Booz Allen Hamilton Holding Corp (BAH) 2012 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 2012 results. (Operator Instructions). I would now like to turn the call to Mr. Curt Riggle.

Thank you, Greta, and thank you all for joining us today for Booz Allen's second quarter and year-to-date fiscal 2012 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 (multiple speakers) now on slide 2.

On today's call, Ralph will provide you with an overview of our business performance and strategic positioning. Sam will then discuss our financial results in detail, including our income statement, balance sheet, cash flow and backlog. Ralph and Sam will discuss our guidance for the remainder of fiscal year 2012, which began on April 1, 2011.

As shown in the disclaimer on slide 3, 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 action 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 2012 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 which we believe provide useful information for investors. We include reconciliations to our non-GAAP measures to the most comparable GAAP measures in our fiscal 2012 second quarter earnings release and in these slides.

It is now my pleasure to turn over to our CEO, Ralph Shrader, and he will start on slide 4.

Thank you, Curt. Good morning and thank you for joining us today.

There is no question; these are challenging times for the global and national economy. Now more than ever, there are heightened expectations for businesses to deliver quality products and services, create jobs and contribute to the economy and to be fiscally and socially responsible. Booz Allen is committed to be the consultant of choice to our clients, the employer of choice for talented people, a good corporate citizen and an investment of choice.

We completed the second quarter and first half of fiscal year 2012 with solid growth in revenue and profitability. During this period, we continued to grow our Federal government business despite challenging conditions in that market and grew across all of our major Federal markets -- civil, defense and intelligence -- with our greatest growth in areas related to health and cyber. Additionally, we launched our focus expansion strategy into commercial and international markets when our non-compete agreement ended on July 31, 2011.

In the past three months, we opened our New York office across from Bryant Park, expanded in San Francisco and Charlotte and began to grow our headcount and Abu Dhabi. Booz Allen's long track record of organic revenue growth going back two decades extends further with today's report on our fiscal 2012 Q2 and half-year results. Our second quarter revenue increased to $1.43 billion, up from $1.37 billion in the second quarter of fiscal 2011. Net income for the quarter increased to $75.3 million, up from $14.8 million in the prior-year period. Adjusted EBITDA increased to $114.5 million up from $101.3 million from the second quarter of fiscal 2011, and adjusted diluted earnings per share increased by $0.11 for the quarter to $0.36 per share.

The end of the government's fiscal year is always a defining moment for those who serve the Federal market. I'm very pleased to report that Booz Allen's total backlog grew to a record $12.86 billion as of September 30, 2011, the closing day of our second quarter, which coincides with the end of the government's fiscal year. This record backlog level, which represents an increase of 16.4% over last year at this time, shows Booz Allen's competitive success and proven ability to win new contract awards and defend recompetes of our existing contracts. Backlog of this magnitude gives us confidence for the future. Booz Allen's powerful combination of stability and agility benefits our clients, our people and our investors.

Our single P&L structure and collaborative culture enables us to easily move leaders and resources to growth markets. To borrow a hockey metaphor, we skate to where the puck is going to be. Three weeks ago at a demonstration of our agility, we announced leadership team moves that put proven leaders in positions we believe will drive further growth. We named Mike McConnell Vice Chairman of Booz Allen and broadened his responsibilities to drive cyber capabilities across all of our markets; civil, defense, intelligence, commercial and international.

We moved Executive Vice President, Rich Wilhelm, to lead our intelligence business, and tapped Senior Vice President Karen Dahut to lead our growing analytics capability. Booz Allen's focus is helping clients succeed in their core mission and improve enterprise effectiveness and efficiency. There is no question that the essential missions of government must be performed even in lean times and Booz Allen will be there to help our clients deliver on these core missions.

In September alone we won numerous mission-critical contracts and major task orders and had a book-to-bill ratio of 2.15 for the quarter. These recent wins included a $40.3 million contract award from the National Institutes of Health to support programs and planning for children's health; a $117 million task order from the Department of Defense to provide technology and systems engineering services to help counter improvised explosive devices; a $96.7 million award from the Army Materiel Command for software architecture support; a $100 million ID/IQ award from the Treasury Department to assist its Office of Terrorism and Financial Intelligence with financial threat analysis; and a $500 million ID/IQ award from the FBI for technical, engineering and analysis services.

Booz Allen's people are our product and our firm continues to be recognized as an employer of choice. In the past quarter, we were named one of the top firms to work for by Consulting Magazine and Vault.com, and we remain named the best company by Working Mother magazine for the 13th consecutive year. Booz Allen believes that good business and good citizenship go hand-in-hand and we were proud to except the BCA 10 Award from the Business Committee on the Arts in New York on October 5 as one of the best companies in America supporting the arts.

Next week is Veterans Day, which has great meaning for us at Booz Allen. Nearly a third of our employees are veterans and we have an active and successful military recruiting program, evidenced by our top ranking by GI Jobs on their 2011 list of military-friendly employers. Booz Allen employees bring specialized knowledge and deep commitment to serve those who serve. Our support to veterans and wounded warriors goes well beyond the boundaries of work. Thousands of Booz Allen employees volunteer and raise funds to help veterans and wounded warriors with issues ranging from successful career transitions to family support to health and well-being. This spirit of service has defined Booz Allen for nearly a century.

I was recently going through some historical materials and read with great pride stories about the military service of our founding partner Edwin Booz in World War I and World War II. He led our first assignment for the Department of the Navy in 1940, and I know he would be proud that we have continuously served the Navy ever since.

In September, we won four awards totaling $375 million from the Navy Space and Naval Warfare Systems Command. We believe that our new contract awards and backlog will drive revenue going forward.

To look back on our just-completed second quarter and first half of fiscal 2012 in greater detail, I would like to turn to our Chief Financial Officer, Sam Strickland.

Good morning, and thank you for joining us. These have been wild times in the global economy and in our own market sector, and I'm proud to be able to report that Booz Allen has performed well in delivering top- and bottom-line growth, delivering earnings per share in line with our annual guidance and generating strong cash flow.

As Curt mentioned in his opening summary, in addition to GAAP results Booz Allen also reports certain non-GAAP measures, such as adjusted operating income, adjusted net income, adjusted EBITDA, adjusted diluted earnings per share and free cash flow. We believe these metrics provide better insight into our operational results because they remove the effects of nonrecurring or unusual items.

Now let's turn to slide 5 for a closer look at our second quarter results for fiscal 2012, which shows a 4.5% increase in revenue over the prior-year period. Most notably, all of our major markets continued to grow.

I'm very happy this morning to report positive top- and bottom-line growth for Booz Allen. In the second quarter of fiscal 2012, operating income increased to $93.7 million from $71.9 million in the prior-year period, and adjusted operating income increased to $100 million compared to $88.9 million in the prior-year period. The improvement in operating income was driven by the continued growth in revenue, increased profitability resulting from decreases in incentive and stock-based compensation costs, lower amortization of intangible assets, a shift in contract mix to more fixed-price contracts and improved profitability on subcontractor arrangements. The profitability increases were partially offset by a significant investment in business development costs leading up to the end of the government's fiscal year, as well as unbillable staff compensation costs incurred in advance of demand.

Adjusted EBITDA increased 13% to $114.5 million in the second quarter of fiscal 2012, compared with $101.3 million in the prior-year period for the reasons cited above which drove the corresponding increase in operating income. Net income increased to $75.3 million from $14.8 million in the prior-year period and adjusted net income increased to $50.6 million from $30.1 million in the prior-year period. The increase in net income was driven by the increase in operating income, a decrease in interest cost, the gain from the sale of state and local transportation business in July 2011, and the release of certain income tax reserves which reduced our effective tax rate.

In the second quarter of fiscal 2012, diluted earnings per share increased to $0.53 per share from $0.12 per share in the prior-year period while adjusted diluted earnings per share increased to $0.36 per share from $0.25 per share in the prior-year period.

Turning to our cash, Booz Allen has a long and successful track record of generating cash from operating activities and the very strong cash collections. Free cash flow was $97.2 million in the second quarter of fiscal 2012 compared to $138.1 million in the prior-year period. The primary driver of this change was higher Federal and state taxes paid this year because we expect fiscal 2012 tax taxable income to exceed the maximum annual available tax benefits from our net operating loss carry-forward. In August on our last earnings call I noted that going forward we would require more cash for the payment of taxes, so this has been factored into our planning.

In the past quarter, Booz Allen continued to generate cash through strong receivable collections as evidenced by an average days sales outstanding for the second quarter of fiscal 2012 of 68 days. I will say more about our cash position shortly in a discussion of year-to-date results.

Our backlog story, like our cash story, is a good one. Total backlog as of September 30, 2011, was $12.86 billion compared with $11.05 billion as of September 30, 2010, an increase of 16.4%, and as Ralph noted, a record high for Booz Allen. Funded backlog was $3.44 billion as of September 30, 2011, up 10% compared to the $3.12 billion as of September 30, 2010. Unfunded backlog increased to $3.35 billion as of September 30, 2011, up 17.5% compared with a $2.85 billion as of September 30, 2010. Priced options under existing contracts in the second quarter of fiscal 2012 increased by nearly 20% compared to the prior-year period.

Let's take a look at our cumulative performance for the fiscal year to date. We are now on slide 6. Booz Allen's revenue was $2.88 billion for the six months ended September 30, 2011, compared to $2.71 billion for the prior-year period, an increase of 6.2%. Net income for the first half of fiscal 2012 was $126.5 million compared to $43 million for the prior-year period and adjusted net income for the first half of fiscal 2012 was $108.6 million compared to $71.8 million last year.

Adjusted EBITDA for the first half of fiscal 2012 was $237.4 million compared to $222.9 million in the prior-year period. Diluted earnings per share for the first half of fiscal 2012 was $0.90 per share and adjusted diluted earnings per share was $0.77 per share, compared with $0.35 and $0.59 per share, respectively, for the first 6 months of fiscal 2011.

Net cash provided by operating activities increased to $177.1 million for the first half of fiscal 2012 from $170.9 million in the first half of fiscal 2011 while free cash flow increased to $133.5 million compared to $131.9 million for the comparable period. As discussed previously, cash flow was affected by an increase in tax payments of approximately $47.4 million in the six months ended September 30, 2011, compared to the prior year.

As a result of the refinancing of our credit facilities in February 2011 which resulted in a reduction in outstanding debt and lower interest rates, Booz Allen realized a reduction in interest expense of $54.7 million in the six months ended September 30, 2011, compared to the prior year.

As discussed on our August earnings call, we are continuing to evaluate all options for the future use of our cash and are fortunate that our strong cash position gives us both stability and flexibility in how we operate our business and create value for shareholders. From time to time, we evaluate alternative uses for excess cash resources, including debt repayments, payment of dividends, share repurchases or funding of acquisitions. Any determinations to pursue one or more of these alternative uses for excess cash is subject to the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts and our senior secured credit agreement as amended, and other factors deemed relevant by our Board of Directors. I want to assure you we will be good stewards of this cash and will seek to use the cash to maximize return to our shareholders.

Now I would like to turn it back to Ralph who will talk briefly about Booz Allen's strategic positioning and differentiation and then I will finish the formal part of our discussion with Booz Allen's guidance for the second-half of fiscal 2012. We are now on slide 7.

Thank you, Sam. Each year, Booz Allen takes a close look at our overall strategic positioning and key leadership roles, our detailed market strategy and segmentation as well as implications for our people strategy and infrastructure. The leadership moves I discussed earlier resulted from this examination. We affirm the key elements of our strategy to pursue quality growth, not growth for growth's sake, and to focus on markets and services in which Booz Allen is truly differentiated and which are aligned with our clients' core mission.

For NSA the core mission is code making and code breaking; for NIH, it is healthcare; for the FBI, law enforcement; for financial services the protection of assets and transactions. This is important work and in these lean times we believe clients will prioritize to spend their funds on core mission rather than peripheral support roles. And we believe clients will pay for quality, not look for the lowest-cost provider when it comes to work that supports their core mission. This is our sweet spot. We are aligning our own leadership talent and internal advancement in areas that help clients with today's most pressing needs, such as cyber, health, and efficiency and effectiveness.

In cyber security, Booz Allen has industry-leading talent and a compelling approach to security focused on dynamic defense; that is, cyber defenses that are as nimble and sophisticated as the attacks. Additionally, we are building a unique cyber solutions network that unites distributed centers and laboratories to provide access to any Booz Allen cyber capability at any time. The first center to come online was our Cyberanalytics Center focusing on forensics and malware detection. By January, we will have eight more centers fully integrated and operational and will continually add centers and capabilities to the Booz Allen cybersolutions network, all virtually connected to deliver unmatched capabilities to our clients.

Health is our fastest-growing area and spans multiple markets -- civil government, military and veterans health and commercial health. Across government, we are helping clients adjust to the new realities of budget constraints and increased expectations are here to stay. And they can best position for the future with a combined focus on mission refinement, operational efficiencies and cost savings. We called the approach E3; enterprise, effectiveness and efficiency.

As we have for 97 years, Booz Allen makes our clients' mission our mission. Managing our own business well is key to our continued ability to serve clients, attract and retain the best people and give back to our community and to our investors. I will now turn back to Sam for a look at our forecast.

Thank you, Ralph. We are now on slide 8. In August we forecasted top-line growth for the first half of fiscal 2012 to be in the range of mid-single digits, and as you have seen our revenue growth was 6.2%. We continue to forecast revenue growth and margin improvements with higher growth rates expected overall for the second half of the year, including a ramp-up expected into the fourth quarter as we deploy staff against recent contact awards. This also reflects our current expectations for continued growth despite the challenging Federal budget environment.

We are increasing our diluted earnings per share guidance, which is now expected to be in the range of $1.56 to $1.66 per share, and we are reaffirming our guidance for adjusted diluted earnings per share which is expected to be in the range of $1.55 to $1.65 per share. The increase to the diluted earnings per share forecast reflects the gain from the sale of our state and local transportation business in July 2011, and the release of certain income tax reserves also during our second quarter. These nonrecurring items are excluded from our calculation of adjusted diluted earnings per share.

Overall, our EPS outlook reflects expectations that bottom-line performance will continue to benefit from revenue growth with increasing operating margins and reduced interest expense. These earnings per share estimates are based on the fiscal year 2012 estimated average diluted shares outstanding of approximately 140.6 million shares.

Thank you, Sam, and thank you all for listening to our summary of results and outlook. Our Chief Operating Officer, Horatio Rozanski, and our Senior Vice President and controller, Kevin Cook, are also here with us today to answer your questions.

Before we open the line for questions, I would like to mention that our analyst and investor day on December 13 from 10 o'clock until 2 o'clock at our McLean, Virginia headquarters. All information is available on our website on the investor page. Greta, please provide instructions for those on the call for the Q&A session.

(Operator Instructions). Nathan Rozof, Morgan Stanley.

Congrats on a strong quarter, particularly related to the funded backlog. I wanted to focus on two things that pertain to the contracting environment.

First off, just given all the puts and takes that seem to be going on in the Federal contracting process this year, how should we think -- I wanted to explore how we should think about this in terms of the impact on Booz's business. And, specifically, last year, we saw award activity delayed by client uncertainty. Meanwhile, we are hearing that contract sizes are getting smaller and funding durations seems to be getting shorter.

So what my question was is, as we look forward, given that contractors are seemingly going to need to come back to the contracting officers more often for awards if funding awards are getting shorter, are we going to see any sort of a change in the seasonality or the pace of contracting towards looking forward through this next government fiscal year, or are we going to see the same type of back-end loaded government business that we have seen in the past, or just any variation thereof?

Nate, it's Horatio. I'm going to take a stab at answering what is a very difficult question. I think the honest answer is, if you could tell us exactly what is going to happen with the continued resolution I can answer your question with a great deal of procession. I don't think we know -- things are moving through the Hill, you have the super committee working its way through its process. I think there has been some good news about defense appropriations moving forward, but I don't know that there is any real knowledge as to how the legislative process is going to deal with budgets this year. And that is really what is going to drive it like it has in prior years the seasonality of the funding.

In the meantime, we feel very fortunate that we have had a fair amount of success towards -- in this last quarter with the end of the government fiscal year and feel like we are well positioned to continue to grow and continue to do the right thing by our clients as all this other stuff gets sorted out.

Okay, great, you actually lead right into my second question, which was, given the very strong growth in funded backlog I think up 10% year-over-year, when I look at the strong bookings performance in the quarter it looks like you had a trailing 12-month book-to-bill of like 1.35, which is also very good. Last year, we saw that similarly very strong performance in 2Q really drive strength in revenue growth in the back half of the year. I just wanted to touch base and see if there was anything that had changed or any reason we should not expect the strong funded backlog performance to similarly translate into improving growth in the second-half this year?

I think as we have said, we do expect the growth rate in the second half of our fiscal year to be higher than in the first half. That is a pattern we also saw in fiscal 2011. As you say, the funded backlog is there in place. I'm also encouraged by the -- I think there was about 17% increase in the unfunded backlog. And as you know, funded and unfunded are closely linked in that they are awarded -- they are ordered work. It's just not all of it gets funded at one point in time.

So, yes, we do expect improvement in our growth rate in the back half of the year. I think as Horatio points out, there is an awful lot of confusion and turbulence that will be in the market, but that is why we are very comforted by having our funded backlog in place because we believe that will -- much like it did last year, carry us through the back half of our fiscal year.

Let me just comment that, Sam talks about the confidence that is generated. I certainly believe that we are in a lot better shape having a solid backlog at this point in time, particularly funded. That obviously is something that you can build on. At the same time, nobody really knows what is going to happen as the month of November creeps along and we get towards budget discussions and everything else.

And I guess the best outcome for us is actually an answer, even if the answer is a somewhat Draconian answer. I think the major factors that influence business going forward actually are uncertainty. And the uncertainty is actually paralyzing. So if we could get to something where one way or another there is a resolution, a resolution to go forward, to go back, to stay in place, whatever it may be, then I think a lot of the clients are at least going to have certainty about the environment they are working in and they can go from there.

So I would say, that is really a key trigger point I would look at, is how much certainty comes out of this discussion as opposed to the ambiguity that drifted on for so long last year.

All right, thanks, Ralph, thanks, gentlemen.

Brian Gesuale, Raymond James.

Hey, guys, this is Matthew here; I'm speaking for Brian, thanks for taking my question. I guess the first question is in relation to the bookings with them being quite strong this quarter. If you could just give out a little flavor with regards to -- I don't know how much of it approximately or just qualitatively in terms of like the new work versus add-on or recompete kind of work, and then in general in terms of -- would you say -- would you characterize the bookings this quarter as in line flush activity from the fiscal year-end or slightly below or average or something along the lines of that?

One of the things we focused on this last quarter very strongly was an effort we called tactical selling. And it was really taking the time to think through what were our major client issues and how could we work with them to define tasks and opportunities where we could help them with those issues and take advantage of the fact that they were getting to the end of the year and they had money left on the books. And that has really driven our efforts. I think that may be a significant driver for the funded backlog, certainly for part of this and also the unfunded. And it patterns around really the rest of the business. Some of it was new, some of it was add-on, some of it was -- and a lot of it was taking advantage of pre-existing ID/IQs, which has you know we don't count into our back log numbers until they become order tasks.

And so that is really the pattern of the business. The recent particular lumpiness that says all of it came in one place or another place or it is driven by a certain factor, it is really a continuation of an effort at working broadly across the client base successfully to identify problems where we can help.

Horatio, I would think it's safe to say that we saw basically a pattern that is rather typical for us at the end of the year. So I mean there were no anomalies' in this pattern this year compared to in the past year. That's the best we could characterize.

Okay, thank you. And then the next question in somewhat relation to this, in terms of you guys have obviously the strong bookings over the last couple of quarters in terms of what your staffing plans for towards the end of the year in terms of hiring more folks, and maybe just a little talk in terms of what you're seeing from the labor and environment with regards to the turnover and just competitive competition there?

Sure. We saw a good increase in headcount in this last quarter in anticipation of the increase in backlog and the increase in business in the second half, and this is a pattern that we have seen the last couple of years where we take advantage. The summer is always a good time to recruit because people are more likely to change jobs in between school years. And so the combination of that and the new funding patterns we have seen the last couple of years drove strong hiring this last quarter. So we feel like we are well positioned to take advantage of what we have.

Tim McHugh, William Blair & Co.

I just wanted to ask on the commercial and international expansion opportunities. I guess in the midst of the uncertainty about the global economy, is that an impediment or are you so new in that expansion opportunity that it's not having any influence on your growth there?

Well, I think you probably characterized it correctly, and that is since we are re-initializing that marketplace there, we have somewhat unlimited potential for growth. And it's not like we have a market that has been capped or anything like that, but I think there's just a lot of things out there now. Clearly, the market itself I'm sure is being impacted by the overall economic conditions, but we are such a small piece of it at this point in time and we are so specialized in terms of niches we play in that it's not having any real impact on us at all at this point. We have got plenty of opportunity out there.

Is it trending as you would have thought a couple of months into it now, or is it too early to tell?

I don't know that -- I think it's too early to call anything a trend. I think that what we can see is we are pursuing the business that we were planning to pursue, we are pursuing it in the way we planned to pursue it and we are seeing results that are consistent with what our expectations were. So I think we feel like it's, quote, on track.

Okay, and then just one numbers question, if I could. The share count for the full year you gave in your guidance, it's lower than the Q2 average. Are you assuming future repurchases, or is that just reflective of the ones you did in the quarter?

I think that's just reflective as of the ones we did in the quarter.

Okay.

And the repurchases in the quarter were really the cashless exercise of options.

Okay, thank you.

Carter Copeland, Barclays Capital.

Just a couple of quick ones. First, on the language around the outlook for the remaining two quarters of the year, you talked about a ramp-up into the fourth quarter in terms of the growth rate. I wondered, is that meant to tell us that the growth rate will accelerate into Q4 from Q3, or are we reading too much into that?

No, I think that's right. And, again, if you follow the pattern we showed the last year, Q4 should be a stronger quarter than Q3. In other words, the March quarter is a stronger quarter than the December quarter. There is not any big holidays -- big holiday seasons in the first quarter, in the March quarter. So, yes, we would expect things to be rocking along pretty good by then. I mean (multiple speakers) but, clearly, we will -- to make our outlook come true, we will have, of course, we will have revenue growth in the December quarter as well. It's just that it will accelerate in the March quarter.

And with respect to the commentary that suggested you were -- you saw growth in all areas, do you anticipate this will be the case in the back half of the year as well?

Yes, across the major markets. Within each of those markets, Booz Allen is truly a portfolio business. We have -- we don't have a lot of big task orders. So we have markets that -- some markets, frankly, are shrinking, some markets are flat and some markets are growing very, very nicely. But overall across all of our major markets, we are growing.

It's only at the submarket level you have concern (multiple speakers) is what you are saying?

I'm sorry, yes, at the submarket level still.

Okay, great, thank you, Sam.

Stifel Nicolaus.

Thank you, good quarter. Just looking at, Sam, some of your comments on the profitability in terms of lower incentive comp and stock compensation, can you just go into that into a little more detail? Do you expect that to reverse and impact margins in the back half? And then as a follow-on, just a broader margin question, what are some of the levers that you can continue to pull here in terms of improving efficiencies and profitability and so forth over the next several quarters?

In talking in terms of the incentive compensation and stock compensation, there are two pieces to that, one of which is let's call it the run out of the stock compensation cost associated with the Carlyle transaction. We take that out for adjusted operating income purposes. But that was just -- we had an accelerated amortization of that and that has just been coming down each year. I think what you are really driving at is we did reduce our incentive compensation accruals for the year and frankly that was based on the amount of money that we spent in our bid and proposal and marketing cost, and to some degree staff carrying cost in the second quarter.

We are ahead of our spend plan there and we do operate this thing as a partnership mentality. Obviously we have been a Corporation for many, many, many, many years, but the notion is that if we overspend in one area then it goes right at the compensation impacts. So we are adjusting our compensation to make sure that we have got those costs accommodated in our annual outlook. If we have a more robust second half then we expect than we have outlooked here, then we will take another look at that.

And other margin leverage you might have in the coming quarters?

Well, the margin levers continue to be what I would call more aggressive fee bidding, more aggressive loading of fees on some contracts. We have seen -- it's interesting now, we saw quite a shift to fixed-price work I think in about the second quarter last year. Now that the shift seems to be a way from T&M and going into FFP and cost-plus, and those are tending to cancel each other out.

So we will see how that goes. You know, we have a very difficult time. We cannot go out and look for fixed-price contracts, right? I mean we go out and look for what our clients need done. And while we will try and influence the type of contracts we get, they tend to make those decisions themselves.

So we will see. That may not be as much of an improvement from that as we have had, say, here in the last year. But we think there are ample levers, including the control of unallowable costs and so forth as we grow to continue to drive the modest improvement in operating margins that we have talked about in the past.

Okay, thank you.

Credit Suisse.

It's actually (inaudible) in for Rob. I just had a quick question. I guess you talked about this a little bit, but I wanted to drill down on your margins as well. I guess particularly you referred to improvements -- improved profitability on subcontractor arrangements. I just wanted to drill down a bit and see how we should think about this for the remainder of the year. Is this something that you expect to continue and specifically what was it referring to?

I think what we have talked about in the past is that we were targeting a 0.1% increase in our operating margins on an annual basis, and we think we will continue on that vector. So that is really what we are looking at here. We did much better than that last year, which is possible this year, but we have not factored that into our thinking at this point.

Okay, and do you expect this to continue? Is it getting better for subcontractor arrangements here? Is this something that you are continuing (multiple speakers) --?

You know, you have to go back, and for those us who have been pawing this for awhile, we never marked up subcontractors in the past. It really goes back to our consulting heritage and consulting firms did not worry about pass-through costs. And shame on us, but it did have an advantage; it made us a very attractive prime contractor. So as we contemplated operating -- splitting off from the commercial business and operating as a public company, we said, my goodness, there is certainly room between where other firms are and where we are in terms of how much we mark up subs.

So we have been slowly moving that up, but clearly you have got a backlog that is priced one way. So we have been focusing on trying to take a little bit more because if you are a prime contractor, you are responsible for the work of that subcontractor and you're responsible for making sure that subcontractor gets paid. So there's real business risk there. So we are trying to tweak our rates and our fees there a bit.

Okay, thank you.

Michael Lewis, Lazard Capital.

My first question has to do with your intelligence market. I think it's a little bit north of 20% of your revenue, and as you well know DNI Clapper has been out the last few weeks talking about intelligence and expectations that the market will come down. What I'm most concerned about is the contractor support services and wanted to find out what you are thinking with regard to any potential impact to Booz.

We have been focused and will continue to be focused on this idea that Ralph talked about in the opening comments about core mission. And the notion that if we are working and supporting the core mission of the intelligence community as opposed to peripheral services, there is both going to be support for that to continue and the need for that to continue as well as a real desire for that to continue at a certain quality. So we believe our business is very much aimed in that direction and continuing to evolve in that direction.

So there is market pressure. I'm sure we will have to figure out how to evolve and adapt to it, but we are not seeing ourselves as hugely vulnerable to big cuts at this point will based on what is known now for those very reasons.

Okay, that's fair. If I shift gears, Sam, I was wondering if you could give us what your forecast plan is for full-year tax rate, D&A and interest expense. Thank you.

Let's see, I don't have those at the tip of my --

It is Kevin. The full-year tax rate is estimated at this point at 33.5%, down from the prior estimate due to the uncertain tax reserves that were released in the second quarter. We will continue to monitor that and adjust by quarter as we go.

The interest, as you know, we have roughly $500 million term loan B at 4%. I don't see that changing over the next six months. And we have roughly $0.5 billion at LIBOR plus 2.25. So you can see in our 10-Q when it's posted in the next day or so what that rate was for Q2. I don't expect the one- to three-month LIBOR to go too crazy so I would expect that would just say at about 3% for the second half.

And then the -- don't forget that you have got the deferred payment obligation interest that is a non-cash hit on the P&L, but it is roughly --

10.25%

10.25% on $80 million. So you can do the math on that one. And I think if you add those three things up, we have very little OID amortization in there, so round up.

I think it would be safe to say that the most recent quarter is pretty representative of what we will run on a quarterly basis.

Okay, thank you.

Jethro Solomon, BB&T Capital.

It's actually George Price at BB&T; good morning. A couple of follow-ups. On the second-half growth expectations, I was wondering, given the environment and what has transpired over the last quarter, is your confidence and comfort, I guess, on the, quote-unquote, higher growth in the second-half at all -- is that lower than it was a quarter ago?

I don't quite know how to answer that, honestly. We feel pretty comfortable. We have got a backlog there. We have got work order and we have got people in house. So at least as I look at it, it seems like most of the turmoil that is going to take place in that market has probably going to take place in the government's -- not this governments fiscal year, but next government fiscal year. So, yes, there is no guarantees, and clearly there's a lot of political uncertainty, but we are pretty comfortable with our outlook.

So I guess for those of us who might have been expecting a little bit more granular color on what was higher in the second half of fiscal 2012, it's more of a timing issue of third quarter versus fourth quarter rather than a confidence in how much higher it's going to be? Is that fair?

Yes.

Okay, thanks. The second question is, I was curious if you could maybe comment a little bit, especially following the comments on debt, comment a little bit on uses of cash. Great cash flow, obviously, how do you see using that? Do you see the potential, for example, for a dividend?

As I mentioned we are looking at all the options. Ultimately it is a call of the Board of Directors. We need to go through those conversations at this point. We -- historically, we have paid down debt, and as you know, we have paid down an awful lot of debt since we did the original Carlyle transaction. So we would continue to look at that. I will have to say paying down 3.5% average debt doesn't particularly excite me. We will take a look at dividends. We will take a look, frankly, at share repurchases.

Now it's clear that one of our issues in the market is the lack of liquidity. By the same token, when the stock price gets down to some of the prices we have seen this quarter, it's hard not to do something there as well. And, frankly, if there is an acquisition that comes about, we would consider doing that.

So we continue to look at all of our options. On acquisitions, I will tell you it's -- we are not out -- as you know, we have not done acquisitions. We have looked at them in the past. If we found something that was a good strategic fit and a reasonable price, then we are not adverse to acquisitions. So we are continuing to look at all those, continuing to discuss the best approach with our Board and we will provide clarity as soon as we have locked in on a final approach there.

If I could sneak in one more, at some recent industry events there has been some discussion by people on both the industry side and government about the need for the government to more closely coordinate with areas of commercial industries, practically around financial -- you know, key critical infrastructure, financials, grid, that sort of thing in terms of cyber. Given your background and focus having and obviously in government, but also having retained that commercial cyber piece after the split, it would seem that that is right in Booz Allen's power alley. And my question is, are you seeing any potential meaningful opportunities where government might -- there might be something coming down the pipe where government actually reaches out and it is an opportunity for you to get involved in that?

I think the short form of the answer would be that a lot of our strategy around commercial and cyber is based on the expectation that there is going to have to be much closer coordination between industry and government and we are beginning to see early signs of progress there. Neither side alone it is going to be able to tackle or solve this issue.

If you have been reading some of Mike McConnell's writings and things like that, it is clear that we have staked both a point of view and a position to build capabilities to assist across a broad spectrum. So we feel that if and when that comes to pass, we are well positioned. In the meantime across financial services and other industries there is industrywide initiatives that don't yet involve the government that we are participating in and trying to both shape the thinking and those very initiatives to make it happen. So that is very much on our minds and very much part of what we are doing.

I would say that having Mike McConnell now guiding all of our cyber activities across the firm allows us the maximal opportunity really to capitalize on firm-wide capability there, and also Mike's background and experience in the intelligence community on the government side. So I think that we actually foresee opportunities and we think we have positioned our resources in a way to allow us to optimize those opportunities across the board.

Great, thank you for taking my questions.

This concludes the question and answer portion of the call. I would now like to turn the call over to Ralph Shrader for closing remarks.

Well, thank you very much and thank all of you for joining us this morning. As I hope you can tell from our comments, we have considerable pride in Booz Allen's performance for fiscal 2012 to date. Our top- and bottom-line growth, our earnings per share, cash flow results show our strength and our resilience in this somewhat challenging market. Our matrix, organization, single P&L structure let us quickly move with the markets to seize the right opportunities across Federal, civil, defense and intelligence agencies as well as commercial and international markets. We believe Booz Allen is well-positioned and stands apart from its peer group. Our management consulting heritage imbues our people with an intense dedication to serve our clients and help them succeed. This is a very different orientation than companies that are focused on just selling to customers. Our deep technology, engineering and analytics expertise enables us to understand and rise to the challenges that our government and industry clients will face in the 21st century. Booz Allen is committed to deliver work of the highest value that directly supports our clients' core missions and to perform it with the utmost integrity. In good times and bad, this has been our formula for success.

So, thanks to all of you, we appreciate your time and attention here today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.