CACI International Inc (CACI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International second quarter fiscal year 2011 conference call. Today's call is being recorded.

(Operator Instructions).

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

Thanks, Ali, and, good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we're 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'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 view 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.

And, our Safe Harbor statement is included on this exhibit, and should be incorporated as part of any transcript of this call. And, I'd also like to point out that our presentation today will include discussion of non-GAAP financial measures. And, these non-GAAP measures should not be considered in isolation, or as a substitute for performance measures prepared in accordance with GAAP. Now, let's go to the next slide, please. And, to open up our discussion this morning, here's Paul Cofoni, President and Chief Executive Officer of CACI International. Paul?

Thank you, Dave, and good morning, everyone. Thank you for joining us today, as we discuss our second quarter and first half fiscal 2011 results. With me today are Tom Mutryn, our Chief Financial Officer; Bill Fairl, President of US Operations. Please turn to slide number four.

CACI has just completed a strong second quarter, resulting in an outstanding first half for the fiscal year. We achieved record quarter two performance in revenue, operating income, net income, diluted earnings per share, and cash-flow. We met our financial goals of mid- to high single-digit organic revenue growth and double-digit earnings growth. In particular, our robust 26% earnings per share growth in this quarter is a clear mark of our ability to create value for our shareholders.

Slide five, please. There are two keys to our continued ability to meet our financial goals. First, our strategy focuses on high priority areas of the government's most critical needs, such as C4ISR, cyber, and intelligence. Included in our strategic focus is IT modernization and government transformation, where federal agencies are directing considerable funding and resources. The recent bombing of the Moscow airport and turmoil in Egypt, Jordan, Yemen and Tunisia, combined with persistent threats from Iran and North Korea and conflicts in southwest Asia, reminds us that we live in a dangerous world, and instability is on the rise globally. We must remain ever vigilant in areas of national security. CACI is well-positioned to provide vital solutions to our clients' high priority national security missions, including pre-emptive intelligence, support services and solutions, and C4ISR support for our deployed forces to leverage both force protection and force projection.

Please turn to slide six. Second, we are 100% committed to operational excellence. Our team aim to execute superbly on all our contracts, to ensure we deliver the value our clients expect and deserve. It is exactly because of this total commitment that we have no trouble programs, and high client satisfaction. Our sustained focus on excellent customer service, and our highly successful pursuit of new business give us confidence that we will continue to win our re-competes, and innovate new solutions that lead to additional growth, and the achievement of our financial goals.

Please go to slide number seven. Another prominent component of our growth strategy is our mergers and acquisitions program. CACI is a strategic consolidator in the market. We recently acquired two companies, TechniGraphics and Applied Systems Research. The latter represented our 50th acquisition. Both of these have expanded our business, with both new and existing clients in the intelligence community. Bill will provide us with more details in just a few minutes about these two important acquisitions. Looking forward, we continue to see a robust pipeline of attractive acquisitions candidates, whose capabilities are at high demand, and who have high potential for synergistic growth with our base business.

Let's turn to slide number eight. As expected, we experienced a seasonal slow down in funding orders in the second quarter, but the exceptional pace of our first quarter funding orders resulted in a 20% increase in total funding orders for the first half of the fiscal year. This growth in funding orders, along with our expanding pipeline, and brisk pace of hiring, are strong leading indicators for growth in the second half of fiscal 2011, and beyond.

Please turn to slide number nine. We are cognizant of the mounting deficit spending and the pressures on the federal budget. In this industry, macro tends -- trends do matter, and we track them very closely. But, our job is to manage at the micro level, that is the performance of CACI. With an addressable market of over $400 billion a year, we continue to see excellent opportunities to gain market share. In fact, it is precisely during times of federal budget pressure that demand increases for the modernization and transformation solutions that we provide. We are winning business consistently in this area, including a truly break-out contract award in the modernizing and transforming financial asset and acquisition management systems.

This, of course, is our award to support the transformation and systems consolidation, or TASC program, for the Department of Homeland Security. TASC is a large-scale transformational program, and CACI is being brought in as a catalyst for change. We won because of our innovative solution, and our proven track record for implementing financial systems in the federal government. We have the right people, the right strategies, and the right solutions. TASC sets us apart from the competition, and establishes us as a leader in modernizing and transforming financial IT systems.

Wins like this, along with other transformative programs like VIPS, VLER, and the Biometric contracts we received in the first quarter, combined with our large and growing C4ISR base, give us confidence in our continued high level of performance in fiscal 2011 and beyond. We look forward to building on our record first half results. Now, I'd like to turn the call over to Tom who'll provide more information on our results. Tom?

Yes. Thank you, Paul, and, good morning, everyone. Please turn to slide number 11. We are pleased with our strong second quarter results. Revenue grew year-over-year by 11.7%, with 9.7% organic growth, easily achieving our stated goals. Our direct billable labor grew 8%, consistent with the levels we have been seeing for the past several quarters, and our other direct costs were up 14.3%.

Operating income was up 25.2% year-over-year, driven by the strong growth in our various business units, increased direct labor, and other direct costs, and continued control of indirect expenses. Our UK operation turned in a healthy net income margin of 6.3%, but absolute net income was down 14% from the second quarter of last year. This resulted from less favorable exchange rates, and the impact from reductions in government spending. We experienced growth in our non-government UK business, which we expect to continue in the coming quarters.

Slide 12, please. Year-over-year, net income for CACI increased 27.6%. The effective tax rate was 37.5% for the quarter, reflecting gains we realized in our executive deferred compensation plan. We are now using a 37.6% effective tax rate 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 by 26.2% to $1.08. A few unusual items positively contributed to our strong results for this quarter. We recognized $2 million, or $0.04 per share from award fees, which shifted from the first quarter to the second quarter. In addition, we benefited from a positive adjustment to our earn-out related reliability, and reductions in certain employee benefit related costs.

Next slide, number 13, please. Our cash position at the end of the quarter was $47 million, reflecting the closing of the two acquisitions, net repayments under the credit facility, and strong operating cash flow for the quarter of $61 million. Quarter-end day sales outstanding was at 58 days, four days better than at the same time last year. We also [report] results after eliminating certain non-cash charges, depreciation, amortization, non-cash interest expense. For the quarter, our diluted adjusted earnings per share were $1.50, materially greater than our GAAP earnings per share of $1.08, and 14.7% higher than last year. Our balance sheet remains strong. Our quarter-end net debt was at $361 million, and our net debt to trailing EBITDA leverage ratio was at a comfortable 1.4 times.

Slide 14, please. We are increasing the fiscal year 2011 guidance ranges we provided last quarter. We now expect revenue to be between $3.5 billion and $3.63 billion, and earnings per share to be in a $4.05 and $4.20 range. The major drivers of the guidance increase are the contributions of the two recent acquisitions, strong second quarter performance, lower interest expense, and a lower assumed effective tax rate. We normally see higher third quarter earnings, compared to the second quarter. This year, we expect a different pattern, due to the positive one-time items impacting the second quarter that I mentioned earlier. Both the timing of the start of the new work associated with recent wins, and the timing of the recognition of award fees, are expected to result in fourth quarter earnings being materially higher than the third quarter. We continue to expect that our full-year operating margin will be at least 6.4%. And, we expect operating cash-flow for fiscal year 2011 to be at least $175 million, with DSO staying in the same general range as 2010. With that, let me turn the call over Bill Fairl. Bill?

Thanks, Tom, and welcome to everyone on the call. This morning, I'll address highlights from operations during our second quarter, and the first half of fiscal year 2011. Please turn to slide 15. Our total funded backlog at the end of the quarter stood at over $2.17 billion, and that's an approximately 25% higher than it was at the end of the second quarter fiscal year 2010. The strong level of new funding orders in the first half of our fiscal year drove this growth in our funded backlog. Contract awards for the second quarter were $829 million. That's an increase of almost 50% over the same quarter in fiscal year 2010. While we won all of our major re-competes, very important, I also want to point out that more than 90% of our second quarter awards were for new business.

And, a key point that I want to make here, is that average period of performance for these wins exceeds four years, four years. That means while they are contributing to our very strong fiscal year 2011 performance, we're really going to see their growth impact once we get into fiscal year 2012 and beyond, when they ramp up. Looking at the first half of fiscal year 2011, awards were $2.3 billion. That's up 79% over the first half of fiscal year 2010.

Now, I'd like to give you a little color on some of our major fiscal year 2011 contract awards. Slide 16, please. Our largest second quarter award was a single award, task order prime contract to support the Department of Homeland Security's TASC program that Paul mentioned earlier. It has a base period of five years, with five one-year options, a ceiling value of $450 million, and it's another large break-out, new business win for CACI. Although the award was protested, it's very important to note that contract performance was not stayed. In other words, the contract is going on, as a result of the protest. Our team is ready to go, and we're excited about starting work this month on this really important job -- Tier 1 win we've had here.

I'd also like to give you an update on two large, single award break-out wins we had in our first quarter, in the area of healthcare, IT, and human capital. If you'll go to slide 17, please.First, is the $91 million Veteran's Affairs Virtual Lifetime Electronic Record, or what we call VLER contract. The VLER program ensures that there's a continuous medical support for our servicemen and women when they transition from active duty to veteran status. So far, we've received two important task orders on VLER, including one to help the VA building infrastructure for it's nationwide health information network.That's sure to be a big project now, and into the future.

I'd also like to update you on our $75 million Virtual Interactive Processing System, or VIPS contract. This award is to transform military recruiting into a more responsive, efficient and paperless process, reducing the time it takes to induct enlistees. And, I thought I'd stop here for just a minute, and give you a little example of how our work here, when we deliver this project, is going to deliver a much improved process. And, more important, in today's environment, is going to deliver really significant cost savings to our government customers.

So, here we go. Each year, more than 500,000 candidates are paid to travel to regional military entrance processing stations for screening and testing. As a result of the screening and testing, anywhere from about 25% to 30% of these candidates are eliminated from further consideration. So, they travel to the screening stations, about 25% to 30% them don't get through that first set of screening. Through the VIPS program that we're working on, we're going to save the government an estimated $100 million per year, in travel and testing cost. And, we're going to do that, by doing up-front screening on these candidates before they travel, saving a $100 million a year. That's great. We've made our first software delivery on the program, well ahead of schedule, and we're proceeding to milestone reviews for the next release.

Our plan is to leverage these two awards to pursue additional business within the healthcare IT practice. That's an area where we see very attractive growth opportunities. Through successful performance on these and our other contracts, we'll demonstrate that government agencies can become more efficient with the right contractors and solutions. And, that transformation programs can be successful in migrating legacy systems to more productive environments. In fact, in today's era of federal budgetary pressure, the need for the modernization and transformation solutions that CACI offers is stronger than ever. And, I think you can appreciate that, from that VIPS example I just gave you, a $100 million a year.

Let's go to slide 18, please. Another area of significant growth is our intelligence business, where we just reported the award of $238 million in classified contracts for the first half of our fiscal year. Now, of these awards, a $165 million came in our second quarter, and that's a 65% increase over the same quarter last year. Complimenting our historical success in growing our intelligence business, our recent purchases of TechniGraphics and Applied Systems Research, two terrific companies that have brought us new clients and capabilities, and increased our footprints in the intelligence community. We've retained their key talent, and that integration into CACI is proceeding smoothly.And, what's more, these acquisitions have been immediately accretive to our bottom line.

These acquisitions also reflect the success of our strategy to grow and invest in capabilities that serve the intelligence market. We are diversifying our intelligence offering, with particular emphasis on core intelligence missions, and areas where we can develop capabilities in market segments adjacent -- adjacent to those where we already have a presence. These acquisitions, and our other intelligence awards, have lifted our intelligence business by 25% over the second quarter of fiscal year 2010. And, now, our total intelligence business stands at almost 45% of CACI's total business -- almost 45% -- amazing.

Let's go to slide 19. Our opportunity pipeline, looking out for the future here, very strong. And, that reflects continued demand in our, in CACI's addressable market. Specifically, at the end of our second quarter, we had approximately $4.1 billion in submitted proposals under evaluation. The majority of them, in fact, about $2.5 billion, they're for new business. In addition, we expect to submit more than $8.5 billion. I will repeat that again, $8.5 billion, in new proposals during the next two quarters. Again, with more than half of these for new business. You can just see the growth here, in this pipeline. We are especially targeting new business in our focus areas, including C4ISR, intelligence, cyber, and IT modernization and government transformation, and that also includes healthcare IT. We are winning at a very high rate.

I'll turn now to hiring. And, again, I'm very pleased to report we continued to record outstanding hiring results, driving our bottom line. We added approximately 200 net new hires in the second quarter, and the number of our firm open hiring [recs], that's your future demand if you will, remained over 400. So, we're hiring folks in, and create new opportunities for all these wins we're getting.

In summary, our operations results give us a great foundation for continued strong performance through the rest of the fiscal year and beyond. We are targeting the right markets, and seeing great growth opportunities in those markets. Our work is critical to national security, the war fighter, and government transformation. We expect little impact from defense spending reprioritization initiatives. And, we're winning consistently in areas like modernization and transformation, where our solutions will help agencies improve efficiencies, and give value back to the taxpayers. And, think back again to that example I gave you around VIPS, rather, $100 million a year. That's real value back.

And, finally, the strength of our first half contract awards and funding orders, our strong backlog and pipeline, increased hiring, increased direct labor, and a proven record of retaining our current business, and winning new business, all give us the confidence to raise guidance. And, Paul, that concludes that my remark.

Thank you, Bill, and thank you, Tom, for the highlights and details you shared this morning. Please turn to slide number 20. CACI has delivered continued, strong financial result in our fiscal 2011 second quarter and first half. We are monitoring the challenges and headwinds in the macro environment of the defense industry, and we remain confident that CACI's micro environment, and our specific target markets, including C4ISR, intelligence, cyber, and IT modernization and government transformation will continue to present solid growth opportunities for the remainder of this fiscal year, and beyond.

We are raising our guidance, and all indicators point to CACI's continued profitable growth for fiscal 2011, and into the future -- excuse me. I also want to thank our CACI employees for making our success possible. They are focused on innovative solutions that create new value for our customers, and they continually raise the bar to deliver service excellence that goes beyond the expectations of our customers. Because of their unwavering support for our Company and our customers, and their consistent performance at high levels, we have delivered double-digit organic revenue growth 12 out of the last 14 quarters, and double-digit earnings growth, ten out of the last 12 quarters. With that, Ali, we'll open the line for questions.

(Operator Instructions).

Our first question comes from Bill Loomis of Stifel Nicolaus. Please go ahead.

Hi, thanks. Great quarter guys.

Thanks, bill.

But on the -- with the continuing resolution we have here in fiscal 2011, and we don't know how that's going to turn out, maybe for the full-year or something else -- for example the DHS TASC contract which is a new award, how is that getting funding under a continuing resolution? Is it the predecessor work from a year ago that the funding is coming from?

Yes, that is not new funding. That funding was there I think in the last fiscal year, so it should be unaffected by the existing continued resolution.

Okay. And so, that's because the DHS -- it was delayed in getting awarded, and they already had it in the fiscal 2010 budget?

Right. Yes. The -- there was a protest of the original or [PRP] package, before the proposal. Before that went in, they had to get that all taken care of and everything, so the whole program got delayed.

I think this one was one of the longer ones --

Yes.

-- in the procurement process that went on for over a year, after the proposals were in, so.

Yes.

Our next question comes from Ed Caso from Wells Fargo Securities. Please go ahead.

Good morning, good quarter.

Thanks, Ed.

Can you talk a little bit about the shift of your mix. It looks like you're seeing a little less time and materials, a little bit more cost plus, and fixed price?

Hi, this is Bill Fairl. I -- I think most of the shift has been into fixed price. I think we're up about 5% over the quarter here. And there's a number of contributors -- and by the way we like that. Fixed price contracting is our most profitable contract -- mechanism around here, if you will. Paul mentioned earlier, we're just so focused on operational excellence, we don't have a single trouble program. So to the extent we get a good fixed price contract, we like that. So what we've seen there, is we've seen more fixed price contracting on S3, for example. And I'd also mention to you, that the acquisition that is we did, TechniGraphics in particular, high level of fixed price contracting -- you get good fixed price contracts with well-defined requirements and acceptance criteria, a good long history of performance. So the mix -- or the shift is mainly the fixed price, which for us means higher margin because we're excellent at managing our programs, and establishing good requirements and acceptance criteria with our clients.

My follow-up is on financial leverage, I think Tom mentioned a very low number. Now where would you go up to, and would you use any of that potential increased leverage to step up the share repurchase?

Right now Ed, we're at -- what I consider very comfortable leverage ratio -- it's a 1.4 times EBITDA leverage ratio. Looking at our -- in history we've got as high as 3.5 or 4 times, when we embarked upon the AMS DIG acquisition. Given the right set of circumstances, I can see us getting to a comparable levels, in a [4-A] temporary time period. I don't think we're comfortable having those sustained levels of leverage, but given a compelling reason, an acquisition, I'd think we'd get to those particular levels. Right now we continue to evaluate uses of cash, and we believe given some of the valuations we are seeing for potential acquisitions in our pipeline, that the best use of cash continues to be our M&A program. We were opportunistic in some share repurchases earlier this fiscal year, repurchasing, slightly over 400,000 shares, that at an average price of $42.00. We will continue to be opportunistic going forward, but in terms of hierarchy, acquisitions are number one, and we have the pipeline to make us feel comfortable in reserving our capital for those acquisitions.

Thank you.

Our next question comes from Brian Gesuale from Raymond James. Pardon me, if I mispronounced, your line is open.

Hi, guys. Nice job on the quarter.

Thanks, Brian.

Tom, I wondered if you can help me out here on the guidance raise. It looks like about $0.12 or $0.13 change in the midpoint. How much of that comes from the two acquisitions that weren't in the prior guidance, and can you maybe foot that with the tailwind you got from a lower tax rate as well?

Yes, Brian, in terms of the increase in guidance range, the largest factor was the two acquisitions, so that is the majority of that. As I mentioned the second quarter performance was good. Tax rate contributed approximately $0.03, if you look at the old tax rate versus the new tax rate, and our interest expense is down as well. Interest expense, let me spend a minute talking about that. Previously we had a credit facility with a $280 million funded term loan.We had the funded term loan, but yet we had cash, such that we were incurring negative arbitrage on that. When we redid the credit facility, we're able to significantly reduce the size of the term loan to $150 million. So that has reduced that negative arbitrage considerably, giving this pick up in the interest expense line as well. So that has contributed to our earnings.

Thanks, that's very helpful. One quick follow up. On direct labor, I think it was up about 8% in the quarter. Can you break the direct organic labor growth versus the M&A direct labor?

Brian, I would say that the majority of that is driven by organic. The acquisitions were relatively small in the grand scheme of things, and we had two months of the acquisitions on. So at least, 7% would be organic, probably 7.5%, given the relative size of the acquisitions. That direct labor growth is consistent with what we've seen in the last several quarters ranging from 6.5% to 9% direct labor growth, for the last successive six quarters. So we're continuing to drive strong direct labor growth.

And I think Brian, Bill pointed out, we had a strong second quarter for hiring, and a strong first quarter as well. I think we're up net over 400 people in the first half. So it's -- our strong hiring programs are real differentiate torr for us too.

Our next question comes from Cai von Rumohr of Cowan & Company. Please go ahead.

Yes, thank you very much. So by my math, it looks like the acquisitions could add something like $0.07 a share. Is that sort of getting it, because obviously you paid more? And I think you said you paid within a range of 5.5 to 7.5 times future numbers? So is that like a $0.07 add?

Yes, that's a very reasonable assumption, Cai.

But then, so I am a little confused. So I get $0.07 there. I get $0.05 from interest. I get $0.03 to $0.04 from the tax rate, and I've got $0.15. So it looks like, all of if not more than all of the guidance, reflect the acquisitions, despite the fact that you had a very strong second quarter in which the acquisitions were not a major factor. Is that correct?

Yes, Cai, I would take a step back to look at the initial guidance we provided, which was $3.70 to $3.90. We increased guidance materially in October. We're still seeing the benefit of the strong operations performance. This guidance increase recently, as you point out, are largely driven by those three items that you mentioned, so that is a fair analysis.

Our next questions comes from Joe Nadol from JPMorgan. Please go ahead.

Thanks. Good morning, guys.

Hi, Joe.

You noted in your -- and I missed the beginning of your call, so I apologize if you already addressed this. But you noted in your press release, that the option was exercised on S3 for five years. But I think there's a number of things going on with procurement in that area. I'm wondering if, maybe Bill, if you could highlight what the S3 procurement strategy coming out of the customer is going to look like, in the coming year or two?

It's kind of hard to say, Joe. First, I'll say that that procurement shop up there has an awful lot to do. And they've certainly been impacted by the move down to Aberdeen, and then also the VA opened a big shop up there as well. So they've -- they've had trouble -- trouble is the wrong word. They just have a lot of work in there, and I would say, are understaffed at this point. So to getting -- just looking at it from the outside, having the five-year option period exercised on S3, gives that shop and that customer set up there a lot of flexibility.

If we were sitting here say a year ago, there was a lot of discussion about breaking the S3 up into multiple pieces and all that, some question about whether the option would be exercised. That's -- now we have the five-year option period exercised, customers can place orders on it with great deal of confidence. They have the period of performance available to them. They have the -- certainly have the contract ceiling. So just, looking at it from the outside -- I never want to second guess our customers or anything -- but it gives that customer set some more flexibility, when they try to balance our workload up there, with everything they have to do, They have a full plate, as you might imagine. So I'd say they've got some breathing room, is how I'm going to summarize this now.

Okay. And then just as a follow up, and you've got the question earlier on the DHS and the CR impact on that. I am wondering if you could go a little higher level, and just talk about the CR in general -- and it obviously hasn't impacted your business much here to date. But as you look into your fiscal second half, and then in theory, if this goes through the entire year, the entire government fiscal year, what sort of impact, what parts of your business do you think are better protected, and what parts could you see some weakness?

Well, Joe, this is Bill again. If -- what we've done is, we've essentially in this guidance we've given, we've assumed a continuing resolution throughout the full-year. So, arguably, that's a pretty conservative assumption there for us. So as part of that, what we did is, we just went through and talked to all of our general managers -- these folks, you've met them before -- and basically asked that same question you just did, let's look at this program by program. What's the impact going to be on this? And we feel pretty good about it. And I'll point to things like -- I talked about our funded backlog. That's why we're so happy, we're sitting on $2.2 billion of funded backlog here. If you take our current run rate, that equates to a little over seven months, we're going to get funding if you will. We think we're in pretty good position, and we think we've factored in what the impact of that continuing resolution throughout the full-year would be on our programs here. We feel pretty good about it.

Yes, I think that's a good way of saying it, Bill. We have fully integrated our expected impact from the continuing resolution in the guidance that we've just provided, number oneNumber two, we like to remind ourselves and you, that we have positioned the Company in the high priority, well funded areas. So you asked what's going to be -- what's going to be strongest in this kind of environment, obviously the C4ISR where you heard the Department of Defense come out very strongly on the importance of CS -- C4ISR going forward. We that is still going to be well prioritized, high in the stack, along with cyber, obviously, where we have a strong program, and intelligence in general.

And if you just look at -- if you just consider the turmoil that we're witnessing in real time here around the world, which is not geographically limited to southwest Asia, we just see that these kind of services and solutions that we're providing are going to be in even greater demand. We also think that the necessary pressures downward on spending in the federal government, will ultimately yield more projects like TASC and VIPS and VLER, all of which are aimed at efficiency. TASC is about consolidating multiple finance systems, asset management and acquisitions systems at Department of Homeland Security, various components into one unified set of -- suite of financial asset management and acquisition systems, that will yield tremendous efficiencies for the department. Similarly Bill pointed to, here we've got a VIPS project for enlistees, virtual enlistment, if you want to think of it that way. It's less than $100 million that they're going to spend on this program, and the benefit is $100 million a year. Just think about how many times if you did that over and over, how that would impact the federal budget spending. So we think that the -- that we'll see a big swing here and focus towards projects, transformative projects that will yield efficiencies and government, and that plays to our sweet spot.

Our next question comes from Rob Spingarn of Credit Suisse. Please go ahead.

Good morning.

Hi, Rob.

So based on what you just went through in your previous answers, how do you think about bookings for the rest of the year.

Let's see in this case, Rob, I assume bookings in this case, I guess you could be talking about funding, or contract awards, either one.

Funding.

Funding? Okay. Well, if you look at years past, where we've gotten into prolonged continuing resolutions. I think last time we had a full-year one was 2007.

Our 2007 fiscal year, yes.

So, we've definitely seen that the funding has been a little bit slower during our third and fourth quarters. That's another reason I'm so glad we've had a really strong first half of a year, and even on a 12 month basis, we've have so much funding, we can power through all of this. I do believe we'll get to the government's fiscal year, and then you'll see that pace pick up, particularly in the September time frame. Now hopefully, we'll reach an accommodation here, where we won't have a full-year continuing resolution. But we have planned for that. We've got plenty of funded backlog. We've got the open hiring recs. We feel like we are in a good position here. But I do think, if continuing resolution drags on, even through the whole year, that you'll see it. It will be kind of spotty here during our third and fourth quarter, and picking up strong again in our first quarter of 2012.

As you might imagine -- this is Paul, Rob. As you might imagine, we track that -- those funding orders on a weekly basis. We have a chart we look at every Monday. And the pattern -- we've been doing that for years here. And the pattern we're seeing, is very consistent with what we've seen in past years. It's following very parallel, at a higher level, and parallel to what we experienced in prior years. Keep in mind, we've been under continuing resolution effectively for four months. We're in our fifth month of continuing resolution. So I think it's fair to say, that even though we have had four months of continuing resolution, we're tracking funding orders at a higher level and parallel to historic patterns.

Obviously the reason I asked the question you had a great funding quarter last time. And this time was a little bit light relative to sales. And if that were to continue from a trend perspective, do you hit -- are you able to achieve your revenue guidance? You've said that your guidance contemplates a full-year CR. But -- so I guess what you're saying is, you can do that with a book-to-bill under one for the full-year?

Yes. As I mentioned we're sitting on $2.2 billion of funded backlog right now, as of December 31st.

In other words, you can live off of the old backlog?

Yes, and they'll be additional fundings that will come in, for sure, during the third and fourth quarters.

Keep in mind, that the continuing resolution does not lower spending. It keeps it at current levels of spending, and many of the contracts that we have, as Bill has mentioned go out over 4 years.

Yes.

So I don't just see a material impact from continuing resolution, and what impact we do have, which is has been a grass roots bottom up valuation, is blended into our forecast, and therefore our guidance.

We've been through this many many times in the past, and as Paul mentioned, we track our funding on a weekly basis and we compare year after year after year, and we can look at this and see the same pattern repeating itself. So we're very confident, with where we are right now.

We're also encouraged that with all the analysis that's going on, the commissions that have looked at this, and analysis done by the Department of Defense, that all of what's been so far evaluated is $100 billion over five years of reprioritization, which we think we're as likely to benefit from as anything. And that $78 billion of reductions over five years -- so $78 billion when you decompose that, you find that big components of that have to do with just economic inflation assumptions built into the Department's planning. Also there's a big component that's assuming reductions in the number of marines and soldiers. And also some program eliminations, and then some further actions in the overhead area.

Again, those actions in overhead, we think are going to be more like the VIPS kind of actions, than they are just raw cutting. Raw cutting helps for short term, it does not help for long term. We really have to go attack the structure that's there. And the way you attack structure is with reengineering of process and automation. And that's where we -- we really have strength.

The VIPS program.

Like VIPS, back to VIPS, and then back to TASC, and back to VIPS, VLER.All of these will bring economies that will help achieve that $78 billion, or some part of that $78 billion.

Yes.

Our next question comes from Arvind Ramnani of UBS. Please go ahead.

Hi, yes. Thanks for taking my question. I just wanted to find out -- the $450 million from DHS, how much of that was counted as part of the total award in December quarter?

In December quarter, all of it was.

The single award TASC order contract for us.

Great. And this -- one more question. Were there any one-time items in the quarter that helped operating margin?

Yes, this is Tom. I mentioned there was on the call. We had some award fees, which we typically get in the first quarter of the year, approximately $2 million, which slipped from the first quarter to the second quarter. That equates to approximately 23 points in margin. We also had some higher one-time expenses, associated with the earn out liability adjustments, as well as some employee benefit expenses which also benefited the quarter, and hits the margin.

A good way to look at the margin for -- in CACI, is look to at the first and second quarter combined, we had 6.5% margin. The first quarter margin was depressed because of those award fees, the second quarter margin benefited by those award fees, and so this 6.5% of first half is more indicative. Those award fees all are half historically been, right on the border of our first quarter and second quarter, and also our third quarter and fourth quarter. And each year we -- we worry about which way it's going to fall, and we can't exactly judge which way it's going to fall. This year has fallen to the right, into the second quarter, and we expect that in the back half, it will fall from the third into the fourth quarter as well. Bill, you wanted to clarify.

Yes, Paul, you were reminding me, I may have misunderstood Arvind's question.The question I answered, I had thought he was asking how much of the DHS TASC order [59] was counted in our contract award total of $829 million, and the answer is all of it. If you we're asking instead, about how much funding was counted, the answer is none, because there really was no additional funding. We're working on details with them right now

Yes, the first TASC orders are expected this month.

This month.

And so we have no funding yet.

Our next question comes from Tim Quillin of Stephens.

Hi, good morning. Nice quarter.

Hi, Tim. Thank you.

In terms of the benefits that you mentioned in the second quarter, it sounds like the earn out liability and employee benefit cost didn't have a meaningful impact on the margin, is that fair?

Well, Tim, the fact that I mentioned it, it implicitly meant that it was meaningful enough that, that it did have an impact. The award fees was the largest. I quantified that. The other two items combined, maybe $1 million to $1.5 million.

Okay. That's good. Thank you. And then, regardless of those one-time benefits, this year you still had some nice year-over-year margin improvement, despite the fact that ODCs are still growing faster than your DO content. And I'm wondering, what that's a function of? Are you just getting some of your materials moving from T&M to cost plus, and that's benefiting you? Or what -- how are you able to get, what seems like maybe a higher margin on your ODCs? Thanks.

Tim, this is Bill Fairl. This -- I think we told you at the beginning of the year, we were committed to margin improvement for this year at least 6.4%, and we did a bunch of things to drive that. And I'll start with number one, which is we, put a margin improvement component in the incentive compensation program, for the whole team here, myself, Paul, Tom, and all of our managers, all the way down. That certainly got a -- [attention]. You asked about contracts moving from one type to another, I'll go back to an answer I provided earlier. With the shift to more fixed price contracts, where we do so very well in managing, delighting our customers, and delivering good returns to our shareholders here, that has helped a lot as well.

There are things we've been doing, and I've been talking about for a number of years now, like we've been concentrating our bidding on those activities, investing our B&P dollars in those activities that deliver more CACI direct labor. And as I mentioned before we make five to ten times as much on CACI direct labor. Just taking -- we just define one part of our business as our C4ISR business. You think of that as our S3 and ETOS work all sort of combined, the work up at Fort Monmouth is going to be at Aberdeen, if you will. That's about $800 million a year.

We've really concentrated on that. And I believe I told you at the beginning of the year, that our direct labor was growing two and a half times as fast as our ODCs, in that 800 million-dollar book of business. We are still looking at it that way, even with the strong ODC growth across the Company, direct labor is growing so fast under the S3 contract. And then, I'll also point out that, that we're pretty proud of the job we do around here, about controlling indirect cost. And Paul has a mandate for us, which we all roger up to, that our indirect cost will grow less fast, than our gross profit, at a lesser rate, and we're driving that as well. All of those things contribute to it.

Our next question comes from George Price of BB&T Capital Markets. Please go ahead.

Thanks. Good morning, again guys, nice job. Wanted to just kind of continue the focus on margin a little bit. You noted the reasons that we saw the spike in margins in the second quarter, that we should see that typical seasonality of strength in the fourth quarter, relative to the third quarter. But I was wondering, if you could maybe guide us a little bit more specifically through how you see the next couple of quarters playing out from a margin perspective? How much down will 3Q be relative to 2Q? And how much stronger do you think 4Q ends up?

George, I will reiterate what we said previously, we expect our margin for the full-year to be at least 6.4%. For the first half of this year our margin was 6.5%, so we're happy with the progress we've made in improving margin. There are some wild cards involved, in terms, of ODC growth, whether it's disproportionate or not. So we wanted to give some flavor -- of that half of the year vis-a-vis the third and fourth quarter. And the fourth quarter will be greater than the third quarter as it typically is. And I also guided that the third quarter will be down from the abnormally high -- I hate to use that term -- in the second quarter. So I think that should be helpful, as you look at the remaining quarters for our fiscal year.

Okay. I mean, do you -- just to kind of try and pin you down on the fourth quarter comment -- I mean would you expect your fourth quarter operating margin to be at least flat to up year-over-year?

George, I know you're trying to pin me down, and I'm kind of reluctant to be pinned down. Again, I'm going to stick with our story, for the full-year we're expecting our margin to be at least 6.4%.

I think that's good. The one thing we can say is, look, Bill mentioned, that we have engineered into the bonus program, margin improvement for every manager. And that's every quarter, because here we pay our bonuses, both on a quarterly basis, se part on a quarterly basis, and some part on an annual basis. So each quarter, every manager in a bonus program is affected by whether or not they increase their margin in that quarter. So you can guess what the behavior is, and so I won't go any further. But I would expect that will have an upward -- a lifting effect on each quarter.

But George, if you want a data point, last year in the fourth quarter we had a significant increase in non-cash stock compensation expense, because we had performance-based in a stock, we exceeded our performance targets. And as a result of that we booked or accrued, a significantly higher stock compensation expense, which had a material negative impact on the margin in the fourth quarter. We do not have a similar situation, related to our stock compensation program this year, so that should help.

Our next question comes from Mark Jordan of Noble Financial. Please go ahead.

Good morning, gentleman. I wondered if Tom, if you could give us some details on the new bank lines, specific terms on the revolver and term, and how they compare to prior lines? And then secondly, given the new line in place, can you give some insight as to -- kind of how the third quarter interest expense could be relative to Q2?

Yes, the previous facility was put in place in 2004, and the pricing was renegotiated in 2006. We were paying, given the current leverage ratio was LIBOR plus 150, the new facility, at last quarter's leverage ratio has LIBOR at 225, given lowered leverage as we speak. The incremental borrowing rate is LIBOR [200]. So slightly higher, spread to LIBOR, however, as I mentioned the term loan is down kind of materially. And so that's all, very positive. We're amortizing the kind of one-time fees over the life of the facility, that's probably similar to what we had previously. In terms of interest expense, I expect our third quarter interest expense to be approximately flat with our second quarter interest expense, and that will be consistent with the fourth quarter as well. So interest expense is down, quite a bit, given the new structure of the facility.

One follow up if I may. Obviously, with the turmoil in Egypt, do you have any exposure in the ISR area on the foreign military front? And if so, have you gotten a sense if there will be any disruptions because of the political turmoil there?

We don't have any people in Egypt. Where our people are working to support the intelligence community, we don't discuss that for obvious reasons. But we have no people in Egypt.

Our next question comes from Tobey Sommer of SunTrust. Please go ahead.

Hi, there. Just wanted to ask a question on intelligence side. Can you go into a little bit of color, what you see as a growth trajectory there? And would it be fair to say that margins are above the Company average, as we kind of try and get an understanding of what the margins are, and kind of backlog and work in that area?

Tobey, it's Bill Fairl. And I'll start here. At CACI< we define our intelligence business to be both, the work we do at the national level, so for all the agencies, as well as the work we do for our service customers. So for example, the Army work, a lot of the work we do on S3, for example, very different kinds of work. At the national level, without going any details, there might be a lot of analysis going on around there. We talked about some of our products that we have there, our high view product, sort of knowledge management, if you will. On the Army side it's a lot of signals intelligence, systems integration work, think about taking different sorts of ISR systems and integrating them on the back of the vehicle. We do a lot of that.

We're quite proud of the system our folks put together, our in-the-field engineers over the past year, this Biometrics system, where we have this field-deployed handheld Biometrics capability, that gives the folks on the front line this terrific ability to identify folks out there. So I'm answering your question by saying this, at least two different, broadly defined buckets here, if you will, at the national level. So it's probably not helpful to think about them all as one bucket together.

I can tell you specifically, as far as our margin trend goes, I'll go back to an answer I gave earlier, that C4ISR work, that we defined as about $800 million a year, which is Army work, our direct labor is growing twice as fast as our ODC's on that. So by that alone our margin is increasing. And because of all the reasons I mentioned earlier, including the changes to our incentive comp program, the investments we're making in B&P, I expect that to continue. Paul, I don't know if you want to add anything?

No, I think you got it. That's it.

Great. Thank you very much.

You bet.

Our next question comes from Josh Sullivan of Gleacher & Company. Please go ahead.

Good morning.

Good morning.

Good morning. So the non-mission oriented businesses then, can you tell us what the growth rate looks there, and the margin environment? I mean you talk about reengineering back in, I mean, is there growth expected there or is it flat?

Well, we're going to get -- we're going to get growth just naturally because of these jobs we've won, just the three we've been talking about this morning here, the DHS TASC, the VIPS and the VLER. You can think of these as sort of back office systems support, if you will. These programs are all just starting out. TASC is a (inaudible) year contract. The other two are multiple year contracts.

And we are just starting out this year, so we are going to get growth over the next, two, three, four years,. I am talking about fiscal year 2012, fiscal year 2013, and fiscal year 14. As though contracts ramp up and get to full speed, we'll get growth out of those. In the meantime, we're targeting additional work there. I took a look at our overall pipeline. I gave you some numbers earlier about we've got $4.1 billion of proposals submitted and under evaluation. We're going to -- we're planning on submitting another $8.5 billion in the next six months.So if you look at our total pipeline, the largest single element in that is civil agency work, which would include this kind of transformational, sort of dollar saving, back office kind of work we're talking about here.

In terms of the mix of work we have, in any enterprise this large, there is always a spectrum of growth across that work, that portfolio. We've talked about areas, Bill's talked about intel, cyber, intel both at the C4ISR level and intel at the national level are big growth areas. Our security services and consulting work that we do is another high growth area. These acquisitions that we've done recently, that have major capabilities in the geographic information systems, and the intelligence elements of that, have strong growth prospects in them.

Keep in mind, this is not a static enterprise. In other words, it doesn't sit there, and kind of grow each piece at its own part -- at it's own pace. What we do as a management team, is we perceive the areas of strong funding and strong growth, and we deploy assets, our investment assets there. So if you go look at our -- if you go sit in on our bid room when we're doing our reviews every Thursday, you see the play in that room, it's like a market there. Who is going to get the B&P money.

Well, the winners on the B&P money are the people who are deploying investment resources into the high growth areas. And so we're managing away from low growth and toward high growth. But in any given enterprise this large, you're going to have a wide mix of growth rates. And we tried to highlight those that are growing fastest, and we tried to explain to you the management process we used to position ourselves dynamically, almost in real time, towards those high growth areas.

Good, thanks for that. And so, do you have any indication -- Gates had mentioned a follow up report to the comments he had made last month. And you said, that you don't think that it's going impact you, but do you have any indication where that report might go?

This is an area ,where there's still a lot of discussion and debate. This has the elements, all the normal elements of the need of the Department of Defense, and the political dynamics that are going on. There is just so many unknowns in that, it's very hard for us.

We take it at face value, when the Secretary says $100 billion over five years. We prioritize. We just take that at face value. We start to assess, where is that money going to be redeployed? He talks about C4ISR. We're strong there, we are adding more capability in that area. And we shy away from the areas where there won't be growth. In the $78 billion, as I pointed out earlier that he's talked about, those reductions are largely affected by assumptions that they have in their planning around escalations, numbers of troops, soldiers and marines. That they're going to reduce the number soldiers and marines, whether that assumption will hold, given the current turmoil we're seeing, I don't know.

Some might argue, it's not a prudent time to be trimming our force back, despite our progress in southwest Asia. These other threats, that we've talked about are looming, and so it's really hard for us. As I said, that's the macro environment. We pay attention to it. I can tell you every day, we're shuttling e-mails back and forth, we're reading everything that comes out, and we have our marketing teams that does the analysis work. But at the end of the day, what we get paid to do is, manage our business, position our Company in the high growth areas, and manage for high win rates, strong pipeline generation, high win rates and excellent performance on delivery. And that's going to determine our outcome, not the macro events.

(Operator Instructions).

Our next question comes from Erik Olbeter of Pacific Crest Securities. Please go ahead.

Hi, guys. Great quarter.

Thanks, Erik.

Real quick question on the stock compensation. It's going to be down --it looks like it will be down significantly this first half, as well as second half. But given the expected operational results, what does that tell us about 2012? I mean, are we -- I know that you guys are paid so that on the back year for good results. So it looks like things are humming along even better than last year. Does that mean we'll see sort of a commensurate tick up in sort of stock compensation next year?

Yes, so Erik, every year the compensation committee reviews various compensation programs. And in 2009 and 2010 our stock compensation program was based on restricted shares, with the concept of paying cut target stretch -- if we exceed performance metrics, individuals would have more shares vested, and over time and we would recognize additional accompanying expense.

The performance metrics that we had in prior years was Company financial performance, which drove increased accounting expense, as more shares were allocated because we exceeded our goals. This year, fiscal year 2011, the performance metric was not our operating performance, but sheer price, which is a market-based consideration. It turns out the accounting rules are such that, if the performance metric is a market-based condition, there is no accounting true-up for stock-based compensation expense. And so we are able to forecast very accurately what our stock-based compensation is, for that particular reason. So that was the primary driver for reduced stock compensation expense this past year, vagaries in accounting rules.

Now what happens in fiscal year 2012, it's hard to say, because the compensation committee has yet to address what is the appropriate compensation scheme for the officers in the Company.

Exactly. I would say that we like this new scheme that we've put in place. The awards that we grant, the equity awards we grant, will be dependent on the performance of the stock price. We think that aligns our people's thinking with that of all of you, and we think that's -- we'd like to continue that I think, and l -- unless something changes in the environment. But it puts us sort of in the same bucket with everyone else that's invested with CACI.

Great. Thank you.

We do have a follow-up question from Cai von Rumohr of Cowen & Company. Please go ahead.

Yes, thank you. You mention that you see a similar pattern, in terms of funding kind of looking forward. If we look at the last seven years, funding to sales has never been below 1.1. So are you saying you think the fundings will be in the area of one or somewhat higher, as you look at it now?

Cai, that calculation that you just did, does that -- on a yearly basis?

That's just for the third quarter, just for the third quarter. If you look at the fundings to sale for the third quarter, for the last seven years, never below 1.1.

Well, my crystal ball isn't working all that well right now. So I'll be happy, if it's a 1.1. Given the environment and the assumptions we've made, we're anticipating that it could be a little spotty here for the rest of this fiscal year.

Okay. But, I mean --

We thought -- go ahead.

You're fine now, because of -- you have this little cushion of the huge fundings in the first quarter. I mean, if we have another couple quarters anywhere near where we are in the second, and the second historically is the worst pattern, you kind of have a problem for the fourth quarter or early next year?

These are really hard things to forecast or predict. If you look at what happened in our first quarter, Bill pointed out in our last year's third and fourth quarter, we're seeing that same kind of phenomena going on, where there was a stretching out to right. And then the flood gates opened in the -- in our first quarter. And so, it's never been our practice to try to forecast any one quarter that way. You're able to -- you're doing some statistical analysis there, I take it. I'm sure you're doing it right. We don't try to do it that way. We try to do a bottom's up analysis of what's there. We -- every week, we look at what proposals that have being submitted, where they're expected to be awarded time-wise. And it's very hard for us in any one quarter to specify -- although right now, we do look every week. And right now, we're tracking higher than, and parallel to last year, and other years. Even though we're in a continuing resolution, we're tracking the same pattern on funding that we had in it last year, which did not have a full-year's continuing resolution in it. So I wish we can give you a more precise answer here, we're just not able to do it, Cai .

We have another follow up question from George Price of BB&T Capital Markets. Please go ahead.

Hi, I just had a couple things that I wanted to throw out. First, I wondered if you'd care to share any thoughts or views on organic growth, ranges or targets, as well annual operating margin expansion targets, maybe for next year, for fiscal 2012? And then I also wanted to ask about DSOs, just that we kind of reached the bottom there. Do you think this level is sustainable, do you see any potential for further improvement? Thank you.

This is Paul. I'll start, and Tom will come back behind me with the second part of the question. But in terms of fiscal 2011, first of all, we are not in position to give guidance for fiscal 2012. But we're also confident in our current set of goals, which are mid- to high single-digit organic growth, and double-digit earnings growth. And nobody here is talking about changing that. So we're going to project forward, with that kind of set of goals. And I think they're doable, given what Bill has talked about, about the strength of the backlog, and these new wins, these exciting new wins. The fact that 90% of the winning is happening in the second quarter, is all new new business, all of this points to our ability to continue to have those goals and meet those goals.

Yes, and George, with regard to DSO, the 58 day DSO is I think, is very admirable. We're very proud of the work throughout the enterprise to achieve such favorable numbers. I have always cautioned that those numbers have a tendency to be choppy, the collections for a quarter often rests on what happened in two or three days of the quarter, whether they are very strong days or they are relatively weak days. But for the full-year, we are expecting DSO to be comparable to what it was last year. We are happy with the performance, but there is that choppiness into it. So I would forecast consistent [ambient] levels of where it has been.

Great. Thank you.

I am showing no further questions at this time, and I would like to turn the call back over to Mr. Paul Cofoni for any closing remarks.

Thank you, Ali, for all your help on the call today. And we are, of course, like to thank you everyone who dialed in, or logged in on our webcast for your participation today, we know that many of you may have follow-up questions. And we'll make sure that Tom and Dave, as usual, are available in a short while to take any calls that come in. This concludes our call. Thank you all, and have a good day.

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