CACI International Inc (CACI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International third 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 call over to Mr. Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Mary, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations at CACI International. 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. During our presentation, we'll also make every effort to keep all of you on the same page as we are. So let's move to slide number two.

Before we begin our discussion this morning, I'd 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. 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. In our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call.

And I would also like to point out that our presentation today will include discussion of non-GAAP financial measures. 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. With me to discuss our results and answer your questions are Tom Mutryn, Chief Financial Officer, Bill Fairl, President of U.S. Operations, Randy Fuerst, Chief Operating Officer of U.S. Operations and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited UK. Please turn to slide four. We are pleased to report that we exceeded our financial goals for yet another quarter. As you know, our financial goals are to achieve double digit earnings per share growth and mid- to high single digit organic growth. In the third quarter, earnings per share grew by 21% over the third quarter of 2009. And organic growth was 14% growth year-over-year. The increase in our operating income was driven by continued growth in both direct and other direct costs. We are proud -- excuse me, direct labor and other direct costs. We are proud to say that we have achieved double digit organic revenue growth in ten out of the last 11 quarters, and double digit net income growth in eight out of the last nine quarters.

CACI offers innovative technology services and solutions through our eight core competencies. These capabilities help our customers ensure achievement of their mission goals effectively and efficiently. We experienced broad-based growth across all our core competencies, with the largest increase in C4ISR Integration Services. Because of the ongoing need for information collection, analysis, and presentation to both protect the nation's war fighters and target the enemy, the demand for our services in this area is strong and is expected to remain so. We also had excellent growth in our enterprise IT and network services core competency. A key growth driver in this area was an increase in the work we performed on a classified contract for the intelligence community for whom we provide IT services. We're excited about our opportunities to continue to drive growth through this core competency as the government increasingly seeks to improve the performance of its IT systems. By combining our legacy network performance modeling capabilities with our track record of success, in both planning and operational phases of special purpose enterprise IT and network services programs, we're able to deliver comprehensive performance-based IT solutions backed up by well defined service level agreements.

Please turn to slide five. As you have heard me say in the past, we believe our consistently strong financial performance is a result of our focus and well defined strategy. Our strategy has three main components. First, provide mission critical services to support national security priorities in well funded areas. National security threats remain high. The asymmetric threat of global terrorism both at home and abroad will demand new technologies and solutions. This is our focus. Second, continue to build on our competitive advantages in defense, intelligence, Homeland Security, and IT modernization. Our deep knowledge of these domains, and our long-term relationships with our clients give us a competitive advantage. Third, capitalize on new opportunities in existing areas, adjacent markets, and new markets, both organically and through strategic hires and acquisitions. CACI's agility at anticipating shifting market needs and moving quickly to acquire new skills and develop new solutions is a hallmark of our 48-year history.

Slide six, please. The importance of our strategy was reinforced when the government's proposed fiscal 2011 budget was released. Overall, the budget calls for a 4% increase in Department of Defense spending. In the sectors on which we're focused, the areas of the government's pressing needs in defense, intelligence, Homeland Security, and IT modernization, are being funded at even higher levels. In fact, the O&M budget where we derive the majority of our funding calls for an 8.5% growth. We are confident that both demand and funding for the services we provide will remain high.

Last quarter, we told you that our pipeline is robust and that we expected the pace of awards to accelerate. The bid pipeline remains attractive. And, we have seen some early indications that the pace of awards has begun to pick up. Bill, will give you an update on what we're seeing on that in just a few minutes. We also see a favorable environment for merger and acquisitions. Accordingly, we are accelerating our M&A program to capitalize on the increasing number of reasonably valued attractive candidates that fit our growth strategy and the availability of capital at reasonable interest rates.

What distinguishes CACI's M&A program is our proven track record of successfully integrating acquisitions. We preserve the value and build on the best qualities of the companies we acquire as we integrate them into our organization. We believe this positions us as an acquirer of choice and gives us an advantage as we pursue acquisitions in a competitive environment. Our recent acquisition of SystemWare is an excellent example of of our successful integration capabilities. SystemWare offers proprietary solutions for monitoring signals that enable customers to assess their security environment. Systemware's technologies fit well into CACI's cybersecurity and counterintelligence growth strategies. We will benefit from the addition of its established customer base and industry-leading technology and associated services. We will also take these solutions to our existing clients to help meet their needs.

I'm confident that our focused strategy along with our continued excellence in execution will enable us to achieve our financial goals of double digit earnings and mid- to high single digit organic revenue growth in fiscal 2011 and beyond. Now I'd like to turn the call over to Tom who will provide more information on our results. Tom?

Thank you, Paul, and good morning everyone. Please turn to slide number seven. We are pleased to be able to report another quarter of strong revenue and earnings growth. Revenue grew year-over-year by 16.3%, fueled by 14.2% organic growth. For the quarter, our direct billable labor, the more profitable aspect of our business, grew a solid 6.6%. Our other direct costs were up 28.6%, driven in large part by our highly valued C4ISR work. For the first nine months of our fiscal year, our direct labor was up 7.6%, and our ODC work increased 24.2%. As we have previously said, we seek to grow both direct labor and other direct costs because each helps our customer with their important missions and each contributes to our bottom line.

Next slide, number eight. Our other key financial metrics shows meaningful increases. EBITDA was up 8.4%. Operating income was up 5.2%. Pretax income was up 9.1%. And net income was up 21.6%. Our growth in our direct labor in ODCs fueled our operating income growth. Lower net interest expense and a lower effective tax rate were major drivers of our net income growth.

The effective tax rate for the quarter was 34.5%, reflecting gains we realized this quarter in equity investments in our executive deferred compensation plan as well as tax benefits related to software development activities. We are now using a 36.3% effective tax rate for our planning for the full year, which is based on an assumption of no net deferred compensation plan gains or losses for the fourth quarter of our fiscal year.

Our UK operation continued to turn in strong performance in the third quarter. Revenue was up 58% over the third quarter of last year, driven largely by three acquisitions completed in the past 12 months. The UK's net profit margin for the quarter was 6.9%.

Next slide, please, number nine. Our cash position at the end of the quarter was $175 million, with third quarter cash flow from operations at $56 million. Our DSO, which was an industry-leading 59 days, has continued to improve, reflecting our longstanding commitment to operational excellence. We report several large noncash charges each period. Depreciation, amortization, stock compensation expense, and noncash interest expense. Given their magnitude, we report adjusted earnings per share, which we believe is an important indicator of our performance. For the quarter, adjusted EPS was $1.32, well in excess of our GAAP earnings per share of $0.87.

Our balance sheet remains strong. Our quarter-ended net debt was $354 million. Our net debt to trailing EBITDA leverage ratio was a comfortable 1.5 times. And we have no near-term financing requirements. We are confident that we are 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 ten. Due to improved, expected full-year results, we are increasing the lower end of our fiscal year 2010 earnings guidance range. We still expect revenues to be between $3.05 billion and $3.125 billion, and we now expect our earnings per share to be between $3.38 and $3.50 per share. With that, let me turn the call over to Bill Fairl. Bill?

Thanks, Tom and welcome to everyone on the call. Slide 11, please. This morning, I'll begin my discussion by addressing our funding orders. Contract funding orders for the third quarter increased to $886 million. That's growth of 19%, or more than $140 million over the third quarter of fiscal '09. Our funded backlog through the third quarter of fiscal year 2010 was $1.88 billion. That's an increase of 17% over the same point in fiscal year '09.

Turning to contract awards. We received approximately $455 million in third quarter awards, and most importantly, we won all of our major recompetes. Our largest single award for the quarter was a $219 million award from the US Navy to provide software development and maintenance services to the space and naval warfare system center Atlantic. The contract supports the automation of logistics, supply, financial, maintenance and medical functions for ships, submarines, and aviation squadrons. The award continues a more than 25-year relationship that we have with this client organization.

S3 remains our largest single contract, and I thought I'd provide you a little insight into the diverse nature of business base on this vehicle. As you may know, S3 is a task order contract under which we serve a large number of distinct clients through specific task orders. We're currently supporting 45 different clients across the Army's C4ISR community, including the intelligence and information warfare, night vision and electronics sensors, and space and terrestrial communication directorates of the Army's communications, electronics research, and development center. Our support is provided through 67 active task orders and ranges from research and development to quick reaction prototyping, modeling and simulation, business operations, cybersecurity, logistics, and training.

Turn to slide 12, please. On last quarter's call I provided insight into the reasons for the light contract award activity in the second quarter. I'd like to briefly reiterate them now, since they impacted our third quarter as well. First, and most significantly, fiscal year 2010 is an exceptionally light year for CACI recompetes. The difference between this year and a typical level of recompete activity translates into an FY 2010 awards differential of well over $1 billion. Secondly, this is more of an industrywide factor, the prolonged continued resolution which finally ended in late December delayed the awarding of new starts. At CACI, we continue to see evidence of this in our opportunity pipeline. At the end of our third quarter, we have approximately $5.1 billion in submitted proposals under evaluation and nearly 90% of them were for new business. Within the last month or so, we have seen some increased award activity as potentially signaling an accelerating pace of awards.

Our intelligence business continues rapid growth during the quarter, coming in 26% higher than the third quarter of fiscal '09 and representing 40% of our business for the quarter. Intel growth this quarter was driven primarily by increased work in our C4ISR and enterprise IT core competencies. Hiring progressed nicely through the quarter. Voluntary attrition continued its trend of improvement, and we ended the third quarter with more firm opened hiring requisitions than we had at the beginning of fiscal year 2010. These are all good forward indicators of continued direct labor growth.

Turning to our future business opportunities, our proposal activity continues at its brisk pace. In addition to the $5.1 billion in submitted proposals I mentioned earlier, we expect to submit over $8 billion in new proposals during the next two quarters. That's a significant increase over a year ago when the total was $6.5 billion and yet another indication of a continuing bow wave of opportunities. Looking ahead, we believe our outstanding performance during the third quarter and our strong leading indicators, particularly funding orders and opportunity pipeline, have set us up for a really strong finish to fiscal year 2010 and lay the foundation for another great year in fiscal fiscal 2011. Paul, that concludes my remarks.

Thanks, Bill, and thank you, Tom, for your comments. Let's go to the last slide, please. Before we open the call to questions, let me reinforce our confidence that CACI's proven strategy, combined with our operational excellence, provides a solid base to achieve our financial goals for fiscal year 2011 and beyond. We are focused on our clients' greatest needs in well funded areas. We offer innovative technology, services, and solutions across our eight core competencies and have longstanding and deep relationships with our customers. And we are pursuing growth opportunities, both organically and through acquisition that we are confident will enhance long-term shareholder value. With that, Operator, we can open the call for questions.

Thank you. (Operator Instructions) Our first question comes from Bill Loomis from Stifel Nicholas.

Hello, thank you. Good quarter. Looking at the bids. If we look at the metrics you gave on the bids outstanding, looks like that was down a little bit sequentially, and then the bids expected to be submitted was up. But generally about the same as what we saw in the December quarter. Could you just give us -- characterize that for us since awards were light in the quarter. Even though we saw a nice pickup in the December quarter on those metrics. Thought that might continue in this quarter. How is the RFP activity out there?

Bill, it's really strong. We continue seeing what we've seen, gosh, for the last 18 months or so where we just have a wealth of opportunities to bid. So the trick in this business is to choose wisely what you're going to invest your bid and proposal dollars in. It's still a very healthy environment out there for us. Wish they'd start picking up the pace on these awards a little bit. So we'll see some early indications, and we'll see if this continues here.

Okay. And then on the S3 contract you had, that was solicitation for the recompete. Looks like it was cancelled. How do you view that related to your business and any expected renegotiations as that follow-on year gets extended?

Okay. So, Bill, so you're referring to the fact that earlier this week the government officially cancelled the S3 procurement. As you know, we have a longstanding relationship with this client organization. It goes back well over 20 years. So what we do is we reiterate their official positions here. So that's the official position right now. In the meantime, we're concentrating on doing the very best job we can for this client. The level of growth we've had on this contract, both ODCs and direct labor, I think is a testament to the kind of support that we provide there. That's what we're focusing on, and I feel like we're in good shape. We're going to stay in good shape whichever way the client chooses to go here. They have a variety of options available to them at this point.

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

Thank you so much, and thanks for getting my question in here. Paul, I wanted to ask you a quick question about a statement made by a competitor that they're noting some of their contracts being changed from one type of higher margin contract vehicle to a lower margin contract structure, which would obviously have an impact on their profitability. Is CACI seeing similar situations of contract resets on vehicles coming up in recompetes?

No, there's no trend. There's no particular trend. Bill might want to add some comment to it.

Mike, the only thing that I would comment on is as you know, years ago the Navy established its SeaPort vehicle which is generally that they issue a cost reimbursable task orders. That was the big movement that we saw, and these days there's nothing really unusual going on in our client set.

Okay. Thank you. Just one follow-up here. Tom, with regard to the EPS upside in the quarter. Was most of this attributable to -- with regard to the tax EPS impact to the Rabbi Trust. In other words, was a $0.03 to $0.04 benefit in the quarter as a result of the Rabbi Trust, a loan? Or was there some other tax benefits in the quarter?

There was some other tax benefits in the quarter. Scripted in the press release, we reference some tax benefits associated with software development. There are provisions in the tax law which provide certain tax benefits for manufacturing activities, and some of our software development activity falls within those guidelines. So we're able to take advantage of some of those provisions. The other one I will comment upon is for the quarter, although we have taken advantage of the lower tax rate. Oftentimes, some of that is offset by higher compensation expenses. And so not all of that tax benefit is necessarily flowing to the bottom line. So adjusting for the tax rate, you still get the meaningful increases.

Our next question comes from Mark Jordan from Noble Financial.

Good morning, gentlemen. Question relative to -- a couple questions relative to the M&A environment. One, do you see much activity in terms of some of the larger primes potentially divesting some of their [SETA]-conflicted work? And if so, what is your appetite to try to exploit that opportunity?

Yes, we -- there was one notable divestiture of course that's been publicly announced, that was divestiture of task organization from Northrup Grumman. I'm not aware of any other large divestitures like that that are going on. Doesn't mean they're not, but I'm not aware of them. Whether or not that would be attractive to us is a case-by-case assessment. And the real question is how does it fit our strategy for growth. And our M&A strategy is focused in areas of C4ISR, cyber and intel and healthcare, and potentially, energy spaces. This is where we have created our strategy for M&A growth activity. So if there is a divestiture that would happen that was in one of those places, we would certainly look at it.

Our next question comes from Edward Caso from Wells Fargo.

Hello. Tom, could you get us updated on the -- you've got a piece of debt coming due in May '11, and there was some chatter that you might refinance it early. And I heard you talking about availability -- getting availability of funds in an increasingly consolidating market. Could you get us updated on where you are in that process? What financial implications there might be, given current rates? Thanks.

Sure thing. So we have a credit facility with a $280 million outstanding term loan and $240 million of unused revolving borrowing capacity. That comes due May 2011. We anticipate refinancing that or entering into a replacement facility sometime in the first half of our fiscal year '11. We entered that facility in 2004 and had subsequent amendments to the facility. Borrowing rates are quite attractive. The borrowing rates on our term loan are LIBOR plus 150. Given the markets today, when we refinance it, we anticipate our borrowing costs will go up to ranges, LIBOR 250 to 300 seem realistic given today's marketplace. But we'll see how the market evolves over the next several months, and we'll keep you posted.

Our next question comes from Jason Kupferberg from UBS. Jason, your line is open.

We'll go to the next question.

Our next question comes from Brian Gesuale from Raymond James.

Good morning. Just a couple quick questions for you. Paul, wondering if you could comment on the business growth outside of S3. S3 has grown so rapidly. Wondering if the rest of the business is growing? Or maybe you could provide some context for us, please?

Really -- thank you, Brian. All eight core competencies are growing. The fastest growing of course is C4ISR. And right behind that of course is network, and even call it, enterprise IT and network services. That's a fast growing area. Our business systems solutions is another fast growing competency. Those competencies go across multiple clients' portfolios, but I'd say those three are the fastest growing. All eight are growing.

Great. Thanks. Just one follow-up. Paul, it looks like according to my count, the operating margins were the lowest they've been at least this decade. Can you maybe talk about a plan to get them there short of maybe just having S3 growth slow down because I know that's weighed on margins over time.

Principally, as you know, Brian, that is driven by the mix of work -- is the number one determinant. And the mix as Tom pointed out, labor was up handsomely, 7%, quite proud of that. The ODCs were way up, 28%, which is even higher than they've been in recent past quarters where it was more like 20%. This is almost to 30%. So I think that is the number one determinant. The margin of course is a resulting calculation and we -- as long as we continue to see strong growth in labor like we've been having, we've added nearly 400 people this year organically due to the demand. And most of that growth, in fact, the largest growth -- cost center for our labor is in that C4ISR area that S3 represents a big part of. So I'd say that the ENCORE vehicle has also been a very productive vehicle for us. It brought a lot of ODCs as well. But it brought lots of labor work on network engineering, network services in the last quarter. I think bottom line, Brian, as long as we see robust growth -- remember, five years ago we started with about a little over 100 people in the C4ISR space. Today, we have over 400 people. We're going to grow this to be a juggernaut in C4ISR. We have probably spent $1 million of D&P to get access to the S3 vehicle, and we've grown this enormously, due to the hard work of a really fantastic group of people. So we would love a higher margin. We work at margin every day here. We have cost containment. We have cost [heart] programs. But as long as we're growing our labor in these critical areas like C4ISR, I'm quite happy.

Our next question comes from Cai von Rumohr from Cowen and Company.

Yes. Thank you very much, gentlemen. Good quarter. Thank you. You mentioned some pickup in award activity. Could you give us some sense how much have awards been so far in the quarter? And in what areas -- what are the signs that you're seeing that awards are starting to pick up?

Okay,Cai, this is Bill. We don't generally give in-quarter award numbers. I don't think we've ever done that so won't do that today. I will tell you that I've talked a lot about our pipeline of bids that are in there and seeing some awards recently right toward the beginning of March, and then as we moved into April, a slightly increased pace of award activity. So in my remarks I said potentially signaling an accelerated pace of awards. I want to see a few more data points before I'm willing to call that a trend here. But so far, so good in the last part of the third quarter and the first month of Q4.

Your next question comes from Robert Spingarn from Credit Suisse.

Good morning.

Good morning.

Just to follow on that, it sounds like the logjam that one of your competitors spoke about maybe two or three weeks ago is starting to lift?

Yes. Early indications of that, yes.

Okay. Paul, a very high level question. Actually, I'll start with this one. You mentioned O&M grew 8.5% in the fiscal '11 budget. How sustainable do you think that level of growth is beyond into the out-years? You're referring to the growth within the Department of Defense budget which overall grew [percent].

Correct.

Within the Department of Defense budget a piece called operations and maintenance, which represents $200 billion of the roughly $700 billion, is scheduled to grow 8.5%. And we think that this is -- the O&M part of the budget is the most resilient part of the defense budget -- is the least vulnerable to reductions because it is a sustainment activity. It is what's necessary to sustain the force. And so that rate of growth is a very positive thing. I won't comment on what government fiscal '12 -- I have no insight into what government fiscal '12 would look like. But we would think that the O&M area would continue to be robust. We are a $3 billion enterprise, going after work in a $700 billion defense market. That's just the defense part of the market. And so I don't see these macro level rates as being constraining to us in any way. In fact, I don't think they're a factor for us. I would tell you if there was just 2% or 3% growth, we would still be going after mid- to high single digit organic growth. I know we can do that.

Our next question comes from Tobey Sommer from SunTrust.

Hi, this is Frank in for Toby. Just a question. If you could give us some more color on the healthcare business. Have you seen any changes or opportunities there?

We -- and Bill may have some comments here too, but this is Paul. We are actively pursuing M&A opportunities in the healthcare market. We have looked at a number. And so we have a bit of a business there. We do close to $100 million a year. We would like to grow that area, both organically and through acquisitions. There hasn't been a big new funding of major programs in this area in the federal space, but we know healthcare is a -- as we all know, a consistent growth area. And so, we are focused on building our business in healthcare.

Okay. And does in-sourcing continue to be on the fringe of the business, and any thoughts on the hiring environment?

Yes, in-sourcing will likely continue. Keep in mind that the Department of Defense has talked about 30,000 jobs as targets for in-sourcing over five years. That's 30,000 out of probably half a million jobs -- contractor work in the Department of Defense. So as a percentage it's a relatively small percentage, and it would be unlikely in a Company our size that going forward this would have a material effect. We had some in-sourcing go on, and it has -- it has obviously had a little bit of [reverberation] in our organic growth, there's no doubt. But still, notwithstanding the in-sourcing we've had, we added nearly 400 people to the rolls this year.

Our next question comes from Joe Nadol from JPMorgan.

Good morning. Start out on S3. First, thanks for the detail that you gave us earlier, Bill. Could you give us the bookings in the quarter, which you used to give us. I guess the cumulative bookings to date? And then just as a follow-up to Bill's question much earlier in the call. Just on a day to day basis with what's going on on the program, are you getting new task orders? Is the pace continuing? Have things frozen up while they are considering what they're going to do next? Any color there would be appreciated.

Okay. We're looking into the bookings thing and don't have that right now on S3. Perhaps we can get that to you later. As far as the second question, just kind of the pace of awards. I would say it's fair to say that it's been a little bit slower. I believe as they sort through what their acquisition strategy is. I think that's a fair statement, and a good way to look at it. And once they get that all straightened out, figured out, announce it, I think things will pick up. It looks like maybe to answer your first question, around $175 million in the third quarter.

Our next question comes from Brian Kinstlinger from Sidoti & Company.

Great. Thank you. Follow up to an earlier question that Brian had. The operating income was up 5% year-over-year, around 14% organic growth. With that said, Paul, curious if you could communicate with the investment community at what point if operating margin continues to fall, would you make a change in strategy. What I mean is, if we get to below 6%, 5.5% operating margin or even lower, would you make a conscious effort to change the way either you bid or do business?

Well, we are -- I should make sure everyone understands. We are consciously working to improve margin every day. Bill can enumerate what they are. But it includes prioritization of high value, high labor activity at the top of our bid list. It includes all of our normal cost containment, cost [talk] programs to lower indirect costs, and a number of other things. Facilities, streamlining of our facilities, and increasing utilization, on and on. However, I don't have a number in my head, so to speak, where I would suddenly do something dramatically different. We see where we are as being close to the bottom of what we expect in terms of margin. Just looking -- as we look at the trends that are going on in our business, we see a convergence going on. So that we think we're toward the bottom of the margin trough, so to speak. But I don't have -- there's not a magic number or something in my head.

With that said, if it does reach a certain point while there's not a specific number. Would there be changes, for example, if you went to 5%? Which again, I know you're not predicting, but if -- I don't think we expected to get this low so if it kept going lower. Would there be other changes than what's actually going on being made?

I don't expect that it will get a lot lower than what it is today. And I think the actions we have in place will prevent it from getting a lot lower from what it is today.

Our next question comes from Jeff Houston from William Blair.

Hello. Thanks for taking my questions. I just wanted to follow up on an earlier question. How much did lower interest expense and taxes add to EPS?

Well, the numbers are in the press release, interest rate was lower. We had a swap where we were paying higher interest rates up until December. That swap expired that we put into place a few years ago, and so that drove some lower interest rates in the quarter. In terms of our tax rates, we were planning a 39.5% tax rate. We had a 34% tax rate. So that certainly helped the bottom line.

I tried to explain it earlier, and I'll talk about another way that you should factor in when you look at this. We have a variable stock and cash incentive plan, which is based as I mentioned in previous calls, on our bottom line earnings. And as we get a higher -- a lower tax rate, it's somewhat offset by some higher compensation expense. So it's not a one for one tax rate going to the bottom line. It's somewhat tempered by the fact that we have some higher variable compensation expense as well, but certainly the higher tax rates last year hurt us. The lower tax rates this year helped us.

Okay. Okay. That makes sense. Then wanted to talk a little about 2010 guidance. Is operating margin still expected to be 6.2% to 6.5%? And operating cash flow, is that still at $150 million?

For operating cash flow, we expect that to be north of $150 million. We had a very nice third quarter. For the operating margin, I would narrow the range from 6.2% to 6.3%. It's unlikely we'll get much beyond 6.3%.

Our next question comes from Josh Sullivan from Broadpoint.

Thanks. All my questions have been answered.

Our next question comes from Joe Nadol from JPMorgan.

Thanks. Just a couple of follow-ups. Paul, any comments on the OCI rules that have come down from DoD recently? Any thoughts on how that either affects your business? Or what you might pursue specifically? And then just on your comment that you're pursuing an accelerating M&A program, is that backward-looking because you've done a couple of deals where you took some time off? Or is that also forward-looking, and we should anticipate more mid-sized tuck-ins like you've been doing?

Let's see. I just lost the first part of your question.

OCI.

On the OCI front, the rules that have come out are very consistent -- actually very consistent with what we've been doing and practiced for years. They favor mitigation of risk, as opposed to elimination of possibility of risk, which is a balanced approach which makes sense for the industry and the client. As opposed to a dramatic shift toward complete elimination of the potential for risk, which would cause a restructuring of the industry and massive disruption for the client. So we think this is a common sense approach. It's very consistent with what we've been doing in practice, looking at each opportunity, case by case, and making sure both we and the client are comfortable that we have the right precautions in place to prevent organizational conflict of interest. That part of the question.

M&A, it's more of a return to our -- the pace that we had established a year and a half or so ago. We took a time out when the capital markets became unpredictable -- high cost and unpredictable. As we've watched interest rates come back into more of a traditional level and availability, therefore, capital has become easier, then we have reverted back. We are reverting back to our previous pace, so to speak, which would would indicate that size acquisitions -- anywhere from $20 million to $200 million, $300 million are in the mix here. And that's what you should reasonably expect from us going forward.

Our next question comes from Erik Olbeter from Pacific Crest.

Hello. Nice quarter.

Thanks, Erik.

Real quick. SG&A came in quarter-over-quarter a little bit down. We're seeing some pretty big increases across the board from competitors. Tell me, is that -- did you do some cost cutting in the quarter, and what should we expect really moving forward?

There's a few things. Major accounts, pluses and minuses. And we had some higher expenses which we spoke about in the past related to facilities costs. We talked about some higher B&P expenses in the second quarter of last -- second quarter of this year, which continued on to the third quarter. But we had some -- we had favorable results with some of our benefit-related expenses. And so we were happy to be able to take advantage of some of those expense fluctuations. In general, our operating principle here around indirect cost is that we do not allow indirect cost to grow faster than our gross profits will. That is our principle so that you can rely on us to have a consistently more efficient organization going forward.

That's helpful. Would you consider that to be the case even as you're chasing all of the awards and really expanding opportunity pipeline that Bill talked about earlier.

As long as we're able to grow, we should be able to have a more efficient ratio of indirect cost to gross profit as a ratio.

Our next question comes from Cai von Rumohr from Cowen and Company.

Yes, thanks so much. Could you give us a little more color, Paul, perhaps on what you're seeing in the M&A? You indicate that you are looking a little bit more. But what are you seeing in terms of availability? Are the properties more attractive? Are the prices for similar quality property lower? Give us some sense of what you think is happening out there.

I'll start and Tom will give you more detail here. I would say in general, our M&A program is focused as a part of our total growth strategy in the key areas of intel, C4ISR, cyber, and also energy. We're looking at that. Healthcare is another one. Those are the principal focus areas where we're looking to add capability. Tom can comment about what we're seeing in terms of attractiveness, evaluations, and the like.

Yes, so one of the ways I look to look at it which I think is helpful is if you look at the valuation of public companies -- ourselves and our peers -- over the last two or three years our valuations have come down on a PE ratio or EBITDA to enterprise value perspective. So the market is valuing our companies less than they had in the past. That same trend is reflected in private companies. There's no reason why it would not be reflected in private companies. And as a result, valuations of smaller private companies have trended downward very similarly to the public companies. Now that the financial crisis is largely over, there's still economic challenges, certainly. But the capital markets are more stable. More companies are coming to market, and their valuation expectations are reflective of the market in general, which is represented by public companies. And so we are seeing lower valuations than we had two or three years ago.

Okay. Thank you.

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

Thanks for taking the follow-ups. Paul, you were talking about O&M and the revenue that is generated by CACI. What percent of revenue is O&M-related? Or that is the foundation of the funding that comes from O&M?

More than half. I don't have an exact figure. It could be as high as 70%, but I don't have an exact figure.

Okay. That's helpful. Bill, if I could just switch gears with you. On S3, what is the total value of tasks that you have won since the initial award of that contract?

Which contract?

On the S3, sir.

Hold on just a second here. Mike, I'm going to say it's in the neighborhood of $2.5 billion.

(Operator Instructions) Our next question comes from Edward Caso from Wells Fargo.

Wondering if you could remind us what the operating cash flow and CapEx guidance is for this year, either in dollars or percent of net income?

Yes, the operating cash flow should be north of $150 million. And our CapEx should be approximately $25 million. It was higher than our average year as we moved into a new consolidated facility.

Thank you.

I'm not showing any other questions. I will now turn it back over to you.

Okay. Thank you, Mary, for your help today. I would like to in closing thank the men and women of CACI for their tireless efforts to support the critical missions of our clients. We wouldn't be able to have results like this were it not for the those efforts of our people, and so I always like to acknowledge that. I'd also like to thank all of you on the call today for your interest in our Company. It's important to us, and we look forward to speaking with you again next quarter or before then as we go to conferences that you hold. So thank you very much.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.