CACI International Inc (CACI) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CACI International's first quarter FY'07 earnings conference call.

[OPERATOR INSTRUCTIONS]

At this time, I would like to turn the conference call over to Dave Dragics. Please go ahead, sir

Thank you, Bob and good morning, ladies and gentlemen, I'm Dave Dragics, Vice President of Investor Relations of CACI International and we're very please that you're able to participate with us today. As is our practice on these calls we are providing presentation slides and during our presentation we'll also make every effort to keep all of you on the same page as we are.

Moving to the next exhibit, before we begin our discussion this morning, I'd like to make our customary but important statement regarding CACI's written and oral disclosures and commentary.

And there will be statements in this call that do not address historical fact and as such constitute forward-looking statements under the current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from what we say today. The primary factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the Company's Securities and Exchange Commission filings and 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. Good morning, ladies and gentlemen, and thank you for joining us today. I'd like to personally welcome those of you who are knew CACI on our call this morning. We appreciate your interest and invite you to join us on future calls.

With me today to discuss our results and answer your questions are Steve Waechter, our Chief Financial Officer, Paul Cofoni, our President of our U.S. Operations, Bill Fairl, Chief Operating Officer of our US operations and by phone from the United Kingdom Greg Bradford, Chief Executive Officer of CACI, Limited, U.K.

Also before we begin to review our first quarter, I'd like to mention we just announced another new contract award this morning. This is our $70 million recompete award to support the Department of Defense Standard Procurement System SPS. SPS is DoDs enterprise wide information system used to manage more than $90 billion in defense procurement and acquisitions.

Now, if you'll move to slide number 4, please.

CACIs first quarter of fiscal year 2007 was strong. We performed as we said we would in our last conference call in August when we presented our fiscal 2006 year end results. At that time we told you we expected a significant level of awards and strong contract funding in the first quarter of fiscal year '07 and these indeed have been the favorable results.

We also said in our last call that we expected major national security appropriations for the government's FY'07 and they would be passed by the end of September. This occurred as well as the President signing the defense authorization measure on October 17th. We believe this will enable us to avoid the budget situation we experienced a year ago when the late approval of defense appropriations delayed the release of many of our clients funds.

In fact, the national security appropriations passed to date signal continued spending in areas where we concentrate. The FY'07 defense bill appropriates $447.4 billion in spending for the government's fiscal year coming. $19.1 billion more than the fiscal '06 defense appropriation bill. This includes $70 billion in supplemental funding to support the wars in Iraq and Afghanistan which is $20 billion more than was requested and we know there will be additional supplemental funding requested next February. We also anticipate that intelligence spending will likely exceed last year's $44 billion. Finally, the appropriation for the Department of Homeland Security also stands at a healthy $34.8 billion, 8% more than the President requested and 9% more than the FY '06 appropriation.

CACI's contract awards this quarter are at record levels particularly in the defense, Homeland Security and intelligence sectors. These awards are helping us build a strong book of future business with key customers who have critical missions to fulfill. The acquisitions we completed during our fiscal year '06 continued to grow, providing $60 million in revenue this past quarter. As a leading strategic industry consolidator, CACI believes the market presents opportunities that meet a longstanding fundamental goal of our acquisition strategy to add capabilities and talent that are the right fit for our customers business needs and our corporate culture. Our core capabilities and information technology and communication services continue to be the force behind our growth. Our business and systems integration, engineering services, intelligence solutions, network services and knowledge management remain strong. With a record quarter for contract awards and contract funding and key appropriations for FY'07 signed into law, we remain enthusiastic about the year and optimistic about strong back half performance. Our fiscal year ends June 30th.

Now for the details of our financial and operational metrics, I'll turn the mike over to CFO, Steve Waechter and our President of U.S. Operations, Paul Cofoni. Steve over to you.

Thank you, Jack and good morning everyone.

Let's go to slide number 6.

Our results this quarter were in line with our guidance and our expectations. Our revenue grew at 10-1/2% driven by approximately $60 million of acquired revenue from the acquisitions we completed last fiscal year primarily ISS and Alpha Insight. Our organic growth in the quarter was down 3.7%. As we indicated or our August call we had some tough comparables this quarter due to the winding down of tobacco litigation support work and the loss of some recompete work during our last fiscal year.

In addition to resolve certain OCI issues this pass July, we divested the assets supporting the port engineering services portion of the service ship maintenance improvement program as we refer to at the SSMIP contract which was producing about $20 million in annualized revenue. Our results also reflect the pretax gain of approximately $500,000 for this sale.

While our top line grew our net income of 18.8 million was off slightly year-over-year. Our recent acquisitions were accretive in the quarter while the lower level of work for DOJ lost some recompetes one less billing day in the quarter, coupled with higher interest expense and the two percentage point higher tax rate affected our bottom line. As a result our diluted earnings per share were down slightly from last year.

Our UK subsidiary turned in solid performance reporting revenue of 18.1 million, an increase of 30% over last year's first fiscal quarter and a pretax margin of 7.4%, down from last year's 8.1%. As was the case last quarter, the increase in revenue was attributable primarily to the acquisitions made in fiscal year '06.

Moving to the next slide.

CACI continues to generate strong cash flow. Our collections were strong throughout the quarter. Our days sales outstanding were negatively impacted by last year's acquisitions with day sales outstanding at 74 compared with 69 a year ago. We generated over $42 million in operating cash flow this quarter compared with just over 38 million a year ago. We paid down $25 million of debt during the quarter and we increased our cash position by $16 million to 40.6 million. This level of cash flow, along with our ability to access additional capital in the marketplace will allow us to continue to invest in strategic acquisition.

Let's go to our next exhibit, our guidance.

We expect our record amount of awards and contract fundings in the September quarter to fuel top and bottom line growth in the second half of our fiscal year. Paul will give you more detail on these awards and how we see them ramping up for this fiscal year. Critical to our success delivering on a strong second half of this fiscal year is our ability to hire and retain qualified billable employees. We continue to experience a very tight labor market in a number of locations particularly here in the Washington, D.C. area where a significant amount of our work is performed. Hiring qualified people remains a top priority as the key factor how quickly we can begin realizing value from the new work we have won.

For the second quarter revenue should range between 475 million and $495 million, up 13 to 18% over the second quarter of our fiscal year '06. We estimate that our operating margin will range between 8% and 8.4% and we are anticipating flat to slightly positive organic growth during the quarter.

Diluted EPS during the quarter should range between $0.65 and $0.72 per share even at the upper end of the range of last year's second quarter diluted EPS of $0.72. Higher interest in health care related expenses as well as expected 38% tax rate are the primary factors we see affecting diluted EPS in the second quarter when compared with the prior year. Our guidance for the full year '07 remains unchanged. We estimate that revenue will range between 14 and 20% over that of fiscal year '06 and that our EPS will range between $2.91 and $3.15 per diluted share up almost 16% at the upper end of the range over fiscal year EPS of $2.72.

That completes my comments and now let me turn the call over to Paul Cofoni who will cover the details of our domestic relations. Paul?

Thank you, Steve and good morning, everyone. I'd also like to begin with a quick note on today's announced contract award. The $70 million recompete to continue developing and enhancing the Department of Defenses enterprise wide standard procurement system. This award is a great example of CACI's ongoing success in supporting government initiatives transform the way it does business. With our work in this case, improving support for both war fighters abroad and all Americans here at home. With over 24,000 users, SPS is one of the largest most complex systems integration programs in government today. Now we'll turn to some of our key operating measures.

Let's move to slide number 9, please.

CACI received record contract awards totaling approximately $900 million in the first quarter of FY'07, up 13% over the comparable period last year. 60% of this was new business. Contract funding orders were $605 million, a 27% increase over our fiscal 2006 first quarter. We received approximately $230 million in previously unannounced contract awards with classified clients in the national security and intelligence community. We also won a $96.4 million recompete contract with US Navy special communications supporting mobile communications for Homeland Security and the war on terror.

Let's go to the next slide.

As we indicated or our August call, one of the key awards for fiscal '06 that we believe will drive our back half growth in fiscal 07 is the strategic services sourcing for S3 program. We are excited about the continued success in this area. At the end of September we had announced more than $133 million in S3 task orders and in just the past week we have announced two new S3 awards totaling over $129 million. In the first seven months of this contract we have been awarded more than $260 million in S3 task orders and that is just a tremendous achievement. We also won other large tier 1 IDIQ contracts in the first quarter. These include the prime contract to support the Department of Homeland Security Eagle Program for IT support services.

A subcontract with Lucent Technology on the $4 billion army infrastructure modernization program or defense IT in telecommunications and a contract to support the $1.9 billion US Air Force Design and Engineering Support Program which provides engineering and technical services throughout the Department of Defense.

Next slide, please.

Work for the defense department comprises 71% of our base revenue with this revenue totaling $334 million this quarter. Revenue from the intelligence community remains about 26% of our base business. And our federal civilian revenue accounts for 23% of our base for the quarter standing at $108 million. CACI's continued success at winning large Tier I opportunities validate our strength in the marketplace and the attractive growth opportunities ahead. Contract funding has improved significantly as we anticipated and in fact was the best ever for CACI.

Let's go to slide 12, please.

Proposal activity in this quarter remains robust. At the end of our quarter we had $2 billion in submitted proposals under evaluation. Both new and recompete. We expect that at least 70% of these will be awarded by the end of March, 2007. And we plan to submit about $2.8 billion in additional proposals by the end of December. We also invested in our corporate team and infrastructure. Key new appointments include Debra Dunie as Chief Technology Officer, Tom [Meutron] as Executive Vice President of Corporate Development and Treasury and Carol Hanna, our Senior Vice President Corporate Controller and Chief Accounting Officer.

We continue to improve our technical capabilities in areas such as software engineering's institutes Capability Maturity Model Integration or CMMI. I'm pleased to report we received our very first CMMI level 3 credential which is a key discriminator to bid on tier 1 deals and we expect to have four more CMMI level 3 credentials by the end of our fiscal year.

Next slide, please.

Looking ahead to the rest of fiscal '07, we are confident of continued growth and success. We are performing as we said we would. As we indicated earlier, CACI had a record quarter in contract awards and contract funding orders. CACI's intelligence business remains a key growth driver for the back half of the fiscal year. All our business remains strongly aligned with the government's budget priority and our clients continue to be well funded.

Jack, that concludes my remarks

Thank you, Paul, and thank you, Steve, for the updates. Ladies and gentlemen, if you'll go to our final slide, number 14, please.

CACI continues to follow our proven and successful strategy to grow the company by winning new business, by winning all our recompete business and acquiring companies in our market space that are accretive to our bottom line. As you've heard today, all of us at CACI are enthusiastic about our continue growth and a strong fiscal year 2007. We are looking beyond 2007. We have just included our all officers meeting where we reviewed our strategic business plan and our goal to reach 4 billion in annual revenue by our fiscal year 2011.

Our mission critical work supports the government's key requirements to secure our home land and win the war on terrorism and to improve the way it serves all Americans. We will continue to deliver our solutions with commitment and integrity in all we do always staying focused on what CACI has been in the past, what we are today and what we will be for our customers in the times ahead. And our fine CACI employees will continue their steadfast quality client service and best value contributions remaining dedicated and ever vigilant in support of our clients. I also want to thank our investors for their continued support. We look forward to continuing our growth and success in fiscal 2007 and beyond.

So at this point we're ready to open our discussion up to your questions, so Bob, I'll turn the mike back over to you for our first question, if you would.

Thank you, Mr. London.

[OPERATOR INSTRUCTIONS]

Our first question will come from BB&Ts Capital, John Mahoney.

Hi, guys. Nice quarter.

Thanks, John.

Thanks.

Just a couple of questions. Could you give us an update on what the turnover was in the quarter? I mean you're mentioning that tight labor markets are going to continue to be a problem but could you give us an update on where it's at and where it's been?

Sure. As you know probably don't disclose our attrition rates and that sort of thing but what we can say is that we are improving. We have a number of initiatives ongoing that are having a positive affect on retention of the workforce. We have seen significant improvements over the last year and a half and we are never satisfied with that. We will continue to work on it, but we are quite confident that we can keep that in the right range, and in terms of the competitive environment for hiring, that's especially true for people that hold the highest security clearances and we - that hasn't really changed. Frankly, that's been about the same way for a long time now. We continue to work at that and chip away that and do better each and every quarter on that. It is a prime focus for us in the business, but it's something we are confident we can hire the people we need and in the back half, that will be a major emphasis for us.

I just have a follow-up and obviously the contract funding orders is up 27% is the highlight of the quarter. S3 is really helping to drive that, I'm very impressed over the seven weeks. I guess that's really the things you have done to really distinguish yourself vis-à-vis, the competitors. I guess now GAO has come back and said they have to make corrective action in what, 30 or 60 days. Can you give us what you are hearing about what the corrective action might be? And I guess you just hope that thing would finally start to get the task force and you guys could start lining those up?

Yes, IS 2S as you pointed out the GAO has upheld the protests and the Army has I think 60 days to respond. We don't know at this time the details of the GAO's findings, nor do we have any insight into how the Army will respond. What we do know is that in the original racking and stacking of competitors we scored extremely high toward the top of the stack of competitors and so we suspect this won't have any impact on our ability to compete for this work, however we don't know for certain, and we just look forward to the day what we can start to take on task orders in this area and when the protest is behind us. So that's what we know about I test today.

[OPERATOR INSTRUCTIONS]

Now on to FBR and Tom Meagher.

Yes, good morning. Good quarter. Could you talk a little bit about the civilian agency environment? Obviously, we're looking at a potential change in Congress and I think the continuing resolution actually runs out here in the next couple of weeks. What your expectations are there under those scenarios?

Yes, I think one qualification around the civilian agencies is to remind ourselves that the Department of Homeland Security is a civil agency but its authorization has already been approved, its authorization bill was approved. So it's nokt held off and that of course is a major focus for us, Department of Homeland Security, its Intel and DOD all have had their bills approved. The civil part of our business is a smaller piece, but we don't suspect, we don't expect any significant impact from the continuing resolution to that part of our business.

Okay. And then I know DOJ Steve was saying was town year-over-year. Are you expecting to see that pick up? I thought I read something about their potentially going to sue the tobacco companies over these light cigarettes or whatever they are. Do you see any potential positive impact come from that?

You know, that business is a bit cyclical and it is all dependent on what the government -- what sorts of government litigation is going on. We have zero influence over that and little insight, frankly and when it comes in a big way we're grateful and when it diminishes as it has in the recent period we throttle back and work hard to find offsetting revenue in other areas.

Okay. Thank you very much. I appreciate it

Thank you. Now moving on we'll hear from Ed Caso of Wachovia Securities.

Good morning. Ed Caso, Wachovia. I was wondering if you could talk a little bit about the military agencies. We hear they are going through a rethink of how they spend their money, particularly for the Air Force. What thoughts do you have there?

Yes, we in the Air Force our business continues to do quite well. We've actually had growth in the last quarter on our Air Force business. We had a nice recent award, medical logistics for the Air Force where we helped stand up mobile hospitals for all really all DOD but it's contract operated out of the Air Force. I believe that's in San Antonio, and we just had a renewal of our business there, and we have other proposals into the Air Force right now for work. So our service work for the Air Force, we don't see any real significant change in either the level of current work or prospects looking forward.

I think you guys are particularly biased to the Army, if you could give us a update to the Army, particularly with the funding coming in higher than expected does that take some pressure off and what's the probability of I think the next 50 billion supplement given what could be a change in Congress?

Okay, first of all we're not biased to the Army. They happen to be our highest contractor and we love them all, but their situation right now, as you know, they have received all of the -- virtually all of the funds they need to conduct the war and other operations and in '07 that looks pretty stable and in '08 they have requested their '08 funding and there's been some debates about that going on. However, all indications are they will get at least as much in government fiscal year '08 as they have in '07 and maybe more. So the Army, I think the country continues to recognize the Army as carrying the burden of the war in Iraq and Afghanistan and that they need to be fully funded and we believe that will be the case.

Last quick question. Tom forgot to ask what the dollar amount with DOJ was.

Tom's slipping out there. 16.7 million is what we in this quarter versus 22.7 a year ago.

Thank you.

And now we'll here from Sandra Notardonato of Robert W. Baird & Company.

Thank you. Good morning. I'm wondering if you could characterize the pace of ramp on the S3 task orders. You mentioned $260 million. How much are you generating from S3 today?

What's the revenue run rate?

Correct.

I don't think we've communicated that in the past. I'm not sure -- I don't have that number here handy, so I guess the answer is it's growing, it's growing at a sharp rate, it's the strongest growing program we have in the company today, but we don't give out the kind of individual contract growth statistic.

How many folks do you still need to higher in order to meet the ramp schedule on those task orders? And then my follow-up question is can you share whether the last 3 acquisitions you have made NSR Alpha Insight and ISS, if they are tracking to meet or not? Thank you

Okay. I didn't understand the second part of the question. Earnings or earnouts?

Earnouts, right.

I think Steve can take that one. But the first one on S3 openings, I don't have that statistic in front of me. I can tell you that our open positions today, firm open positions are in excess of 400, which is a very healthy inventory of open requisitions and S3 is contained in that number, some significant part of that number.

That number seems higher than it has over the last couple quarters; is that right?

A little bit higher. We had been down to about I think mid 250, to 300, now it's up over 400. So I think that's the result largely of this increase in funding orders that we have received recently and so now our chore is to go out and get the people now that the funding orders are here at that volume.

What happens in the second half of the year if you can't meet your hiring demands with the guidance?

What happens if we can't meet our hiring? Well, we will. We will meet our hiring.

It seems though that the market is very tight right now and a lot of your peers are saying that they are having a hard time finding folks as well, the government is hiring more internally. You know, your companies are also experiencing an aging work force. Do you have any comment on that, Paul?

Aging work force, I don't have a specific comment. I don't have any of that demographic.

I don't think that's valid for us either. We have a strong IT component, system integration component with I would say younger generation people, I don't run other companies or keep track of them, but I think the demographics for CACI have been pretty steady for the last 15 years

And as I look around the table, we're all here for the long haul. The other part of your question what happens if we don't, I don't know how to answer that. We don't think that way here. We're going to hire the people we need to do the work. We have recently I said about six months ago, we centralized all of our recruiting function, streamlined it re-engineered it and now we're growing that as well, adding top caliber recruiters to the team to make sure that all the candidates that are available are known to our hiring managers. Bill and I are meeting routinely with hiring managers, making sure we understand what unique needs they have, giving them whatever authority they need to break through in this area. We have a goal to ramp up to 65 hires a week and Bill do you want to add anything?

Yes, Sandra, Bill Fairl. I would just add that recruiting has kind of a geographic flavor to it as well. Certainly in the northern Virginia area it is a very tight labor market, but any of our openings are not in the northern Virginia area. We have a global presence as you know, and those openings aren't quite as difficult to fill. So it's -- you got to kind of look beneath the surface on these things. But what Paul said is true, we got the openings and that's a great opportunity for us.

You asked the question about the earnouts. With ISS we didn't have any earnouts. We had some holdbacks for indemnification claims and so forth. There's been none at this point. Alpha Insight we had two earnouts of relates items. One was their continuation of some small business contracts and another one related to their conversion to open some ATA contracts that they had. To date, I think they are tracking fine on the small business piece of it but we haven't seen enough progress yet on the ATA conversion piece to really make a statement on that but by now they are not making that earnout I would tell you at this point. All that money has been escrowed so any short fall on that would just be cash back to the company.

Our next question will come from Cai von Rumohr of Cowen & Company.

Yes, thank you. Could you give us an update on task orders on some of the programs? You did a great job on S3 but how you doing - ETOSS how are you doing on sub on IMOD. How you doing on eagle?

Okay. Cai, this is Bill Fairl. On ETOSS as you know that was a follow on to our [tempos] recompete and we had a great experience on that contract, and I'm very pleased to report that trend is continuing with the new award. We win just around 69% of the tasks that we bid in terms of a number of tasks and we win about a little over 60% of the dollars that we bid on ETOSS and both of those track just exactly, if you will, with the [TEPOS] award we had before. I would say the dollars are maybe up just a little bit. So far this year, we have had awards of -- or rather bookings of $38.2 billion on ETOSS so it's going gang busters like it did before on that. As far as IMOD goes and eagle, there hasn't really been a lot of activity on that yet. We're still actually on eagle waiting for the first one to come out to take a shot at, so we'll have to reserve comment on that one.

Okay. Thank you. And clearly you are you had very good cash flow in the quarter. Could you comment on what are you seeing on the M&A front?

This is Steve Cai. It's clearly evaluations on some of the transactions have gone up. We still remain very active in the M&A marketplace. We've got a number of opportunities tee'd up. Jack and Paul and Bill and I review that every Monday, so we are very active, we are in the hunt and hopefully we'll conclude something here at some point in the near future.

Now moving on to James Harlow, Stifel Nicholas.

Hi, everyone. Just a quick question. Is there any update on the DOJ mega recompete?

Yes, this is Paul. We are currently in the process of finalizing our proposal for that recompete and we will submit that I think in about 8 or 10 days and then there will be a -- I think it's a 60 to 90 day period where the customer will be evaluating the proposals and they could be longer than that, and so that's where we are.

Okay. Thank you.

Now moving on to Jason Kupferberg - forgive me if this is incorrect, but I believe it Kupferberg at UBS.

Pretty close, thanks. I just want to ask a question following up on a comment last quarter. I think last quarter you guys had said that about 55% of the required fiscal second half ramp was already under contract. I don't necessarily think that was all funded at the time, but can you give us an update on these metrics now that we're a little bit deeper into the fiscal year, so in terms of how much of the fiscal second half ramp is already under contract and how much of that is funded?

Here's what I would say about that. This is Paul again. We have confidence in our second half because of the following things. More than half of the growth that we forecast in the second half will come from new work we have already won, recently won. And approximately 75% of our second half growth will come from Intel community work, and we can see that growth, we can just see that growth laid out in the plans of those contracts. Also as we have already discussed our contract funding orders at $605 million the best ever indicate a good forward indicator. And as we mentioned also earlier, we have over 400 open personnel requisitions. So we're quite confident that as we fill these open positions we will realize our back half because the work is there. It's a function of us putting the people into those slots and then that will solve the back half.

Okay. Can you tell us how many net new hires you had in the September quarter?

We don't -- Jason, it's Bill Fairl. The first quarter for us was a little bit extraordinary. As you know, I think Steve mentioned that we divested ourselves of the assets, including the people associated with the port engineer SSMIP contract and that was approximately 80 people, so that kind of really skewed the first quarter. I'll go back to what Paul said earlier. We have got over 400 openings and our priority is to fill those going forward here and we're going to do it. We're hiring additional recruiters and have flexed the organization to bring those new hires in.

So just to clarify that. Should we be looking for them say over - I don't know, the next couple quarters you guys to be getting 400 or so net new hires in the door?

You know, it's -- that goes through the rest of the year and the other thing I would say is approximately, yes, but you got -- there's a little give and take on it because some of the new hires are higher margin than other new hires and it depends on when they come in, but approximately yes.

Thanks.

And next we'll hear from Julie Santoriello of Morgan Stanley.

This is Matt Spiegelman standing in for Julie. Just a quick question on the interest expense. We noticed that it was off $700,000 roughly quarter-on-quarter despite the pay down. Can you comment on why it was off and what the pay down plans are going forward?

This is Steve. We had an increase in the quarter in our interest rate expense. Our interest rate now is around 6.7%, which is about 50 basis points higher and a lot of that pay down happened at the very end of the quarter. So the average outstanding in the quarter was higher and then we also have a full quarter impact of the Alpha Insight acquisition in there.

Okay. Thanks. And one more question. Of the 4.7 billion in proposals under evaluation, you mentioned 70% to be awarded by March '07. Could you give us any idea of what should be awarded by December?

Actually the number that we have communicated in terms of proposals under evaluation is 2 billion, and I think -- I believe you said that we expected -- oh, we had the wrong number. I apologize. On this chart, number 12, we have the wrong number. It says 4.7 billion. That should say 2 billion.

Okay.

I apologize for that. Anyhow, I think we said 70% of that will be adjudicated between now and the end of March of 2007.

Okay. And do you have any estimate of what would be adjudicated by December?

I don't have that in front of me. I mean, we would get that for you, but I don't have it now

Moving on we'll take a question from Laura Lederman of William Blair Brokerage.

Just a few questions. One, can you give us a sense of the M&A pricing out there, what that environment looks like versus a quarter ago, versus a year ago and not to beat on a dead horse, if we could discuss a little more detail what gives you the comfort and the ability to hire roughly the 400 people that you need the rest of the year? Thanks.

This is Steve. I'll take the M&A question. Evaluations are kind of all over the lot now. We have seen some that we quite frankly don't see how people can make some money at the evaluation ranges out there. However, having said that, there are opportunities we think that we can acquire at reasonable multiples that will be accretive to the company. In fact, we won't do a deal unless we can make it accretive. A lot depends on the structure of a deal, how you set it up. Whether it's an asset sale, or a 330AH election. Whether it's an S core versus a C core, so there's a lot of things that we can do to make a deal accretive and so we're looking at it. But the evaluations are up, I would tell you, but we think we'll be successful in getting something done here.

And what about a little bit of discussion about what gives you the comfort to hire the 400. After I ended the call last night it sounded like that was a real issue for them and was wondering what gives you the comfort and the ability to--?

Just to give a little more insight, this is Paul. About 6 months ago -- first of all, about 9 months ago we hired our new chief human resources officer and the very first task we gave him was to work on retention and recruiting, and he's been busy at that putting a new team together, reengineering our capabilities, our process there. And in the last 6 months we have seen a 20 % improvement in our hiring over the prior year's same six months. So we are hiring at a rate of about 20% more than we were.

Now, what have we done to accomplish that? Well, we have brought in a very senior level work force management and hiring executive who is assembling a team of world class recruiters. We have raised this up as a priority amongst all of our operational hiring managers and P&L executives. Bill and I are meeting weekly with all levels of the organization all the way down to hiring managers. And we are trying to understand what special needs they have and to give them additional authority to break through in this area. But I think the thing that gives me the most confidence is the fact that we actually have demonstrated a 20% increase in the last 6 months in our ability to recruit people. And our plan is to ramp that one more step. We are currently hiring at about 40 people a week, and we expect to ramp that to 60 to 65. So I don't know if that answers your question, but those are the things that give us confidence. It's not without challenge. We don't want to minimize the fact that it is a competitive environment. However, keep in mind of the 400 opened requisitions approximately 70 of those are the top secret lifestyle poly. The balance are all secret or lower or not as difficult to get people to--

We have a lighter community today of cleared people, I think roughly 70 to 75% of our people are cleared and many at these higher senior levels so you have a network of opportunity here of people that know people that work in this community so we think that gives us the extra dimension and leverage of connectivity, if you will in the people network and people who will be interested in joining the program here at CACI International.

I think also as we look out there at the candidates that are interested in doing this kind of work, they recognize we are well branded in the intelligence community, and these candidates know that we are well branded. They know our customers are very satisfied. They think of us as a company, a preferred company to be a part of to perform this type of work and so I think we have a special attraction for people with those skills and security clearances as well. We hear that back from the people we talk to, people who come to us tell us that that we have a highly respected brand in the intelligence community.

And we'll take our next question from Tim Quillin of Stephens, Inc.

Good morning. Just a couple quick questions. One is of the 400 planned hires how many of those would be in the Washington area versus other areas of the country?

Tim, this is Bill Fairl. It's slightly less than half, approximately, are in the northern Virginia area.

Okay. That's helpful. Just one other quick question. What are the contract funding trends look like in the current quarter? I think the year ago 2Q provides some easy comparisons but do you feel like contract fundings are tracking a little bit closer 1Q or are they going to fall off a little bit? What are you seeing so far in the quarter? Thanks.

I would just say the statistics we watch very closely obviously is our bookings or fundings and we have a very good start this fiscal year and we have if you will a gradient that we track literally on a weekly basis and we've been off to a very strong funding profile and I would anticipate it would continue given all the market environmental issues that I outlined in my opening remarks. I think we've got a strong market out there and I think you could anticipate that but Paul, would you like to add anything?

I think that sums it up. We continue to see strong contract funding order profile, it's tracking ahead, well ahead of last year, even as we sit here today, and, you know, that's really a strong indicator forward for us.

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Now on to Mark Jordan, AG Edwards.

Good morning, gentlemen. Could you give us details in terms of your organic growth assumptions? It looks like you're starting the first half of the year will be slightly negative. Could you tell us what your third and fourth quarter ranges would assume from an organic growth standpoint and therefore the full year outlook?

Yes. As you pointed out and as we had forecast in our plan, our first half was rather flat and then in the third and fourth quarters, the ramp really goes up and the organic growth as I recall is around mid single digit in the third quarter and double digit in the second quarter -- I mean, I'm sorry, third quarter, mid single digit in the third quarter and double digit in the fourth quarter.

And then finally going back, you did talk that contract funding environment has improved. Could you run through a list of what you feel were the catalysts that have changed in the last three to six months to have this fundamental change in the industry?

This is Paul. I think the number one thing is that we are not operating under a continuing resolution as we were at this time last year, and I think that that is the primary -- the primary difference that I have observed. I don't know--

The fundamental struggle last year was in the defense arena, primarily associated with the United States Army. If you recall there were some significant news releases out by General Skewmaker and General Cody regarding funds and applications on contracts and that was a little bit of a threshold issue I will say in the United States Army vis-a-vis the Congress and the funds to go along with it. I think those areas have been cleared. I think it's a very clear picture we have ahead that the United States Army will receive the funding it needs to continue whatever program is outlined for the engagements it has around the world. I think there was some considerable contention a year ago at least as to the budget programs and prognosis. I think that's all cleared. I think it's solid now. I think Paul mentioned that earlier and the visibility that we see is much clarified compared to where we were 18 months ago and I think it's sustaining itself.

Thank you.

And that's everything for our questions today. At this time I'd like to turn the call back to Mr. London for any concluding remarks

Okay, Bob, thank you for your help today, I really appreciate it. I think we have had a very good exchange. We would like to thank everyone on the call for their questions and interest, obviously most important to us and we like to communicate and see what's on your mind as well. We know there may be some of you that have some additional questions for us and our team will be available to take some calls here in about 15 or 20 minutes or so if you would like to dial in. So again, thank you, ladies and gentlemen, for coming onboard with us this morning. That concludes our first quarter conference call. Have a good day.

And again, that does conclude today's conference. Thank you all for participation.