CACI International Inc (CACI) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International second quarter fiscal year 2013 conference call. This call is being recorded. At this time all lines are in a listen-only mode. Later we will announce the opportunity for questions and answers, and instructions will be given at that time.

(Operator Instructions).

As a special reminder for our media guests who are listening in, please remember that during the question and answer portion of this call, we are taking questions only 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.

Thanks, Latoya and good morning, ladies and gentlemen. I am Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we are very pleased you are able to participate with us today. And is our practice we are providing presentation slides so let's move to slide 2.

Now, about our written and oral disclosures and commentary, there will be statements in this call they do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Now factors that 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 in the Company's Securities and Exchange Commission filings.

And our Safe Harbor statement is included on this exhibit and should be incorporated as a part of any transcript of this call. I would also like to point out that are 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. To open up our discussion this morning here is Dan Allen, President and Chief Executive Officer of CACI international. Dan?

Great. Thanks, Dave. Good morning to everyone on the call. Let's go to Slide 3. Joining me on the call this morning are Tom Mutryn, our Chief Financial Officer; John Mengucci, our Chief Operating Officer and President of US Operations; and Greg Bradford, Chief Executive Officer of CACI Limited in the UK. Today I will provide an overview of our second quarter results. I also want to discuss our views of the government spending environment and our approach to dealing with the uncertainties in this difficult market. Tom will review our financial results and John will provide an operational overview.

Slide 4, please. Yesterday, CACI announced our performance for the second quarter of our fiscal year '13. Our second quarter results demonstrated continued progress in executing our market-driven strategy. During the quarter, we delivered solid net income, secured a record level of second quarter funding, maintained a strong backlog position, and expanded our pipeline of new business opportunities. Next slide.

Our most recent fiscal year '13 guidance issued in October anticipated the government would be operating under it's continuing resolution for our entire fiscal year. However, in the back half of our second quarter, which is the federal government's first quarter, we began to see our customers becoming more cautious with contract awards and spending, driven by the uncertainties around sequestration. And as we look at the second half of our fiscal year, the uncertainties of the CR environment and potential for sequestration remain and we expect our customers to remain cautious with fewer contract awards and reduced spending. Given these conditions, we are revising our guidance for the remainder of this fiscal year. It remains uncertain how the deficit situation will be resolved and if sequestration is implemented.

In recent weeks, the Deputy Secretary of Defense and each of the service chiefs have provided sequestration guidance. And their organizations are taking action to prepare for significant reductions in FY '13 funding. They have faded their priorities and which functions will be impacted, giving us some insight into which areas will be affected in the near-term. More importantly, we are maintaining a close dialogue with each of our government program managers to assess the specific, if any, impact on each of our programs. Our revised guidance captures our current assessment, sequestration impacts on our expected fiscal year '13 performance.

Let's go to Slide 6, please. We maintain confidence in our strategy to focus on the government's high-priority missions. We continue to invest in our organization's ability to win new business in an ever-increasing competitive environment and ensure we deliver quality program performance. We are acquiring the right talent and developing our skills to ensure we can deliver the unique capability of our clients missions. We are investing in our infrastructure and improving our processes to increase our operational efficiency. And as always, we remain committed to our operational excellence program. With a focus on quality, program execution, and maintaining the highest level of customer satisfaction.

Operational efficiency is key to our success. During our second quarter, we took steps to further align our operations with our customers and improve our delivery platform for our healthcare and business systems markets. Our new Business Systems Solutions group and our Federal Civilians Solutions group will bring a higher level of corporate awareness and support for these growth areas. Our drive for operational efficiency is delivering continuous improvement while we limit disruptive affects to ongoing operations. We are maintaining our approach the balance capital deployment.

Through our strategic M&A program, a core competency of CACI, we completed two acquisitions in this quarter. The acquisition of Emergint Technologies and IDL Solutions brings important new client relationships and expands our capabilities that will accelerate growth in our healthcare market. We continue to build our pipeline of acquisition opportunities. Fully assessing the qualities of each company, and ensuring we meet return hurdles while we look for opportunities to create long-term shareholder value.

We remain confident in our strategy to focus on the government's high-priority missions. Our ability to execute with agility and discipline enables us to identify competitive positions in our large addressable market, even in this difficult environment, and to deliver value to all of our stakeholders. With that, let me turn the call over to Tom for some more insight into our financial results. Tom?

Yes, thank you, Dan, and good morning everyone. We are pleased with our performance for our second quarter with solid direct labor earnings and cash flow. Slide 7, please. As outlined in our earnings press release and as discussed on prior calls three material one-time items positively impacted last year's results. To provide better insight into our fiscal year '13 performance and more meaningful comparisons, we are comparing this year's results to adjusted fiscal year '12 results.

Next slide, number 8, please. For the quarter, revenue decreased 4.3% from last year, driven by an expected decrease in other direct costs of 11.7%, due to lower subcontractor provided material and equipment at our C4ISR and intelligence markets, related to the draw down in Afghanistan. Direct labor, the primary driver of earnings increased 5.1% with organic direct labor up 1.4%. Our [indirect] cost and selling expense were up a modest 2.2% as we continue to focus on ensuring our organization is efficient. Having an efficient cost structure allows us to have competitive rates while allowing for the investment and support growth that is Dan spoke about.

Net earnings increased 7.4% from last year's adjusted level and earnings per share increased 24.5%, driven by a $3.7 million decrease in diluted shares, due to share repurchases. We also report earnings per share adjusted for certain non-cash items, stock-based compensation, non-cash interest and depreciation and amortization. For the second quarter, our adjusted earnings per share were $2.22, 31% higher than our GAAP earnings per share $1.59.

Slide 9, please. We generated solid second quarter operating cash of $23.8 million, $91.5 million year-to-date and are on track for another strong year of operating cash flow. On a trailing 12 month basis, free cash flow was $252 million or $9.79 per diluted share. This translates to a free cash flow yield of 17.8% at a $55 share price. Our net debt at the end of the quarter was $665 million and our net debt-to-trailing 12 month adjusted EBITDA leverage ratio was at 2 times, a comfortable level.

Slide 10, please. Due to the change in customer behavior that Dan discussed, we have revised our guidance with the new revenue range of $3.7 billion to $3.9 billion in the net income range of $157 million to $163 million. Our secured funding, backlog position, and pipeline of opportunities support the revised guidance ranges. We expect to see modest year-over-year increases in both direct labor and other direct costs in our second half, and we anticipate our effective tax rate will be approximately be 38% based on non-taxable gains in our deferred compensation plan and certain tax credits. With that, let me turn the call over to John. John?

Thanks, Tom. Let's turn to Slide 11. I am pleased to say that our second quarter results were driven by executing successfully our market-driven strategy in a difficult market environment. We achieved $512 million of awards in the second quarter, which was spread among all 10 of our markets. Specifically, we generated $168 million of awards in our high-growth markets of business systems, Cyberspace, healthcare, and Integrated Security Solutions and $344 million in awards in our high-volume markets. As a broad measure of awards, on a trailing 12 month basis, our awards were just under $4 billion, within the range of previous periods.

As Dan mentioned, the behavior of our clients is changing as the level uncertainty continues. Specifically, this quarter we experienced bridge extensions on some of our contracts which had an impact on our year-over-year comparison of awards. In addition, we've experienced a slowdown in the pace of IDIQ task order releases and some delays in awards. Looking forward to the second half of fiscal year '13, we believe we will continue to see similar client behaviors. I am pleased to say that we have experienced no program cancellations.

Slide 12, please. During the quarter, we were awarded prime positions on new IDIQ contract vehicles, expanding our inventory to more than 160. IDIQ contract vehicles support our growth plans across our 10 markets and provide CACI the flexibility to deliver on our customers mission critical requirements. As for funding orders, we closed the quarter at $625 million, slightly above the same quarter of fiscal '12.

We attribute this growth to our clients desire to ensure funding for the critical missions we perform on their behalf prior to any form of a sequestered environment. These awards and funding orders contribute to our over $2.1 billion of funded backlog of total backlog of $7.6 billion. The composition of our funded backlog in Q2 did not change materially from Q1. Nor do we anticipated a change in the second half of fiscal year since we expect to see growth in both direct labor and ODCs.

In past earnings calls, we have discussed the pricing pressures that exist in our market. We continue to succeed on our LPTA competitions. Our success is based on our investments aimed at reducing program costs while maintaining our level of projected profits. Now let's please turn to Slide 13. Our leading indicators of direct labor growth, secured revenue, and secured funding support our confidence in CACI's continued growth. Our direct labor grew 5.1% this past quarter, increasing our headcount by more than 200 and represents another step forward in our strategy to reduce ODC revenue and replace it with higher margin, direct labor.

Both secured revenue and secured funding have improved from last quarter's measures as well. Last quarter are measure of secured revenue was 85% coming from contracts we hold, 11% from new business, and 4% from rate competes. In line with our revised guidance, 97% of our forecasted FY '13 revenue is in the form of contracts we currently hold, 1% from new business, and 2% from rates competes. In addition, 87% of the funding required to deliver FY '13 plan has already been secured. While market conditions remain challenging, we believe that are agility within the markets we serve, our diverse portfolio of mission-critical business, our positive leading indicators, and our commitment to operational excellence, position us for future continued growth. I will now turn the call back over to Dan.

Great. Thanks, John. And Tom, thank you for your remarks. Let's go to Slide 14. Before we go to Q&A, I would like to thank the CACI team for another solid quarter of performance. CACI's dedicated employees work hard to anticipate our clients' needs, and deliver solid program performance. We are unwavering in our dedication to our customers and committed to delivering the solutions and services they need for mission success. I am proud to be part a member of this team and appreciate all of their contributions.

For fiscal year '13, our revised guidance indicates we will perform at a level very similar to our fiscal year '12, with modest increases in revenue and earnings. Looking forward to our fiscal year '14, we remain confident in our strategy and our ability to execute. We are anticipating continued uncertainties in the government spending environment. But our goal is to annually increase earnings and provide long-term value for our shareholders. With that, let's open up the call for questions.

(Operator Instructions).

The first question is from Bill Loomis of Stifel Nicolaus.

Hi. Thank you. Good morning.

Morning, Bill.

What happens, for example, I know obviously you're highly confident in the guidance, but let's just say we have a sequestration and kind of a worst-case scenario, you see a 5% to 10% drop in direct labor customer as they cut spending in the remaining months of the fiscal year. I'm trying to understand how CACI could react to that if that happened. In other words, how quickly could you get your cost structure in line with -- when an environment like that? How would that impact cash flow and would you have a bench if that happened?

Bill, let me start and I will turn it over to John. As we look at sequestration and how it actually would be implemented in the latter half of this year, our fiscal year, it does come -- it could be put in effect the very end of our fiscal year. And as we look at the schedules and timelines that would need to be put in place, with contract changes, we see the risk of the business that's already in our plan to be very minimal. John gave some insight to that a second ago. And risk to new business being small. So we feel -- as we looked at our forecast, we built it from the bottom up, that risk is small. Going forward we would assess that as we plan for fiscal year '14. John, do you have anything you want there?

Yes. We also took a look, Bill, at what were our current run rates, and how were our clients funding us, also. If we look at our current run rates, when we set our revised guidance, we did take into account any run rate changes -- although they were very, very minimal, and pretty much in line with what we expected what we put our initial FY '13 guidance out there -- since that point, we have seen some level of program D scopes, we also have programs that have added and I guess I can could tell you that they have netted, pretty much negligible. As we move forward, we continue to stay in close contact. We are also watching funding. When we look forward to the volume, we are also making sure that all of that volume comes with funding. We are very pleased that about 87% of our FY '13 revenue is currently funded. Tom, do you want to talk about some of the cost structures?

Yes. Yes, Bill. I think you also asked what would we do in terms of some of our cash structure and cash flow and the like. As an organization we are committed to ensure that we have a cost structure infrastructure which is consistent with the size of the organization. You have your organizations increase, we add additional resources to support a larger organization. And if it ever would contract, we would make sure that the structure that we have in place is appropriate into the size of the organization. That's one thing we would clearly do. Lastly, in terms of cash flow characteristics. I don't see a large impact on cash flow characteristics. There may be some in the short-term fluctuations before we can align our resources of the organization, but throughout this whole process, the government continues to pay its invoices on time. The government payment offices are not impacted, and we would just make sure that we would need to manage our expenses appropriately.

Bill, I'd like to wrap it up with -- from our management processes and how we run the Company. We are not waiting for sequestration to be put in place or to be implemented. We are focusing on our programs and assessing them on a program-by-program basis is an ongoing activity. We are assessing our indirect costs and looking at scenarios from extreme conditions of what could the outcomes look like. And we will be prepared as this unfolds. I don't believe it will just be a switch and everything is put in place. We are preparing for that to gradually become a reality, and we will be prepared for it.

Thanks.

The next question is from Edward Caso of Wells Fargo.

Good morning, Ed.

Good morning and congratulations on managing so far here. A lot of chatter on the defense side, although military heads coming out with some drastic contingency plans, including moving forward with some of them. Haven't heard much on the civil side of the equation. I saw that has been a good growth area for you of late. I was wondering if you could talk a little bit about your civilian clients, and where they are in their process of sequestration preparation?

Yes, Ed, the civilian part of our business is growing. Particularly in some of these areas where I believe are high-priority, and particularly in the administration and focus on healthcare. That is the area where we are seeing a lot of attention. What we have not seen are the types of forward level, senior-level guidance that have been provided. So we aren't quite certain to their direction as we are from what we are getting from the Department of Defense. At the agency level, individual agencies are looking for areas, particularly in some of their IT infrastructure supports spend that they are looking at. We really are not exposed to that part of the business. I imagine as March 1st gets closer, which is about a month away now, we will hear more. We are not hearing a lot there today.

Just a quick follow-up, on the DoD side, was the commentary and actions by your clients happen gradually, or has this sort of act up steam here in the month of January as far as the pace of funding?

I would say it was a building process. As we looked at our Q1 performance and the level of awards and funding, and even into October, we saw behavior that was consistent with the CR environment that we have experienced in the past. Following the election and the changes of the election, there began to be more uncertainty about the future of sequestration. Prior to that most people were saying it is never going to happen. Right? There was confidence they would negotiate a fiscal cliff settlement that sequestration as it was put into law, would not become reality. And as we got closer to the end of the calendar year, our clients got more and more cautious, as we described. So it was really in the November, December timeframe, where we began to really see them take action. As we have now stepped into January, or wrapping up January, now we have gone beyond, it is not going to happen - we are not going to plan for it, to they are providing guidance for their organization to take action. So it was a gradual build up to where we are today.

Great. Thank you.

Thanks, Ed.

The next question is from Cai von Rumohr of Cowen and Company.

Yes. Thank you very much. So most of your sale shortfall quarter was in the ODCs, and you mentioned the draw down coming down. How much of your revenues do you still get, because every time you say it's not a big factor, and here we just lost 3% of total revenues from the OCOs -- so about how big is it, and how much more exposure might there be an adverse case?

Yes, Cai. ODCs are a significant part of our revenue and our direct costs. They are disproportionately a small part of our profit. We, as a convenience to our customer, as an accommodation to our customer, embarked upon a variety of pass-through activities over the last three years or four years. That contributed to some of our large increases in revenue, which we spoke about. We always knew that it was a temporary, not sustainable portion of our revenue. It made sense to do at the time, provided some positive cash flow, some modest earnings increases. That work is largely abating at this point in time. Looking forward into the third and fourth quarter, we expect a modest ODC growth anywhere between 1% to 3%. So we have gotten over the cliff for the change in behavior that we saw at the end of last year's second quarter driven by the draw down in Afghanistan. The work is going away, 12 year -- 12 month, rather, to the anniversary the impact on our financial statements, and we expect to see relatively flat level of ODCs for the remainder of our fiscal year.

Actually, the question was, how much of the revenues -- because obviously, I know you're always going to have a certain level of ODC. How much of it, approximately, is related to the OCO, to Iraq, Afghanistan, and related to the draw down.

Yes, Cai, we have in our FY '13 plan about $290 million worth of pass-through. The first half of the fiscal year, '13, about $65 million of our ODCs was pass-through in nature. And those have now run their course. And as Tom mentioned, as you look at the ODCs going forward, those are not so much pass-through ODCs, those are value-added ODCs that will be part of the solutions as we move towards more of a solutions type business.

Terrific. Good answer. How much, usually you give some metrics on the bids awaiting decision and the bids to be submitted in the next six months. Where were those numbers?

Yes, Cai, this is John. Both of those numbers -- we've got about $11.2 billion that we expect to submit during the third and fourth quarter. We have about $7.2 billion that are under evaluation today.

The next question from Brian Gesulae with Raymond James.

Good morning, guys. I wonder if you could help me out here. Last quarter you gave metrics on existing contracts, recompetes and new contracts. It was 85%, 4%, and 11%. Did I hear you right, that fell 87%, 2% and 9%? Is that the way to think about it?

Brian, this is John. Actually, what we have with our revised guidance is 97% of our work, of our FY '13 revenue is in contracts that we hold. 1% is new business and 2% is recompetes. So we have been able to bring the 4% of recompete down to 2%, and that is about $70 million to $80 million, Brian, the new business side is roughly $30 million to $40 million. So relatively negligible as we run the second half of fiscal '13.

Okay. Great. Maybe just, Dan, one question for you. You've been inside bigger companies than CACI, some of those companies as the budgets have turned negative have looked at divestitures. CACI has always been acquisitive. Is divestitures something you are looking at in things that you are evaluating? And how should we think about that?

I would say, we've talked about our 10 market strategies and in those 10 market strategies, we see growth opportunities. Those are areas where we are focusing our energy and primarily are almost exclusively on acquiring -- acquisitions. We have made some small divestitures, not material in nature, but we don't see an aspect of our portfolio at the moment that we feel is in need of consideration for divestitures. So we are focusing on how do we add to the Company as we see opportunities in the market, as well as companies that are out there. Or capabilities.

Your next question is from Joe Nadol, JPMorgan.

Thanks. Just a couple. First, the 87% that is secured, I want to make sure I understand. Is that basically -- is the remainder of that basically, fiscal fourth-quarter revenues that would need another CR to get to 100 or a full-year budget, obviously?

Joe, this is John. So we've got 97% of our revenue is already booked.

No, I understand that. I'm talking about the funded.

I'm sorry. So when 87% of it is funded. We watch funding on a program by program basis. As we look through the second quarter, we had one of our strongest second quarters in recent history as it pertains to funding. We don't see the need for anything to fundamentally change so that we would generate funding that supports at least 97% of our revenue today. So the remaining 13%, Joe, is just timing.

Okay. I guess, I don't understand, precisely, what has to happen. I imagine it is because of the CR isn't a full-year CR yet. Maybe we can follow-up on that off-line. The second piece here is, if you guys could characterize the revenue that came out of your plan. How much of that is directly (inaudible) is ODC? Is it similar to your company mix overall? Or was there an imbalance one way or another? And then maybe more interestingly or importantly, is it any type of customer, in particular? Or is it just a blend? In other words, was it more intel, less intel -- more of one service or another? Thanks.

Joe, when we took the expected revenue -- was right in line with our current mix of direct labor and other direct costs. To give you a little bit of a finer -- finer point, when we review the service chief letters, the three markets that we believe would be most impacted by us are our enterprise IT market, our logistics and materials support and are C4IS. We when we read all of the service chief letters, that was predominantly where the revenue came out, and it was almost all new business awards. So in those three areas, Joe, we are very dependent on having cash orders in a timely manner to have supported, both third quarter and fourth quarter revenue. As we saw the clients in those three areas slowdown to release task orders, that is what drove us to pull that revenue out. So it is not any one of those areas, monetarily, but as a whole, the majority of our new business that we took up have been in those three markets.

Joe, let me try to follow up on one other item with you. On the funding side, we've been talking about this over the last couple of quarters. A lot of our clients have moved more towards incremental funding. So whereas, if we had a one year award, we would secure the majority of that funding upfront. We now have clients doing it more often, but in smaller amounts. So now, those programs are fully obligated. They are fully contracted with us. It is just that the way they have been funding in some of our areas has been different than they have in the past.

Okay. Alright, thank you guys, that is very helpful.

Thanks, Joe.

The next question is from Mark Jordan with Noble Financial.

Thank you. Quick question relative to the potential implementation of sequestration. Under sequestration, is there the potential for the customer to claw back funding? Or do you expect the funded aspect of a program to be fully available, and then if there is a cut, it would occur on the next funding cycle?

Yes, Mark, our expectations or understanding of sequestration is, as they implement this, there can be actions they can take to cancel contracts, to adjust funding that is on contract, but that process would need to be taken in an orderly way. It would have to be done through contract changes and that will take a detailed interaction with the customer and the client. Our view is, that will take some time. So as we look at an orderly transition, that process, we think -- we have included that in our forecast, which is included in our guidance for the year. We believe we've got factored in -- in those risk areas.

With the slowdown that you have seen in award cycles over the last few months, do you believe that some of your customers are de facto implementing sequestration related cuts by just reducing contracting activity, so that if sequestration comes into play, there will be less retroactive reductions that they will have to implement.

We haven't seen the type of action that would support that -- that said they've got a procurement or RFP and they have started down the acquisition process and they are canceling it. We have seen is they have taken steps and they delayed the RFP release date, or they have delayed an award for a task order or a single work contract into a period later in the calendar year. We believe that delay is all tied to the uncertainty of not only -- more importantly, the amount of funding they will have to support the activity that they are looking to do. We don't see that priority, or the need for that going away. It is just to what level will they be funded?

Thank you.

The next question is from Brian Kinstlinger with Sidoti & Co.

One follow-up and then a different question. The first one was, I think someone asked about your (inaudible) exposure. I was confused. How much direct labor do you have in (inaudible) in your fiscal '13 plan and how much ODC? Just relate in (inaudible) whether it United States related or even in Afghanistan or in Iraq or anywhere else?

Yes, Brian, this is John. We have always had about $250 million of total revenue in Southwest Asia. About $160 million of that based in Afghanistan, and of $160 million, it was about always 60% of that was passed through ODC and remainder was direct -- direct labor.

Thank you. That's very clear. The other question I had was, how much business was new wins this quarter? How much in your current guidance is contributed from the acquisitions you just completed -- the two?

Yes, in terms of new business in the awards, was approximately 50% of awards were new bids with the remaining 50% were either modifications or re-competes. In terms of acquisitions, for the full year, the Delta, Emergint Technologies, and IDL acquisitions contributes to approximately $90 million worth of revenue. In the back half, the two recent acquisitions; Emergint and IDL contribute about $35 million.

Great. Thank you so much.

Sure.

The next question is from Tim Quillin of Stephens.

Good morning.

Good morning.

Hey, Tim.

Could you talk about how you're thinking about capital allocation at this point. You've done a couple of big buybacks. Your share count's getting relatively low, I'm sure that's somewhat of a consideration on future buybacks. Will you repurchase more shares? Are you considering a dividend? And when do you get more aggressive on acquisitions? Because my sense is that you could have an interesting point in time this year where maybe you gets more clarity, and there is some properties for sale. There hasn't been a lot of M&A activity for a while, maybe you could step up the size of acquisitions that you do. But if you could talk about all three of those components that would be great.

Sure. Tim, this is Dan. Our approach to looking at capital deployment -- priority has always been M&A, and we continue to -- with the acquisitions that we have announced to this point, focus on opportunities in areas where we see good growth opportunities to create long-term shareholder value. We (inaudible) continue to have a pipeline of good opportunities that we are evaluating. And the process that we use as a Company, we focus very carefully on the quality of the company, including the financial performance and the future financial performance that fit into our culture to ensure that we integrate well and ultimately can we deliver additional value with a combination of our Company and the asset. There are -- we suspect with the change in the market driven by these budget uncertainties that there's going to be opportunities for us to continue to complement the portfolio and we are aggressively looking at that.

In the area of share repurchases, this is a tool we've used to create long-term shareholder value. The Board continuously looks at it and has taken opportunities when they are right -- the timing is right to move forward with that. I would -- can say we will continue to look at that. Ultimately, dividend is an area that the Board is continuously looking at. Is it a proper use of cash for us, particularly with the opportunities we have in the M&A area to continue to grow the Company? Those decisions, they're constantly, regularly looking at and updating.

Okay. Thank you.

The next question is from George Price of BB&T Capital Markets.

Thank you very much for taking my question. A lot of my questions have been asked and answered. But I do want to follow-up on a couple of things. First, just to be clear, your revised fiscal '13 guidance at this point includes your best assessment of the impact of sequestration if it is enacted as it stands. Is that correct?

That's correct. We looked at our current portfolio programs and assessed risk associated with the secretaries and the service chiefs letters. And we have factored our pipeline of new business opportunities with the behavior and those -- and that guidance. So it is our best assessment of, for sure something that it is uncertain what will ultimately happen, but we've done a detailed bottom up review. And to the best that we can predict what we know, that's our guidance.

Okay. Thank you for clarifying. So if sequestering is implemented and there is a minimal impact to fiscal '13, based on the whole process -- that contracting process, that suggests that after what is an increasingly challenging fiscal '13, we have the potential for an even tougher year in fiscal '14. Certainly, some preliminary things that have been thrown out like the GFY '14 budget looked kind of tough at this point, just wanted to get your thoughts on that.

Yes. We look forward to the instability or uncertainty tied to is sequestration going to be implemented? And if it does, how do you take $1 trillion out of the government, both defense and civil? And how does the government then reprioritize what actions they are taking? Those are the areas that, to me, create uncertainty. For our organization, we feel -- we look forward, and we look at what are the stated priorities of the government and believe we are positioned in some of those areas that will be enduring even as they reduce funding. That means, highly likely, there will be less funding, but will they go away? We don't believe so. And that still is a very large market for us, and we will use the capabilities, the agility of our team to maneuver to continue to perform well as an organization. But to say, specifically, what that looks like, we need to have some clarity. And, George, I think that's going to take some time. First is, do they do it? And when they make that decision, how does that get implemented? All of the things that would help enable that QDR, all has been delayed. So we will need the results of that before we can chart a course going forward, but I still think there's -- they are not going to stop governing.

No. It is fair enough. I guess, what do you anticipate your timeline, you know, to be this year in terms of discussing even preliminary outlook for GFY '14. Last year, you touched on the GFY '13 preliminary outlook a little earlier than you normally do. Do you have any thoughts about how you're going to approach it this year?

Yes. I would say, as we work our way through the next couple of months, we will have a better feel for what happens with sequestration. We will see how they are planning to implement it, which will include the remainder of their fiscal year, which is the beginning of our fiscal year '14. And we will have some feel for where do they plan to prioritize, at least in the near-term. So when we come out of our Q3 and do our earnings call in -- for Q3, we'll have a better insight of what that looks like. We'll give you an update on our guidance based on what we know, and what we are experiencing in our contracts. Then we will plan as we normally do, in the June timeframe to go to a full guidance call and give you some detailed insight of we are approaching this.

The next question is from Jason Kupferberg with Jefferies.

Hi this is Ahmed Singh for Jason. Just coming back on the contribution from the recent acquisitions, you mentioned you are expecting $90 million in fiscal '13. Do you have some sort of a target on the revenue that you plan to enter in this fiscal year from acquisitions in journal -- M&A in journal? And along with that, talk about your current M&A pipeline and a specific area you might be focusing on.

Yes, Ahmed, this is Tom. Our philosophy is to deploy cash in a direct position. It has provided long-term value for our shareholders in the past. And we are continuing to do that. I am hesitant to put out a particular project because our ability to perform acquisitions is largely a function of what we see in the market and what properties are available. And there is some choppiness to our acquisitions. We will induce several in a short amount of time and there will be a lull, not because we are less interested in acquisitions, but more so because we are not seeing the appropriate companies that have the right strategic fit or the right economic characteristics. At this point in time, I am reluctant to guide you to a particular number for acquisitions in the back half, and -- it may be large, it may be small, it is really a function of what we're seeing in the marketplace.

Mark, can I give you a little bit of thought on areas that might be of interest to us. Because we have in the last year had to broaden our discussion with the street, talking about our market strategies. In those market strategies, we have areas, itineraries where we identify growth potential for the organization. In some cases we have organic capabilities and we are pretty well positioned there, augmenting small things on an opportunity basis. But if there are -- there are also some high-growth areas. Healthcare is one that we have looked at fairly aggressively in the last first half of the year, the acquisitions we have made to build and client relationships and corporate capabilities to where we think we can really take a stab going forward there. Cyberspace, intel, are other areas where we believe there are large markets where we have an opportunity to bring the information solutions and services part of our ability that allow our clients to make better decisions, faster decisions -- as a core capabilities of our organization, bring that to them to help them, not only with their mission needs, but help them solve some big budget issues that they have. So those would be the areas that are likely. But we are looking across all 10 to leverage a power of our M&A program to help us grow.

All right. Thank you. Quickly, on the margin side, the operating margins this quarter were year over year pretty much inline or slightly lower. You have been talking about the growth in direct labor and you are witnessing that and that helping your margins. I am trying to get a sense of -- is the growth in direct labor pretty much helping you maintain the margins at current level in this challenging environment? Or should we expect, over time, that considering the growth remains that to start improving your margins?

It seems to be that, for this year, the improvement in the direct labor to ODC mix helped our margins. That improved our gross margins and that slow down our operating margins as well. At the same time, we are controlling our indirect expenses. And that is helping us to maintain the operating margins. I would imagine going forward, we are committed to maintaining profitability and margins our one of the key characteristics, and despite a low-price environment and a shift to more cost-plus work, we should be able to maintain margins approximately at these levels. That would be our internal goals.

The next question is from Tobey Sommer of SunTrust.

Just a follow-up on an earlier question related to the civil side of your business, where you have seen some growth. I am curious if you think that in aggregate, the civil side of the business will be -- kind of relatively perform better than the DoD side of the business?

I'm not sure I would compare them, Tobey, and say one is better than the other. I would say as you look at the markets that we are looking at -- and civil would be heavily part of our investigative and litigation support business, our healthcare business. Those areas we just see as the demand. The need by our government to expand their capabilities is fairly strong. We are seeing that demand in these added services. I would expect that to continue. Equally, I could go into the defense or the intel community and say there are areas where there are similar demand. Cyber being one of them and it's probably the most visible. I wouldn't compare and contrast them. I would just say we look across our 10 markets there's pockets in there with those kinds of opportunities.

(Operator Instructions).

The next questions Stephen Chow with Royal Bank of Canada.

Hello. Maybe just firstly on the sequestration side. You mentioned looking at the service chief letters and speaking to the secretaries and an orderly approach in sequestration on the defense side. We have not seen the same sort of news coming out on the civil side. Is there any chance that the federal civilian revenues are more at risk under a sequestering scenario because there's less organization and potential planning over all? Or our your customers, in your opinion preparing for this in the same way the DoD is?

I'm not sure they are preparing for it in the same way. It does feel like that DoD, and particularly in the services are a little farther along and getting their organizations prepared and moving forward. That has benefited us. On the fed civil side, it is uncertain to that level of planning -- it has not been made public so it is hard to comment on that. I don't think a puts us more at risk. And I say that because whatever action they take, there is an orderly process that they will need to through. Which includes defining their strategy, those areas they're going to prioritize. And then make adjustments, which will require contract changes and the orderly redeployment of people or exiting of people. All of that will take some time, and I don't see it happening. We don't see it happening overnight here. I hope that helps.

And then, maybe on the contract mix. You mentioned maybe a bit more cost-plus going forward. That is been slowly up-ticking as a trend. The time of materials has been coming down. Is that a trend that we should continue to expect going forward? And the government looks forward and everyone looks to maybe shed some risk, is there a point what where we see the fixed price starting to pick up when time and material is coming down?

Yes, our government has stated some revisions to the acquisition policies that are Better Buying 2.0 and the drive -- the demand to move away from T&M. With those stated policies, we are actually seeing it happen in contract execution. I would say, we would expect to see that continue. In Better Buying 2.0, the cost-plus and fixed-price are the tools -- the contract vehicle tools that they state will be used. I think that trend is going to continue. It is really driven by high-level guidance on how they are attempting to manage their costs going forward. So it is consistent.

The next question is from George Price, BB&T Capital Markets.

Thank you very much for taking some follow-ups. Tom, I just had some questions I think are more geared to you. You talked a little bit about what some of the expectations in the second half of the year. Given what you are seeing, how can you help us maybe a little bit more in how to frame fiscal third quarter and fiscal fourth quarter in terms of having a play out from a revenue perspective? How that might be different then you typically see, seasonally?

Yes. George. I will talk about that in the second half, in total. During that time period, we expect to see a continued direct labor growth. Anywhere from 2% to 5% is the reasonable expectation for direct labor growth, and some ODC growth of approximately 1% to 3%. As a result of that, we should be seeing anywhere between 2% to 4% revenue growth for CACI. So we expect that to occur. Our fourth quarter is typically higher than our third quarter for two reasons. One is the timing of our award fees are materially higher in the fourth quarter versus our third quarter, so that creates a seasonal increase, sequentially. And probably a primary reason for that sequential increase on top of it.

Okay. I wanted to see, given some of the behaviors you seen if any of that might have been skewed, but it doesn't sound like it. Any unusual impacts or benefits expected in the second half that you are aware of at this point that would move EPS either on the cost side, perhaps or I know you had tax credits in the quarter? I wondered if any of those were related to the retroactive renewal of R&D tax credit for 2012. Or are we going to see the catch-up for that in the tax rate in the March quarter to the extent that you guys benefit from that. Anything you can call out around that?

The broad question on unusual, unexpected items in the back half of the year. And at this point in time, there is none we are aware of. We continue to monitor the business and every so often, as you know, unexpected things happen. Some are positive, some are negative. At this point in time, there's nothing that is been identified that would fall into the category so we would expect to have normalized behavior.

With regard to tax, I do want to make a clarification. On the tax credit I spoke about were largely related to work opportunity tax credits on hiring people out of work, hiring veterans. We have a little ability to take advantage of the R&D tax credit, given the nature of our business. It is mostly kind of work opportunity credits that are helping our tax rates. As well as strong performance in our deferred compensation plan, the equity component of the deferred compensation plan, driven by strong US equity market, that creates non-taxable gains which serves to lower our tax rate. So if we continue to see a strong equity market, that will continue to benefit our tax rate. If the equity markets go the other way, our tax rates will increase.

Great. Thanks for the follow-up.

Sure thing.

(Operator Instructions).

The next questions from Brian Kinstlinger of Sidoti & Co.

Great. Thank you for taking my follow-up. I am curious, on the proposals outstanding and proposals planned to submit. First of all, on the proposals outstanding we saw decent sized drop, if my numbers are right in December quarter and I'm wondering what caused that? If it was a large program that was not one that was in there. And then, if the proposal to submit, looking at that, you mentioned that for the next six months, you have about $11 billion to $12 billion you have been planning to submit every quarter over a two quarter period. But the proposal outstanding aren't going up. I guess I am wondering with that said, are you not able to hit that target, given what's going on in the procurement environment?

Yes. Brian. This is John. If we looked at the difference in the proposals waiting to be evaluated, I think in the first quarter -- yes, in the last quarter we were at $8.9 billion, Brian, and now we are at $7.2 billion. The way we account for those total -- total values, in the proposals to be submitted and the proposals to be awarded, we actually assign an expected value of predicted revenue we are going to get from those multiple award IDIQs. That drives those submitted proposal values higher than we may eventually see in the awards. If I were to break down the $8.9 billion to $7.2 billion for you, about $1.5 billion of that -- $1.7 billion, Delta was multiple award IDIQ awards. The remainder would be task orders in RFPs. If I look at the $11.2 billion, that has been very consistent, however the mix of IDIQs to task orders has been moving over the last three or four quarters. We are actually see more in RFP and task orders -- $11.2 billion over in the next two quarters than we saw in the first two. So that gives us an indicator that we have a pent-up customer demand for task orders and RFPs, a little bit different than what we may have seen in the first half -- fiscal half '13.

Okay. Last one. I want to understand, have you been able to achieve in submitting your targets of roughly that 11.7 or 11.2, whatever it is, in plans to submit, given this environment, or have you been short of that given what is going on in the market environment?

Yes. We were short of that towards the end of the first quarter. We are continuing to fall slightly short of that, Brian, during the second. We do expect some of those things to be able to pick up. But it is predominately driven by the multiple award IDIQs piece.

Great. Thank you so much.

You bet.

Thank you. There are no further questions. I'll turn it back over to Dan for closing remarks.

Great. Thanks, Latoya. And thank you for your help on the call today. We would like to thank everyone who dialed in or logged into the webcast for their participation as well. We know many of you will have follow-up questions, and Tom, and Dave will be available for calls later today. This concludes our call. Thank you and have a good day.