CACI International Inc (CACI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI international second quarter fiscal year 2010 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).

At this time, I would like to turn the conference over to Dave Dragics, Senior Vice President of Investor Relations for CACI international. Please go ahead, sir.

Thanks, Brendan, and good morning, ladies and gentlemen. I am Dave Dragics, Senior Vice President of IR here at CACI international. And we're very pleased that you're able to participate with us today. Now as is our practice on these calls, we are providing presentation slides, and during our presentation, we will also make every effort to keep all of you on the same page as we are. So let's move to slide number 2.

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 anticipated results. And the 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 also described in the Company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.

I also like to point out that our presentation today will include discussion of non-GAAP financial measures, and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

Now let's go to the next slide, please. And to open up our discussion this morning, here's Paul Cofoni, President and Chief Executive Officer of CACI international. Paul?

Thank you, Dave, and good morning, everyone. Thank you for joining us this morning. With me to discuss our results and answer questions are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President US Operations, Randy Fuerst, Chief Operating Officer of US Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive Officer of CACI Limited UK. Let's go to slide four.

Let me begin today by providing you an overview of our results for the quarter, and discussing how execution of our growth strategy continues to drive these results.

We are pleased to announce another quarter of record revenue and earnings per share. As you know, our financial goals are to achieve double digit growth in earnings, and mid-to-high single digit organic growth.

In the second quarter, our net income grew more than 26%. And revenue grew more than 15%, driven by 13% organic growth. Our growth in direct labor and ODCs fueled the increase in our operating income. That growth was moderated by several factors. First, we made the strategic decision to increase our investment and bid and proposal activity, to take advantage of an opportunity-rich bid market. Second, we incurred onetime expenses related to the consolidation of three of our facilities, to lower our occupancy expenses going forward.

Third, we experienced higher variable compensation expenses, due to strong bottom line results. We continue to win business, with innovative solutions in areas of our client's most pressing needs. We experienced growth in all of our core competencies with a strongest increase in C4ISR Integration Services. Growth drivers in this area include our continuing support for tactical warfare as we provide information collection, analysis and presentation that both protects our troops and helps target the enemy.

Turn to slide 5, please. CACI continuously delivers on our financial goals because of our well-defined strategy. Let me refresh you on that strategy.

First, to provide mission critical services to support national security priorities in well-funded areas. Second, to continue to build on our competitive advantages in defense, intelligence, homeland security, cybersecurity, and IT modernization. Third, to capitalize on new opportunities for growth in existing areas, adjacent markets, and new markets, both organically and through acquisitions. As you know we have a track record of successfully acquiring and integrating companies and we continue to see attractive M&A candidates.

Slide six, please. As we all have witnessed in recent events, the threats to our national security are greater than ever. Incidents from the Christmas bomber attempt to the Fort Hood shootings to suicide attack on CIA employees in Afghanistan are diverse, geographically dispersed and unpredictable asymmetric threats.

They also include increasing cyber attacks such as the one we have just seen on Google, and 34 other American companies. Our government clients continue to place high priority on the funding necessary to address these threats. This was reinforced just last night in President Obama's State of the Union address, when he exempted national security from the proposed spending freeze.

We provide vital technology services and solutions in our eight core competencies, to help ensure our customer's mission goals are met successfully, effectually and efficiently. We see continued strong demand in intelligence, defense because threat levels are expected to remain high.

Now that the government's fiscal year 2010 budget has been approved, we expect funding and the pace of awards to accelerate, for the remainder of our fiscal year. And our pipeline for proposals is significantly larger. Bill will address this and provide more details in just a few moments.

We also expect to see healthy funding in the government fiscal year 2011 budget, particularly in the market spaces where we are focused. With recent improvements in capital markets, we're increasingly confident in our strategy of using M&A to gain new capabilities and access new clients.

We completed two acquisitions this quarter, and announced our intent for a third. Each acquisition is in an important market, and includes strong differentiators such as cybersecurity, counterintelligence and web enablement. Cybersecurity in particular, is an increasing threat, and therefore an attractive area of growth for CACI. We are working with our clients to integrate cyber capabilities into their business processes, including supply chain security, threat identification, and network access control.

Our cyber attack mitigation and exploitation lab or CAMEL, offers clients significant advances in identifying emerging threats, tracing attacks back to the origin, and reverse engineering attacks. Cyber security is also the topic of our next CACI US Naval Institute Co-sponsored Asymmetric Threat Symposium on March 2nd, as we continue to collaborate with other thought leaders on how to advance the state of thinking on countering Asymmetric threats.

Let's move to slide seven.

As we stated in yesterday's release, we're pleased to increase our fiscal 2010 guidance for revenue and net income to reflect the strength of our business. For all the reasons I have just described, we're confident that our strategy will continue to deliver on our financial goals of double digit earnings and mid-to-high single digit organic growth in fiscal 2010, 2011, and beyond. Now I would like to turn the call over to Tom, who will provide information on our results. Tom?

Thank you, Paul and good morning, everyone. Please turn to slide number eight.

We are glad to be able to report another quarter of strong revenue and earnings growth. Revenue grew year-over-year by 15.5%, fueled by 13% organic growth. In the quarter we acquired two companies for an aggregate consideration of $67 million plus certain earn outs. The first is the UK company focused on web enablement services. The second, is a domestic commercial security technology company, and due to the sensitive nature of this company's client relationships, we will not be disclosing any more information about the transaction. Both acquisitions are expected to be accretive to fiscal 2010 earnings.

For the quarter our direct billable labor, the more profitable aspect of our business grew a solid 7.9%. Our other direct costs were up an impressive 24.1%, driven by our highly valued C4ISR work. This follows our first quarter, when our direct labor was up 8.3%, and our ODC work increased 19.8%. As we said we seek to grow both direct labor and other direct costs, because each helps our customers with their important mission, and each contributes to our bottom line.

Next slide, number nine.

Our other key financial metrics showed meaningful increases. EBITDA was up 7.6%. Operating income was up 4.9%, pre-tax income up 8.6% and net income was up 26.1%. Our growth in our direct labor and ODCs fueled our operating and income growth, partly offset by higher indirect costs and selling expenses which Paul mentioned. Lowered net interest expense and a much lower effective tax rates were the major drivers of our net income growth.

The effective tax rate was 35.3% for the quarter, much lower than last year's unusually high rate, reflecting gains we've realized in this quarter in equity investments in our executive deferred compensation plan, as well as tax-related interest income associated to amended returns from prior years. We're now using a 37.2% effective rate for planning for the full-year, which is based on an assumption of no planned gains or losses through the remaining six months of our fiscal year.

Next slide, number ten. Our UK operation turned in strong performance for the second quarter. Revenue was up 70% over the same period, from last year, primarily the result of four acquisitions completed in the past 12 months. Our cash position at the end of the quarter was $148 million, with second quarter cash flow from operations at $16 million. Our DSO was 62 days, reflecting our long-standing commitment to operational excellence.

We record several large noncash charges each period, depreciation, amortization, stock comp expense, noncash interest expense. Given their magnitude, we report cash earnings per share which we believe is an important indicator of our performance. For the quarter, cash earnings per share was $1.30, well in excess of our GAAP earnings per share of $0.85.

Our balance sheet remains strong, our quarter-end net debt was $385 million, our net debt to trailing EBITDA leverage ratio was at a comfortable 1.6 times, and we have no near term financing requirements. We're confident we're able to execute mid-sized acquisitions with our current capital structure. And we believe we are able to access the capital markets for additional relatively attractive financing if the needs arise. Please go to slide number 11.

Due to improved expected operating results, and a lower tax rate we are increasing our fiscal 2010 guidance ranges. We now expect revenue to be between 2.05, -- excuse me $3.050 billion and $3.125 billion, and earnings per share to be between $3.30 and $3.50. With that, I would turn the call over to Bill Fairl. Bill?

Thanks, Tom. And welcome to everyone on the call. Slide 12, please.

This morning, I will begin my discussion of operations by addressing our funding orders. Contract funding orders for the second quarter increased to $599 million. That's growth of 11%, or more than $61 million over the second quarter of fiscal 2009. Funded backlog through the first half of fiscal 2010 was $1.75 billion. That's growth of more than 14% over the second quarter of fiscal 2009. Funding order growth is especially impressive given the prolonged continuing resolution.

Turning to contract awards, we received approximately $561 million in second quarter awards. And nearly half of those were for new work, and we won all our major recompetes. For the trailing 12 months, our contract awards totaled approximately $3.4 billion. Our largest single award for the quarter was FAST. A single award prime contract with a $190 million ceiling for a base, plus four one-year operations. This recompete award calls for CACI to provide logistics and training support in automated supply management for Navy and Marine Corps activities. The award continues our 23 year client relationship, and represents 50% growth over the predecessor contract.

We also won an $81 million task order award under LOGWORLD to support the Army's BRAC transition of C4ISR operations to Aberdeen Proving Ground. This award validates our strategy of using contract vehicles such as S3, to build strong client partnerships leading these new clients to turn to CACI for more value-added content for their critical missions. This new work calls for CACI to lead the efforts of 14 integrated teams through the planning, documentation, deinstallation, testing and reconstitution of 146 C4ISR laboratories at Aberdeen.

When you consider that this consolidation of critical C4ISR laboratories at Aberdeen is occurring during a time of war, with the need to balance live mission needs with relocation imperatives, you will understand why the Army has designated it its number one BRAC objective. I believe you will also understand the tremendous degree of confidence the Army has in CACI, and why we are so very proud to have been selected for this mission critical program.

Additionally, we received classified contract awards with afternoon approximate valve $100 million to support the intel community.

I would like to take a moment now to give you insight into the reason for the light contract award activity in the second quarter. We believe this is a timing issue driven by two major factors. First, and most importantly, fiscal year 2010 is turning out to be an exceptionally light year for CACI recompetes. Based on fiscal year '10 year-to-date, and analysis of the back half forecast, the difference between this year, and a typical level of recompete activity, translates into a fiscal year 2010 awards differential of over $1 billion.

Secondly, and this is more of an industry wide factor, the prolonged continuing resolution has delayed the awarding of new starts. At CACI, we see dramatic evidence of this in our opportunity pipeline. At the end of our second quarter, we had approximately $5.6 billion in submitted proposals under evaluation, and more than 90% of them for new business. This $5.6 billion is a 33% increase over the same time last year, when the total was $4.2 billion. Our strong operational performance this quarter was driven by new work in both intel and C4ISR. In both instances, we significantly increased our higher margin direct labor based revenue through new hires.

Examples of growing C4ISR programs include providing highly specialized "train the trainer" services for long-range surveillance systems, as well as integration support for rapid development of high priority sensor systems. On the intel side, our growth is broad-based across a number of clients, with a focus on counterintelligence and analysis, areas which we believe will experience solid growth, for the foreseeable future.

Our intelligence business continued its rapid growth during the quarter coming in 19.2% higher than the second quarter of fiscal 2009, and representing 40% of our business for the quarter. 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 growth for years to come.

Turning to our future business opportunities, our proposal activity continues at its brisk pace. In addition to the $5.6 billion in submitted proposals I mentioned earlier, we expect to submit $7.5 billion in new proposals during the back half of fiscal year 2010. That's a 50% increase over a year-ago when the total was $5 billion yet another indicator of a building bow wave opportunities.

Looking ahead, we believe our outstanding performance during the second quarter, and our strong leading indicators, particularly funding orders and opportunity pipeline, have laid the foundation for a terrific finish to fiscal year 2010, and build momentum for our fiscal year 2011.

Paul, that concludes my remarks.

Thanks Bill, and thank you, Tom, for your comments. Please, let's go to slide 14.

Before we open the call for questions, let me close by reiterating our confidence in CACI's strategy for continued growth. We have the right strategy, robust core competencies, and a commitment to delivering superior financial performance. Our funding orders and funded backlog, the best predictors of future revenue and earnings growth are increasing consistently, quarter-over-quarter.

We are pursuing new growth opportunities in areas that align with government priorities, including cyber, intel, and soft power. Soft power which requires the collective strength of a broad range of government agencies, in such areas as medical aid, communications, and socio-economic development is a growing focus for our government clients. It is critical to preserving global security in an increasingly complex and interconnected world.

Given our record second quarter financial performance, strong leading indicators and a healthy pipeline, we believe these positive trends will continue through fiscal 2011, and beyond. We are confident with the increase in our fiscal 2010 guidance, and our ability to outpace the market.

Before we conclude the call, I would like to thank all the men and women of CACI, who have worked so hard to serve our nation and deliver superior service to our clients. I would like in particular to thank those who have responded quickly to serve the critical needs in Haiti. Our teams are supporting radio communications for troops providing relief efforts, we provided a command and control system that would help restore national communications in Haiti, and we have assembled mobile hospitals to treat the wounded. Those employees are a perfect example of the dedication, courage and commitment that I am proud to say exemplify the culture here at CACI.

With that, Brendan, we can open the lines for questions.

(Operator Instructions).

We will take our first question from Brian Gesuale.

Good morning, Brian.

Good morning, Paul. Nice job on the quarter. I wanted to follow-up and thank you very much for the detail on the contract awards. But wanted to follow-up, maybe you can talk a little bit about the recompete burden in fiscal 2011, and then I know your win rate has really been a high-water mark. Maybe you can add a little detail around the win rates you have had and what you have done on the BD side to really juice those win rates.

Bill, you want to take those?

I sure will, Brian. So let's see, I think the first question was around fiscal year 2011 recompetes. And just looking at the -- at the pipeline there, I say right now, that fiscal year 2011 is looking like a much more normal year for us in terms of recompetes. And that's partly built around the assumption that there would be a S3 recompete sometime next year, not exactly sure of the timing. But that obviously would be a big factor in it.

As far as the recompete win rate, yes, you're absolutely right. It has just been terrific. And I think that's a real testament to the -- both the strength of the team here, project managers on up, and their relationships with the clients, particularly in what is a very competitive environment out there.

We have been able to actually increase our win rate. And as you know, I don't give specific numbers, but I told you last year it was the best it had been over the last five years. It is even better so far this year. Just terrific performance. And I attribute that just to solid relationships with the clients, and just fulfilling our promises.

Then we have also instituted over the last few years now, a program of our executives, that would be myself, Randy, Paul and others, getting out and meeting with all of our clients. Not just when the recompete are coming up but all through the performance, just to make sure they are getting everything they need from us. That really seems to be paying dividends to us.

We will move on to our next question from Michael Lewis of BB&T Capital Markets.

Good morning. Good morning. Thank you very much for taking my questions here. Tom, just a quick question with regard to EBIT margins. Should we assume that for fiscal year 2010, we would expect EBIT margins in the 6% to 6.5% range now?

Given where we are year-to-date, and given the growth -- the very positive growth in ODC, currently we expect our EBIT margins to be between 6.2% and 6.5% for the full-year.

Okay. And then just -- I guess this general question for either Bill or Randy specifically related to IA. And if we look at the IA front, how material has been -- has the growth been in intrusion detection technologies and offensive cyber operations for CACI's business units? In other words, if you look at your IA business, what is growing the fastest right now? Can you give us a little more information on that right now?

Sure, Michael, this is Randy. I would say right now, we got a pretty -- healthy pipeline in IA right now. About a $1 billion dollars. If you look at that pipeline, I would say that computer network defense is a critical area that our clients are really worried about. And as you can see, with -- as Bill highlighted or Paul highlighted on the Google attack, clearly our clients are focused on that area.

As far as the exploitation on the attack side, there is equal focus there but I really can't go into too much more in terms of the emphasis in that area. So we're pretty busy in that team, -- which is being headed up by the (cell ASME).

We will move on to our next question from Bill Loomis with Stifel Nicolaus.

Hi, thanks. Good results and outlook. Just the acquisitions you made, the one in the US that you don't want to talk about. What is the nature of the business, is it physical or cyber security? And then second, because it is commercial and not government from what you have said, is this a -- a new area of growth, and -- that you're exploring for the firm overall taking that capability, and moving it to the commercial sector? Thanks.

Yes, Bill, this is Tom. And you're absolutely right. We do not want to discuss more about it, and it is a commercial security technology company. And that is about all we're going to talk about.

But what about strategy?

Again, due to the sensitive nature of this company's client relationships we're not disclosing more information about the strategy and what the company does.

And we'll move on to our next question from Jason Kupferberg with UBS.

Thanks, good morning, guys. I wanted to ask a question about fiscal 2011. I know you're reinforcing the target for double digit earnings growth, and mid-to-high single digit revenue growth. So that in and of itself, I guess would seem to imply some degree of margin expansion next year. I mean, is that a fair conclusion? And if so, how do we get comfortable with the visibility on that objective, just given the general margin trends we have seen in the business over the past couple of years? I know the tax rate can obviously be a wild card in there as well but you have gotten some benefit from that this year. Who knows if that will persist into next year? So if you can talk a little bit about that, that would be great.

Sure, sure, happy to. This is Paul.

As we mentioned in the quarter, labor grew 7.9%, which we're very happy with. ODCs grew by 24%. So, we applaud both achievements. Each contributes to earnings. Although labor's contribution is much higher.

There is -- there is really no tradeoff that goes on between the two. In other words, we don't defer labor-based work to do ODC work. In fact, they tend to be one a companion to the other because we have the labor work. We are -- we have access to the ODC work. And this past quarter, for example, a great deal of the growth in ODCs, is related to the people who are providing -- our people who are providing surge capacity in C4ISR into Afghanistan. So there is a growth -- a large growth. In fact, that area of labor growth was the largest area of labor growth in our whole business, the labor associated with that C4ISR work, the ODC part of that was just so much larger.

So there is not a tradeoff we're making one for the other. They come as almost as semi independent in volume, but they are connected in terms of the work itself. Again, it is largely ODC growth coming from C4ISR.

Now I will remind you of what we have said before. Some five years ago we made a conscious decision, in fact, a strategy, that we developed was to make an entry in a big way into the C4ISR market place. Why? Because C4ISR is the primary sets of technologies that define the battlefields of the future. It is the technology that on the one hand protects the force, and on the other hand, provides the vital intelligence necessary to target the enemy.

And so we made it a strategy, back five years ago to enter this space. We had at the time about $50 million worth of work in C4ISR, and that strategy has worked beautifully. We are now around $500 million. So, we have had an order magnitude growth in our C4ISR business in five years. And so it is a remarkably successful strategy that has yielded our results today.

It is brought with it this, this unusual consequence of mix difference. But we're happy to have both parts of that work. And, when it is driven by things that are warfare-related or battlefield activity related, we can't often predict what those needs are going to be well in advance.

For example, a big part of the growth that occurred this quarter, happened in the last few days of the quarter, when the president announced that there would be a surge of 30,000 troops into Afghanistan. We were quickly alerted to surge forward, and provide a variety of equipment related to communications in the field and C4ISR sensing collection systems in the field.

So, all of this is good news. It has the unintended consequence of bringing a margin that is lower, but we don't focus on that. Our objectives are to grow earnings per share at a double digit rate. We're confident we can do it this year, and fiscal 2011 and beyond.

But are you confident that the margins will go up next year? I'm just trying to understand --

In terms of margin, here is my belief. The end of the story on this strategy is, now that we have such a strong partnership with our Army clients in this area, we're starting to get more and more labor work that comes with higher margin. Bill talked about the $81 million award for BRAC work. That is bringing a lot of labor, and excellent margins, high value work, real partnership with a client. We're going to see more and more of that work. The exact timing of when that work starts to exceed the rate of growth of the ODCs is very difficult for us to predict. But we're convinced that over the long term, yes, the margins will start to come back up because we're going to add more and more of this rich, high value, labor-based C4ISR work to the portfolio going forward.

Now, if you ask me specifically about fiscal 2011, I can't give you exact numbers. But my expectation is we have -- we will see the bottoming of this margin. And over time we will start to see improvements in margin, because we have many initiatives underway, in both the overhead areas. And on each and every contract bill, Randy and their teams work vigorously month after month to review every one of these contracts to optimize the profit potential on each and every contract. So I do believe we will see margins improving as we go out into the out years. The exact time frame when it happens is more difficult, because it is related to client requirements and we don't control those.

We will move on to our next question from Mark Jordan with Noble Financial.

Good morning, Mark.

Mr. Jordan, your line is open please make sure your mute function is turned off? And hearing no response, we will move on to Tim Quillin with Stephens, Inc.

Good morning.

Good morning, Tim.

Well, I -- just one quick question on the ODCs. And I understand your strategy there, but how should we think about sustainability and how that C4ISR resale activity is related to the wars?

Well, a part of it is related to the -- part of the ODC work is not resell. It is us provisioning equipment, materials, and a subcontractor labor to the war -- to the needs of the C4ISR community.

C4ISR is being applied today in a theater of war. But C4ISR is going to be the largest area of investment for the Department of Defense, because it defines the battle field of the future. All of the sensing technologies that are used to protect the force, and to detect and target the enemy, are built upon the C4ISR technologies that are being developed over time. So this is a high -- a high leverage force multiplier for the Department of Defense, which they've declared to be their largest investment area going forward. Because it gives our war fighters such superiority over the adversary, by the technological leverage our war fighters have such an edge, in the fight.

So this will continue for years, and decades to be an area of high investment for the Department of Defense. That's why we -- it is why we created a strategy five years ago to focus in this area, because it was clear.

Understood. And just a question on acquired companies. Maybe Tom, could you tell us what your expectations are as far as contribution of revenue from acquired companies in 3Q and then for fiscal 2010? And then is the acquisition of the domestic commercial security company accretive to earnings? Thanks.

Yes, well, first of all they are accretive to earnings -- both acquisitions are accretive to earnings. In terms of contribution to revenue, we put in our press release what the acquisitive revenue is, and that is somewhat indicative of the revenue in the third and fourth quarter as well. So you can refer to those numbers we have provided to you.

We will go once again to Mark Jordan from Noble Financial.

Thank you, gentlemen. Sorry for the confusion. I would like to just ask a question related to the submitted bid total of $5.6 billion. You stated about 90% of it was new business. Looking at that new business opportunity, is -- what percent of that is there an incumbent in place? And what percent represents really new programs where it might be a more level competitive field?

Mark, this is Bill Fairl. I don't have the exact percentages with me, but I can tell you that of that amount there, one of the largest bids we have in there in terms of dollar volumes -- and, by the way, of that total, over 12 of those bids are over $100 million.

Now one of the largest ones in there, is a brand new start. And, again, I take that back to why the award total was light, because they can't start those brand new programs there. So, that is by itself there, in terms of quantity, is the biggest one.

Okay. Any color you could have on that $7.5 billion that is pending, pending submittals, in terms of mix of competitive situations or new starts?

Yes, you bet. So there, kind of consistent with this picture I have painted with you of a light recompete activity this year, and then building towards normal next year. When you look out to these proposals we're going to submit, which most of those would be awarded, say, maybe late this fiscal year but thinking about next year, that is more like 60% recompetes, and 40% new. So returning to more of a normal sort of distribution if you will.

Now inside of that pipeline of $7.5 billion, 34 of those are $100 million or more. So a lot of really big deals in there.

And we will take our next question from Ed Caso with Wells Fargo Securities.

Good morning, Ed. This is Chris for Ed.

Morning, Chris.

Bill or Randy, can you comment on what you're seeing in the civil side of the business, and your expectations for this year?

Sure. This is Randy. Civil side remains very robust. I have seen lots of opportunities in the Department of Homeland Security. And it -- as you're well aware of, we have a heavy footprint in Department of State, and those requirements continue to evolve. So it is a very robust area for us, and constitutes a lot of that opportunity in the bid pipeline that Bill was referring to.

In fact, Randy, I will just add to that, that big deal, the new start I was just referring to to the previous question, that is on the civilian side.

The other thing I tell you in the way of sort of color to all of this is that the -- the civilian work that we do would not be subjected to this freeze sort of thing that the President has been talking about. It is related to national security sorts of issues and international relations.

Okay, thanks. And then separately, can you comment on any trends in attrition, hiring expectations, labor market in the Washington area?

You bet. So -- in terms of voluntary attrition, again, I mentioned last year, that that was the lowest voluntary attrition rate we had had again since we started measuring this over the last five or six years. It is significantly lower, again this year. So I think a lot of these programs that we've put in place, things like management training and improved communication methodologies, looking at our benefits, et cetera, have really paid off in terms of reducing our voluntary attrition. It is an all time low here. Just excellent there.

In terms of hiring, we had a strong -- I didn't mention in my script -- we had a strong hiring quarter in the second quarter. And the number of firm open hiring requisitions if you will, went up over the quarter as well. So kind of think there, that we added nicely to our direct labor, so that's Paul's point about emphasizing direct labor growth. That is really what drives the earnings. And then the demand is still there, because the number of firm open recs went up at the same time, so that looks really good as well.

We will take our next question from Brian Kinstlinger with Sidoti & Company.

Hi, good morning. Thank you. You talked about the low recompete year and a pick-up in awards, can you give us expectations for contract awards in fiscal 2010? And maybe what percentage of the outstanding proposals that you talked about are ODCs versus direct labor content?

Okay, Brian, this is Bill Fairl. I -- to be quite honest -- I have been in this business a long time. I have never been able to predict exactly when awards are going to occur. I can tell you when I look at the pipeline, again, just to go back over the data, we have $5.6 billion in submitted proposals. A dozen of those are $100 million or more, 90% plus are for new business. I expect the majority of those to be awarded, by the end of our fiscal year 2010. But I really don't have control over that. And we all know that in this business we do see things slip from time to time.

So I am not going to predict exactly when these awards will be made rather, but I will tell you that our win rate is staying way up there. We're very pleased with our win rate. Not just on the recompete side, which we're extremely pleased with, but also on the new business side. So, you put that together, we're in this area where there is high demand. We have a tremendous pipeline, growing opportunities, lots of big ones, 12 and over and a terrific win rate. It is going to happen. Now, exactly what quarter that's will fall -- and I'm not -- my crystal ball isn't that good.

Right. So that bow wave is there. There has been little or no cancelation of RFP opportunities. In other words opportunities are not getting canceled. They are just mounting up. And the win rate will over time eat away at that big bow wave of submitted proposals. So we should see the revenue start to convert.

When you look at those proposal can you give me a sense of ODC content versus direct labor? And then my follow-up was, do you have free cash flow guidance maybe for the year?

Okay. So this is Bill again. I will start with the ODC versus direct labor.

I will tell you in general, this part of our -- I will call it our margin improvement program -- understanding everything Paul said earlier, that our top priority is to serve the client. But we do have an active margin improvement program, in place. And a big part of that is to seek the maximum CACI labor content in our bid pipeline.

So every time Randy and myself, Dale Luddeke, that runs our business development, we look at all these bids that are coming through, where are we going to spends our B&P money. Our first priority to spend it on those deals that offer the most CACI labor content value-add to the client, if you will, going forward here. And in fact, the bid that I referred to earlier, that large, totally new start, civilian-related thing, very high CACI labor content. We made that decision explicitly.

In terms of the cash flow, Brian, this is Tom. We had really a nice first half of the year in terms of operating cash flow. Last year we were $14 million. This year we're around $66 million, based on that we're increasing our estimate for operating cash flow for the year to the range of around $150 million. CapEx should be around $20 million higher this year, due to the relocation to the new facility. So our free cash flow would be around $130 million.

We will move on to our next question from Jeff Houston with William Blair.

Wonder if you could talk a little bit about the sequential revenue ramp for the rest of the fiscal year? Should we expect third quarter revenue to decline sequentially and then increase nicely into the fourth quarter? Or should it be relatively flat?

You want to take that one?

Yes, I do. So, we gave you a full-year revenue guidance as part of our -- the numbers here, and kind of implicit in this, we expect the revenue right now in the third quarter to be a bit comparable to the revenue in the second quarter, and then a ramp up in the fourth quarter.

Okay. Thanks. And then separately, could you quantify the size of acquisitions a little bit more? I know you said mid size, but could you quantify that? How big of an acquisition would you look at?

So going forward, I think that we had a period here since October of last year, where we were really reluctant to move aggressively with our M&A program. Now that we are observing capital markets improving, access to capital is easing, interest rates are coming down. There are many attractive candidates or acquisitions at reasonable valuations, so we, you should expect that we would increase our M&A activity in terms of size.

There is both the opportunity for us to find small niche technology companies that add real capabilities to our functional core competencies or even a whole new competency. Those tend to be in the range of 20 -- $20 million a year to $100 million a year. But -- there are also larger opportunities, where we can pick up a whole new client sets, and new capabilities as well. And we're also looking, have been looking, and continue to look at large transformational M&A opportunities. And so I would say the full spectrum is in our radar screen, as we speak.

We will take our next question from Chidozie Ugwumba with Neuberger Berman.

Hi, thanks for taking my questions. Just quickly, can you quantify the onetime cost related to facility consolidation, and any sort of exceptional seasonal compensation expenses?

I will let Tom -- how do you want to answer that?

Well, you know, all 3 items are kind of material. That's why we kind of disclose them -- in kind of a rough order of magnitude, a one-time move expenses were approximately a $1 million -- move expenses plus some duplicative rent as we move our employees from one facility to another facility.

Our business in proposals, approximately a million dollars more than they were in comparable periods last year. Bill talked about a very strong pipeline, and we felt that was a very kind of reasonable investment. In terms of the variable compensation plans, as most of you know, our compensation plan that is disclosed our proxy are based on net income for CACI. We're trying to align the incentives of the management team, with what is most important to our share holders. And we chose, and the compensation committee chose net income to do that. Our net income performed quite nicely, so we had higher variable compensation expense both tied to performance stock, as well as cash.

Two years ago we changed our stock compensation plans to put performance shares in place, as opposed to outright grants. And so as the Company performs better, (technical difficulty) greater noncash stock compensation expense.

Order of magnitude for the variable expenses, approximately $4 million higher than they were comparable period last year.

Okay, thanks very much. That is very helpful. And, so with respect to the guidance, I guess given the acquisitions, one could interpret the increasing guidance is not representing much acceleration in revenue, over your expectations at the beginning of the fiscal year, in terms of acceleration revenue over the balance of the year. Is that a correct interpretation?

I think the guidance kind of speaks for itself. I think I wouldn't argue with the way you have described it. But basically -- most of the guidance increase was due to the actuals in the quarter. I think that's what you're asking, right? It is less to do with the next two quarters, and pretty completely to do with the second quarter.

We will move on to our next question from Erik Olbeter with Pacific Crest Securities.

Yes, thanks guys for taking my call.

Hi, Erik.

Just -- just one question, looking at the civilian business again, can you give us a little bit of color on the quarter? It looked like it shrank year-over-year a little bit. Did DOJ and that contract there play a factor there? How should we think about your opportunity sets moving forward in that space?

Erik, this is Bill Fairl. That decline was due principally to a really short-term, high-priority project we had a year ago for one of our civilian clients. It was really a quick turn. They said come on in here, we need some help. Really an important project. Really it only lasted about a quarter or so. Very high burn rate. Happy to do it. We knew it went away, at the same time. That was the number one factor in that decline.

Civilian business, looks good, when we look at the pipeline, there is really -- there really is going forward a really high contribution of opportunities in the civilian area. And again as I mentioned earlier, I think this is exempt from that -- in fact I know it is exempt from that freeze the President talked about, because it is related to national security and international relations.

Right. Sounds like a lot of things will be exempt from that freeze, the way he defined it.

Real quick, just on the DOJ question, is it right to think we're roughly in line with where we were last year, still around $18 million or so?

Yes, it is about level, that's right.

We will move on to our next question from Tobey Sommer with SunTrust Robinson Humphrey .

Thank you. Wanted to ask you a question about the S3 contract. Wondering if you could share with us what contribution that made to revenue, and maybe where was it a year or so ago? And how much did it contribute to the organic growth in the quarter?

Yes, Tobey, this is Tom Mutryn. While we qualitatively talk about our various contract -- contract vehicles, we have chosen not to disclose specific dollars of revenue or profitability, with regard to specific contracts. And so while S3 is kind of material to our business, it is -- we're not choosing to disclose that amount of detail.

But I will say while S3 has significant ODC content which we spoke about before, the S3 contract contributed approximately 25% of our direct labor growth. Our direct labor growth is up 7.3% in the quarter -- 7.9% in the quarter -- 25% of that growth was driven by S3.

I think it is also fair to say that S3 was a driver of our organic growth. Sure. It is fair to say that. Not the only contributor but a driver.

Yes.

We will take a follow-up question from Brian Kinstlinger with Sidoti & Company.

Hi, great, Tom. Just to follow-up on the cash flow. You're looking for cash flow to be flat year-over-year. I am curious with earnings growing pretty strongly this year, what was the reason you think operating cash flow will be flat, as opposed to in line with the earnings growth through operating earnings growth?

Good question, Brian.

One of the challenges of cash flow is the choppiness of cash collections. And we spoke about that -- on any particular day -- and we look at there every day, and we have a very good team in place we focus on cash collections every day. Some days we will collect $4 million. Some days we will collect $25 million. That is very choppy collection activity. And it turns out that the end of a quarter, or at the end of the fiscal year, if we have two $25 million days versus two $5 million days, we're going to have significant swing in our accounting cash flow from operations.

As a result of that, we're trying to -- I won't say be conservative, but we're cognizant of those fluctuations, those daily fluctuations. And we're trying to guide to that level that we believe we will be able to hit.

So last year then was a big collection at the end of the year, whereas this year you're just not quite as sure and it is too uncertain?

Last year was $150 million. The prior year was $160 some-odd million. The year before was $160 some-odd million dollars. So one could suggest that last year was a bit light based on kind of normal trends.

You also have various changes in working capital, which are big drivers. That's as companies get larger, there is more working capital requirements. The working capital requirements of direct labor are different than the working requirements of ODC subcontractor mix. A lot of depends upon when we get the subcontractor bills in place, how quickly we pay those bills, what are the terms of individual contracts. So a lot of factors come into play, and it becomes inexact science to pin down the numbers specifically.

On a kind of a macro trend I am very comfortable to say that we're a cash generation machine. We very predictably generate cash. It's hard to determine at what day it will come in or what month, but that cash will come in.

(Operator Instructions).

And we will take a follow-up question from Tim Quillin with Stephens Inc.

Yes, just a real simple question on tax rate. I know your guidance is 37.2% for the year, but for the next couple of quarters, and going forward a more normal rate would be 38%, is that right?

A more normal rate would be around 39.5%.

39.5%.

That's correct.

Okay. But over the next couple of quarters, 38?

Well, --

To get to that 37.2?

It will be slightly higher -- around 37.7 for the next couple of quarters.

37.7, okay. And how should we think about that for fiscal 2011? I know that's a difficult question, but how would you think about it for fiscal 2011?

I would revert to a more normalized tax rate of 39.5%.

All right. And we have no further questions in our queue. I would like to turn the call back over to Mr. Cofoni for any additional or closing remarks.

Thank you, Brendan for all your help today. We certainly appreciate that. And I would also like to thank everyone who participated on the call today. Your questions and your interest in our Company is very important to us. That concludes our conference call. Thank you all again.

And once again that does conclude today's call. Thank you for your participation.