CACI International Inc (CACI) 2007 Q3 法說會逐字稿

Welcome to the CACI International third quarter fiscal year 2007 earnings conference call. (OPERATOR INSTRUCTIONS) Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Dave Dragics, please go ahead, sir.

Thanks and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. We're very pleased 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 on to the next exhibit, before we begin our discussion this morning I'd like to make our customary but important statement regarding CACI's written and oral disclosures and commentary.

There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements 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. Primary factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evenings 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. Now, moving to the next exhibit, number three, to open up our discussion this morning, here is Jack London, Chairman, President, and CEO of CACI. Jack?

Thank you, Dave. Good morning, ladies and gentlemen. Welcome. Thank you for joining us today. I'd like to personally welcome those of you who are new to 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 Tom Mutryn, our Chief Financial Officer; Paul Cofoni, our President of U.S. Operations; Bill Fairl, Chief Operating Officer of our U.S. Operations; and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Ltd. UK. I want to speak to you today, as we always do, discussing our financial results in a straightforward and direct way and following our history of being reliable and credible and providing public information to the investment community.

Next slide, please. Our results of the third quarter are on target relative to our January guidance. As we've indicated, the marketplace is going through changes and our historic growth model has been temporarily affected a bit; however in the quarter we received several important contract awards and our contract funding is substantial at record levels for the quarter. I'm also pleased to report we won 100% of our recompetes in the third quarter. Paul will have more details on these and other contract awards a little bit later.

CACI, like other companies in our industry sector of government IT services is still operating in a challenging environment. Some of the factors we discussed with you on our February conference call continue to be relevant. We are seeing continuing pressure in DOD to reduce dollars and redirect dollars to the combat zone war fighters. There's also continued industry competition for people with high level security clearances. Although the current environment is challenging, we see a number of very positive indicators for CACI. We continue to win new contract awards, both recompete and take away business. We see a dynamic federal IT marketplace that attracts many competitors. Nonetheless, in this market space, our position remains solid and widely accepted. We are meeting important needs, even critical needs in the government's high priority funding areas of national security, intelligence, Homeland Security, and Government Systems and IT Transformation. We're extremely well positioned for long term growth in the IT and Network services that our clients rely on, as well as the military logistics and support systems, our forces require.

CACI also remains the industry's leading strategic consolidator. I'm happy to note that Tom Mutryn was recently named our Chief Financial Officer, after serving in an acting capacity as CFO for the past several months. With Tom's leadership comes new emphasis and strategies related to capital structure and our mergers and acquisitions program. We are delighted to have Tom move into CACI's CFO position.

I'm also extremely proud that two outstanding and highly experienced individuals have joined CACI's Board of Directors as we mentioned publicly last week and effective as of Tuesday. They are General Hugh Shelton United States Army retired and Dan Bannister, former Chairman, President, and Chief Executive Officer of DynCorp. General Shelton served two terms as the 14th Chairman of the Joint Chiefs of Staff from 1997 to 2001. His unsurpassed knowledge of our military markets and clients will be extremely valuable as an asset to CACI. Dan Bannister served as President and CEO from 19895 to 1997 and as as Chairman from 1997 to 2003. His keen insight into the defense services and IT market is a perfect fit with our Company. Both of these men have significant corporate Board experience, in our market sector and operations and M&A transactions.

I'm also very proud of the outstanding qualifications of our Board overall and of our Senior Management Team. As we realize our strategy to compete at the Tier 1 level, our management team will continue to evolve to implement that strategy and succeed with our plans for growth. Now I'll turn the mic over to Tom Mutryn and Paul Cofoni who will provide some additional important details of our third quarter financial results. So, Tom, my friend, over to you.

Well, thank you, Jack, and good morning, everyone. Please go to slide number six. Our year-over-year revenue growth for the third quarter of 8.7% was driven by the acquisitions we made last year for accounted for all of the $38 million increase in revenue. Our organic growth continues to be impacted by the factors we cited in our second quarter call. Industry wide issues related to government funding, protest related delays, a tough hiring environment and lost recompetes. Third quarter operating income of $34.5 million was 6.4% below last year and net income was $18.4 million. Next slide.

The resulting operating margin for the third quarter was 7.3%. For the first nine months of the year, our operating margin of 7.6% was down one point from the same period last year. In our second quarter 2007 conference call, we highlighted two trends associated with our direct expenses which are effecting our margins. The first trend is the shift in our direct cost from CACI direct labor to other direct costs, attributable in part to the movement to larger consolidating contracts, many of which entail significant subcontractor content. The second trend is the shift of our contract mix from timing material to cost reimbursable contracts. Typically, timing material labor margins are higher than those per cost plus contracts for CACI labor. While the percentage of our work in timing material contracts improved to 53% of our volume in the third quarter compared to 51% for the first six months of fiscal year '07, this was insufficient to offset the unfavorable overall decline in CACI direct labor content.

In addition, our margins are being impacted by some pricing pressure due to constrained funding in the competitive environment, especially for recompeted work. We continue to do well in managing our indirect expenses. Our third quarter indirect cost and selling expenses increased by 8.9% year-over-year, about the same rate as the 8.7% increase in revenue. Year-to-date, our indirect costs were about 25% of revenue consistent with the same period last year. Next slide, number eight, please.

Our UK subsidiary reported revenue of $21.2 million a 36% increase over last year's third quarter. This growth resulted primarily from the acquisition of Soft Run Unlimited last June and favorable exchange rate. The Soft Run acquisition is exceeding our projections in terms of both revenue and profit performance. Overall our UK operation turned in solid performance for the quarter and is positioned to turn in a record profit for the year. Our third quarter tax rate was 37.6% up from the second quarter when we benefited from a retroactive catch up associated with the extension of R&D credits in December 2006. For all of fiscal year '07, we expect our tax rate to average about 37.5%.

We had another strong quarter of cash flow generating $50.3 million of operating cash flow. In the first three quarters, our net debt position, that is debt less our cash, declined by $127 million to $217 million. Our Day Sale Outstanding at 67 days continues to compare favorably with others in the sector reflective of operational efficiencies we have throughout our organization. Our cash position was $124 million at the end of the period. Next slide, number nine, please.

In terms of guidance for the fourth quarter, we expect revenue will range between 465 and $495 million. We expect our operating margin will range between 7.1 and 7.6% and our organic growth will be flat to slightly positive. We have revised the top end of our fourth quarter diluted earnings per share guidance and now expect the EPS range to be $0.60 to $0.68 per share compared with last year's $0.71. As we move into our fiscal year '08, we expect continued uncertainty regarding government funding, margin pressure in a continued competitive hiring environment. Going forward, we plan to use our positive cash flow in growing cash balance primarily for acquisitions. We have a solid pipeline of acquisition opportunities consisting mainly of companies doing work to support the Department of Defense and the Intelligence communities and similar insights to recent acquisitions. In addition, we are undertaking an analysis of our capital structure to ensure that we have the capacity and flexibility to continue to grow as a strategic consolidator. I will now turnover the discussion to Paul Cofoni. Paul?

Thanks, Tom. I'd like to begin my discussion today with our third quarter highlights. There were many. Let's go to slide ten. CACI's contract awards are at another record level. Contract funding was $88 million over what we reported a year ago in the third quarter. This funding continues to indicate growth opportunity. We are enthusiastic about the level of contract awards and funding as it reflects our continued success in winning long term business at the Tier 1 level.

I'm also proud to say that our focus on our recompete process has paid off. We have won all our recompetes in the third quarter. Contract awards were $896 million for the quarter and $2.3 billion year-to-date. 39% higher than this time last year. Contract funding was at $577 million for the quarter and $1.7 billion year-to-date, 32% higher than this time last year. Our significant contract awards for the third quarter include a $330 million award to our joint venture to provide systems engineering and technical assistance to the U.S. Navy, Space Enable Warfare Systems Center in New Orleans. For this client, we are supporting Navy systems used to manage Human Resources.

Another substantial accomplishment of which we are very proud is our sustained success this quarter on the S-3 contract. CACI is providing valuable services to the U.S. Army on this critical contract to support National Security and the war fighter. We want S-3 task orders in the third quarter with an estimated value of $281 million. These include $39 million award that we announced in February to continue our engineering support for the U.S. Army's Night Vision and Electronic Centers Directory. Just yesterday, we announced our $149 million award to continue IT and logistics support for the Army's Trojan Satellite Communications, and this morning, we announced our $91 million award to provide IT training and logistics services for the Army Telecommunications systems and Command Centers worldwide. We are proud of this work and especially proud of our employees who support this valuable customer. This work is essential to national security and we are honored to support the Army in its vital role in the war on terrorism.

One important recompete we won this quarter was the $24 million contract to provide command and control services to the Pacific Air Force. This award comes to us as a result of our acquisition of Information Systems Support last year. Our proposal activity also remains robust. At the end of the third quarter, we had $2.7 billion in submitted proposal, under evaluation for both new and recompete business. We expect that most, if not all, will be awarded by the end of September 2007. We also plan to submit more than $3.5 billion in additional proposals by that same time. This quarter, we also focused on continuing to build our management team, to facilitate our growth. Dale Luddeke was named Head of our Corporate Business Development organization a few weeks ago. Dale brings us proven Tier 1 experience in the federal IT arena both in managing operations and managing business development functions. His expertise will be invaluable to CACI as we continue to pursue Tier 1 opportunities. Next slide, please.

So let's take a closer look at our current market environment. As we all know, the Department of Defense is reprogramming funds to war related activities. The overall budget situation became more apparent in January when it became clear that most of the U.S. Government would be operating under a continuing resolution through the end of the current federal fiscal year. With a continuing uncertainty and the passing of the FY '07 supplemental spending appropriation, actions are being taken within the Department of Defense and specifically the U.S. Army to slow spending on non-mission critical operations. We cannot precisely estimate the specific impact these actions will have on our operations, however, the longer there is a delay in passing the supplemental, the broader the impact will be throughout the Army. We already know for example, that funding for our Army First IDIQ contract for which we expected to receive task order opportunities by now has been delayed. What's important to remember is that we operate in a strong market that is currently experiencing short-term spending issues. The defense budget remains high, and the work we perform for our Department of Defense, Homeland Security, and Intelligence Community clients is crucial. We continue to win the large Tier 1 contracts in these market sectors with significant potential for long term growth. Slide 12, please.

We also, we are also increasing our acquisition activity as both Jack and Tom mentioned. Viable, qualified, and strategic acquisition opportunities exist in our market space and CACI is well positioned to act on them with our capital structure and our first class M&A team. We continue to pursue companies with strong core competencies that complement our own mission critical solutions. Our objective is to increase our operational leverage, pursue accretive acquisitions which have high margins and strong growth.

In summary, I believe we will continue to win new Tier 1 business, make accretive acquisitions and grow profitably. Jack, that concludes my remarks.

Thank you, Paul. Thank you, Tom, as well. Let's move to our last slide Number 13. CACI Is operating in a market where the priority is our client's short-term needs related to the war fighter, and we serve important parts of that market. We will continue to deliver high quality client service and best value and stay on course with our focus on long term growth. CACI will continue to acquire companies in our sweet spot areas of National Security, Intelligence, Homeland Security, and Government Transformation. CACI's balance sheet is strong and our cash position has grown to over $100 million. This enables us to pursue meaningful acquisitions in the M&A environment that is full of opportunities. CACI's M&A team continues to evaluate low risk, high margin opportunities in our sweet spot. The objective is to deepen current client relationships, add talent and expertise and capabilities and pursue new client opportunities.

Management remains strongly committed to delivering the highest level of quality to our clients and value to our shareholders. CACI's long term future is bright. We also take great pride in our CACI employees. They are client oriented. They collaborate to win within the Company, and remain dedicated to excellence. They give us great confidence in our ability to keep CACI on the path to becoming a first rate Tier 1 player. We thank our talented and valued employees and all the members of our top management team and Board of Directors. they remain ever vigilant in their committment to our Company, our clients, and our shareholders. We're now ready to open up the call for questions so Felicia?

Thank you. (OPERATOR INSTRUCTIONS) We'll go to Bill Loomis of Stifel Nicolaus.

Hi, thank you. Your contract wins have been very strong over the last really six quarters. Can you give us an idea of some specific examples maybe when you look at some of these larger wins of how quickly the ramping up if you're seeing them deferred because certainly if we look at just the contract wins relative to your revenues, revenues should be going higher. Obviously we're in a constrained funding environment but when you get down to the specific program level, do you see specific contracts and task orders, not IDIQ's but specific task orders that have been -- that you've announced as awards that have been a lot slower than you expected ramping up?

That's right, Bill. This is Paul. In fact, both awards and fundings are as you noted doing quite well in the last six quarters. There is a deferral that's the result of the spending environment that we're in and we find our customers who are somewhat uncertain about what the long term funding will be while they award us the work and actually give us the funding orders. They hold our spending line lower, so the slope of the spending line or the revenue therefore is not the same as the funding orders and the awards, and it's very difficult, frankly, for us to predict exactly when that funding converts to revenue. We know obviously eventually what will convert, so that's why we have such -- in the long term, we have such strong feeling about the growth prospects for the Company.

Now, as I'm looking back at the contract awards that you announced three, six quarters ago, is that still valid numbers? In other words, if you had clients come back to you and say, this is being reduced or we're really pushing this out further, obviously some of that's reflected in your backlog in the adjustments you make there, but how should we look at those historical contract awards relative to what--?

Yes, well I think that what we're seeing is that they're holding, funding orders are coming across and they are holding at those levels. It's just spending against the funding orders where the clients are directing us to hold back on fully resourcing the work based on not that work itself, because they know that work will be done but based on their uncertainty about the funding that they will receive in the longer term. So I'd say it's not a question of will the funding convert. It's when.

We'll go to Ed Caso of Wachovia.

Good morning, thank you. Tom mentioned something about a review of the capital structure. Wondered if you could elaborate a little bit more on that?

Yes, hi, Ed. All in all, if I look at CACI, we have a very solid balance sheet. We have some leverage but it's kind of very manageable in terms of our amount of leverage. Going forward, we want to make sure that we have the right capital structure, kind of in place to allow us the kind of flexibility to consummate acquisitions that are contemplated as well as to the extent we can reduce our interest expense, borrowing costs, we should kind of look at those opportunities as well, so kind of one of our activities under way is to ensure that we have the right capital structure so I think that's kind of more to come on that hopefully.

I think I heard you say you're thinking about equity but did I read that wrong and are you thinking about more leverage?

No. We did not mention that at all, so, that is correct.

We'll go to Cai von Rumohr of Cowen & Co.

Yes, looking at your risk opportunities, first you mentioned those deferrals. Are you seeing signs where customers are telling you to cut back from the run rate you're at even though you have an enormous backlog so that we might see more pressures to come and secondly, when do you expect initial task orders on FIRST, on I-test two, and on Encore 2?

Cai, this is Bill Fairl. We're not really seeing, to your first question there about customers asking us to cut back. We really don't see that, going back to what Paul said. On occasion, you may see a situation where perhaps an individual resigns off the team. They may tell you, well, hold off just a little bit before you replace that individual. I wouldn't say that that's systemic throughout the organization but you do see that sort of thing happening from time to time. Regarding your second question, but again, no major cutbacks or anything. It's what Paul said, it's not a question of if it's a a question of when.

Your second question had to do with seeing, I believe task orders beginning to flow on Army FIRST and I-test. We have begun to see the first few task orders start to come out on Army FIRST. Now, it's well behind the schedule that was originally anticipated. We had thought there would be based upon our discussions with the Program Office, well over 20 task orders on FIRST that would have come out by this time. It's just in the 2, 3 at this point, just really really started on that. Now I-test 2-S, there have been a few that have come out on that. That is beginning to ramp up, so you will see increased activity on that going forward here.

We'll go to Mark Jordan of A.G. Edwards.

Good morning, gentlemen. I was wondering if you could quantify for us what impact lost recompetes have had on the organic growth rates for the third quarter here. For example, if you had won all of your recompetes in the past 12 months, what would have been the organic growth?

Yes. This is Tom. I don't have that kind of number off hand. I mean, we articulated in the second quarter that we lost a couple recompetes, both of them had relatively high margins, but don't have that kind of specific number of what that is.

Okay. Given your desires to look at the financial structure, could you give us an overview as to what you think is a comfortable level of debt and what amount of liquidity would you like to have on your balance sheet at all times?

Well, kind of liquidity on the balance sheet is both cash on the balance sheet as well as access to kind of credit, revolving credit facility, so either cash r or kind of ready access to cash, get a mind there for liquidity and we need to have kind of a reasonable level of liquidity going forward. In terms of leverage, right now, we're leveraged just a little over kind of one-time EBITDA, which is pretty conservative. Going up to a level of 3 is something certainly we feel comfortable doing and a lot of it is depending upon the opportunities that present themselves so we'll evaluate those on kind of a case-by-case basis.

We'll go to Michael Lewis of BB&T Capital Markets.

Good morning. Dr. London, last night on a competitor's conference call, management discussed an interest to explore possible acquisitions in some hardware and software areas outside the core IT services market. Would this be a strategy that CACI could also implement over the next few years in order to more fully diversify the revenue to possibly higher margin areas like products?

Well, let me just respond by saying that CACI International is in a continuing examination of strategic alternatives and opportunities. That's part of top management, the leadership's job, if you will. I can quickly respond to you by saying that what we see now, the best significant major opportunities where we are well positioned, extraordinarily well positioned are in the defense arena, the intelligence arena, and in the special purpose network services business which has really become a brand for CACI, we're well recognized in the major client arenas for those areas. Would we be in a position to look at certain types of specialized product technology, conceivably?

If it fit application areas that we felt had high value for our customers, we do have some specialized proprietary technology already and have had for many years special lines of business in particular in the communications arena. As well as the intelligence community. So the answer is broadly, yes, but I don't think as narrowly defined as would lead us to look at a manufacturing capability. I don't foresee that in the near term, but specialized products, specialized technology is really part of our portfolio even today.

Okay, that's helpful. Thanks very much.

We'll go next to Tim Quillin of Stephens, Inc.

Good morning. Just a couple quick questions. One, typically the first quarter of your fiscal years are flat to down in terms of revenue. Do you see any reason why that wouldn't be the case in fiscal 08?

We're currently building our plan for fiscal 08. We don't have that plan brought together yet, so it's impossible really for us to say what our '08 first quarter will look like or I guess we could say that has been kind of a trend year to year that that quarter is not our strongest quarter but we haven't got our plan together, so really we don't have the ability to comment on that.

Okay, fair enough and then in terms of margins, the range for the fourth quarter is fairly wide. I think you said 7.1 to 7.6, how should we think about that going into 2008 and the different factors that are impacting margin. Should we expect margin improvement going into '08? Is it controllable, or are there factors beyond your control that might result in flat or even down margins in '08? Thank you.

Yes, we talked about some of the margin factors in the prepared comments, and some of the things that we're seeing currently are expected to continue into '08. The change in the nature of the work whereby our percentage of CACI direct labor has declined versus other direct costs, that's a negative factor and margin. We're seeing some pricing kind of pressure particularly for recompeted work, which is driving margins down. So those are kind of two of the factors I want to highlight and as we said into the future, it's a little cloudy today given the uncertainty in the environment, funding environment, competitive environment.

I'd like to just chime in by saying my view of this, I've been in this business quite awhile is I look at this as a relatively short-term issue, short-term meaning maybe six months to a year given the environment, but I think the market space we're in is extremely well positioned and viable into the foreseeable future, given the world around us and what's happening in the Department of Defense.

We'll go to Sandra Notardonato of Robert W. Baird.

Hi, thank you. In past earnings calls or past presentations you've mentioned what your internal targets are for sustainable organic revenue and growth. Notice that you didn't mention that or that or it's not in your presentation today. Wondering if you can give some high level thoughts there. I understand you're not providing guidance for FY '08 but historically you've talked big picture and I'm wondering if you can give your thoughts there, thank you.

Sandra, this is Paul. I'll happily attempt that. First of all, our long term strategy is to grow the Company at 20% year-over-year and we are still committed to doing that. In the past, we had a strategy that led with the organic growth, obviously with the whole industry is seeing that the organic growth is not there in the short-term. We have adjusted our strategy and put more emphasis on our M&A program to compensate so that we can still work toward the 20% goal. So you would reasonably expect that in the near term, we're going to have a greater emphasis on M&A.

Now, fortunately, we've managed our cash very well here and our debt very well here, so we're positioned perfectly for ramping up our M&A program, and that you haven't seen any announcements from us but I want to assure you that there's a frenzy of activity going on here. We have a rich pipeline of candidates that frankly prefer to be acquired by a company like ours because of the cultural aspects and et cetera, and we're working with several companies right now on that and we expect that we will do acquisitions in the short-term here.

And on other conference calls it's been discussed the fact that the private company value, I'm assuming you're talking about acquiring private companies or maybe your talking about acquiring public companies, but I'm just curious, what are the valuation targets that you're aiming toward to make sure that you can maintain the level of return on invested capital that you've been delivering to shareholders?

Yes, this is Paul. I'll start and then I'll ask Tom to help out. First, we are very focused. We're staying tightly focused where we are strong. Department of Defense and Intelligence and Homeland Security, so you would reasonably expect that those are the kinds of companies that we're looking at. Secondly, we're looking for strong companies that have demonstrated and have the ability to continue strong growth with excellent margins, and when you get past that, wanted to get more numeric than that, Tom would have to--.

Yes. In our criteria, Sandra, pretty straightforward. We're looking for acquisitions which are accretive, and we're looking for acquisitions that are positive present value, so those are the two inviolate financial criteria.

We'll go to Jason Kupferberg of UBS.

Thanks, and good morning, guys.

Hi.

I wanted to just talk about some of the similarities between this year and last in terms of the delayed supplemental and recognizing the fact that fiscal '07 guidance proved to be too aggressive for you and some of your competitors. Are you guys taking a different approach to your guidance and planning process as you form your plan for fiscal '08 so that you can avoid such issues from recurring in the future?

Yes, Ed, this is Paul and exactly, we have, I think in '07, we were a little surprised at how quickly the market came down on us and in '08, obviously we don't plan to be surprised again. We've got our teams are benefiting from the sad experience of that and so the plans that come together will reflect a better understanding of the likelihood what's going to happen in the market going forward here and it won't be the likelihood of these kinds of revised guidance, I don't believe.

I'd like to just punctuate that, that my tradition, our tradition at CACI International with our investment community is to give you our very best professional estimate of the situation and our future. It's not shaded to the left or shaded to the right. That doesn't mean we can get it right all the time. There is a dynamic world out there. You've seen a number of significant political and situational factors that have come upon our business this year. Virtually none of them were the kinds of things that I would have expected to be clairvoyant about but you can be rest assured that when CACI International comes out with its guidance for the investment community and our shareholders at large it will be the best job that this professional management team can put together.

Just a quick follow-up, it seems like part of what you're talking about in the awards and the fundings is that there is a fair amount of pent up demand that you guys see in the business, hasn't fully translated into revenues obviously, so what are the triggers we really need to look for here once a the fiscal '07 supplemental gets passed, I guess we're still not out of the woods at that point, does the focus then turn to the timing of the fiscal '08 appropriations and then once those are the rear view mirror, then there's much clearer sailing in terms of revenue conversion. Is that the right way to think about events unfolding over the next several quarters?

Jason, this is Dave Dragics. There are a couple of trigger events you want to watch but that doesn't necessarily ensure there's going to be any flood of spending. First of all, obviously is the passage of a revised supplemental Congressional leaders have said, indicated publicly that they are trying to get something done at least in Congress before the Memorial Day recess. We're from Missouri. We'll take the show me approach on that but that's their intended goal because they have to get to the FY '08 appropriations process and the House has set a goal of trying to pass all of those bills on their side by the end of June because they have to kick them over to the Senate and they want them there by the 1st of July, but there's also still an ongoing debate with regards to the war and the FY '08 appropriations bills are going to be, if you will, under attack. So just because the supplemental will eventually get passed doesn't mean that it's going to relieve the pressure on defense appropriations starting on October 1, of '08. The debate still goes on, so that's why we see continued uncertainty.

I do agree with the front part of your question, Jason, that there is a pent up demand that's building as these tasks that are being deferred in the operations and maintenance part of the Department of Defense, as they defer out, these are things that will not go away. These are requirements that will continue to be there and the need for them will be more and more as time goes by. So there is a building of latent or pent up demand so that when funds are available, when the funding levels for the war come down eventually, that money will naturally be absorbed into the needs of the operations and maintenance environment. Secondly, I believe strongly that the Intelligence and Homeland Security needs are high and that the funds will swing back into those areas as well. So I do believe there's a building up of pent up demand.

We'll go to Laura Lederman of William Blair.

Yes, a few quick questions following up on the discussion with Jason a moment ago. It sounds like a lot of the key to this is winding down and spending in Iraq. Any feeling on when that would really happen? Obviously there's a lot of discussion on the subject, would love your thoughts on it as well.

Let me just respond saying it's something obviously we watch very carefully. I don't believe you're going to see very many people with crystal balls that don't have lots of cloud and cotton and fuzz in them frankly. There has been talk obviously you can (inaudible0 within Congress and the White House and so on as well as anybody else. I can't, with any clarity, forecast what's going to happen over there. I don't know if it's reasonable to expect any near term withdrawal. I don't think the funding levels are going to slow. I think that there's a even or better chance that we'll continue in the foreseeable future certainly through the end of the current administration. That will be my bet and forecast at the moment.

So can one translate that to that we might continue to see deferrals and spending hold backs until we have a new administration?

Well, I think it's going to be continued spending at about the current rates, and in fact conceivably it could go up. It depends on the situation, but I don't think anybody in Congress is going to be cutting back significantly and taking a risk on being the ones who cut the budget and have another 9-11 happen or a complete collapse in the Middle East. I don't think you're going to find any of those political, notwithstanding the dialogue in the marketplace today that you read in the paper, I don't think it will happen. I think the political risks so to speak if I could use that side of the argument, is too great.

We'll go to Julie Santoriello of Morgan Stanley.

Hi, this is Matt Spiegelman standing in for Julie today. I wanted to ask you, you identified in the press release that there would be an update to the guidance if there were any material changes in the budgeting situation. What was the exact assumption you made for the fourth quarter about when the supplemental would be passed?

Well, basically, that guidance we formulated in the last week or two, so it's based on understanding we currently have that the supplemental is in a state of flux. May be approved. Some would argue will be approved by Memorial Day. Others would argue might not be approved until the early part of July even or late June or early July. So again, it's back to Jack's crystal ball scenario here, but our understanding -- the assumption we use is that this is going to be a tough period in terms of the supplemental that we didn't make an assumption, we have the supplemental approved tomorrow or a week from that.

Yes, and let me comment upon it as well. Basically, the quarter is one-third over so April is already behind us, that's not impacted by the supplemental. That's already done, and kind of number two is we have a range and so the range, which is an $0.08 range accounts for a certain amount of uncertainty.

Okay. And my follow-up question on that was just after the supplemental is passed, how long would it really take before we could start to see some of this pent up demand coming through?

Yes, I think we have to be careful here. The supplemental really is really associated with the war fighting, and so we don't get a direct correlation from that. What we get is the effect that today, without the supplemental, our customers are being required to defer operational and maintenance activities which we support heavily to provide funds out of those O&M budgets to the war fighter because the supplemental funds are not available. So we'll see that our customers will relax the purse strings a bit and get back to spending when the supplemental is passed so we will see some release when that occurs but it's not the pent up demand I was talking about earlier. The pent up demand I was talking about earlier is that right now, given the reality of priorities for the war, there is not the same kind of spending that has gone on historically in new starts, new programs, grassfield programs, renewals of systems for the vast, the big installation part of the Department of Defense. Rather, the money is being spent to support the war to fight as it should. So that was the pent up demand I was talking about that would be relieved when the levels of spending in Iraq and Afghanistan come down, which we can't predict as Jack said. The supplemental will give us relief on the programs that have we been funded for.

I might add and you're thinking our thinking here that this is one of the reasons we want to shift to a more aggressive M&A program because we want to pick up those ongoing opportunities and the contract activities and relationships that are already in place recognizing the greenfield opportunities of new initiatives are fewer and far between relatively speaking so we're managing this on a relative opportunity basis here, relative opportunities in the short-term meaning the next six months to a year, maybe 18 months we think is better served in the M&A side of things which we've articulated in some detail in this conference call.

We'll go to Alex Hamilton of Benchmark.

Hi, good morning. DSO's declined. Free cash flow was very strong this quarter and I guess for the nine months to date. Can we talk about the sustainability of that going forward?

Yes. Certainly, we can. The fundamental premise is CACI generates significant cash flow from our sales to the government, customers are very predictable, the government typically will pay its bills on time if we send them appropriate bills. This quarter in particular, DSO was quite favorable. We had some nice kind of DSO trends, and so that helped our cash flow for the quarter, kind of on a steady state basis, I'm not sure if we can generate the $50 million of cash flow a quarter again. We had some kind of favorable DSO this quarter. Looking to the fourth quarter, I think $30 million of cash flow is kind of more reasonable and there is some fluctuations in kind of DSO but overall looking at the profile of CACI, nice cash positive generation, cash flow generation, and kind of nice clean balance sheet.

Great. And then just my follow-up, in terms of recompetes, you talked about winning 100% of recompetes during the quarter. Is it possible for you to quantify that in terms of number of contracts and in terms of revenue and then potentially recompetes going forward?

In the quarter, this is Paul. Recompetes in the quarter about roughly $375 million of the $896 million that we've won in awards was for recompetes. And Bill, did you want to add something?

Yes. As far as going forward is concerned, of course the big one that we have out there now is the recompete of our mega contract, which again we're back to the crystal ball activity, but I do expect that it's likely we'll see an award of that contracts this quarter, our fourth quarter if you will, and then as Paul mentioned earlier, we're still in our early roll up of our data fiscal '08, but fiscal '08 looks to me to be what I would characterize as a normal year for recompete activity. In other words, most of our contracts have a four or five year period of performance on them, so it's that kind of cycle there. The big ones I just mentioned mega and of course last year it was the recompete of our Etos contract, the really big ones have been booked over the last year or so, so next year , the level of revenue there is about average, but it's spread out over a larger number of individual recompete pursuits.

We'll go to [Ferat Ungerin] of Citigroup.

Good morning. If you look at the bookings over the last 12 months, what percentage was total and new incremental business?

New business has been approximately 50% of our awards. I don't have a statistic around bookings, but I do know that we have quarter to quarter been showing about half of the work that we win being new. Now, the definition of new is that it's not work. Not a recompete or a follow-on. It's new work. It could be new work that was somebody else's incumbency, so it may not be a new start. It may be someone else's incumbency that we have won, so I didn't want to mislead you to think that 50% is new starts. In fact, that percent of new start, I don't have a statistic on it but it is lower than we've seen, as you might expect, because of what I said earlier, so the new start activity greenfield, big complex problems to solve which by the way have the characteristic of having higher margin associated with them, there's been less of that. There's been more obviously recompete and extensions on existing work that we do and take away from competitors, so 50% is new but new doesn't mean new start, brand new problem to solve. It may mean somebody else's recompete.

Okay. And given the flat to slightly down organic growth recently, it appears, and we understand the delays on the funding front, it seems like recent recompetes cause some of the negative performance. You don't want to quantify it I understand it but if you kind of think about the quarterly progression, by which quarter in fiscal '08 these recompetes will no longer be an issue?

They happened, the ones that you're referring to happened at the turn of the calendar year, in December, January time frame if I recall correctly and they will therefore anniversary next December or January, and you won't see that anymore. We did in the second quarter quantify the amount of revenue that was impacted by the loss recompetes. I'd rather not speculate or I can't actually just recall it at the moment but we could get back to you with that information later, so we won't talk about the specific contracts or customers but we would have communicated the amounts of revenue impacted and we can get you that information or you could look at the second quarter transcripts because I think these questions were asked and answered in there as well.

We'll go to [Robert Dasigo] of Banc of America Securities.

Hi, this is [Greg Wilkin] calling in for Robert. Can can you please comment on utilization as well as other labor metrics in the quarter such as voluntary and total attrition?

Yes. We have as a policy here not communicated that sort of information in the past. I would say our utilization is good. It's where we want it. It's high. It's efficient. I would say in terms of voluntary attrition, we're sort of in the middle of the, sort of at the average of our industry. We have improved it over the last year or so. It was a problem for us a year or so ago. It's improved by over 3 percentage points, maybe even 4 percentage points and we have ongoing programs to drive it down lower. We want to be best-in-class and we want to be the employer of choice and we are working on a number of initiatives to help improve retention, make sure that we're doing what we need to do for employees to give them career opportunities that make them want to stay with us long term, but we're in the average right now, not satisfied with that being in the average.

Okay, thank you.

We'll go to [Joseph Bathy] of Jefferies and Company.

Hi, good morning. I was wondering if we could talk a little bit about from the business development expenses that the Company has been incurring recently. Looks like it has been trending up as a percentage of revenue, obviously I think probably part of that is a tighter spending environment and trying to focus a little bit more on sales as a result. Should we be looking for this type of run rate of I guess indirect and sales expense to continue or if we actually saw a better funding environment, would we expect it to ease a little bit here?

I actually think that we're funding our bidding proposal activity. This is our future. Our bids are our future, and that's the last place we cut when it comes to indirect. In fact, we do the opposite where we can with our cost efficiency programs that we have going on to identify places to streamline or eliminate waste. We're doing that and we're moving that money over to our bid and proposal. We're also moving money over into our M&A activity to make sure we have adequate resources to prosecute all of the opportunities in front of us, but B&P will be the place where we'll continue to invest at the current rates. I think the current rates we have are adequate. We certainly are achieving our win rate objectives in that area with the investments we're making, so I would say you could expect it to continue at about the same rate.

Thank you.

We'll go to Manny Weintraub of Integra.

Hi, there. On your February presentation, you said that the Board of Directors would look at share buyback as a use of capital, and there's been a lot of talk about capital usage, but I haven't heard anything about share buyback nor did I see any indication in the most recent quarter. Can you discuss what the outlook is for buying in some of your shares with your increased leverage? is for buying in some of your shares with your increased leverage?

This is Jack. We did examine in the March meeting time frame the alternative uses of capital. We did considerate some length the potential implications of a buyback program, and did so with the advice and counsel of the banking community. The Board of Directors feels like at the current time that the acquisition world in particular has a significant opportunities for us. We recognize that our growth program and profile over the next short-term as I've indicated a couple times in this conversation leads us to drive toward a M&A priority program for the short run as the organic opportunities are less forthcoming as Paul has very carefully I think and robustly provided information for you folks. So, we will not be moving in that direction in the near term. Does that mean that we've closed the door? Absolutely not. We always keep our alternative opportunities for use of our assets and resources including our capital, but for the time being, we're going to focus on the M&A program, and that would be sort of I would say the strategy in going forward here.

Good luck.

We'll go next to Alok Chopra of Oppenheimer Capital.

Yes, good morning. Could you break out the organic growth in the DOD revenues versus civilian? It looked like from the press release the Civilian Agency business was up about 16% year-over-year in the quarter and DOD was up 6%. What was the organic in the two segments, if you would, and then I have a follow-up question.

We don't have that at our fingertips. But we're going through our--.

I've got it.

You got it?

The organic growth, Alok, are you talking about, this is Dave, are you talking about the organic growth in the quarter for DOD?

Organic revenue growth in DOD business versus--?

It was flat. It was essentially flat. Federal civilian was up about 2%.

Okay. So 0 in DOD and 2% in civilian?

Right.

Okay, so if we get the budget passed on time and we don't have a continued resolution again this year in October, what do you think the organic growth just in the civilian business could pick up to next year? I know you haven't given fiscal '08 guidance yet and I know about the environment and budget pressures et cetera, but if we don't get another CR, do you think at least the civilian side of your business will pick up?

Very hard to say. What we see in the civil side, of course a lot of our civil work is Intel related. We have the Intel community there in that category and so that's a strong part of our business. It's been growing. I think it grew in the last quarter, the Intel part of the business grew at 18% and so we would expect to see some growth in the civil side by virtue of the large amount of work we do for the Intel community, but I don't have specific, we're still pulling together our fiscal '08 plan and I don't have that insight right now for you. We'll be sure to give you that just as soon as we have that insight or visibility in it, to it.

We'll go next to Cai von Rumohr of Cowen & Co.

Yes, a quick follow-on. In your January guidance, you talked of 25 to 30 million negative impact to Fed civil from lost recompetes and yet, Fed civil was up 15 million in this quarter from the second quarter. Why was it up and how big was DOJ business?

The DOJ business is about $16 million in the quarter, sort of 60ish for the year, 16 in the quarter. That's been coming down as you know, Cai, for awhile. The thing that offset the lost recompetes in the civil side was, as I said, these Intel related work that we're doing grew I think 18%. We may also, if you're looking at, you're talking now not just purely organic so there's acquisitions on the civil side, if you remember the Alpha Insight acquisition which was pretty much completely focused in the civil side, Department of State related work, so that may be what you're seeing there too, partly our Intel business, partly the acquisition of Alpha Insight.

But Alpha couldn't have done it because you've already owned Alpha for awhile. I'm talking relative to the December quarter, your Fed civil was up by 15 million.

Oh, okay, December quarter.

So just, yes, sequentially DOD is down.

I misunderstood that, Cai. Hang on a second.

We misunderstood your question, I'm sorry. Yes, basically, Fed civilian actually was down a million from the December quarter to the March quarter, so.

Okay I'll deal with it off line.

Maybe we can get with you off line on that.

Okay.

Maybe I'll understand it. But this third quarter was impacted by the loss recompetes in the civil sector. That's probably, I'm not surprised it's down a million.

(OPERATOR INSTRUCTIONS) We'll go to Sandra Notardonato of Robert W. Baird.

Hi. I just wanted to follow-up on my question earlier about the longer term growth of the story. Or the Company. So if I'm thinking about FY '08 in terms of or maybe even FY '09 because maybe you can't get a couple of deals done here in the near term but if I'm looking at the incremental revenue that you need to generate in FY '08 to get to 20% growth, it's about $400 million. I'm curious, what would that break down be based on what you see in your M&A pipeline of what would be organic versus what would be acquired?

Well, I think if you were to extrapolate the kinds of growth your seeing in the industry in general which to me what I understand, what I've seen in the releases recently is low single digit organic growth is what's happening in our sector, so if you were to take that and subtract that from our goal of 20%, that's what you should expect in the M&A.

Okay, so that means that you're going to need to find about $350 million or so in acquired revenue. From what you see in your pipeline, does that look like one deal, one large deal, two smaller deals, a string of small deals? Just a sense of how you think that that acquired revenue is going to come together for you.

Well, this is Jack, Sandra. I guess to put it in the format here, you're well aware I'm sure that we do not include the acquisitions in our guidance and haven't done that for many years; however, to your point, to make our goal as opposed to guidance, you're talking about our goal which is a 20% factor and you clearly articulated the 400 million and I expect that out of the 100 million on the internal organic so we got $300 million worth of deals that we need to put on the tray and I would say the configuration of the immediate opportunities meaning what we're looking at now and what we see as a pipeline and what's been a bit of a pipeline for the last six months would be somewhat similar to what we've seen. Companies from the 50 to 100 to $150 million in sales. So we're going to need three or four of these things depending on what numbers come out. Can we do that? That's what we've set out to do. That's what Paul and the team are reconfiguring our M&A program. We have a long history of being able to integrate these deals quite successfully. Our capital structure is in good place. Our balance sheet is in good place. Our capacity is in good place. I think that we've added some team players here inside the Company to focus on this, so this is going to be our game plan, and we think that we're going to be able to do it quite nicely, but obviously, there's a bit of work ahead of us, but that is in general the plan and I hope that responds and gives you some color on the kind of thing that you're interested in looking at in terms of our goal.

We'll go to Ferat Ungerin of Citigroup.

One quick follow-up. What was the intelligence growth for the total company in the quarter?

Could you repeat the question Ferat?

What was the organic growth for the Intelligence business for the total company in the quarter? I don't think we have, we haven't got that at our fingertips here.

Ferat, the growth was 18% on the intelligence revenue but we never break that out between organic and acquired.

Okay. And is the total, what was the percentage from Intelligence?

As a percent of the total revenue?

Yes.

About 30%, 28%.

Okay, thank you very much.

And at this time, I'll turn the conference back to Dr. London for any additional remarks.

Thank you for your help today. We certainly appreciate it. We would like to thank everyone on the call. Those that participated with your questions and your interest and we certainly appreciate it. We do know that many of you may have some more questions for us. And as is our custom our team will be available to take your calls in about 20 minutes or so. Here, our lines will be open so once again, ladies and gentlemen, on behalf of CACI International and its employees worldwide, thank you for coming on board with us this morning. That concludes our third quarter conference call and we wish you a good day. Thank you.

Thank you for your participation. You may disconnect at this time.