Ladies and gentlemen, thank you for standing by, and welcome to the CACI International Third Quarter Fiscal Year 2012 Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Dave Dragics, Senior Vice President of Investor Relations for CACI International. Please go ahead, sir.

Thanks, Kevin, and good morning, ladies and gentlemen. I'm Dave Dragics, Senior Vice President of Investor Relations of CACI International, and we're very pleased that you're able to participate with us today. Now as is our practice on these calls, we are providing presentation slides. And during our presentation, we'll also make every effort to keep all of you on the same page as we are, so let's move to Slide #2. Before we begin our discussion this morning, I'd like to make our customary but important statement regarding our written and oral disclosures and commentary. There will be statements in this call that do not address historical fact and as such, constitute forward-looking statements under current law. These statements reflect our views as of today and are subject to important factors that could cause our actual results to differ materially from anticipated results. Now 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 of 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 in isolation or as a substitute for performance measures prepared in accordance with GAAP. Now let's go to the next slide, please. And to open up our discussion this morning, here's Paul Cofoni, President and Chief Executive Officer of CACI International. Paul?

Thank you, Dave, and good morning, everyone. With me this morning are Tom Mutryn, our Chief Financial Officer; Dan Allen, President of U.S. Operations; John Mengucci, our new Chief Operating Officer; and Greg Bradford, Chief Executive of CACI Limited in the United Kingdom. Please go to Slide #4. CACI announced record revenue and net income for the third quarter of fiscal 2012. In addition, we continued to deliver on important financial and operational metrics, such as funding orders and contract awards which Dan will discuss in a few minutes. Our direct labor also reached the highest hiring levels in our company's history. Today, we employ more than 14,600 outstanding professionals, up from approximately 13,700 we had at this time last year. Slide 5, please. At the same time, we are beginning to feel the impact of the budgetary pressures affecting our clients. In our case, there are 2 factors that have contributed to the modest increase in our year-over-year revenue. First, we have seen a change in the dynamics of our clients' buying patterns. Specifically, we're experiencing lower pass-through ODCs primarily associated with the drawdown in Southwest Asia. Pass-through ODCs have been a good source of revenue for us, but for several years, our strategy has successfully focused on growing direct labor to increase our earnings, which we did this quarter. The lower pass-through ODCs have affected our top line, but our focus on direct labor has benefited our bottom line. The other factor we're seeing is slower than anticipated procurement actions. We are not experiencing any contract or procurement cancellations, and client satisfaction is as high as ever. In addition, our pipeline of high-quality bids is at a record level and growing, and we expect an increasing bow wave of pending awards for the high-demand solutions we provide. Please go to the next slide. We continue to have confidence in our long-term strategy. Addressing the simultaneous challenges of securing our nation and taming the budget requires our clients to make decisions based on strategic vision and fiscal constraints, which we believe works to CACI's advantage. We believe an effective and an affordable national security strategy will benefit from the innovative capabilities CACI provides. The key elements in our growth strategy still apply. We are fully focused on the high-priority markets of defense, intelligence, homeland security and government transformation. This includes special emphasis on our clients' growing requirement in government transformation, cyberspace, special operating forces and healthcare IT. Our position -- positioning in our addressable market sets us apart. We have an extensive portfolio of IDIQ contracts providing the vehicles to pursue significant business opportunities. Our commitment to operational excellence with more than 2,000 trouble-free programs is a distinct component in our competitive success. We focus on innovation, finding new ways for clients to improve productivity, save money and meet mission goals. We are a strategic consolidator with an industry-leading mergers and acquisition program, giving us access to new capabilities, clients, markets and solutions. Finally, we have a high-integrity empowering culture that values teamwork, winning and agility in responding to emerging trends in client needs. CACI also continues to attract top performers, such as John Mengucci, to our executive team, who want to be part of our strong culture, successful growth strategy and commitment to innovation and operational excellence. John, our new Chief Operating Officer, has an outstanding track record of implementing growth strategies across large organizations. He's managed similar-sized business areas in the same defense and federal civilian market space in which we operate today, and he gives us additional leadership in leveraging our solutions and commitment to operational excellence to ensure our clients are meeting their mission goals. I'd like to ask John to make a few remarks at this time. John?

Thank you, Paul. Well, I'm very excited to be part of a company with a solid corporate culture and outstanding reputation for ethics and integrity. I see great opportunities for continued growth through our highly diversified business base and look forward to contributing to our continued success. In addition to expanding our offerings in defense, intelligence, homeland security and government transformation, I'm looking forward to leveraging the robust capabilities CACI brings to the federal civilian sector in the increasingly critical markets of transformation, cyberspace and healthcare IT solutions, all multibillion-dollar addressable markets. In addition to growth, I will continue to emphasize on CACI's lean business practices in streamlining our processes to optimize the efficiencies of the corporation.

Thank you, John, and welcome aboard.

Thanks, Paul.

Looking ahead, it's important to remember that we live in a world facing persistent global and asymmetric threats. Our services and solutions are needed to give national intelligence and our Armed Forces the technical edge, not just in Southwest Asia but wherever national security is defended. For instance, our presence in Asia Pacific can support DoD's increasing focus on this area. Our experience supporting military and national Intelligence positions us to assist DoD as it steps up its focus on high-priority targets and the expanding U.S. global intelligence operations. We are also well positioned to continue our services in Afghanistan following the U.S.-Afghan strategic partnership, which will support the transition in Afghanistan beyond the 2014 drawdown. In cyberspace, our capabilities offer a distinct competitive advantage for us in meeting our clients' cyber challenges. We believe that funding for cyber activities will remain one of the nation's highest priorities. Even in a challenging environment, we continue to see many opportunities for growth in our specific markets and core capabilities. Now I'll turn the call over to Tom, who will provide all of us more insight on our financial performance this quarter. Tom?

All right. Thank you, Paul, and good morning. Let's go to Slide #8. Overall, we reported another solid quarter with record third quarter revenue and earnings results. Our year-over-year revenue growth was 1.6% but was lower than we had anticipated. Both our direct labor and our other direct costs drive our revenue performance. As we have indicated in the past, we have focused on strategy on growing direct labor, which is significantly more profitable than our ODC activity. For the quarter, direct labor grew by 8.1% with a solid 4.1% organic direct labor growth. Other direct costs include the subcontractor labor, equipment and materials we use in our service solution as well as pass-through other direct costs. These pass-through costs help our government customers secure equipment or services. During the third quarter, our other direct costs decreased by 7.7% and were below our expectations primarily due to a reduction of pass-through ODCs related to drawdowns in Southwest Asia. In addition, delays in government procurement activity resulted in lower revenue than we had anticipated. Our revenue, therefore, was affected by the slowdown in the pass-through activity, but the impact on our earnings was materially less. Since last year, we have been reporting results on a pro forma basis to remove the impact of adjustments related to contingent considerations for 2 domestic acquisitions we made in FY '10. We recorded no adjustments this quarter, but we recorded adjustments in the third quarter of FY '11 that had been removed for pro forma purposes. Year-over-year, third quarter pro forma operating income growth of 23.3% was driven by strong direct labor growth. As a result of this strong growth in the changing mix of our direct cost to include more direct labor, our operating margin increased to 7.8% from 6.8% in the third quarter of last year. The large fixed-price contract I mentioned last quarter also added to third quarter earnings. Earnings on this contract were greater than what we expected when we submitted our bid and greater than what we had incorporated into our initial and revised FY '12 plans. The contract is now complete, and for FY '12, it has provided $12 million in pretax earnings and $7 million of net income, greater than our bid model. Our U.K. operation turned in net income margin of 6.5%, but absolute net income was down 26% from the third quarter of last year. Quarter 3 of last year was an exceptionally profitable one, driven in large part by the volumes of work from our Irish and Scottish census projects. Our third quarter this year was impacted by less favorable exchange rates and continued reductions in U.K. government spending. During the quarter, our U.K. operation acquired Tomorrow Communications Limited, which specializes in the design, implementation and ongoing support of the data networks of large commercial companies. Tomorrow Communications generates annual revenue of approximately $30 million, has a staff of 170 and is accretive. Slide 9, please. For the quarter, pro forma earnings per share increased 31% on 17.6% increase in net income and a the 3.2 million share decrease of our diluted share count as a result of our August accelerated share repurchase program. Dilution associated with our convertible debt added over 400,000 shares per diluted earnings per share calculation purposes. Slide 10, please. Our operating cash flow for the quarter was $59 million and $145 million for the 9-month period ended March 31. Our free cash flow for the 12-month period ended March 31 was $207 million or about $7.37 per diluted share. This translates to a free cash flow yield of 12% per share, at a $60 share price. Our DSO increased 9 days from the third quarter of 2011 to the third quarter of 2012 and increased 4 days from the end of our second quarter. Several factors contributed to this increase. During FY '12, we decided to suspend our prompt payment discount feature as we determined that the cost of the program exceeded the benefit of accelerating cash collections. This added an estimated 3 days to DSO. In addition, this quarter, we encountered payment delays due to contractual negotiation and funding realignments with 3 specific customers, adding about 2 days to our DSO, although these payments are in the process of being resolved, and we expect full collection during our fourth quarter. Our balance sheet remains strong. Our net debt at the end of the quarter was $524 million, and our net debt to trailing 12-month pro forma EBITDA leverage ratio was at 1.5x. Slide 11 please. For fiscal '12, we are increasing our GAAP net income guidance we provided in February to $163 million to $169 million as a result of a lower tax rate, lower interest and indirect expense and the positive impact of the U.K. acquisition. We are revising our revenue guidance range to $3.73 billion to $3.83 billion due to lower than expected pass-through revenue. Through FY '12, we now expect our fully diluted share count to be 28.4 million shares, interest expense to be approximately $25 million, our effective tax rate to be 39.3% and our GAAP operating margin to be at least 7.7%. Slide 12. In FY '12, 2 material items positively impacted our full year results. The first is a onetime commercial product sales that generated $6 million of net income in the first quarter. The second item is the greater than expected profitability on the large fixed-price contract which I spoke of. We believe both these items were onetime and unusual and that they should be adjusted from FY '12 to create a normalized base to better measure our growth performance going forward. With that, let me turn the call over to Dan. Dan?

Thanks, Tom, and good morning to everyone on the call. Let's go to Slide 13. This morning, I'd like to provide operational highlights from our third quarter and first 9 months of fiscal year '12. CACI's 23% increase in operating income is directly attributable to our ongoing strategy to grow direct labor and our continuous focus on operational excellence. Our direct labor growth was 8.1% over the same quarter last year and continues to grow. Program performance is critical to our success, and we continue to experience trouble-free programs across our base of more than 2,000 contracts. By anticipating client needs, creating innovative solutions and delivering excellent program performance, we have established trusted business relationships in which our clients know they can rely on CACI to achieve their mission objectives. We continue our solid performance in funded orders and contract awards. Our contract funding orders for the quarter were $800 million, up approximately 7% over the same quarter in fiscal year 2011. Our 9-month results were even better, topping $3 billion and coming in at more than 10% over fiscal year '11 -- over the fiscal year '11 9-month period. We also recorded approximately $547 million in contract awards this quarter, a 16% increase year-over-year, and we have won more than $3.5 billion in contracts year-to-date, which is a 35% increase over the same period last year. We are well positioned in our addressable market, and we continue to invest in our capabilities. Investments in our people, our business, program management and engineering processes and our technical capabilities will enable CACI to meet current client priorities and their emerging needs. Slide 14, please. I would like -- now like to highlight a few of our third quarter awards that demonstrate the success of our growth strategy. I'll begin with the expansion of our portfolio of large indefinite delivery/indefinite quantity contracts in high-priority and well-funded government mission areas. These vehicles provide CACI continued growth potential, and we've added 3 new vehicles this quarter. Most recently, we won a prime position on a 5-year $3 billion contract providing tactical communication solutions for the Department of Homeland Security. This new business for CACI will ensure the viability of critical voice communications and enhance information sharing among federal, state and local law enforcement and public safety institutions during natural and man-made emergencies. We also won a prime position on a 5-year $985 million consultant, advisory and technical services contract to support the Air Force Medical Service. Under this new contract, CACI will offer management and professional services, evaluate emerging technologies and provide systems integration and lifecycle management of field medical systems to ensure high-quality patient care. Our third IDIQ contract award was in our Enterprise IT business, which is one of the lines of business that contributed significantly to our earnings growth this quarter. This award is for a new prime position on the 5-year USD $476 million U.S. government omnibus network enterprise contract to provide network security, engineering and systems design for the Executive Branch, Defense Department and other federal agencies. Our strategic focus on government transformation resulted in several Q3 awards that help clients modernize their business systems and improve productivity. Standout contracts here include our 5-year $78 million award to support the Air Force's Civil Engineering Next Generation IT program. This program will modernize the Air Force IT systems that manage real estate, supply, housing, energy and related functions. We also won a 4-year $41 million task order to continue as lead developer of the Defense Logistics Agency's Defense Agencies Initiative to provide a single accounting system and standard business processes across the DoD. Our federal civilian market also grew with government transformation awards in this quarter. We won a 5-year $15 million contract with the Department of Homeland Security -- a Department of Homeland Security component to provide operations, maintenance and optimization support for its Oracle Federal Financial system. This award leverages our October 2011 acquisition of the Advance Programs Group or APG and continues to validate CACI as a market-leading provider of Oracle eBusiness software solutions in the federal government. Another third quarter driver of our federal civilian business was our ongoing development of the Virtual Lifetime Electronic Health Record program for the Department of Veterans Affairs. This reflects the success of our strategic focus on the high-priority healthcare market, where we continually to organically target and win new business. During this quarter, we added new business to 2 of our existing federal civilian clients. With the Department of Justice, we are expanding their electronic files processing and cloud hosting capabilities. And with the Department of Housing and Urban Development, we are providing IT software and services. We also expanded our support of the Special Operations Forces this quarter with a 4-year $229 million task order to augment planning support of services that include strategic integration, studies and analysis. Let's go to Slide 15. Our opportunity pipeline remains strong, and the pace of our bidding proposal activities continues to accelerate. At the end of our third quarter, we had nearly $9 billion in submitted proposals under evaluation compared to $6.1 billion of proposals at the same time last year, with approximately 65% of these for new business. In addition, we are focusing on several large target pursuits, and we expect to submit more than $11.9 billion in new proposals during the next 2 quarters, with more than 57% of those anticipated proposals for new business. We are not seeing any large contract cancellations and believe that current government delays in releasing RFPs and awarding contracts will create a bow wave of contract awards in our fiscal year '13. We are confident in our ability to compete and to win in our addressable market, where we are well positioned to respond with innovation and agility to emerging requirements. I'll turn the call back over to Paul.

Thank you, Dan, and thank you, Tom, for your highlights and details. Let's go to the last slide. We remain confident in our long-term growth strategy. We are confident in our competitive position, our focus on the nation's highest priorities and our program of operational excellence, which assures clients they can rely on CACI to get the job done right. We're also pleased that Fortune Magazine named CACI one of the world's most-admired companies in 2012. We placed fifth among IT services companies and in the top 10 companies in Virginia. We remain a thought leader in the ongoing vital collaboration among academia, government and industry to help counter asymmetric threats. On May 8, we are cosponsoring the annual Asymmetric Threat Symposium, which continues to advance the national dialogue on U.S. and global security. We make it a priority to hire veterans, especially disabled veterans. They offer outstanding skill sets, and their dedication and expertise are real assets to our clients. CACI recruiters also continue to receive industry recognition for our programs to hire veterans. I also want to thank our 14,600 outstanding CACI professionals. They are committed to delivering innovation and excellence for our clients and their high-priority missions. We are in the early stages of developing our fiscal '13 plan. As is our normal practice, we will communicate our fiscal '13 guidance at the end of fiscal '12, this year on June 27, 2012, with a press release followed by conference call on June 28. Our preliminary view is that we do not expect to realize the growth rates we have experienced in recent years due to continued challenges related to uncertainty in the government budget process, delays in government procurement activities and the drawdown in Southwest Asia. We remain optimistic, however, in our agility and competitiveness in the high-priority markets of defense, intelligence, homeland security and government transformation with the expectation of higher growth opportunities in business and government transformation, cyberspace, Special Operating Forces support and Healthcare IT in this fiscal year and beyond. With that, Kevin, we'll open the call for questions.

[Operator Instructions] Our first question comes from Edward Caso with Wells Fargo.

Can I ask about pricing? I assume at least 35% of your pipeline and a fair amount of your activity is recompetes and trying to get a sense of the level of price competition and the amount of discount you have to give to, one, protect your work and two, to take work away from others?

Dan, can you help Ed with that?

Sure. Pricing is becoming -- price, overall, is becoming a more important part of our clients' evaluation process. One of the -- as we`ve looked at structuring and continue to structure our organization to be a lean organization, we don't see ourselves in a discounting mode. We see ourselves using the components of our price and continuing to focus on managing those components of our price, maintaining the lean organization to be price competitive. So we don't -- aren't anticipating a significant impact in our recompetes and financial performance going forward towards -- driven by that -- by those pricing pressures.

And my second question is for Tom. There was a comment about being in a strategic acquirer. Could you remind us of your dry powder and what you're seeing in the market as far as availability of quality product and where the pricing of that -- of those deals might be?

Yes, Ed. In terms of -- kind of drive harder, we certainly have a strong balance sheet. Right now, we're leveraged at 1.5x. We feel comfortable increasing that leverage by at least kind of 1 to 1.5 turns. EBITDA is approximately $325 million. And so if we wanted to borrow additional funds, we could have a material amount for acquisitions. Annual operating cash flow is $200-plus million, and we certainly have I guess the financial wherewithal. Borrowing cost, as most people know, is relatively low as we speak, as we sit here today. In terms of the pipeline, we are seeing some kind of interesting opportunities present themselves. Overall, we're seeing a high volume of potential transactions. I would characterize it as perhaps the quality is not quite as good as we've seen in the past, some smaller opportunity, some companies with small business content, some companies with a large amount of subcontractor content to their business. But that being said, we are seeing a few kind of interesting opportunities, and we are also looking for ones which are a bit larger than what we have seen in the recent past. Instead of doing the $50 million, $100 million transaction, there are a couple of larger transactions in the marketplace that we're evaluating. So all in all, it's a pretty decent pipeline. We completed a U.K. acquisition that was in this quarter, and I think we'll continue to look at activity in the next 12 months.

Our next question comes from Bill Loomis with Stifel, Nicolaus.

Just one thing, my 2 questions, I'll just ask them upfront. Why -- your last call was 2 months ago, and pass-through seemed to drop off pretty quick. You certainly weren't talking about it then. So what really changed at the customer side so quickly? And then the second is just on the overall exposure to the Middle East area. In the past, you've said it's a pretty small amount. But given what you're talking about today and the revenue reduction, it seems that it's larger than what you implied in the past. So if you can give us a sense of kind of what your overall exposure to Middle East action is, both directly and indirectly, so beyond just people actually in theater but what you do here that's being done on behalf of in theater?

Okay. Bill, let me start, and then Dan will jump in on the part of our business that's correlated to Southwest Asia. In terms of what happened this quarter with the pass-through ODCs, historically, the third and fourth quarters have been years of good growth or high growth of pass-through ODC type activity. That was further accentuated, I think, a little last year with the surge in Afghanistan. So we had expected our third and fourth quarter of pass-through ODCs to also be in a good growth mode, and we were surprised starting in the February, March timeframe that they were coming in lower and continue to come in lower. We correlated almost completely to these pass-through ODCs, which are ODCs that we don't add a lot of value to. They are done as more of a convenience for our clients, a procurement action that's a convenience for our client and that certainly is important to them. It brings a small profit with it, but as you know, we've been focused more on direct labor growth in recent years. And so on the other hand, it is a big part of our business, and so we're paying attention to it and trying to evaluate it for fiscal '13 to have a better understanding of what the impacts could be. I think it's also fair to say that these come sort of in a unpredictable pattern. They come generally based on up-tempo demands, and so they're not always predictable. Usually, they're difficult to predict. But Dan, maybe you -- can you want to -- do you want to address the question about Southwest Asia content?

Bill, our exposure to Southwest Asia across the entire portfolio with programs that are supporting activities that are here in the Konos [ph] and overseas is less than 10% of our overall business. And we -- I think we guided appropriately in '12 to assess the -- any impact that we have there. As we look going forward, we are in the midst of a bottoms-up analysis that looks at each of our major programs. And with the revised partnership between the Afghan and the U.S. President, we're looking at each of those and aligning what we believe will happen on a program-by-program basis. Overall, we don't see a significant impact with the forces that remain going forward. I believe we're pretty comfortable with the ODC component, particularly the pass-through component, finding its way out of our plan. We will guide and provide much more detail on that as we release our fiscal year '13 guidance in June.

Our next question comes from Michael Lewis with Lazard Capital Markets.

I will just ask my 2 questions and let you go with them. First, Tom, I was wondering if you could give us the S3 in the quarter. And then also, we saw $11.9 billion being submitted -- that you expect to submit over the next 6 months with 57% of that as new business. So I really want to isolate in on the 43% that's existing. What are the largest contracts or tests that are being recompeted there? If you could give us some content on that.

Okay, Mike. I'll talk about kind of S3. I'm not sure if the question was kind of the S3 awards or the S3 revenue. I can tell you about the S3 performance. As you know, the primary customer on S3 is Army CECOM. And a lot of the activity in S3 was related to Southwest Asia activities, and we've had a good amount of ODC pass-throughs under the S3 vehicle. The falloff in those ODC pass-throughs were largely coming from the S3 contract vehicle. So actually, revenue for that particular contract vehicle declined. And with that being said, direct labor content grew in the S3 vehicle, still very profitable and a cornerstone of our strategy, but that falloff in ODCs was driven largely under the S3 vehicle.

I was actually looking for the awards, Tom, for the quarter.

Yes. Give us a second to try to -- about $24 million, Mike. Sorry for the delay there.

And then also with regard to the content on the other 43%, the existing business that's up for submission over the next 6 months, what's the content there?

So we've got -- our pipeline, we're very encouraged by what we see in the pipeline. I think you captured the main new business opportunities that we're chasing. We're very encouraged that those are real and making their way through the acquisition process. As we look at more of our established business and our established programs, there's a couple of them that have been long-term programs for us. The OMEGA program that we have with the Department of Justice. We have a long-term relationship with the routine cycle of acquisition that TESS ties [ph]. Competition contract that we have today will be recompeted in ties [ph]. Those would be the 2 big drivers in volume. And then a big part of our -- a broader set of our smaller vehicles and some of the task orders make up that other 40%. But the OMEGA is a very large program, and that would be the #1 item on our list.

Our next question comes from Cai Von Rumohr with Cowen and Company.

So 2 questions. The first one is you missed your sales by about $75 million. You told us that's pretty much pass-throughs, but you pretty well hit your EBIT target. And so is it fair to assume that the profit, because you said it was small, on the pass-throughs was like in the 1%, 2% area?

Cai, we always said that the margin on the pass-through revenue is kind of very thin. Each particular contract deal has a lot different profit margin on it, but it's fair to say that the profit margin on the pass-through is just kind of -- it's very thin. We did hit our EBIT target, and the decline in the margin associated with the pass-through is -- was offset by, as I mentioned, some other kind of reductions in SG&A expense and the like. So all in all, we were able to maintain our profit level.

Okay. And the second question is if you look at your ODCs as a percent of COGS, they're probably a bit over 62% today. If we go back to 2002 to '05, they were running more like 50% to 52%. If this is the beginning of a trend with a major falloff coming in pass-throughs as we withdraw from Iraq and Afghanistan, what kind of incremental margin leverage will that have on your business? Can you sustain the profitability overall? I mean, can the profitability move up? Will it just be a 1% to 2% negative impact? Or will it have more leverage if we continue to see this trend continue in the future?

Well, Cai, in the short term, there's no question that you've seen our margins improve as a result of our increased focus on direct labor and the good direct labor growth. It's really much more -- the margins really much more correlated to that direct labor growth. As the ODCs come down, of course, they have a lower margin, so they'll have some beneficial impact to -- in the short term -- they'll have some beneficial impact to our margin. However, keep in mind the government is always adjusting their contracting mechanisms. And the shift we have going on these days, which is away from time and materials, towards fix priced and towards cost recoverable contracts, changes some of that dynamic and throws some of these ODCs into the pool, the cost pool, for which an overall percent fee is assigned. So I'd say in the long term, it may not be correlatable 100%. In the short term, it has been very correlatable.

Our next question comes from Robert Spingarn with Credit Suisse.

As you go through and approach your late June fiscal '13 guidance, how are you balancing all of the unknowns with regard to the CR potential sequester? We understand this puts you in a very challenging position because of the unknowns, but how are you going to frame that?

Oh, good. That's an excellent question. We've spent a lot of time, obviously, thinking about this, and we pay close attention to all of the planning coming out of the Pentagon. And we have -- in fact, Dan has commissioned a study that's been going on, really an ongoing study for about 6 months here to look at our addressable market space and in particular, the potential effects of sequestration. So Dan, do you want to add a little here?

Sure. Maybe we'll talk a little bit about '12 and how that then extends into '13. One of the things that we are seeing and we believe are somewhat impacting the slowdown in some of the new awards, when the budget was finalized in the December timeframe, we anticipated that our clients would move out of a CR mode into more of a traditional mode. They would -- the restraints would be taken off, and they'd be able to spend to their '12 budget. Unfortunately, the ambiguity uncertainty in the '13 budget caused them to take pause and to reassess priorities and look at what they were actually -- they were taking in '12 and how do they extend into '13 and '14. So to some extent, to a major extent today, we're seeing them behave somewhat like they're still on a CR -- under a CR constraints. So going forward, we're expecting that to continue. As you look through most of next fiscal year, the budget uncertainty, the election and how that translates into stability that our clients can make decisions, we think they will be somewhat guarded in how they do that. Now they still have a fairly large amount of money on their budgets that they do need to spend even under a CR, and it's in their interest to spend that money. And we hear that in our engagements with them. They do not want that unused budget -- to lose that unused budget. So there will be more tactical decisions. There'll be contract extensions, and we think that that's going to be the core part of our approach as we look through the next year.

Just a follow-up, and this is perhaps a little bit of an unfair question, because I'm not sure anybody knows the answer to it. But for the December quarter, do you think that will be treated like -- under a CR, like a fifth quarter of government fiscal year '12 or the first quarter of '13, meaning that the -- potentially, the sequester is retroactive to October 1? And I'm trying to figure out if the CR actually does what you just said, it promotes spending or the opposite happens.

It's a really tough question to answer. I -- there are lots of varying views about that. We're not really able to speculate on what will happen. What we have done, though, is we have studied what would happen in the event of a full sequestration to our addressable market space. As you know, we have a very large $200-plus billion addressable market space, and we think it would come down about 5% over the period in a full sequestration. So while the sequestration itself might represent something approaching 20% of the defense budget in total over the 10-year period, for us, because of where we are positioned in the market, we assess the impact to us would be more like 5% over the period. So -- and it's a really large market. We're a $4 billion enterprise operating in a $200-plus billion market. So we -- trying to get more precise than that is very hard at this point. We're all, like you, watching to see what happens.

Our next question comes from Joe Nadol with JPMorgan.

My question is on the bookings. And I'm wondering if you guys can give -- now that your direct labor is still going up nicely and your ODCs are declining, indirect labor that's 40%, obviously contributes the lion's share of your profits, wondering if you can disclose, in terms of your bookings, how much of that is direct labor versus ODCs both looking backwards and maybe going -- maybe on a regular basis going forward. So in the quarter itself and then year-to-date...

Joe, can we get back to you on that one. We don't have that at our fingertips.

Well, can you characterize it? Is direct labor -- direct labor bookings still coming in strong?

Well, that's in our -- we would say right now that ODCs are declining, and direct labor is increased -- continues to increase. So we'd expect the ratio between direct labor and ODCs to continue moving more toward direct labor. I can characterize it that way. But to give you a precise number of what's in the backlog or what's in the funding orders, I don't have that immediately available, but we can get that for you.

Okay. That would be helpful in terms of analysis, because otherwise, it's tough to analyze what your bookings really mean and backlog really mean. The second question is just if you look at the procurement vehicle, so I guess S3 in particular but any of the others, have there been real changes in what vehicles the customers are using? Or is it just that their -- the overall level of their demand is dropping? Are they migrating to other vehicles? Or is this just demand that's dropping because of the reduction in operations?

As we're looking at tracking the opportunities, we actually have just seen them delay -- be delayed or slip to the right. We don't see our clients going to new vehicles or the opportunities shifting to other vehicles or going away. It's the slowdown in the process of getting through the acquisition process, of getting decisions made, awards made that's driving that. And we -- circling back to our core strategy with really pursuing those large IDIQ vehicles that support the client set, the markets, the missions that we're targeting, we're well positioned there. So in most cases, as -- if there would be that type of action, we would be positioned to go pursue it. And S3 is a good example of that. The client has put S3 in place over 5 years ago with the goal of having a single efficient vehicle. As time is progressing, the organizations that are part -- the work up at CECOM are beginning to establish their own vehicles, and you'll see more of that come out over the next year or 2.

Our next question comes from Tim Quillin with Stephens Inc.

Tom, on the $7 million in net income impact from the fixed-price contract, I think you said last quarter that there was a $3 million benefit in 2Q. Was the other $4 million all in 3Q?

Yes. So let me provide some more detail on that. As I mentioned, that large fixed-price contract generated more profit than we anticipated when we submitted our bid a year plus ago. It also provided our guidance during FY '12. So compared to what we did, if I break it down by quarter, we realized about $1 million in additional pretax profit in the first quarter, approximately $7 million of pretax profit in the second quarter and $4 million in the third quarter. And that's the amount we should be adjusted out of FY '12 to derive that normalized base that we spoke off, and that equates to the $7 million of net income, so pretax and net income. And to be clear, in the last call, I quoted a $5 million pretax number. That variance was what had been in the prior guidance, so I was comparing a different base. And so the numbers appropriate to use in terms of pretax, $1 million in the first quarter, $7 million in the second quarter, $4 million in the third quarter.

Got it. And then with regards to ODCs, I understand that, hopefully, you'll have more insight or visibility when you give guidance for next fiscal year. But it sounds like -- that you think you're going to have this trend, as Cai said, from a 60-40 split of ODCs to track down to 50-50 over the next 3 years, or at least you didn't argue with that. I was just wondering if that is the -- that's kind of the rational way to look at things.

Tim, this is Dan. I think we do expect the mix of direct labor to ODCs to continue to focus or shift towards direct labor. That's going to be driven by 2 major factors. One we've talked a lot about, and that's the real reduction in pass-through ODCs. Equally, our clients are buying more along the lines of systems or buying the end deliverable products than they are buying labor hours. As we look at some of the vehicles that we are performing on and pursuing, as they bundle those things into end item deliveries, that brings with it more of a CACI value-added services, program management, engineering oversight and so forth and also allows us to look at margins differently. The more systems-type work tends to be able to demand higher margins. So we see that as a trend. We think that is a good thing, and that's part of our strategy to expand that systems part of our business. The question is that we have not yet rolled into our '13 plan and forward as at what pace that'll happen.

Our next question comes from Jason Kupferberg with Jefferies.

This is Amit Singh for Jason Kupferberg. My question is regarding the revenue guidance. So in your guidance, how much of revenues do you expect to be from acquisitions? And I know even though the revenue guidance has gone down, the EPS guidance has remained strong or at the same level. And you mentioned that that was primarily due to tax, interest and U.K. acquisition. Would you be able to quantify the effects from these items?

Yes. So we have kind of seen several puts and takes in terms of the -- kind of in our earnings guidance. With a lower level of ODCs, pass-through ODCs, they generate a modest amount of profit. They're not coming at a loss, they're coming out of a small level of profit. And so as these went down that had negative impact on our P&L, we were able to offset that by those items that I mentioned: the U.K. acquisition adding approximately maybe $0.01 to our earnings per share for the quarter; interest expense was probably a little bit less than $0.01; a reduction in SG&A cost, approximately $0.01 or so. So those are the order of magnitude, not by themselves were that material, but they all added up to offset the reduction in the gross margin associated with the ODCs. Your first part of your question dealt with the kind of the composition of the revenue in the guidance. The acquisitions that we did in the past 12 months and including the most recent U.K. acquisition are adding approximately $100 million to our FY '12 performance.

Perfect. And just a quick second question. You talked about the effect of budget uncertainty and the sequestration on the top line. But are you doing anything on your expense side to prepare yourself for the cuts, maybe reorganizing the workforce and also maybe, again on the top line, prioritizing the type of projects you bid on?

Sure. This is Dan Allen. Managing our expenses, I think we had discussed earlier one of the features of CACI is our focus on our market center clients and the fact that we have a fairly lean organization. And we, on a continuous basis, are looking at how do we ensure that we align our strategy with where our clients are going and we that we're appropriately prioritizing discretionary resources to be successful with those clients. And that's an ongoing process. We are -- as our -- as we go into fiscal year '13, we do an annual assessment of that. If there's anything more significant than the ongoing process, and we're in the works -- in the process of doing that now. So there'll be more to come if that's needed.

And I'll make one other comment. Most of our expenses are direct cost, either direct labor or other direct cost. We hire people to bring them to work for particular government projects. Typically, we do not create benches where we hire people in advance of a specific contractual need. And so in terms of our labor utilization of direct labor, it's very, very high just given the nature of our work. So there's really not a lot of opportunities to prepare in advance for some unknown activity since the direct labor is very, very tightly managed. The other piece of the equation is our indirect overhead expense. And as Dan mentioned, we have a very kind of lean organization as part of our culture for the past many years. We've been focusing on continuous improvement, driving efficiencies, measuring the performance on a very regular basis to always ensure that we have a very efficient workforce. So we do not -- always room for improvement certainly, but we do not see kind of excess expense at our organization.

Our next question comes from George Price with BB&T Capital Markets.

Many have been asked. But Tom, I guess I wanted to just kind of follow up on the prior questions around the onetime items you called out in fiscal '12 just to make sure I understand what the numbers represent. The -- those pretax numbers, are those that you gave related to the contract outperformance? Are those sort of excess benefits or beyond normal profitability? Or is that the total -- does that represent the total contribution from that contract?

Yes. Those represent those excess benefits, so we...

Overperformed.

We overperformed, yes. So we bid on a contract, assuming a certain profit level on this particular fixed-price contract, and we believe that was the normal expectation. It turns out that when we executed on the contract, our team did a very -- a superlative job of kind of providing services at a materially lower cost and significantly quicker than the government customer kind of needed, so it generated this -- an abnormally high level of profit. We do not believe that, that level of profit is sustainable or repeatable given the unique nature of that particular fixed-price contract.

Great. Okay. I just wanted to make sure -- I just wanted to clarify that. I guess 2 things on that, just as follow-up. First, I mean, those are -- you performed better basically on a contract that's core operations part of the business, which admittedly does set up a higher hurdle in fiscal '13. But it's -- normal course of business could argue the same for the product sale. I mean, that's -- those together, I believe, are about $0.46 in EPS that you're kind of suggesting to ignore for purposes of the fiscal '13 comparison. I'm not sure why an investor should do that. I mean, you guys did a better job than you expected. It just sets a higher bar for fiscal '13.

We could have a kind of, again, a debate or a disagreement about how to characterize that. The way we're looking at our business ourselves is that FY '12 is a very strong year. These 2 large kind of onetime singular events added the 40-some-odd cents to our earnings per share. And given the nature of the work -- and unfortunately, we can't be very specific as to the nature of the work since we do not typically talk about any specific contract. Given the unique nature of the work, we do not see that reoccurring. We very much believe it's onetime. And so when we look at our performance, we are adjusting the FY '12 basis. We encourage you to do it -- that as well, but you're going to have to make your own decision. We're just trying to provide some good information and transparency for you.

Okay. And just lastly, the -- could the -- given the reported EPS in fiscal '12, all in, I mean, could EPS possibly be down in fiscal '13?

We provided some information on that by ‘13 basically saying the levels of profitability or the levels of growth will most likely not be sustained in FY '13. And basically, we'll provide additional details on FY '13 when we get to the guidance call in June. So I'm going to defer answering that question specifically for a couple of months.

I think the onetime adjustments -- we all understand these onetime adjustments, we're not considering going forward as part of a run rate. We just don't -- these are so unique. They're special. We're happy to have had that business, but they won't reoccur, and so that's for sure. In terms of the comment about our growth rates, it's really a comment that's in reference to that reduced baseline by taking these 2 onetime items out. So we don't expect to see the double-digit earnings growth from the reduced baseline.

Our next question comes from Nathan Rozof with Morgan Stanley.

Apologies about the technical issues before. So if you've answered these questions while I was off the call, then I apologize. But I'll ask them both upfront, just a little bit of a multi-parter. But I wanted to go back to the -- some of the comments you've made about the behavior of your clients, particularly as it pertains to sequestration. And the 2 kind of questions I have around that are, first off, can you give us any insights into what may be -- what clients are prioritizing more versus less as it pertains to that spend? So based on ODCs going down, it looks to me like products are being potentially hit harder than services. And secondarily, as it relates to the upcoming concerns about sequestration in next year's CR, are we going to see any change in seasonality in CACI's business either from an awards or a revenue perspective as we move forward into fiscal '13?

So the first question on any insight that we might provide on our government setting their priorities, I think I'd have to defer that to our clients. They -- so I'll just leave that there. But seasonality, I think the rhythm that we are in will be constant as we go forward. With the main driver being our Q1 as it aligns with the end of the government's fiscal year, that tends to be the highest awards booking period for us. I think we'll see that seasonality continue. Q2, Q3, they tend to be driven by some tying up some major events like CR. And in this case, next year, it might driven by the -- how the sequestration plays out. Q4 begins to ramp up to our Q1 again, so I think that seasonality will be enduring.

And we also -- Dan, we also have a little bit of more billable hours in the back half because of the holidays. The ways holidays split between the front and the back half, I think that generally runs at around 5% or 6% higher in the back half just in terms of that. That seasonality, obviously, will stay. Then going back to the first part of the question, just thinking about it a little bit, the one thing I can say, we don't have insight -- as Dan pointed out, we don't have insight into the detail of prioritization that our clients are currently going through. We'll have that eventually, but we don't have it right now. But we do know what the President and the Secretary of Defense have told us, which is that the focus going forward is going to be in areas of C4ISR, special operating forces, cyber, which we know is a big, big issue for us. And we would just add to that list, ourselves, the Healthcare IT issue, because it affects so many in the military and veterans, that that will be a continued important growth area. So those are really -- those come out of the statements and strategy redefinition by the Secretary of Defense. And fortunately, we have positioned ourselves, our company into those swim lanes. And so we think while we're not invulnerable to reductions from sequestration, we feel that's the reason why we'll have less impact than potentially others. We're also not a product company. We have a few small products. We're not a platform company, and therefore, there's not -- we're not going to see an impact from a major platform cancellation. There's no program of record out there that could get canceled that would have a significant impact on us. We don't have any one program that's more than -- any one program more than $100 million, I think you said, Dan. So we're very well diversified over those 2,000 contracts as well. I hope that helps.

Our next question comes from Mark Jordan with Noble Financial.

A question. I think, Tom, you had talked about the M&A landscape. Could you just talk about what the management's philosophy might be moving through 2013 relative to the buyback in light of the large onetime share repurchase of past August?

Yes. Our first priority for our capital deployment is forward acquisitions. Tom's characterized that market. We are very aggressive in that market. We're a strategic consolidator. We've done 54 acquisitions in the last 20 years, all of which are very successful and have been an important part of our growth strategy right along. So that will continue to be a major thrust area for us. We don't do acquisitions to add bulk. We do acquisitions for -- to fill strategic needs, either a special capability, a technology area or a client that we haven't had access to in the past or geography sometimes. So they're always done with an eye toward the overall 5-year strategy that we maintain. And that is our first priority, because we actually believe our experience shows us with, having done 50-some of these, that that's how we get the good returns and the growth for the shareholders. And of course, we have -- the board considers from time to time both share repurchase, and they've thought about dividends. But share repurchase, we see that as a valuable tool in certain instances to return value to shareholders especially when the prices look attractive on our stock. Also, we've used it as a tool, a tactical tool to keep the share count about the same so that the comparables on earnings per share sort of consistent with the comparables on net income. I think that is our -- that will continue to be our philosophy. We've done this one very large share repurchase, which we thought was -- and because the -- we just thought it was an opportune time for the company to do that. But our first preference is, of course, for our strategic consolidation, merger and acquisition program.

I'd like a little clarification on -- you talked about the exposure in Southwest Asia being -- I believe you said it was less than 10% of revenues. Could you break that down relative to, is it 10% of revenue? And what is the direct labor in ODC component relative to that number?

So roughly, overall, the characterization was our -- at the revenue line. I don't think we're prepared to break that down into more detail. What we would like to do, as we go into the June guidance, give you some more color on -- that exposure as well as the timing of what might be -- what impacts might affect that as the administration strategy rolls out. So I ask you maybe just to hold off until June.

We have obviously built the FY '12 component of that into our guidance. So what you see in our guidance reflects any effects in fiscal '12. What Dan's saying is that we'll give you the best guidance we can at the end of June about '13.

Our next question comes from Tobey Sommer with SunTrust.

A follow-up question on your share repurchase strategy. Given the volatility that can exist in shares, what is your preference having just experienced kind of one rifle-shot approach, where you bought a lot at a specific price versus a more persistent repurchase effort over time, where you don't have to get the price quite as accurately?

Yes. So let me explain how the accelerated share repurchase program worked. Basically, we entered into a transaction with a counter-party, whereby they delivered us 4 million shares in this particular case, and we gave them an additional -- an initial payment for those kind of 4 million shares. Over a approximate 9-month period, the counter-party would be in the market kind of purchasing shares. And at the end of that 9-month period, we will pay the volume-weighted average price during that 9-month period less a small discount. That's how a accelerated share repurchase program works. And so we are actually not paying a particular price at a point in time but an average price over an extended time period. That is how we chose to execute this one accelerated share repurchase program. The advantage is we're able to retire those shares immediately. In the past, we've done things more tactically, entering 10b5 programs with upper and lower levels with regards share price and the like. So tactically, there's a variety of ways to execute those repurchase programs, and our tactics have changed over time depending upon kind of what our needs are or our views of the market.

Right. Yes. I guess I understand what they work. I'm asking you what your preference is now that you've experienced both methods.

Clearly, our preference when we did the accelerated share repurchase program was an accelerated share repurchase program. If we wanted to do another really large one, that seems to be -- has a lot of advantages for us. But again, the market conditions change, and situations continuously change. And so if we did another share repurchase program, kind of the board would consider a variety of alternatives and pick the best one given the facts of the circumstances at the time. I'm being not responsive to your question, but it's hard to say how we would behave in the future.

Okay. And then my last question, since most of the other ones have been asked. You mentioned in your -- the early stages of fiscal '13 planning, preliminary views, that you don't expect to realize the same rates of growth. But those rates of growth have been pretty heady and very successful and above the -- what many public peers have achieved. So the range of potential growth below those rates is very wide and extends into negative territory. Can you give us any more color as to what those words mean?

Well, I think what we can say is we expect to continue to be very, very competitive going forward. So our degree of success and our positioning in the marketplace will continue we believe as is. The exact growth rate or what that number will be is something we have to defer until June when we have our plan developed. It's just not available right now, because we're in the middle of the planning cycle.

The next question comes from Michael Lewis of Lazard Capital Markets.

Tom, I was wondering if you can give us what your expectation is for that fixed-price contract in Q4. And then also, I had a quick follow-up for Dan.

I'm sorry. Could you repeat it? I didn't get all of that, Mike.

I'm sorry. I was hoping that you could give us what your expectation is embedded in Q4 from that fixed-price contract.

Oh, virtually nothing.

Okay. And then, Dan, last quarter, you had several hundred million of S3 in the pipeline. Could you give us an update on the trend or standing of those opportunities?

Yes. There's a -- several of those opportunities have slipped out of this fiscal year. The pipeline in S3 remains. We still have about $100 million of activities that we are pursuing, but there were 2 major ones that have moved out of this fiscal year into our next fiscal year.

[Operator Instructions] Our next question comes from Cai Von Rumohr with Cowen and Company.

So one simple question. I can certainly understand why you can't provide estimates on total revenues next year. Do you expect to be able to continue to grow your direct labor billings next year?

Yes, again, I think I'm going to give the same answer, is that we're in the middle of the planning cycle, and I'd be speculating to give you an answer to the question. We've tried to give some idea of what we expect next year that we won't have that same kind of double-digit earnings growth rate. Beyond that, we just don't have the visibility, Cai.

The next question comes from Tim Quillin with Stephens Inc.

Sorry for taking us into overtime but just fun-with-numbers questions on acquisitions. If you look at what you thought the revenue was from Pangia and Paradigm and APG and Tomorrow, at the time of the acquisitions, it looks like you kind of add that up, and it should have contributed something like $33 million in revenue in the quarter, but there was $28 million from acquisitions in the quarter. Was one of them -- was one of the acquisitions annualizing at a lower rate than at the time you announced those deals?

Yes. As we look at the acquisitions, we kind of do some, obviously, pretty detailed forecasts trying to determine kind of what the profitability of the acquisitions are. And the acquisitions are performing, in total, kind of fine. More than fine, they're performing quite well. We spoke about delays in some of our government procurement processes and shifting awards to the right. And the acquisitions that we -- the companies we acquired are experiencing some of those kind of interesting phenomena we're experiencing. And so we expect to do get some awards, some large material ones. We're still confident that they will come, but they have shifted a bit to the right.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing comments.

Thank you, Kevin, for your help here today, and I'd like to thank everyone who dialed in or logged onto the webcast for your participation as well. We know that some of you will have some follow-up questions, and Tom and Dave will be available in the next few minutes to take your calls. This concludes our call. Thank you, and have a great day.

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