CACI International Inc (CACI) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International first quarter FY 2012 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 call over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Allie. Good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International. We're very pleased that you're able to participate with us today. Now, as is our practice on those 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 2.

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

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

Thank you, Dave, and good morning, everyone. With me this morning are Tom Mutryn, our Chief Financial Officer; Bill Fairl, President of US Operations; Dan Allen, Chief Operating Officer for US operations; and by phone, Greg Bradford, Chief Executive of CACI Limited in the United Kingdom.

Please go to slide 4. CACI once again delivered record performance in the first quarter of fiscal 2012. We are often asked how we've been able to buck the trend, and why we are so confident in our ability to keep growing. Let's go to slide 5. The answer is straightforward. We have the right strategy in place, and we have a team that is totally committed to delivering operational excellence and innovation to our clients. Our growth strategy has 3 core elements. First, provide mission-critical services for our clients' most pressing challenges. Second, concentrate on well-funded areas within our large addressable market of defense intelligence, homeland security, and government transformation. And third, capitalize on new opportunities for growth both organically and through acquisitions.

But, it's not enough to have the right strategy. We also have the right culture, people, and agility to deliver on our commitments to clients and shareholders. We deliver these results in many ways. We create innovative solutions for our clients' needs, which resulted this quarter in a high win rate, and $2 billion in first quarter awards. We embed operational excellence into every one of our more than 2,000 programs, keeping them trouble free. That allows us to meet or exceed our client expectations and sets us up to continue our high recompete win rate. Clients keep coming back to us because they know we will perform.

We also move rapidly to identify and respond to our clients' current and emerging needs. We do this by investing in new technologies, prioritizing our bid and proposal investments, acquiring in demand capabilities, and attracting key leadership and technical talent. Combine these with our focused strategy, and the result is another quarter of record revenue, operating income, cash flow, and earnings per share. Once again, we have met or exceeded our financial goals of mid-to high single-digit organic growth and double-digit earnings growth. These are goals we have achieved consistently since 2007. Our strong financial performance, the record levels of contract awards and funding orders, and the continued success of our mergers and acquisition program give us the confidence in our ability to grow despite a challenging market, and the confidence, therefore, to raise our guidance.

Let's go to slide 6. We see significant new growth opportunities in intelligence, surveillance, and reconnaissance solutions; cyberspace operations, government transformation, healthcare IT, identity management, cloud computing, and mobile applications. The need for our defense intelligence and homeland security solutions is driven by the persistent global threat environment, and the demand for our government transformation capability is increasing as the government seeks to cut cost by streamlining and automating its processes. Mergers and acquisitions is an important component of our growth strategy, bringing us new capabilities in emerging high demand market areas.

In our first quarter we acquired 2 companies, Pangia and Paradigm, with intel and cyberspace capabilities that complement our organic strengths. These acquisitions give us cutting edge services in cyber intelligence and computer network defense, along with some of the world's foremost experts in cyber forensics to help our clients address cyberspace vulnerability before they can be exploited. We also recently acquired Advanced Programs Group that specializes in e-business systems solutions, which improve productivity and reduce costs for clients. APG enhances our ability to serve clients who are seeking to meet budget challenges by modernizing and moving IT processing from dedicated facilities to cloud environments.

M&A is just one way we bring innovation to our clients. Innovation is also at the core of our new business development and our day to day delivery, as we continuously pursue new applications of technology to our clients' most challenging problems. One recent example of CACI innovation in our C4ISR business was the rapid development and deployment of a biometric smart phone application, which is making a difference in the theatre of war. This application allows our forces to capture, from a safe distance, the biometrics of individuals approaching checkpoints, then use secure wireless technology to compare this to biometrics data for known terrorists.

Turn to slide 7 please. We expect to continue our momentum in winning new business for the rest of the fiscal year and into the future. There is ample room to grow in our large addressable market, and we continue to gain momentum and win new business in new markets.

Now, I'd like to turn the call over Tom, who will provide more insight on our financial performance. Tom?

Yes. Thank you, Paul, and good morning, everyone. Let's go to slide number 8. We are pleased with our first quarter results. Revenue grew year over year by 10.8%, with 8.3% organic revenue growth. Our direct billable labor grew by 12.2%, and our other direct costs were up 5.2%. Consistent with last quarter, we reported our results on both a GAAP and a pro forma basis, with our pro forma results excluding fiscal year 2011 and 2012 earn-out adjustments related to 2 domestic acquisitions that we completed in fiscal year '10.

Slide 9, please. First quarter pro forma operating income was up 40.3% year over year, driven by strong growth in our various business units, increased direct labor, and a one-time commercial product sale that generated $12 million in revenue, and $6.1 million in net income. Business in the UK remains challenging because of continuing cuts in government spending. That said, our UK operations net income grew 12.6% over the same period last year, driven primarily by growth in our commercial business. Year over year first quarter pro forma net income for CACI increased 41.6%, and 21%, excluding the one-time product sale.

Next slide please. Our operating cash flow of $56 million was a record first quarter performance, and our quarter end DSO was at 58 days, 1 day better than last year. Our free cash flow was $262 million for the 12 month period ended September 30, 2011, or about $8.77 per diluted share. This translates to a free cash flow yield per share of 15.9% at a $55 share price. Our balance sheet remains strong. Our quarter end net debt was $507 million, comprised of our convertible debt security, our bank term loan, and our revolving credit facility borrowings. Our net debt to trailing 12 month pro forma EBITDA leverage ratio was at 1.6 times. Our credit facility, along with our strong operating cash flow, gives us the financial flexibility to execute on our strategy. We continue to evaluate exciting M&A opportunities, ones which are squarely in higher growth areas, and have what we call star distinctions; innovative solutions, or record of operational excellence, demonstrated agility, and a like culture, based on ethics and integrity.

Slide 11, please. We are increasing the fiscal year 2012 guidance we provided in August. We now expect revenue to be between $385 billion and $405 billion, net income to be between $157 million and $163 million, and earnings per share to be between $5.55 and $5.80. The primary drivers in the guidance increases are strength in our US operations, the contribution of the Paradigm and APG acquisitions, and the first quarter commercial product sales. The guidance also reflects the accelerated share repurchase. For fiscal year '12, we now expect our fully diluted share count to be 28.2 million shares, and our effective tax rate to be 39.9%. Interest expense is expected to be between $26 million and $27 million, and operating cash flow should be approximately the same as last year, about $225 million.

With that, let me 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 for our first quarter of fiscal year 2012. Let's go to slide 12, please. Our contract funding orders for the quarter were $1.6 billion. That's a record quarterly amount for CACI. While I'm on the subject of record quarterly amounts, we also established a new record for contract awards in a quarter. During the first quarter of fiscal year '12, we received an estimated $2 billion; that's $2 billion in contract awards. The $2 billion in awards comprised about 45% in new business and 55% in recompetes. Dan is going to provide you with some color on these awards in a few minutes.

Right now, I would like to give you an example of how we continue to leverage our core capabilities to win diverse new business. This past quarter, we were selected as 1 of the 3 large business prime contractors on a $100 million multiple award IDIQ contract. Under this new business award, we will draw upon our expertise in intelligence, financial systems, and threat analysis to support the government in research, analysis, and documentation of possible violations of US economic and trade sanctions programs. Our goal is to help the federal government safeguard America's financial system from illicit use by rogue nations, terrorists, drug traffickers, and other national security threats.

Our intelligence business continued its strong performance during the quarter. As an example, we recorded more than $350 million in classified intelligence awards this past quarter. Intel now represents some 43% of our business. Intel is another differentiator area for CACI, with our distinctive solutions in strategic acquisitions, and it's a market that we believe the space we are in will continue to be well funded for many years.

Slide 13, please. Our opportunity pipeline remains very strong. At the end of our first quarter, we had more than $5 billion in submitted proposals under evaluation, with approximately half of them for new business. In addition, we expect to submit a little bit more than $9 billion in new proposals during the second and third quarters of our fiscal year '12, and a little more than half of those anticipated proposals are for new business. CACI direct labor growth was also very strong in our first quarter. We added 240 net new hires during the quarter, and we currently have more than 425 firm open hiring reqs, showing continued demand for both our current clients, as well as our new business wins, during our first quarter.

We are off to a great start in fiscal '12. We had record quarterly amounts of funding orders and contract awards. Our growth in net new hires was very strong, and we saw an increase in firm hiring requisitions, again from both our current and new clients. We are positioned to win. We are capitalizing on new opportunities with agility and innovation, and we are delivering on our commitments to our clients through our relentless focus on operational excellence.

Dan? Over to you.

Thanks, Bill, and good morning to everyone. Our record first quarter contract funding orders and new contract awards demonstrate that our clients continue to have confidence in CACI, and are increasingly choosing us for our innovative value added solutions and services.

Let's move to slide 14. We operate in a dynamic business environment, with budgetary uncertainty and continuing resolutions occurring on a regular basis. Our business strategy focuses on mission-critical national security needs, and government transformation initiatives in high priority, well funded markets where we see significant long-term growth opportunities. Our ongoing detail analysis quantifies CACI's addressable market to be approximately $250 billion. With a market share of roughly 1.5%, we see great opportunities to maneuver and to continue our growth.

In our last call, I spoke about 4 of our key growth market segments; mission-critical ISR, full spectrum cyberspace operations, government transformation, and healthcare IT. We continue to expand our business in these 4 areas, and I would like to provide some insight into several key wins this quarter. Let's go to slide 15. One of our top first quarter ISR awards was our DCGS-A recompete victory to help the US Army upgrade battlefield intelligence systems with new ISR capabilities. These upgrades connect commanders at every level with hundreds of ISR data sources, consolidated into a single system, increasing their situational awareness. Our continued solid program execution and high customer satisfaction are the key reasons we have been so successful at retaining this business.

Also in the ISR area, we were awarded a $33.6 million contract with the Irregular Worker Technology Division of the Naval Service Worker Center in Crane, Indiana. This is new work for CACI, where we are providing design, development, acquisition, integration, modeling and simulation, and assessments of ISR systems, ground-based electronic protection systems, signature management technologies, computer network systems, and threat detection systems. What makes this award so special is that we are expanding a partnership that we have maintained with NSWC Crane that goes back almost 30 years.

Let's go to slide 16. In the government transformation area, we were selected as the prime contractor on a $273 million IDIQ contract to support recruiting and retention for the US Army. Our work will help streamline and enhance the Army's recruiting and retention processes, improving efficiency, reducing costs, and helping to maintain a well-staffed military. This represents new business for us, and leverages the work we currently have supporting recruiting and retention for the intelligence community and federal agencies, as well as the work we won last year to develop the military's virtual interactive processing system or VIPS.

Our Health and IT segment is also experiencing strong growth, as we continue to win a number of new awards. For the defense medical logistics standard support system, we won 4 task orders, totaling $69 million. This continues our key role in supporting medical logistics, facility management, and medical maintenance for US forces. Our work here has expanded from providing functional expertise to playing a major role in software development that will lead to improved management of medical logistics worldwide. We also won a $99 million award from the Navy's Space and Naval Warfare Command to modernize their legacy healthcare information systems, and to migrate them into a single data repository. This expansion of current CACI work enables medical practitioners to more easily research medical data and trends, thereby improving medical care for our military service men and women. I would also like to point out that this has the potential to become a joint effort across all services.

In addition to the 4 markets I just mentioned, I wanted to introduce a new area where we are experiencing growth; the global counter-narcoterrorism mission. We have several programs supporting this mission, and in the last quarter we won a $232 million award to deliver solutions and services to counter this asymmetric threat. Our pipeline of opportunities is growing in this area, and we believe our innovation and agility will help us to grow this part of our business. In each of these growing business areas, we continue to invest in capabilities, build our customer relationships, expand our new business pursuits, and strengthen our competitive position. With significant room to maneuver in our large addressable market, we expect our solid performance to continue, delivering growth for the remainder of fiscal year '12 and into the future.

Now, I'll turn the call back to Paul for closing remarks.

Thank you, Dan, and thank you, Tom and Bill, for your highlights and details. Let's go to slide 17, please. CACI's continued strong financial performance sets us apart. We are in high priority markets where customers value our solutions for their most important missions. We capitalize on growth opportunities with agility. We innovate in our projects and meet our commitments, giving customers the edge in solving their greatest problems. We help counter persistent threats, terrorists, and allow clients to leverage limited funds to streamline processes, reduce costs, and enhance productivity.

At the heart of our success are the 14,300 diverse and dedicated CACI employees. We come from all fields and backgrounds, but we have one thing in common; a deep passion for the missions of our clients. 22% of us are veterans, and we continue to make hiring veterans, especially disabled veterans, a priority, to bring the dedicated skill sets of these individuals to our customers. We have completed the first quarter of our fiftieth year in business with record financial performance and momentum that gives us the confidence to raise our guidance for fiscal 2012. We look forward to continuing to provide innovative solutions for our clients, career opportunities for our outstanding employees, and value for our shareholders.

With that, Allie, we'll open the call for questions.

(Operator Instructions)

We ask that you please limit yourself to one question and one follow-up. Our first question comes from Bill Loomis of Stifel Nicolaus. Please go ahead.

Thank you, and great quarter guys. Looking at the direct labor, I mean, this is the first time in years, from my model, that I've seen direct labor outpace ODC's. Is that temporary, because you had some big S3 awards in the quarter? Is that something we can look forward to over the next few quarters, higher direct labor versus ODC's?

Bill, this is Bill Fairl, and I will say that we love the growth in direct labor we have. As we have mentioned many times, that is what really drives our bottom line results. We like the ODC's too. We make money on our ODC's. Our long-term strategy here has been to become a prime on the vast majority of our contracts, establish relationships with clients, and over time seek to increase the CACI labor content, both in our existing work and in our B&P investments as well. So that strategy is paying off. As you point out, this quarter the ODC growth -- or the direct labor growth was much stronger than the ODC growth. We'd like both things to grow. We are obviously very, very pleased with the direct labor growth, and that is a direct result of our strategy.

Do you expect that to continue over the next year?

Right now we have given you our guidance, and I would say yes. Particularly on the direct labor growth, because we have had such a strong first quarter in the hiring. And then while we're doing all this hiring, our number of firm open reqs increased at the same time, so both the results and the future demand for this year have increased at the same time. So, to me, that signals continued strong labor growth during fiscal year '12.

Our next question comes from Michael Lewis of Lazard Capital. Please go ahead.

Thank you, and again, great quarter. Paul, I was wondering on M&A. With Jason leaving the firm, will you be able to maintain the M&A momentum that we have seen over the last 12 months?

Yes. Thanks, Mike. Good morning. We wish Jason the very best. He has decided to go be an entrepreneur and open his own little business, and we wish him the very best. We hired a very strong professional to work and replace Jason, John [Noe], who you will get to meet, I'm sure, in the future. And John is off and running, hit the ground running. He is an experienced M&A professional, having worked in other firms, and having some notches on his belt doing acquisitions, so.

And he is from [Tubic], correct?

Yes, that's right.

Okay. And then just a follow-up on the narco work, actually that is an area that I think is going to be a strong growth area over the next 3 to 5 years. Now is the contract base that you are working with now more focused on Latin and South America, or is this focused in Southeast Asia?

It's spread -- this is Dan -- it's spread across a couple of different theaters, including Africa. But the focus, at least for the initial tasks that we are on is in Africom and Southwest Asia theatre.

Our next question comes from Cai von Rumohr of Cowen and Company. Please go ahead.

Yes. Let me join the others, and say great quarter. (multiple speakers) So S3, again, good awards there, can you say, have you been taking any subcontract work in-house, as others have done? And is the direct labor ratio of S3 work increasing?

Cai, this is Bill Fairl. So, the first question is -- we honor our commitments around here, so -- and that includes being a good prime contractor. So no, we don't do that. We sign -- enter into a Team agreement with our subcontractors, we're putting them on the Team because they really can contribute to that. We make commitments to them. They invest in helping us win, and we honor those commitments. We want to be here for a long time. We have partnerships with a lot of companies, and the only way to stay a viable prime in this business is to honor your commitments. So, long answer, but we honor our commitments around here.

And then in terms of the S3, yes, it has been our strategy, as I mentioned earlier, to grow our direct labor content and the S3 has been a great example of that. We got in there, we established good client relationships, performed really well, initially a high ODC content, but as new tasks have come up, we've been able to do more work in-house here. And that, again, has been our strategy and it is working. We are just delighted with the results.

Our next question comes from Jason Kupferberg of Jefferies. Please go ahead.

Thanks guys. So I just wanted to ask a question about the guidance. You obviously had the one-time product sale in the September quarter, which give you a nice boost, which was good to see. You had the accelerated share repurchase, which we knew about from August. And then you had some of the more recent acquisitions. So, excluding those 3 items, would you guys have still been in a position to raise the fiscal '12 guidance this early in the fiscal year?

Jason, this is Tom. The answer is yes. I mentioned in our prepared remarks that the operations are performing quite nicely and added some goodness in terms of direct labor growth and other performance. When you go through the numbers, which I'm sure all of you are going through, you will see that the unexplained variants associated with growth in operations is relatively small compared to the other ones. I think that belies the underlying strength of the organization. As with any type of organization, there is a series of pluses and minuses. We had some higher interest expenses associated with the share repurchase. We had some higher bonus accruals, because we were performing greater than our plan. And so our operational organization has overcome that, and contributed to some increases in the guidance.

Okay. And then, obviously, you are off to a fantastic start to the year in terms of awards and funded orders. I think we all understand, they can be quite lumpy. But how should we think about, on an annual basis for fiscal '12, where you would see those metrics coming in, understanding there is going to be a lot of quarterly bouncing around in those metrics?

This is Bill Fairl. So I will take them separately. Contract awards, we are off to a great start. We are very pleased with that. The pipeline looks real strong to us. They are lumpy. I think we will have a reasonable year. It's hard to predict when the awards are going to happen in any given quarter, so we tend to stay away from that. We tend to look long-term, is the pipeline healthy? Are we putting our A teams on all of our bids? Are we defending our recompetes? And the answers to all those things are yes. So I think timing of individual quarters notwithstanding, I think our awards are going to be good. We took a look at the funding to see if we could discern any pattern there.

One useful metric is to take the existing funded backlog and figure out how many months of revenue run rate we currently have. And right now that is a little over 8 months, which is actually the second highest amount we have ever had, and reflects the fact that our first-quarter of any fiscal year is typically our strongest quarter for funding orders. And that's because the government has to get all the funding placed, if you will, by September 30. So we saw that pattern again this year. Depending upon what is happening with the continuing resolution process during any given fiscal year, that drives the behavior in between first quarters. So if we have a prolonged continuing resolution we tend to see slow quarters, with a big, big bounce right at the end, and if we have a relatively quick end to the continuing resolution, then you get a little bit more level funding during the year.

So, again, can't predict any given quarter, but we look like we're in the right markets, we think our programs will continue to be well-funded by the time next September 30 rolls around. We expect to have solid funding again. But the intermediate quarters, tell me when the continuing resolution is done, and I can give you a better answer to that one.

Our next question comes from Joseph Nadol and JPMorgan. Please go ahead.

Thanks, good morning. Just a couple of numbers questions for you. What was your direct labor organic growth? So, of the 12% that was direct labor growth, how much was organic specifically? And then secondly, in terms of the new revenue guidance for FY '12 of 8% to 13% revenue growth, again, which -- what component to that is organic, and what kind of boost are you getting from the acquisitions?

Okay. Joe, this is Tom. The DL organic growth in the first quarter was approximately 8.5%. In terms of the revenue guidance for the full year, we added $100 million to the upper and lower range of the revenue guidance. The 3 acquisitions that are in place; Paradigm, APG and Pangia are contributing approximately $100 million worth of revenue, so that accounts for most of the change in the revenue guidance. The revenue is consistent with what we originally guided in June and reaffirmed in August. That represents approximately 6% to 8% organic revenue growth.

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

This is following on that same vein. If we look at the impact in guidance of the acquisitions, can you give us any color in terms of, either the profitability level, is it safe to assume fairly normalized company margins for the new acquisitions, and what impact do you see there as we work down the P&L?

Tobey, again this is Tom. The first acquisition, Pangia, was incorporated in the revised guidance we gave in August, so now we're talking about the 2 acquisitions, Paradigm and APG. They are contributing approximately $2.5 million in net after-tax profit for the remaining of our fiscal year '12. Let me add that when we look at the profitability of the acquisitions, initially there is relatively large intangible amortization charges. The acquisitions are accretive. They are contributing on a cash basis. They are even doing better in making up for the non-cash intangible amortization charge.

Okay, great. That's helpful. Then also, we've heard from some peers that there has been some pricing pressure out there, some of the customers really focusing on lowest price rather than best value. Have you seen any trends that would support that, or has there been any changes in your view?

Hi Tobey, it is Bill Fairl. I'll start, and maybe Dan will want to jump in here as well. To me, that is very much a function of the particular market space you are in. The things that tend to be commoditized, if you will, they lend themselves to that sort of low price technically acceptable, sort of decision-making thing, and when things truly are of a commodity nature, that does make sense. We've had a deliberate strategy around here to steer our business in a different direction where Jack London has a phrase, quality client service and best value. That is how we have managed our business, and where we have made our investments, both in acquisitions and through our B&P pipeline. So in our business space, our specific business space, we haven't seen any big trend towards low price technically acceptable. There is a little bit of that. But no big trend for us.

Dan, anything to add there?

No, I'd just like to make a couple of things. One, just reinforce the fact that the market space that we are operating in, the predominant programs are best value programs. We do see price as becoming more influential in the decision-making process, but our customers are still looking for value. And we are finding that. We are winning at the higher price range with our value, and we also see customers willing to stand up and select CACI for sole-source awards, because of that value. Price is becoming more of an issue, but we are not seeing LPTA, low price technically acceptable, as a huge trend in our space.

Our next question comes from Brian Kintslinger of Sidoti and Company. Please go ahead.

Great, thanks so much. After raising guidance so much, I hate to ask this question, but you mentioned that your funded backlog versus your -- has 8 months of revenue, basically, and was the second highest in its history, and you didn't raise organic revenue guidance. So I hate to ask this question, but why are you being so conservative, at least from the metric of funded backlog in terms of organic revenue growth, and does it have to do more with ODC's waning than anything else?

Brian, it is Bill Fairl. I will start, and the answer is I don't believe we are being conservative. As our CEO says, we like to go right down the middle of the fairway here. So our guidance represents our best professional estimate of where we're going to end up for the year. So 8 months, it is good. We like that. We expect to be at a high watermark at the end of our first quarter. This just happens to be the second highest one we've ever had, which we are delighted with.

So, Tom, you want to (multiple speakers) --?

Yes. Let me add, Brian. When we put our initial plan together, consistent with any plan, there's highly defined opportunities, things we know with certainty. There's certain work we need to win, there's certain identified opportunities, there's certain unidentified opportunities. The fact that we are so successful with our awards gives us more confidence in our ability to perform during the year. So we had some work to do to deliver the plan, and this reconfirms that we have been successful closing those gaps of getting the business.

As a follow-up, if I could. Maybe can you give us when the first highest one was, so we can see how you performed after? (laughter) And then on the S3 contract, the direct labor percentage, maybe as a percentage of total S3, without giving a specific number, has it improved 10%, 15% as a percentage of total? I know you mentioned that as a major strategy to pitch DL on S3.

Right. Okay, so, trying to remember -- you've got 2 questions in here. So the first one was what was the highest mark? That was a year ago. First quarter of fiscal year '11, we actually got up to 9 months of funded backlog. Then you start to worry that you are not -- that you are missing something here, so you want to get working harder on that.

In terms of your question about S3, I like to look at, essentially, 2 major contracts that we had there, and I've been talking about them over the last couple of quarters, which is our S3 work and our test work. And we have measured how fast our direct labor is growing with regard to our ODC's, and I have been saying it's been growing 2 to 2.5 times as fast, the direct labor, that is, relative to ODC's. And I just took a look at the report for the end of the first quarter, and that trend is continuing. So we are still growing our direct labor 2, 2.5 times as fast as our ODC's. So, that is great. That, again, is our strategy there, and it's working.

(Operator Instructions)

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

Good morning, gentlemen. Question on operating margin. It looks like if you use a normalized tax rate, back out the one-time gain, you had about a 7.1% operating margin. Traditionally or historically your first quarter op margin has been, by far, the lowest of the year because of high compensation incurred in that quarter. How was the seasonality this year? Should you expect a meaningful sequential increase in operating margin on that 7.1% level, or is that more normalized now?

Mark, I think my answer would be it's more normalized. We have award fees, which are variable by quarter, which is it got a big implication in margin. In terms of the stock compensation expense, in prior years, our first quarter had a significantly larger non-cash stock compensation charge. You'll notice this year the stock compensation charge was around $3.2 million, versus $4.2 million last year. A couple things are happening. One was that we had some front loaded awards due to the market based nature of the awards in 2009 and 2010, and those are being amortized off our books, and so that provided us some headwinds. And we also changed some of our compensation structures, whereby the awards are not first quarter loaded, they are spread evenly throughout the year. So there were some relative goodness in that line item this year.

Okay. I was wondering if you could give us a little more comments on your -- talking about your global counter-narcoterrorism sector. Could you talk about the revenue base you have in there now, and what kind of market size and growth dynamics do you think that market has?

So let me -- maybe I'll focus on the growth part of that business. We have a small set of programs in the tens of millions of dollars range today. And as I mentioned with this new award, you can see that potential growing there significantly. This is an area, as the nation withdraws from Iraq and Afghanistan, that we'll see larger priority across the globe. And we think as that priority shifts, and some of the resources shift, that this has got a great opportunity for us to continue to expand our business. We're focusing on that global presence. I mentioned the Southwest Asia and Africom theatres, but we are also looking at how do we continue supporting, or expand this support into South America as well as the Pacific? So this will be an area we talk more about. This recent opportunity that we have just won is a great step for us. And we see more opportunity there.

I'm showing no further questions at this time. I would like to turn the call back over to Mr. Paul Cafoni for any closing remarks.

Okay. Thank you, Allie, for all your help on the call. And we certainly would like to thank everyone who dialed in or logged on to the webcast for your participation today. Your interest in our company is deeply appreciated. We know that many of you will have some follow-up questions, and as usual, Tom and Dave will be available shortly after the call to help you with any other questions you may have. So, I'd like to thank you all, and wish you a good day, and Operator, this ends the call.

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