CACI International Inc (CACI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International first quarter FY 2011 earnings conference call. Today's call is being recorded. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. (Operator Instructions). A special reminder to our media guests who are listening in, please remember that during the question-and-answer portion of this call, we are only taking questions from the analysts. At this time I would like to turn the conference over to Dave Dragics, Senior Vice President of Investor Relations of CACI International. Please go ahead, sir.

Thank you Trinicia. Good morning ladies and gentlemen. I am Dave Dragics, Senior Vice President of Investor Relations of CACI International. And we are very pleased that you are 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 two.

Before we begin our discussion this morning, I would like to make our customary but important statement regarding our written and oral disclosures and commentary. There will be statements 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. Now factors that 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. And our Safe Harbor Statement is included on this exhibit, and should be incorporated as part of any transcript of this call.

I would also like to point out that our presentation today will include discussion of non-GAAP financials. 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 today as we discuss our first quarter 2011 results. With me today are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President of U.S. Operations, and Greg Bradford, Chief Executive of CACI Limited in the United Kingdom.

Let's go for the next slide please. CACI has just completed a stand-out first quarter. We are delivering strongly on our guidance that we have given,and have surpassed expectations in key areas. We are fulfilling our commitments to shareholders, and have more than met our goals of mid to high-single digit organic growth, and double-double digit earnings growth.

We had a breakout quarterly bookings performance and record contract awards in the first quarter. Our operations team is executing extremely well. We are winning our recompetes and recording extraordinary wins in exciting new growth areas, like electronic health records, healthcare IT, and biometric support to intelligence and security missions. Bill will talk about each of these in a little more detail shortly. And our contract funding orders, increased by 40% to a record $1.5 billion, a strong indicator of CACI's top and bottom line growth prospects. We did see the expected increase in government fiscal year-end contract funding orders. In fact, in greater proportion than past years. And the pace and diversity of our awards was also exceptional.

Our first quarter fiscal 2011 contract awards also totaled a record $1.5 billion, which is up from our first quarter of last year by an amazing 103%. We are winning new business with new customers, and expanding current customer relationships. I would also like to note that a significant percentage of the contract awards this quarter carry higher than average margins, as a direct result of our focus on margin improvement initiatives. Please go to Slide five.

CACI also continues to execute on our mergers and acquisitions strategy. As you know, we recently announced our intent to acquire Technographics Incorporated and Applied Systems Research Incorporated, or ASR. We expect to close on both of those on November 1st. Both are proven providers of technical services and products to the intelligence community. And I would like to tell you a little bit more about them.

Technographics provides imagery and geospatial services, including digital maps to the US intelligence community. Their products support intelligence analysis for military operations and for disaster relief. ASR offers expertise in measurements and signatures intelligence. This includes working with sensors, radar, and infrared imagery, and applying scientific algorithms to convert resulting geospatial data into useable intelligence. These acquisitions are smart investments, and reflect our strategy of adding niche but critical capabilities, to help our clients solve their toughest problems. Inthis case we want to help our intelligence clients get the greatest benefit from increasingly important geospatial technologies.

CACI provides the mission expertise, Technographics provides the imagery services, and ASR provides a high-end engineering and science skills. 85% of Technographics employees and 92% of ASR employees have security clearances. Geospatial intelligence is a growing field that is vital to national security, and CACI intends to distinguish itself as one of the leaders in this field. Both companies have demonstrated their ability to win large ID/IQ contracts in full and open competition and against large Tier 1 companies. Both acquisitions provide CACI with prime positions on three large ID/IQ. Taken together the acquisitions make CACI a major provider of geospatial and technical intelligence to new customers.

Slide six, please. We maintain a leadership position in a unique space in the federal market. We serve customers whose missions are critical to national security, and who provide efficiencies and value to back taxpayers. As is evident from the awards we have announced, and those we will shortly announce, we are delivering solutions centered on mission critical war fighter support, such as C4 ISR, intelligence, logistics, and cyber. These awards are in priority areas that are least vulnerable to spending reprioritization initiatives recently announced by the Department of Defense. In addition, we are focused and already performing on IT modernization contracts to improve government efficiency. We are ideally positioned and well funded areas of defense, intelligence, Homeland Security, and the transformation of government, where there is both strong demand and future growth opportunities.

Slide seven, please. We are raising our guidance for fiscal 2011 based on our outstanding first quarter performance, and our current forecast for the balance of the year. The combination of our innovative solutioning and operational excellence give us the one-two punch for continued growth at double-digit rates. Our record funding orders and contract wins, strong-funded backlog, and successful recompete retention, all point to continued outstanding performance for CACI in fiscal 2011 and for years to come.

Now I would 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 eight. We are proud of our strong first quarter results. Revenue grew year-over-year by 12.8% with 10.8% organic growth,easily surpassing our goal of mid to high-single digit organic growth. Our direct billable labor grew by 7.3%, and our direct costs were up 20.6%.

Operating income was up 13.2% year-over-year, driven by the strong growth in direct labor and ODCs, as well as continued control of indirect expenses. Our UK operation, which makes up approximately 3.5% of our total revenue, turned a net margin of 5.5%, but absolute net income was down 23% from the first quarter of last year. This resulted from an unfavorable exchange rate, and a hiatus in new government business, as the newly-elected conservative government conducted a comprehensive review of UK budgets. Those budgets have not been announced, and we are closely monitoring the situation.

Slide nine, please. Our year-over-year net income increased 20.1%. The effective tax rate was 37.8% for the quarter, reflecting gains we realized in investments in our executive deferred compensation plan. We are now using a 38.7% 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 remainder of our fiscal year. Earnings per share increased 17.7% to $0.92. During the quarter we repurchased 395,000 shares at an average price of $42.62, and then purchased another 30,000 shares in October.

Next slide. Our cash position at the end of the quarter was $110 million, reflecting a $129 million paydown of our term loan. Quarter-end DSO was at 59 days, comparable to where it was at the end of the first quarter last year. We record several large non-cash charges in our income statement, depreciation, amortization, stock compensation and noncash interest expense, and we believe it is meaning to measure our performance excluding these non-cash charges. For the quarter our diluted adjusted earnings per share was $1.34, materially greater than our GAAP earnings per share, and 11% higher than last year.

Our balance sheet remains strong. Our quarter-end net debt was at $295 million, and our net debt to trailing EBITDA leverage ratio was at a comfortable 1.2 times. We recently replaced our credit facility which was coming due in May 2011, with a larger, more flexible five-year facility, consisting of a $150 million Term A loan, and a $600 million revolving credit facility. Pricing is based on a grid and our initial borrowing costs are at LIBOR plus 225. We received tremendous interest support of CACI by the banking community, and we expect this new expanded facility to provide the financial flexibility we may need in the years to come.

Slide 11, please. We are increasing the fiscal year 2011 guidance we provided last quarter. We now expect revenue to be between $3.45 billionand $3.6 billion, and earnings per share to be in a $3.90 and $4.10 range. The primary drivers of the guidance increases are, improved expectations for organic growth based on strong first quarter results, a healthy funded backlog, and recent new contract awards, as well as reduced interest expense and a lower effective tax rate.

We continue to expect that our full-year operating margin will be at least 6.4%. We expect diluted share count for the full year to be 31.1 million, based on share repurchases completed through the end of our first quarter. We still expect operating cash flow in 2011 to be at least $175 million, with DSO staying in the same general range as 2010.

This guidance does not include the impact of the two pending acquisitions. Our policy is to wait until the acquisitions close before we incorporate them into our guidance. But I can say that these acquisitions are expected to be solidly accretive for 2011. Both Technographics and ASR. are high margin, high-growth companies, and we were able to purchase them at attractive prices, paying in the six to seven times forward EBITDA range.

With that, I will now turn the call over to Bill Fairl. Bill?

Thanks, Tom. And welcome to everyone on the call. This morning I will address highlights from operations during our first quarter of fiscal 2011.

Let's move to slide 12, please. I will started with our first quarter contract funding orders. They increased dramatically to $1.457 billion, that is by far the largest amount of quarterly funding orders we have ever received. This represents growth of 40%, or more than $415 million over the first quarter of fiscal 2010, and puts our funded backlog at $2.5 billion. $2.5 billion. That is an all-time high for us.

Our contract awards for the first quarter were even more impressive. For Q1, they totaled $1.483 billion, that is an increase of more than 100% over the same quarter in fiscal 2010. S3 activity has picked up again, and we have now been awarded more than $3.2 billion in S3 task orders since the contract's inception. And importantly, our recent awards on S3 contain higher CACI labor content.

While we won all our major recompetes, over 70% of our first quarter awards were for new business. And a key point that I want to make here, is that the average period of performance for these wins exceeds two years. So that means that while they are giving us increased growth in fiscal 2011 and contributing to our raised guidance, they are really representing new business in fiscal year 2012 and beyond, kind a key point there, building into 2012 and beyond.

Let's go to slide 13, please. I would like to give you a little color on some of our major first quarter new business contract awards. As you know, we have been talking to you for a while about federal healthcare IT as a strategic growth area for CACI. In our first quarter, we had two large single award breakout wins in healthcare IT. The first is to provide mission critical solutions in the healthcare and human capital markets.

Our win of the Department of Veterans' Affairs $91 million Virtual Lifetime Electronic Record contract, we call that VLER, calls for us to develop a system to consolidate the medical records of military service members, an electronic database, available to all VA and DODmedical facilities, and other medical providers that service members might use. Successful delivery on VLER will enable us to pursue other work with both the defense and federal civilian medical markets, providing solutions across the boundaries between the VA, DOD, Health and Human Services, and commercial medical and benefits providers.

We were also selected for the $75 million Virtual Interactive Processing System contract, to transform the current brick and mortar process by which military service applicants are processed into the military. CACI's innovative solutions will enable the military to process applicants quickly and virtually. Our solution provides the DOD with a platform that can be extended for future services, such as virtual enlistments, biometrics for rapid and positive identification of applicants, enterprise-wide content management of medical data and future integration with the defense, medical and VA communities. We are very excited about both of these selections and are pleased that our strategy for growing our healthcare IT practice continues to bear fruit.

Slide 14, please. The next two awards demonstrate the success of our C4 ISR growth and diversification strategy. In September, we received two S3 awards totaling $239 million, which established CACI's credentials as a leading edge solutions provider to the DOD in the emerging field of biometrics enhanced intelligence and identity management. The first award is for experimentation, demonstration, and fielding of select biometric, forensic, and information management capabilities. As well as the analysis of collected biometric information to support our deployed forces. The second task supports the development of biometrics tools for sensing, processing and analysis, that will enable deployed forces to uniquely detect, recognize, identify, and track individuals. This technology can be used to support C4 ISR, tracking, targeting, force protection, and offensive operations. Looking ahead, we see growth opportunities for applications of our new biometrics capabilities to DHS and additional members of the intelligence community.

Let's go to slide 15. Not included in our Q1 award total of $1.48 billion are a number of large multiple award ID/IQ contracts, including a prime position on the US Army's rapid response third generation, or R23G program. That is five-year award, and it represents new business for CACI. It has a ceiling of $16.4 billion, and it is squarely in the middle of our C4 ISR growth strategy.

We also got a prime position to support the Centers for Disease Control and Prevention's IT infrastructure work under what is called the SIMS contract. This ten-year new business award has a ceiling of $1 billion, and provides another healthcare IT growth opportunity for CACI. Now while we have not included these two awards in our quarterly awards total, we do expect significant task order activity on them, and we plan to compete very aggressively for them.

Let's go to slide 16, please. Moving onto our opportunity pipeline. It remains very strong. Specifically at the end of our first quarter, we had approximately $3.8 billion in submitted proposals under evaluation,the large majority of them for new business. Most of these are currently scheduled for award by the end of next March. In addition, we expect to submit approximately $7.5 billion in new proposals during the next two quarters, a little more than half of these anticipated proposals are recompetes.

I will turn now to hiring. I am delighted to report that our trend of outstanding hiring results continued during our first quarter, as we added approximately 200 net new hires, while the number of firm open hiring recs remained over 400. This 400 number is a very conservative number, since it doesn't include our contingent recs,which currently exceeds 3,000. At this point I would like to emphasize an area of distinction for CACI that has long been a CACI strength, and I think it is increasingly important in today's important.

That area of distinction for CACI is operational excellence. And just a few of the items that I'm talking about here are our terrific DSO metrics, the fact that with more than 2,500 active contracts and task orders, we don't have trouble programs. We have outstanding delivery to our clients. We have an outstanding record of managing fixed price contracts. We are diligent in cost control. We are successful in bidding and winning against the toughest competition out there. And our outstanding track record of entering new markets by successfully identifying, acquiring and integrating new enterprises into CACI.

Now before I turn it back to Paul, I want to give you some background on our margin improvement plans and progress. About two years ago, we instituted a broad-based program to stabilize and improve our operating margin. The focus of this plan is not to improve margin by turning away profitable work, but rather to improve our margin by increasing the growth of our higher margin work. Key components of our plan include, margin improvement training programs for our managers, adding a margin improvement element to our incentive comp program, and margin improvement as a key component of our B&P investment decisions. And I would also like to add that margin improvement is a key consideration in our mergers and acquisitions considerations.

We are one quarter into fiscal year 2011, and as evidenced by our very strong first quarter performance, raised guidance and the forward margin implications of our recent contract wins, our margin improvement is paying off. In summary, a record contract funding orders, great hiring, and strong contract awards have gotten us off to a great start in fiscal 2011. Our team is focused on maintaining our momentum through the remainder of fiscal 2011, into fiscal year 2012 and beyond, and Paul, that concludes my remarks.

Thank you, Bill. And thank you, Tom, for your details that you provided here.

Please turn to slide 17. CACI's standout fiscal 2011 first quarter has demonstrated the success of our focused growth strategy. We are executing superbly against that strategy, and the results show it. Our record quarterly contract awards demonstrate the innovation and operational excellence we continue to bring to our clients. And our record quarterly contract funding indicates strong growth for the balance of fiscal 2011 and beyond. We are successfully pursuing strategic acquisitions, that complement our strength, add distinctions to our solutions, have good growth and strong margins, and help our clients solve their most complex problems.

I also want to thank CACI employees for their outstanding performance. They are innovating in ways that drive new value for our customers each and every day. And striving for levels of service excellence that go beyond the expectations of our clients. It is because of their efforts that we are keeping our promises to our clients and to our shareholders, delivering double-digit organic growth 12 out of the last 13 quarters,and double-digit earnings growth nine out of the last 11 quarters.

We continue to position the Company in areas that are of the highest priority to our nation. We are partnering well with both our defense and civil clients to help them achieve their critical missions. And as a management team, we are determined to continue to meet our financial goals of mid to high single-digit organic growth and double-digit earnings growth. For all of these reasons, we have raised our guidance, and are confident we will continue to deliver strong fiscal results now and in the future.

With that, we can open the lines for questions. Thank you.

Thank you. (Operator Instructions). Our first question is from Brian Gesuale with Raymond James.

Hi guys. Really nice job on the quarter here.

Thanks, Brian.

Wanted to talk about these great bookings numbers that you put up. Can you talk to maybe the length of work maybe shortening. We heard from a competitor in the space, that the duration of contracts are shortening, which should push out revenue to the income statement a little bit quicker. And then also what the implications are from those heavy S3 awards, in terms of your overall ODC direct labor mix?

Yes, Brian, it is Bill Fairl. So I think we have all heard some of the discussion about potentially in general shortening the performance periods on contract awards. We haven't seen anything yet on that. And when I look at what is in our pipeline, I don't see that. As I mentioned to you, the average award period for the award as we just announced for the first quarter was a little over two years. That is about the same. There are two years awards in there and there are some five-year awards in there. So far I haven't seen any major shift in award periods for the awards we have gotten, and for what I can see in our pipeline. But we will keep an eye on it. Let's see.

You had a second question about I think maybe the ODC direct labor mix and the awards there. And as I mentioned, particularly on our S3 contract, where in the past we have had very strong ODC growth, which has been very profitable by the way as well. With these recent awards, as part of our margin improvement plan, we have seen higher direct labor content for CACI.

In fact, what I will share with you is that we look at our S3 contract, and another couple of contracts as part of something we call our C4 ISR work. As part of my margin improvement program, rather, have been looking at the statistics on that. Because that is a big driver for us. So our plan for fiscal year 2011 there, and the forecast we just updated, the direct labor part of that business, of which S3 is the biggest part, is growing more than twice as fast as the ODCs are. So that is the clearest statistic I can give you on the fact that the forward implications are very strong here in this S3 market.

Thank you.

Our next question is from Bill Loomis with Stifel Nicolaus. Your question, please.

Thanks. Good quarters, guys. Just looking at the two big ID/IQs important ones that you won on R2 and the CDC SIMS. First, can you tell us what the pipeline looks like? How many tasks are out there pending in terms of amount or size in each of those, and what is the timing? And then, second, if we do get the CR and we don't get Omnibus Bill passed this year and it goes into next year, how do you see that as impact on not only these two IDIQs, but your other contracts and your visibility? How did you factor that into guidance?

Okay, Bill. I will start with the R2-3G and the CDC win. And Paul, do you want to pick up?

Yes. Once you start.

Okay. So R2-3G, which we have better insight into, there are about 486 task order RFIs or RFPs, if you will, that are in the pipeline right now. Our analysis of those is by far the large majority of those are for incumbent work on the previous R2 contract. And so I believe what our customers are wanting to do first is get their recompetes in there for the old contract, transitioning to new contract, before they go doing a whole lot of brand-new work. So we will take a look. We didn't have an incumbency on the previous R2 contracts, so we are really happy that we have a new contract win here. But we will take a look at these recompetes of other people's work, and see whether we have a real fighting chance at unseating them or not. And to the extent we, do we will bid on those.

But for the timing about, and I would say my guess here is about six months or so, they are going to be working off that backlog there. So that is kind of how we are looking at that. The CDC, contract, it is a brand new one with a brand-new client. We are just having our initial meetings. So I don't, I wish I had more insight for you here today. But we are in the very early stages of that one. So I will turn this back to Paul.

Yes. I don't have much to add except I would reiterate what Bill said, that we are not an incumbent on either of those two vehicles. So it is all upside for us, whatever task orders comes out that we elect to bid, it is all upside for us. And a reminder that the continuing resolution is, continues work at levels that are current levels. And if you think about the current levels, we are looking at in the Department of Defense, where we are at the $700-plus billion level.

And if you look at the buckets even in the civilian, civil agencies, what we find there is as you know, the President had increased the budgets for many of the departments, and especially the departments where we have interest and presence, like Department of State, as just an example. And the VA, where we are winning new work. And in those cases, those budgets have been plussed up in the last year or so, so we think that the continued resolution doesn't represent a significant threat, given the positioning we have in the market.

Thank you.

Our next question is from Jason Kupferberg with UBS. Your question, please.

Thanks, guys. So congratulations. Obviously the funding orders and awards were tremendous in the quarter. Now we are faced with the CR, like we have talked about a little bit now, who knows how long that will run out.

The December quarter is usually the weaker quarter seasonally for the industry. So I just wanted to get a sense. Should we expect a bigger than usual dropoff in funded orders and awards in your second fiscal quarter, especially since you got so much business here in the first quarter? And then if you can also just comment on whether or not you think we will see signs of some of Secretary Gates' planned contractor cutbacks in the fiscal 2012 budget request when that comes out in February, would love your thoughts there as well? Thanks.

We will let Bill take the first piece, Jason and then I will pick up on the Secretary Gates initiatives to reprioritize.

Okay, Jason. It is Bill Fairl. Thanks for the kind remarks on the quarter. As you might imagine, we are delighted over here as well.

So the second quarter, I have been talking to you for a while. I have always said it is really hard to predict awards in any particular single quarter, which is why I always talk to you about activity we expect over the next two quarters. So CR or no CR I don't have a crystal ball that is clear enough to tell you with any particular precision, in any particular quarter what is going to happen here. I will stick with what I said before, that we have the $3.8 billion in submitted proposals, and I expect the majority of those to be awarded, virtually all of them to be awarded by the end of March, or the end of our third quarter of fiscal year 2011.

So far this year our win rates have been fabulous. So I hope that they hold that high. But we are optimistic. We bid those things because we think we have got a fighting chance to win those. The second quarter you may see a little bit or you may not. I don't know. All I know is over the next two quarters, I expect all of those things to be awarded.

Another thing on the funding orders, our funding has been so strong as I mentioned, our funded backlog is sitting at $2.5 billion. If you just think of that as, in terms of our trailing 12 months, how many months of revenue do we have sitting here? We have got nine months of revenue in funded backlog. One way of looking at that is we already have all of the funding we need for fiscal year 2011, and we are building funding for fiscal year 2012.

So we can deal with continued resolution, and then I will always say what Dave Dragics reminds me, we have a continuing resolution virtually every year. We are used to this. Our clients are used to it. We know how to operate in here. So I will turn it back.

Thanks. Good, Bill. And Jason, just to pick up on the second part of the question, which was Secretary Gates' direction and guidance. And when he gave the original guidance last quarter, earlier in the quarter, there were two phrases that he used to describe categories of contracts to be reduced, in an effort to reprioritize funds away from unnecessary or low value toward higher value war fighter support activity. And the two categories, first, was advisory and assistance contracts, which there is actually a definition for in the [FAR]. And basically those advisory and assistance contracts are where a contractor is performing, doing studies and making recommendations, sort of consulting-type work.

And then the second category he gave guidance on, was something called service support contracts, which is something that puzzled all of us, because there is no definition in FAR or anywhere else we could find, subsequently Secretary Gates issued a memo on September 24th to all DOD leadership, acknowledging that service support contract area is not well defined, and he attempted in this memo to put boundaries around it, and what he said, he said here is the kind of thing it is. And here is the kind of thing it is not. That didn't give what I would consider to be a precise definition,but more boundary type conditions.

And so he said it is things like people who come into the Pentagon each day and have a seat there, and have a computer and telephone there, and are kind of working in the staff augmentation mode. Or people, contracts where people are doing duties like writing memorandums, preparing routine briefings. Again very similar to that, the other term that he had used as well. And then he went on to say, here is what it does not include, and I won't read you all of it. One of the things it specifically says, it does not include highly specialized technical assistance. And it does it not include IT support.

So the part that is included in this definition or the other definition, is that advisory and assistance services is a very, very tiny part of what we do. Therefore, if this guidance holds, now we are yet we will all learn as time goes by, what the department actually actual implements and does here. But the guidance the Secretary has issued, would appear to us to be no major impediment to our forecasted growth.

Thank you. Our next question is from Mark Jordan with Noble Financial. Your question, please.

Good morning, everyone. I would like to ask a little bit about the M&A activity, and if you have any specific goals. You said right now your debt load was about 1.2 trailing EBITDA. What do you feel is a comfortable upper limit now into your new bank line?And then secondly looking at the current use of cash flow, do you think you will generate out of operations and grow the acquisition pot?

Yes, Mark. This is Tom Mutryn. Right now as I mentioned our net debt to EBITDA is 1.2 times. We believe that we have the capability to increase our leverage, and believe that given the right set of facts and circumstances, getting to the 3 to 3.5 times, at least on a temporary basis, something that we would be comfortable with. So we do have a reasonable acquisition appetite. The credit facility, as you know, gives us significant capability to borrow money under that facility to finance acquisitions. And in addition, there are other opportunities in the capital markets if we need to do so. The size of the credit facility was based on the fact that CACI is a much larger company than it was in 2004, when we first put the credit facility in place. And we believe that over the next five years, having this financial flexibility will be valuable to us, given the facts and circumstances.

Our free cash flow, as you note is strong. And so we would like to use our free cash flow plus some incremental borrowing to finance our acquisitions. This all presupposes that we find the right acquisition candidate at the right prices, with the right strategic fit. We do not feel compelled to do acquisitions for acquisitions sake. We are only doing them if they have a very compelling business case. In the absence of acquisition candidates, there are other opportunities for cash. Repaying debt, return to shareholders, and the like. But first and foremost, we believe that we do have the acquisition opportunities, and we will continue to pursue that.

Follow-up. Your line came at a spread of 225 basis points, when you had talked about getting the new line on the last call, you were assuming a spread of 250 to 300 basis points. Was the improvement in the actual line a function of improving of the banking environment, or was it a lower interest rate environment, or the perception of the Company by your bank syndicate?

Clearly we took advantage of an improving bank market. So that was very positive, timing helped it in this particular case. At the same time, we had significant interest by the banking community, the facility was materially oversubscribed. And we were perceived by the banks we spoke to, as just being kind of stellar credit. So that added to the attractive pricing on the facility.

Thank you. Our next question is from Tobey Sommer with SunTrust Robinson Humphrey. Your question, please.

Thank you. I was wondering if you could give us some color on the one of the points that you cited for driving margin expansion. And that was how you are tying it to incentive compensation?Thank you.

Yes. This is Paul, Tobey. We have added margin improvement to the bonus plans for everyone that is bonus eligible at CACI. And it represents approximately 25% of the bonus potential.

And when was that kind of first presented to everyone that is bonus-eligible? Just trying to get a sense of whether there was a long lead time, given bid and proposal lead times?Thanks.

We had general discussions around this topic, as long ago as six to nine months ago. And it became effective on July 1st, 2010.

Thank you. Our next question is from Brian Kinstlinger with Sidoti & Co. Your question, please.

[audio break]--time and materials that would affect their margins. And I am wondering if you can comment on anything you are seeing or hearing about your contract base moving away from time and materials?

Brian, this is Bill Fairl. I think the first part of your question got cut off. So if I could ask you to repeat it just to make sure?

Yes, sure. Just basically. One of your competitors last night had talked about a transition away from time of materials contracts, the government wants to, which is going to affect our margins. There will be more cost-plus work, clearly there will be some more fixed price, which is good too. But maybe you can comment on the percentage your business maybe that is affected, or if it is affected at all on what you are hearing?

Well, Brian, I think if you looked at our mix in our report there, you probably saw that our fixed price element went up. We haven't seen a big change there in the mix, say between time of materials and cost plus. We have heard that discussion for quite some time now, about more fixed price contracting. Really yet to see much of a move there. And I hope it does happen, because as I mentioned, when I was talking about operational excellence, we are terrific at that. We have a couple of hundred fixed price contracts at any given time. And we are hitting on every single one of those things. Our customers are happy because they are getting a terrific solution for a fair price. We are executing well. We are getting the proper risk/reward return on that. I hope they do it. But so far it just hasn't happened yet. So we are keeping an eye on it.

Okay. The second question I have, I know there are puts and takes to different quarters. Maybe we can just take a look at the September quarter versus the June quarter. So sequentially your operating margin went down 20 basis points. You had $8 million less of stock-based comp. And you had a better direct labor mix, so I guess I am wondering the factors of why the operating margin wouldn't be equal to at least the operating margin of the fourth quarter, and what were the reasons there?

Yes. Brian, one of the things that we see seasonally is a reduction in margins, typically from the fourth quarter to the first quarter. In 2010 it went down from 7.2% to 6.2%, so a 100 basis point shift. A lot of that is due to the fact that our indirect expenses are relatively flat quarter after quarter after quarter. But our direct labor content changes, in particular in the summer months, people take vacations. And so we have less direct labor. So that is a major factor impacting that seasonal decline in margin. Last year the seasonal decline was 100 basis points. This year the seasonal decline was 20 basis points. So a material shift in that decline for some of the reasons you articulated.

Thank you. Our next question is from Joe Nadol with JPMorgan. Your question, please.

Hi. This is [Reagan Mendoza] for Joe. Good morning.

Good morning.

Good morning.

I just wanted to ask you for your thoughts on sort of the overall compete environment?We have been seeing trends that DOD is looking more at price and contract negotiations. I was just wondering if you could speak to that issue?Are you seeing more competition as you bid for more task orders, and is price becoming more of an issue, and are competitors getting more aggressive?

This is Bill Fairl. So my view of it is that we haven't seen dramatically more competition here. I think as, part of our strategy here is always to pursue best value wins, as opposed to low price kinds of business. That low price is just not a good way to do business around here. It is really hard to win your recompetes. So look for customers and jobs that you can do, and get awarded on a best-value basis. So a combination of the solution you are offering at a fair price, and a customer that is willing to make that evaluation. That is our sweet spot. That is where we have been, that is where we want to stay. And that environment, our customers are still making what we believe are sound decisions and on their buys. It is not based on low price. It is based on total best value. And as I mentioned, our win rate has been spectacular. So no, we really haven't seen in our space, can't talk about others, but in our space any additional pricing pressures.

Right. Let me just add. This is Paul. Let me just add a little bit to that answer. If you think about the total price a contractor offers to a client, and these are very sophisticated customers we are dealing with. They are very, very sophisticated. They know that less than 10% of the price is really negotiable. Because that is the fee. 90%-plus is the cost. The big opportunity there is how do you attack the cost.

And the way to attack the cost is through innovation. So the savvy customers, and our customers by and large are very sophisticated, are really looking for what Bill is talking about. Where is the innovation, where is the value? How can you help us improve our process so that our total costs go down? And I think that has held true in my experience for three decades. And I think that will hold true as we go forward here.

Okay. Great. Thank you so much.

You are welcome.

Thank you. Our next question is from Eric Olbeter with Pacific Crest. Your question, please.

Yes. Hey, guys. Great quarter and great outlook.

Thanks, Eric.

Thinking about the indirect cost lines. Can you talk about sort SG&A and sort of expectations for the year?I mean, you guys have done, it looks like you are getting a lot of leverage there. Given the environment and some of the extra spending that everyone is predicting, how do you see that going? I mean, should we continue to expect 150 basis points, or more year-over-year throughout the rest of 2011?

Yes. Eric this is Tom. We have an internal goal and we have been successful in kind of realizing this internal goal. And that is to ensure that the SG&A line grows lower than our change in operating margin dollars. So if operating margin dollars is up 10%, our SG&A should be south of that, in an 8% or 9% range. Now within any quads there are always a little bit of fluctuations in terms of some of the expenses we realize, medical accruals, 401ks, and the like. But generally that is our stated internal goal and stated external goal. And we focus on that quite diligently. So in terms of that looking at that line over time, we expect SG&A to grow at a lower rate. Now that being said our depreciation and intangibles lines had been growing faster because we have been buying some companies, and that adds to the intangible amortization.

Yes. That is all I have got. Great quarter.

Thanks, Eric.

Thank you. Our next question is from Sarah Catherine Phillips with Stephens. Your question, please.

Good morning. Thanks for taking my question.

You bet, Sarah.

Can you give us what the S3 contract was as a percent of revenue in the first quarter?

Sarah, in the past we haven't done that. And so not going to do it today. Do you have another question, Sarah.

No. I mean, can I get a sense if it was like more than 20%?

Less than 20%.

Yes, less than 20%.

Okay. Great. Yes. The rest of my questions were answered. Thank you.

Okay.

Keep in mind, let me add something to the S3. S3 represents less than 20% of our revenue. But if you look at how many different clients use the S3 vehicle, you could misinterpret and think well, gee, you have got a big portion of your revenue tied up in one customer. But actually there are probably a dozen customers--

45.

45 customers that use the S3 vehicle. So even though the number is a big number for that vehicle, it is really spread out over these 45 clients.

Thank you. Our next question is from Joseph Vafi with Jefferies & Co. Your question, please.

Good morning, Joe.

Good morning. Just a couple questions on the awards and maybe some of the moving parts going behind it. Saw great awards out of you and great awards out of ManTech last night. Obviously this is a seasonally strong award and bookings in general. Is there anything going on in the government workforce in the procurement workforce, or anything like that, that all of a sudden allowed so many decisions to be made in the quarter, versus some of the gridlock that we have seen previously?

Joe, this is Bill Fairl. I will start. No, I haven't seen anything there. I have talked to you in the past about a bow wave of opportunities building up. None of our opportunities were getting canceled. So at some point they had to make some awards. So they were up against the press at times. So I think that probably more than anything else is what drove it. No, no megatrends or anything that I could see.

Okay. And then maybe just one follow-up. If just kind of given the state of overall market still being a bit subdued, do you see any change in conversion of funding orders or funded backlog, or overall backlog into revenue, maybe having to bump up award to bill metric, to hit the same type of organic growth bogeyed at maybe you would have done in the past?

Joe, I don't see that. I see it as business as usual. And as I mentioned, we are now because of the very, very strong funding order we have had this past quarter and quarters before, been strong for quite a while now. We have got nine months, nine months of revenue here, based upon our trailing 12-month or trailing revenue metrics, if you will. We expect that to convert. And in the meantime we will keep building funding and building into fiscal year 2012. I don't see anything there, Joe.

I think it seems to us that the tempo for conversion of funding orders to revenue seems to be just as brisk as it ever was. It is almost, as soon as the money gets committed in the funding order, it starts converting on a schedule to revenue, based on program plans without interruption.

I think the hold-up had been in getting the awards. Funding had if you recall, funding orders had been strong right along in the last three, four quarters. It was awards that was sort of backed up and bottlenecked. And we did see a lot of that break through here. So a lot of it is was catch-up. But for us, there were some stunning awards in this quarter, that I wouldn't say they were unexpected, but they caused us to jump higher for joy than normal, because they are really key wins in healthcare IT, with the Veterans' Administration and MEPCOM and biometrics.

There were things that we have been working on for a long time. And trying to mature those opportunities and so they happened to hit. But they weren't related to backlog really. They were just in a normal maturation process of an opportunity. And they came through very nicely in that quarter, almost just coincidentally they came through in that quarter. It was a mix of catch-up of backlog of submitted proposals. But also I just think there were a number of these very exciting ones that happened to happen in that period.

I will add one more thought, Joe, on your question, which is we are very conservative. When we give you an awards total, we have gone through and looked at those awards. And I told you like we didn't have R2-3G in there and we didn't have the CDC, there were a whole bunch of other things that we didn't put in that awards total. We are giving you the ones, we have got a pretty high standard here that we have high, high confidence that those things are going to convert to funding, which is then going to convert to revenue. So CACI very diligent about this process here.

Thank you. Our next question is from Jeff Rosenbaum with York Capital. Your question, please.

--the discrepancy between private market and public market valuations in the space, given the recent LBOs, as well as some of the press around VA and others having strategic interest, and you and your competitors. And if consolidation were to happen around you, and not include you, if that is a net negative or a net positive or net unchanged for your business?

I will start. Tom might have to help here. Valuations, we missed the very first half sentence. If you could repeat that first half sentence?

Yes. Your thoughts on the discrepancy between private market and public market valuations in your space? I mean, I guess that is highlighted by the two recent LBOs happening at twice your multiple?

Yes. You are talking about the Lockheed?

Yes.

EIG business?

Yes.

I think those are sort of marquee, large-scale marquee acquisitions by private equity. Private equity has a different operating model than a strategic buyer. Private equity probably has a shorter term view of how long they are going to keep that business, and what they are going to do in the interim, between IPOs, et cetera, et cetera. We don't think that way. Of course, we are in this for the long haul with the businesses we acquire. We are acquiring businesses that we intend to keep forever. And so what we offer in terms of prices is based on that sort of thinking. We need to have our deals be net present value positive. And they need to be accretive. And they have to have a return on investment that exceeds our weighted average cost to capital.

And we won't do them if they don't. And so we won't pay the kind of prices that others might pay, who don't have those same constraints. I think that is what I can say about us. And in terms of our own situation in the consolidation arena, we are a strategic consolidator. We are almost a serial consolidator. We have done nearly 50, how many it is, Tom?

It will be 50 once we close the two next Monday.

We will have done 50 in the last 15 or so years. And we are very good at doing it. And we do a good job with people. We do a good job at delivering the promises we make to the Board of Directors and to our shareholders about the returns, et cetera.

So we will be a player in the consolidation activity going forward. In terms of our own selves, in terms of someone acquiring us, as you know, we are a publicly traded company. We understand our fiduciary responsibility. If there were ever a bona fide offer the Board of course, they would create a committee, we have a process, they would create a committee, they would evaluate that versus other strategic alternatives to the business. This is a matter that is discussed regularly, and regularly on the Board agenda from time to time. And our current strategy is to continue on and to be a strategic consolidator in the marketplace.

Right. Thank you.

You are welcome.

Thank you. Our next question is from Edward Caso with Wells Fargo. Your question, please.

Hi had, good morning. I apologize. I hopped on late. Can you just let me know if you provided operating margin guidance for the year, especially with the sequential decline here in the most recent quarter?

Yes. Ed, this is Tom. The guidance that we are providing in terms ever operating margin is the same, which we said previously we believe margin will be at least 6.4%. Now clearly there is some ambiguity in that number. Specifically so given the unpredictability of ODCs primarily. But we did put a floor on operating margin last year was 6.2%. So we see, we are expecting at least a 20 basis point improvement.

On a sequential decline, the fourth quarter versus the first quarter, this year we were down approximately 20 basis points. Last year we were down 100 basis points. A lot of that decline sequentially has to do with some vacations taken by our direct labor workforce during the summer months, which has an implication of reducing margins. So we still believe that we reached a trough, if you will, and see some margin improvement going forward.

Yes. As a point here, that question did get asked earlier, when you weren't on the call. And the point here is our first quarter is seasonally has lower margin than our fourth quarter. And we have gone back and looked four years. And while the pattern continues this quarter, it is a smaller gap in margin as Tom pointed out. But it is historically a very seasonal, predictability seasonal event.

Paul, just my last question. A sense on any shift here in your management structure, given the recent departure of your COO? Maybe give us some color on that and whether other changes may be appearing?

Yes. You are referring to the fact that Randy Fuerst, our Chief Operating Officer, has resigned and moved on. First of all, I would like to thank Randy for all his many contributions to CACI. He was here over five years, and did so many important things to help our Company grow. And we wish him the very, very best going forward. And he will continue to be a great friend of CACI.

We are in a process of searching for, internally and externally looking for a replacement for Randy. Our expectation is that search could take four to six months. We will do that very carefully. And as soon as we find and bring onboard that new person, we will introduce them to you, him to you or her to you.

Thank you. Our next question is from Jeremy Devaney with BB&T Capital Markets. Your question, please.

I was wondering, earlier you mentioned that the backlog is appearing to be trending above the average core margin. Could you give us a little bit more color around that?What exactly you are seeing in the profitability and on those awards?

Jeremy, this is Bill Fairl. The best way for me to answer that is that I don't want to get into a lot of detail. But as I said, sort of at a macro level, our CACI direct labor content is significantly higher in these new wins. And we earn five to ten times as much on CACI direct labor as we do on ODCs. That's the number one factor. And then I will give you a little additional color, which is as part of our margin improvement program, we started looking at our C4 ISR business as sort of a thing by itself. Because that is where we are getting a lot of ODC growth, if you will. So specifically we sent our team to say, hey, tell us how you can improve the margin inside of this with all of this ODC growth. Because that is still good, we make money on ODCs. Let's look at it all together and improve the margin on it. So we have a terrific team there. And we went off and as they usually do, they have delivered tremendous results.

So fiscal year 2011, for our fiscal year 2011, when I look at their original plan and their updated forecast, the direct labor component of that business, which is about $800 million at the top line, the direct labor component of that is growing twice as fast as the ODCs, twice as fast. So going back we earn five to ten times as much on direct labor as we do on ODCs. That is great news. We are going to earn more income period,and the margin implications for that are improvement.

Great. Great. And just I guess as a follow-up to that, and just to kind of put a point on it. You had mentioned 6.4%as of EBIT target for the fiscal year. Looking at that backlog and you referenced the core margin, should we anticipate that the backlog has a possibility of trending above that 6.4%? Or are you looking at more of a historical number?

Backlog.

Yes, I will start. First of all, the 6.4% is the floor. And so what we have said is that the margin for fiscal year 2011 will be at least 6.4%. Which as Tom said earlier, would be 20 basis points better than fiscal year 2010, so confidence in margin improvement there. Looking at this batch of awards going forward, we are excited, as you can probably tell from my voice and that of Tom and Paul as well. Great awards which indicate margin improvement for fiscal year 2011. But fiscal year 2012 and beyond as well. Great, great awards.

Thank you. (Operator Instructions). I am showing no further questions in the queue at this time. I would now like to turn the conference over to Mr. Paul Cofoni.

Thank you. I hope I am pronouncing that right, Trinicia, for your help on the call today. And we would like to thank everyone who dialed in or logged on for the webcast for their participation today as well. We know that many of you may have follow-up questions, and Tom and Dave I know will make themselves available if you just give them about a half an hour. They will make themselves available.

We also look forward to seeing all of you at our Analysts' Conference on December 7th in New York City, where we have got a terrific lineup of exciting demonstrations of technology to share with you, including some peeks into some of these new contract areas that we are so excited about. And so I invite you all, and look forward to seeing you there. So with that, we will conclude the call. Thank you and have a good day.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect, and have a wonderful day.