CACI International Inc (CACI) 2008 Q4 法說會逐字稿

Welcome to today's CACI International fourth quarter 2008 conference call. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions. 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 portion of the call we are only taking questions from the analysts.

At this time I would like to turn the conference over to David Dragics, Senior Vice President of Investor Relations for CACI.

Thank you. Good morning, ladies and gentlemen. I'm David Dragics, Senior Vice President of Investor Relations of CACI International. We're very pleased 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.

So moving to the next slide 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 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 the anticipated results. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the Company's Securities and Exchange Commission filings. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I also would like to point out that our presentation will include discussion of non-GAAP financial measures.

Now let's go to the next slide please. To open 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 begin by thanking Bill Faril, our President of U.S. Operations for his leadership during my recovery from bypass surgery. I'm back, I'm at 100% and I'm more energized than ever about our Company's prospects and for a significant achievement in profitable growth. I'd also like to thank the entire management team for the way they pulled together during my absence finishing the year with a flourish. I would like to personally welcome each and every one of you to our call this morning. We appreciate your interest in the Company. With me to discuss our results and answer your questions are Tom Mutryn, our Chief Financial Officer; Bill Faril, President of U.S. Operations; Randy Fuerst, Chief Operating Officer for U.S. Operations; and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Ltd. UK.

Let's move to the next slide, please. It gives me great personal satisfaction to report that CACI has completed our fiscal year 2008 with record revenue and operating income for the fourth quarter and for the full fiscal year. We communicated our growth strategy to you throughout the year and today we report that our strategy is working, delivering the results we expected. We have great confidence going forward and positive momentum for year 2009 and beyond. Bill and Tom will be discussing the key drivers that are contributing to our momentum. We are reiterating the guidance we gave you in June which is based on our best professional judgment, and we have confidence in those estimates. They are neither conservative nor aggressive.

One of the key reasons for our success this past year is our strategic targeting of federal markets that receive high priority funding. These markets have steady, lock-term demand for our valuable and innovative offerings. We provide essential professional services and information technology solutions for national defense, intelligence, homeland security, and the overall improvement of government services. These are all areas where the government needs more resources. Another factor in our success is our strong and growing position in a very special area of the intelligence market. This is at the nexus of intelligence and security where we have very strong offerings. Our distinction here begins with an exceptionally well qualified leadership team which includes a former Director of the Defense Intelligence Agency and a former Deputy Director of the Central Intelligence Agency.

CACI's analysis tools and services lead the industry in helping the government sift through mountains of data to find actionable intelligence. This is another critical area in which the government does not have sufficient resources for its priority requirements. CACI delivers both these resources and offers a surge capacity and a lasting, affordable approach. Our services and solutions help the government combine intelligence activity with law enforcement actions to identify and pre-empt terrorist attacks and save lives.

In fiscal 2008 we made smart investments that are delivering bottom line results above our expectations. Our acquisitions have made major contributions to our earnings per share performance this past fiscal year with even stronger contributions expected this fiscal year. And we continue to evaluate acquisition opportunities that will be accretive to our bottom line and that will leverage our capabilities in new markets and with new clients. We had excellent results in hiring in fiscal 2008. We added approximately 1600 people, both organically and through acquisitions. We are particularly proud of the initiative to hire veterans with disabilities and in fiscal 2008 we added 133 highly qualified disabled veterans. We continue to successfully recruit highly skilled employees with top level security clearances that our clients need to complete their most critical missions.

Next slide, slide number five, please. For CACI's fourth quarter of 2008 we delivered record quarterly revenue operating income and earnings per share, along with very strong contract funding orders. For the full year of fiscal 2008, we reported record revenue, operating income, and contract funding orders. CACI's leading position in our industry was recognized in fiscal 2008. We placed second in Fortune magazine's most admired IT services companies, demonstrating our solid reputation for honesty, innovation, and customer commitment. We also placed third in the Ethicsphere Institutes survey of ethics programs of the 100 largest government contractors. This recognizes CACI's total commitment to the highest standards of ethics and integrity. I am grateful to our talented and dedicated employees for both of these outstanding recognitions. We are all committed to being the very best at all that we do.

Let's go to the next slide, please. Finally, I am pleased to announce that the CACI Board of Directors has authorized, at management's discretion, a $20 million share repurchase. This action is part of our balanced and integrated financial strategy, and we believe a wise use of our cash at this time. We believe CACI's strong financial performance in fiscal 2008, particularly our strong organic growth, and EPS growth, positions us with confidence and momentum for fiscal '09 and beyond. We believe earnings per share is a very important indicator of our growth. We expect to deliver double-digit EPS growth in fiscal '09 while continuously pursuing opportunities to improve our profit margin as we progress toward our long-term goals of 8 to 10% organic growth and 15% earnings per share growth on an annual basis. Tom Mutryn will now provide the financial details in his overview is and he will be followed by Bill Faril who will provide more information on our operations.

Thank you, Paul, and good morning, everyone. Please turn to slide number seven. As Paul said we are very pleased with our full-year and fourth quarter results. Our fourth quarter revenue grew year-over-year by 26% with a strong 12.3% organic growth in acquisition-related revenue adding $70 million. Our direct billable labor grew an impressive 28%, driven by both our hiring activities and our acquisitions. For the full year, our revenue increased $483 million, or 25%, compared to 2007, driven by our 13.8% organic growth in our acquisition activity.

Let's go to the next slide, number eight. Our net income for the quarter was a record $23.5 million, a 13% increase from fourth quarter of last year with a 14% increase in diluted earnings per share. The full year net income was 83.3 million, which was 6.1% greater than last year. Diluted earnings per share for the full year were $2.72, up a solid 8%. As Paul indicated, growing our EPS is our highest priority objective. And we expect to deliver double-digit earnings per share growth in fiscal year '09, pursue opportunities for margin improvement, make progress towards our long-term goals of 8 to 10% organic growth, and 15% earnings per share growth.

Next slide, number nine, please. For the quarter, our EBITDA grew 23% year-over-year to $58.5 million with full year EBITDA up 14% to $210 million. Our EBITDA margin is at a healthy 8.7%. And let me note that EBITDA includes significant noncash stock compensation expense.

Next slide, please. Our UK subsidiary reported record quarter revenue of $23.6 million in record full year revenue of $92.8 million, up 15% year-over-year. Net income for the year was $6.4 million an increase of 43% over last year. These increases came from organic growth in the acquisition of three companies last year which added new proprietary software product and strengthened existing capabilities all of which will help position our UK operations for another successful year in fiscal '09. Our cash position at the end of the quarter was $120.4 million up from $52.3 million at the beginning of the quarter. Fourth quarter operating cash flow was exceptionally strong at $81.5 million. Day sales outstanding were up 60 days, a decrease of six days from a year ago, highlighting our excellent collection processes, for the full year our cash from operations was $160 million, or $5.23 per diluted share. Based on today's stock price this represents a double-digit operating cash flow yield. Our net debt, that is, debt less cash was at $522 million. Our leverage, which is net debt to EBITDA, was at a comfortable 2.5 times, and we continue to maintain a strong balance sheet.

Next slide, number 11, please. We communicated our fiscal year '09 guidance to you on June 26, and based on activities during the subsequent seven weeks continued review of our operation and our expectations for the remainder of the year we are reaffirming that guidance. We expect revenue to be between 2.55 billion and $2.65 billion and based on the midpoint of our guidance our net income to increase by 11.5%. With that I will now turn over the discussions to Bill Faril.

Thanks, Tom. Let me add my welcome to everyone on the call. This morning I will address highlights from operations during both our fourth quarter as well as our full fiscal year '08. I will also provide a few comments on our fiscal '09 focus points and our outlook going forward.

Let's move to slide number 12. Our contract funding orders, funded backlog and total backlog were all well above fiscal year '07 levels. For the fourth quarter funding orders came in strong at $639 million. That's an increase of 30% over the fourth quarter of fiscal year '07. That's particularly impressive considering the delayed fiscal year '08 supplemental. Looking at the full year fiscal year '08 was a record year for contract funding orders, $2.5 billion, and that's a 15.9% increase for fiscal year '07.

Turning now to contract awards, we received awards totaling $605 million during our fourth quarter, and we won all of our major recompetes. Our strategy of pursuing large prime business opportunities was again rewarded as we won a prime position on the $453 million contract to support the joint improvised explosive device defeat organization, and we received approximately $142 million in awards under our S3 contract with the U.S. Army. Both of these are areas in which we will continue to aggressively compete for and win task order business. Not included in our total of $605 million of new awards we also announced our fourth quarter win of a prime contract on the defense information systems agency ENCORE II program, with a ceiling value of more than $12 billion and a 10-year period of performance, counting option years, ENCORE II is far and away our largest award ever at at DISA. For the full year our contract awards totaled $2.9 billion, including both recompetes and new awards.

Let's go to the next slide. In addition to our fourth quarter awards, key fiscal year '08 contract wins included an $85 million award from the U.S. Air Force to continue our support of medical logistics services. This award adds to several others we've won in fiscal '08 establishing us as a premier provider of military healthcare solutions and growing our core competency in logistics and material readiness. During fiscal year '08 CACI became one of the largest providers of logistics services in Fort Bliss, Texas as a result of the $60 million task order we won under the Army first contract. The great news here is that we've already doubled this contract and expect to continue increasing our Fort Bliss business at a significant rate. CACI won approximately $552 million in S3 cash quarter wins in fiscal '08. That's $1.34 billion in awards since we won S3 in March of 2006. S3 remains one of our most outstanding ongoing success stories.

Our intelligence business continued its rapid growth during the quarter, coming in more than 53% higher than in the fourth quarter of fiscal 2007. For the full fiscal year, our Intel work grew by 53.9% and now represents about 34% of our business, with the strength of our distinctive offerings and a market that continues to be well funded, we believe intel will be a mainstay of our business for years to come.

Let's go to slide 14, please. Looking forward, CACI's proposal activity continues at a brisk pace. At the end of fiscal '08 we had more than $2.9 billion in submitted proposals under evaluation with approximately 60% of those for new business. We expect 75% of these to be awarded by the end of the calendar year. During the first half of fiscal '09 we expect to submit over $6 billion in additional proposals both new and recompete with about a third of these valued at $100 million or more. We also expanded the technical distinctions that enable us to compete and win at the tier 1 level. We're especially pleased to note that CACI's National Solutions Group, that's our business group which serves the national level intelligence community, was rated at maturity level 3 of the software engineering institute's CMMI. CMMI level 3 is an increasingly important discriminator in winning integration, management, and software contracts.

Next slide, please. For fiscal '09 our top priority is to continue the double-digit growth in net income and EPS we saw during the second half of fiscal '08. As Paul and Tom stated, that means delivering double-digit EPS growth in fiscal '09, as we progress towards our long-term goal of 15% annual EPS growth within the next two to three years. To do that, we'll stay focused on the three key areas that drove our fiscal '08 growth and our momentum for '09.

First is growing CACI's direct billable labor. With the new work we see for fiscal '09 the challenge of recruiting and retaining qualified individuals, especially those with high level security clearances isn't going to lessen. Throughout the fiscal '08 and into fiscal '09 our best in class recruiters and line managers have delivered great hiring results week in and week out.

Second, concentrating our bid and proposal resources on winning new work with high CACI labor content while vigorously defending our recompetes. We'll accomplish this while maintaining our practice of bidding large, multiple award ID/IQ contracts such as S3, Army FIRST, and iTEST 2S and that may entail a significant amount of what he sees.

The third and final major focus area is successful integration and performance of acquired businesses. In addition to the major fiscal year '08 bottom line contributions that Paul mentioned, our acquired businesses have opened new growth opportunities for us. The $453 million JIEDDO win by our Wexford team and recent intel wins by our Athena folks are two great examples. Given our emphasis on and success with our corporate development program as a growth driver we're prepared to integrate additional businesses as the opportunities present themselves.

By achieving our objectives in these three key focus areas, we'll deliver solid fiscal '09 results, including our top priority of double-digit net income and EPS growth while continuously pursuing opportunities to improve our profit margin. And just as we did during fiscal '08, we'll exit fiscal '09 with great momentum for fiscal '10. Paul that concludes my remarks.

Thanks, Bill, and thank you Tom for your comments. Let's move to slide 16, please. Fiscal year 2008 completes my first full year as CACI's President and Chief Executive Officer. I've enjoyed serving with our outstanding professionals, and we've recorded many achievements. Most importantly our performance gives me confidence in our future. In fiscal '09, CACI will continue to strengthen our offerings for the intelligence community, the defense department, and federal agencies with high priority funding and a long-term demand for our services. We will leverage and strengthen our eight core competencies in such areas as intelligence and security services and cyber security to offer more to current customers and to attract new customers. These core competencies are our discriminators in our markets, and we continually enhance them. We will be concentrating on new areas of growth such as military healthcare where as Bill mentioned, we won significant business in fiscal '08.

We're especially focused on military logistics with our 30 plus years of logistics experience, our logistics core competency is one of our greatest strengths. Just as we have supported our government in moving troops and equipment and supplies abroad, we join the government in envisioning a post Iraq environment where those troops and the equipment and supplies will be repositioned to other geographies. CACI will be there to help with our logistics capabilities and our prime position on the U.S. Army FIRST contract to help with that important repositioning.

We believe our nation's highest priority is the long-term challenge of asymmetric global terrorism. Our goal is to continue to place CACI at the center of our clients' efforts to meet this challenge, providing them with valuable solutions and clear, dedicated personnel. We're also focused on countering global terrorism in our collaboration with the National Defense University. We cosponsored with the University a symposium gathering the best minds in national security to spur a new dialogue on addressing asymmetric global threats. We have now published their recommendations for a unified strategy to defeat global terrorism. And because we believe this is so vital to our country, NDU and CACI will continue to assemble the thought leaders in this area in the coming months. Our next symposium is scheduled for this October, and is focused on development of soft power, a critical need in this long war.

The Defense Department also has made the development of unified inner-agency response to asymmetric global terrorism a top priority. In its new defense, national defense strategy, and communications from both Presidential candidates identify global terrorism as the most serious threat to our national security. For CACI, this convergence of thinking from both defense and political leaders validates the intelligence and security services strategy we launched over a year ago. This has been a strong growth area for us in fiscal '08 and is projected to continue growing vigorously in FY '09 and beyond. The acquisitions of IQM, Wexford, Athena, and Dragon were all focused on helping our clients defeat global terrorism.

This is how we remain relevant to our customers. We continuously anticipate their most critical needs and challenges and assemble the necessary resources to meet those needs and overcome those challenges. So we believe CACI is well positioned for the future. We have a superb leadership team supported by skilled employees who perform consistently every day with honesty and integrity. We have a practical vision and strategy for growth that is aligned with our nations highest priorities. We enter fiscal 2009 with confidence and momentum, making continuous progress toward our long-term financial goals, enhancing client capabilities, and building lasting shareholder value. With that we can open the lines for questions.

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

Glad to hear you back, Paul. Looking at the target, couple things I noticed wasn't in your presentation, one, a specific margin goal. I think in the past you've said at least 8%. Can you talk a little bit about that? Then I didn't see any return on equity targets that you rolled out on your analyst meeting. What are your thoughts along those two?

Well, our analyst meeting I think you're referring to back in February in Boston we highlighted three long-term metrics. The first was double-digit growth of net income and EPS. The second was organic growth in the high single-digit area. These were two to three-year type objectives. And the third was to consistently pursue opportunities to expand our margin toward a goal of getting to approximately 8% operating income margin over the two to three period. Those still are the goals. I did them in the priority that we have them. We continue to believe that EPS and net income growth rate is the number one priority for us and the Company. We continuously look for and organic growth is vital as we've talked about with all the hiring we're doing, over 800 people last year. This year we expect to hire over 700, 750 people net increase, and, of course, we continuously look for ways to improve our margin and are still committed to doing that.

Thank you.

We'll take our next question from Ed Caso with Wachovia.

Good morning and welcome back as well, Paul.

Thank you, Ed.

There was a terrific DSO in the quarter. Curious how much of that is seasonality or comp plan related and maybe what's the normal sort of DSO level we should expect.

Yes, the -- we had a very strong cash collection month in June. It was extraordinary, so that helped our DSO the way we calculate our DSO, and it also helped our cash flow, year end cash balance. Last June, we guided to DSO in the high 60-day range for fiscal year '09 we believe the high 60-day range is a long-term and steady, sustainable level. We're pleased with the 60-day that we had in this quarter, but we think that's going to drift north of that.

Can you talk a little bit about anything you've seen so far on the new rules on task orders being protested, task orders of $10 million or more?

Bill, do you want to?

Sure, I'll try. This is Bill faril. We're aware of it. We haven't seen much in our book of business right now. Of course, we're all well aware the protests happening with the big deals and that's still a part of the landscape, but down at the task order level not much has bubbled up so far.

We'll take our next question from Michael Lewis with BB&T Capital Markets.

Good morning, Michael.

Good morning. Again, welcome back. Nice, clean quarter, by the way. If I could follow up on Ed's question, on the task orders, did you anticipate that we will start to see more protests related to $10 million plus tasks in the future as there's not much greenfield money, and to market share grab, and I think people are going to try to hold on to their territory. What's your opinion there?

Where we've seen high protest activity is on these large multiple award ID/IQ vehicles. So if you think about them historically, iTEST 2S was protested, I think Army FIRST, Alliant, was protested, Encore was protested, all of those except, is Alliant was protested. All those I have mentioned have come off protest with the exception of Alliant. We haven't seen a lot of protest activity at the task order level. There may be some, but the big impacts we've had where our ability to grow has been impacted was from those large multiple award ID/IQ vehicles. Bill, do you want to add?

Just expanding on what you said there, Paul, I think one of the reasons -- one of the key differences may be on these big deals, you're talking about a big bucket of business with a long performance period on it, in excess of 10 years sometimes. So if you're locked out of that one you're locked out for a very long time. The task orders, it could be multiple a year, but you're not talking about 10 and 20-year task orders, if you will. So this is not to say we won't see that coming along, but I see it as less likely.

That's very helpful. Paul, just one more question, if you could help me reconcile something we heard. In late July we attended a briefing with the Associated Director over at D&I where he made what I think was a surprising statement, and the statement was that he expected intel budgets to remain "relatively flat" for some period of time. Now, are you seeing flat to modestly up growth in the intel business, or is your expectation that we're going to continue to see high single low double-digit growth area the next two or three years? I was hoping could you talk about this a little bit.

I'll invite Bill to jump in, too. While the overall intel budget has got modest growth in it, as I understand, the areas that we're focused are the sweet spots of the intel. We are at the mission, and for the most part -- not providing so much support type services but really integrated into the mission, doing -- using our software tools for data collection, management, analysis of the data. We have people that specialize in support analysis role, and in those areas, we think there's only one direction, and that's north. The requirement there is driven by the threat. The threat continues to be persistent, pervasive and global. And so data collection, data analysis, sorting through the data analyzing data continues to be the beehive of activity. And there is where we're getting our growth.

It's also where we have our acquisitions have have been concentrated, our acquisitions are concentrated in direct support to these mission areas of intel, counter intel, human and now more recently in the last year or so we've really focused on the intersection or nexus of intelligence and security services. That means that the hand-off where we've always had a weak spot as a nation is in the collaboration and the interaction between the intelligence community and the law -- local, national law enforcement as well as military on foreign soil that has to actually act on the intelligence, and we have been focusing on the intersection there. How do we enable that intersection to work more effectively, and that is where a great deal of energy has been spent since 9/11 by the entire intelligence community. And if you look at our acquisitions of Athena and Wexford most especially that is exactly where they are. Wexford on the security services side, on the interdiction or preemption and supporting the military with all sorts of training and consulting in the field and here at home, and the intel gathering, counterintel human aspects of the Athena operation. I think Bill talked about recent wins that both Wexford and Athena had that are propelling them in their growth. That's a long answer. The short, of course, is that the entire intelligence area is growing at a modest -- more modest rate but we are focused on the hot spots.

We'll take our next question from Cai Von Rumohr with Cowen and Company.

Yes, Paul, welcome back.

Thank you, Cai.

And Bill thanks for the additional data on some of the contracts. S3, looks like it was 23% of your awards in the fourth quarter. It's been 19% for the year, 19% since you won it. So should we assume that it's currently running about 18 to 19% of revenues and trending up? And secondly, are the margins still in the 3% area, and how are you doing in your plan to kind of increase your DL on that contract?

Cai, this is Bill Faril. I will start on the first question, which I think was what percent of our revenue is at -- it's about 10% of the revenue, so more or less. It's actually trending town a little bit as other things are growing. I'm trying to remember what the second question was. The second one was margins, I think. As we've talked about one of our fastest growing profit centers, I think the second fastest growing one we have, as a matter of fact, is the profit center that runs our is S3 program. And that's because over time they've been able to convert some of the work that we've previously subbed out into new hires for CACI quite frankly. So we have grown the direct labor content on S3, and so we would think over time, and I'm not going to say over the next six months or, so but over time that more of that revenue stream would convert to CACI in-house labor which would drive the margin up on that, but that's a longer term objective, as Paul mentioned.

Great. Thanks a lot. And, Tom, given your super DSO performance in the fourth quarter, could you kind of update us on what your expectations are for operating and free cash flow in fiscal '09?

Yes, I can. After taking a look at June's performance and seeing what's happening July, August, to date, we are not changing our guidance which was provided to you in kind of late June. We expect our operating cash flow to be between 130 million and $140 million, and we're still expecting our DSO to be in the high 60-day range. Clearly we'll monitor that and as necessary we'll update you, but that we think is the best long term expectation.

We'll take our next question from Joe Nadol with JPMorgan.

Good morning. I'd like to ask -- just asking you about your direct labor versus ODC breakdown for the quarter, and I think you may have mentioned during your opening remarks that maybe you expect a little bit of slackening in that ratio. Just wondering what you're kind of looking for, for the early part of fiscal '09.

So for the quarter, our direct labor, as I mentioned, grew by 28%, and our ODC's grew by around 26%. For the full year, our direct labor represented around 42% of our total direct costs, and ODCs represented the remaining 58%.

So in the quarter itself was that 42/58 mix as well?

For the quarter itself, yes, it was. Yes.

We'll take our next question from Mark Jordan with Noble Finance.

Good morning, Mark.

Good morning. Could we talk a little about seasonality? Could you recap what your 123R expense was in '08, what it should be in '09, and what percent of the '09 charge should be in the first quarter?

Tom, you want to?

Yes, there's a couple of things driving seasonality. One factor driving the seasonality in our business is the fact that a good portion of our profit or the majority of our profit is associated with direct, billable labor during our fiscal first quarter people take vacations, as they should. And that impacts our billable hours and our profitability, so that's kind of one factor. In terms of 123R expense, typically we'll have a few more dollars of 123R expense in the first quarter versus other quarters. For fiscal year '08, we had approximately $1million more of stock compensation expense in the first quarter versus other quarters, and that trend should be similar in fiscal year '09.

Okay. Second question, if I may, the buyback of $20 million represents probably less than 20% of fiscal '09's projected free cash flow. Given the M&A value, the values that you were paying for companies in the last 12 months or, why would it not make more sense to be more aggressive on buying your own stock back, given your discount to general M&A values?

Yes, the -- we still see very attractive opportunities in the M&A area. We have a long, rich pipeline of prospects. We only do acquisitions that meet the characteristics of having a strong net present value and having an IRR that is much higher than our own weighted average cost of capital, and that are accretive. So by definition, therefore, we believe the better use of our cash, as long as we can continue to find companies that are interested in joining us and have those characteristics, that that's a better use of our investment cash. Let me add that we did repurchase $45 million of shares in May of '07 so we have -- in recent history, so we are either judicious as to how we deploy our cash, and as Paul articulated the acquisitions we done the last -- in the last 15 months are spectacular. We're very pleased with the months. In retrospect is in hindsight, we're absolutely convinced we made the right decision.

Having said that, we will continually look at, and as we've demonstrated both last year and this year, $45 million last year, $20 million this year. We'll continue to look at stock buyback as a balanced approach to our investment strategy.

We'll take our next question from Laura Lederman with William Blair.

Welcome back as well from me. Can you talk about following up on the acquisition question what type of pricing you are seeing and also kind of the sizes you're looking for what would that sweet spot be and kind of how large would you go? Also, can you talk a little about employee churn on a total basis what that is, including voluntary and involuntary? Give us a sense of how that's trending.

Let's see. I don't know if I got them all. I'll start and maybe get some help here. First of all, in terms of what prices we pay, it varies quite a bit. We haven't been way out there paying high premiums, but we have paid full price in some cases. We pay full price when we see that there's a strong growth prospect for the Company with a high margin. In other cases we've found that there are some companies that are good companies that were able to get at a bit of a discount to what we see in the market right now. So it's a mix, it's a wide range. Tom can give you more specifics on that.

In terms of the size of acquisitions, we have a multiple threaded strategy for acquisition. We are looking for acquisitions that bring us new capabilities, new clients, new geographies. So BRAC, for example. There are growing geographies. Fort Bliss is one where we're very happy to have made a new entree there at Fort Bliss. So geographies that are important going forward for growth. Customers, new clients that are -- where we don't have a foothold and looking to rapidly get a foothold, and technology and methodologies that we need to fill out our functional core competencies or to build a completely new functional core competency. That drives our M&A program. So consequently, when you look at the acquisitions, they tend to be anywhere from $50 million on up to couple hundred million. We do look at opportunities for a transformative type of merger type opportunity. We continue to look at those and evaluate those. And so far we haven't obviously found one that works for both parties. But we continue to evaluate those as well. Tom, did you want to add anything?

No, I think that summarizes it pretty well, Paul.

Okay, Laura, did we get to the heart of your question?

The other question was employee churn, how that's trending.

The employee turnover, Bill.

Sure. Laura, it's Bill Faril. We ended up fiscal '08 exactly where we ended up in terms of voluntary attrition rate at the end of fiscal '07. We're in the middle of the pack for our industry here. Like to be better. Retention is a key focus area for myself and for our Chief Operating Officer, Randy Fuerst here.

I will say that that's voluntary attrition On the involuntary attrition side we were significantly down in FY '08, and that's a direct result of having a much better recompete win rate. So we were very pleased with our ability to defend our recompetes in '08, and as was mentioned by an earlier person on the call here, there aren't that many greenfield opportunities, so your ability to defend your existing book of business is one of the key elements, if you're going to grow, and we're very pleased with our track record there.

We'll go next to Jason Kupferberg with UBS.

Welcome back, Paul, good to have you on the call again. I just wanted to clarify and confirm that your operating margin guidance for this fiscal year, for FY '09 is also unchanged?

That is correct. We initially guided 6.7 to 7%, and it is unchanged.

Thanks for clarifying that. And a balance sheet question. Net debt to EBITDA is around 2.5 times now as I think you guys pointed out. Where are you comfortable taking that ratio potentially? Obviously it would depend on the acquisition opportunities that present themselves but can you give us a sense of where your general level of comfort would be?

Yes, Jason, let me try to address that. It's very situation-specific. Paul mentioned some transformative or larger transactions. If we decided to embark upon that type of transaction that would have a material impact in our kind of leverage ratios. After we did the AMS transaction, our leverage got north of 4 times. And so in recent past the Company was comfortable taking leverage to that level to do a major transaction. I would imagine that we would be comfortable with similar high levels of leverage situation specific.

On a more normal run rate activity, we're comfortable in the 2.5, 3 times range, perhaps a little bit north of 3 times. The good news is that CACI generates significant positive cash flow. The last two years our operating cash flow was north of $160 million in that positive cash flow and provides significant capital to redeploy for a large number of these smaller acquisitions that Paul mentioned, the 50 million to $100 million transactions, if we find them to meet our internal strategic and financial goals.

We'll take our next question from Erik Olbeter with Pacific Crest.

Good morning, Erik.

Good morning, guys. Again, let me add my welcome back to you, Paul. Actually, my questions have been answered. Thanks a lot.

Thanks for joining us this morning, Eric.

(OPERATOR INSTRUCTIONS) We'll go to a follow-up with Joe Nadol with JPMorgan.

Just wanted to follow back up on the track I was headed on earlier, which is as we get into Q1 here I think you indicated in your guidance conference call that you expected a sequential leg down in margin, and you gave a bit of a wider range. I'm wondering, since we're halfway through first quarter, if you could give us a better sense as to what you're looking for.

This is Tom. I believe what we mentioned at the last call is that we expect either typical sequential reductions in operating margin between our fourth quarter '08 and first quarter '09, and we are experiencing that as we see for a couple of the reasons we indicated. The change in direct billable labor due to 123R expense. At this point in time we feel no need to update the guidance we provided previously.

It's fair to say you still expect margin improvement year over year though, right from the 6.3% level?

That's our goal, continuously work it.

Thank you.

We'll take our next question from Cai Von Rumohr with Cowen and Company.

Yes, if I could follow on, Bill, you commented the orders were good kind of given when the sup was passed, could you comment what are you seeing for the current quarter now that the sup has passed? Do you expect good awards in the current quarter?

Well, Cai, my crystal ball probably needs a little polishing on it, but typically the first quarter of our fiscal year, and therefore the government's fourth fiscal quarter is one of our strongest if not our strongest contract funding quarters and contract awards, and I expect, again, my crystal ball as good as it is, I expect that trend to continue again this year. I would be very surprised if it wasn't like that again this year. Frantic pace as we get towards September 30.

Okay. Then the question on mix, you mentioned that since you've won S3 it's been 19% of your awards, yet it's only running 10% of your revenues and trending down. Where would you expect that as we look at the full year, fiscal '09, is it likely to be at the current level, lower for the year? Given that at some point I assume if it's 19% it kind of has to true up and move up as a percent, or is that incorrect?

Okay. So I'll try to answer that question as best I understand it. Our S3 revenue right now is less than 10%. You would round it up to 10%, but it's probably closer to 8, 8.5%, something like that, of our revenues. Going forward, right now, if you're asking me if that percentage is going to increase over time, I really don't see that. There have been a lot of task order awards on S3, as you mentioned. When we talk about awards, and you may recall from my remarks earlier, we don't include the large ID/IQs. I mentioned specifically ENCORE II. That's a $12 billion award. When I gave that you total of $605 million that did not have thing there, it had had 0 in there there for ENCORE II. Our practice there is, on those kind of contracts is we'll wait until the actual task order awards start coming through. So we'll start announcing those as they're sizeable enough.

I think what you'll begin to see over time is we've got a big ramp-up in S3, and we're now about 8, 8.5% of our revenue. I expect it will stay there. What you may see and what we're planning on is to convert more of that revenue stream into CACI direct labor, and therefore see if we can't squeeze a little margin improvement out of that. But then you'll see task order awards hopefully start to come through on vehicles liken ENCORE II. Hopefully one day Alliant will get an award and we'll see task order awards come out on that as well. So long answer. Paul, do you want to expand on that?

No, I think you hit it. S3 climbed very rapidly up to the level run rate it's at now, and we don't expect the slope of that growth to continue. It's sort of topping the off a bit with -- there's still growth going on there, but it's it not going to go from 8% to 15% of our revenue, for example.

It will hang around at that 8, 9% level.

Keep in mind, we're growing -- we grew the whole business over 24%, and we have strong growth objectives for this year as well. And so to hold its 8.5% it has to grow at that same rate as the rest of the business.

We'll go next to Jason Kupferberg with UBS.

Just want to follow up with the revenue growth question, you have the 5 to 9% guidance out there for fiscal '09. How would you parse that out between direct labor and ODC growth? I know direct labor grew a little faster than ODC in the fourth quarter.

Yes, when we provided initial guidance we said that we expected the ratio of direct labor to ODCs to improve to get more direct labor. We'd grow disproportionate to ODCs.

Right.

That's still what we believe at this point in time. There is a caveat, though. ODCs oftentimes are harder to predict, given kind of the client needs, so we may be positively surprised by getting more ODCs, because ODCs provide both revenue and bottom line profit.

Okay. And then last question, based on what you know or are hearing today what is your guys' best interest in terms of how long of a CR we'll see this year on both the defense and the civil side?

David, do you want to?

Jason, it's Dave Dragics. The CR is going to go from October 1, to past the inauguration. We haven't heard exactly any kind of dates, and that's probably going to take place in the last two weeks of September. There's a lot of things Congress has to do with they get back. The House has only passed one appropriations Bill. That's military construction, VA. And they are going -- the House is going to adjourn, or Congress is going to adjourn at the end of September so that they can campaign and the majority does not intend to come back for a lame-duck session. So that's a TBD, but other than the fact that we know, or what we've heard it's going to be past the inauguration, that's all we can tell you.

We'll take our next question from Brian Kinstlinger from Sidoti.

My question, just one on, you haven't heard anything on the first contract, like offers or anything like that, but I'm just curious what the deal flow is like there? Has it slowed substantially? Are they delaying RFPs? Can you just give a sense of what you're doing there?

Your question is what's going on with the first contract, and is there -- has it got a pace to it, or is there delays in it in terms of RFP?

Right.

Randy, do you want to?

This is Randy Fuerst. We're actually seeing task order pace on first -- we've got a couple bids that are in that we're waiting on, and we see a couple in the pipeline that we are positioning on right now but, no, we see the pace to be pretty normal.

We had a great win there this year on Army FIRST with the Fort Bliss logistics work.

The beauty of that one, Paul, was you came out as a $63 million win for us. Since we he eve won that job we've actually doubled in size. And so very, very successful on that task order.

Great. Since January--?

Keep in mind, FIRST is the logistics contract that the Army is going to use for reset, refurbishment of all the war-based equipment, and the repositioning of the force over time, and so that's going to be a long -- a pretty big requirement over the next two or three years.

I think George's discussion about log jams having--?

-- which party wins the election for the administration. Army FIRST is going to be critical going forward.

I guess there was some discussion about log jams having a decent amount of funding left, flowing that RFP process. You are not seeing that in some of the RFPs you're looking at?

Log jams? I missed it. What about log jams?

The predecessor contract has, we had heard had more funding under it, and so as a result was slowing the RFP process--?

We didn't have any of that business so it's hard for us to track trends on that. But all we know is we've gone from 0 to $120 million this year on FIRST, so it feels pretty good to us.

We'll take our next question from Michael Lewis with BB&T capital markets.

Dave, it's our understanding that the DoD Bill will be the vehicle for the CR. Are you hearing the same thing, by chance?

Yes, Mike, we are hearing that they will tack this on to the Bill because it's parliamentary maneuver from the standpoint. There's also rumblings that the Republicans may want to push for a veto of the CR. It's political theater. You have to stand by and watch and see what happens but, yes, we've heard the same thing.

I agree. Tom, just on -- I'm going to split hairs with you here for a second but with regard to your two to three-year goal on EBIT margin, of around 8% now, can you help us better define around, is it at 8%? Above 8%? Below 8%?Can you help me out there?

The target is 8%.

8% firm?

That's our goal.

Great. That answers the the question.

That does conclude today's question and answer session. At this time I would like to turn the call back to our speakers for any additional or closing remarks.

Thank you, for your help today. We certainly appreciate it. And we'd like to thank everyone on the call for your questions and your interest in our Company. That's important to us, of course. We know that some of you may have additional questions, and as always, our team, specifically Tom and David, will be available to respond to any questions you have after the call. They need about 20 minutes to get themselves organized for that, but that concludes our fourth quarter and full fiscal year 2008 earnings conference call, and thank you all very, very much.

Once again that does does conclude today's call. We do appreciate your participation. You may disconnect at this time.