Booz Allen Hamilton Holding Corp (BAH) 2011 Q3 法說會逐字稿

Good morning, thank you for standing by and welcome to the Booz Allen Hamilton third-quarter fiscal 2011 earnings call. At this time, all lines are in a listen only mode. Later there will be an opportunity for questions. I would now like to turn the call over to Mr. Kevin Cook. Mr. Cook, please proceed.

Thank you, Caitlin, and thank you all for joining us today for Booz Allen's third-quarter fiscal 2011 earnings announcement. I'm Kevin Cook, Vice President of Finance and Corporate Controller. With me this morning is Ralph Schrader, 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 news release on our third-quarter earnings that we issued earlier this morning. We've also provided presentation slides on our website and are now on slide one.

On today's call, Ralph will provide a summary of our results and provide a context for Booz Allen's business performance. Sam will then review our financial results in detail including our income statement, balance sheet, cash flow and backlog. Sam will also discuss our outlook for our full-year fiscal 2011 and will provide a preliminary guidance on our forecast for fiscal year 2012 which begins on April 1, 2011.

As shown on the disclaimer on slide three, please keep in mind that some of the things we will discuss this morning are forward-looking statements 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 services, and other factors discussed on our call today and as set forth in the forward-looking statements disclaimer included in our third-quarter earnings release and in these slides and as discussed in the risk factors section of the prospectus relating to our initial public offering and other SEC filings. We caution you not to place undue reliance on these forward-looking statements which are made as of the date of this release and remind you that we assume no obligation to update or revise the information discussed on the call.

During today's call, we will also discuss some non-GAAP financial measures and other metrics which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of non-GAAP measures in our earnings release and in these slides. It is now my pleasure to turn to our CEO Ralph Schrader.

Thank you, Kevin. Good morning to all of you and thank you for joining us today. I would like you to please turn to slide four.

It is with great pride and excitement that Booz Allen Hamilton host its first earnings call after our listing on the New York Stock Exchange last November. While we are a newcomer to the financial markets and believe we have the dynamism that comes with that, we also have the strength and resilience that comes from being a respected 97-year-old firm.

Because we are new to the financial market, I would like to take just a minute to explain what we do and what we believe makes us different, and then we'll tell you about our performance this quarter. As a public company, we are focusing on retaining the differentiators in our management consulting heritage and culture that have established Booz Allen Hamilton as a high-performing, high-quality brand in the professional services industry. We are a leading provider of management and technology consulting services primarily to the United States government.

What specifically do we do? Well, we help the United States Navy redesign the manufacturing process for Virginia class submarines to take $1 billion in cost out of each sub. We helped the Centers for Disease Control and Prevention improve their supply chain to speed the delivery of vaccines to children. And we help clients ranging from US intelligence agencies to financial services companies improve their cybersecurity.

And these are just a few examples of the hundreds of important assignments Booz Allen undertakes each year. Booz Allen's operating model allows us to quickly assemble teams with expertise tailored to our clients' needs and to easily redeploy staff to growing markets.

A key enabler of our model is our single P&L and a single bonus pool which provides an incentive for us to collaborate internally and to compete externally. Please turn to slide five, the financial highlights.

We're off to a strong start as a public company, achieving double-digit growth with improved margins. Here are some highlights from this quarter.

Revenue increased 10.1% to $1.4 billion. Net income increased to $24 million from $1 million. Adjusted EBITDA increased 23.1% to $106 million.

Adjusted diluted earnings per share increased by $0.10 to $0.27 per share. We also grew our backlog to $11 billion at December 31, 2010, the closing day of our third quarter of fiscal 2011.

This backlog increase of 21.4% from the prior year demonstrates the continued strong client demand for Booz Allen's services and our long-standing ability to win new work and recompetes in a highly competitive marketplace. Our services grew across all major markets -- defense, intelligence and civil -- with the highest growth coming in areas related to cybersecurity, health and consulting services for civil government agencies.

Booz Allen has long been committed to being a consultant of choice to our clients, the employer of choice to the best people, and a good corporate citizen. And I'm proud to note that in January, we were named to Fortune Magazine's list of the best companies to work for for the seventh consecutive year.

We recently added a new commitment, to be an investment of choice. To tell you more about how we're doing in that regard, I'll turn the call over to Sam who will provide more detail on our financial performance.

Thank you, Ralph. Good morning to all of you and thank you for joining us.

I have the pleasure of telling you more about Booz Allen's fiscal year 2011 third-quarter financial results. Staying on slide five, our 10.1% revenue increase over the same period last year was a result of winning new contracts in all of our markets while retaining and growing our existing contracts.

This enabled the deployment of additional consulting staff and an increase in billable expenses. Now before discussing our income and EPS for the quarter, I would like to take a moment to explain the basis of presentation for the non-GAAP measures that we will discuss in addition to the GAAP measures.

Starting with the Carlyle investment in July 2008, there have been a series of financial transactions which have impacted our financial statements including the Carlyle transaction, our recapitalization and special dividend in December of 2009, our initial public offering in November of 2010 and our IPO overallotment exercise in December of 2010 and lastly, our just completed debt refinancing.

From our discussion with analysts and investors, we have found that when these transactions are properly reflected in our financial statements, it makes it hard to separate the results of these financial transactions from our non-financial operations. In an effort to facilitate an understanding of our non-financial operations, we are presenting adjusted income and adjusted EPS numbers as a supplement to the GAAP income and EPS announced.

The adjusted income and EPS numbers as more fully explained in our November 2010 S-1 present operating income, EBITDA, net income and diluted earnings per share after excluding the effects of the Carlyle transaction which includes one, the amortization of intangibles, the stock compensation expense associated with the rollover of stock rights and the initial grant of options to the Booz Allen executives who reinvested in Booz Allen Hamilton.

Adjusted net income and diluted earnings per share numbers also exclude the transaction expenses associated with the Carlyle transaction for recapitalization and the fees resulting from the prepayment of the mezzanine debt enabled by the IPO and cash generated from operations. For forward-looking adjusted net income and diluted earnings per share, we have also excluded the expenses associated with the February 2011 debt refinance.

Now with that explanation behind us, let's take a closer look at our third-quarter results. Operating income increased to $75 million from $41 million and adjusted operating income increased to $92 million from $68 million in the prior year period. The increase in adjusted operating income was primarily driven by a decrease in our accrual of fiscal 2011 incentive compensation costs, by higher revenue and by an increased profitability as a result of a modest shift in our contract mix away from cost reimbursable and time and materials contracts into fixed-price contracts.

Net income increased to $24 million from $1 million and adjusted net income increased to $35 million up from $21 million for the prior year. Adjusted EBITDA increased 23% to $106 million for the third quarter of fiscal 2011 compared with $86 million for the prior year period, primarily as a result of the growth in adjusted operating income.

Now, diluted earnings per share increased to $0.18 per share from $0.01 per share which includes and $0.08 per share benefit related to the reversal of tax reserves during the current quarter. Adjusted diluted earnings per share increased to $0.27 per share from 17% per share in the third quarter of fiscal 2011 compared with the prior year period and excludes the $0.08 per share gain from the income tax reserve reversal.

A reconciliation of diluted earnings per share to adjusted diluted earnings per share is shown on exhibit four of the press release. I should point out that our fully diluted share count was $131.2 million for the third quarter of fiscal 2011 and is projected to be $140.4 million for the fourth quarter with the average for the entire fiscal year 2011 being $121.8 million.

Now, let's move onto a much simpler discussion, Booz Allen's cash flow statement which presents a very nice picture indeed. Net cash from operating activities for the nine months ended December 31, 2010 was $281 million compared to $219 million for the same period last year.

Free cash flow for the nine months ended December 31, 2010 was $219 million, up from $184 million for the same period last year. And as a sign of the future health of our business, funded backlog as of December 31, 2010 was $2.7 billion, a 15% increase over funded backlog as of December 31, 2009.

Our total backlog which includes funded and unfunded orders and awarded but unexercised [price options] stands at $11 billion, a 21% increase as compared to the December 31, 2009 total backlog. Turning to slide six and looking forward to the completion of our full fiscal year 2011, Booz Allen forecasts its year-over-year revenue growth to be between 9.1 and 9.5% and adjusted diluted earnings per share is forecast to be in the range of $1.09 to $1.13 per share.

Additionally as a result of completing last week's debt financing in our credit facilities, we now have less total debt outstanding at lower interest rates. We expect this will positively affect earnings in fiscal 2012 and beyond.

In our press release announcing the completion of our most recent financing, we estimated annual interest savings to be on the order of $58 million which is $35 million after tax. We've also incurred refinancing costs of approximately $38 million that will affect the fiscal year 2011 fourth quarter and will reduce net income from the current fiscal year by approximately $23 million after-tax.

This will have a corresponding adverse impact on fiscal 2011 diluted earnings per share. However there is no impact on an adjusted diluted earnings per share basis as these refinancing costs are added back.

We expect to continue to generate strong cash flows in the fourth quarter of fiscal 2011. Although the business environment continues to be challenging for government contractors, we expect positive revenue growth and margin improvements to continue.

Specifically we are forecasting topline growth in fiscal 2012 in the high single digits to low double digits. We forecast adjusted diluted earnings per share to be on the order of $1.45 to $1.55 per share benefiting from reduced interest expense generated by debt paydowns and the debt refinancing earlier this month.

Thus EPS forecast is based on 143.8 million estimated average fully diluted shares outstanding. Even with headwinds facing the government services sector as a whole, we expect to grow in the new year in all of our core markets across the defense, intelligence and civil sectors.

Our core US Government market will remain our primary focus. In addition as many of you are aware, the non-compete agreement with our spinoff, Booz & Company, expires on July 31, 2011 at which time Booz Allen Hamilton will be free to pursue both commercial and international work without any constraints.

We strongly believe in focus and will be approaching these markets in a targeted manner with plays to our strength. Initially our primary target in the commercial segment will be financial services where we are already seeing strong demand for cyber-related services in cybersecurity, fraud detection, risk management and regulatory compliance.

Our primary target in the international sector will be the Middle East and North Africa. We already have a solid business base there serving US government clients and believe there is a strong market for our services in cyber and after expiration of the non-compete this summer, for our capabilities in IT and infrastructure project management.

In summary, turning to slide seven, we believe we can continue to do what Booz Allen does best, focusing on quality growth in areas in which we combine our historical management consulting skills with our deep expertise in technology, analytics and engineering and integration.

We believe we can continue to be a performance leader in our sector, growing the top line organically, improving our bottom line margins and creating value for our shareholders. And now, we would like to open the lines for questions.

Thank you, Sam. Our Chief Strategy and Talent Officer Horatio Rozanski is here with us today as well. And Horatio and I will join Ralph and Sam in answering the questions. Caitlin, please provide instructions for those on the call.

(Operator Instructions) Adam Frisch, Morgan Stanley.

Thanks. Good morning, guys. Congratulations on your first quarter as a public company.

Your headcount was a little bit higher than we expected, which obviously bodes well for near-term revs. But because you're a new public company, I thought it would be helpful for shareholders if you talked about the next couple quarters maybe, Sam, and laid out where you think backlog and headcount will trend over the next couple of months.

We are forecasting growth in the high single digits to low double digits for fiscal 2012 and we believe we will be on that trend both for the fourth fiscal quarter of this year, in other words the March quarter, as well as continuing on next year. I think that the high headcount number, Adam, as you will recall, we went through a hiring surge this summer to ensure we had the staff in place to meet what we thought was going to be and what turned out to be a surge in backlog at the end of the government's fiscal year on September 30.

And the good news was that hiring campaign was very successful. And I think the momentum we built up carried over into the December quarter. So the good news there is we don't have quite as much hiring to do in the fourth quarter because of the fact that we've already added a fair number of folks.

Okay, do you think backlog numbers -- again we kind of have limited data because we only have a couple of years of information on the Company. But do you think -- how did the backlog number trend?

I think that's a data point that a lot of people focus on, specifically the funded backlog number. Last year it was down in the December quarter, so not sure if two data points make it a seasonal point or not, but if you could just kind of give some color there because I think people are focused on that.

Okay, yes. We are actually -- given that we're operating under a continuing resolution, we're pretty pleased with the backlog number. As we said, the funded number is up 15%. The total number is up over 20%.

We expect -- normally the backlog will tend to trend down. Actually it will trend down between December 31 and September 30.

And of course the big proposal season starts late spring, early summer. So we would expect it to start back up in the July/August timeframe and then again, it peaks at the end of September.

We think we're seeing the same patterns this year as we saw last year. It is -- when you're under a continuing resolution, it's tricky for the government to make new starts. But we do see demand building for what I'll call the summer proposal season.

Okay, great. Just a couple more and then I'll turn it over. We know what we see and hear in the media as it relates to the government spending and how that may or may not change. You talk about the continuing resolution that we are under.

Maybe give us a flavor though for what you guys are seeing in the field in terms of the types and tone of the conversations you're having with your clients. I assume that's all reflected obviously in your outlook for fiscal 12. Maybe just a little bit more color in terms of what is going on inside the conference rooms with your clients.

Adam, this is Horatio. Good morning. I think what we're seeing is more of a continuation of what has been happening which is that the government is trying to define what their posture is going to be at a macro level and then working agency by agency and into the field to understand what that is all going to mean.

So in some cases, that has taken place and there's a more renewed sense of stability and it's -- and more clarity. In other places that's still to happen and so that will probably drive some mild level of turbulence and so forth which is (inaudible) what we are experiencing.

We don't at this point see anything kind of out of the ordinary that would make us want to affect the way we think about the financial future of the firm in any way. It is a tough market, it's a competitive market. It's a market in which we have done well historically and expect to continue to do well.

Okay, great. Just last question here, point of clarification. Sam, the commercial revenue that you spoke to, the priority, it's great to see you zeroing in on some opportunities. Is this something that is included in your guidance for fiscal 12 or would it represent an incremental to the high double, low double digit? Thanks, guys.

It would be -- speaking as a CFO, yes, it's either incremental or it's a cushion against other uncertainties in the market which is why I think we are saying that we're looking at the high single to low double digits. But yes, if you -- we believe we have business in our backlog, in our contract backlog, in our proposal backlog, in our opportunity set to drive the single digits to low double digits. And if all that comes to fruition of course, the commercial work would be incremental to that.

Perfect, thanks, guys. Congratulations.

Joseph Campbell, Barclays Capital.

Thank you. Good morning, Ralph, Horatio, Sam and Kevin and congratulations from our side as well on your first quarter as a public company. We were very impressed by that 15% year-over-year backlog we really don't see much given the continuing resolution that's been I think awfully hard and that's a very, very nice number.

We wanted to ask if you could give us however on the outlook some granularity about how your -- you reported that everything was up in defense, civil and intelligence and we wondered if you could give us a little more sense of how these individual sectors looked for you both in the results that we are seeing and more importantly, as you look out to 2012. Which of these is showing the best strength and which of them is showing a little less?

Sure, Joe, and as you know, we -- our intent going forward is not to break down our revenue by market simply because the way we work the matrix, we staff -- we can move staff from one market to the other to take advantage of opportunities. That said, if we look out into fiscal 2012, we see a continuation of the trends that we saw this year which is robust markets in intelligence and in civil.

And defense is not growing at its historic levels for Booz Allen Hamilton, but that's the beauty of having this matrix environment that enables us to redeploy staff efficiently and to do that is having a diverse business base in that we are able to shift resources so we can take advantage of opportunities in the intelligence market and [assembly] market while continuing to grow as we can in the defense market.

Thanks, Sam, within defense, were there any particular pockets of strength or weakness? I mean we've seen some differences in some of the earlier data between the Army and the Navy and the Air Force and the DOD agencies. Anything particular that -- in terms of how the various military departments are doing?

What I would say is the growth rates are down from prior years across those markets. The Army and the Navy is -- that growth rate now is a bit lower than say the Air Force or the joint agencies. But we're working that problem very hard as well.

Do you see that as something likely to continue into 2012?

Our belief at this point is that we've got the growth rate stabilized let's call it. So we are working to make sure that we are growing across all these markets.

And then turning to the -- as you pointed out, the end of the non-compete with your former Booz partners in the civil side, you're going to continue to do things you were precluded from doing starting halfway through next year. Have you included some estimates for revenue and profits in that world in your guidance or have you left that out awaiting to see how you might do?

Well, we have left that out, waiting to see how we're going to do. As I mentioned in answer to Adam's question, I look at it from a CFO standpoint, is that that's either incremental revenue that we can capture for FY 2012 or it's the cushion against the FY 12 uncertainties in the challenging -- particularly the challenging defense market.

But either way, our hope would be that there's real upside there. Clearly there will be some startup costs associated with that and that we have accounted for in our forecast.

And just one more. Because of the continuing resolution, I mean we see it affecting the sort of normal seasonal patterns because so many things have been on hold waiting for the Congress to sort of get off its ass and vote a bill.

Do you think that we might see some aberrations in the normal Booz pattern? Or you mentioned before your sort of big proposal season and a regular rhythm to the business. Do you see the CR upsetting that rhythm that you've usually seen?

I believe that -- not at this time, Joe. There's talk about cuts here and cuts there and we're going to cut this sort of thing. But we haven't seen that come through the communities this year, the contracting communities this year as much.

Last year there seemed to be almost a paralysis in the contracting community because we operated under a continuing resolution for so long. I think this year, the government system has gotten used to the fact and so we are seeing money being lent, and you can see that just from our increase in funded backlog for example.

So, at this point, we don't see a major disruption. Certainly I can't say there won't be minor disruptions. But we don't see anything at this point in time that would substantially damage our chances of making our 2012 numbers.

Terrific, well thank you for your answers, Sam, and for the detail in the presentation and congratulations to all of you from Carter and Joe and the rest of the Barclays team.

Thank you, Joe.

Jim Kissane, Bank of America Merrill Lynch.

I would like to add my congratulations as well. Just a question on the margin performance. It was very solid.

Is the shift to the fixed price -- I guess the move from (inaudible) sequentially 13 to 16%, is that the primary driver of the stronger margins or are there some other factors that you can kind of talk about? Thanks.

We listed out three factors there. One is the incentive compensation. We are highly -- the way our compensation structure is structured, we have a high percentage of incentive compensation associated with that. Last year the fiscal 2010 revenue growth was on the order of 17%. So in our system when revenue growth decreases, then incentive compensation will go down as well.

So you see some of that impact in our margin improvement. And we had frankly when we went on the roadshow, we mentioned that there would be slight margin improvement and that was clearly going to be one of the sources.

Second impact was from as you pointed out, there was about a 4 percentage point shift from -- primarily from T&M to firm fixed price. Frankly that caught me by surprise because that has been our percentage of business from cost plus T&M and FFP has remained remarkably stable over the years.

The administration did say that it was going to move away from T&M to cost plus contracts and lo and behold, when we tallied up the new starts as a result of the September 30 awards, the government fiscal year-end awards, we did see a movement from T&M to the firm fixed contracts. So that helped out margin. As you know, margins on fixed-price contracts are higher than on T&M contracts.

Was there any particular contracts that shifted to fixed-price that would've moved the needle that much?

Well I think it was -- there were a number of contracts. As I say, it is a subtle shift and it's not one contract that drove that. And the nature of what we do hasn't changed significantly. So I think there's no one contract we could point to.

And I know you don't break out cyber as a line, but can you give us maybe a sense of the growth rate behind cyber? It seems like it's the hottest topic and where you've seen a lot of investor interest. So not breaking out the absolute number, but just sort of the growth rate for cybersecurity projects. Thank you.

This is a Horatio again. We don't necessarily track the numbers in a way that we can give you a precise number. We can give you some flavor for it.

And the reason for that is we have a relatively expansive view of what constitutes cyber to match the reality that cyber is more than just people [seeing a keyboard]. It's policy, it's change, it's systems architecture done a different way and so forth.

So against that, what we are seeing, cyber was of great interest in the intelligence community and that's clearly where the first wave of opportunity hit. And we've capitalized on that. We believe we have done very well.

We are now seeing great interest in the services. All across the military, they are taking a lot of steps to make sure that they are prepared and that they're doing cyber the right way. The 10th Fleet is one example but there's many.

And then the civilian agencies have also begun, maybe at a lower pace, but they've begun to show some interest in commercial markets. As you may know, we have carveout in our non-compete with Booz & Company that allows us do cyber work in the commercial market given in anticipation of the full release in next July. And we have seen some opportunities there that we are pursuing. So we are seeing the promise of cyber turning to real revenue and real profit at a good rate.

Excellent, thank you very much.

We just announced a -- I guess the Department of Defense announced the award of an IDIQ cyber contract for the Navy and there were four companies of which we were one. And that has a big ceiling on it.

Of course, none of that is in our backlog because we don't put IDIQs in our backlog until they turn into funded work. But it's another indication of what Horatio says (inaudible) that the servicers are starting to say I need cyber support as well.

Rob Spingarn, Credit Suisse.

Again, our congratulations on your first quarter. I have a couple of questions.

I really want to clarify on the continuing resolution with regard to the fact that you're looking for I think the low 9s on sales growth, that would imply about 11% in the final quarter based on the fact that the first three quarters have been a little bit lower. Is that a fair assumption? And what would drive that?

It is a fair assumption and two things are driving that. One, we're seeing actually an increase -- we do have a 15% funded backlog, and so we have the funded backlog. We have more staff on board. So you know -- and I think we have an extra business day in the March quarter, so you put all of that together and we feel like that the fourth fiscal quarter will continue to show -- we're growing, our growth rate is increasing sequentially as we go throughout the year and we think that trend will continue in the fourth quarter.

Okay and that extra business day in March of 2011, that's compared to March of 2010?

Yes.

Okay, and then specifically I think Joe touched on this earlier, but your guidance assumption for 12 on the revenue side, taking the commercial out of it, does that contemplate a full-year CR in government fiscal 2011 or there's no specific assumption to that?

There is. We did not sit down and factor in CR versus non-CR. What we did is we took a look at the business that we have, we took a look at the proposals we have outstanding and the likelihood that they would get awarded, and we took a look at the proposals that we know we're going to submit. And of course you always look at that and you factor it down for what we like to call the gotchas.

But we feel like the business base will be there. Now there's been all sorts of speculation about what might happen. But in the end, we do still feel like that the government has a mission to execute. So we intend to help them execute that mission.

Okay and then what kind of adjusted EBITDA margin are you expecting in your fiscal 2012 guidance and also what tax rate?

The tax rate, I can tell you that we've focused in on 41%. We have not presented an adjusted EBITDA margin. I think -- we haven't set down and calculated it on an adjusted EBITDA basis. So let me not give you a number that we haven't --

Okay and then just as a final question, looking at the cost of services, that went up slightly to just under 52%. Although I do notice historically it moves around a bit.

Does that reflect higher costs? Is it emblematic of any kind of pricing adjustment or this shift towards a more fixed-price contract? How should we think about the percentage of cost of services?

I don't think there is any one -- as you say, it does move around. Given the nature of our work, we are managing it against the rate base.

We manage cost of services against G&A as we go. So normally those things will -- you don't see both of those on a relative scale increasing at the same time.

Okay, just the last thing, maybe this is for Kevin. Is there any kind of cost under target assumption or adjustment that we should be thinking about with the revenue performance here?

Rob, it is Kevin. And we are on the path that we talked about over the summer where we built up the cost under target and it is reversing in the second half of the year, so we're pretty much spot on.

Bill Loomis, Stifel Nicolaus.

Good morning, gentlemen, and great results here. Just looking at the -- couple things. First, Sam, you talked about awards where you said the backlog will trend down. Were you talking about total or funded backlog?

Funded backlog. Normally funded backlog is what (inaudible)

Okay, so you aren't trying to imply that awards book to bill will be below one times revenue? That was not your implication?

No, no.

And then the second is on the interest savings, the $35 million a year in interest savings, so what actual rate should I put in including any amortized fees should I think about for the different debt classes? Not the LIBOR plus spread but what the actual rate is today?

What did we assume? 4.5%? Something in that neighborhood? Let us not, Bill, give you a number on the fly unless you get (multiple speakers)

We did assume 3% on term loan A and 4% on term loan B. And that was offset, Bill -- to come up with a net rate, we haven't calculated the rate, but it was offset by the amortization of the debt issuance cost and the original issue discount associated with some of the continuing costs from the old loans as well as those costs associated with the new loans.

Okay and that will be implied -- that will be in the interest expense line also?

That is absolutely right.

And then just one more thing on the -- I know you're not giving quarterly guidance for fiscal 2012, but do you still expect like the year to year patterns we saw in fiscal 2011 where the first quarter was quite strong on margins? Do you expect that to repeat when we look through the quarters in fiscal 12?

Yes, generally, yes. The reason for that is I think as Rob touched on earlier, the cost under target, we were pretty conservative in spending against our indirect rates in the first quarter to make sure that the year gets off to a good start.

The one thing we do not want to do is exceed the rates we have bid in our contracts and the rates for both T&M, FFP and cost plus. You want to manage within those rates. And so we will tend to underspend on the first quarter. So I would expect that to continue this year.

Okay, and then sequentially decline into the September quarter in terms of margins and December being lower than September?

Yes, that's the traditional pattern, let's call it. You do also then have to take a look at business days in there and so forth because that can have a slight impact.

Okay, well thanks a lot. Great quarter, guys.

Brian Gesuale, Raymond James.

Congratulations again on your first quarter out of the gate. Most of my questions have been answered, but wondering if you could give us a little bit of additional color on the pipeline of new opportunities out there, whether it's in terms of proposals submitted, bids outstanding or pending proposals that you expect to submit, just some color around the general business development activity.

There is honestly not much to say but that it looks quite robust. It looks like what we've been seeing. There are no major either changes or distortions across all the markets. We're pursuing the same type of work, reinventing our work to move upstream and to continue to make sure that we are relevant to the government.

But there is nothing in particular that we see that provides any -- there's really more of what we have been doing. It's continuing to serve our clients and trying to figure out what they need and where they need it, going after it. That's about it.

Yes, I think as we said, we have been seeing robust growth in the cyber area, in the health area as well as in the integration systems -- engineering and integration area and we would expect that to continue. That's certainly reflected in our proposal backlog and in our opportunity pipeline.

Would you characterize the year-over-year growth in the proposals outstanding or the pipeline -- is it growing commensurate with funded backlog? Lagging it, leading it? Is there any way to kind of characterize it in a historical context quantitatively?

We don't see a major change. The problem with of course the proposal backlog is valuing the IDIQs. Given the nature of contracts these days -- so for example, this big win we just had at [stay war], on the one hand, the government announced that's x billions of dollars, but then sitting down and figuring out how much of that we're actually going to spend, you've got to break it down into sub targets.

So we don't see a major difference from what we've seen historically. I think like a lot of folks see awards moving out to the right, but as we get close, we think that will -- that tends to tighten up as you get closer to the end of September.

Okay, terrific. Just wanted to follow up on margins. They were impressive in the quarter. Can you maybe remind us of the difference in margins for the commercial opportunities versus the government? And then the sustainability of that increase in fixed price contract mix?

Let's start with the sustainability of the fixed-price contract mix. We did not set out to do more fixed-price contracting.

We just did -- normally it is driven by our customers and the way they want to contract. And of course the administration said they wanted to move away from T&M, time and materials contracts to fixed-price contracts.

And given the nature of the work we do, that's fine with us. We're not big systems developers for example. So our exposure to fixed-price deliverable contracts is pretty small. So now if I -- that will take care of that. I'm sorry (multiple speakers)

Commercial margin.

In terms of the commercial margin, there are two things going there. One, we baked into our forecast the cost of developing our commercial and international markets. So setting that aside, we believe in a steady state that the margins in those markets will be higher than we experienced in the government market.

I would say our plan is to be even higher than we experienced doing fixed-price work in the government markets. (multiple speakers) so we'll have the startup costs which we have factored in and we believe once there's a steady state that it will be more profitable than our government business.

Great, that's helpful, guys. Thanks a lot and congratulations.

(Operator Instructions) Michael Lewis, Lazard Capital Markets.

Good morning, everyone. Thanks for taking my question.

Sam, I just wanted to circle back on the IDIQ that you were discussing a few minutes ago. Was that the $189 million contract that you won for work over in San Diego?

Yes.

And none of that had been embedded in the funded backlog at this time, right?

Exactly.

And then just to circle back on another recent contract win I haven't seen you press release yet, on January 20, it looks like DARPA put out a [SBIR] admin services contract. It's about $225 million total value to you and I'm wondering is this a five-year program or has this ben shortened to say a three-year timeline?

I'm sorry, I don't know. Given that it's -- well I don't want to guess -- I would have to check that and get back to you.

Okay, I will circle back with you on that. Horatio, I just wanted to circle back on another cyber comment that you made.

With regard to the focus of the cyber operation within the intelligence community, are you focusing more on the [C&D], computer network attack or exploitation markets? Which one of the three are you really pinpointing your expertise?

I think the beauty of what we do in cyber is we work across literally all aspects. And what we have learned working with our clients is that this whole cyber question, people like to talk about offense versus defense and things like that. They're really all one thing and it's one set of skill sets that gets applied in different ways.

So there isn't a particular vector. What we try to work on much like with the rest of our other work is the highly analytical (inaudible) aspects of cyber that we believe over time give us a preeminent position and the ability to then take those learnings and scale them across other clients that might need them.

So that's been more of our approach and that's what we believe is going to continue. We are working at the intersection of analytics, traditional cyber, cloud computing and so forth. That's kind of where we are trying to take the service offering.

Okay, that's fair. And, Sam, just one more question for you just to make sure that the models are right here. On the debt, where exactly will you roll out of fiscal year 2011 on the debt line? And that is also including the deferred payment obligation. Could you give us some help there, thanks?

The bank debt, the debt we just structured will be $1 billion and we would not expect -- the DPO will increase slightly because that is a -- the DPO is -- you accrue the interest but the interest is payable when it matures. So it's a balloon payment if you think about it. So it will continue to accrete over time. But I think if you took a look at the historical quarterly increments, that would give you a pretty good indication.

Okay, thank you so much. Congratulations on the quarter.

George Price, BB&T Capital.

Great, thanks very much. Hope you guys can hear me OK and let me extend my congratulations as well on your first report as a public company.

Just I'd like to circle back on a few things. First on the revenue growth, obviously still showing very healthy growth relative to most of your public peers. But also pulling back a little bit on the 10% plus kind of expectation that I think was previously discussed and just a couple questions on that.

First, can you talk about specifically what changed and how things evolved relative to your expectations over the last several months? And second, in light of that, and I know you talked a little bit about this, but I guess what kind of specifically gives you confidence from here that maybe the upper single digits plus range is achievable even if we continue to see some bumps in the budgeting and spending environment?

Well I -- in terms of what has changed, when we went through our planning process completed in the last few weeks for FY 2012, we dialed back our assumed growth rate in defenses for example. So we continued to see robust opportunities in (inaudible) and in civil. We made a modest downward adjustment in our planned growth rate in defense.

And I think that reflects the environment that we're heading into. Again if you -- there was a -- we see ample both contract backlog, proposal backlog and opportunities to drive growth rates that we've been talking about historically.

But I think as everybody knows, we are in some interesting times particularly when it comes to defense. So that is why you see a slight tick-down.

It is hard in this business. The difference between let's say 9 and 10.5%, it is hard to forecast that precisely. You're just seeing some conservativism, some additional conservativism let's say creep into it.

Okay and maybe if you could also comment a little bit on margin expectations. Again I know you talked a little bit about it, but on an adjusted EBITDA basis, are you sticking with kind of the 10% annual increase you think you can achieve or perhaps do you see more than that at this point?

Well, I think what we said sort of as part of our IPO is that it would be 0.10% as opposed to [off on] the margin itself. Yes, 10 basis points. So it's not 10%. It's 0.10% or 10 basis points on the margin.

Oh, sorry if I misspoke.

Well, I just wanted to be clear where your model can get out of whack pretty (multiple speakers) but, yes, we would see that continuing.

Very strong cash flow which I think is great. Couple questions on that. I guess what are your debt repayment assumptions going forward?

And maybe what is a comfortable level of cash, that is cash on the balance sheet for you, when we think about modeling cash and then how much you might defer to paying down debt?

It's Kevin Cook. Going forward as Sam mentioned, we have the $1 billion term loan A and B, we have standard amortization rates on the term loan A and B. So we will obviously make all those payments.

We have modeled in the potential for some early payments in fiscal year 2012. But we also don't expect interest rates to spike in FY 2012.

We are looking at the potential as to whether we need to hedge the new debt. And we will continue to assess that in light of what we see going on and potentially down the road with interest rates.

As I recall, Kevin, the amortization on the A is 5% (multiple speakers)

In the first year.

In the first year and it's 1% on the B. So we will do that debt repayment and then we're looking at something on the order of $100 million a quarter paid in additional paydown in the third and fourth quarter right now. That's what's factored into our outlook.

That's in that fiscal Q3 and fiscal Q4 12?

Yes.

At the end of the quarter.

At the end of the quarter, there you go.

Yes, yes. And I guess what is kind of a comfortable crash level for you guys?

Well you know, we have the $275 million revolver and we keep increasing it but we've never actually used it. So we've always said let's target to have $100 million. I don't -- it's not going to hurt my head if we find ourselves going into that revolver.

We have a couple of -- our peak cash usage is in June when we pay out partner and staff bonuses. At this point, we're not forecasting that we would need to draw on the revolver.

But when you get paid from the government, the government tends to pay in very big chunks. And you know, if there's a power outage in Columbus, Ohio for example; that could cause something to move for two or three days. So while we're not forecasting going into the revolver, it's there for a purpose and if we need to use it, as you know, it's pretty cheap debt these days.

Last thing, if I could. I was wondering if maybe you could talk a little bit about award flow under some of your largest contracts, the SURVIAC contracts for example, S3, maybe IATAC given that those are some pretty interesting work for you guys. How have things been moving there in this environment? And if you could also maybe comment on anticipated recompete activity timing and magnitude over the next maybe six to 12 months. Thank you very much.

I haven't looked at S3 of late. I know with SURVIAC and IATAC we're seeing a continuation of awards under those two contracts pretty much commensurate with what we saw in the current fiscal year. Do you have any insight into these three?

Related to CECOM as well, we are starting to see a ramp-up on the R23G contract that was awarded last summer. So the Army is finally getting around to issuing some task orders on that contract.

And re-competes?

Re-competes we decided that we wouldn't get into talking about specific re-competes. I can tell you that there are no major re-competes.

It's pretty much the norm as we look into FY 12. In other words, every year we have x number of contracts, some percentage of our business gets re-competed every year. There's no significant change in this year compared to prior years.

What percentage just -- should we assume that 20% or so gets re-competed every year?

(multiple speakers) the average contract is 3.5 to five years, so not a bad assumption.

Keep in mind as we've talked in the past about the fact that we have multiple ordering vehicles into most of our clients. So even when things go out for re-compete, it doesn't really necessarily mean that work is at risk. It's maybe that that particular vehicle could change or could change hands or something.

A lot of these you know are multiple award IDIQs and so the chances of -- so it's not a -- this is why we don't talk about specific contracts because they don't give a clear view of the business pipeline anyway.

Fair enough, thanks very much for your time.

Ed Caso, Wells Fargo.

It's actually Rick Eskelson on for Ed. I just had a quick question for you on OCI and your thoughts there. It seems like it's maybe getting a little bit firmer but I wanted to get your thoughts there on whether you think or have had any problems in the past regarding OCI since you were owned by Carlyle.

I don't think we have seen any OCI impacts as a result of the Carlyle transaction. In general we -- given what we do, we tend to stay on one side of the OCI wall and we have worried about that for a number of years. So we haven't seen any real issues around OCI.

Ladies and gentlemen, this ends the question-and-answer section of the call. I would now like to turn the presentation over to Mr. Ralph Schrader, CEO, for closing remarks.

Thank you, Caitlin. First of all, I would like to just thank everybody for participating today and being a part of this call with us.

As is always the case, as the CEO, you sort of want to make sure that all the points have been made and I just would like to reiterate the fact that we believe the key metrics we talked about today are very important and that is that in the third quarter, our revenue did increase by 10.1%. Our adjusted EBITDA increased to 23.1% and the adjusted diluted earnings per share increased to 27%.

And we also continued to generate the strong cash flow and free cash flow. The backlog numbers are very strong, the funded backlog is strong as well and the refinancing of our debt which we think will positions us for the future.

So that being said, again our strong appreciation for all of your participation today and we hope that you found this to be a very beneficial time for you. So thanks, everyone, and this concludes the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.