CACI International Inc (CACI) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to the CACI International First Quarter Fiscal 2006 Earnings Conference Call.

[Operator Instructions].

For opening remarks, I would like to turn the conference over to CACI's Vice President of Investor Relations, Mr. David Dragics. Please go ahead, sir.

Thank you, Cecelia and good morning, ladies and gentlemen. I am Dave Dragics, Vice President of Investor Relations at CACI International. And we're pleased that you're able to participate with us today. We are providing presentation slides during our conference call, and we'll also make every effort to keep all of you on the same page as we are.

So moving to the next exhibit number two, 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. And the 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 Securities and Exchange Commission 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 International.

Thank you, Dave and good morning, ladies and gentlemen, and thank you for joining us today. I'd like to extend a personal welcome to those of you who are new to CACI and to our call this morning. We're glad you joined us today. And we invite you to continue participating in our future conference calls as we go along.

With me today to discuss our results and answer your questions are Paul Cofoni, CACI's President of US Operations; Steve Waechter, our Chief Financial Officer; Bill Fairl, Chief Operating Officer of our US Operations; and Greg Bradford, Chief Executive of CACI Limited, UK.

Let's move to the next exhibit. I'll begin with some important metrics about CACI's first quarter performance. In our first quarter of fiscal 2006, we continued to deliver record growth with total revenue of $423.1 million, and total net earnings of $19.1 million. Our growth rate was 8.9%, which was entirely organic in nature. Contract awards in the quarter reached an all-time high of $800 million with about half of this being new business for CACI.

Contract funding orders also remained quite strong, a record $477 million. Steve and Paul will provide you a more detailed breakdown of first quarter metrics and performance later in the call. But here is the bottom-line -- our first quarter performance combined with our ability to read the trend-lines positions us for another record year in fiscal 2006, and to meet our long-term objective of recording $3 billion in revenue by the end of fiscal 2009. Next exhibit, please.

Adding to our confidence for the future is the successful alignment between CACI's business, and our nation's highest priority needs in the national defense arena, intelligence and information collaboration, Homeland Security and law-enforcement security. This reflects our strong corporate commitment to serve America's interests. CACI's operational strategy has also proven beneficial to our shareholders.

Security is vital because the United States and all civilized nations are threatened by ideology that embraces violence and terror, and exploits technology to attack these freedoms. These enemies have unleashed violence in every corner of the world. Working today, world governments have derailed many attacks and captured terrorist leaders, and CACI has afforded these efforts. The recent constitutional elections in Iraq is also another victory against terror, although challenges there in country remain great.

Beyond Iraq and our involvement in Southwest Asia, our other challenges to our national security. The proliferation of weapons of mass destruction and nuclear weapons, the need to monitor threatening activities in Iran, North Korea and Syria, and China's political direction as well as its growing global economic power and its influence around the world enhances and increases.

America needs to remain alert because of these threats and they are quite serious. Secretary of Defense Rumsfeld took note of China's growing military might on a recent visit there. At CACI, we are fully committed and proud to provide our customers with information intelligence and networking services that deliver daily support for our national security.

Let's move to exhibit 6. Our national security capabilities at CACI were also recently enhanced with our acquisition of National Security Research Incorporated, NSR, strengthening CACI's high level continuing solutions in command and control, homeland security, international security and missile defense. NSR's work has affected decisions of the highest level of military departments -- the Joint Chiefs of Staff, the Office of the Secretary of Defense, and the Executive Office of the President in the White House.

We intend to build on that reputation, while continuing to provide critical high level strategic consulting and solutions to these clients. In addition, our acquisitions increased one of our most critical assets, people, qualified analysts, experts, engineers with high-level security clearances. Adding talented people with the required government clearances is one of the keys to our growth, and recruiting is also one of our highest priorities.

As for our M&A plans, as I said before, every company we acquire must fit our culture and provide capabilities that match our business strategy. And we intend to be an active acquirer this year. We continue to pursue both strategic niche targets, as well as larger broad-based opportunities that expand our skill sets and provide us far reach and access to new customers. With our continued strong operating cash flow, available debt capacity, and our self registration last spring, CACI has ample liquidity to fully execute on its strategic plans. The next exhibit, please.

National security also requires our nation to address a range of other priority issues. For example, we need to enhance security at our defense and intel networks against cyber warfare, hacker intruders and infrastructure failures. And as recent experience with Katrina reminds us, America must significantly strengthened its disaster response infrastructure and for many reasons. And here is the punch line, every one of these troubling issues fall under the broad umbrella of national security, and these are all scenarios that CACI has amply demonstrated in-depth capabilities to support.

CACI Solutions can help integrate communications and improve response times. We are specialists in rapid response logistics, including managing and tracking inventory and resources, which are the core capabilities needed by the way to help the victims of disasters like Hurricane Katrina. CACI just won a contract to support US Navy organizations directly involved in Katrina support.

This is our $107 million award announced on our news release with the Navy's automatic identification technology or AIT program. AIT includes technologies like barcodes and microchips for better inventory tracking, and is being used by the Seabees today to support recovery efforts from their base in Gulfport, Mississippi. Next exhibit, please.

The broad range of these national security challenges fit well into CACI's business plans for the balance of this fiscal year and well beyond. It signals continued strong spending for every one of our key clients in the arenas that we participate in the Department of Defense, with the national intelligence agencies, with the Department of Homeland Security and law-enforcement agencies as well.

At the same time, because we serve our military customers wherever they are, we do not expect any negative impact from the base realignment and closure process. We do foresee positive impacts on our growth and rising from another trend, and that is the Defense Department's increasing focus on the war fighter.

IT (ph) support for the war fighter aligns directly CACI's expertise in tactical intelligence gathering, field analysis, and decision dissemination. This is vital not only to the success of our troops in combat operations in the field, but also obviously to Homeland Security and ultimately to winning the war on terrorism. In the global struggle as well as home, CACI's teams and technologies are taking leadership position. For example, several CACI's clients rely on our DOCEX system, which scans and converts languages into electronic files. A machine translates them then into English.

DOCEX is helping deliver actual intelligence with the speed necessary to make a difference. Turn to exhibit 9, please. That's how things look at CACI's as we finish another record quarter. We're off to another great year of stellar performance. And we'd be happy to respond to your questions later in the call, but now we'll present more details on our financial and operational metrics.

And for that information , let me turn it over to our Chief Financial Officer, Stephen Waechter. He will then be followed by Paul Cofoni, President of CACI Operations in the US. Steve over to you.

Thank you, Jack and good morning, everyone. Before I begin my remarks, I would like to remind everyone on the call or reading the transcript that effective July 1 of this year, CACI was required to adopt a provision of FAS 123R in reporting its results. As I go through this overview, whenever necessary I will specify between GAAP under the new rule and net earnings prior to the effect of stock option expense. So that everyone will be able to make the proper comparisons to our first quarter fiscal year '05 results, which have been restated to include stock option expense. We want to make certain in comparing our results to last year's first quarter that everyone is on the same page.

Let us move to exhibit number 11, and I'll give you details on our GAAP financial results and other key metrics. Our revenue in the first quarter was up 8.9%. Our federal business grew 8.7% during the quarter, which was all organic and represented approximately 95% of our total revenue. On a trailing 12 month basis, CACI's organic growth was 12.5%.

Moving to the next exhibit, our GAAP net income for the quarter was $19.1 million, or $0.62 per diluted share, up 4.3% compared with the prior year's restated GAAP net income of $18.3 million or $0.61 per diluted share. Without the effect of expensing stock options in the first quarter of fiscal year '06, our net income would have been $22.8 million or $0.74 per diluted share. This is a 15.5% increase over net income of $19.8 million or $0.66 per diluted share that we reported a year ago.

As a reminder, our general practice is to issue most of our stock options at the beginning of each fiscal year. For certain grants, the full value of the underlying grant is expensed immediately on the date of the grant rather than amortized over a period of time, which is the typical treatment. The effect of our stock option expense for the first quarter, and for any first fiscal quarter going forward, is higher than what the effect will be for the remaining quarters. In accordance with the guidance we received on implementing FAS 123R, prior restated results do not include the immediate expense recognition for similar grants issued last year.

Our effective tax rate for the quarter decrease to approximately 36%, down from 38.5% from the same quarter a year ago. This percentage is largely attributable to the benefit associated with research and development credits realized by CACI. These credits are generated primarily from activities of the AMS operations we acquired in May of 2004.

Moving to exhibit 13, let's take a look at some of our key income statement, balance sheet and operating metrics during the quarter, most of which are included in the financial exhibits in our press release. Our GAAP operating margin was 7.9% compared to 8.6% in the restated first quarter of last year. Non-cash charges related to the expensing of stock options were approximately 1.4% of revenue in the first quarter of our fiscal year 2006, compared with 0.6% in the earlier quarter. For stock options expense our operating margins in the first quarter was 9.3% compared to last year's operating margin of 9.2%.

Moving to the next exhibit number 14. Our operating cash flow for the quarter was $38.2 million, an 89% increase over the prior year. We increased our cash position by $38 million in the quarter, giving us approximately $171 million in cash and equivalents at September 30th. Our outstanding debt was $345.5 million at the end of the quarter. With another strong quarter of operating cash flow as a result of our continuing successful collection activities, DSO outstanding at the end of the quarter were 69, down 14 days from the same quarter a year ago.

In the next exhibit, with respect to our contract metrics, approximately 83% of our revenue this past quarter was earned as a prime contractor. For the quarter, 55% of our revenue came from time and materials work, 26% from cost reimbursable, and 19% from fixed price work. Our United Kingdom operation reported $13.9 million of revenue during the quarter, 12% more than the $12.4 million reported in the year earlier quarter. The pre-tax margin for the quarter was 8.1% compared to 5.5% in the prior year.

Effective October 1st, 2005, our UK operation acquired Tech Computer Office Ltd., or TCO. TCO owns a proprietary suite of resource management software known as Office Space which primarily provides to UK local and Central Government. Our UK operation has historically been a commercial based business and this acquisition is part of our ongoing strategy of creating a more diversified commercial and government business in the UK. TCO's projected to generate $7 million in revenue in its first full year with CACI and is expected to be accretive.

Moving to exhibit number 16 turning to our guidance and as we did last did last quarter, I shall reference margin, income, and EPS amounts that reflect the expensing of stock options. Comparative numbers with and without the impact of stock option expenses are displayed on the slides. I encourage each of you to follow closely with the slides. For the second quarter of fiscal year '06 we estimate that our revenue will range between 415 and $425 million and we expect that operating income for the quarter will range between 37.5 to $39 million.

We expect that our operating margin for the quarter will range from 9% to 9.2% and net income will range from 21.3 to $22.3 million. Finally we expect the diluted earnings per share for the quarter to be between $0.69 and $0.72 and that diluted weighted average shares will be 31.1 million. For all of fiscal 2006, we now expect revenue will range from 1.750 billion to $1.825 billion. We expect net income for the full year to be in the range of $88.2 million to $92.4 million. Diluted earnings per share is expected to range from $2.84 to $2.98. Fully diluted shares for all of fiscal 2006 are expected to be approximately $31.1 million.

That completes my financial review. And now here's Paul Cofoni, who will cover the details on our domestic operations. Paul?

Thanks Steve and good morning, everyone. Let's turn to exhibit 17. Our first quarter continued the trend of strong performance. We had another solid quarter of contract funding orders, a record demand of contract awards, and a pipeline of qualified opportunities continued to grow. During the quarter we also responded to our customers and our employees as a result of Hurricane Katrina. We helped our customers to return to an operational mode as quickly as possible, minimizing the impact of the storm on their work and our revenue.

Let's go to exhibit number 18, and take a look at key operating metrics for the past quarter. Our performance during the quarter continued to be driven by our mission critical support of the Army, the Navy, and the intelligence community. Contract funding orders totaled $477 million. And on a trailing four quarter basis, we have received over $1.8 billion in contract funding orders.

Revenue from our DOD customers increased almost 11%. During the quarter this growth was primarily driven by our support to the Army, and the war fighter, and to the Navy through the SeaPort-e contract. Revenue from our work in the intelligence community also continues to grow. Our intelligence revenue grew by 22% in the quarter and represented 27% of our total revenue. Our federal civilian revenue was up 3% during the quarter driven by our work with the Veterans Benefit Administration.

Let's go to the next exhibit to view some of the business development metrics. As I mentioned, a few moments ago, this past quarter was a record one for CACI and the dollar volume of awards received. Approximately $800 million worth, which is 38% higher than the first quarter of last year. About 50% of this amount is for new orders.

In addition, as we noted in our release, $150 million of these awards were from the intelligence community. Our largest award in the quarter was with the Navy's Program Executive Office for Littoral and Mine Warfare. This $188 million contract consolidates consulting work being done by CACI and other contractors, all under the leadership of CACI. We will be consulting with the Program Executive Officer and all of his program managers on the design, development, production and support of Littoral and Mine Warfare equipment.

Next exhibit. Our proposal activity also remains very strong. We currently have $1.7 billion of proposals submitted and under evaluation by the government. We expect that over 60% of these will be awarded between now and next March. And we anticipate submitting over 4 billion in additional proposals in that same period. We expect that over 50% of those proposals will be for $100 million or more, as we continue to pursue larger more significant opportunities.

Our pipeline of qualified opportunities stood at more than $14 billion at the end of September. The majority of these opportunities, again are greater than $100 million. While the federal budget remains under pressure, our core competencies are focused in the center of National Security imperatives and funding priorities. We believe, therefore, the mission critical support CACI provides to its customers will continue to be funded.

Overall, I believe we continue to be in a strong position as we wind up calendar 2005. We're coming off a record quarter of awards and contract funding orders and we will continue to be unyielding in our defense of our incumbencies on key contracts scheduled for recompete this year.

That concludes my remarks. Now back to Dr. London.

Thanks Paul and thanks, Steve, for the updates. Let's go to the next exhibit -- our last exhibit. As you just heard, our first quarter was another record setter. We experienced record revenue. We have an expert team of senior leaders and a skilled and dedicated employee base. Our clients continue to value and request our support and we continue to win top tier deals.

We'd like to say that CACI is now operating at the next level. We are competitive with top tier companies. And we're bidding selectively on more and more larger deals. We're well-positioned in the government marketplace through our focus on national defense, the intelligence community, the homeland security arena, and the transformation in the IT sector for government operations.

Our management goal this fiscal year remains to grow 12 to 15% organically and 5 to 8% through acquisitions. And our long-term goal, as I mentioned earlier, is to reach $3 billion in annual revenue by our fiscal year 2009. We'll meet these goals in part by continuing to align our capabilities carefully with the objectives of our government clients, particularly those in the Department of Defense, the intelligence community, and those that have key roles in the aggregate area of national security.

And as I mentioned before, we believe national security is more than just external military threats or terrorist attacks, we have seen recently over this last summer that it includes national disasters such as the recent devastating hurricanes that have impacted the quality of life for Americans. We must have confidence that our government will move effectively and efficiently in all of these situations, and we believe that CACI has many of the solutions to support these efforts.

Most importantly, what enables us to deliver our solutions so well is our excellent CACI staff. It is their client focus and quality support, coupled with the alignment of CACI priorities with the national critical agenda that delivered CACI's first quarter's record results. So at this part we're ready to open up our discussion to your questions. We've had a great quarter and we're looking forward to responding to your interests.

So, Cecelia, I'll turn the microphone back over to you to introduce our first questions, if you would please.

Thank you, sir.

[Operator Instructions].

And we'll go first to Sandra Notardonato.

A couple of questions. First of all, is TCO in the numbers? And if maybe Steve, you could address the decline in gross margins? I want to get my last question on here as well. Just trying to understand if new awards were so strong at 800 million, your contract funding has been 1.8 billion over the next four quarter -- over the last four quarters, why are we seeing the decline potentially sequentially in the next quarter? Why didn't we make up for that DOD and DOJ business that seemed to go away?

Well, I'll start off by saying that there are conditions that have to do more over timing then anything else, and the way awards array and began their ramp-ups. But Steve has been looking at that, so I will turn it over to you so you can amplify and perhaps gives a little color for the audience.

Right. Thanks. I only try to address, I think all I think it was three question there. TCO is in the forecast as well as NSR, National Security Research. So that is in the numbers. Your second question I believe was with respect to gross margins, down this quarter primarily because of the higher ODC content in our direct labor, which is about -- our direct cost if you will. ODCs were about 54% of direct costs, versus about 51% a year ago.

And with respect to the forecast and your general question about the good news of the ramp-up -- or the good news of good contract awards et cetera and why we aren't seeing that. As you know, we recently, we completed some of our work in Iraq, which represents slightly more than 2% of our revenue in the first quarter. And additionally, we anticipate a ramp down by the Department Of Justice for litigation support services, primarily on tobacco and Windstar litigation. And as a result, we expect kind of a slower growth rate in the second quarter because of those two programs.

And together, they represent about a $45 million revenue hurt if you will for the full year. Overall we took the top line down about 25 million for the year, which is reflective of the partially the offset from the revenue associated with the acquisitions of National Security Research and TCO. And we believe these acquisitions can add about $20 million to the revenue. So 45 on the shortfall plus 20 on the acquisitions is the -- basically the change in the guidance that we gave which is down 25.

But on the long term front, we are really encouraged by back half of the fiscal year, and our record level of contract awards in the quarter is going to allow us to ramp up over the back half. And additionally, we remain optimistic as you heard Paul talk about the growing pipeline opportunities, which we think is going to lead to additional contract wins for us. So, that I hope that answers your question.

Yes, Steve. I think it's a primarily a timing issue, and I think you laid out the factors that we put into our assessment of it.

Am I still on?

Yes, you are.

Great. I'm just unclear, though, if we knew these contracts were coming to a close, when you provided your outlook initially for 2006, why it wasn't included? An outsider would assume that maybe some contracts you were expecting to hit you didn't win them. And if you did see more ODC revenue this quarter, does that mean that your core business actually didn't perform as well as expected?

Well, with respect to the overall contracts and the knowledge -- that we were anticipating a little bit longer stay with some of these things -- the transition to some of these contracts at the time, we put our guidance together. We thought that they would be here a little longer than they turned out to be. With respect to all our business, it is subject to change and goes up and down and this is our best estimate of where we think we are at this point in time.

Now we remain hopeful, and you heard Jack's comments. Our goal is to grow 20% plus a year through a combination of internal organic growth and acquisitions. And internally, I'd say that's our mission is to do that. Our guidance to you is -- our best look is kind of where we are today.

And we remain bullish on the back half of the year particularly because by that time, we should see these funding orders and the contract additions begin to staff up and begin to move out. So it's a -- what I would call a temporary issue and we certainly built our business on the long-term perspective.

And we'll go now to Tom Meagher with FBR.

Yes. Good morning. Steve, let me start off with my standard DOJ question for you if you can.

Tom?

Yes.

Okay, go ahead please.

Yes. I was going to start off with my standard DOJ question for Steve.

Okay. Fine.

It's -- the DOJ revenue for everyone else is down slightly from last quarter, a couple of percentage points down in the $22 million range.

Okay. And how does that compare to last year, Steve?

Let's see, hold on one second. It's over here.

Okay.

It's down about 5% from the prior year.

5% down. Okay. Thank you. And then maybe one Jack for you more on a strategic or sector standpoint, we've had these recent press reports, detailing the break up of CNC into its respected commercial and federal units with Lockheed Martin potentially taking over that latter business. That would give them about $10 billion or so, I think, if my numbers are correct, of services revenue in the mix.

You've also got an SAIC coming public here, 7 billion, say, before the end of the year. In reference to your comments about going after these larger $100 million type contracts, how do you see your ability to compete on those contracts being impacted by the fact that you may suddenly be seeing two, three, four more contractors out there that are significantly larger than the typical name we've seen in the sector?

Love the question. Let me add a few thoughts, and then I am going to ask Paul to come in behind, because it is a strategic question, and it is an issue that we've put considerable thought into. First of all, let me say that generally speaking the acquisition of business units of those sizes don't get necessarily all that much leverage or synergy out of them. They're big enough as it is, they're going to be still our competitors in very much the same way that they were before.

I think that's the first plateau that I would address. The second point I will make and then hand it to Paul is, it's matter of selectivity, Tom. It's a matter of choosing those which you have the highest, most likely win opportunities. So it's not a matter of just size and what the size of the deals are, it's crucially important the selectivity, the pre-positioning, the focus, the solution you are bringing to the table are discriminators, but I don't want to overdo it. Paul, what do you have?

I agree 100%, Jack. I think, the obvious factor is if one of the Tier 1 competitors is absorbed by another Tier 1 competitor, the obvious fact is that there is one less Tier 1 competitor. We all understand that. In terms of how it affects us and our competitive, I think it can't hurt. It might help a bit by reducing one competitor from the fray. Our strategy is very clear. We are focused on our strong relationships with our best long-term clients.

And we're notching it up and convincing them that we can do more. And so we're being, as Jack said, very selective. We're taking those clients where we've had great success historically, and added great value, and notching it up and being quite successful, frankly, as we've demonstrated in this quarter, with two awards, both the AIT award at 107 million, and the PEO, Littoral and Mine Warfare award at 188 million that demonstrate that we are, in fact, notching it up not into the $100 million plus category and we're going to continue.

Thanks Paul.

And we'll go now to Edward Caso with Wachovia Securities.

Great. Thank you, very much. Can you talk a little bit about your civil business and how much of it is a function of the annual authorization budgeting process, and how much of it is based on the fees of the individual agencies? I mean how much of it is sort of self funding?

Speaking with civil agencies I think maybe we're talking with regard to -- our work with Department of Justice perhaps or the FAA or of that nature because the intelligence community, we typically consider that more in the defense arena, so that's a lion's share of CACI's business. I think we reported something like 55% on our DOD side and a big chunk of the civil side is with the Department of Justice. So maybe, I guess, the relevant thing there is to talk about the DOJ going forward perhaps. Bill?

Yes Jack. As thinking about your question, I'm not sure I have it broken out that way, so I can't give you a precise answer at that point in time. But I will tell you that when we look at our customer set there on the civilian side, particularly in the Homeland Security area, those folks are going to really see some funding coming their away. The law enforcement arena, the federal civilian side of the intelligence community, that's quite frankly one of our fastest growing areas here. So we feel pretty good about it going forward here, forward-looking indicators look very strong. I'd also mentioned the VA which has become a preeminent customer for us, it looks to be well funded going forward as well. And we've got a great client relationship there. So, I'm very positive about it.

Can I ask just one last question. The interrogator -- Iraqi interrogator contract that was lost, which is good riddance in my book, is that the -- are there other contracts of note that have been lost or is this a unique situation?

I would say that that was the most potentially consequential and you pointed out something in terms of our relinquishing our involvement in that arena. I think we serve the United States government, the United States Army in fine stead. We're very proud. I'm extremely proud of the quality of work we have provided with an intense time. We're moving beyond that. As we've reported to many folks it wasn't central core to our business, although I thought we had a wonderful team that did a magnificent job, and I am extremely proud of them, and sited each one of them for their strong in their service to our nation.

But we have moved on beyond that, and we'll look at that with pride and reflection. But again, as you point out, we're moving into our more traditional intelligence field, field deployed intelligence, actual decision support arenas as well as our broader intelligence community work at the national level. So I think the answer is yes, but we're moving on. We see great opportunities expanding. And we do think in terms of a great year bullish on the back half of the year. Again, our target is to be about double our size here in a handful of years.

And we'll go now to John Mahoney with BB&T.

Hi, John.

Hi, guys. How are you doing? Can you hear me?

Yes.

Great. I wanted to just talk -- we talked about the -- this is huge quarter in terms of awards -- $800 million. Can you talk about how it all came together in this quarter and kind of why there was -- you had some kind of more sluggish quarters recently in awards? And then I'll have a follow-up.

I'm not sure I picked up. There was a little blip in the communication, John. Were you talking about the flow of awards in this calendar year?

I meant that the award this quarter, $800 million, and it had been a sluggish in the quarters leading up to this -- why the timing. What can we expect to the remaining quarters this year?

Okay. Good. That helps -- we've missed a little word or two. Bill has been right on top of this and has a good view of how our expectations are as we look forward to a very fine half year -- back year. Would you please pick up there, Bill, and amplify it for, John?

You bet, Jack. John, I think we've been mentioning over the last quarter is that we really saw our pipeline and proposal activity really ramping up. I think I mentioned that they're really burning the midnight oil there, if you will. I'll also -- the awards you see now in this quarter are very much a reflection of that. I think Paul talked about $4 billion in submittals over the next two quarters as well. So those folks in our proposal shop are still cranking it out down there. The other thing about last year is, that it was actually turned out to be a very light year for us in terms of recompetes. So that in part contributed to not a lot of award-type activity there. But it's -- the whole proposal activity on both fronts going forward is very much ramped up now and staying there.

The one thing I would just add, Bill, on top of that, for you John too, is the focus on the funding level. As you'll recall, we've brought in and introduced that dimension and metric, because it was a -- we feel it was more important in many ways, not entirely, but in many ways that gives you a projection of the forward momentum of the corporation. And of course 477 quarter was significantly above our 423 run rate. So, we think that those kinds of metrics have to be looked at as sort of a ray that gives you the positive indications, and quite frankly, they build our confidence and our bullish outlook for the back half.

I have just one follow up. I think myself and some of the other analysts in the community were a little concerned -- had been that you might have -- because the awards had been a little sluggish have been starving the bid proposal opportunities. You could see indirect cost and selling hadn't been growing. And it looks like you're doing a great job, but we're worried that you're starting the bid proposal (ph). I mean, this quarter, it was up just 1%. I know that a bid proposals is not all of $105 million. But can you speak to how you're being able to -- what you're doing specifically to kind of really keep these costs down? I guess, and most of this you'd call it SG&A, which is 1% growth.

I believe I understand it. But let me talk --

... for Steve?

It's more or somewhat or a little bit from the philosophical point. The -- I won't say trick but the emphasis in this business has got to be on selectivity. It's not necessarily how much you bid or how much you spend; it's what the quality of the win opportunity is. And I think that's what we've demonstrated in this first quarter. It's getting the deals to the table that you can win, and I think that's been our focus. We have had some issues in terms of management and some of our investment expenses in --. What I would like to do is turn it to Paul, because he has been focusing on as a perspective of his sort of initial time at the company here since joining us in terms of viewing that between. Paul and Bill, maybe we'd give a little more color for you.

It may be that you're perceiving some controls that we're are putting in place more control in the SG&A area. In fact, we are. We have taken actions in the last several months that have the effect of lowering our indirect costs. But they are not in the area of bid in proposal. In fact, our bid in proposal is really popping through the ceiling, so to speak. We're actually doing some offsets in the other indirect areas to allow the B&P to rise to the needed level in order to pursue the opportunities, as they eventualize. So, I think that our investment profile right now is about right. In fact, our B&P is up 12%, and we will continue to fund B&P as needed.

To hammer this point home, what makes us feel so bullish is our strategy of selectivity. This business is a selectivity, especially as we go up the hill, it's kind of a David and Goliath game. We want to be in a position to nail the deals that we think we can pull down because of extraordinary positioning issues and solution indications. That is going to be the emphasis, and Paul is really borne down on that with Bill to make sure our bid shots will have a higher potential for award.

That's also an important area, is to make sure that we separate probability from possibility and get our people focused on prioritizing our very best resource at the very best opportunities we have. So we're doing that as well, Jack.

Okay. Thank you.

And we'll take our next question from Jason Kupferberg with UBS.

Good morning.

Morning, Jason.

Morning, Jason.

A question for you, in terms of the December quarter, obviously you guys had a huge contract award quarter in September. And no one could expect that, probably to be replicated in December, but we do have the overhang of duel continuing resolutions in the both the DOD and civilian side, which is a little bit unusual, particularly, on the defense side. What's the right way to think about the December quarter as far as how that could impact award activity, not necessarily just for yourselves but for the industry as a whole?

Well, I think we are obviously, always interested in the idea of setting new records on awards. But as you all know, the award cycle is somewhat lumpy. We don't control the decision processes or schedules and inside of the United States government, there are certain times in the year, which things tend to slow, and that certainly would be typical over the holiday cycle of last half of December. You've got the other holidays during the quarter as well. So it wouldn't be reasonable to expect, except in extraordinary situations, to keep up such a pace. On the other hand we're optimistic. And maybe Bill can put some color on that for us.

Yes. Jason, what we've noticed over the years is that the -- our first quarter is typically our strongest quarter for new awards and this year obviously was -- really proved that right down the middle, if you will. The idea of a continuing resolution is not new. In fact, I would tell you in the 30-some-odd years I have been in this business that that seems to happen at about 90% of the time. So this is a very typical sort of situation for us.

So to get right to the point, typically, our first quarter is our strongest award quarter then we see a little bit of a fall off in awards as the government rolls into its new fiscal year. And then it begin to it builds back up through the rest of the year. And that's a pattern we've seen year in and year out. I don't expect this year to be any different. Again just really excited about the -- as Paul has mentioned earlier, the level of proposal activity have going here. Again I think Paul mentioned $4 billion in submittals over the next two quarters, and we expect to roll those out in a timely fashion.

Okay. And just a follow-up on the timing of the TEFOS rebid, I think it's in the relative near-term here. What's the status on that? And if can you just refresh us on what percentage of revenue that contract was in fiscal year '05?

You bet, Jason, it's Bill Fairl, again. The government's schedule on that is that we would see an award this quarter some time. We're very, very confident about our position on that. We have a longstanding relationship with that client and just have excellent relationships on it. And I think that's it.

And we'll go to now to Tim Quillin with Stephens Investment Bank.

Good morning.

Hi, Tim.

Did I hear you right, that the interrogation contract was a little over 2% of revenue in the first quarter?

That's about right.

And I assume it was winding down during the first quarter, which begs the question of where it was as a percentage of revenue in the fourth quarter. And I had thought it was less than 2% of revenue.

No. It's -- it was actually -- that's pretty steady. It was pretty steady stated at that point in time, and really just got completed as of September 30.

Okay. It looks like ODCs were still very high in the first quarter. And I'd like to address why does that is. But you know, given the fact that the interrogation contract didn't drop off in the first quarter and ODCs were maybe consistent were - with where they were in fourth quarter. Why did we see the sequential decline in revenue from the fourth quarter to first quarter? Thank you.

Fourth quarter to first quarter. Well, I guess the thing is that I'd probably respond to broadly, because it is -- is germane and that is the much of the ODC, if you will, part of our business. What I think we've tried to relate in the past is not something that is -- can have a highly reliable or highly correlated projections factor. We have, obviously, can generate averages over the period in time. But in any one given quarter, it's like any one given day in the NFL. You can have surprises. So I think that the -- generally speaking, we don't think this is any way to forecast with any high precision the ODCs. We just -- that's not the way it works. On the other hand, there are some other aspects that bear on this in the financial side, so I'm going to pass that to Steve.

Yes, Tim. I think your question is on the first quarter, why is it down from the fourth quarter, if you will. But, typically, what we'll have in the first quarter, there is a seasonal impact in our first quarter, that being vacation time. And typically, what we see if you historically, go back and look over a five-year period of time and back out any acquisitions that may have hit, you'll typically see about a 3% downturn in revenue just because the billable hours are just not available because people take vacations during the July, August timeframe. So that's what you're seeing in the first quarter.

And we'll go now to George Price with Legg Mason.

Hi, George.

Hi, guys. Good morning. A couple of questions. First on DSOs, nice job on the decline there.

Thank you.

Assuming that is sustainable around that level, obviously, you're going to look to do acquisitions. But can you give us maybe some flavor of how much debt retirement you might be willing to undertake with the cash flow?

Well, let me just start off by saying that I'm extremely pleased with and continue to be pleased with CACI, the team both ups and the finance and focusing on receivables in our collection and managing our cash. I'm very proud of it -- we've made some significant progress. I think to get to some of the intricacies of your question, I'm going to ask Steve to address it because he obviously is on top of that. Steve would you help George?

Sure. George, I think with respect your question, on the days outstanding, I think our hope is that we can actually get them down lower. I think for your modeling, I'd use a 70 day kind of a number as a reasonable kind of a number. But here internally Tom Lechs (ph) and crew are working hard to get those collections in even faster. And we're doing a lot to work on quality of our billing and all of our process improvements, if you will.

With respect to the long-term debt, it's our intention we will continue to advertise that down. It's about $3 million to $4 million a year, but we have no intention of paying that off. As you saw, we had $170 million of cash here at the end of the quarter. It's our intent to use that cash for acquisitions and perhaps even borrow some more if we can find the right kind of opportunities to lever up. Our thought processes that are optimal level is to been in that two to three times debt to EBITDA. That's a good capital structure for us. And that's what we're hoping to get to here by the end of the year.

We continue to use the -- our strong balance sheet and our expert collections mechanisms to put us in a good position in our M&A program, and we think we're very well-positioned out there and we're very aggressive in the market looking for targets. And that will assist us in continuing to build a corporation as we've indicated.

Okay. And then, just a question on margins, and really sustainability of margins at this level. Thoughts on that and maybe what kind of margins are implied in the strong new work that you're bidding? And then, I just have a clarification on your guidance after that.

Let me just start off from the Chief Executive Officer's perspective. Margins and margin performance is high on my list of metrics and achievement objectives. We continue to focus on it. We trade off investment issues versus other aspects of cost reduction. But as -- talking to some of the metric aspects, I'd like turn it to Steve.

I think in response to your question and I think looking at this on a new GAAP basis, if you will, with our stock option expenses, let me kind of put it into perspective. We did about 7.9% operating margin this quarter. As I indicated earlier in my comments, we had the one-time blip of some of those options being expensed earlier than what you normally would see. We see the back-half margins increasing nicely here that you should wind up the year somewhere between 8.8% to 9% for the year.

So, on a margin basis, I think you'll see that improvement. With respect to new work coming in, it would be our hope and anticipation that we would be higher margin kinds of businesses. That's where -- certainly National Security Research is an example that we just acquired, is a kind of 14% margin business. So as they grow, that mix should certainly help our business as we go forward.

I'd like to punctuate this because there is an M&A side of this. And that is that we have closed some 30 transactions in the last 15 years. And I'm proud to say that all of them have been accretive. Obviously, some have been a little bit better than others as a matter of degree here. But all of our transactions, every single one of them has been accretive and cash flow positive and successfully integrated.

And that takes a lot of focus. But we feel like we have a very organized team here in terms of pulling -- putting M&A as a major element of our business strategy very successfully, and will augment and assist us in building our $3 billion company in the next few years, and achieving the back-half performance that we're looking for in this fiscal year as well.

And we'll go now to Laura Lederman with William Blair.

Yes. Good morning. A few questions. One, can you give us the operating cash flow? What's your expectation for full-year '06? Also, CapEx, just a rough feel for what else do you think also going to come in, and then I've got a few more questions.

I believe the focus was on the cash management cash flow, and faded a little on your question Laura, but may I turn it over to Steve?

Yes, of course.

Steve?

Yes, on a CapEx standpoint, I think we are looking into kind of the $10 million range for CapEx. On an operating cash flow basis, I would expect this to be somewhere in kind of 135 to 145 range would be my anticipation at this point in time.

All right. Moving on a little bit, can you talk about how many large deals are in the pipeline, how many of 100 million plus, and when you expect some those to get awarded?

Yes, that's obviously near and dear to our heart as a central in terms of our high confidence and bullishness over the next few years. And Bill has been focusing on that intently, and Paul has been looking at some realignment considerations in terms of our pursuit programs. But Bill, could you maybe respond to the interests there of our analyst?

You bet. The pipeline that Paul referred to earlier with the $14 billion, I believe. We take mostly about a two year time horizon on that thing. There might be one or two that are a little bit further out on that. But most of those are going to be awarded over the next two years. Now, Paul gave you some percentages saying that more than half of those deals were $100 million or above. And that again goes to his point about really wanting to focus.

We have the ability to go out and pursue and win these big deals, but we want to put in every single situation put the best foot forward for the Company. We've got an opportunity-rich environment out here, and the trick is to take your best shot at every shot you take. And that's what we are bringing to the table here now at this point. So two-year time horizon for most of them, more than half of the deals, the majority of them are $100 million or above.

I hope that helps your question.

And we'll take our next question from Cai von Rumohr with SG Cowen.

Thank you very much. Congratulations on excellent awards.

Thank you.

Thanks.

You'd indicated, I guess, that 50% of the awards in the quarter were recompete. What percent was recompete of the awards in fiscal '05, and what percent is recompete of the bids kind of in place awaiting decision and the bids you expect to submit over the next six months?

Well -- a very important question. Again, we are proud of it and where it will take us. But, I'd like to ask Bill Fairl to give you some more color and amplify a bit in that area to be helpful.

You bet, Jack. Cai, last year was a light recompete activity year for us, meaning our fiscal '05. I don't have the precise numbers in front of me, but my recollection is we were down around down 5%, less than 10% of our business recompeted last year. It's actually 5%, I think. And then, this year, it's a much more normal activity for us. So if you -- just for planning purposes, if you think in terms of four and five year award terms on most of these contracts, then we would expect on an average year that 20 to 25% of our business would be up for recompete and that's where we are this year. That's what we're looking at.

Okay. But the fact that the first quarter was 50%, it's really like only half of that kind of generates growth, or are the recompetes that you won expanded recompetes, so that you can get growth also on kind of that existing business you've re-won?

Yes, that's an excellent point, Cai. A fair amount of the recompetes -- in fact, I would tell you more than half of them have some sort growth wedge associated with them. So, we're starting to call that kind of a bid hybrid around here. So, it's got part of a recompete and part of a new business aspect to it.

Okay. And to follow-up on the interrogator contract. My understanding was that L-3 won (ph) had been the July timeframe, and then you protested it. And so, given that your knew -- presumably you knew a decision was coming at the time of the last call, and I can't remember whether it was made at the time of the call and you might protest it. I mean why did you think this contract was going to go much beyond September? I mean because you'd indicated earlier on that it was a timing issue and you expected this to kind of go longer than it did. Or was it that you expected to win your protest?

Well, all I'll just say the fact of the matter is there was a number of indeterminate aspects of the whole contract situation. There were some subtleties associated with it, some transition planning that was not clear and was been work in great detail and interfaced with United States Army. And quite frankly, it wasn't clear what are position was going to be. We did not want to be overly pessimistic. I don't think we overly optimistic, I think, we gave it a fair and very reasonable and a prudent projection. But things don't always turn out exactly like you think they're going to, and we wound up sort of in the situation. Do you want to add any more color to that Bill?

Yes. Jack, I think you really put your finger on it. The transition planning associated with that, and Cai you can imagine in that part of the world over there trying to do that, it really extended out. And I'll tell you, it went well into September before it became clear as to what the actual transition plan was, so just a lot of uncertainty surrounding that.

Down to the last minute, if I might add. I think we were very pleased with the way we were able to finish that nonetheless with -- on behalf of the United States Army. And felt that our relationships remain very good. And there was no protest, by the way, just to make sure that you're aware of the activities of the company. And quite frankly, we normally get into this kind of thing, but we're very proud of our credibility and our responsiveness and responsibility in dealing with the public and within our guidance and our projections. It's very best professional effort.

We spent a lot of time on doing it. I feel very comfortable on behalf of the Board that we do our very best job for the public shareholder community. Sometimes things go a bit -- a different direction that you anticipate. It's not very often. I think if you look back over the years, our credibility and our record is quite remarkable, and our ability to project and to be responsible to our marketplace.

And we'll take our next question from Tim Quillin with Stephens Investment Bank.

Yes, I just had a couple of follow ups, thank you. First of all, it was my understanding that the DOJ business had bottomed out or was at least close to bottoming out. Where is that business on a quarterly revenue basis? Where do you foresee that going?

Let me just make a few broad comments. DOG is been -- DOJ has been one of my customers since the late '70s. They still have a team that I deal with frequently. It is a business that is a lawsuit case driven business, so there's some bubbling effect that has to do with the peaks and valleys of the litigation activity. But in terms of bottoming out, I guess bottoming and peaks -- I guess I'm never quite able to project them with great clarity. But Bob -- Bill does watch that and I like to ask him to give little color in quick answer we are talking about here. If you might, Bill, please.

Sure thing Jack. Yes, Tim. We do a number of projects -- a large number of projects for Department of Justice and at any given time those projects are a different phases of their life cycle. And it just so happens recently a couple of the major ones are getting into the end of their particular life cycle. So I think our plans look good, we're on plan for the first quarter and the rest of this year as far as DOJ goes, and we'll look forward for new projects coming in and those beginning to ramp-up.

Okay. And just a couple quick questions for Steve. One is ODCs over the past couple of quarters have been the highest I've modeled at least over the past several years as a percent of direct costs. What do you assume as far as ODCs and guidance? And then the second question is, free cash flow has been extraordinarily high last year, and it looks like it will be again this year. What is a good way to think about a sustainable level of free cash flow generation relative to net income? Thank you.

With respect to the ODCs I think you probably a little bit high this quarter relative to what we see going forward on a -- as you look at as percent to our total direct costs. So I would if you're modeling, I would model it down slightly. With respect to the operating cash flow, that we remain confident this could be in that range, I told you earlier and kind of though 135 million to 145 million, again CapEx is could be in that $10 million range. So again, hopefully we bet those numbers but that's where we would be right now.

And again, ladies and gentlemen, please limit yourself to two questions. And we go now to George Price of Legg Mason.

Hi George, again.

Hi. Thanks. I had couple of follow ups, I just wanted to with regard to the guidance, the internal -- I do not know if you mentioned the internal growth assumption behind the revised fiscal '06 revenue guidance. And then, also the tax rate, the sustainability of that lower tax rate in '07.

These are obviously, important issues, especially for trying to refine the modeling projections going forward. We look at these things carefully and endeavor to give our committee our best judgment and estimates. So I want give -- Steve to handle color for you on this because they are important factors as you begin to do your projective and modeling.

Obvious, with respect to the organic growth in the current guidance I'd tell you it's in the range of 7% to 11%. With respect to the tax rate going forward into fiscal year '07, I'd be hesitant to give you something at this time. We'll look at that as we get closer to '07, and give that guidance out. We are doing these R&D tax credits. We're hopeful that those will continue into '07, but it's too early for us to kind of know exactly what that number will be at this point.

Okay. Thanks very much.

And our next question comes from Eric Olbeter with Standard -- Stanford Financial.

Yes. Hi, guys. Actually, the last analyst answered my question. I have one other and it's related to the DOJ business. Can you tell us just how you saw that ramping this year when you gave your forma; guidance? What were the -- I'm trying to get a feel for how much of that is coming out of each quarter. So, was this something where the shortfall from analyst expectation in the second quarter of the year is completely related to DOJ? Is it sort of $20 million that you're pulling out? Can you give us a sense how you expected that in your last assessment? How that was going to roll?

Again, the DOJ is a an interesting kind of contract because it has some up and down aspects that I try to relate to you in terms of the status of the various cases and whether you're in closure or settlement in the litigation phase. But -- so it's not with high perfection that we're able to project these things --

Sure.

-- so I'm going to ask Steve to give you a little color. We've had a long steady relationship and we've been able to manage so to speak the peaks and the valleys from time-to-time with DOJ. I can assure you that they're a very active organization down there, and litigation is a major contingent issue of the US Department of Defense -- Justice. But I'd like some color if you would Steve.

Sure. As you heard Bill say earlier, the DOJ business that we have is made up of a lot of different components. There's many different cases that we're working on. And when we put our plans together, we were putting our plan was pretty much, the business would be flat for the year at kind of a $22 million run rate. What we are now seeing though is, as we indicated earlier, a couple of these cases have reached their life cycle and they control the life cycles. Where they have, kind of, ramped down a little bit here in a couple of million dollars a quarter, is what we would now anticipate that that will be down.

Okay. Great. Another question, just going back to the organic growth issue, if your new guidance is suggesting 7 to 11% organic growth, and I assume that you're taking out the $20 million in acquisitions?

That's correct.

Okay. And the $45 billion fall off, that you guys are seeing represent, roughly, 2.5% organic growth, is that about right?

That's very right.

Okay: Than really what we're seeing now is that organic growth is looking to be somewhere between, if it had no, this work had went off would've been 9.5 to 13.5. So, again, that's, sort of, below the 12 or 15% range that you previously, you guys have been pushing that. So, can you tell us now, what has changed from last quarter when you were saying 12 to 15? Even exclude this work, it seems that there's something else that's affecting your visibility on 12 to 15%. Can you give some color?

Yes, I'd like to have a chance to visit with you a little about that. It's -- we have for many years, meaning the recent 10 anyway, looked at our business prospects as a function of where we've positioned the company and the opportunity segments and sectors in which we deal, which is crucial to this industry. And we've operated with the idea of management goals, internal management goals, for objectives, for driving our performance and our leadership, as a 12 to 15% organic span -- range and a 5 to 8% because we're still talking about driving this enterprise above the average at a 20% rate compounded.

And we've done pretty good at that in the last five years, if you reflect on our data. We are also very responsible and even a bit conservative when it comes to our guidance numbers. So I don't see any consistencies in -- say, in telling you what our management goals are vis-à-vis the guidance. The guidance is what our best professional estimate and projection as for the community, which we feel is a responsible way to do and sustains our long, long credibility in these areas.

Recent past was at 15% or better, and I can assure you that the Chief Executive Officer is going to do everything possible to make sure that we rise to the goal levels and quite frankly, we would like to beat our projections and guidance. But, so, I would like the community to not confuse what we have as our goals for performance versus what we professionally and in our best judgment provide in the way of guidance.

So, there are some issues then that we're going to have to address, and the challenges. But, that's what comes down to running a business. In the leadership, our senior leadership and how we style our moves in the marketplace and inside the company to make our overall objectives.

And we'll take our next question from Cindy Shaw with Morris Cabot.

Thanks. A couple of questions. First one around some opportunities from some things I'm picking up. DHS, or the Eagle program rolling up a lot of different opportunities set to favor the larger contracts. Does CACI feel they're in the running to benefit from that? And also, FEMA now looking at outsourcing IT, partially, because of the hurricane disasters. And then the second question, Paul, you've been there about 3, 4 months now, if you could talk -- now that you've got your sleeves rolled up and in the thick of things, a little bit about what the biggest opportunities you have found that surprised you? And the biggest positive surprises that were pleasant for you?

Well, I think, it's - there are very interesting array of questions and Paul is joining us. We are proud to have him with us. He's off to a great start. I think, he's dug in and has taken a very good look at our performance, and where we are and what he thinks are good suggestions moving forward. But we are very bullish over all because of CACI's position, because of our strong backlog situation, our incredible award sector in the first quarter, and all of the omens, all of the signals for a strong fiscal year '06 moving through this quarter, moving through the second quarter, and going into back half and my view are extremely optimistic and I'm very bullish. But I'd like to give the color opportunity to Paul if you want to pick up here and bring us forward. And again, welcome aboard, Paul.

Thank you Jack. Just for the record, it's been 2.5 months, not 4 and I am having a great time. With regards to Eagle, we are active around that opportunity and we have a -- it is a very high priority for us. And we have, as you may know, that is broken up into about five parts. There will be five opportunities there to compete for our parts of the business at Homeland Security, and we'll be aggressive there around the parts where our core competencies line up most with those requirements. In terms of observations I have at this point, I'll be happy to give you a few.

First of all, I'm overwhelmed with the positive relationships with customers. I've had the opportunity now, to get out to the field, and Bill and I are continuing at this next month or so. And what I'm getting for feedback from the customers is a very, very big thumbs-up and long term positive relationships. As you know, that's the fundamental ingredient for our business development going forward.

Secondly, I've been really fascinated by these very unique sorts of technologies and capabilities in the C4ISR area. Also, that was a bit of surprise for me to see, a pleasant surprise to see so much confidence in the mission side of our customer environment around technology. Also, the fact that our people are engaged, sort of a little known fact to me at least, was before I got here, heavily engaged with senior level consulting with our customers, working at the most senior parts of government, providing new insights and opinions insights, visioning forward, thought leadership.

That was, frankly, something I was very pleasantly surprised to see. And then just a general quality of the people here. The leadership and all of the people This is a larger, a very large business that still has the entrepreneurial spirit of a smaller business. And the people are just 1000% committed to the company and its goals. There is probably more I could say, but for right now, I'd say those are my initial reactions.

Paul, I appreciate the comments. I think that bodes well with wherever we are trying to take this organization in the next few years, up to the $3 billion level. We're looking for a very bullish year for '06. Our current run rate is close to 17 -- 1.7 billion as it is. And that I would say is reasonably conservative and we're looking to, obviously, to move past that I must say to you. So in any case, those are some of the indications. Do we have another question?

FEMA, we're hearing that after the hurricane disaster as part of the problem was IT and they're now looking at outsourcing that. Would that be an opportunity for CACI?

I think, obviously, it would be and we haven't seen any firm requirement for that, but you can be sure that we'll be aggressive around that opportunity as it emerges.

[Operator Instructions].

And we'll go now to Julie Santoriello with Morgan Stanley.

Hi Julie.

Hello. Good morning.

Good morning.

Let see, a few questions just on the ODC front. Would any of this be related to hardware pass through type of activities from just your basic budget flush?

Steve, maybe you could bring a little color to that for us.

Julie, it is probably a little of that and I don't think we saw quite as much this year as we did last year. We saw a very heavy flush out. But I'll tell you this year it's pretty much the standard types of cost that we see, subcontractor cost what have you, but nothing out of the extraordinary.

Okay. And forgive me, if you covered this at the start of the call. But just the strong contract awards in the quarter, 800 million or so. Why -- was that completely within your expectation? I'm just wondering why that wouldn't have more of a strong effects, at least in the latter part of fiscal '06, and in fact that could have partially offset some of the negative factors?

Well, as again I indicated. Let me start of by saying we were absolutely delighted with 800 million worth of awards, let me emphasize the importance of that. That is four-times eight is about a $3.2 billion run rate on awards now, I want to emphasize that thus come in lumps. So, we've got to be careful about how you look at all this. But, maybe Bill you could give a little color because you've been focusing on the cycle of the award, and the profiles, and the implications, and the ramp rates, and so on. Would you please add a little bit for Julie there?

You bet Jack. Julie, first of all, I think, the first part of your question had to do with were we surprised by the level of awards in our first quarter. And I'd say, not surprised because we had really wrapped up our bid activity as we talked about earlier, delighted as Jack said, delighted with the result there. And it - that's a great indicator for us going forward, because as we've point out on a number of occasions here the pipeline continues to be full with proposals already submitted and more proposals coming into the pipeline, if you will.

As far as the ramp-up aspect of this, again if you think of, okay, $400 million of that is new, new business. And you think about a five-year award term on that, and then you think well we're getting it in a September timeframe so it has to rollout over the year. And has a ramp-up cycle, so you think if it as starting to gather steam during our second quarter, picking up speed in the back half of our year and being at a full run rate as we roll into fiscal '07. So, we're just really excited about the trend forward here. And I think that's the best way I can portray it.

And our next question comes from Tim Quillin with Stephens Investment Bank.

I'm sorry. I don't mean to monopolize. But Steve, just going to back to my cash -- this an academic question about cash flow just because it's so strong, right now. And I think investors would be very interested in that. But it's been -- free cash flow has been about 150% of net-income. Last fiscal year it looks like it'll be the same level as this fiscal year. How should we think of a sustainable level though in FY '07 and beyond? Thank you.

Tim, I think in response to that I think, it is a sustainable level or -- our hope -- this business as you know does not have a lot of capital requirement. Our CapEx is very small and the -- what we haven't historically done is the cash that we generate is plowed back into our acquisition program. That will be our intent. We continually work to streamline our internal processes and our collection activities to continue to generate. As Jack reminds us just about everyday, your cash is king and that's what we focus on. So I would tell you that it is a sustainable level as we go forward.

Thank you.

And our next question comes from George Price with Legg Mason.

Hi, George?

Hi. Thanks. Actually, all of my questions have been answered at this point. Thank you.

Okay. Thank you.

We will go next Cai von Rumohr with SG Cowen.

Yes. Thank you very much. You'd indicated -- so 50% of your awards in the first quarter were recompetes, and you said that recompete would be 20 to 25% of the year. Approximately what percent of 1.7 billion bids in the hopper for decision and the 2 billion that you're going to submit, of those are recompetes or new business? Because if your numbers are right the percentage of new business as the percent of the award should be going up in the next couple of quarters

Let me just start off by saying that, we have as we've tried to indicate in our conference call made several adjustments in our focal length if you will -- or focal emphasis on new business pursued. I maintain a standard of 100% success on our recompetes. We are aggressive, we are as mean in the street as anybody in protecting our business. One of the phenomenas however is the sweeping up our accumulation of recompete business and adding to it additional work. So, that's what we've -- I think, Bill mentioned the high bid idea. But in terms of this particular vendor opportunity, I want to ask Bill to give us some color on that if you would.

Yes, Cai. I'll just tell you that the single biggest one for us this year is the one that was mentioned earlier that's the recompete of our TEFOS contract. And we expect to see that decision here this quarter -- that's the government's current schedule. And I'll go back to what I said before, we are very confident about our prospects on that contract. We have a great relationship with that client very long standing.

We're taking nothing for granted. We're very aggressive and very protective of that business space, and we'll remain so until the final moments.

Okay. No I guess the gist of the question was, if half of Q1's awards were new business, and you expect new business to be 75% or 75% or 80% of the full year, kind of available business, it would have seemed that new business is going to be a bigger part of the available award coming up. And you're saying that's not really the case in this quarter, because TEFOS is in this quarter, so that's more a second half phenomenon. Is that what I'm hearing you say?

Bill can you help. I'm not sure --

...Yes, Jack. I'm not sure I exactly followed either, but let me say that I'm trying to stay away from projecting awards in any given quarter just because as Jack mentioned earlier a kind -- it can be kind of lumpy and schedules can change. Particularly what you get into the second quarter and you got holidays coming up at the end of the year. So we're looking over, kind of, a two quarter period if you will. But to go back to TEFOS, you're right, that currently is scheduled for this quarter.

And the last one, what was your win rate on the awards in the first quarter in terms of the dollars, percent of dollars?

Cai. It's Bill Fairl, again. I don't have that readily available here, and I don't believe we normally give that out either. As Jack mentioned earlier, we're shooting for 100% of our recompete dollars and every time we turn in a bid, we expect the win it around here.

Okay. Great.

I just don't have the number calculated right now.

Okay. Great. Thank you very much, gentlemen.

You bet.

We'll take about one or two more questions. It's -- we've gone about 90 minutes.

And we have one last question from James Bayer (ph) with Trusco Capital Management.

I don't know if you've covered this - I didn't hear your whole call -- but on the number of people that you're looking to hire, I guess, and how many people with intelligence backgrounds do you need or clearance?

Yes. We have around 600 racks out right now. And obviously it's a competitive market out there. But I think that that is very good indicator of how we see our business opportunities unfolding as we go ahead. Indeed a significant proportion, I'd say in the order of about half of those are TSSEI and some are poly (ph) required which CACI has a big legacy and big volume of a high security TSSEI and poly covered people. I guess three quarters of our people overall have some kind of security clearance.

So we have reoriented our business. As I indicated in my new release about $150 million of our awards, were in a security sector for which we are not permitted to announce the specifics for obvious reasons, security classifications. I think that that is our fastest growing area, intel area. We have a good reputation and some extremely interesting technologies.

I gave you some hands in my script as to the special kinds of (inaudible) deployed things that CACI is involved with of which we are very proud. It also tends to be a more higher margin opportunity business for us for the reasons of the special requirements in the kinds of what we do. So, it is a important part of our business and growing part of our business by far.

So that's kind of a big growth in number of employees you're trying to hire from say a year ago?

Yes it is and obviously it's a challenge but I think it should give our listeners here an indication of at least another -- get another metric of potential opportunity and things that we can look forward. And we consider -- we frankly consider it good news --

...Exactly.

-- as we go forward. We're very bullish as I've said several times on the back half of this year. And over the next few years see a fairly straight away program and business plan to rise to our 3 billion or so sales by the year 2009.

And it appears we have no further questions at this time. So, I'd like to turn the call back over to you.

Cecilia, thank you. I certainly appreciate your help, and I want to extend my thanks appreciation to everyone who joined us for our program this morning, and our questions and for your interest. We hope we've provided you with a clear picture of our first quarter results and more importantly in some ways our bullish expectations for the rest of the fiscal year and how we see our business positioned in a highly important sector of the national government's operations going forward.

This quarter, we'll be traveling to New York City and to the West Coast as well as one or two others cities that are on our agenda. And as always, you are most welcome to come. If you're headed into the Washington DC area, and would like to range a meeting or stop by to visit with our leadership or contact us. And to do that if you'd contact our Vise President for Investor Relations, Mr. David Dragics, he will be most helpful in trying to set something up mutually convenient for you.

We also know some of you may have some questions, perhaps in the follow-up sense for some of the things we discussed today. We've tried keep our window open here and provide as much information as our leaders and, as our listeners and investment continuity would like to have brought forward. We will say that the our team will be available about 10 to 20 minutes -- 15 to 20 minutes to take your calls and questions if you'd like to ring in. And David what line do you want them to call in on please.

If you just call my line 703-841-3710, we'll get to you today.

Jack London All right. Well, let me just summarize by saying that we see our first quarter is extraordinarily interesting and delightful set of results that came out. It gives us every indication of a bullish back half of the year. We'll go through this second quarter a bit and be on our way. We have a lot of interesting or recruiting opportunities in a very special sector that we've transformed our business into an intelligence and defense security oriented organization over the last 5 to 10 years. And we think we're right in middle of national priorities in the IT and solutions sector.

Thank you again, ladies and gentleman, for you participation. We wish you a good day and thank you for interest in CACI.

That does conclude today's conference call. Thank you for your participation, and you may disconnect at this time.