CACI International Inc (CACI) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the CACI International third quarter 2008 earnings conference call. Today's call is being recorded. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS). A special reminder to our media guests who are listening in, please remember that during the question-and-answer session, we are only taking questions from the analysts.

For opening remarks and introductions, I would like to turn the conference over to Senior Vice President Investor Relations, Mr. David Dragics, please go ahead sir.

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

So moving to slide number two, before we begin our discussion this morning, I would like to make our customary but important statement regarding our written and oral disclosures, and commentary. There will be statements 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 actual results to differ materially from anticipated results. Factors that could cause actual results to differ materially, from those we anticipate are listed at it the bottom of last evening's earnings release, and are described in the company's Securities and Exchange Commission filing. Our Safe Harbor statement is included on this exhibit, and really should be incorporated as part of any transcript of this call.

Moving to slide three and to open up our discussion this morning, here is Paul Cofoni, President and CEO of CACI International.

Thank you Dave and good morning, ladies and gentlemen. I'd like to personally welcome all of you to our call this morning. We appreciate your interest, and we invite you to join us on future calls. With me to discuss our results and answer your questions today, are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President of our U.S. Operations, Randy Fuerst, Chief Operating Officer of U.S. Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited U.K.

Let's move to the next slide please. We're extremely pleased with the results of the third quarter of CACI's fiscal year 2008. Our solid performance included an impressive win rate, strong cash flow, substantial contract awards, and funding orders. And outstanding hiring results. Our strong performance is the direct result of our continuing focus on providing our valuable customers with timely and essential professional services and information technology solutions, for national defense, intelligence, homeland security, and the improvement of government services. This includes our emphasis on solutions at the nexus of intelligence and security to help our clients develop actionable information, to counter the threat of terrorism. We are delivering on our strategic plan, and building momentum for long-term growth.

In the third quarter we achieved record revenue of $634 million, which represented a 34% increase over the same quarter in fiscal 2007. This was driven by acquired revenue, and strong 20% organic growth, as we continue to increase CACI's direct labor content. Our third quarter growth represents a considerable increase over the comparable quarter in fiscal '07, and is the fourth consecutive quarter of solid organic growth. And this improvement in organic growth has helped drive two consecutive quarters of operating margin improvement. Net income was $22 million, which is 21% over last year's third quarter. This led to a 24% increase in earnings per share. We said we were going to deliver a strong second half, and that's just what we're doing.

Let's go to slide five. We continue to realize strong results in our hiring program, including our initiative to hire disabled veterans who bring valuable expertise and commitment to our company and our clients. We aspire to be the employer of choice for professionals, and with firsthand knowledge of government agency missions and requirements. Between hiring and acquisitions, we've grown our headcount by 1700 people over the last 12 months.

Another key part of our growth strategy is our acquisition program. Our acquisitions are wise investments. They are delivering bottom-line results that exceed our expectations, and are ahead of our plan. Our acquisitions are centered in the intelligence and security services arenas, and they give us expertise and skill sets that are a perfect fit, with our goal to be at the center of our clients' efforts to counter global terrorists.

Our intelligence business grew 71% over the third quarter of fiscal 2007, fueled by both acquisitions and organic growth. Our intel business is now 36% of our total revenue, up from 28% a year ago. As we stated, we are continually developing and strengthening the integrated intelligence and security service offerings we provide to the Federal Government. Intel continues to be a high value growth area for CACI.

Looking forward, our performance positions us very well for continued long-term, top and bottom line growth. At our February conference in Boston, we shared with you our commitment to improvements in net income and operating margin over the next two to three years. To at least 15% growth in annual net income-- annual net income growth, and an 8% operating margin. The momentum we are building in the second half of this year, is right in line with that commitment. Already, we can see that fiscal year '09 will be a year of continued progress toward those goals. Our solutions are in demand, our management team is providing decisive leadership, and our talented employees bring the necessary dedication and mission understanding, our clients need to meet their most complex challenges.

Tom Mutryn will have more details in his financial overview, and Bill Fairl will provide more insight on the progress of our operations. Now here's Tom.

Thank you, Paul, and good morning everyone. Please turn to slide number six. Our third quarter revenue grew year-over-year by 34%, with strong organic growth in acquisition related revenue contributing $67 million, for 14 percentage points of the overall growth. Our direct billable labor grew an impressive 29%, driven by both our hiring activity, and our acquisitions. Other direct costs, mostly work performed by our subcontractors to support our customers, grew 46%.

Let's go to the next slide, number seven. Our third quarter operating margin was 6.9%, compared to third quarter margin of 7.3% last year. Consistent with prior periods and with our expectations, change in margin is due mostly to continued strong growth in subcontractor work. Other direct costs representing 58% of total (inaudible) in this quarter. And we are pleased with our sequential increase in operating margin from 6.6% in the second quarter, to 6.9% this quarter. Direct labor increased sequentially by 12%, while other direct costs grew 8%. Our diluted earnings per share of $0.73 are up 24%, compared to the same period last year.

Let's go to the next slide. We have included a table in our press release, showing our earnings before interest, tax, depreciation, and amortization, or EBITDA. We believe it's a useful metric because it approximates cash operating earnings, by excluding our large non-cash depreciation and amortization accounting expenses. Let me note that EBITDA still includes significant non-cash stock compensation expense. For the quarter, EBITDA grew 26% year-over-year to $55.8 million, and our EBITDA margin is at a healthy 8.8%.

Next slide, number nine. Our U.K. subsidiary reported record revenue of $23.4 million, a 10% increase over last year's third quarter. Net income of $1.6 million increased 31% over the same period. Most of the revenue growth came from the acquisition of [Aretay] Software in July of last year, and the acquisition of Invocom, an IT consulting business to the telecommunication industry, on February 1. Our cash position at the end of the quarter was $52.3 million, up from $11.7 million at the beginning of the quarter. Third quarter operating cash flow was a strong $62.8 million, as we collected funds which were delayed in December, as well as our normal receipts. Days sales outstanding was at 67 days, reflective of our excellent collection processes. CACI continues to generate strong operating and free cash flow, both on an absolute and a per-share basis.

Next slide, number 10. We are providing updated guidance for fiscal year '08. Revenue continues to be strong, and we have increased the midpoint of our guidance, based on the third quarter actuals and fourth quarter expectations, as reflected in our earnings press release. We expect diluted earnings per share to be between $2.65 and $2.75, with fourth quarter earnings per share slightly ahead of our third quarter. Full-year operating margin is expected to be between 6.6% and 6.8%. We anticipate 2008 cash flow from operations to be in the $120 million range, reflecting a return to normal collection activity, and offset by a further increase of working capital, associated with our higher than originally expected revenue growth. We expect a full-year tax rate of between 39% and 40%.

Let's go to slide number 11. Before turning the call over to Bill I want to elaborate on the two longer term financial goals Paul mentioned. Our first long-term goal is to grow our net income annually, by at least 15%. We expect to reach this goal in two to three years, through a combination of solid organic growth, and smart accretive acquisitions. Our second goal is to increase our operating margin to 8%. We can realize this goal over time, by increasing our direct labor content, by driving SG&A efficiencies, and by acquiring high-margin companies. Our four-part plan to improve our direct labor content is to, one, bid on contracts with higher CACI labor content. Two, acquire companies with strong direct labor. Three, broaden internal capabilities to offer more services directly to our customer. And four, continue to grow direct labor through our aggressive hiring.

With that I will now turn over the discussion to Bill Fairl. Bill.

Thanks, Tom, and let me add my welcome to everyone. This morning I'll address highlights from operations for our third quarter of fiscal year 2008. Please turn to slide number 12.

Our contract awards for the third quarter totaled a very impressive $897 million, bringing the total to $2.3 billion, for the first nine months of fiscal year '08. Our contract funding orders for the third quarter were also very strong, reaching a total of $706 million, an increase of 22% over the third quarter of fiscal year '07. Through the end of our third quarter of fiscal year '08, our funding orders are approximately $1.9 billion, and that's up 12%, 12% over the same period in fiscal year '07.

I'd like to touch for a moment on some of our key contract awards for the third quarter. We received four awards totaling approximately $93 million through our S3 contract vehicle with the U.S. Army. CACI has now won more than $1.2 billion in S3 task orders. It's also significant to note that S3 performance organization is one of CACI's fastest growing profit centers. We received a four-year contract with an estimated value of almost $83 million, to continue providing professional services for the Department of Navy, Chief Information Officer. We're also awarded a five-year $49 million prime contract from the U.S. Navy's Space and Naval Warfare Systems Center, what we call SPAWAR, in Charleston, South Carolina. This is our first prime contract SPAWAR has awarded to us in Charleston. We view this as a key new award, given SPAWAR Charleston's role as a principal provider of DOD and Homeland Security C4-ISR solutions.

Looking to the future, our proposal activity continues at a very high level. At the end of the third quarter, we had more than $2.5 billion in submitted proposals under evaluation, and more than 70% of those, are for new business. We expect nearly all of them to be awarded by the end of our first quarter of fiscal year '09. The pace shows no signs of slowing down from there, either. During our fourth quarter of fiscal year '08, and the first quarter of '09, we currently anticipate submitting more than $6 billion in additional proposals.

We're very pleased with the remarkable 20% top-line organic growth we delivered during our third quarter. And I'd also like to comment on the spectacular growth in the intel portion of our portfolio. With the 71% quarter-over-quarter growth in our intel related business, that Paul mentioned, this portion of our business base now exceeds $800 million in annual revenue. As we've mentioned on previous calls, CACI's strategic growth plans are built upon our conviction that our nation will have an enduring need for the services and solutions that CACI provides today, and will provide tomorrow, to our clients across the intelligence community.

During our second quarter conference call, I discussed the progress we had made in our hiring. During our third quarter our progress accelerated, enabling us to exceed our hiring goals, while also increasing our number of open, firm hiring requisitions. Many of our new hires have security clearances of top-secret or above, and today we employ more than 4,000 of these highly prized specialists. That's people with top-secret and above clearances. I will just comment that our hiring is the key driver to the sequential margin improvement that both Paul and Tom mentioned.

In summary, I'm most encouraged by our performance through the first three-quarters of fiscal '08. Our continued strong hiring, very impressive funding orders and contract awards, combined with terrific organic growth, and solid performance of our acquisitions, have set us up for what we believe will be strong performance in the final quarter of fiscal '08, and great momentum to carry us into fiscal '09, and, Paul, that concludes my remarks.

Thanks, Bill, and thank you, Tom, for your comments. Let's go to the last slide, number 14. We believe our third quarter results demonstrate that CACI is well positioned for the future. Our plan for strategic growth is centered on our nation's most pressing needs, guided by a strong, experienced leadership team, and carried out by a skilled and dedicated work-force. Our robust acquisition program has made us the leading strategic consolidator in our industry. We are meeting our central goal of assisting our clients in their number one challenge, countering global terrorism, by delivering timely and essential solutions at the nexus of intelligence and security.

In our markets we believe there will continue to be priority funding in national defense and intelligence. We also see a great demand for professional services, systems integration capabilities, and other solutions we provide for government transformation. Our industry recognition continues to grow. We've just advanced in the Fortune 1,000, moving up 24 positions from last year. Fortune also rated us the second most admired IT services company in the nation, as well as the second most admired company in Virginia. Moreover, the Ethisphere Institute gave us their highest rating of best overall ethics program, and placed us third among the top 100 government contractors. Our vision is to be the very best in everything we do.

I want to thank our CACI employees who continually perform with excellence and integrity, and to reach all of these positive results. CACI people are committed to growing our business through uncompromising quality and distinction. Client satisfaction remains our top priority, and we remain focused on providing valuable and innovative client solutions, and delivering shareholder value for the remainder of the fiscal year, well into the future.

With that, Sara, we can open up the lines for questions.

Certainly. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We do ask you limit yourself to one question and one follow-up question today. We'll take our first question from Ed Caso, with Wachovia.

Hello, thanks. One of your competitors last night highlighted the potential for adding on money for the war supplemental for first part of '09, onto the current legislation. What's your read on that front?

David, do you want to address that?

This is David. That's a possibility. I think the other issue associated with the supplemental is, what else are they going to add from the supplemental from standpoint of like additional veterans benefits, and additional domestic spending because it is a must piece pass of legislation. Late last night, on the Senate side, Senator Byrd came out and said, no, this thing is going to be considered by the Senate, it is going to go through the appropriations committee, and the Senate is going to add a fair amount of things. So it's a moving target.

I know some people, the administration wants it passed by Memorial Day. And I think that's up for grabs, considering the fact that it's now going to be debated, go through the Appropriations Committee on the Senate side, and go through the process, as opposed to going directly to the floor. So it's stand by and see. It depends upon how the White House wants to read it, and what they consider extraneous to the request for the funds for the supplemental. So it's a "to be determined."

Next question, operator.

Our next question comes from Bill Loomis, with Stifel Nicolaus.

Hello, thanks, good quarter.

Good morning bill.

Good morning, a couple things. I'll ask them both up-front. What's the organic growth on the intelligence business, the organic growth there? And then second, if we back out on the fourth quarter guidance, for the full year, what the fourth quarter is specifically, if it is in the bottom half of that range, it's down sequentially on revenues and EPS, in your strongest quarter what are your comments on that? Why isn't the range higher? Thanks.

The first question was about organic growth and intel. This is not something we generally break out, Bill. We can tell you, of course, that organic growth in intel was strong, and we had growth from the acquisitions as well as organic growth in our intel business. Very robust. But we don't give specific percentages. It's just a matter of practice.

The second part of the question I think maybe relates to our fourth quarter, and your observations that generally our fourth quarter is our best quarter of the year, and why this year is it just slightly better. Is that the right question? Is that your question, or did I miss it? Bill? Are you there?

That was his question.

Why don't we try to answer that question. Tom, do you want to try to take a crack at that?

I do. We provided a range of guidance for the fourth quarter, which you can back into, based on the annual guidance, and we believe our fourth quarter will be slightly ahead from an earnings per share perspective, versus the third quarter, as I mentioned. We go through a pretty rigorous bottoms-up build of what our expected revenue and expenses are going to be, and that's how we arrive at the forecast.

I will add to that, our third quarter was positively impacted by some unusually high award fees. We spoke about those in the last call, whereby our award fees sometimes tend to be either choppy or lumpy, given timing of those award fees, and that did benefit our third quarter, a bit higher than usual, but as Paul and Bill mentioned, we are still pretty optimistic going forward. I think our fourth quarter will be a very solid fourth quarter, from an earnings per share perspective. Back half of the year, as Paul mentioned, will generate significant improvement in earnings per share.

Next question Operator.

Moving on, we'll hear from Chris Donaghey, from SunTrust Robinson.

Good morning Chris.

Good morning, good quarter guys. I was wondering if you could break out for us, on the intel side of the business, just characterize the direct growth there versus indirect growth?

Indirect versus direct growth on the intel side of the business, we don't that have statistic handy. We can try and get back to you later with something. But generally we don't manage that separately from our total business, and our management philosophy here is we don't allow the indirect to grow faster than the direct base, if that's the spirit of your question.

I thought the question had to deal with whether it's direct related or ODC associated with. Is that what you meant, Chris?

Yeah, that's what I meant.

Go ahead, Bill.

Let's see. I don't know that we've-- they both were very strong in the quarter, I don't have exact percentages there, but both the organic-- not the organic, both the direct labor base, the hiring was very, very strong in the intel portion of our portfolio, and the ODC's were very strong as well. Both grew very rapidly. I would say they mirror the statistics that Tom gave earlier.

And let me add that some of (inaudible) growth was driven by our acquisitions, and the acquisition has a preponderance of direct labor content, serving the intel community.

Okay, great, that's fine. I apologize if I missed this, did you put out the hiring statistics for quarter?

I think we published the ending headcount at the end of the quarter.

we round to the nearest 100, Chris, and that is in a tag line, so we're about 11,800. That's up about 1700 from a year ago.

And our next question comes from Jason Kupferberg, with UBS.

Good morning guys, and congratulations on the top-line trends here.

Thank you Jason.

I want to ask a question regarding the direct labor mix in the March quarter contract awards, and if you can also comment on what the direct labor mix might look like in the bids that you have awaiting in adjudication, as well as the 6 billion or so in impending pipeline, so we can get of the trends there?

the direct labor mix in the third quarter was approximately 42%, and 58% by definition with other direct costs. That is very comparable to the first half of this year. So we are at a somewhat of a steady state level. I did mention, however, that sequentially, third quarter versus second quarter, our direct labor grew 12%, four points higher than our ODC growth at 8%. So we see some positive momentum there, in terms of our recent performance. Bill, you may want to talk about our content in our bid pipeline.

I think the question was, in the bid pipeline going forward, what's the expected direct labor content looking like. As we mentioned, and I think we reiterated a little bit this morning, as part of our long-term goals, in margin improvement, among other things, is improving is mix between our direct labor and ODCs. We've said as a basic rule for all bids that go out, everything else being equal, that we want at least 60% CACI direct labor content in those bids.

Is that to say that we will never bid another S3 contract? Of course not. If those opportunities present themselves we're going to bid them. And one of the reasons for that is, as I mentioned earlier, S3 contract organization is one of our fastest growing profit centers. But everything else being equal, the pipeline going forward, we're looking to get 60% CACI direct labor content out of those new business wins.

Our next question comes from Greg Wowkun, with Banc of America Securities.

Good morning gentlemen. Could you just comment on the tempo of award activity since the end of the quarter?

Tempo of award activity Bill, since the end. So you're talking about April?

Correct.

We don't generally get into reporting on a monthly basis. I would say it's on about the pace that we expected, and we'll just see as the quarter unwinds. It tends to be a little lumpy, but so far so good.

In terms of DSO, they look pretty much --

Let me add to Bill's comment there. The one thing I will say is, as I mentioned briefly in the script, that we are experiencing really strong win rates right now, and the awards are coming in well as a result of that. I couldn't be more pleased or proud of our team, and the work they're doing in winning business, both new and recompete business. So I'd say we're performing at the highest level I've seen since I've been here, on winning business right now.

Great. Just as a quick follow-up, DSOs stayed around 67 days here. Have the payment issues at a few of your customers been resolved, or is that still an ongoing issue?

No, those issues have been resolved. In the month of December we had, as I mentioned in the last call, some kind of weather-related closing of some payment offices, which impacted us. I mentioned at that point in time this was at the end of January, that those issues were largely behind us, and yes, those are fully behind us at this point in time, and we're back to normal collection pace, very happy with our DSO, and our collection performance. We believe it's an industry best.

Our next question comes from Michael Lewis with BB&T Capital Market.

Good morning, Michael.

Good morning. How are you all? Tom, just to follow up on an interesting statistic you gave out earlier, talking about the sequential buildup in direct labor and ODCs where direct labor looked like it outpaced by about 400 basis points on the ODCs. I was wondering if you had the detail from Q1 and Q2, with regard to the sequential report there, on the numbers.

Mike, I don't have it offhand. I could-- I could provide it to you. I think we can piece it together based on information we previously spoke on calls.

I'll circle back with you there. What about Q4? Do you anticipate that the trend of higher direct labor will continue going forward into the fourth quarter into early '09?

It's a little bit harder to make those assessments on a quarterly basis. Our subcontractor work is, sometimes becomes a little bit more challenging to forecast, due to some demands of the customer, due to some differences in billing processes and the like, and while we are very gratified with our direct hiring activities, our hiring machine continues to perform quite well. It becomes more of a challenge to forecast our subcontractor recognized revenue, on a quarterly basis.

Mike, I've got the sequential increase on direct labor. In the September quarter of this year, it was 6.3% over the fourth quarter of last fiscal year. The December quarter was 5.2%, and then this quarter, as Tom mentioned, was 12.4%.

Our next question comes from Joe Nadol with JPMorgan.

Thanks. Good morning. I'd like to start out on organic growth. Is it possible to give us a sense of what the top three or four drivers, just besides generically intel growth being strong, what the top drivers were at that 20% growth, and I'm really wondering if S3 is continuing to drive that strength, or if it's really diversifying into other areas?

S3 is certainly one of them, one of the top three. Some of our classified wins in the intel space have been real key drivers to that as well. And then the third one that's in the top three, is that about a year or so ago, we won a job down in New Orleans that has been a very, very rapidly paced growth item for us. And then I'm happy to report that our D.O.J. work has come up here a little bit as well. I'd characterize those as the top four drivers to that organic growth.

Thanks. That's helpful. My second question is, back on Q4-- and I don't want to split hairs too much here, but your Q4 sales guidance does seem a little bit conservative. Is there any real reason-- you did 634 in the quarter and your guidance kind of brackets that. Is there any reason to think that sales would be down sequentially? You noted that you had some award fees that maybe gave you a little bit more margin, but that doesn't explain why sales would be down. And then on top of that, on the EPS side, if you do EPS better than Q3, in Q4, that would really be the upper half of your guidance, not the full $0.10 range. Could you comment on that a little bit?

Well, Tom, I'll try the first part of it, which has to do with the top line, then I'll ask you to address the bottom line question. The top line, it kind of goes back to a comment Tom made a few minutes ago about, we have very good insight into our-- and visibility into our direct labor, and are able to forecast that well. We actually forecast every one of our employees, every month, and roll the forecast forward. So as Tom mentioned, it's the timing of those ODCs, perhaps material purchases that clients are going to ask us to make, or perhaps not make. The timing of invoices that we get from subcontractors, are they going to be on time, are they going to be a little bit late, a little early, so it's that part of it that's kind of got the lumpy aspect to it. So we're just trying to create a range that sort of brackets all that uncertainty in the ODC part of it. Tom, if could you go to the bottom line part of it.

Yes, I certainly can. The midpoint of our earnings per share guidance, backing into third-- or the fourth quarter is $0.74, which, as I said is slightly ahead of the $0.73 we experienced this quarter. The question is how were we going to do versus that number. We certainly strive to exceed that, as we do every quarter, to exceed expectations, and to generate more profit improvement. Right now we have a range because there are some uncertainties, and we are striving to continue to generate positive results.

Our next question comes from Cai Von Rumohr, with Cowen and Company.

Thank you and good quarter, guys.

Thanks, Cai.

We had leap year this year, which presumably for most folks added an extra day to the quarter. Could you give us some commentary on how many billing days you had in this quarter versus last year versus the fourth quarter, versus the second quarter, excuse me, and how many will you have in the fourth quarter?

This quarter we had 64 billing days. That is the same as the third quarter last year.

And then versus the second quarter and the fourth?

Versus the second quarter and the fourth? The fourth quarter we will also have 64 billing days. In the second quarter we have 63 billing days. So second quarter was 63. The third and the fourth are 64, and the 64 is consistent with the third quarter of last year.

Moving on we'll hear from Mark Jordan, with Noble Financial.

Good morning, gentlemen. Could we delve into the pipeline of $6 billion proposals that you're going to put out, and also that pending 2.5 billion. You state-- could you talk about what-- when you look at the percent of new business here, what percent of that is held by an incumbent, and do you have a sense of what is truly kind of an open field, where there may be a new program starts, where everyone is on an equal footing, and then related question, given this large group of awards out there, and at least your historical success, would this imply a continuation of expectations of double-digit organic growth in '09?

Okay, this is Bill Fairl. So as I mentioned, 70% of the pipeline going forward looks to be new business for us, and as Paul has commented in the past, we're in a phase of the market right now, where there are green field opportunities. That's the sort of open pastures that you alluded to, but there are not as many as there used to be in the past. I haven't broken down the entire pipeline here to tell you exactly how many of these are brand-spanking new, no incumbent situation, but of that 70% new business, 70% of $6 billion to be submitted is a healthy, healthy number, obviously. It's over $4 billion.

A fair amount of that is opportunities that we see where an incumbent may be vulnerable. It makes sense. We have a good value proposition, and we track our take-away ratio here for that business that we do on that, and we have a very, very healthy take-away ratio, almost three, if you will, three times as many programs that we take away, as opposed to those unfortunate situations where somebody takes one away from us. So we're pretty confident in that. Randy, do you want to add anything to that?

I think the ops tempo on our bids continues to be very, very strong. There's lots of things out there on the pipeline. We're actually having to be very selective in terms of the opportunities that we're looking at, and all of them with very high direct labor content.

Our next question comes from Tim Quillin, with Stephens, Incorporated.

Good morning. Nice quarter.

Thank you, Tim.

Can you, in a little more detail, talk about your organic new hires this quarter and year to date?

Hi this is Randy. I would say that one of the things that Paul and Bill have mentioned, we've put a very increased focus on our recruiting machine, and I can tell you third quarter was exceptional for us. We basically have time lines when reqs open, on a time to fill basis, and we've actually improved that by a couple days. So the organic hiring remains very, very strong, and we see a continuation of that trend.

Would you be able to tell us how many people you brought on during the quarter?

Well, this is Bill Fairl. So I'll tell you we had a plan-- we laid out a plan for the whole year, what our hiring had to be, and what it had to be per quarter. The third quarter was our toughest hiring challenge, if you will, and I mentioned on the-- when we did our second quarter conference call that we had won this large job down at Fort Bliss, and another job in the intel community, that were going to require us to add over 200 people in the third quarter for those two programs alone. And we did that, and we did it virtually on day one.

We had additional hiring besides that, and so I'm pleased to report that in the third quarter, we exceeded the hiring requirement, which included those 200 some odd people I just mentioned, on those two programs alone, plus the other programs we had. Toughest hiring quarter we had, we blew through the quarter. So we're well ahead for the year as well. And Paul has mentioned that we're up 1700.

1700 from a year ago.

About half of that through acquisition, and about half through organic over a years period of time. One of the really good things about that, as you know, is that the quicker you hire those people, the sooner they start producing results for the company. So it was just good news all the way around. Very, very strong hiring quarter, well above our plan for the quarter.

Moving on we'll hear from Jeff Houston with William Blair.

Good morning Jeff.

Good morning guys, good quarter. I'm filling in for Laura Letterman. Just a few questions. I wanted to follow up on the win rates, on your recompetes. I know last quarter you said it was south of 100%, but I wanted to see if we could get a more concrete percentage this quarter. And then also going into fiscal '09, are there any large recompetes coming up? And then one last question on cash from operations. Wondered if could you give us an adjusted number for the delayed fundings from December that were collected in this quarter? Thanks.

Okay. First up on the recompete win rate this quarter, we had a very solid quarter for recompete win rates, or recompete wins, rather, if you will. When you look at the total number of wins that we had this quarter, and the number I quoted was almost $900 million, right around 70% of those were for recompete wipes. So it was-- we're very pleased. We had a lot up-- a number of things that had to be won. Not necessarily huge bids, in and of themselves, but just a lot of them. So it requires the team, as Randy was alluding to earlier, the proposal machine, this recompete team, new business team we have to really be focused on it, and I was really pleased that they delivered.

Now, I think the second question was having to do with large recompetes next year. We're looking at the plan. I was just doing this over the past week, of what's coming up for recompetes next year, doing some of our bid proposal planning, and if you think about-- most of our contracts have a four to five-year performance period on them, which would lead to you believe that maybe 25% to 20% of continues comes up for recompete every year. Next year is a little bit low. It's not-- it doesn't meet that 20% threshold, if you will. There are one or two that are a little bit on the large side. I don't want to get into the specifics, for competitive reasons, but all in all, it's a built of a light year for recompetes for us in fiscal '09, after a fairly heavy year this year, which we're doing quite well in. And I think, Tom, there was a final question.

Yes there was, you asked a question in regards to cash flows. In our last conference call I said that, we had a shortfall of around 25 to $30 million in the second quarter due to those payment delays which I mentioned. Those had been recovered. One could back into the year to date cash flow, where we should be for the third quarter was higher because of that timing. But we're on track for the full year cash flow of around $120 million.

Our next question comes from Erik [Obletter], with Pacific Crest.

Good morning Eric.

Good morning, great job on the top line guys. Just two questions for Tom, maybe you can help me out. On the exchange rate, did that have a material impact on EPS? Do you have a number for that?

I don't have a number for that. Our U.K. operations are relatively small, important part of our business, but relatively small business. I mentioned that our net operating profit in the U.K. was $1.6 million. So a portion of that was exchange rate related, but I don't think it's material to our bottom line.

Okay. Doesn't look like it. And the award fees that you guys recovered, do you have a sense, or can you give a sense of how much additional award fees you received this quarter, relative to either expectation or 3Q of last year? Just trying to get a sense of how much that really impacts margins, it was material, immaterial, et cetera.

I did mention that award fees were unusually high. Our estimate is that the higher than normalized award fees in through quarter added approximately $0.02 to our earnings per share.

Our next question comes from Joseph Vafi, with Jefferies & Company.

Good morning Joe.

Good morning, good results. Most of my questions have been answered. But I was wondering if you could remind us, if there are specific contract vehicles that have driven the ODC spike that we've seen? Then as a follow-up, one of your peer companies, has started talking a lot about cyber security as a large growth leg. Was wondering how you might be positioned in that market? Thanks.

Okay. Well, this is Bill Fairl. I'll take the first one on the ODC spike, then ask Randy to comment on the cyber security.. The ODC spike is delivered by-- or driven primarily by S3, I mentioned earlier the top four contracts that were driving the organic growth, but when you think about ODCs, it's mostly about S3. I would reiterate, that we're quite pleased with that because it's also driving one of our fastest growing profit centers in the company, as well. So we're earning some pretty good money off that. Anyhow with that, Randy I'll turn it to you for the second question about the cyber.

Good morning. Actually, the cyber security area is a strong area in the company, and it continues to be a high emphasis area that Paul puts a lot of focus on. There is considerable market opportunity out there, as our competitors probably alluded to. In fact, we are in the process of going after a number of strategic bids in that area, as a prime, and we like our chances.

Our next question comes from Alok Chopra, with Oppenheimer Capital.

Good morning, thanks for taking my question, impressive organic growth in the quarter. How much does S3 as a percentage of-- I don't know if you will break this out, but as a percentage of revenues this quarter, versus the year ago quarter, then I have a follow-up.

Tom, I don't think we have that readily available.

We don't have that readily available and we're reluctant to talk about the revenue or profitability in that level of detail, because of the contract.

Let me ask it another way. Is it $150 million to $200 million a year in revenue from this contract? I would think this is your largest contract and it would be material.

That is a general range. We mentioned that we won around $1.2 billion of awards. Those awards typically go over a few years. So that $150 million to $200 million is a good revenue estimate.

Yes.

Moving on we'll hear from Brian Kintslinger, with Sidoti & Company.

I had a question related to your (inaudible) million Fort Bliss contract. So many DOLs need to outsource logistics services that aren't yet. I'm wondering if you could quantify how much logistic support services represent, and is this is a big opportunity? If it is, can you talk about how many deals have been submitted that in space?

Okay. Brian this is Bill Fairl. I don't know that I have all that broken out right now. We can take a look at it. I will tell you that award came to us through the Army First contract, and while I don't have a list of all of those, we do see a lot of opportunities coming up in that same sort of area there, and we're actually getting ready to bid a couple right now. We do see a need for that as the Army repositions its forces and such. That's one of the reasons why we're so pleased to win that first contract. That's the venue through which most of the stuff is procured.

Logistics is in general one of our eight core competencies. We do a great deal of that work, especially with the military services, the Army, as Bill just pointed out, and Fort Bliss, with the Navy we have for decades, and that continues to do really well. Even with the Air Force, and the Air Force medical logistics area, we have a strong position. We also do some of that work for the Intelligence Agency, and Department of State, and so we are-- this is one of our eight functional competencies. We're so happy to win that first contract, and we were so happy to get that first task order win, and you can expect us to be strong in that area going forward. I think the ceiling on the first contract is--

36 billion.

Which reflects, especially the need the Army and the Marine Corps have, in terms of repositioning and resetting the force.

Moving on we'll take a follow-up question from Michael Lewis.

Just to follow up on one of Bill's questions earlier, I'm going to ask it another way. Was the internal growth in intel above the company's reported internal growth in Q3?

Do we have that statistic? It was, yes. It was a leading part of our organic growth.

Okay. And did you happen to give out what the pass-through number was in the quarter?

When you say pass-through number, you mean the amount of other direct costs revenue?

Mike, the other direct costs were 58% of direct costs in the quarter.

And we'll take a follow-up question from Cai Von Rumohr.

Yes, thank you. You talked about the $0.02 of extra award fees in the third quarter. And kind of looking back, your fourth quarter margins are normally close to the third. They're usually not better. Should we assume, therefore that your best guess is, that margins in the fourth quarter, operating margins, that is, will be below the third quarter? It seems that's what you're saying. Am I over reading that?

Perhaps you are over reading that. Full-year margin, I will reiterate what we said. We expect full-year margin to be between 6.6% and 6.8%. You have year to date margins, then we leave a range for our revenue and earnings per share guidance. So there is some variability in there.

Thank you. And the last one, Tom, you mentioned, and maybe you misspoke, that your long-term goal is 15% in earnings growth, and yet you also kind of mentioned what's clearly strong revenue momentum going into fiscal 2009, and you said, I think, that it would take you several years to get to your longer term goal of 15%. I mean, given the revenue momentum growth you're going to have, how come we can't get it to the in fiscal '09? Am I missing something? Because on paper it would look like you could.

Well, we certainly are striving to get to it as quickly as possible. Some of the actions in place are longer term. We talked about our efforts to improve our direct labor mix, primarily driven by hiring, and bidding contracts, and acquisition strategies. That takes a certain amount of time for those initiatives to start showing results. And so we're in the final midst of completing our 2009, in a detailed financial plan. We'll be providing that guidance near the end of June, to the investment community. So stay tuned.

I would go back and repeat what I said earlier, Cai. Already we can tell FY '09 is going to be a strong year, and it's going to be a step forward from where we are toward that long-term goal.

(OPERATOR INSTRUCTIONS).

Is that it, operator? No more questions?

It appears that we have no further questions.

Okay, thank you, Sara, for your help today. We really do appreciate it. And we'd like to once again thank all the people on the call, for your questions and your interest in our company. We value your interest in our company. We know that many of you have-- may have some other questions, maybe more detailed questions, and as always our team will be available following the call, in about 20 minutes, to help with you any other questions you may have. So in conclusion, I'd like to thank you again for joining us. That concludes our fiscal third quarter 2008 conference call. Thank you.

Once again that does conclude today's conference. Thank you for your participation, and have a nice day.