing it by almost $65 million this fiscal year. We’ve paid off the revolver portion of our $550 million credit facility this quarter -- one quarter earlier than what we had originally projected. Leaving us with $200 million of availability for acquisitions or other corporate purposes.

Our remaining debt is term debt, and our cash balance was $75 million. Our outstanding debt was $347 million on March 31st. We do not anticipate any significant reduction in our debt between now and June 30th, but we do anticipate ending the fiscal year with more than $100 million in cash.

Moving to the next exhibit on page 11. We’re extremely pleased with the successful collection activity during the quarter. Our DSO at the end of the quarter were 76 days -- down from the prior quarter’s 82, and down from 84 days a year ago. We expect that our DSOs should range in the mid-70s at year-end.

With respect to contract metrics, approximately 84 percent of our revenue this past quarter was earned as a prime contractor. For the quarter, 56 percent of our revenue came from time and materials work, 26 percent from cost-reimbursable, and 18 percent from fixed-price work. Last year, those percentages were 63, 22 and 15 percent, respectively. The changes in this mix from the prior year are primarily attributable to the acquisition of the DNIG business.

On the next exhibit, on Page 12, our UK Operations reported $14.3 million in revenue -- 12 percent more than the $12.7 million reported in the year-earlier quarter. The pre-tax margin was 8 percent, compared to 11.6 percent a year ago, when the operation closed several large product sales. We believe the UK IT services and software market is growing, once again. This enabled our operation to turn in another solid performance in the quarter, and we project the same in the 4th quarter. This should result in our UK Operations producing record performance in fiscal year 2005.

The next exhibit -- page 13 -- contains our updated guidance for revenue, net income, diluted earnings, shares for the 4th quarter and for the full year. CACI’s management guidance always represents our best estimates of future performance. This guidance assumes that we complete no new acquisitions. And with respect to acquisitions, we are actively looking at several opportunities, but do not anticipate closing a transaction in the 4th quarter.

This quarter we provided you with our funding statistics. With respect to our forecasts, let me propose an analogy that might be helpful to understanding the relationship between contract awards and fundings. If we were an auto-rental agency, the contract awards would represent new cars or vehicles for our fleet. We actually refer to contract awards as, “Contract Vehicles.” Today, we have over 500 contract vehicles in our fleet. But these contract vehicles are just expensive vehicles sitting on the CACI parking lot if you don’t have any customers wanting to use them. Fundings represent customers actually renting or using our vehicles. Without customers using our vehicles, by providing us with tasking or fundings, we have no business. But we have lots of business that’s represented by the funding we receive from our customers. It is the fundings that drive our revenue and profitability. We don’t need to win new contract vehicles every quarter in order to grow.

It is also true that over time, cars depreciate and contract vehicles run out. So it is important to replace them, periodically. But quarterly contract awards is the wrong short-term measurement to be looking at as a determinant of our growth over the next several quarters.

Hopefully, you should be able to gain some insight from this information. You will see that our business is strong. I would remind you that we have won close to $1 billion in new contract vehicles this year -- which should lead to additional bookings. We are looking to win significant new contract vehicles over the next several quarters, and our success here will provide us with opportunity for even greater growth into the future.

For the third time this year, we are increasing our guidance. We expect that our revenue for the 4th quarter will range between $415 and $425 million -- an increase of 16 to 19 percent over the 4th quarter of fiscal year ’04.

Also, this quarter we expect our operating margins to range between 9.4 percent and 9.6 percent. We project that our net income will range between $21.8 million and $22.9 million -- a 5 to 11 percent increase.

We expect diluted EPS to be between $0.71 and $0.74 per share -- up 3 to 7 percent over the year-earlier period. We believe that our organic growth in the 4th quarter will range between 9 to 12 percent, and that our organic growth rate for the full year will be approximately 15 to 16 percent -- exceeding our operating goal of 12 to 15 percent.

Our tax rate should remain near to 38 percent for the year. Finally, we estimate that the diluted weighted average shares for the 4th quarter will be $30.9 million.

For the full year, we are increasing our revenue forecast again, to range between $1.608 billion and $1.618 billion -- a 40 to 41 percent increase over fiscal year ’04. We are again increasing our net income for the year to range between $83.7 million and $84.8 million -- a 31 to 33 percent increase -- over the $63.7 million reported for the fiscal year ’04. Diluted EPS will range between $2.74 to $2.78 per share -- an increase of 29 to 31 percent over the $2.13 per share reported last fiscal year.

With respect to our compliance with Sarbanes-Oxley Section 404 out-of-station requirement for us on June 30th 2005, we continue to make great progress. We’ve identified and documented all 27 of our key financial processes. We have begun or completed almost all of our testing on over 200 control points. While we’ve had some minor deficiencies, none rise to the level of being significant. CACI’s outside auditors have begun their testing, and have also disclosed no material weaknesses or significant deficiencies, to date.

Even though Dave mentioned the Safe Harbor statement at the beginning of this call, I want to again state that this guidance is forward-looking, and represents our current estimates of our future operating results. 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 my financial review.

Now here’s Bill Fairl, who’ll cover the details on our domestic operations. Bill?

Thanks, Steve. Good morning, everyone. As Jack noted in his opening comments, our domestic operation continued its dynamic growth during our 3rd quarter. Growth in our systems integration, engineering services and network services areas was significant as a result of being cast to support mission-critical needs -- particularly for our Army, Navy and Intelligence Community clients. I’m especially pleased to note that our organic growth in the federal market remains very strong -- coming in at 14.9 percent for the 3rd quarter.

I want to take a minute here and call your attention to a very important aspect of CACI’s business. Our clients are coming to us for additional work through the expansion and modification work on our existing contracts. This is a great component of our growth profile, since it makes use of in-place, long-term contract vehicles that have virtually unlimited contract ceilings.

I want to repeat this point. CACI’s clients are routinely ordering and funding new work with us by making use of our existing long-term contract vehicles that have virtually unlimited contract ceiling available.

Next exhibit, please.

Our 3rd quarter saw a dramatic increase in the number of RFPs released, and subsequently bid by CACI. During our 3rd quarter, we submitted more than $1.6 billion in proposals -- giving us a total of $1.9 billion in submitted proposals currently under evaluation. Five of these were $100 million or greater. Together, they total more than $1.3 billion.

Our increased bidding activity will continue over the next two quarters -- that’s April to September -- while we expect to submit bids with a combined value of more than $4 billion. Of these, 19 will be $100 million or greater -- and they total more than $3.5 billion.

Now, although predicting award dates is inexact, we currently estimate that more than $3 billion of those proposals will be awarded by the end of September. We see that trend continuing. Just looking at those opportunities over the next few years that are $200 million and above, we are aggressively marketing and positioning for more than 20 of what I’ll call these “Tier 1” big deals. Together, they have a combined estimated award value which exceeds $7.5 billion.

As indicted on the next exhibit, our work this past quarter in supporting the Department of Defense was driven primarily by the global war on terrorism, and military operations in Southwest Asia. In particular, we continue to see growth from our US Army customers, including providing quick-reaction, mission-critical systems integration support to the war fighter.

With regard to our support of the other Department of Defense services, we experienced a significant level of demand from Task Quarters as a result of our clients moving more toward indefinite delivery and definite quantity contract vehicles. Funding from all contract sources aggregated $465 million during the quarter -- that’s up 17.5 percent over last year.

One overall trend we have noted at the Department of Defense and with our Intelligence Community customers is the priority that the operation spending is getting versus spending on infrastructure. Much of our new work for the Intelligence Community has resulted from our clients putting an increased emphasis on contracting out for Intelligence Analysis and training support.

Year-to-date, we have experienced continued strong growth of our work in the Intelligence Community, with revenue up 45 percent. Intelligence Community work constitutes approximately 25 percent of our business space.

Common themes that we are experiencing in our continued funding of mission-critical contracts while potential new infrastructure-related work is delayed. An important exception to that trend is infrastructure projects that provide demonstrated efficiencies and cost-savings. Our work in support of the Naval Aviation Enterprise is an excellent example.

Our Federal Civilian revenue growth during the quarter was driven by our work in the Defense and Intelligence Groups. Department of Justice work was up slightly, compared with last quarter -- but down year-over-year as a result of funds in the Department of Justice being shifted to support Homeland Security -- an area which we are actively pursuing.

Let’s go to Exhibit Number 17, please. Here is a recap of the revenue we generated from our federal, commercial, and state and local customers through our various services offerings. These percentages, as always, are approximate. Systems integration work -- which represents our UK Operations and a Defense and Intelligence Group -- represents about 63 percent of our revenue. Engineering Services are in the 18 to 20 percent range. Network Services represents between 12 and 13 percent of our revenue. And Knowledge Management represents approximately 6 percent.

Moving to the next exhibit, I want to comment on some trends we are seeing in government procurement. First, we are seeing the consolidation of contracts -- which is a trend we’ve noted before. Second, with the lengthening of the procurement cycle for new contracts in some parts of the government, our clients are frequently utilizing our existing long-term contracts -- which as I noted earlier -- feature virtually unlimited ceiling. Our funding for the 9 months ended March 31st is up 28.6 percent, to $1.368 billion. The third trend -- outsourcing to contractors -- which includes field support for deployed forces -- continues to be a source of robust growth for CACI.

Overall, we’re very pleased with our results this past quarter, and our positioning going forward. The demand for our services and solutions continues to increase. The hiring environment is competitive, but remains rich with qualified candidates for CACI. We recently held a Career Day for individuals with in-demand security clearances. I’m pleased to report we had more than 400 top-quality candidates attend.

We have the contract funding in place to fuel our growth objectives, and our opportunity pipeline is the strongest it’s ever been. Our clients are now and will continue to be extremely well funded, as we support them in fulfilling their national priority missions. In other words, CACI is positioned squarely in the sweet spot of the federal marketplace.

The 4th quarter promises to be another strong quarter for CACI, and it gives us a great launching point for Fiscal ’06. Jack, that concludes my remarks.

Okay. Thank you, Bill. And thank you Steve, also, for your updates and the details that you folks have provided for us.

Let’s move to Exhibit 19. Let’s take an overall look at our pipeline of qualified opportunities. When we spoke to you in January, we were looking at about $10 billion of business in our pipeline. That estimate has now grown to more than $12 billion. This represents opportunities that CICA will address over the next 2 years, and includes the near-term activities that we discussed in detail, earlier.

Strategically, we continue our pursuit of increasing levels of business from the Department of Defense, the Intelligence Community and the Department of Homeland Security, where we have an established customer base.

Exhibit 20, please.

Our success this year provides us with a solid foundation for 2006. As we move into 2006, we believe that we can achieve our operating goals of growing both our top and bottom lines at a 20 percent rate.

We’re very proud of the performance of our over 9,500 employees. Some 10 percent of CACI people are permanently based outside of the Continental US. I recently returned from a trip to Germany, where I met with our employees and customers, and I’ve very pleased to report that our customers have the highest regard for CACI support and the contributions of our team to their critical missions.

We’re excited about the future and our ability to provide valuable, mission-critical support to our customers around the world. We believe that Fiscal Year ’05 will be another record year for CACI International, and we look forward to CACI’s success in the coming years.

At this point, we’re ready to open up our discussion to your questions. So Sylvester, I’ll turn it back over to you for our first question, if you would, sir.

Thank you, sir. If you’d like to ask a question, you may do so by pressing *1 on your touchtone telephone. Again, that is *1 for questions. We do ask that you limit yourself to one question -- then re-signal for a follow-up question. Again, we do ask that you limit yourself to one question, then re-signal for a follow-up question. If you’re on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is *1 on your touchtone telephone to ask a question. We’ll pause for a moment to assemble our roster.

Jason Kupferberg with UBS.

First of all, in the funding metrics, thanks for that additional disclosure. I think it’s very helpful. Just so we’re clear on how to look at this metric -- it seems like this is something a bit closer to a true book-to-bill ratio. Is that kind of the right way to think about it? Will you guys be providing this on a quarterly basis, going forward?

I think that’s a reasonable assumption, Jason, in terms of what it represents. We call it funding -- and, yes, we’ll be providing it in the future.

That’s helpful. Bill, maybe if you could give us a little more color around the pipeline. Obviously the numbers here are a really encouraging -- as far as the RFP and the bidding activity. If we could get a little more color on the specific agencies and/or service lines -- where you guys are really seeing the accelerated activity -- that would be much appreciated.

Okay, Jason. Yes. It’s pretty much across-the-board for us. More on the Department of Defense side and the Intel Community. Our Army customer -- which is our largest customer -- plenty of opportunities, there. And some very large opportunities are coming out of the Intel Community. Those are the two biggest areas, followed by the Navy.

Again, we do ask that you limit yourself to one question -- then re-signal for a follow-up question. We’ll take our next question from Brian Gesuale with Raymond James.

I’d also like to applaud the additional disclosure. I think it’s very helpful, and really shows that this backlog number is going to grow, and business remains very robust, here. I wanted to drill down into within that funding from all sources number -- talk about some of the specific contracts out there, where you’re seeing a lot of activity. And maybe some more specific customer sets, where you’re really seeing an acceleration. Because the number was truly impressive.

As far as where it’s coming from -- we’ve talked a lot, this morning. It’s across-the-board, but specific highlights again, quite frankly, are the Army and our support of the mission-critical work that they’re doing over there. And a lot of growth out of the Intelligence Community clients, as well. Those are the top two.

As Steve mentioned, we just have a host of contracts. It’s just across-the-board on those 500-some-odd contract vehicles, as Steve mentioned earlier.

Thomas Meagher with FBR.

Congratulations on the quarter and also for the increased disclosure. Hopefully, that’ll clear up some of the confusion we’ve seen out there between what contract awards and bookings are. My question, I guess, is for Jack or Bill. That is, we’ve seen the delay in the supplemental, and I’m just wondering. Are you starting to see any indication that the Department of Defense might be starting to reprogram funds to cover the day-to-day costs of Iraq and Afghanistan in lieu of getting the supplemental?

David?

Not yet, Tom. This is Dave Dragics. The supplemental, as you know -- the Senate is going to probably pass it this week. But we’re not seeing any change in the funding. As you can see from the funding orders that we’ve disclosed.

I think the fact that the supplemental finally came out, it certainly was a factor in the loosening of the RFPs during the last quarter. So it was positive for us.

Cindy Shaw, Moors & Cabot.

Great. Thank you. I was wondering if you could give us some color on why the dramatic improvements sequentially in the number of RFPs. I know you’ve been talking about larger RFPs. Is it really just getting the bigger RFPs in there? Or is it getting more? Any particular improvement in demand?

Let me just address that, Cindy. I guess that my first thought is IS opinions -- there’s an answer out there. In the past, we have pursued particular kinds of clients and particular contract agencies and so on. We saw that slow down. I think there were a number of overarching reasons that affected certain segments of the marketplace.

Certainly, the election last year put a lot of scrutiny on contract and funding decisions. Award decisions certainly were slow. I think that a lot of the things began to sort themselves out. The election became clearer. The administration’s view going forward became clear. Certain new cabinet officers had left and new ones were put in place. So there was a kind of gelling of decisions. I’m sure that had a lot to do with it. In fact, that probably was the driving factor, in terms of our business. Because we’re talking about new awards.

As you noted and we tried to make very clear, our funding was stable and secure, moving forward, because of continuing resolutions, and then the approval of the budget. So we saw the business basically proceeding on a solid footing. In fact, expanding, as we demonstrated here in detail.

Now, apparently, the collective institution of the federal government is becoming more robust in the release of RFPs, and we’re delighted to see it. We’re telling you the ones that we’ve been pursuing and watching carefully and reporting on our piece of the marketplace -- I’m sure there are other perspectives seen by other companies.

Cai von Rumohr, SG Cowen

Yes. If we look at it as a measure of the funding to the sales, it looks like it’s 1.12 in this quarter, and kind of has been decelerating. I guess you gave somewhat of an explanation, Jack. What do we look for of these kinds of awards? The $3 billion to be awarded, coming up? Could we get it in the June quarter? Or are we going to have to wait until September?

Given that this kind of book-to-bill funding-to-orders is decelerating, is there kind of any risk to early part of the year if, in fact, this continues to push out?

Again, the dramatic difference between the concept of funding task orders and such against logistic contracts versus contract awards -- we’re obviously looking forward to a robust award cycle here over the next 6 months. At least that’s our best estimate of the situation.

The current picture seems to be strong on the funding for existing contract vehicles. But I’d like to ask Bill to amplify a bit.

Sure, Jack. Thanks.

As far as the awards go, I see them occurring in both our 4th quarter and our 1st quarter. That’s through the April through September timeframe. Traditionally, our heaviest award period is in our 1st quarter of our new fiscal year. That would be July through September. But we’re going to see some awards here, this quarter. I’m quite confident of that.

Michael Lewis, BB&T Capital Markets.

Great quarter, guys.

Thank you.

Jack, I’ve had a number of discussions with some CEOs of some private companies here in town over the last few months. In my opinion, the managers of these firms continue to have over-inflated expectations with regard to acquisition valuations that they would accept in a selling effort.

My question to you is, “How do you manage down these private-company CEO expectations on valuation, in order to get a deal closed?”

Well, you’ve put your finger on the quintessential challenge -- haven’t you? In some cases, reality begins to set in. In some cases, wishful thinking prevails. I think quite frankly, my point has much to do with how serious the owners are in seeking their exit. If they’re just sort of sampling out there to see what the opportunity is like, that’s different from somebody who has a serious intent to move his property and get a liquidity event.

When they begin to really face reality and get really serious about it, I think the market begins to become reality for them.

Tim Quillen, Stephens Incorporated.

Great quarter.

Thank you.

One of the procurement trends that you mentioned was field support for deployed forces. Could you talk a little bit about what you’re doing to support deployed forces -- particularly in Iraq? How correlated that work is to troop levels in Iraq? Then you also mentioned Iraq-related costs. I wondered if you could touch on what that means, as well. Thank you.

Let me start with the Iraq-related costs. Then last, Bill, if you’ll amplify that for deployed people around the world. The Iraq-related costs quite simply are associated with -- I will call it -- the continuing aspects of the Abu-Ghirab affair from last year. I’ll quickly note that at this point, no CACI people have been charged or indicted in any way by any organization. So we will be seeing that whole episode in the rear-view mirror.

The thing I would point out is, though, we have faced a couple of lawsuits that we’re still expensing -- outside legal litigation costs -- pertaining to it. So until those are dismissed or defeated, we’ll have that kind of litigation cost continuing. But clearly, it’s drawn back to a much more manageable rate.

Bill, you might want to talk about the kinds of things we’re doing around the world in the deployed aspect of it. I might -- before Bill takes it -- let me just say, “deployed,” doesn’t necessarily mean out in the field in a tent. We have operations in Germany, Bosnia, Korea, Japan, Okinawa, Honolulu and around the world in many locations.

But Bill, would you take the mic on that?

Sure, Jack. As we get involved in a lot of the logistics support work forum, it’s something called the “property book,” kind of work -- keeping track of everything for them -- our traditional IT skills are very much in-demand, over there. As are our Intelligence Analysis training and systems support. That pretty much generally covers it.

David Grilli, [Harris & Company]

Thank you very much again for the increased scope of disclosure. With respect to when you’re looking at this number. This is basically telling us what percentage -- what the dollar about in your backlog -- what’s currently funded?

That’s correct.

Could you give us a little bit of history on this, going back to what it was in the last two quarters?

David, let me just really quickly make sure I’m clear on the point I just made. That “fundings” is the cumulative fundings that we’ve received -- either in the quarter or year-to-date. It doesn’t necessarily represent what’s currently funded in the backlog position. We get the fundings and we work it off.

So the 465 and that is sort of a running cumulative total, then?

In the current quarter.

Just for reference sake, can you give us what that number was, say, at the end of December?

I don’t have that handy.

No. Let me just say that we’re going to continue to provide this scope of information. I’m not sure that it’s in anybody’s best interest to keep slicing it, dicing it. It is a good indicator. We believe it has value in providing and adding to the investor community. But I want to emphasize something that was mentioned in our conference script a little while ago. That is that the guidance numbers are CACI’s best professional estimate of performance. I want to emphasize that it’s the guidance that I would recommend people focus on. Because at CACI, that is really the number. We pull all of the different sources of opportunity together. We have some speculation we have to put in the equation about even tasking awards that we anticipate. So the best notion of indication of forwards is going to be our professional estimate of guidance, going forward.

We can back it up with these indicators. We’ve invited you to look at the new funding statistics we’re providing. We’ve encouraged you to de-emphasize contract awards. We think that is a less-than. Your focus should not be on that number, per se. I think it could lead you to some misunderstandings of performance opportunities.

We’ll take our next question from Julie Santoriello with Morgan Stanley.

Could you talk a little bit about the win rate in the quarter? If my numbers are correct, it looks like the proposals under evaluation went down from 2.7 billion to 1.9 billion. I’m wondering if that was down based on awards made to other firms, and so on. Any changes in the win rate?

Julie, this is Bill Fairl. I don’t think that’s the right comparison to make, there. I think that $2.7 billion…

That was pipeline.

Yes. That was pipeline-type stuff over an extended period. I’m here to tell you that $1.9 billion of submitted proposals under evaluation for CACI is just a tremendous dynamic increase over what it was last quarter. And it really represents a significant increase in proposal activity in the 3rd quarter. Simple as that.

Joseph Vafi with Jefferies.

Good quarter. I was wondering if you could talk a little bit -- maybe Bill -- if you have an idea on this. That’s good organic growth in the quarter. Kind of to the extent that that growth was driven -- we’ve been talking a lot here about fundings versus awards. If you look at the new award activity over the last year, that’s kind of driving at least part of your organic growth. If you might be able to break up for us -- if at all possible -- or put some color on it. What’s being… Is your organic growth being driven or the breakup between new fundings on existing contracts versus new awards, in that growth that we’re seeing, right now?

Steve? You [inaudible]

Sure. It’s difficult, but we have, as I indicated earlier -- we’re 500 contract vehicles. And to split it out between the new ones and the old ones is… I’m not prepared to that at this point in time. We don’t even have that analysis, here. Suffice it to say, as Jack indicated, as we put our forecast together looking forward, we do go in and our team looks at all the contracts that are out there -- what funding is available, what people do we have… And we use that to drive our forecast of it.

To break it into all those components is just -- we’re not prepared to do that.

Mark Jordan, AG Edwards.

Good morning, gentlemen. If you look back at the end of the last fiscal year, your pipeline of opportunities you’re looking at was $7.4 billion. It’s now $12 billion -- which is up over 60 percent. That’s significant growth. Has that been driven by an expansion of the scope of the business opportunities that you can address? Market growth? Or has there been a fundamental change in how you address your bid-and-proposal function?

Well, I’d like to respond by saying that CACI is a larger enterprise. We have more depth of capability. We have more bench strength. We’ve added significant resources in our technology profile and capability set.

What I’d like to do, though, is ask Bill to focus on it a bit. But broadly, the broad issue is we are a bigger company and can pursue larger opportunities.

Bill?

Yes. That’s right, Jack. I would add to that that the acquisitions we’ve done over the last couple of years were specifically targeted to positions to go after these sorts of things, and get into the new promising market areas. That’s just how it’s worked out for us. Take that with what Jack said about adding additional firepower into our bid-and-proposal activity, and our organization, there -- and you’ve got a really dynamic equation. That’s what you’re seeing, here.

Alex Hamilton, [In-Depth Research Group].

Hopefully that’s not Inept Research Group. It’s IRG. Good morning. Quick question. You talk about how you have larger scale and greater capabilities and we see this huge tidal wave on most of opportunities growing. What I’d like to know is are there any trends that you see potentially bubbling away that you think potentially these are currents that you need to build up a little more in order to continue to ride that wave? In other words, are there capabilities that you see that are going to have to become your forte, to continue the momentum, going forward? Despite you being well-positioned, as you currently are?

I’d start off by saying -- and then I’ll ask Bill to respond, as well… I’ll start off by saying that each deal -- each contract opportunity -- is a separate and distinct matter. You have to craft a solution. You have to put a team together for each one of these. So yes, they’re being looked at carefully. There are challenges. There are areas where we’ll be having to augment through teaming arrangements -- or in some case, selection of key personnel and maybe some recruiting of key personnel. But I think we are gaining the momentum of taking on this challenge.

There are some issues that we have to resolve, as we go forward. Bill, you might want to amplify.

Alex, Jack mentioned earlier that our pipeline is now $12 billion. That’s got about a 2-year horizon on it. I also mentioned it in my comments that we are looking it over the next couple of years. There, I have like a 24- to 36-month window on that. Nineteen of these big deals -- and by “big deals,” I mean things that are $200 million and above. So, we’re doing pre-positioning on that. As we do that pre-positioning and marketing, where we see if we could add this capability or this particular relationship, it would strengthen our opportunity, we’re going to go out and do it. That’s part of the long-term positioning that we have going on, here. I’ll tell you that we’re more and more taking a longer view of the marketplace out there -- to make sure we’re in the right place at the right time.

Bill Loomis, Legg Mason.

Great quarter, guys. Looking at the Department of Justice business -- what was the dollar amount, exactly. Then you mentioned that some of that’s getting shifted away from traditional work, which I assume you mean litigation support, the Homeland Security initiatives which you’re pursuing. It seems like two completely different areas. If you’d just describe that a little more, and what the pipeline for litigation support activates is.

Yes. Steve, do you have a number for him?

Yes. Bill, this is Steve. The quarter we did just under $24 million in the 3rd quarter. Just down slightly from the previous year, which was about $26 million. But it was up sequentially over the previous quarter, which was $22 million. So we were up about 7 percent, I guess, over the last quarter. So those are the statistics. Then you had a comment about Department of Justice.

Sure, Steve. Yes. One area there is that we see a set of opportunities coming out in the case-management area. While on the surface, that may seem like a big leap from litigation support to Department of Homeland Security, I want to tell you that in some cases, the customers are the same -- and the technologies that you need -- the skill sets -- are very similar, quite frankly. I think our experience there and the client relationships will serve us well a we tackle, for example, using one example -- some of these case-management opportunities.

Erik Olbeter, Stanford Financial Group.

Great quarter!

Thank you.

Question on just pass-through revenue. We’ve seen some pass-through revenues sort of bumped to the revenue at the top line in the past. Just wondering if we saw what was a normalized trend or if we saw some additional pass-through as the equipment or services that are sort of being demanded by the customers?

Steve, could you respond to that?

Erik, I’d like to say we always have some of that pass-through during the quarter. I would say nothing out of the norm. It was the ratios. If you look at the direct labor and ODCs -- as we refer to it -- “Other Direct Costs” -- they’re pretty much in line with what we did in previous quarters. So nothing unusual.

Laura Lederman, William Blair.

This is actually Jennifer. I was wondering what sized acquisitions are you looking at? Are there any particular spaces that you’re more interested in? And also, what was the turnover in the quarter?

I’d like to say that our pursuit of acquisition opportunities is about the same as we’ve been working in the last two years. That is, high-priority to operational aspects of the Department of Defense and technology emphasis in the Intelligence Community. Those are the two areas that we’ve been more or less focusing on.

Certainly, represented in its most robust way with the Defense and Intelligence Group acquisition from American Management Systems. That was one exceptional representation of the kind of deal we’d be looking for. I don’t know if there’s such a thing as a perfect deal, but in terms of strategic fit, that came as close as I can imagine. So that would represent our target.

In terms of size of opportunities, Jennifer, we’re looking at deals anywhere from smaller niche plays that can give us distinction and some new market opportunity -- perhaps strategically, perhaps fitting under a bid opportunity, as Bill was pointing out. Some strategic positioning on deals.

So we’re looking at smaller deals, but also obviously, we have a 2-track path going on, right now. Certainly, we’ll be looking for more large acquisition opportunities or divestitures. Significant divestitures from larger corporations. That’s one of the reasons we put the Universal Self-Registration in. We’re, I think, using our balance sheet to total resources in a very economic way for our shareholders.

So you had another one? Turnover issue?

Yes. Sure, Jack. We don’t give out, Jennifer, a specific number on that quarter-to-quarter. But let me just say in relative terms that our first quarter -- that was July through September -- was relatively high. Then the last two quarters -- our second and third quarter -- have been trending down. Having said that, is this as good as I want it to be? No. And we’re working on it. And we’ve launched a number of voluntary attrition issues that we’re working very hard as a corporation to drive it even lower.

Colin Gillis, Adams Harkness.

Congratulations again in the form of [Heidel].

Thank you.

Steve, any update on the fair-value process you’re going to be using for stock option expense? Or just an update on when you want to make your recommendation to the compensation committee on this topic?

Yes. Well, it’s a good question, Colin. We’re hoping it’ll get delayed again, but for us, unfortunately not. [Mark Marcelli], who’s our Corporate Controller, has the task right now to propose to back in the comp committee a formula. What we’ll do -- we’re leaning, I think, toward the [Black Schul]’s methodology. That’s where we are, right now. But we have not concluded that, at this point in time. We will, very shortly, get to Jack at some time early in this quarter with a recommendation.

[Cynthia Holton], RBC Capital Markets.

Just on the gross margin and operating margin line. You did mention that there were some higher SarbOx and some other associated costs that caused it to be slightly lower than previous quarters. Could you just walk through? Then you also talked about targeting the operating margin line to continue to expand. Do you have kind of a sense of what a new long-term target is? Or what maybe end-of-fiscal-year target should be on operating margin?

Sure. Steve?

Yes. Cynthia, my comment was really that the expenses were really relative to last year. We didn’t have, certainly, the SarbOx kinds of costs. We didn’t have the restricted stock-unit kinds of expenses. If you go to your cash flow statement there in the press release, you can see we spent or charged off about $1.9 million this year versus last year -- an expense we didn’t have. So that gives you I think an indicator of what’s there.

That will continue, as we go forward. However having said that, we are targeting hopefully to get that operating margin in the 9.5 to 10 percent target over the next several years, here. It’s where we’d like to be.

We’ll take our next question -- a follow-up question, from Tom Meagher with FBR.

Bill got my question, so I’m good. Thanks very much.

We’ll take a follow-up from Cai von Rumohr with SG Cowen.

Just a quick one. You gross margin was down 80 BIPS from the 2nd quarter. Did that have anything to do with ODCs and what are you looking for, for the ODCs, going forward, 4th quarter?

The answer is yes. We also had -- previous quarter had some -- we had more holidays. So you had less direct labor being charged, and what have you. So there are some differences between the quarters. I think the key is, we’re right around that 38 percent kind of a number. I think we’ll hover right around it. We’ll be a little bit up and a little bit down, but in that range is, I think, an appropriate number to be looking at.

We’ll take a follow-up from David Grilli.

Quick question for you. Your June guidance. If I look at the increment year-over-year versus where it was a year ago, the incremental net income versus the incremental net revenue -- it’s about 3.3 percent margin. That’s down pretty significantly from what we see in the prior years. If you wish to expand your operating margins going forward, what’s causing this degradation and how are you going to tackle it?

Steve?

In last year’s 4th quarter, we had some very pleasant surprises. So our year-over-year comparisons I would say first and foremost are tough, this year. Overall, we also in the 4th quarter of this year have a full year of interest-expense related to the acquisition activity and the debt burden that we took on. So the plan is to pay off that debt. Hopefully, we’ll be able to do some other acquisitions with the cash we have, and continue to get the economies of scale out of those acquisitions and others -- and we’ll continue to grow the margins.

Again, hopefully on the new awards that we hopefully will bring in here -- the margins on those will also help sustain and grow the margins.

To follow up -- the degradation in terms of incremental margin contribution is reflected at the gross margin line -- on my model and also potentially at the EBITDA line. So it doesn’t seem to be necessarily reflecting just interest expense.

We also had -- as I pointed out earlier, the $2 million roughly through the first 9 months of restricted stock units -- which is a cost that we didn’t have last year. We also had Sarbanes-Oxley cost this year, which we didn’t have. And we also are carrying some costs related to the Iraq situation, which we hope will go away very shortly. I think the Sarbanes costs will certainly be there next year, as we roll forward -- but hopefully not at the same level.

We’ll take a follow-up from Julie Santoriello.

On this idea of the procurement cycle slowing or the cycle lengthening. From what we understand, it’s I guess for the most part, related to just the government’s increased scrutiny of contracts, as they come out. And in some cases, a shortage of qualified employees.

So I’m wondering if your thinking is that these problems can be turned around quickly enough, so that you can see the strong RFP and award cycle you expect in the June and September quarters. And indeed, how important is that to you maintaining your organic growth for the next fiscal year? Thanks.

There’s a lot of information in that question. Bill, can you shed some light here for Julie, please?

Sure. First of all, I think we are seeing now a release of about -- I think -- I know we are seeing now a release of these RFPs that before, I think, were a little slowed up by some of the points that you raised, Julie. The other thing is -- and that’s one of the reasons why Steve talked about the nice great portfolio, I’ll call it, of contracts we already have in place. Those are available for our clients to use, and I’m here to tell you they are using them right now, as they go about the business of putting new vehicles in place.

Having said all of that, I’ll go back to the numbers that we were talking about, before. e in fact turned in $1.6 billion in new proposals in the 3rd quarter. And we anticipate turning in another $4 billion in new proposals over the next two quarters. That’s this current quarter, our 4th quarter and our 1st quarter. Then we expect -- anticipate, at this point -- of that $5.9 billion total, they’re going to award approximately $3 billion of that between now and the end of September. So the pace really has picked up here, I think.

So -- two points. We have a contract view in place that allows us to continue to grow and the opportunities are coming down the pipeline, now.

Thanks, Bill.

You bet.

We’ll take a follow-up from Joseph Vafi: Gentlemen, I guess we have a question for Bill, here, on that pipeline.

Sure.

You might’ve already answered this, to some degree -- or in bits and pieces, perhaps. But obviously in that pipeline we’re in now -- the Company’s bigger. We’re looking at larger-sized deals. Because the Company is larger, and naturally should be going after larger pieces of business. To the extent that you can kind of provide some color as to maybe some of the efforts that you’re making to hopefully keep your win rate as high -- or what kind of win rate you might expect on the larger deals -- at least initially -- versus some of your bread and butter stuff? Because it’ll probably be a little harder to win big deals -- at least initially. And some of the efforts you’re taking to kind of make sure that you can win your fair share of these larger deals that are in your pipeline.

Yes, Joe. This is Bill Fairl. Good question. We have a goal of winning 40 percent of the bids that we turn in, and 100 percent of our recompetes. I’m here to tell you that we’ve actually been doing better than that in recent times, here. Your point is well-taken, though, about those big deals. Just to go back to what I was saying earlier there -- in the near-term here, we’re bidding 5 of what I would call those “big deals” that total more than $1.3 billion. Then as we look out longer, I’ve identified 19 more that are $200 million or greater, and have a potential award value exceeding $7.5 billion.

Yes. You’ve got to really step up to the plate on those kinds of bids. You’re going up against the big guys -- the other Tier 1 players. We have -- as Jack mentioned, earlier -- brought on new business development, business pursuit, business capture, resources -- to enable us to maintain that what I’ll call “excellent win rate on competitive bids.”

Having said that, it also involves taking a good, hard look at those things that you’re going to bid, and choosing wisely -- picking the ones that you actually have a great chance of winning. I think we do a good job of that. And we’re going to keep doing a good job of that.

Ed Caso with Wachovia Securities.

Good quarter. Co-incidentally, for Ed.

Thank you.

A few weeks ago, guys, we saw the Army with their $20 billion eye test contract down select several of the Tier 1 players to compete for that award. I guess this morning we’re also hearing you sort of focus us away from the awards and more toward funding. My question is, does this recent decision by the Army and sort of your focus here mean that we should expect your prime work to decrease, going forward?

A decrease?

Yes.

Bill?

Ed, it’s Bill Fairl. No. Not at all. That was not a contract that we had targeted as a prime contract holder, on that. We are looking for a solid position as a Tier 1 subcontractor to one of the -- quite frankly -- Tier 1 contractors. That’s the Army’s procurement strategy on that, all along. They’re going to have a set of the big Tier 1 players, and then they’re going to have a set of small businesses. Our role will be -- quite frankly -- teaming up on both ends, with the large and small businesses, to get a solid subcontractor position on that.

Our business profile, going forward, is to maintain and even grow our prime position on these contracts. So that particular one was part of our plan, all along -- and doesn’t represent a change in our philosophy, in any way.

Thank you, Bill.

Erik Olbeter.

Just some housekeeping. Could you do the breakdown of your contract type for the quarter? Cost plus G&M fixed price? I don’t think I got it.

Yes. We gave you that earlier. I believe there’s actually a chart. David, is there a chart?

There is. It’s on a slide.

It’s on a slide. Hold on a second, here.

56 percent of the revenue came from time and materials. 26 percent from cost-reimbursables and 18 percent from fixed price work.

It’s on page 11, Erik, of the slides.

Michael Lewis.

Did I hear correctly earlier that you said 25 percent of your revenue is currently Intel-focused revenue?

That’s right, Michael.

Steve, could you give me the turnover? Is it still average industry turnover? 13-14 percent? Voluntary.

Well, as Bill indicated earlier, we don’t give out the actual percentages. But I’ll tell you, we’re within industry ranges of what that turnover is. As Bill said, we’ve seen it’s actually decreased here over the last two quarters. So we’re feeling pretty good about the trend and I think some of the corporate initiatives that Bill and his team have undertaken to reduce that even further.

Just one more, if you’ll allow it. Steve, could you quantify how much Iraq-related legal expenses were in Q3? And what can we expect in Q4?

The answer is no, we won’t give that out publicly. But it’s not a huge number. There are costs associated with our Defense on those two contracts, and our hope is that very shortly, those will go away.

Once again, that is *1 on your touchtone telephone for questions.

Is that it, Sylvester?

Mr. London, there appear to be no further questions. I would like to turn the call back over to you, sir.

All right. Well, thank you very much, Sylvester. We certainly appreciate your help. I want to thank everyone that’s called in this morning for your questions and for your interest and participation. I want to thank you for being present. We hope we’ve provided you with a clear picture of CACI’s 2nd and 3rd quarter results, and our expectations for the remainder of fiscal year ’05.

This quarter we’ll be participating in several conferences and visiting investors in New York City and Boston. We look forward to seeing you and bringing you up to date at those locations.

As always, if you’re coming to the Washington area and would like to arrange a meeting, please contact David Dragics in our Investor Relations department, and he’ll help you. We’re also aware that some of you may have other questions you’d like to discuss. Our team will be available in about 15 to 20 minutes to take your calls, with any questions you may have in the way of follow-up.

So thank you, indeed, ladies and gentlemen for your participation and your interest in CACI.

This does conclude today’s conference call. At this time, you may disconnect.