Booz Allen Hamilton Holding Corp (BAH) 2013 Q2 法說會逐字稿

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton's earnings call covering second-quarter fiscal 2013 results. At this time all lines are in listen-only mode. Later there will be an opportunity for questions. I would now like to turn the call over to Mr. Curt Riggle. Please proceed, sir.

Great. Thank you, Tawanda. And thank you all for joining us today for Booz Allen's second-quarter fiscal 2013 earnings announcement. I'm Curt Riggle, Director of Investor Relations, and with me to talk about our financial results this morning is Ralph Shrader, our Chairman, Chief Executive Officer, and President, and Sam Strickland, Executive Vice President and Chief Financial Officer.

We hope you have had an opportunity to read the press release on our second-quarter earnings that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide one. On today's call, Ralph will provide you with an overview of our business performance, recent developments, and strategic positioning. Sam will then discuss our financial results in detail, including our income statement, balance sheet and cash flow, and backlog. Ralph will talk about what the future holds for our business, and Sam will discuss our earnings guidance for the remainder of fiscal 2013, which began on April 1, 2012.

As shown in the disclaimer on slide two, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include among other things general economic conditions, the availability of government funding for our Company's services, and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our fiscal 2013 second-quarter earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call we will also discuss some non-GAAP financial measures and other metrics we believe provide useful information for investors. We include an explanation of our adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2013 second-quarter slides.

It is now my pleasure to turn over to our CEO Ralph Shrader, and he will start on slide three.

Well, thank you, Curt and good morning. Thanks to all of you for joining us here on this Halloween morning following the incredible storm. I do hope everyone is safe and as dry as possible here on the East Coast. I don't know how many of the costumed superheroes will be able to knock on your doors tonight, but I know that you agree our emergency personnel and electric repair crews seem to be the real superheroes in the area this week. Eleven days from now will hopefully be drier and brighter when we salute the heroes who secure our nation and its allies, our American veterans and active duty military.

As we approach our firm's centennial, Booz Allen is proud to have continuously served our clients in the US armed services for 72 years, and to again this year be named a Best Company to Work For for veterans. Last month in the important end of government fiscal year award cycle Booz Allen won mission-critical contracts to support the US Department of Defense and all of the armed services. We won numerous contracts to support vital programs in the civil agencies and the intelligence community as well.

In terms of financial results, despite the challenging macro environment for government contractors in this last quarter, Booz Allen grew our margins and adjusted earnings, and we generated strong cash flow. As result of our capital deployment actions for the 12 months ending September 30, 2012, we have delivered an impressive 68% total return to our shareholders.

Here are the financial headlines for our fiscal 2013 second quarter.

Second-quarter revenue was $1.39 billion, down from $1.43 billion in the prior-year period. Net income for the quarter decreased to $46.1 million from $75.3 million in the prior year, while adjusted net income increased to $55.7 million from $50.6 million in the prior-year period. Adjusted EBITDA increased 8.2% to $123.8 million and adjusted diluted earnings per share increased by 8.3% to $0.39 per share.

Now it's important to understand that GAAP earnings from the prior-year period at both the aggregate and per share level reflected a substantial increase, attributable to the release of a significant income tax reserve and the realization of a gain from the sale of our state and local transportation business in the quarter ending September 30, 2011. Additionally, the current year's quarter includes one-time charges associated with the July 2012 refinancing transaction that we discussed on our August 1 earnings call. Adjusted net income, adjusted EBITDA and adjusted EPS remove these one-time and unusual items and, therefore, Booz Allen believes these metrics are useful tools to help you better evaluate our ongoing business results.

We ended the second quarter of fiscal 2013 with total backlog above $12 billion; and our funded backlog for the second quarter of fiscal 2013 was $3.52 billion, up from $3.44 billion in the prior-year period. Our book-to-bill ratio for the second quarter was a superb 2.6, demonstrate strong demand from our clients for our services. Today we are announcing our fourth regular quarterly cash dividend in the amount of $0.09 per share.

You may remember that on our August 1 earnings call, I said we had sufficient cash on hand to pursue an opportunistic acquisition strategy in this time of potential industry consolidation. Two weeks ago we announced the definitive purchase agreement to acquire the Defense Systems Engineering and Support division of ARINC, known as DSES, which is being fully paid with available cash on hand. We are very excited about this. The acquisition adds to Booz Allen's engineering capabilities and brings us additional scale and specialized expertise in C4ISR, prototyping, specialized software development, and analytics -- all areas where we see further growth potential and client demand and that complement our existing capabilities.

For example, DSES supports key Navy and Air Force weapons platforms, aviation and navigation systems with systems engineering, and the development and fielding of software-intensive operational systems. I've often said when asked about acquisitions that we would only pursue another company that was a strong fit for our business and our culture, and our management team feels very confident that DSES will be both an excellent addition to our current capabilities, and a driver of our growth plans in a way that is consistent with Booz Allen's long-term strategy.

We're guiding our business on a steady course, navigating today's rough market conditions with a focus on the future, and real excitement about this future. Booz Allen is delivering top quality to our clients, providing rewarding work and strong culture for our people, giving back to our community, and generating value for our shareholders. Evidence of Booz Allen's success in winning and performing important work can be found in some of the major contract awards and task orders we have recently won -- a single award contract worth $159.8 million from the National Science Foundation to provide support for transformation, program management, enterprise services, and solution engineering and integration services to the NSF Office of Information and Resource Management. A $91 million task order from the Army's Software Engineering Center for analytical, technical and software development support. A $26 million task order from the Air Force headquarters for business process re-engineering and IT services in support of installations, logistics and mission support. A $184 million contract vehicle award from the National Institutes of Health National Heart, Lung, and Blood Institute for IT support services; and a number of new contracts with commercial financial institutions, energy, and healthcare companies.

These are just a few of the new and re-competed contracts we've won in the past quarter. And they span all of our major market areas.

Booz Allen is a people business, and we are committed to providing our talented employees with rewarding work and career opportunities supporting our clients with missions that matter. Last month, Booz Allen was named by Working Mother Magazine for the 14th consecutive year to its list of the 100 Best Companies to Work For. During the past quarter we were again named to Consulting Magazine's Best Companies to Work For and received a now recognition from Latina Magazine as one of the top companies providing career opportunities for Hispanic women.

Our people give generously to the communities in which they work and live, and a new program we're especially proud of focuses on mentoring around technology. The overall initiative, which we call Time to Inspire, connects talented Booz Allen employees with young people through three key programs. First, appropriately enough, is First Robotics, in which our employees coach teams of students, primarily at the high school level. Second is Safe and Secure Online, an innovative program to teach cyber security skills to children so they can protect themselves online. And third, Innovations for Learning in which our employees tutor first- and second-grade students across the country in reading over the phone and internet connection.

In addition to helping young people across the country, our goal with the Time to Inspire initiative is to encourage other companies to join us in mentoring the next generation. Booz Allen has been helping our clients prepare for the future for 98 years, and we're focused on the future close to home in our firm as well. I will talk more about our Vision 2020 strategy in just a few minutes after Sam provides a more detailed discussion of the present, specifically of our financial performance for the second quarter and first half of fiscal 2013 which ended a month ago, on September 30.

Good morning, and thank you for joining us. We are very proud of how we've managed the business this year. Under challenging market conditions, we have delivered significant returns for investors. We believe our focus on serving clients, tactical selling, and cost management, as well as our ongoing investment in growth opportunities, will continue to drive our future success. And all the while we're generating a strong cash flow that will keep our options open going forward.

Let's turn to slide four for a closer look at our second quarter of fiscal 2013, in which we saw a decrease of 2.9% in our top-line revenue over the prior-year period. The decrease in revenue was primarily the result of a decrease in billable expenses and a lower ratio of indirect costs to direct labor compared to the prior-year period. Reductions in indirect cost have a direct correlation to the amount of revenue recognized under cost reimbursable contracts. The lower rate of indirect cost is primarily attributable to the cost-reduction actions the Company implemented in late fiscal 2012 and the continued cost management in our business.

It's also important to point out our continued improvement in other measures below the top line despite very challenging conditions in the government sector. In the second quarter of fiscal 2013, operating income increased to a $102 million, from $93.7 million in the prior-year period, and adjusted operating income increased to $109.3 million from $100 million in the prior-year period. The improvement in adjusted operating income was primarily driven by more effective deployment of Booz Allen's consulting staff.

More broadly, we have continued our strong focus on cost management, and saw further improvement in the second quarter. As we noted last quarter, the slower spending on indirect cost is beneficial, and is part of our management strategy to maintain flexibility within our operations, and avoid cost overruns that could negatively impact our bottom-line. While this does negatively affect revenue, the actions we've taken are having the expected results and are beneficial to our bottom-line.

In the second quarter of fiscal 2013 net income decreased to $46.1 million from $75.3 million in the prior-year period, while adjusted net income increased to $55.7 million from $50.6 million in the prior-year period. Adjusted EBITDA increased 8.2% to $123.8 million in the second quarter of fiscal 2013, compared with $114.5 million in the prior-year period.

In the second quarter of fiscal 2013 diluted earnings per share decreased to $0.27 per share, from $0.53 per share in the prior-year period. Adjusted diluted earnings per share increased to $0.39 per share compared to $0.36 per share in the prior-year period.

As Ralph noted earlier, there are a number of unusual non-recurring items in both the current quarter and the comparable period of our last fiscal year that are affecting the GAAP net income and EPS numbers. Specifically, in the second quarter of fiscal 2012 we released a $23.6 million income tax reserve and we recognized a $5.7 million net gain on the sale of our state and local transportation business. In the current quarter we incurred $2.7 million in transaction fees and accelerated $7.2 million of debt financing costs as a result of our July 2012 debt refinancing to effect the special dividend. Each of these three transaction, are added back to come up with our adjusted net income, adjusted earnings per share, and adjusted diluted earnings per share metrics for the current quarter and the comparable period of our last fiscal year.

I mentioned a reversal of a significant income tax reserve during the second quarter of last fiscal year as one of these major adjustments. You can see in Exhibit 1 of our earnings press release that our income tax expense for the current quarter is more than $20 million higher than in the prior year quarter and that is primarily because of last year's reserve reversal. I want to note that our tax rate this year is generally the same as it was last year without the reserve reversal, approximately 40%. And this tax rate is factored into the EPS forecast that I will discuss later.

Now, let's talk about cash. For some time, we've been asked what we plan to do with our cash and we're very pleased with how we've deployed our cash since our last earnings call. We've created strong shareholder value with the issuance of a special dividend in late August in addition to our regular dividend, and we've made what we believe is an excellent strategic investment in the anticipated purchase of the Defense Systems Engineering and Support division from ARINC, which is expected to close in late November. Assuming a close of November 30, 2012, DSES is expected to add between $110 million and $120 million in revenue during fiscal 2013. However, accretion to earnings this fiscal year is likely to be mostly offset by transaction and integration costs. We do expect the transaction to be accretive to earnings in fiscal 2014 which begins April 1, 2013.

I want to emphasize that even after a special dividend and using cash on hand to fund the DSES acquisition, we will retain a healthy cash balance with strong cash flow, and if necessary we have additional access to cash through our currently untapped $500 million revolver.

Our historical focus on organic growth in our core business and investments in growth areas like cyber, cloud, commercial and international markets continues. And as we have said for many quarters, we remain open to evaluating potential acquisition opportunities. As we demonstrated with DSES, we will consider only companies that are a cultural fit and bring us additional client access and/or enhance our capabilities.

Let's go through the basics numbers regarding cash. Our days sales outstanding were 57 days for the quarter ended September 30, 2012, reflecting very strong cash collections. Net cash provided by operating activities in the first half of fiscal 2013 was $389.7 million, compared to $177.1 million in the prior-year period.

Free cash flow was $375.4 million in the first half of fiscal 2013, compared to $133.5 million in the prior-year period, a 181% increase. Free cash flow has benefitted from an increase in cash from operations and a decrease in capital spending, which is primarily related to the reduced capital outlays associated with the leasehold improvements to build out our Washington metro offices for hoteling that we completed last winter.

And finally, on the basic numbers, let's finish up with specifics on our contract wins. As Ralph mentioned, our book-to-bill ratio in the quarter was 2.6, indicating a strong pace of new awards, as clients continue to acknowledge and seek the value of our services. Our total backlog at the end of the second quarter was a strong $12.45 billion. Additionally, our funded backlog continued to rise both sequentially and year-over-year, and as of September 30, 2012, was $3.52 billion, an all-time record high, compared with $3.44 billion as of a year ago, and $2.58 billion at the end of our first quarter of fiscal 2013.

Now, let's take a look at our cumulative performance for fiscal year-to-date. We are now on slide five. Booz Allen's revenue was $2.82 billion for the six months ended September 30, 2012, compared to $2.88 billion for the prior-year period, a decrease of 1.9%. Net income for the first half of fiscal 2013 was $108.1 million compared to $126.5 million for the prior-year period, and adjusted net income for the first half of fiscal 2013 was $121.7 million, compared to $108.6 million.

Adjusted EBITDA for the first half of 2013 was $259.5 million, compared to $237.4 million in the prior-year period. Diluted earnings per share for the first half of fiscal 2013 was $0.69 per share compared with $0.90 per share in the prior-year period. And adjusted diluted earnings per share was $0.85 per share, up from $0.77 per share in the first six months of fiscal 2012.

I would like to turn back to Ralph who will talk briefly about Booz Allen's strategic positioning and differentiation, and I will finish the formal part of our presentation with guidance for fiscal 2013. We are now on slide six.

Thank you, Sam. We recognize the reality of current market conditions, and have been managing our business with care and precision to ensure that Booz Allen delivers the best value to our clients and to our shareholders. We've been forthright about our prospects and forecast, so you can have confidence in what we say about the near future.

What we're even more excited about lies further ahead. Booz Allen is focused on the future, moving with speed and determination with the throttle down. We're excited about our investment in growth areas of our business, such as finance and health in the civil market, engineering services and C4ISR in the defense market, special access programs in the intelligence market, and our emerging business in commercial and international markets. We are balancing our historic focus on organic growth with strategically aligned inorganic growth, illustrated most recently by our DSES acquisition.

We believe there are significant growth avenues available to our firm by combining a deeper technical portfolio with our legendary consulting heritage and mission understanding. This is the core idea behind our long-range strategic planning initiative known internally as Vision 2020. Vision 2020 is about capturing the best of our past, looking to the future, and implementing changes to make Booz Allen even more successful going forward. It's important to note that we are not waiting for the year 2020 or for our strategic planning to be completed before moving out on this agenda. Our acquisition of DSES is clearly in line with our intent to enhance our technical capabilities. Later this week, we will be discussing with our Board of Directors the kind of leadership roles and construct to best serve our business going forward.

Over the next 90 days we're looking at enhancements to our cost structure, infrastructure, and people models that we plan to implement at the start of our next fiscal year on April 1, 2013. As I told our new DSES colleagues in welcoming them to Booz Allen, I've been with the firm for 38 years, and every day that I come to work here, I'm so proud of the work we do for our clients and of the talent and teamwork of Booz Allen people. I'm incredibly excited about the future that we are charting through Vision 2020 and am confident it will deliver results for our clients, our people, and our investors.

I would now like to turn back to Sam to talk about our forecast, and then we look forward to taking your questions.

Thank you, Ralph. We are now on slide seven. We are very excited about our Vision 2020 long-range strategy, but I know what you're interested in on the phone this morning and that's the nearer future, which is the second half of the current fiscal year. Next week at this time the election will be over, and we are confident that Booz Allen has taken steps to ensure that we have the flexibility and financial resources to perform well no matter what the outcome of the election or the severity of the fiscal cliff.

At the bottom-line for the full year, we are reaffirming our forecast for diluted earnings per share to be in the range of $1.40 to $1.50 per share, and adjusted diluted earnings per share on the order of $1.60 to $1.70 per share. At the top line, assuming a continuation of current macroeconomic trends, and no sequestration, we expect revenue growth to remain flat for the second half of our fiscal 2013. This guidance is inclusive of the DSES acquisition, which is expected to close by the end of November.

As I have said before, our overall EPS outlook reflects our confidence in our ability to manage our business with agility and precision as illustrated by the cost restructuring actions taken in the fourth quarter of fiscal 2012 and our ongoing careful cost management of the business, which we believe will continue to translate into improvements in operating margins. Now, these EPS estimates are based on fiscal 2013 estimated average diluted shares outstanding of approximately 144.5 million.

All right. Thank you, Sam and Ralph, and thank you all for listening to our summary of results and outlook. Related to our discussion about Booz Allen's thrust in the area of engineering services, more information is available on the investor page of Booz Allen's website or by going directly to boozallen.com/engineering. Our Chief Operating Officer Horacio Rozanski, and Senior Vice President and Controller Kevin Cook, are here with Ralph and Sam to answer your questions.

Tawanda, can you please provide instructions for the question-and-answer portion of our call?

Thank you. (Operator Instructions). Your first question comes from the line of George Price with BB&T Capital Markets. Please proceed, sir.

Hi. Good morning. Thanks very much. Nice results. Just first thing I wanted to do is just confirm some of the elements of the guidance. The revenue growth remaining flat, Sam, in fiscal second half of this year -- so equal to the fiscal second half 2012 revenue, right? It's year-over-year growth you're talking about, not on a quarter-over-quarter basis.

Yes.

Okay. All right. Thanks. And I think, as you said, that does include DSES.

Yes.

And I was wondering, too, could you maybe give us a little bit more details as to the expected transaction and integration expenses for DSES in the second half of 2013 in terms of how much those expenses are, maybe how they break down between the two types and between the two quarters.

The -- we haven't gotten to that fine grain. We clearly had acquisition expenses in the second quarter associated with that transaction. Those were, you know, a few million dollars so we would expect something like that in the back half as well.

So kind of a few million per quarter.

Yes. Something along those lines, George. We haven't -- I mean at this point we've -- I think we have finished our integration planning, we've got our integration checklist. We don't feel like the amounts involved will be material, but probably will absorb most of the earnings that we'll generate out of DSES over the last four months of our fiscal year.

Okay. And then lastly just on the fiscal 2013 guidance you maintained your EPS guidance. You've got $0.85 in adjusted EPS in the first half of 2013 and EPS usually is as good or better in the second half of the fiscal year. Notwithstanding the current uncertainty, is it fair to say you think you're tracking toward the upper end of that $1.60 to $1.70 EPS guidance?

Of course we work carefully with our lawyers and we do provide the range for a purpose, so. I think traditionally, we've had a history of coming in in the middle of that range, George, but clearly particularly given this environment, we feel pretty comfortable sticking with the range that we have out there.

Okay. All right. Great. Thanks very much.

Your next question comes from the line of Bill Loomis with Stifel Nicolaus. Please proceed, sir.

Hi. Thank you, good morning.

Good morning.

Morning. Sam, just looking at the cash flow, the DSOs obviously look like record lows for you guys. Is that sustainable?

That's an excellent question, Bill, and we would like to think so. Clearly there was a bit of -- there was an emphasis by current administration to get cash out in the second fiscal quarter. I think that amazingly showed up in the GDP numbers for the second quarter.

It's our understanding at least that they intend to keep that program in place for at least a year. Your guess is as good as ours as to whether that will continue, but I would -- we would expect then, given the guidance, that it will be in place for at least a year.

Okay. And then --

That we'll have to see.

Okay. And then just on the -- looking at your utilization I mean consulting headcount is down about a little over 7% year-over-year, revenue is down only 3%. Is that just because of the better utilization in the -- what you've implemented at the beginning of the year? And do you see the revenue drops or headcount reductions continuing at a greater pace than revenue would suggest?

No. I think that we feel like -- I will tell you in the past one of the ways we drove growth was hiring ahead of demand.

Right.

And I think clearly in this environment we've just recognized that that's not prudent because our clients are facing great uncertainty and so, therefore, it's very difficult for us to predict. So we're now hiring to -- against what we call sold and funded recs.

So I would not expect the headcount to continue to decrease. I will say that one of the things we did -- one of the reasons we took the cost action was to make sure we got our staffing levels trimmed up to reflect the business we had, not the business that we were hoping for or were predicting when we were growing.

Okay. Thank you.

Sure.

Your next question comes from the line of Tim McHugh with William Blair Company. Please proceed, sir.

Yes. I just want to if talk a little bit about just the -- your initial plans at least for the integration of the acquisition into the matrix and how you're going to treat that just from an organizational structure as well as culturally. Will it get blended in or are you going to leave it as a separate entity? I'm just curious, given it's your first acquisition, how you're going to approach that.

Hi. Good morning. It's Horacio Rozanski. Let me take a cut at that.

Because it's the first acquisition, we're putting a lot of focus and resource on getting it right. It is important that we take the same conservative approach to the integration that we take to making acquisitions, that we take to running the business in this environment.

Our current thinking is for the time being, we want to just transition DSES into our system and our infrastructure without trying to integrate it in the matrix at least for the balance of this fiscal year. Once we are confident that things are stable, our first step is to do sales integration more than organizational integration. Let's find ways to go to market together that enhance both sides. They have client positions that we can take advantage of in terms of bringing now capabilities. We have client positions where we are very confident their capabilities can actually enhance our revenues, and so that's going to be the second step.

Once we are in a place where we feel we understand them well enough, they understand us well enough, we will then take advantage of that and figure out how much to integrate into the matrix, where to do it, and so forth.

Along that road, it's interesting -- they have a very diverse geographic footprint that matches very well with ours. It so happens that a number of their leases are coming up and we're going to take advantage of that and begin to co-locate people to create savings. As I said, we're going to create revenue growth.

Another area that we're excited by is, as part of the Vision 2020 initiative that Ralph talked about, there's quite a bit of interest in expanding our career model on the Booz Allen traditional business to include a technical track. It so happens that DSES runs a fully scaled up, fully experienced technical track so we're interested in seeing whether that's something we could port over.

So we see a lot of opportunities and there is a lot of enthusiasm internally for integration, but we're going to take at that slow and make sure that we get it right along the way.

Okay. Great. And then just a numbers question on the acquisition -- or two parts to it I guess. One is just to be clear; in the adjusted EPS that you guys present, will you be excluding the intangible amortization. And secondly, what type of profit margin, I guess not so much in the second half of this year, but more so looking out to next year, should we normally expect the acquisition to contribute?

The -- good questions, Tim. At this point we do not intend to exclude the amortization of intangibles for purposes of calculating adjusted earnings per share. What we have tried to do with the adjusted numbers is to carve-out the impacts of the Carlyle acquisition and then carve-out the -- let's call it the non-recurring items both good and bad.

And we feel like that this is -- it's not our intent for this to be our last acquisition, so we feel like going forward we will have other acquisitions and we just really would get -- we would start confusing things if we started excluding items associated with the acquisition in terms of calculating our adjusted numbers. So we don't intend to go forward with that. In the future we don't intend to do that.

As for the margins, let me say that DSES for this calendar year just to put that out there will have revenue in the order of $350 million. Again, tends to be more heavily billable-expense oriented than we are so the margins are slightly lower than ours. We will provide formal guidance for all of Booz Allen for our fiscal 2014 when we do our next quarterly earnings call which should be sometime around the end of January, the 1st of February.

Okay. Thank you.

Sure.

(Operator Instructions). Your next question comes from the line of Edward Caso with Wells Fargo. Please proceed, sir.

Hi. Good morning. My question is on the December quarter award activity. What have you seen so far? Historically you have a pretty good December quarter which is usually a light quarter and I was wondering if you were seeing that trend again this year.

Well, I think it's hard for us to predict the quarter right now simply because, as you know, Ed, the government is cleaning up from September 30. We don't see anything abnormal either positive or negative when it comes to awards at this point. But frankly it's hard to tell because, you know, an awful lot of the contracting staff, particularly on the government side, spend an awful lot of October just getting all the paperwork in place from the September 30 awards.

And then you indicated -- a different question. Employee attrition. Could you give us an update both on a total percentage basis and on a voluntary basis? Thanks.

I don't know that we have done that on -- we certainly don't break that down on a quarterly basis. We feel like our attrition is pretty much in line with industry.

Okay. Thank you.

Sure.

(Operator Instructions).

Tawanda, do we have another question in the queue now?

Yes, we do have a follow-up that comes from the line of Mr. George Price with BB&T Capital Markets. Please proceed.

Hi. Thanks very much. Just wanted to follow up on a couple of things. One thing, Sam, just a comment you made about giving fiscal 2014 guidance next quarter. And I guess we'll obviously get more detail on the expectations for the DSES impact, but obviously you have chosen for the second half of fiscal 2013 not to try and enter the fray in terms of the potential impact of sequestration on your business. Obviously, I know that's a big unknown, but it still looms out there and I guess the question is twofold.

One, how did you think about it for the second half of 2013? And second is I guess given -- assuming that it doesn't get dealt with before January, which I don't think is an unreasonable assumption despite what is in the press, how are you going to tackle it when you give fiscal 2014 guidance?

The -- well, the easy to answer that, George, is so to say, "I'll let you know when we get there," but once we know more facts.

Our view on sequestration corporately is plan for the worst and hope for the best. So we've taken the steps we think that we can take to get ready for sequestration, but of course the big problem is I don't know that our clients have done an awful lot of work to get ready for sequestration. I think there has been some planning that has been done, and what you hear is you hear about across-the-board cuts, but how that ultimately lays out I think it's just difficult for us to predict.

But of course what we have done is in terms of putting together a situation room is to make sure that we have mechanisms for collecting and disseminating information and decisions as quickly as possible should that case occur. But in terms of what impact that's going to have on our FY14 guidance, honestly we'll just have to wait and see.

We don't have an official corporate view of what's going to happen. I think the one that for me personally seems to make the most sense is that something will be done somewhere around the January 1 time frame that will push the ball to April 1 and give the new Congress and the new administration, which could be a continuation of the old administration, an opportunity to deal with this. That to me would be not a bad outcome because I don't expect any sort of a solution between now and January 1. But even knowing that would give us a fair amount more insight into what our FY14 is going to look like than we have right now.

Okay.

So as you can imagine what's creating a problem for us now is the uncertainty in the market because our clients, not knowing how much money they have to spend, are reluctant to commit it, much of it, very long-term. So I think I'm not sure how long this will take, but we're pretty optimistic that once this settles down we'll know what our clients will be procuring. We are positioning ourselves and investing in those areas, and we will be ready to resume the growth curve.

But right now there's just an awful lot of turbulence that we've got to work through. One of the reasons we're keeping our cost structure very lean and mean. And it is costing us something at the revenue line. It just seems to us to be prudent to make certain that we are financially very secure and healthy as we get ready for what's next.

I understand and I certainly think you guys are doing a good job in terms of running the business in a tough time although I don't -- I'm not sure a short-term punt is really going to help with the uncertainty, but that is a longer conversation.

I guess last thing -- shifting gears maybe to a different part of your business. I was wondering if maybe you could talk a little bit more about the commercial side. You noted some wins recently in your focus sectors there, financial, health and energy.

Maybe you could talk a little bit more about those, about what you're seeing companies focusing on in those areas at this point, maybe in the context of the broader macro uncertainty and how big is that business now, et cetera. Thank you.

George, let me take a cut at that. It's Horacio.

First of all, we are very pleased with, both in commercial and international, the focus strategy that we have taken and what we still believe are early returns from that strategy. The core of our business revolves around our cyber capabilities and our ability to push that into the three verticals that you described.

In addition to that, especially, at this point in energy -- and we expect a similar thing in health-- there's great interest from clients in terms of helping compliance and regulatory efforts to take off. We're doing a lot of work in utilities and the nuclear side of things in terms of helping them think about and manage and comply with existing regulations, cyber and otherwise.

Certainly, what's happened recently with the banks and the largest denial of service attack in history suggests that we're on the right track in terms of our capabilities. We are launching some innovative things -- we've done the partnership with RSA that I think you have seen. In addition to that, we are focusing on some pilots around different ways of delivering our services, different revenue models, and again all of those show very promising results.

I guess it is in the course of the -- is it the current quarter we opened our office in Abu Dhabi officially, and we are seeing once again from those clients, both private and public sector, great interest in what we can bring on the cyber defense capabilities for them.

So it's all systems go. We are throttle down, to borrow from Ralph's earlier remarks, and feeling good that our focused strategy is going to pay off in the medium term.

Okay. And can you size -- can you give us any update on size of that business, maybe what you think it ends the year on a run rate basis maybe?

Yes. What we've said in the past and I think what we will stick with is when it becomes significant, when it becomes material, we'll talk about it. But it's still less than 2% of the business and while we've had growth in certain areas, and while we continue to have success, it's still a fairly small piece of the business.

So I think that's the amount of guidance we'll give. At some point we're hopeful it will be a very good business and we can talk more about it. But right now I think we've probably covered enough.

Okay. Fair enough. Thanks very much for taking my questions.

And your next question is a follow-up from the line of Edward Caso with Wells Fargo. Please proceed, sir.

Hi. Thank you. Have you seen any de-obligation? We're starting to hear some more chatter on that front.

Ed, I think Curt Riggle was anticipating that so he's actually done some research.

Curt, let me see if I get this right. For the quarter ended September 30 we had about right around $20 million more de-obligations than we had in the September 2011 quarter. So, $20 million, on the one hand, sounds like a lot of money. On the other hand, given the amount of awards during the quarter, that was pretty small.

Okay. Can you talk a little bit about your re-compete efforts, what your win rates are, where they were compared to recent past, and maybe sort of what kind of pricing, that pressure that you're seeing over whatever time frame? We hear that it's being difficult to rebid business with the same workforce. Thanks.

The -- well, I don't know that we have talked about win rates either competitive or re-competes or -- in the past. I think ours are certainly consistent with other numbers that I've heard in industry.

In terms of the pricing, which I think is your real question, certainly in certain markets, we see pricing pressures. In certain markets, we see the need to rotate to less expensive staff. Honestly we think that's likely to be a -- let's call it certainly no more than a medium-term phenomenon, as clients are, as you would expect in these times, wanting to get more bang for their buck.

And there is a natural tendency, given the division between the contracting staff and the technical staff, there's a natural tendency to want to move towards a lower priced technically acceptable. Oftentimes that translates into more junior, less experienced staff. And of course I think then the technical side starts to understand that you do get what you pay for.

So while we're seeing that in certain areas, and we're certainly capable of being competitive in those environments, we have always tried to focus our expansion, our investments, on areas where there really is an appreciation that you get what you pay for. And so we'll tend to focus on no-kidding best value acquisitions.

That said, I mean it's clear we are seeing that, as is every other contractor that we're aware of. We feel like we're being as successful there as we have always been and, again, I do think it's a -- let's call it a shorter-term phenomenon. It will take a year or two or so.

Again, I think once the budgetary environment settles down and people again start focusing on okay we've got a mission let's get it done, I think you will see some of that pressure to just do what I will call -- to just do the low-cost technically acceptable, which is a very difficult concept to define. I think you will see that pressure abate.

Last question. On the ARINC business that you're acquiring, I'm curious how fungible the workforce is. I mean that's one of the nice aspects of Booz Allen has been the workforce fungibility. How specific-skilled are these people relative to the projects they're working on?

That sort of ties into the last question, which is -- seems like some of the work they do would be susceptible to LPTA and you therefore would have to make personnel adjustments.

Well, let me -- the good news about the DSES personnel is that they're very highly billable. Because they do -- let's call it -- less transactional selling than we do in Booz Allen, they end up having higher billability rates. But we do feel like the capabilities they have transport easily into our markets.

It's not known -- while we don't have a precise number, we have an engineering services business that is several hundreds of millions of dollars. So what's great about DSES is that while ours will tend to be focused in the Army, for example, theirs tends to be focused in the Air Force and the Navy. And it happens to be in Air Force clients, in Air Force areas like Dayton where we have a large presence, and in Navy clients where we either have a large presence or have been marketing heavily. Think the Naval warfare centers.

So we would expect to be able to use some of that staff to help us both make market penetration and let's say share capabilities. But we're not looking to deploy large numbers of their staff back into our markets. We're really looking forward to going to market with those folks, as opposed to pulling them up by the roots and pulling them out of their present markets.

That concludes the question-and-answer portion of the call. At this time I would like to turn the call back over to Ralph Shrader for some closing remarks.

Well, thanks to all of you for joining us this morning. I know it's been quite a wild week with the significant storm here on the East Coast, and certainly promises to be a wild week ahead of a different kind as we have Election Day to deal with next week. So the financial markets and the pressures affecting our industry sector have been wild for quite some time. In fact, probably long enough for it to become the new normal.

I hope the key message you take away this morning is that Booz Allen is leading from the center and guiding our business on a steady course in these very challenging times. We're focused first and foremost on delivering excellence and value to our clients. We are committed to continuing to be an employer of choice and a good corporate citizen.

And for you, our investors, we're focused on improving our bottom-line and our margins. We are building on our proven track record of strong cash generation and capital deployment to deliver a strong return on your investment in our Company.

So I would like to close just by saying thank you.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.