CACI International Inc (CACI) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CACI International Third Quarter Fiscal Year 2013 Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to Dave Dragics, Senior Vice President of Investor Relations of CACI International. Please go ahead, sir.

Thanks, Ashley, and good morning, everyone. I am Dave Dragics, Senior Vice President of Investor Relations at CACI, and we're very pleased you're able to participate with us today. As is our practice, we are providing presentation slides. So let's move to Slide #2. And about our written and oral disclosures and commentary, there will be statements in this call that do not address historical facts and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. The factors that could cause our actual results to differ materially from those we anticipate are listed at the bottom of last evening's earnings release and are described in the company's Securities and Exchange Commission filings. And our safe harbor statement is included on this exhibit and should be incorporated as part of any transcript to this call. I'd also like to point out that our presentation today will include discussion of non-GAAP financial measures, and these non-GAAP measures should not be considered an isolation or as a substitute for performance measures prepared in accordance with GAAP. So to open of our discussion this morning, here's Ken Asbury, President and Chief Executive Officer of CACI International. Ken?

Thanks, Dave. Good morning to everyone on the call. Before I begin, I want to say it is a pleasure to be here on my first earnings call, and I'm looking forward to working with each of you in the future. Let me turn to Slide 3, please. Joining me on the call this morning are Tom Mutryn, our Chief Financial Officer; John Mengucci, our Chief Operating Officer and President of U.S. Operations; and Greg Bradford, Chief Executive Officer of CACI Limited in the United Kingdom. Today, I'll comment on our third quarter results, the current budget environment and then share my vision for CACI going forward. Tom will review our financial results, and John will provide an operational overview. I am honored that the Board has selected me to lead this company through the current market environment and provide long-term value to our shareholders. I followed CACI's success for many years, and I am confident in this leadership team and the talent and offering CACI brings to our addressable market. I'm impressed by our vigilant commitment to our customers' success that is ingrained in our culture. This organization has a great sense of the government's highest priorities and fastest-growing areas of opportunity. We watch emerging market trends and have the agility to respond quickly to support our customers' missions. Since arriving here, I've met extensively with our business groups leaders and corporate staff, have shaken hands with hundreds of CACI team members, conducted strategic financial and people reviews and met with numerous customers. I joined CACI because of the people, the integrity, the excellent culture that is here, and the great opportunity to apply my more than 20 years experience in leading technology solution and services organizations that have grown in a variety of markets. Slide 4, please. Yesterday, we announced our results for the third quarter of our fiscal year '13. Our third quarter was affected by continuing budget pressure on our customers. However, we had solid operating performance, generated strong cash flow, maintained margins and our earnings per share benefited from our share repurchases. Tom and John will provide details on this quarter in just a few minutes. In our January earnings conference call, we spoke of the uncertainty among our federal government customers as they face the prospect of sequestration. Our view today is, even though the sequestration has happened and a budget through September has been signed, varying levels of uncertainty among our customers will continue as they implement the actions of sequestration. Slide 5, please. Looking ahead, we have a focused 3-part strategy to position us for a more stable market in the new normal. First is to win new business in our addressable markets. Second is to drive operational excellence. Tom will discuss this part of our strategy in just a moment. Third is to continue our successful mergers and acquisition program with a focus on our high-growth markets, which for us are Business Systems, Integrated Security Solutions, Cyberspace and Healthcare. Slide 6, please. We remain focused on the federal government marketplace and capturing more market share. Though we understand the market may be smaller in the near term, we are targeting an addressable market of greater than $200 billion annually. Given our current size, we believe there is plenty of long-term opportunity for us. To win new business, we'll continue to focus on the government's high-priority missions. That has served us well in various market conditions in the past, and we believe it will continue to serve us well in this environment. In addition to winning new business, we will be focused on increasing earnings and cash generation by increasing the solutions content of the mix of our business. Today, our solutions portfolio represents just over 40% of revenue. Number two, pursuing and winning more fixed-price contracts. And three, pursuing and winning larger contracts. On that last point, I'm also introducing a new element in our business development strategy. I call it campaign pursuits. Campaigns are larger contract pursuits that might ordinarily not be on the radar of just one of our business groups, but would require cross collaboration with multiple groups. We will manage these campaigns out of my office with a small team of people who will receive support from the groups -- the business groups as required. I've successfully used this model in the past, and I'm quite confident it will work here at CACI. CACI's business development program is fundamentally sound. Our win rates on recompetes and takeaways in the third quarter and year-to-date are in line with the last several years. That being said, we have organized and aligned our business development strategy and methods to better position CACI to capture more opportunity in our marketplace. To illustrate what I mean, business development now reports into my office. And we are also transitioning our business development resources from a centralized model out into our business groups to better meet the needs of our customers. We consider this a best practice as it will enhance our ability to rapidly respond to our customers' needs. This model also directly ties accountability and program delivery to each of the business groups. My focus is to ensure that we complete this transition efficiently and effectively. As the fog of sequestration lifts and the federal market begins to stabilize into a new normal, I am confident that the investments and attention we are making in business development will improve our ability to execute with agility and discipline to identify and win new business. Slide 7, please. The third part of our strategy, M&A, is a high-value core competency and will remain a top priority for us. M&A brings us new customer relationships and capabilities, fills gaps in our portfolio of solutions and services, and helps us to better penetrate markets we serve. All of our acquisitions have to meet rigorous thresholds. We have to align with our market-focused strategy, be accretive to our earnings and provide returns greater than our cost of capital. As we look ahead, there will be more acquisitions in our future. My focus is and will be on strategy, business development and the longer-term growth of CACI. John Mengucci and our business group leaders will focus on our operations, ensuring that we are competitive and consistently perform at the highest levels of excellence with integrity. Tom Mutryn and team will ensure that our financial systems are in order and will drive our M&A process. This tightly integrated leadership team ensures that we are executing on the right priorities: Longer-term growth, driving operational excellence and providing differentiating value to our customers. Over the longer term, we expect this approach to winning new business, operational excellence and continuing to make acquisitions will increase our market share, grow our earnings, improve cash generation and drive long-term shareholder value. With that, let me turn the call over to Tom for some more insight into our financial results. Tom?

Yes. Thank you, Ken, and good morning, everyone. Our third quarter results reflect the continuation of the environment we have experienced since the latter part of the year, characterized by uncertainty, delays and changes in government procurement processes. Despite the environment, we were able to increase our earnings per share, maintain our net income levels, generate solid cash flow and increase direct labor. Slide 8, please. As we explained in our release and on previous calls this fiscal year, 3 material onetime items positively impacted last year's results. To provide better insight into our fiscal year '13 performance in more meaning comparisons, we are comparing this year's results to adjusted fiscal year '12 results. Next slide, please. For the quarter, revenue decreased 2.3%, with a 5.2% increase in direct labor and a 5.9% reduction in other direct costs. This other direct costs reduction was driven by lower pass through-related activity associated with the draw down in Afghanistan, as well as slowdowns in procurement activity related to government budget pressures. This greater-than-expected ODC decline resulted in a lower revenue. Our direct labor, by far the most profitable part of our business, now represents 43% of direct costs compared to 40% a year ago. Our direct costs and selling expenses were down 3.9%, primarily due to lower bonus and stock compensation expenses. Third quarter net earnings, which include $2 million of severance expenses, were essentially flat with last year's adjusted level. Earnings per share increased 18%, driven by a lower share count as we returned capital to our shareholders last summer in the form of a share buyback. Slide 10, please. We generated solid third quarter operating cash flow about $51 million, $142 million year-to-date, and are on track to realize $225 million of operating cash flow for the year. On a trailing 12-month basis, free cash flow was $246 million or $10 per diluted share. This translates to a free cash flow yield of 18.2% at a $55 share price. Our net debt at the end of the quarter was $628 million and our net debt to trailing 12-month adjusted EBITDA leverage ratio was a modest 1.9x. Slide 11, please. Based on our current forecast, which reflects our year-to-date performance and our best estimates as to the effect of sequestration and customer behaviors for the rest of the year, we have revised our fiscal year '13 guidance. We expect revenue to range between $3.65 billion and $3.75 billion and our net income to be between $151 million and $157 million. This guidance reflects expected severance-related expenses of $3 million to $5 million in the fourth quarter, as we continue to ensure our organization is efficient and properly sized as we move into the next year, which brings back to fourth quarter year-over-year increase in direct labor and a decrease in other direct cost comparable to the third quarter. We expect our full year operating margin to be comparable to last year's adjusted margin of 7.4%. With that, I'll turn the call over to John. John?

Thanks, Tom. Let's turn to Slide 12, please. First, let me say, I'm pleased with our third quarter performance, our operational accomplishments and leading indicators in what will continue to be an uncertain environment. During the quarter, we received $555 million of contract awards, this represents a 1.5% growth over third quarter of last year with 1/3 of those awards coming in our high-growth market areas of Business Systems, Cyberspace, Healthcare and Integrated Security Solutions. Driven by budget uncertainty, our customers' short-term behavior continued to include limited new program starts, more delays and contract bridges, making our industry's ability to predict contract awards more difficult. Driven by continued budget uncertainties, our customers are allocating funds on a more incremental basis than they have in past years. In response, at the beginning of this fiscal year, we moved to a metric of current year funded revenue to provide a better indicated -- a better indicator of funding. At the end of our second quarter, 87% of our expected revenue was funded. Today, I'm pleased to report that we are virtually 100% funded for the remainder of FY '13, even during these uncertain times. And despite these challenging budget conditions, we retained a funded backlog of $1.9 billion, or 6.5 months of revenue, which is comparable to previous years. As Ken noted in his comments, we continue to focus on operational excellence. During our third quarter, we drove cost efficiencies, we aligned our organization to maintain the agility necessary to be successful in today's marketplace and obtained key credentials to differentiate our solutions and our services. In March, we announced the creation of 2 business groups. C4ISR systems and Mission Systems and Services, from our former Mission Systems group. We did this to increase customer and operational focus in our C4ISR and Integrated Security Solutions market areas, as well as drive cost efficiencies throughout our business. We also earned 3 significant enterprise credentials this quarter. The first was an ISO 28000 certification in supply chain security management. This has been a key pursuit of ours for some time and is critical to our logistics and material readiness strategy. Second, we were appraised at CMMI Level 5 for services, critical to growth in the market areas that we serve. In both cases, CACI became the first U.S. company to earn these credentials, an affirmation of our strategy to invest and differentiate our offerings in these market areas while delivering them with excellence. Finally, our U.S. Operations revalidated its CMMI Level 3 rating for software systems engineering continuing our long tradition of operational excellence across the company. Looking forward, we are encouraged by our opportunity pipeline containing over $6 billion of pending contract awards, 40% of which are in our high-growth market areas. We also plan to submit greater than $12 billion in proposals over the next 2 quarters. Again, with 40% of that work in high-growth market areas. We continue to grow our direct labor, illustrating our focus on high-value, non-commodity revenue, which in our estimation, is less likely to be procured with an LPTA acquisition strategy. And we are proud that during this time of budget constraint, CACI has continued to experience no program cancellations and continues to receive optioneer contract awards. While uncertainty is a current reality of our market, our customers remain committed to their missions and our high-value solutions and services. And we will continue delivering cost-efficient and quality solutions our customers just as we have done for our more than 50 year history. With that, I'd like to turn the call back to Ken.

Great. Thanks, John and Tom. Thank you for your remarks. Before we go to Q&A, I would like to thank the CACI team for another solid quarter of performance during one of the more challenging times that many of us have seen. CACI's dedicated people work hard and work smart to anticipate our customers' needs, deliver solid program performance and provide long-term value. We are unwavering in our dedication to our customers and are committed to delivering the solutions and services they need for mission success. I am proud to be a member of this team and appreciate all of their contributions. Slide 14, please. I would like to share the priorities that I have established with the CACI team. First is to protect our existing business base. Second is to grow in the high-growth areas of our addressable market. Third is to achieve higher program performance and to credential our value delivery systems. Four is to optimize our program portfolio and to improve the efficiency of everything we do to drive sustainable earnings improvement. And last, deploy cash for M&A to support expansion of our business. I believe that achievement of these priorities will allow us to continue to provide excellent performance for our customers and shareholders into the future. Slide 15, please. Looking ahead to June, we will provide you with more information on our view of FY '14 during our annual guidance conference call. As we have done in the past, to develop that guidance, we are conducting a careful, thorough review of our contracts base and our new business opportunities. We will also stay very tuned to the actions that our customers take to implement budget reductions. Even in this challenging environment, our goal is to annually increase earnings and provide long-term value for our shareholders. We look forward to providing FY '14 guidance to you in June. In closing, we remain confident in our strategy and our ability to grow in our addressable market. With our focus on the government's high-priority missions, we believe there is ample opportunity to capture market share beyond FY '13. We believe our operational excellence, our ability to deliver cost-efficient and quality solutions and our agility will drive our results. Our ability to generate strong free cash flow will support our M&A program as we acquire new relationships and capabilities. As we transition through the current environment and into the new normal, we believe the combination of these factors will result in increased shareholder value. Once again, thank you for joining the call this morning and I'm looking forward to working with all of you. With that, let's open up the call for questions.

[Operator Instructions] Our first question is from Brian Gesuale of Raymond James. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Question for Ken here. Ken, you've been in the seat for a fairly short period of time. Can you talk about any capability or customer areas that need the most investment, from your perspective, with a little bit of granularity as you talk about those growth areas that you want to really beef up over the next couple years?

Yes, Brian. Thank you. Thank you for the question. First of all, let me tell you I'm happy to be here. And there are some areas that I'm -- we are looking. We talked -- you've heard us refer to the high-growth areas, and those are going to be Business Solutions, Integrated Security, Healthcare and Cyberspace. All 4 of those areas are what we term our high-growth markets. Now, we see reasonable forward-looking budget for each of those areas. There -- 2 of those, Cyberspace, of course, and Healthcare, are relatively new and emerging kind of things and, of course, national priorities. We've made a couple of acquisitions in the recent past in Emergint and IDL to give us a purchase inside of the Healthcare space. We'll be looking to do the same when we find the right sort of properties for the Cyberspace activity. And in the past, we bought Delta Solutions and I think one other that doesn't come to mind at the moment, to sort of -- to bolster our position with the business systems. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Great. That's very helpful. Just a quick follow-up. This might be for John. John, you mentioned $6 billion in submitted contracts out there are awaiting award. Can you talk to the mix of new versus renewing contracts and then maybe give us an outlook of what the renewal piece of the business looks like next year as well?

Sure, Brian. Thanks. If I were to talk through the $6 billion, about 50% of that is in new business, about 50% of that is made up of our recompete business. If I look at the difference from the $7.2 billion we had to the $6 billion moving forward, clearly, about $555 million of those awards, we received in the third quarter as wins. Some of those dropped dollar values were due to recompetes that were bridged for us. And then some of those procurements were either losses or they were cancellations. What's exciting about the $6 billion and the $12 billion over the next 2 quarters is that greater than 40% of those bids that we submitted and bids that we look to submit are in our high-growth markets of Business Systems, Cyber, Health and ISS.

Our next question is from Bill Loomis of Stifel. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Just on the high-growth areas. If you can -- how much does that represent in revenue now as a percent? What is it grow in the quarter, those 4 areas combined? And then I have a follow-up after that.

Okay, Bill. Hey, this is John. We like to look at our high-growth markets and our high-volume markets. And the way we're measuring those today, Bill, is by the percentage of awards that we're receiving in those respective market areas. Over the last 9 months, we received about 1/3 of our awards in our high-growth markets and about 2/3 in our high-volume areas. For us, just as we started moving to these market areas, for us, that's a better representation of what we can expect in both our high-growth and our high-volume markets. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: So you're saying that this is -- that high-growth areas represent about 1/3 of revenues today in the third quarter?

It's about 1/3 of our awards, Bill. And that's roughly equivalent to 1/3 of our revenue. Although that revenue to awards mix changes quarter-over-quarter. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: And just to carry on, on that, just -- so 40% of your bids are in the high-growth areas. Why isn't it higher? Why isn't it 60%, 70% if these areas are growing more rapidly in the marketplace overall and then the others are declining? Why aren't we seeing 60%, 70% of your bids out in these high-growth areas?

Yes, thanks. So the way I look at it, if we have 4 market areas in our high-growth area. We have 6 market areas in our high-volume. That has been long-term high-volume business. So when I look at a mix of -- we're generating about 30% of our awards in our new. We're on a path towards 40%. Some of those high-volume markets are rather large markets for CACI. We can look at our intelligence market, look at our C4ISR market. Those are nearly $500 million to $1 billion market. So as we look at some of the recompete work there, it will naturally be slightly higher. As we move over the longer term, we would like to see that ratio change so that far more of our future bids are in our high-growth versus our high-volume area.

Our next question is from Brian Kinstlinger of Sidoti & Company. Brian Kinstlinger - Sidoti & Company, LLC: The first question I had was your proposal's awaiting decision. I think what you mentioned is, it went down by $1.2 billion and you won $555 million. So just $700 million are the losses or contracts that didn't -- that got canceled potentially, but I assume you also bid on a bunch work, too. So maybe you can just talk about this and reconcile it with -- you mentioned with your win rates are unchanged.

Brian, this is John. So let me try to walk down from the $7.2 billion to the $6 billion and how we think that looks moving forward. If I -- typically, the $1.2 billion delta, beyond the awards, we had many proposals in for 1-, 2-, 3-year recompete work. What happened during the third quarter is that our customer continued to bridge a fair amount of that work. So as an example, our -- if we had a $200 million 3-year award in part of our $7.2 billion pending award queue, that number goes to 0. What we received was a smaller dollar value bridge, which is in our awards, but that's going to take an awful lot of dollar value out of our $7.2 billion area. Some of those bids that we had submitted have been losses. And frankly, some of those procurements that we saw coming have since been canceled. If you look at the delay of awards, I don't think we've ever seen a time where we're looking at anywhere between 3 and 12 months worth of delays between the time we submit a proposal and between the time we can begin to generate revenue on that. So that increased window -- where it used to be 0 to 3 months is now 3 to 12 months. That's going to drive some of that factoring, trying to do a year-over-year comparison or quarter-to-quarter of the $7.2 versus the $6 billion. Brian Kinstlinger - Sidoti & Company, LLC: Great. And my follow-up is, how many -- how much did you submit were actually bids in the quarter that added to that $6 billion? And then, finally, the awards from new business, please?

Yes, Brian. I don't have the first number for you off hand. If I look at our -- of the mix of our $555 million of award, about 25% of that -- of those awards were in our new business, about 35% were in recompete side and the remainder were in mods to existing business.

Our next question is from Mark Jordan of Noble Financial.

A question relative to your company's exposure to the wind down in Afghanistan. What percent of revenues are -- or what dollar amount of annual revenues do you believe you will have to replace over the next 24 to 36 months in essence as we scale -- meaningfully scale back our exposure in the Persian Gulf, including both direct activities in theater and any direct support that might be exposed to being truncated as the wind down occurs?

Thanks. Thanks, Mark. This is John. We started off FY '13 with about $240 million worth of work related to the Afghanistan war effort. About $160 million of that was in the other direct cost area. We are on track with the drawdown of ODCs through fiscal year '13. If we look at our ODC, 5.9% decrease over the third quarter, what we have changed in our updated guidance is the level of other pass-through ODCs, as well as other material purchases that are being delayed beyond our Q4. So we are on track against the $160 million number and we look to fill that in with the other material and more highly profitable direct labor business as we move forward.

Okay. Second question, you mentioned, I believe, that you had $2 million of severance in the third quarter and expecting $3 million to $5 million in the fourth. Specifically, what areas are you finding that you specifically have those severance requirements?

Yes, Mark. This is Tom Mutryn answering this call. The third quarter severance is kind of easier to identify. There were a couple kind of individuals, one, highly visible, who departed CACI, and we incurred certain severance associated with that in particular situation. With regards to the fourth quarter, as we're putting together our plans for fiscal year '14, it's becoming apparent that we need to make sure that the infrastructure of our business is properly sized to the level of operation. And we're in the process of sorting all that out. A lot of work is being done to put our budgets together. It's not finalized yet. But we're looking across the enterprise to see where we need to make some kind of decisions to rightsize the organization. So at this point in time, we do not have the specifics of that. But for planning, in particular, for our guidance, we felt it was appropriate to put a number in there, $3 million to $5 million, for some of the anticipation of activity.

Our next question is from Joe Nadol of JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: First question is on business development in changes you're making, Ken. In the past, the company has had and still has a pretty high amount of ODCs, subcontract or pass-throughs, material pass-throughs, et cetera. What are you doing, if anything? I noted that you said specifically you're going to focus on direct labor, on growing that piece of the business. What are you doing specifically to emphasize that in terms of incentives or other metrics that you're establishing within the company?

Thanks for the question, Joe. And -- as we look at business development going forward and sort of the change in this business. As the war in Afghanistan winds down, that part of the business is going to be harder to go and pursue. We think that we want to emphasize our solution -- we know that we want to emphasize our Solutions business going forward. That's the Business Systems solutions. The stuff that we do in Cyberspace. The things that we're doing in Healthcare. And so the -- I don't know how to describe it in terms of incentives. The metrics that we're going to be looking at are the kind of investments, the amount of investment that we're putting into those things. The amount of time that we're investing in the pursuit of individual capture activities, how we measure the quality of the wins and our effectiveness in applying our SG&A resources or B&P resources are going to be the measures that we look at. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just on the acquisition front. I noted that you specifically said that one of the key, I think, 3 criteria for M&A is a threshold of your cost of capital, having to exceed that threshold for the acquisition to make sense, which sounds good. I'm just wondering how you define your cost of capital. You noted during the presentation here that you have an 18% free cash flow yield. And clearly, $1 of -- $1 towards acquisitions, that's $1 that can't go towards buying stock in at an 18% free cash flow yield.

Tom's going to take this question. He looks eager for it.

Yes. So the criteria we've used is kind of traditional finance 101 criteria present values and internal rates of return, which are essentially the same construct. And our weighted average cost of capital, weighted average debt in equity is probably less than 10% right now. And so we are looking at our acquisitions with that type of kind of discount factor in place. It turns out, over the past several acquisitions, we expected our internal rates of returns to those acquisitions to generate between 15% and 20% internal rates of return. So we're buying companies which we believe, at the time of the acquisition, are going to generate internal rates of return significantly higher than our weighted average cost of capital. And so that is a criteria we use. I think your question also gets to the question of should we buy companies or should we buy CACI stock itself, given the valuations of CACI stock? We do not believe those to be mutually exclusive, and in the past, we've done both. We've been pretty active with regards to acquisition and we've also been active in repurchasing shares. As we sit here today, we believe that over the next 6 to 12 to 18 months, there may be some very interesting acquisition opportunities. Some in the medium run rate size that we've seen in the past. But there may be some larger acquisitions opportunities. And we believe its prudent to have the financial flexibility to pursue those larger opportunities if they become available. And as a result of that, we're focusing our capital deployment strategy on M&A. And I will say that this is a strategy that gets reviewed on a periodic basis. The Board, at each of their Board meetings, reviews our capital deployment strategy. And at this point in time, we believe the best use is to focus on long-term shareholder value by buying good companies at effective prices.

Our next question is from Robert Spingarn of Credit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: I am actually going to ask a couple of questions, it might be more for Tom. But just on the heels of that, I'm going to cut to the chase. On the share buyback versus M&A. Tom, based on what you just said, would it therefore be unlikely that we'd see the same kind of significant buyback that we saw in June of last year?

Yes, I'm going to -- I'd kind of defer to that question specifically. And I don't want to put a likelihood or unlikelihood with regards to that. As I mentioned, we evaluate our capital to deployment and our share repurchase activity on a regular basis. The Board is obviously the key determinant here. And the criteria we look at is what is the acquisition pipeline? Do we expect to do a lot of deals in the foreseeable future or is the pipeline relatively thin? What is our cost of borrowing? What is the kind of market outlook? What is our share price? In weighing those criteria, on a real time basis, we'll make that decision. Sometimes the share repurchase activity has been opportunistic where we have taken advantage of stock price in the marketplace. And so I don't want to handicap the probability of us kind of moving forward with another share repurchase. Robert Spingarn - Crédit Suisse AG, Research Division: And I know you don't want to do that. But the reason -- and you know why I asked the question, it was just such an important component of your introductory guidance last year. And of course, with that coming up soon, I figured it was relevant to ask about that.

No, I don't mind you asking that. And that's fine. I think the good news is, is that, as I mentioned, we're focused on growing kind of earnings, both net income and earnings per share, as well as cash flow. This past year, our net income for the quarter was essentially flat. Earnings per share increased 18% due to the share repurchase. And we realized the value and the leverage of the share repurchase activity. But at the same time, we also realized the long-term value of acquiring companies. And that is the cornerstone of our DNA.

Our next question is from Cai Von Rumohr of Cowen and Company.

Yes. So 2 questions -- 2-part question. First, you mentioned the severance costs. What percent of those costs do you expect to be allowable and therefore, recoverable? And secondly, you mentioned that bonus accruals were down. Could you give us the level of bonus accruals in the third quarter and last year, and the 9 months this year and last year?

Yes. This is Tom. With regards to severance, the majority of the severance cost is allowable. Severance is an allowable cost assuming that the severances are paid consistent with published and approved policies. And we're paying severance in accordance with our published and approved policies, and so the majority of that will be allowable. Secondly, in terms of kind of bonus expense, for the third quarter, our bonus expense this year is approximately $16 million below the level of last year. I do not have the year-to-date number. I can provide that to you separately, Cai. The reason why the bonus is down is we have -- a good portion of our compensation is variable based on company performance metric. And clearly, we are south of where we want it to be this year, vis-à-vis our initial guidance. And as a result of that, cash bonuses are down significantly. For the third quarter, we had accrued certain bonus expenses, annual bonus expenses, in the first and second quarter. And as it became probable, we would to meet these particular targets we had relatively large reversals of the month that were accrued in the first and second quarter. The good news for the shareholders is that we're aligning compensation with the objectives of the shareholders. And as we do not meet the performance metrics we put in place, the benefits flows to the shareholders and we're able to maintain a level of earnings through the reduction of bonus expense.

So that as we think about the fourth quarter, presumably the net bonus accrual will be a little bit higher because you've already reversed the first and second quarter. And the severance costs, really, are not going to be a heavy hit against the P&L because they're allowable. Is that the right way to think about it?

Yes, that's correct. When you say allowable, though, let's be clear. Approximately 50% of our work is cost plus. And an allowable cost means that either we recover 50% of a expense or we realize the value in our P&L of a reduction in expense. And so our -- the kind of rule of thumb is we'll put a 50% factor on those particular expenses.

Our next question is from George Price of BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: Wanted to just kind of -- going back to the guidance. The prior fiscal '13 guidance was reiterated as recently as February 22 and was supposed to -- incorporated the impacts of sequestration. Can you kind of talk a little bit more specifically, maybe about the factors that drove the reductions in guidance and kind of how that played out? What your clients told you. What they were telling you then versus what they're telling you now?

Yes, George. This is Tom. I will start then I'll turn it over to John. The first factor to keep in mind is the severance expense. We incurred severance expense of approximately $3 million pretax in the third quarter and we expect $3 million to $5 million pretax in the fourth quarter. And that is material, and that is one of the key factors in the reduction of the guidance. Those, hopefully, will be onetime type of expenses and that will prepare us to have the right organization as we move into '14. And the second part of the question deals with what's happening in the underlying operations part of our business, and John can best speak to that.

Great. Thanks, Tom. George, I'm going to attempt to provide sort of -- I guess what I would say is maximum transparency as to what we're hearing and actually try to relate back to what -- how that's different and how it's the same as what we've -- we're experiencing during our last call. Clearly, it's a new environment out there with a lot of uncertainty, still. What we're trying to do is attempt to reflect what we're hearing from our customers, and we do recognize that this continues to evolve. I've been out there talking to many of our customers, as have our RPMs, as have our business group leaders, and one thing is certain. We continue to not see changes in the pace of awards. Now have we received awards? Yes. Are they back to the pre-FY '13 levels, where from bid to beginning of revenue generation, that was a period of time between 1 to 3 months? No, it haven't. So they continued to delay awards. But we truly believe that after March 1, at least by the May 1 time period, we would see that type of award delay, track record improve as we found better clarity. We do continue to see customers, bridge our contracts. And that does push our recompetes out. On the positive side, that does support revenue continuation as well earnings, but it doesn't support year-over-year metrics of awards for funded backlog. As we talk about funding, we have seen more in incremental funding. That aspect, George, has not changed from where we were the last call. We're seeing more incremental funding. Again, good for support of our current quarter revenue, not as good when we look at year-over-year comparators for long-term funding, which is why at beginning of FY '13, we did consciously move away from looking at year-to-year measures and then look at every program we have within our revenue guidance, is that revenue supported with current time funding. In addition, we are seeing spending changes around material buys, not war-related ones, but non-war related ones. Some of these material buys for us have been in our third and fourth quarter for years. And as the delays have hit new awards, delays are also hitting our acquisition plans also. I've been out talking to the acquisition commands. And as the number of awards have delayed, some of the things that used to be routine are no longer routine. So that's what we're hearing from our clients. Now on the positive side, we are getting some clarity. But I think we would all tend to agree that it's not as quickly as everyone, including us, was expecting to be able to see. So were we leaning forward during our last earnings call? Perhaps. But it was all based on some initial discussions with clients, where we believe that we would be learning more about their forward looking budget process as going forward. In response to that, we are absolutely focused on ensuring we have funding so we're able to close fiscal year '13 in quarter 4 and out in lines with our current guidance. We continue to work more cost efficiencies across the business because what's most important to us is to maintain competitive rates. We continue to stay tuned to where our customers go next. We have many, many clients, George, that are changing direction on a weekly, or as a minimum, on a monthly basis. We're going to continue to bid, not only to win, but to perform. We're a 51 year-long company. We pride ourselves in operational excellence. And when we set our pricings out there, we're going to continue to bid, not only to win, but to ensure that we can perform. So I hope that provides at least some compares.

Our next question is from Tobey Sommer of SunTrust.

This is Frank in for Tobey. Most of my questions have been answered. Just a quick question on cyber security. Are you seeing any changes in margins with new work there? Or any change in terms of growth rate trajectories looking out?

Frank, I don't think -- this is Ken. We have not seen any appreciable change in the Cyberspace with regard to margins or profitability at all at this point.

Yes, Frank. This is John. We recently won a $12 million cyber job. We can't do a lot on discussing who that client plan is. That one happened during the third quarter. And even as late of an award that came in the end of April, we haven't seen any margin pressure there.

Our next question is from Steven Cahall of RBC.

Just a quick question on the fourth quarter. If I look at the revenue guide for the rest of the year, there's that $100 million swing there that looks representing maybe about 10% of fourth quarter sales. So what is the swing factor that's in there since I know you've got about 100% funded? And how much of that is sequester? And related to that, can you quantify maybe what revenues in the third quarter would have looked like without a sequestration? I know that's hard thing to do, but any color would be great.

Right, Steve. Let me -- this is John. Let me take a stab at that one. As we look at the fourth quarter, I think when we ended -- I'm sorry, let me actually move back one. When we look forward at the end of our second quarter, we were looking at a funded revenue that was in our plan, when we had a guidance of $3.7 million to $3 9 million. So what we were looking at is about 80% to 90% of our $3.8 million roughly revenue was going to be funded. What we saw happen in the third and fourth quarter was a much deeper drawdown of the other direct costs. Some of those year-over-year material buys, we had in the third and in the fourth quarter. So although the drawdown from Afghanistan was planned, we did not expect the higher-than-planned lash of other material purchases. Some of that came with delay of new awards that had material content in it. As we look at -- what's now within our guidance range, we're in the $3.65 million to $3.75 million range, with the center point being in the $3.7 million area. We're very confident of the funding that we have in-house and that, that will support our FY '13 guidance. It never protects us against clients making run rate changes. But we have a fair amount of run rate changes that we've seen. We believe we have those accurately captured in this updated guidance. I hope that answers your question there, Steve.

Yes, and is it fair to say if we just maybe tier those a little bit that OCO versus sequester, that would you put one or the other as a bigger risk factor for the next quarter?

Well, Steve, let me help with that as well. As we went into the third quarter, we expected ODCs will increase 5% to 7%. And they were actually down 5%. And that decline in ODCs represents around $40 million to $45 million worth of revenue. And that, we believe, is largely sequester/government pressure-driven. And we expect that similar behavior to occur in the fourth quarter. But one could say that approximately $100 million of the revenue ODCs in the third and the fourth quarter were due to reductions in material purchases, not Afghanistan related, but budget pressure-related. That's how we're looking at it.

We'll move onto George Price of BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: Just following up on my prior sequestration question. Just, John, I wanted to get a kind of a sense of where you think you are, or where we think industry is, process of your customers identifying how they're going to implement the cuts under the sequester and communicating that to industry? Obviously, to you guys, but as best as you can tell to broader industry. Generally, my -- from what I've heard is there's generally still fairly thin communications. It seems like maybe you're starting to get more detail. But if you could comment on that, I'd appreciate it. And then I have one more question.

Sure, George. George, this is Ken. Let me take the first part of this question and then I'll pass it onto John who'll do the high-low on the -- I mean the thing that we're really looking at is sort of some timing events that are coming up in the future. First, I think is what Secretary Hagel is going to see at the end of the month during his sort of strategic rereview of where DoD is going. Some people are postulating that we may see a re-prioritization of where their spending patterns are, and that may be why we've seen such a slowdown in awards and priorities and the difference between this amount of furlough or that. And so basically, the uncertainty that's gripped that part of the market. Next, I think, we're going to be looking at in the September timeframe, the discussion about debt ceiling negotiations between the Congress and obviously, the administration. Finally, the President's budget got a come in to play here as well. And all those, to us, represent sort of key milestones around and whether the right decisions are made to lift us out of or change the notion of sequestration or really establish what the new normal is going to be. I think John's got some other details down below, but that's how we're looking at it from a macro view.

Thanks, Ken. George, so I guess, first off, what we have experienced and what I personally have, I've been out there a lot over the last 90 days. I wouldn't say that communication is an issue. We've enjoyed some great client relationships. So I don't see that the communication or the lack thereof is what's causing some uncertainty. What I've learned is that we have clients that are still learning and understanding this is the first task for them. They were -- they've been in a CR-like budget world. They then receive their budgets then sequestration came out. I think what we have our -- I'm going to try to break it into our 3 different client sets. In the Intelligence space, we received some very early on, very close to March 1, some guidance as to how the next 6 months was going to look. Most of that has played out well. However, I would be remiss if I didn't tell you, some of that direction changed month-to-month. On the defense side, we are seeing some run rate changes for some of our direct labor work and we already talked about our earlier usual bulk material purchases. I see our customers not canceling those, George, but they're actually holding on to those funds, working through, is this what I want to spend this amount of money on now, because they're not quite sure what that budget level is going to be looking forward. So although we believe as it got further in the government fiscal year, that would allow them to be able to free some funding up. Some parts of the defense department have, some haven't. In the federal civilian area, we've had a lot of discussions with those clients. And we're seeing some run rate changes. We're also seeing a lot of freezes, George, which is they're not canceling, they're just not spending those funds. So when I look at the sum of all of that, what's concerning to us is, by this point, we would have expected more clarity. We don't have that yet. So the best we can do is give an absolute estimate of revenue within our plans is that funded. So I hope that at least answers part of your follow-on. George A. Price - BB&T Capital Markets, Research Division: It does. And then just a second question kind of segue from that is maybe you could comment, as we move through the back end of GFY '13 into GFY '14, do you think that we'll see any sort of typical flush activity at the end of GFY '13 or how might that be impacted by the sequester? Might that be more muted? And you have any initial thoughts going into '14? Do think we're going to start with CR? Just -- I know it's obviously tough to call, but would love to hear your thoughts.

Okay, George. This is John. I'll start of and then I'll pass it over to Ken. I think just as our fiscal year comes to a close, we have better clarity because the actual time delta is less. I do believe that clarity will eventually prevail as the government gets closer to their Q3 and their Q4. But I can't say on an absolute client basis, but just from net to net time delta, they will be closer to at their end budgets are, we should have better clarity. As for anything looking at FY '14, I -- other than the mix of our business, it's really hard right now. Our job over the next 3 months is to continue to keep the dialogue open with our customers and not only understand how they're going to close FY '13 -- their FY '13 budget but what they'll have in place in FY '14. And Ken, from a higher macro level?

Well, I think the question about, are we going to have another CR? I mean, that's been the world for 4 to 5 years. And I don't see any sign that it's about to change. And so I think that's probably part of what we need to be planning against. So meaning, we certainly planned FY '13 against the CR-type of spending. I'm not -- I don't know -- I'm hoping from the earlier dialogue about the -- that people are tired of dealing with this uncertainty that there will be a sort of renewed sense of urgency about getting some clarity into how we're going to run the government and how that's going to affect the rest of us in industry.

Our next question is from Brian Kinstlinger of Sidoti & Company. Brian Kinstlinger - Sidoti & Company, LLC: Two questions. The first one please is you said 100% of your revenue guidance is funded. Is that the low end or mid-point?

Brian, this is John. That would be at the mid-point level. Brian Kinstlinger - Sidoti & Company, LLC: Great. And then my second question is last night, a competitor reported they've got now 70% of the revenue at cost plus. And I don't expect you, obviously, to comment on their business. But you have 50% of your proposals in recompetes. So I'm wondering do you expect a major shift to cost plus as you obviously, have a decent amount lower in terms of cost plus revenue?

Yes, Brian. This is John. I don't see the mix changing. In fact over the next 6 months worth of bids that we're submitting. I don't have it in front of me, but the mix is relatively consistent with what we have been experiencing.

[Operator Instructions] Our next question is from Steven Cahall of RBC.

Yes, just a quick one on the pricing pressure and bid and proposal. I know it's something you've talked about has accelerated since kind of late last fall. In the quarter, was it better, worse, same? And any color is great.

Okay. Thanks, Steve. This is John. I -- we haven't seen any change in the use of our LPTA. If we talk about our -- if we're talking about pricing pressures in the environment that we find ourselves in, clearly, the government budget pressures are doing -- are increasing. Government's still driving better buying power 2.2.0. One portion of that solution is moving more towards LPTA. I think the other thing we're seeing is we're seeing many more competitors within our marketplace. I made a comment earlier about pricing decisions within CACI. We'll continue to be focused on winning, but also being able to perform to the lifting within those tasks. What we're doing against some of those pressures, continuing to invest in driving lower-cost solutions. We've been talking about that all during FY '13. We've seen very good success rates where we do that. We've seen not so good success rate when we don't. We're going to continue price focus on performance. We're working cost efficiency. Tom talked about that. Ken also did. And because all of those cost efficiencies are in support of competitive cost, cost rates. Then as Ken also mentioned, we are enhancing our business development organization, because in this marketplace that we're in now, we believe one winning solution is to ensure that we're connecting our organizations closer to the business groups.

Our next question is from George Price of BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: One more. Just that CACI, at this point, the only one of the sizable public pure-play services firms without a dividend. Notwithstanding the commentary, Tom and others have made on the focus in M&A, but not -- that doesn't necessarily exclude other actions, but the discussion was primarily focused on share repurchases. I was just curious if you have any updated comments or thoughts on the dividend?

Thank you. No, we do not have any updated comments on the dividend. Capital deployment, first and foremost, M&A. Secondly,returning funds to our shareholders in the form of either a share repurchase or a dividend is something that we consider on a regular basis, and at this point in time, it is what it is. We are focusing on M&A and some share repurchases. And we do not have a dividend as we speak.

Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to Ken Asbury for any further remarks.

Thanks, Ashley, and thanks for your help on the call today. We would like to thank everyone who dialed in or logged in -- or logged onto the website for their participation as well. We know that many of you will have follow-up questions, and Tom Mutryn and Dave Dragics are available for calls later today. So this concludes our call. Thank you, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day. Speakers, standby.