CACI International Inc (CACI) 2012 Q2 法說會逐字稿

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

Thanks, Stephanie and good morning, ladies and gentleman. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we are very pleased that you are able to participate with us today.

Now, as is our practice on these calls, we are providing presentation slides. And during our presentation, we'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.

Now, before we begin our discussion this morning, I'd like to make our customary but important statement regarding our written and oral disclosures and commentary. There will be statements in this call that do not address historical fact and, as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are also described in the Company's Securities and Exchange Commission filings. And our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. I'd also like to point out that our presentation today will include a discussion of non-GAAP financial measures. These non-GAAP financial 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; Dan Allen, President of US Operations; Bill Fairl, Chief Development Officer; and Greg Bradford, Chief Executive of CACI Limited in the United Kingdom.

Let's go to slide 4. CACI delivered yet another quarter of record revenue, operating income, net income, and earnings per share. We have met or exceeded our goals of mid- to high single-digit organic growth and double-digit earnings growth -- goals we have met for three consecutive years.

Let's go to slide 5.

We believe there are four fundamental reasons for our continued success and our confidence in our ability to continue this level of performance forward. First, we studied the market carefully and maintain a very clear view of where business opportunities will emerge. And we have carefully positioned the Company over the last decade at the forefront of high demand, which is in the well-funded markets of defense, intelligence, homeland security, and transformation of government.

We have done this with strong organic growth, important strategic hires, and an industry-leading mergers and acquisition program. Second, we have committed ourselves to a program of operational excellence. This means we insist on nothing short of total client satisfaction.

We routinely sample our clients in a variety of ways to get their reaction to our services and solutions, and we quickly resolve issues and continuously improve our performance to maintain a high satisfaction level. This is the reason we have no trouble programs on a base of over 2000 contracts, and it accounts for our consistently high re-compete win rate.

Third, we focus on bringing innovation to our clients, both in our proposals for new work and in our day-to-day interactions on current contracts. Innovation is a key factor that our clients give us for choosing CACI. This is making a difference in our win rate and our organic revenue growth.

Fourth, we have a high integrity empowering culture that values teamwork, winning, and agility in responding to emerging trends and client needs. Our culture serves as a magnet for attracting the best professionals from both industry and government, and is seen by our clients as a differentiator.

Our second quarter and first half contract awards and contract funding orders continue to be very strong. In fact, to the first six months of this fiscal year, our contract award dollar value is almost equal to all of fiscal 2011 awards. Our award-winning recruitment program continues to add more talent to our employee base, and our win rates for both re-competes and new business are excellent, while the pipeline continues to expand.

Slide 6, please.

As you know the Department of Defense has released its strategic guidance for a leaner, more agile Armed Forces. DoD is calling for new ways of operating and partnering, which we see as very compatible with our own culture of agility and innovation. Our corporate strategy is aligned with DoD priorities for increased funding for such critical capabilities as intelligence, surveillance, and reconnaissance, counter-terrorism, prevalence in the cyberspace arena, and reducing the cost of doing the business of government.

We have businesses in all of these areas and have been investing in them for years. And Dan we will tell you more shortly about recent new work supporting counter-terrorism and our efforts to support the Special Operations Command.

Our nation faces a persistent threat environment and global tensions remain high. Asymmetric threats to our security can take many forms, and technologies in these areas of intelligence, surveillance, reconnaissance and cyberspace are critical to countering these threats and safeguarding our future. DoD has made it very clear that the Armed Forces needs the technical edge.

We are not newcomers to these priorities. This is our forte, where we have built our competencies and reputation over five decades. So, while we are mindful of a tightening market, we see our addressable market continuing to be in high demand, well-funded areas that our clients continue to prioritize as critical to mission success.

We also continue to see the federal civilian market as a growth area. As our second quarter results demonstrate, our clients continue to seek our solutions in government transformation, cyberspace and healthcare IT.

Finally, I would like to update you on the CACI management team. As we announced in December, Dan Allen is now President of US Operations. He brings his vision and a proven track record of strong execution to this new role. Former President of US Operations, Bill Fairl, is now Chief Development Officer. He will focus on mergers and acquisitions and sustaining our strong re-compete win rate.

Bill is planning to retire in September of 2012, and I would like to take this opportunity to thank him for his many years of exceptional leadership and his continued support for our Company in his new role.

We continue to attract top performers to our executive team -- industry leaders who are drawn to our successful growth strategy, operational excellence, and high integrity culture of teamwork and agility. Our new Business Development leader is Krisstie Kondrotis. Krisstie is a results-driven professional with proven expertise in large-scale business development in both the defense and intelligence communities. She is responsible for the strategic and tactical direction of our business development activities, and her contributions will be key to continuing our organic growth.

I also want to welcome Dr. Lani Kass as our new Corporate Strategic Advisor. As former senior policy advisor to the Chairman of the Joint Chiefs of Staff, Lani has extensive experience in national security strategy and policy. She will be a tremendous asset as we continue to align our strategic planning to organic growth opportunities serving the government's top priorities.

Guided by our proven growth strategy, and led by our outstanding team, we continue to sustain record financial performance. Our second-quarter results complete an outstanding first half and give us the confidence to raise our earnings guidance once more in fiscal 2012. Now I will turn it over to Tom who will provide us more insight into our financial performance. Tom?

Thank you, Paul, and good morning everyone. Let's go to slide number 8.

We are pleased with our second quarter results, as we achieved another quarter of record revenue and earnings. Revenue grew by 12.2% year-over-year with organic revenue increasing 8.9%. Our direct billable labor grew 11.8%, and our other indirect costs increased 11.6%. Consistent with past practices, we reported our results on both a GAAP and a pro forma basis, with our pro forma results excluding earn-out adjustments in fiscal years 2011 and 2012.

Year-over-year, a second quarter pro forma operating earnings income growth of 26.8% was driven by strong direct labor growth, continued cost controls, and greater than expected profitability of the large fixed-part contract.

We are nearing completion on that percentage of completion contract, and the work was performed earlier than anticipated with lower than expected cost to complete. This increased the second-quarter operating earnings by roughly $5 million more than we had anticipated.

Indirect cost and selling expense grew 10.4% -- less than our gross profit growth of 13.6%. This reflects our ongoing commitment to continually become more efficient, and ensuring that we have the appropriate indirect resources to support our operations, drive operational excellence, and enable our growth objectives.

Our UK operation turned in a healthy net income margin of 6.4%, but with net income down 9% in the second quarter of last year. This resulted from continued reduction in UK government spending in a slow commercial market.

Slide 9, please.

For the quarter, pro forma earnings per share increased 41.4% on a 24.8% increase in net income; with our diluted share down by 3.6 million shares due to our August accelerated share repurchase.

Slide 10, please.

Our operating cash flow was $29 million for the quarter and $85 million for the six-month period ended December 31, up from $69 million for the first half of 2011. Our free cash flow for the 12 month period ended December 31 was $228 million, or about $8.36 per diluted share. This translates to a free cash flow yield of 14.4% per share at a $58 share price. Our balance sheet remains strong. Our net debt at the end of the quarter was $573 million, and our net debt to trailing 12-month pro forma EBITDA leverage ratio was 1.75.

Slide 11, please.

For fiscal 2012 we are maintaining the revenue guidance we provided in November, while increasing our GAAP net income and earnings per share guidance. We now expect GAAP net income to be between $162 million and $168 million. The primary driver for the guidance increases include our strong second-quarter results and the continued strength in our US operations.

For FY '12 we now expect our fully diluted share count to be 28.3 million shares, our respective tax rate to be 39.8%, and our GAAP operating margin to be at least 7%. Typically, we have had seasonally higher net earnings in our third quarter compared to our second quarter. Given the strong second quarter of this year, due, in part to the fixed price contract I mentioned, we may not see this trend this year.

And with that, let me turn the call over to Dan Allen. Dan?

Thanks, John, and welcome to everyone on the call.

Let's go to slide 12.

This morning I would like to provide operational highlights from our second quarter, and provide some insight into CACI's focus on operational excellence and how it continues to propel our strong performance.

Our 27% increase in operating income can be directly attributed to continued strong program performance. Anticipating our clients' needs, coupled with reliable program execution, enables our clients to achieve their demanding mission objectives within their tight fiscal constraints -- why we build enduring, trusted business relationships.

Our direct labor growth of 12% highlights our success in expanding CACI labor content across our portfolio of contracts. For the first six months of this fiscal year, we had 272 net new hires, and currently have over 400 firm open hiring requisitions. Our success in managing our indirect costs, with a focus on improved efficiency and agility in our operations, has created a lean organization.

Empowering our employees to act swiftly and rapidly address our clients' needs, with the infrastructure to reach back to the broad set of CACI capabilities, enables our program teams to efficiently solve our clients' most difficult challenges.

Our customers continued to award new contracts and extend contracts, with CACI achieving new second quarter records in funding awards and new contract awards. Our contract funding orders for the quarter were $605 million, up more than 17% over the same quarter in fiscal year 2011.

We recorded approximately $962 million in contract awards, an 88% increase year-over-year. We also performed very well in our re-competes, preserving our business base and sustaining a strong foundation to continue our growth momentum. The strong performance of our Intelligence Business yielded more than $189 million in classified intelligence awards. Intel represents approximately 43% of our business. We believe the US Government will continue to place a high priority on this area, and the Intel market will be well-funded into the future.

Our Civilian business grew by almost 20% over the same quarter of last year, with almost 60% coming from organic growth and the acquisitions of the Advanced Programs group and Paradigm Systems contributing the remainder. Our federal Civilian business now represents slightly more than 15% of CACI's revenue, demonstrating our ability to expand our federal civil market share, providing solutions for Healthcare, Cyber Security, Litigation Support and Government Transformation.

Slide 13, please. I'd like to highlight a few of our second quarter awards to demonstrate success in our strategy execution.

CACI won a $37 million contract to continue supporting the US Naval Single Supply Solutions for Logistics. Our capabilities are helping the Navy build a unified secure logistics information system to more efficiently manage the purchase, maintenance, and deployment of supplies to support efficient naval operations. This is a long-term customer of CACI, and highlights a key program that is supporting the DoD strategy of more disciplined use of defense dollars through the better inventory management.

We won a $39 million task order for the Defense Information System for security to support the Defense Logistics Agency in developing a service-oriented, architecture-based solution to modernize and streamline the DoD security clearance process.

This is new business for CACI, and also supports the DoD strategy for more disciplined use of defense dollars through the better use of information technology, and business and enterprise systems. CACI was awarded a task order to support the Air Force Surgeon General's office of the Chief Information Officer. We are providing government transformation solutions that include business process modernization, financial management and IT support. This is new business for CACI, and expands our presence within the military health system.

And finally, we received a $22 million in new business to provide training support for the US Special Operations Command. Our innovative training approach will provide modeling and simulation data for aircraft and specialized vehicles. We won this competitive effort by integrating CACI's current experience with SOCOM and the geospatial capabilities we acquired with the 2010 purchase of TechniGraphics. This win illustrates the value of our M&A program, and demonstrates how we can expand our relationships with current clients by bringing new capabilities into our portfolio.

Slide 14, please.

Our opportunity pipeline is very strong, and the pace of our bid and proposal activity is accelerating. At the end of our second quarter, we had nearly $6 billion in submitted proposals under evaluation, with approximately 66% of those for new business. In addition, we expect to submit more than $10.7 billion in proposals during our third and fourth quarters, with more than 67% of those anticipated proposals for new business.

Our view of the CACI addressable market remains positive. Following the President and the Secretary of Defense's announcement of the new DoD strategy and five-year defense budget request, we have done a preliminary update of our addressable market, and it reaffirms that addressable market for CACI of roughly $230 billion to $250 billion.

Our detail assessment of this addressable market will continue, as further details of the DoD strategic guidance are available, the full President's budget request for fiscal year '13 is released, and the implementation of 2011 Budget Control Act progresses. Our record second quarter revenue confirms that our strategy of aligning our agile operations and innovation capabilities with the government's highest priority is working.

Our focus on operational excellence is driving solid program performance that is growing our operating margin, enabling our high re-compete win rate, and providing outstanding past performance credentials to win new business. Our continuous attention to cost with a focus on improving efficiency and agility in our operations is fueling opportunities to expand our investments in our employees, our capabilities, and pursuing new business to capitalize on our dynamic market.

We have great momentum going forward and expect solid performance and growth for the remainder of fiscal year 2012 and into the future. And now I will turn the call back to Paul.

Thank you, Dan, and thank you, Tom, for your highlights and details.

Please go to slide 15.

In an environment of ongoing global and asymmetric threats to national security, CACI is committed to helping our government preserve our security and freedom. Our vision is to provide our clients with the capabilities to meet their most pressing challenges, and help them find the best ways to do the business of government.

I know this requires a partnership based on integrity, innovation, agility, and operational excellence. This is what CACI offers. One of our great strengths is analysis of emerging trends and anticipation of our clients emerging needs. We adapt quickly to market changes, and we meet rapidly evolving client requirements.

We have aligned our capabilities with the Department of Defense's strategic guidance and the government mandate to meet its budget challenges. Our successful growth strategy has delivered another quarter of record financial performance, and we are again confidently raising our guidance for fiscal 2012.

As I have mentioned before, almost a quarter of our employees are veterans, and, within our company, we proudly make the hiring of veterans, especially disabled veterans, a priority. CACI is a recognized leader in employing veterans because we believe they have a deep understanding of our clients' requirements due to their own personal experience, they share the passion of our clients for their missions, and it's important for industry to offer careers to those who have served our country.

I'd like to close by thanking the 14,300 CACI employees who come to work every day 110% committed to delivering innovation and excellence for our clients and high value for our shareholders.

With that, Stephanie, we will open the call for questions.

(Operator Instructions) Brian Gesuale, Raymond James.

Hello, guys, nice job on the quarter, and congratulations on Executive of the Year, Paul. Wanted to get maybe some broad commentary on the pricing environment. We have been hearing a lot out there that there's been a migration from best value to lowest price technically acceptable, and some ongoing contract mix changes back over towards cost plus. Can you maybe just comment on both of those themes?

This is Dan Allen. There are some broad trends and objectives that our customers have to look at low cost price technically acceptable and to move to cost plus. But in our -- as we look at our competitive environment and the wins that we are achieving, we don't see that as really a driving force.

There are a small number of programs that are being awarded on a low price, technically acceptable basis, and we feel comfortable that we've been able to compete in that environment. And in the cost plus -- C&M to cost plus trends, we are seeing some of that. Actually about 10% of our business has swung to that over the first half of the year, and we continue to perform pretty well. There are certain aspects of our contracts that enable that.

So, it is an overall objective of our client. In the environment that we're in, we see that it's not really impacting our business. And that's really driven by what -- the high-value services that we believe we are taking to our clients.

Great. Thanks very much. One quick follow-up. Paul, can you talk about the M&A environment with so much uncertainty for what fiscal 2013 brings, both in terms of your appetite and seller availability?

Yes, we still have -- our M&A program is still very aggressive and active. We have an interesting pipeline of candidates. We did hit a little bit of a dry spell in terms of the pipeline of candidates in second quarter, but we see that starting to pick up again now. In the first quarter, we had a lot of activity. It dried up a little in the second. We think it will pick up here in the third.

And our goal, as part of our corporate strategy is -- this is a major component of our growth -- first organic growth, which we say mid to high single-digit organic growth is our goal. But we also like to see 5% to 7% growth in revenue coming from acquisitions.

And our focus areas, not surprising, the C4ISR, cyberspace, healthcare, IT, and those are the principal focus areas. And typically, in the size range, we like anything from $20 million to $100 million type of enterprises. We like them bigger, but there aren't that many up at that higher end.

And, in terms of availability, I think, as the market tightens, I think we are going to see more smaller companies coming to the conclusion that they need to scale up to preserve what they've built in their enterprise -- small enterprises. And companies like ours, which partner well and integrate nicely -- people nicely into our culture, we are hoping will continue to be an attractive thing for those companies.

Edward Caso, Wells Fargo.

Good morning, and congratulations on another good quarter. I guess my question -- on a sequential basis, the awards go down. Obviously, that is a seasonal issue. But also the new business component of it went down. Was there any change in your win rate?

Ed, this is Dan. It's fairly comparable quarter-over-quarter. We attribute a big part of the lower new business awards in the second quarter as somewhat seasonal, that's really driven by the CR. During the CR process, it's very hard for our clients to award new business, and that seems to be the dominant factor there.

The pipeline is strong, as I mentioned in the remarks, of new business, and we see activity moving forward with that. We don't see -- we see that as a positive event.

I think on a corollary to that, Ed, is that we had such a nice volume of re-compete wins in the quarter, and that just firms up our foundation going forward -- takes risks out of the future. And so we are quite happy with the re-compete win rate we had.

My follow-up is -- your commentary on the market size and your positive tone, I assume you are working under the assumption that the sequestration is reversed. If it's not, or not meaningfully reversed, would your tone change?

A full sequestration, of course, would be, in the words of the Secretary of Defense, catastrophic to our national security, and have big ramifications across the industry. And, because of the way it's designed, it would apply to every line item evenly, and so it's sort of this mindless meet "X" approach. And we think, for all those reasons, it is a highly unlikely outcome. Not that we will necessarily be at the same $490 billion reduction over 10 years -- that might go up, and I would expect it will go up some. I highly doubt it would go up to the $1 trillion number.

If you just calculate the impact on -- others have done these studies -- and we hear that the impact on unemployment in the nation, that the sequestration would effectively add over 1 percentage point of additional unemployment in the country. So, the impact, in terms of national security, having to go back completely and reevaluate our strategy in defense, and then the impact on the economy, and of course, these are all high-tech jobs we're talking about.

And so, I view that as a low probability outcome, and that nobody in Congress -- we're down there every month, we find nobody who wants it to occur. It's a matter of how do they get to the right compromise to prevent this kind of crazy trigger event.

Michael Lewis, Lazard Capital Markets.

Thank you, and good morning, and very nice results, guys. Tom, I was hoping you could help me with my math here. It looks like the implied growth -- internal growth for the full year looks like 3% to 9% based on the guidance. What are you looking for on organic growth in Q3 and the second half?

Mike, the first part of your question, just to make sure we got it right. Are you saying you are interpreting our second half internal organic growth rate to be 3% to 9%?

No, based on the way the guidance works out for the full year, I am seeing the range of 3% to 9%, but what I'm trying to reconcile here is what is the expectation in Q3 and for the second half?

Oh, okay.

This is Tom. In the back half, we are expecting at -- if you just do the arithmetic in the midpoint, our revenue growth is around 9.4%, based on the guidance that we provided in the first half of the year. Organic revenue growth in the back half should be around 6.5% type of range, and that should be relatively consistent in both the third and the fourth quarters.

Okay, that's helpful. My follow-up is -- S3 orders came in around $45 million, so it slowed a bit in Q2. But what this is implying to me is that there is one or a few other contracts that have showed some significant expansion. Can you address some of those contracts, and where you are seeing this growth whether it's one or two?

Mike, this is Dan. Actually, we are seeing the growth come across several different areas of our portfolio. I mentioned the healthcare being one. Our intelligence business continues to grow. And some of the litigation support work that we have been doing is growing. Cyber is growing. That's one of the encouraging things as we assess and analyze the growth of the Company, it isn't in one small pocket. These are in the high demand areas that we are talking about. And S3 continues to grow, and continues to support our growth objectives. Our clients are continuing to come to us through that vehicle or vehicles similar to that like GSA and so forth. We see this is a very positive step.

Bill Loomis, Stifel Nicolaus.

Thank you, good quarter. Can you tell us what the organic growth was for the civilian and defense, and then just a follow-up on the S3 again. What were the orders in the quarter, and how do you see that playing out in the second half on S3? Are you seeing -- within your bid pipeline, are you seeing a high amount of bids, or have we seen the peak in that program?

I think the first part, Bill, in terms of the civilian growth, approximately 40% was due to acquisitions of the APG and the Paradigm acquisition had a high civilian content, and so that helped. The remaining growth in civilian sector was organic.

Dealers could have worked with the [Defense] administration was meaningful, as was work in support of Department of Justice and the additional work on our mega contract. And then a series of other smaller ones, and so pretty nice growth in that sector.

And Defense Internal?

Defense Internal was mostly all internal. The acquisitive growth was relatively minor. The PNG acquisition contributed to that, and so did the TechniGraphics acquisition last year.

Okay, and S3?

Dan, you can talk about S3.

Repeat the question again, please?

Remind me what the orders were in the quarter? And then looking to the second half, when you're looking at your bids submitted today, are you seeing a lot of S3 opportunities or has the work peaked on that contract?

The $45 million of orders in Q2, as we look at the pipeline for S3, there are still several hundred million dollars of opportunities in our pipeline, which we are pursuing aggressively. Some of the users of the S3 vehicles are beginning to establish or take actions to establish their own vehicles. The SEC and the SS NextGen and so forth things like that -- GTAC -- those are all vehicles that we see as also very positive in this -- because it gives that customer base -- established customer base with long relationships for CACI, but also gives us a lot more ceiling to work with, when we look at S3 or beginning to approach a ceiling level that could impact future growth.

So, lots of things in the pipeline. Vehicles that are companions to S3 becoming -- working through the acquisition cycle. We have high confidence that we'll win those, and this will allow us to keep growing our business in line with our growth guidance.

Jason Kupferberg, Jefferies & Co.

Hi, this is [Amet Singh] for Jason Kupferberg. Again, first of all, congratulations on a great quarter. I actually just wanted to dig in a little bit more into the results, and how that flows into the rest of the year. So, the EPS definitely beat consensus by a good $0.20, $0.21 this quarter. And that was primarily because of the fixed price and the margin upside from the contract you mentioned.

It would be great if you could give a little bit more information on that, and how that flows through for the rest of the year. Because the midpoint of the EPS guidance was only raised $0.15, although, like I mentioned, this quarter the EPS beat was almost $0.20. It's not flowing -- I understand it is not flowing through to the rest of the year. So, if you could give a little bit more color on that, that would be great.

This is Tom, I will take the first stab at that. First of all, it's hard for us to reconcile our numbers versus the consensus numbers. The consensus numbers are an average of a large number of wide-ranging estimates. We do not provide quarterly guidance. It's hard to understand what specifically went into that consensus number. So that is not a benchmark that we use internally to try to reconcile with.

With that being said, we did have one large anomalous event in the quarter -- the large fixed price contract I mentioned. And the reason why we wanted to underscore that is that it is good work that we do. Our team does a very good job of winning the work and executing on it.

And it was providing more profit than we anticipated, and that created a distortion in this normal seasonal trend. The second-quarter results were greater than they normally would have been versus the first quarter based on the seasonal pattern. And simultaneously, the third quarter relationship with the second-quarter will be distorted because of that large piece of work. So we highlighted it.

We had some of that work in our base forecasts, so we knew it all along. It turns out the profit was higher than anticipated because we did a good job of doing the work earlier, and having lower cost to complete to satisfy the government requirement. So, that is why we highlighted it and the positive impact was primarily concentrated in the second quarter. And when I say positive impact, that is positive impact versus our expectations in planning and forecast assumptions. So, I hope that helps.

Definitely. Thank you very much. And just a quick follow-up. In this macro environment, what is the funded order of the new business awards that you are projecting for the remaining part of the year, and do you see any sort of concerns because of this being a presidential year and all the macro [issues] regarding the debt that are going on?

This is Paul. First of all, now that we have the CR behind us, and we have an approved budget that takes us all the way through our fiscal year, and of course, through the government's fiscal 2012, we think that we will have a more consistent flow of activity going on.

Our strong contract awards, both in the second quarter but also in the first quarter, so for the whole half, adds up to around $3 billion. And that points to continued revenue growth out into the future.

So, what we are seeing so far is -- the indicators are all pointing in the right direction. Dan mentioned 400 open personnel reqs. We're trying to recruit actively to fill those. Funding orders -- 17% stronger than last year's second quarter. So, we're feeling pretty good about the balance of the year for certain.

And also the pipeline -- the win rate is very good both for re-competes and for new business, and the pipeline continues to expand. And good value opportunities that we are going after. It's not a low-value commodity type work. It's high-value intellectual capital or solutions. And so we are feeling pretty good about things, and I think we probably just explained that in our press release and in our script this morning.

Robert Spingarn, Credit Suisse.

Good morning. Couple different questions. First, Paul, what in the fiscal '13 budget -- what are the focus items that you are going to be watching when we get this budget in a couple of weeks?

Well, of course, we're going to have to take a look at everything in there and understand where the focus is for the $490 billion in cuts, let's say the fiscal 2013 portion of that. And so far what we -- the facts we have gotten about what things are targeted is good news for us. It's -- unfortunately, I don't think it's good for the nation, but in terms of our business, we seem to be in the right categories. We are aligned with the rising priorities of cyber, ISR, counter-terrorism, non-proliferation. These are all the areas where we have been -- have invested and acquired and hired and won organically for years. And so in those -- and special operations activities.

We know that will continue even though there is a reduction in the number of war fighters in the Army and in the Marine Corps. The special operations forces will continue to increase up to a level of 35,000 with greater emphasis on them.

Of course, we had that nice win about a year ago down in Tampa with the Special Operations Command where we are providing them all sorts of infrastructure and technology support. That is all new to us in the last 1.5 years or so. And their mission is going to increase in terms of training -- the training mission that they have. Their role in helping other governments to develop the kinds of special operations/Intel capabilities they need to detect and preempt terrorism and insurgencies. And so, we are really feeling good about our increasing role there with SOCom.

So, I think we are lined up in these priority areas, and I don't think it's luck. I think for years every year, every day, every minute we think about -- I go to bed at night and Dan and others go to bed at night thinking about where it's going. We read everything, just as you do. And we try to make the necessary adjustments, and we are an agile culture. So, we turn quickly.

When we see shifts, we move out. We hire the right people who have the expertise. We acquire the companies that can complement our existing capabilities, and we put the BMP where it needs to be. And I think this is part of our recipe for success here, and it will keep going because these are fundamentals that we've built into -- we've institutionalized in our business.

Perhaps to put a slightly finer pencil to this, could you refresh us on the top five or so contract vehicles like S3, et cetera, that are running through the P&L, and what those are and how big they are relative to the overall business, and the outlook for those into 2013?

I don't think we have that list here in front of us. Obviously, you have heard about many of them before. We could rattle off the obvious ones that we have. I mentioned the SOCom one that is a rapidly growing one. We've had the S3 program and tests up there. We are supporting the [C-Com] community now at Aberdeen.

Dan, do you want to throw a few others --?

Yes, Robert, I would just like to maybe add -- if you reflect on some of our previous discussions, we've talked a lot about our pursuit of multiple award ID/IQ vehicles. So that as we really target the clients that Paul mentioned, that we have the ability for those clients to get to us. And across the customer set in Intel Defense and the fed civil business areas, we have those vehicles in place. So, it's on the order of 10s of different vehicles that we need to -- and have in place to effectively pursue this growth strategy. So, we are fortunate for that.

And actually, when you think about it, the ones we are winning today might not have the highest volume of awards coming through them because these are the ones that we are betting on that will be in the emerging areas. And so two or three years from now maybe they start to fulfill themselves. But we do have more than 2,000 active contracts.

It's a very broad-based portfolio. We have hundreds of billions of dollars of ceiling from ID/IQ vehicle. There is not one ID/IQ vehicle we sit around here feeling badly that we don't have a seat on. All of the ones that we think are important, we're on. And I think that is the best way to summarize it.

Cai von Rumohr, Cowen and Company.

Yes, thank you, and let me echo -- excellent work. Paul, you mentioned the obvious -- that the CR sort of hurt you in the quarter, and the CR is now behind you. You've got a robust backlog of bids awaiting decisions. You've got -- if you look at the second and at the third quarter, your fundings to sales have averaged 1.12 over the last seven years. Should we expect you to hit that average that the fundings to sales in the third quarter would be 1.1, and they would be close to the longer-term average of 1 in the fourth quarter? Is that possible?

Wow, Tom, you could take a crack at it.

It is certainly possible. I think what is useful to kind of -- keep continuing to remind ourselves is that in some of the funding, the awards are choppy. They are episodic, and some quarters are better than others. And it's always better to look at those on a smooth basis through prior 12 months -- prior six months. We'll see how the third quarter goes.

All the indicators are positive. We have a large number of awards submitted waiting adjudication. We plan to submit another large number of awards. Our win rate is high. Our re-compete win rate is high. All these factors are quite positive. Time will tell because a lot of the activity, the specific contract actions, protests and the like are beyond our control.

As one looks at some of the larger players in this space; L-3 and Northrop, they had some backlog adjustments on ID/IQs where work is there but it gets de-scoped. So it's not like -- they won the business but then the pie is not going to be as big as they thought. Are you seeing any pressures from your customers to de-scope your work, so the new wins might be okay, but the existing backlog might get nicked by that?

Cai, we haven't seen any of that kind of activity. We haven't seen that. Particularly how we manage our business and the way we account -- we use funded orders, which tend to really focus on actual commitments from clients for real scope. So, we don't see it.

Joe Nadol, JPMorgan.

Thanks. Good morning, and congrats on a good quarter. My question is -- my first question is just on mix between direct labor and ODC's. It looked like year-on-year they were both up kind of the same, so there wasn't much of a mix shift. If you look at it sequentially though, direct labor was flattish, and ODC's were up quite a bit, and that was sort of the sequential growth I think that you experienced. So, how do we think about -- how are things shaping up in the backlog as we look out into the back half of the year and into next year?

This is Tom. As we have articulated in the past, the equipment material component of the ODC's are hard to forecast. And so there is some choppiness in those particular numbers. Your observations are right. In this quarter -- our second quarter, our direct labor in our ODC's grew approximately the same.

For the full year, right now we are anticipating direct labor to grow around 10% to 12%. Direct labor, as you know, is the most profitable part of our business, and it got -- we pay the most attention to. We are quite pleased with that.

Right now we are anticipating ODCs to grow at a lesser rate -- somewhere between 5% and 8%, and that is the best forecast that we have. We can forecast the labor content of ODC's with some degree of accuracy. The material equipment are a little bit more irregular, but that's how we are looking at the rest of the year.

Okay, that's very helpful, thanks. As the follow-up, sequestration obviously doesn't kick in for another 11 months. But there have been some speculation that it's already starting to have an impact on the tenor and the tone of contracting.

Some government agencies are starting to -- I guess some parts of the DOD specifically are starting to hoard their authority, so to speak. I'm wondering if you guys are seeing any of that yet? And, if not, when you think -- if you have any idea -- when you think you might start to see it if we don't have some resolution?

Joe, this is Dan. We're actually not seeing any activity from our client base based on sequestration. We see them aligning around the DOD strategy and the budget that requested was just submitted. So, that seems to be the driver in their actions.

And, as Paul mentioned, that is -- as we as a business, that's what we are aligning around and watching the trends so that we ensure that we are positioned correctly. We are paying close attention to sequestration and how it ultimately unfolds, but that is such a big unknown that we are not reacting to that.

And I would just remind you again that Secretary Panetta has characterized sequestration as catastrophic, and that it would require the DOD to go back and completely start over on our national security strategy. And so, the notion that someone down the line would be able to implement sequestration on their little piece just doesn't make any sense. And he is not telling them to do that. He is telling them to plan for the $490 billion reduction over 10 years, and I'm sure that they are going to follow his instructions on that.

Mark Jordan, Noble Financial.

Good morning. A question relative to the pipeline. The new business component, which is roughly two-thirds of both the bids submitted and what you intend to submit through the balance of the fiscal year. Could you say what percentage of that is for new customer initiatives, and what percent is related to competitive take-aways you are going after? And why, in those takeaway situations, why do you think you have a high probability of success?

So, let me try to answer that question. This is Dan. As we look at our pipeline, most of the market is fairly flat. And the new initiatives that are out there are focused on some key expansion of missions -- things like cyber and so forth.

We as an organization are focusing on our major take-aways in the strategic capture process where we look at where the client is going, how our capabilities line up, and how we might bring together a winning offering. And we position the Company to go pursue those.

We at the corporate level monitor 10-plus of those on an ongoing basis, and we focus on those areas where we believe we can go effectively win -- effectively spend our, and deploy our resources. We have been successful with that today.

The growth rates we are achieving have a component of the new business -- the cyber things as we've mentioned in the past. But it also represents take-away success and our ability to take market share in some of these key areas.

So, to give you specifics on each of those different areas, we don't track it that way. But the fact that we are looking at the market with those components, and very focused applying our resources in areas that we think we can be successful, that's an ongoing part of our culture and how we run our business.

Related to that -- of that $16.7 billion combined of the two groups, how does that break down relative to your sort of major groups, which would be sort of the Intel business, civil and then other defense?

I don't have that with me.

We track that, of course, but we don't have it in the room here. We could follow up and get that to you maybe after the call.

(Operator Instructions) Tobey Sommer, SunTrust.

Hi, this is Frank in for Toby. Over the past year or so you've put in some compensation changes with a little bit more emphasis on kind of margin and margin goals. And as you see the effects of that impact your business, can you kind of tell us what inning you think we're in, and what type of ramp or tail -- what are you looking for going forward in terms of signs of the effectiveness of that?

Frank, is this specifically around margins, that your question --?

It is, yes.

Well, we did implement a component -- a new component a year or two ago that deals with margin. I think it's roughly 20% or 25% of the incentive compensation for bonus-eligible individuals that is based on them improving their margin. But we are going to keep that in place. We think that is working well. So, we would expect to see our margin stay where it is or get a little better based on that.

Okay, great. And maybe a quick numbers question. As you look at the back half of this year, what do you expect for kind of the share count trajectory? Should there be any more repurchases or any increase in share count relative to earn outs? Any color there would be helpful.

For the full year, we're expecting our diluted share count to be, I think, 28.3 million was the number I quoted. We know what the first half diluted share count is, and so it's kind of mathematically back into the back up. I don't have the number in front of me. I can get it to you.

And I think, in terms of planning perspective, the best bet is to assume that is the number. The Board periodically looks at our capital structure, trying to determine the best way to deploy capital. And on an ongoing basis, they review those issues, and if an additional share repurchase activity takes place, we will inform the investors appropriately.

I'm showing no further questions at this time. I will now turn the call back over to Paul Cofoni for further remarks.

Thank you, Stephanie. Before we conclude this morning, I thought it would be really nice to ask Bill Fairl, who is going through this transition both in his role and then, of course, thinking about his retirement down the road, if he would like to make a few comments. So Bill, I will turn the mike over to you.

Thanks, Paul, and thanks to all of CACI. It's been a real honor and privilege to be able to work with this team. And I guess I should start by thanking Dr. Jack London for acquiring the Company I was working for back in 1998. I've really enjoyed a marvelous career thanks to that move that Jack made, and the opportunities I've had here, and the great people I've been able to work with.

And I'm proud of what we've done around here, and I have to tell you, it feels really good to be able to have handed the reins over to Dan Allen here as our new President. He has got a firm grip on them, and I see him putting his programs in place, and just moving right out, so I'm really excited about the future here.

Paul, I am going to retire on September 1, but I've got plenty of work to do between now and then. It's always been a passion of mine about retaining our base of business, and the whole re-compete thing is center cut for me. And then I guess it only seems fair that I should focus on the M&A since I was a beneficiary of our wonderful M&A program here.

So, I'm just really happy and proud, and I want to thank the entire team. It's just been great. This is an outstanding company. You get to go home everyday and think about what a wonderful outfit you work for. We are now in our 50th year.

The way we have addressed the needs of all of our constituents, our shareholders, our clients, our employees, we are number one. With that, I'm going to turn it back over --.

Wow, that's a great way to finish, and thank you, again, Bill, for all of your many, many contributions to the Company. And Bill has been a terrific partner to work with, and in fact the whole team here, it just enjoys a wonderful uplifting work environment. We come to work every day knowing we are going to work hard and apply ourselves totally, but we have a lot of fun, and we enjoy each other as a company a lot.

So, Stephanie, thank you again for all your help on the call today, and we would like to thank every one of you who dialed in or logged in on our webcast for your participation as well. We know that many of you may have some follow-up questions, and of course, Tom Mutryn and Dave Dragics will be available shortly to take your calls and answer those questions.

This concludes our call today. I'd like to thank you all, and wish you a very great day today. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.