CACI International Inc (CACI) Q1 2009 Earnings Report, Transcript and Summary

Welcome to the CACI International first quarter fiscal year '09 conference call. Today's conference 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 the call, we are only taking questions from the analysts. At this time, I'd like to turn the call over to Mr. Dave Dragics, Senior Vice President of Investor Relations for CACI. Please go ahead, sir.

Thank you, Shelon, and good morning, ladies and gentlemen. I'm Dave Dragics, senior vice president of investor relations at CACI International. We're very pleased that you're able to participate with us today. As this 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 moving to slide 2, before we begin our discussion this morning I would like to make our customary, but important statement regarding our written and oral disclosures and commentary. There will be statements in this call that do not address historical fact and as such constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the company's Securities and Exchange Commission filing. Our Safe Harbor statement is included on this exhibit and should be incorporated as part of any transcript of this call. And I would also like to point out that our presentation today will include discussion of non-GAAP financial measures. Now let's go to the next slide, please. 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, ladies and gentlemen. I'd like to personally welcome everyone to our call this morning. We appreciate your interest in our company. With me to discuss our results and answer your questions are Tom Mutryn, our Chief Financial Officer, Bill Fairl, President of U.S. Operations, Randy Fuerst, Chief Operating Officer of U.S. Operations, and by phone from the United Kingdom, Greg Bradford, Chief Executive of CACI Limited, U.K. Let's go to the next slide, please. CACI's strong first quarter financial performance reflects the success of our strategic focus on federal marker that receive high priority funding. That growth strategy of delivering mission critical support for defense, intelligence, homeland security, and the improvement of government services is delivering excellent results consistent with our guidance. CACI is financially strong. We reported our third consecutive quarter of double-digit earnings per share growth. Our revenue increased more than 18% for the first quarter of last year – over the first quarter of last year, with our intelligence revenue growing more than 40%. We've had five consecutive quarters of double-digit organic growth. Contract awards were up, and we received record contract funding orders. Our core markets continue to receive high priority mission critical funding, and we see a steady long-term demand for innovative and valuable solutions. Let's go to slide number 5, please. CACI's strong market position is also a reflection of our experience and innovative leadership team. We, senior executives, are invested as stakeholders and have a total commitment to lead CACI to excel at the Tier 1 level. We are staying ahead of the curve. We saw the intelligent security services, cyber security and soft power for winning hearts and minds would be the key drivers on countering the threat of terrorism. And we have strategically positioned our…

Thank you, Paul, and good morning, everyone. As Paul said, we are very pleased with our first quarter results. Our revenue grew year-over-year by 18.3% driven by strong organic growth of 10.8% and acquisition-related revenue from the Dragon in a transaction. Our direct billable labor grew an impressive 23% driven by both our hiring activities and our acquisitions. Let's go to the next slide, number 8, please. Our net income for the quarter was $20.99 million, a 14.8% increase from the first quarter of last year, despite an increase in our tax rate. For the quarter, the tax rate was 41%, driven by declines in the asset values of the investment in our executive deferred compensation plan. Next slide, please. Our UK subsidiary, a small but important portion of our business, reported revenue of $22.4 million for the quarter, a 2% decrease from last year's first quarter. The net income margin was 4.9% compared to 6.4% for the first quarter of last year. Although our UK operation generated record results last year, performance in the first quarter of this year was adversely impacted by the substantial fall in the value of the pound in the weakened U.S. economy. This business is centered on marketing solutions targeted to commercial customers and is being negatively impacted by economic conditions. We are working to mitigate these impacts by taking action to sustain our business and reduce costs. Diluted earnings per share for the quarter was $0.69, up 14.6%, the third quarter in a row of double-digit earnings per share growth. We had rather like to see continued progress towards our two-to-three-year goal of at least 15% annual EPS growth. Next slide, please. Our cash position at the end of the quarter was $112 million. First quarter operating cash flow was a healthy $15.6…

Thanks, Tom, and let me add my welcome to everyone on the call. This morning I'll address highlights from U.S. operations during our first quarter of fiscal year 2009. Let's go to slide number 12, please. I will start by calling your attention to our contract funding orders for the first quarter. They increased dramatically at $943 million, by far the largest amount of quarterly funding orders we have received in our 47 years of business. This represents growth of 33% or more than $230 million, over the first quarter of fiscal 2008, and puts our funded backlog at $1.7 billion, that's an all-time high. Our contract awards for the first quarter were also up. They totaled $989 million, an increase of $55 million over the same quarter in fiscal '08. We won all our major recompetes, which is an important contributor to maintaining our organic growth momentum. At the same time we won new business in both the defense and federal civilian sectors. Like to take a moment now and briefly discuss some of our major first quarter contract awards. As you may know we recently announced that we have been awarded contracts both new and recompete valued at $406 million to provide a range of technical IT and analytical support to our national security and intelligence clients. This support includes helping analyze networks and organizations responsible for planning and perpetrating attacks on our war fighters as well as providing technical solutions and software tools that allow government analysts to quickly gather actionable information resulting in improved tracking and prevention of terrorist attacks. We were also awarded a $150 million task order by the naval sea systems command to modernize maintenance applications through IT upgrades and software development. The goal of this effort is to save infrastructure costs and…

Thanks, Bill, and thank you, Tom, for your comments. Let's go to the last slide, number 14, please. We believe CACI's financial performance for the first quarter of fiscal 2009 validates our growth strategy and gives us strong confidence to reaffirm the guidance we provided you in June. Our business base is strong, and funding for the critical missions we support remain steady. Looking ahead, we will continue to leverage our core competencies to offer more services to current customers and attract new customers. We will focus on new areas of growth, such as security services, cyber security, and soft power. We will also continue to explore ways we can assist our clients with emerging issues, such as energy, environment, and healthcare. We believe our nation's highest national security priority is the long-term challenge of global terrorism, independent of which political party is in the White House or has congressional leadership. And CACI is at the center of our clients' efforts to meet this challenge, providing them with valuable solutions and cleared personnel. CACI is well-positioned for the future. We have an outstanding and experienced leadership team supported by skilled employees who consistently perform at the highest levels and always with honesty and integrity. Our contracts average three to five years in length, backlog is building, and we have good cash flow. We have a practical strategy for growth that is aligned with our nation's national security highest priorities. We are making continuous progress toward our long-term financial goals, enhancing client capabilities, and building long-term shareholder value. With that, Shelon, we can open up the lines for questions.

(Operator instructions) We'll have our first question from Brian Gesuale, Raymond James. Brian Gesuale – Raymond James: Hey, guys, great job on the quarter.

Thanks.

Thank you, Brian. Brian Gesuale – Raymond James: Paul, I wonder if you could talk strategically a little bit. We've seen a lot of pressure on the public company valuations. Your fundamentals have really accelerated, and we've seen private multiples for acquisitions kind of remain high here. Can you maybe address potentially revisiting share buyback and looking at some of the alternative uses of capital here?

Yes, Brian. We have noticed the same thing. There is, on the one hand, we expect, over the next year to year and a half that the valuations will come down as sellers come to grips with the new reality. On the other hand, there are sort of opportunities for us in the area of either share buyback or repayment of loan. Both of those we're evaluating currently. We have no decision that we've made at this time, but we – from time to time this matter comes up in front of our board, we have a thorough discussion, and there are some new realities here, and we will be discussing these with the board at upcoming board meetings. Brian Gesuale – Raymond James: Great. Thanks. One follow-up. Tom, wondering if you could maybe take us through the interest expense line, the actual costs here. Looks like you guys made some very positive strides in reducing your cost of debt. Maybe take us through that and what we should expect going forward, because it looks like that's going to be a nice tail wind for you as you did mentioned some of the other headwinds out there for you?

If I look at that one line, interest and other net, on our income statement, it is comprised largely of interest expense, but it also includes our interest in a joint venture, which we established a couple years ago. The sequential quarter change in our net interest expense other line from $6.7 million to $5.5 million was roughly half driven by a decline in the minority interest value of the joint venture and half driven by lower interest expense. Not to get too detail in the fourth quarter of last year the joint venture had a very nice award fees which we were able to recognize. Going forward, I would model interest expense similar to the first quarter of this year for the next three quarters.

We'll have our next question from Jason Kupferberg, UBS. Jason Kupferberg – UBS: Hey, good morning, guys.

Good morning, Jason.

Good morning. Jason Kupferberg – UBS: Wanted to start with a question on the margins. And if you can give us a sense on the visibility you have on the year-over-year improvement that you're forecasting during the balance of fiscal '09 to hit your full-year target, which I am assuming is intact, and as part of that if you can comment on where your direct labor mix was exactly in the quarter and where it needs to go approximately in order to achieve that full-year operating margin target?

Bill, do you want to start-off on that one?

Sure, Paul. Jason, it's Bill Fairl. I will start by calling your attention to the fact that our number one goal here is to grow our net after tax, and by extension, our EPS of course. The models we have out there for what we think implied in our guidance, what our margin is going to look like are based on what we need to do in the way of growing our direct labor and therefore, growing our net after tax and EPS, and our best assumptions regarding level of ODCs we're going to have. So – as you know, it's easier to forecast the level of direct labor as long as we keep making our hiring objectives. We're actually doing much better on the hiring objectives. That drives our net after tax and our EPS. The ODCs can go up and down, and admittedly, it's a little harder to forecast some of those things. The timing of them, the invoices, and the fact that a client could come in which kind of a late breaking sort of requirements there, and that really impacts that whole margin calculation. So what you see out there, we're not giving quarterly guidance any more, is our best estimate at this point. But again, I want to draw your attention to the fact that it's our direct labor growth, our ability to hire and retain people that's really driving that net after-tax, and that's really what we're concentrating on. And I think, Tom, Jason had a question on the actual mix between the – in the direct labor and ODCs I think.

Yes, Jason, for U.S. operations, we did have an improvement or amusement to more direct labor. I did mention that our direct labor in the quarter was up 23%, a very strong number, and our direct labor as a percentage of our direct costs increased from 40.2% in the first quarter of '08 to 41.7% in the first quarter of fiscal year '09. And I guess I would just add to that, that's good, that's interesting, but the real key thing for us is to make sure we meet our direct labor, and therefore, hiring goals, which drives the net after-tax. If it turns out we get a few more ODCs, which may change that mix ratio, that's all good, too, because we make money on ODCs, make more money on direct labor.

We'll go next to Ed Caso, Wachovia. Chris Woodland – Wachovia: Hi, good morning, this is Chris Woodland [ph] for Ed Caso.

Good morning, Chris. Chris Woodland – Wachovia: I had a question – could you follow up with what your hiring target is for the year?

Sure, this is Bill Fairl again. We have an objective of right around 800 people for the year.

That's net increase.

Net new hires. Right. And that does not include any acquisitions we might do during the year. That's essentially organic growth, if you will. Chris Woodland – Wachovia: Okay, thank you. And then also 37% of your revenue is now Intel related. How should we think about that figure for the remainder of '09?

I think your question is will the 37% Intel participation in our total revenue increase. I think it's likely to because that is the strength. That's where we position the company and hiring we do. Bill would tell you we have over – well over 250 open reqs, and about half of those are typically for Intel related high level security clearance personnel. Chris Woodland – Wachovia: Thank you.

Your next Michael Lewis, BB&T Capital Market. Michael Lewis – BB&T Capital Market: Good morning.

Good morning, Mike. Michael Lewis – BB&T Capital Market:

Mike, I'm going to ask – this is Bill Fairl. I'm going to ask Randy to address that question.

We are tracking ETAS, Mike, and we expect it to come out when it's supposed to. We're well-positioned for it, and as far as increasing scope, yes, we fully expect that, our clients and what requirements there, and we're pretty bullish on that vehicle. Michael Lewis – BB&T Capital Market: Okay. It was 450 prior, but do you think that this is a $600 million or 700 million contract now?

I'm not quite sure. I know it's going up. I don't have the exact valuation of what they're going to put the ceiling at, but they are going to increase it, that's for sure. Michael Lewis – BB&T Capital Market: That's helpful. And then just a final question here. Hearing more and more about soft power from CACI, do you have any idea what the size of the addressable market is outside core anti-terrorist spending for this kind of sub segment, soft power area?

I don't have a specific – we don't have a specific projection on that market. That as you know it's an emerging market. It is a concept that is both the Secretary of Defense and other leadership in government are pointing to increasingly, and I think you find references in both national campaigns as well that for the long-term solution and the short-term we have to rely on the nexus of intelligence and security services as a way of defeating terrorist attempts. In the longer-term, we really have to use the collective capabilities of our government and other governments to deal with the underlying social issues that create breeding grounds for terrorism. That is sort of the heart of the soft power. So that will involve many elements of government, U.S. government and partners, and other nations. And I would say it's emerging, it's gaining a lot of – let's say, intellectual attention, and more – you will see more and more of this discussion going forward, but the exact addressable market space is not something I could comment on.

We'll have our next question from Cai von Rumohr, Cowen & Co. Cai von Rumohr – Cowen & Co.: Yes, thank you, and let me repeat, good quarter, guys.

Thank you, Cai.

Thank you, Cai. Cai von Rumohr – Cowen & Co.: Could you give us some more detail on the mark-to-market losses? How big were they? What is the asset mix in the rabbi trust, and given that the markets are down more substantially in October, should we expect that mark-to-market loss to increase in the second quarter?

Cai, this is Tom, let me take a stab at answering that question. At that most detailed level this is a fairly complicated issue associated with deferred compensation plan and tax and accounting, et cetera. On a macro level, let me say that the increase in our tax rate is directly related to the drop in equity value, which creates losses in our deferred compensation plan. And what we establish this tax rate we need to forecast what we think the drop in equity markets value will be for the full year, so there is a certain amount of judgment in this calculation. A longer term, we're expecting an improvement in equity value and a move to a more normal tax rate, but for this year, we do not expect any appreciable equity market recovery, resulting in a full-year tax rate of approximately 41%. That's what we're currently anticipating. And I'm happy to get into more details with you or anyone else after this call, and we can get into more of the mechanics of how this plays out. Cai von Rumohr – Cowen & Co.: Okay. And then the second question would be, in the UK, your margin this quarter was 4.9%, down from 7.6% in the fourth quarter, 6.4% last year. Did you include any severance charges in this quarter and kind of what should we be looking for there as we go forward? You mentioned this as a potential point of weakness.

I'm going to ask – this is Paul. I will ask Greg Bradford to address that.

Cai, I think in terms of what UK economy bodes for the future, we don't actually know. This isn't just a UK event. It's a global economic turndown which is affecting the UK. What happens in the UK in the future will be partially dependent on what happens in the US and the worldwide economy. We are reading the market closely as we go along, and we have put together contingency plans based on different levels of possible deterioration. What has affected the UK business in Q1 is our work in the retail sector over here consumer spending is down, and as a result, retailers are cutting back. Enviably though, we're not just a one product or one sector business. We have many products and service offerings which we sell across a number of sectors, some of which are not impacted at all. So the government sector, which about 25% of our business is still remaining strong. And we also have literally hundreds of clients which, of course, diversifies our risk and exposure, and a great many of these clients are marquee names, either UK companies or even US companies, such as Subway and Starbucks who come to the UK. And these marquee names will continue to have a strong need for our service and products, even if the economy slows further. I think the other thing that we're doing is to see us through the side is repositioning our sales focus, in particular, repositioning our overall offer to clients to help them meet the challenges of any kind of economic slowdown. Our products, our marketing services and products help our clients expand during good times, and we can use those same services and products to help them retain customers and business in bad times. So we feel that we will – we've done what we need to do for now and we have plans in place if we have to do anything further to maintain our level of business over here. It's a bit of a long answer.

That's a good answer, Greg, and I would just add to it that, in response to the question on severance costs, there were a small amount of severance costs that were incurred in the October time frame. Therefore, they would show up in our second quarter, and they're fully integrated into our guidance.

We'll have our next question from Drew Trobro [ph] Morgan Stanley. Drew Trobro – Morgan Stanley: Hey, good morning. I was wondering – two quick questions. One is given some of the moving parts around, are there any updates to your cash flow from operations targets of $130 million to $140 million?

Tom, can you take that?

Yes, I can. We're still comfortable with those particular targets. We continue to generate nice cash flows, business is performing quite well and based on what we've seen so far this year, we are comfortable with those levels. Drew Trobro – Morgan Stanley: Okay, great. And just secondly, if you look out a couple of years, how do you expect the pricing and competitive environment to change, given your propensity to pursue larger deals as well as some of the proposals being made by the presidential candidates?

I think your question is around pricing on future opportunities? Drew Trobro – Morgan Stanley: Pricing and the general competitive landscape.

Yes, okay. Bill, do you want to take a crack at that?

I'll start. I think we're a pretty large company now. Well over 12,000 employees, and we've been competing at the Tier 1 stage here for quite some time against some of the most or the strongest competitors out there. I haven't really seen – we're – I'm going to ask Randy to talk about this in a minute. We're targeting to move up the food chain here and really stay out of wherever we can, those deals that are really sensitive to just pure low cost per hour, decided strictly on low cost basis. So it's really more about what we call a value proposition here, so a real true best value award. That's our sweet spot. We feel like we can be competitive there and then importantly win our recompete as well since it's not a pure dollar per hour thing. With that as an introduction, I'm going to ask Randy to talk about some of the work that he has done in lining our accounts and our functional core competencies.

Yes, good morning. We've actually put significant effort over the past 18 months in really defining account strategies and really kind of being – putting together plans to help drive value into our client markets. I would invite you also to visit our website that we just recently updated where you are going to see kind of a detailed explanation of our eight functional core competencies. As you read through those functional core competencies, you are going to see real thought in terms of our value propositions across areas like logistics and material readiness, which is a key area for us, as well as our business systems and solutions. And what we're seeing actually in some of our wins in the first quarter is we're able to maintain – it is a competitive market, but we're able to maintain our bid strategies in terms of what we – how we price those bids.

We'll have our next question from Matthew Crews, Noble Financial. Matthew Crews – Noble Financial: Hi, yes, good morning. Standing in for Mark Jordan this morning. Question regarding your feelings on the strong funded orders this quarter. Was this above expectations, below expectations, or about as expected?

Matthew, this is Bill Fairl. I was expecting a strong quarter. This was above my strong expectations. I was thinking – I had kind of a back of my mind number I was kind of thinking we'd end up around 850, maybe a little bit higher than that. So this came in quite a bit stronger. And I think when you look back at it, what contributed to this – of course, we're in the right marketplace, as Paul mentioned, and then also we had a fairly late finalization of the whole supplemental process. And as Dave Dragics often says, one of the important dates in the government services solution business is September 30th. You got to get it all done by September 30th. So that meant that there was going to be a really high level of activity here in getting funding orders placed, and we saw that, and then plus a little bit more. So happy for it.

And I would say, Bill, there we had a big surge in some of our intelligence-related vehicles that – the DIAS vehicle in particular, there was a surge of activity late in the government fiscal year, and we were very, very successful and competitive. Going back to Randy's point, these are the areas we've positioned the company that are high value, very senior expert level of people with high security clearances, and they command excellent rates. And so, by virtue of us positioning the company toward the clients' largest most complex problems, we're able to avoid sort of the food fight over price shoot-outs. That's our strategy going forward. Matthew Crews – Noble Financial: And a follow-up question, given what you just discussed in terms of the seasonality of the order flow, how do you feel the second fiscal quarter is shaping up, given that we've passed the magical September 30th date?

Yes, we're not even a month into that yet. We track our funding orders on a weekly basis and plot them out. We have a plan at the beginning of the year and we're way ahead of the plan for this year. And then I was just looking at how we did kind of the pattern last year. We're actually slightly ahead of the pattern for last year in the second quarter as well. But I want to emphasize, we're really only three weeks into the second quarter. So we'll see. Haven't seen anything extraordinary yet, but we'll see.

We'll have our next question from Eric Olbeter, Pacific Crest. Eric Olbeter – Pacific Crest: Hi, guys. Congratulations on the quarter, really strong bookings. All my questions have been answered. Thank you.

Thanks, Eric.

Thank you, Eric.

We'll go next to Joe Nadol, JP Morgan. Joe Nadol – JP Morgan: Thanks. Good morning.

Hi, Joe. Joe Nadol – JP Morgan: Question on contract mix. There wasn't much change sequentially, but year-over-year you are showing an increase in cost plus and a decline in time and materials. I'm just wondering if that's due to some of the M&A you did a little bit less than a year ago, or is there something else happening there.

No, most of the M&A – this is Paul – most of the acquisitions we did last year had a high content of time and materials. Bill, do you have any other comment?

Yes, I would say, going forward, what do we think going forward, I think, if I had to guess, I would say we'll be seeing more fixed price kind of work, which is fine. We have a very good program here for managing our fixed-price contracts. We don't have – Paul likes to use this term, we don't have any bleeders here, that's certainly true, and that's due to a kind of a careful review process before we enter into any fixed price contracts. We really avoid fixed price software completion jobs. For the kind of fixed price work that we do, we're very good at managing it and very comfortable with that.

And the margins there are usually higher –

And that's why. Exactly right. Then I would also say that – Tom mentioned earlier this joint venture we have. We had a lot of growth in that over the past year, and that's a cost plus kind of work. We also had one of our major awards that allowed us to hire a lot of people was our award under the first contract down in Fort Bliss. That was a new start last year, so that kind of went from zero way up there. And then we continue on the Navy side, get a lot of growth out of the sea port contract, and that's all kind of a cost plus kind of flavors. Joe Nadol – JP Morgan: So trend wise, we should see fixed price going up, maybe cost-plus going up a little bit, and T&M going down? Is that a fair characterization of what your backlog looks like compared to your revenue?

I would say – and again, right now it's just looking at the backlog, it looks to stay about the same. When I look at the trend lines out there and try to use my crystal ball, I think more movement towards fixed price based upon everything we're hearing out there. And some of that would come maybe from T&M, and some would probably come from cost plus too, but that's just me looking at my crystal ball.

We'll have our next question from Joseph Vafi, Jefferies & Co. Joseph Vafi – Jefferies & Co.: Hi, gentlemen, good morning.

Hi, Joe. Joseph Vafi – Jefferies & Co.: Good quarter. I was wondering if we could just revisit the margin issue one more time. Obviously, the direct labor grew nicely in the quarter, kind of higher than the overall average, and with revenue up, maybe we should have been seeing a little bit of operating leverage, yet overall margin kind of came in flat. Sounds like there is a little bit of headwind in the UK and maybe a little more cost base business in the quarters there. Is there any other moving parts to kind of the margin story that we're not aware of at this point, maybe some award fees in the quarter that – or maybe a lack of award fees this quarter that might be.

No, Joe, I think you've hit the points there, you've hit the main points. The ODC all Bill points out, is always the unknown quantity, and it's hard for us to predict that. It tends to be the variable that's least understood, and but it always brings with it profits and so we are happy to have that work. And it has a big effect on the actual margin. So we work in the areas that we have more control over, so you've heard us talk about prioritizing bids that have high CACI labor content. Bill has a focused effort going on to manage our rack rate on our labor rates because that's something we have control over and we have initiatives underway that will improve rack rate. But having said that, the largest single determinant comes from how much ODC volume we get. And I'll remind everyone again that ODC volume comes with earnings, and it improves our EPS, and our number one goal is to grow net income and the associated earnings per share. Joseph Vafi – Jefferies & Co.: Okay. Fair enough. And then could you remind us where we stand on any upcoming recompetes for the end of the fiscal year if there is some larger pieces of business out there that we should be looking at?

Randy, do you want to take that?

Sure, I'll be happy to. Actually, we already talked about earlier. We have our ETAS recompete coming up, which is a big one for us, but we're on track with that, we're well-positioned. Other than that everything else seems to be falling in place. That would be the one that I would highlight.

We'll have our next question from Laura Lederman, William Blair. Laura Lederman – William Blair: Thank you for taking my question and good quarter as well. Could you talk a little bit about – you mentioned on the acquisition front that the prices of the private companies haven't come down. Does that mean you'll kind of wait and push acquisitions into the future thinking the pricing is going to come down, or are you still expect a fairly rapid pace? Secondly, could you give what the voluntary churn and the total churn was in the quarter? And following up on ETAS, can you talk a little bit about how big that is and exactly when you expect that to be rebid or the information to come out a new one? Thank you.

Sure, Laura. First, in the M&A space, we continue to have a very active program in mergers and acquisition area, and continue to look at companies that are interested in mergers with us. And I would say that we are, given the environment we're in, the economic downturn and the tightening of credit, et cetera, while we have strong credit worthiness and availability of capital to pursue our program, we're sort of, as you said, sort of stockpiling our cash and waiting a bit to see if these valuations come down. We know they will. It's a function of how long it takes for sellers to come to grips with this reality. So we're being a little more conservative, I would say, right now in stockpiling our cash. The other question, I think, Bill, turnover, we generally do not comment on voluntary – we do not comment on voluntary turnover. I would say it hasn't changed dramatically and that we're very competitive. This is a big focus area for us in terms of retention of our people. I think the last question was back to – was back to ETAS? Laura Lederman – William Blair: Sure.

The timing of the ETAS award, is that it, Laura? Laura Lederman – William Blair: Yes.

Okay.

This is Randy. The solicitation, of course, isn't out yet, and we're expecting it in this quarter, and so, I don't think you are going to see an award until early part of next year. Laura Lederman – William Blair: And roughly on a yearly basis, how much have you been doing with that?

The value of the ETAS? Bill The run rate on ETAS? Laura Lederman – William Blair: Yes.

I don't – we have to get back to you on that. I don't think we have that in the room with us. Laura Lederman – William Blair & Company: Okay, thank you.

We'll go next to Tim Quillin, Stephens Inc. Tim Quillin – Stephens, Inc.: Good morning.

Good morning.

Good morning. Tim Quillin – Stephens, Inc.: Nice quarter.

Thank you, Tim. Tim Quillin – Stephens, Inc.: In terms of your revenue guidance, if you just annualize first quarter sales, you get a little above the midpoint of your annual guidance. So could you talk about maybe any seasonality we'll see or a drop-off from 2Q levels or how we should think about your revenue growth over the next three quarters?

Tim, this is Bill Fairl. I will go ahead and start, and Tom or Paul, if you want to add to it. Again, I'll just remind everyone that we're – we just finished our first quarter, and it was a strong first quarter. We're very pleased with it. But we have three quarters to go here. So – we don't want to get ahead of ourselves here with forecasting revenue. As I mentioned in answering previous questions, ODCs, which are a big part of our revenue stream are harder to forecast. We're concentrating on what's happening with our direct labor, our ability to hire and retain people. That's what's growing our net after tax. That looks good to us right now. Several of us mentioned during our opening remarks that we're reaffirming our guidance, so we're very comfortable with that bottom line range that we have set up there right now. And admittedly, the revenue is a little harder to see because of the ODC content in there. So given that we're only one quarter into this, I'm very comfortable with where we are right now. Tom, anything else on that?

Yes, I will add that as we go through this guidance exercise there are a large number of moving pieces. At the beginning of each fiscal year, we go through a rigorous planning process to create a good expectation of what we believe the coming year will be. Mid-year we go through another pretty detailed planning process. We are in the process of embarking upon that in November and December to finalize it. And at that point in time, we may get some more granularity with regard to the remainder of the year. But at this point, in totality, as Bill mentioned, we're comfortable with the revenue and earnings per share and net after-tax range that we provided. Tim Quillin – Stephens, Inc.: And just in terms of margins, I know you are focused on earnings growth, but is the 6.7% to 7% operating margin target still valid for the year? Thank you.

That is still a good guidance number for the year, correct. Tim Quillin – Stephens, Inc.: Thanks.

We'll have our next question from Brian Kinstlinger, Sidoti & Co. Brian Kinstlinger – Sidoti & Co.: Hi, good morning, thank you. I was curious, in your U.K. operation what percentage of revenue and what percentage of costs are in pounds or euros? And obviously, what I'm trying to get at is this quarter has been pretty crazy for currency, and how that specifically just currency is going to impact you?

Brian, – in our SEC filings we break out the UK segment, international operation. Fiscal year '08 revenue was approximately $93 million, but that is all pound denominated and gets translated into dollars. Brian Kinstlinger – Sidoti & Co.: Which then means we should see in the second quarter further pressure on the margins, even if I exclude severance just based on currency?

I wouldn't say margins, I would say profit. Brian Kinstlinger – Sidoti & Co.: Profit. Yes, you're right, sorry.

As most of you know, there has been a significant strengthening of the dollar and a commensurate weakening of the pound.

We'll have our next question from Stefan Mykytiuk, Pike Place Capital. Stefan Mykytiuk – Pike Place Capital: Good morning. All my questions are kind of cash flow related. I'm just curious, is the increase in the tax rate due to this deferred comp plan, is that non-cash? In other words, are you kind of reserving – why is that creating a higher tax rate, and is it non-cash? I'm just noticing in the cash flow statement, there is a pretty good size add-back for deferred taxes and I'm wondering if part of that is the tax rate or some other timing issue?

What I suggest is we handle it offline. The reality though it is cash taxes. The deferred compensation plan is a tax-free account, and when the market goes up, we're not paying cash taxes on investment return, and in the adverse, we do not get deductions on U.S. federal tax – Stefan Mykytiuk – Pike Place Capital: Yes, I'm just – it's kind of the latter that's at work right now, is that you are taking a hit in the plan, but you are not getting credit for it on your taxes because it's kind of a noncash move?

In a way, yes. Stefan Mykytiuk – Pike Place Capital: Alright. I will follow up with it. How much of the D&A is actually amortization versus depreciation?

Of our D&A, approximately, two-thirds is amortization and one-third is depreciation.

We'll have our next question from Patrick McCarthy, FBR. Patrick McCarthy – FBR: Hi, good morning, and thank you for taking my call. I was – you just speak even thematically about what your expectations are across each of your end markets? I would think that intuitively the DoD and Intel business looks for remainder of the year, but what about the Fed on the commercial side given the current environment? Thanks.

Talking federal civilian and the commercial market? Is that the question, Patrick? Is he there? I think that's your question. Our federal civilian work is – represents about a little over 20% of the business. We think it will hold at that ratio. As you know, that part of the government has sort of been a bill payer for the total war effort – to support the war effort and where the priority necessarily has been, but we think that – we know that the new budget that's been proposed for the next government fiscal year has reasonable increases for the federal civilian. We are actively exploring areas where we can help issue solve problems in the areas of healthcare, energy, and environment, those areas, and Department of Homeland Security is an important large customer of ours as well, and DHS is, I think, a beneficiary of plus-ups in their budget. So I say that. In terms of the commercial market space, it's a little more difficult to forecast because of what Greg said earlier, the UK is our commercial – is the part of our business, is commercial, is suffering from the global economic turndown, and the business we do there is oriented toward helping companies, lot of retail customers who are trying to determine where to place the next franchise store front based on demographic databases that we have, and that sort of – demand for that sort of work has come way down recently. Hard for us to determine how long that will last. We expect it would probably go through the balance of the year. It's a very small portion of our work, but a very profitable – historically, a very profitable part of our business. And so, I think, we're expecting and we have provided for in our guidance that the current turndown we've seen will remain through the balance of this fiscal year. Fortunately, our U.S. operations has been strong, even stronger than what we had expected and planned and has made up a good part of the erosion we've seen as a result of the tax increase and the softness in sales forecast for the U.K.

We'll have our next question, a follow-up from Mike Lewis, BB&T Capital Markets. Michael Lewis – BB&T Capital Markets: Okay. So ODCs are very difficult to predict, but with regard to your expectations on your plan in the first quarter, did they come in higher than expected, and if so, by how much?

Mike, this is Bill Fairl. They did come in higher, as to exactly how much higher they came in, I don't know right off the top of my head. Perhaps you can have a follow-up question on that.

We get back to you on that, Mike. Michael Lewis – BB&T Capital Markets: Okay. And just one more quick follow-up here. The revenue in the intelligence business is up. I think you said 40% year-over-year. Would you offer to us what the actual internal growth of the intelligence segment of the business is?

Sure. Mike, it's Bill Fairl. It splits about 50/50, so it's about 20% organic and 20% through acquisitions last year. Michael Lewis – BB&T Capital Markets: Very helpful. Thank you.

We'll have a follow-up from Cai von Rumohr, Cowen & Co. Cai von Rumohr – Cowen & Co.: Yes, if we could – you mentioned you would take offline the mark-to-market question. Given that I assume most of us are somewhat confused, and to save you the time of going through it individually for each of us, could you walk us through that a little bit, Tom? I know you have this Rabbi Trust that had a value of $42 million. Presumably, you mark this to market every quarter and so that valuation changes. Just walk us through those mechanics, if you would?

I will – again, I will try to keep that at a macro level, but, yes, we do have the assets in the deferred compensation plan in a Rabbi Trust, which creates a mark-to-market, which creates immediate kind of tax benefits, gains in the portfolio not being taxed at federal income tax rates. The Rabbi Trust assets are approximately $35 million as we speak. Those are invested typical to what you would anticipate executives of a company to invest the assets in. Certain amount of cash, certain amount of more conservative bond investments, the majority being international U.S. equity investments. There has been real tight changes to the value of those assets as they have been in everyone's 401-K or other types of retirement savings accounts which are impacting our tax rates. Cai von Rumohr – Cowen & Co.: But does that also impact your P&L, i.e. if it goes from 42 to 35, as it did, does that flow through your P&L or just – ?

Not applicable to our pretax income. Our pretax – the changes in the plan assets are 100% or close to 100% offset by change to compensation expense, indirect compensation expense. So on a pretax level, there is a 100% pension involved. It only occurs on a tax line because of the asymmetric treatment of taxes for these two accounts. Cai von Rumohr – Cowen & Co.: Got it. Thank you very much.

I'm glad you got it. Very good.

Complex.

And we'll have our next question from Brian Kinstlinger, Sidoti & Co. Brian Kinstlinger – Sidoti & Co.: Hi, Tom, I'm curious if you have any debt that comes due in the next 12 months?

No, we do not. Our term B loan revolving credit facility debt is due May of '11 and our convertible in 2014. Brian Kinstlinger – Sidoti & Co.: Okay. And my other question is on the BTA contract you won, was that a sole sourced IDIQ, or were there other players on that?

It's a multiple award. I think there were a total of six were altogether. Brian Kinstlinger – Sidoti & Co.: Last question I have is breakdown of DoD, civil, commercial, and state and local, if you have that. I didn't hear that.

That's in the release, Brian. Brian Kinstlinger – Sidoti & Co.: I'm sorry. I will get it then. Thanks.

We have our final question from Stefan Mykytiuk, Pike Place Capital. Stefan Mykytiuk – Pike Place Capital: Hi, just to finish up on my line of questioning earlier, what do you think CapEx would be this year?

CapEx this year should be approximately similar to what we've seen in the past couple years, approximately $10 million. Stefan Mykytiuk – Pike Place Capital: Okay. I'll just throw in my $0.02 as a shareholder that it seems like you guys generate – if you are going to generate $4 or so free cash flow based on the cash flow from operations guidance less this CapEx, you are going to de-lever naturally pretty nicely this year, and given where the stock price is, seems like a very unique opportunity to buy a piece of your company and wait for acquisition multiples to come down over time. So that's just my $0.02 as a shareholder.

Thank you for that, we appreciate to take your comment very seriously here. As I said earlier, we too have observed that – our stock is priced very attractively right now. I don't want to indicate that we've made any decisions, but we continue to look at all these alternatives for opportunities to invest our capital wisely, acquisitions, share buyback, and paying down debt. Frankly, all three of those bring us strong returns if we do that wisely. As we've seen with the acquisitions we did last year, their performance has been even better than what we expected. We're really glad we did those acquisitions as opposed to something else. Times are different, and we're reevaluating the landscape, and I very much appreciate your comment. Thank you.

We have no further questions in the queue at this time. I will turn the conference back over to Mr. Paul Cofoni for any additional or closing remarks.

Thank you, Shelon, for all your help today, we certainly appreciate that. And we'd like to thank everyone on the call today for your questions and your interest. It's important to us to have these open, frank communications with you, and we know that some of you may have additional questions. And as we normally do, following this call, if you could just give us about 20 minutes, Tom and Dave I think will make themselves available to address any other questions you might have. That concludes our fourth quarter – excuse me, that concludes our first quarter fiscal '09 earnings conference call. I want to thank all of you very much. Have a great day.