Booz Allen Hamilton Holding Corp (BAH) 2012 Q4 法說會逐字稿

Good morning. Thank you for standing by and welcome to the Booz Allen Hamilton earnings conference call covering fourth-quarter and full fiscal year 2012 results.

At this time all lines are in listen-only mode. Later there will be an opportunity for questions. I would now like to turn the call over to Mr. Curt Riggle.

Thank you, Lacey, and thank you all for joining us today for Booz Allen's fourth-quarter and full-year fiscal 2012 earnings announcement. I am 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 review the press release on our fourth-quarter and full-year earnings that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two.

On today's call Ralph will provide you with an overview of our business performance, recent developments, and strategic positioning. Sam will then discuss our financial results in detail, including our income statement, balance sheet, cash flow, and backlog. Ralph will talk about what the future holds for our business and Sam will discuss our earnings guidance for fiscal year 2013 which began on April 1, 2012.

As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's services, and other factors discussed in today's earnings release and set forth under the forward-looking statement disclaimer included in our fiscal 2012 fourth-quarter and full-year 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 are assuming 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 our investors. We include an explanation of the adjustment from GAAP and reconciliation of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2012 fourth-quarter and full-year 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 four.

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

On our last earnings call I said it was an eventful quarter and today I can say the adventure continues. The macro trends in the global economy and in the market for services to our primary client, the US federal government, are dramatic and dynamic. Against this backdrop we see continued demand for Booz Allen's expertise from government agency clients that we have served for decades and we are excited about the prospects from new commercial and international clients.

We grew revenue, net income, earnings per share, and EBITDA for the fourth quarter and full year of fiscal 2012. This is our sixth straight quarter of top- and bottom-line growth since our IPO in November of 2010, demonstrating our ability to manage our business well despite a challenging market environment.

Here are the headlines. Fourth-quarter revenue increased to $1.54 billion from $1.49 billion. Full-year revenue increased to more than $5.8 billion, up from $5.6 billion in the prior year.

Net income for the year increased to $240 million from $84.7 million in the prior year. Adjusted EBITDA increased 9.8% to $488 million and full-year adjusted diluted earnings per share increased by $0.37 to $1.61 per share.

Total backlog ended the year at $10.8 billion as of March 31, 2012, which was a slight decrease in total backlog from the prior year's $10.9 billion. We are very pleased with the growth in funded backlog, which grew by 21.2% year over year to $2.9 billion, compared to $2.39 billion as of March 31, 2011.

Today we are announcing that our Board of Directors has declared our second regular cash dividend in the amount of $0.09 per share, and the Board declared a special cash dividend of $1.50 per share. The dividends are payable on June 29, 2012, to stockholders of record on June 11, 2012.

We are dedicated to delivering value to our current and future stockholders, as evidenced by our operating margin improvements and strong cash flow and by the dividends just declared by our Board. We will continue to look at the full range of opportunities to strengthen Booz Allen's strategic position and to evaluate our use of cash.

As discussed on our last earnings call, we took important and difficult steps in January and February of this year to reduce the size of our senior and middle management ranks and take cost out of our infrastructure. The restructuring charge related to these actions is reflected in our fourth-quarter financial results. While these actions are never easy for those involved, cost reductions have provided us with operational flexibility and funds to invest in growth areas for the future.

On February 6, 2012, our San Antonio office was proposed for debarment by the U.S. Air Force in a matter which arose from actions of a former government employee hired by US who inappropriately retained and shared sensitive information about a pending procurement. His actions were in violation of our firm's policies and high standards of ethical conduct, a matter we take very seriously.

We worked closely with the United States Air Force and entered into an administrative agreement on April 13, 2012, which lifted the proposed debarment of our San Antonio office. As a result, that office is now eligible to compete for new contracts with the US federal government. In response we have focused on improving our firm-wide communications, delivered firm-wide training on the issues that gave rise to the San Antonio situation, as well as ethical conduct in general, and implemented enhancements to our ethics and compliance program.

Booz Allen remains committed to being the consultant of choice to our clients, employer of choice for the best people, and a good corporate citizen. Evidence of our success in winning and performing important work can be found in some of the major contract awards and task orders we have recently won.

For example, an $88 million award from the Army's Materiel Command for Distributed Common Ground Systems, a program involving cloud computing, two major task orders totaling $5.3 million from the Centers for Disease Control and Prevention to support the vaccine management business improvement system, a $30.6 million award from the Department of Commerce to support the National Telecommunications and Information Administration Broadband Technology Opportunities program, and $86.9 million task order from the Chief of Naval Operations Deputy for Manpower Personnel Education and Training Automation. These and numerous other new contract words will drive revenue going forward.

Booz Allen was recently named a Fortune magazine's list of the world's most admired companies, which recognizes corporate reputation and brand value. This complements our many awards as an employer of choice. In February 2012 we were again named one of Fortune's Best Companies to Work For for the eighth consecutive year, one of Working Mother's 100 Best Companies for the 13 consecutive year, and one of the Top 10 Military Friendly Employers by G.I. Jobs. And we again received a perfect score of 100% from the Human Rights Campaign for equality in the workplace.

Giving back to our communities and taking care of our planet are important to Booz Allen as an institution and to our employees as individuals. We reduced the firm's overhead costs and carbon footprint through The Way We Work hoteling and teleworking initiatives in which employees are assigned offices closer to their homes reducing commute times. Booz Allen won the Green Hammer Award from Rebuilding Together and employee teams across the country helped clean up our nation's waters with the Ocean Conservancy.

Our Board of Directors uses a secure, paperless portal, our supply rooms are filled with recycled office products, and our employees are passionate about sustainability taking steps large and small to help safeguard our environment for future generations. I will talk more about the future, specifically for our strategy for Booz Allen's business, in a few minutes after Sam provides additional details about our financial performance.

Good morning and thank you for joining us. Ralph talked about the adventure of managing in turbulent times, and there is probably not a company or country in the world today that wouldn't wish for a bit less excitement. Yet, despite the macro uncertainty, Booz Allen is proud of our ability and commitment to control our own destiny by managing our business effectively and efficiently. We are proud of our continued growth, operating margin improvements, and strong cash flow.

As Kurt mentioned in his opening summary, in addition to the 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 non-recurring or unusual items.

With that context, let's turn to slide five for a closer look at our fourth quarter and fiscal 2012 which shows a 3.2% increase in revenue over the prior period. This increase was primarily the result of improved deployment of direct consulting staff against funded backlog under existing contracts and funded backlog under new contracts in all markets, as well as an increase in other direct costs.

In the fourth quarter of fiscal 2012 operating income increased to $97.5 million from $83.7 million in the prior-year period and adjusted operating income increased to $115.4 million from $101.9 million in the prior-year period. The improvement in adjusted operating income was primarily driven by growth in revenue and the increased profitability that resulted from decreases in incentive compensation costs, partially offset by unbillable staff compensation costs and unrecoverable expenses.

Adjusted operating income excludes a restructuring charge of $11.2 million, net of related revenues associated with one-time termination benefits paid to departing employees, as a part of the plan that Ralph discussed by which we reduced certain personnel and infrastructure costs. We took these restructuring actions to improve our operational flexibility and to free up funds to invest in areas of the business we believe have strong potential for growth, including our commercial and international businesses.

In the fourth quarter of fiscal 2012 net income increased to $50.6 million from $18.1 million in the prior-year period and adjusted net income increased to $62.2 million from $50.5 million in the prior-year period. Adjusted EBITDA increased 12.9% to $130.6 million in the fourth quarter of fiscal 2012 compared with $115.6 million in the prior-year period. Adjusted net income and adjusted EBITDA exclude the net restructuring charge of $11.2 million discussed above.

In the fourth quarter of fiscal 2012 diluted earnings per share increased to $0.36 per share from $0.13 per share in the prior-year period, while adjusted diluted earnings per share increased to $0.44 per share compared to $0.36 per share in the prior-year period.

During the fourth quarter the Company recorded an adjustment to revenue associated with the recovery of allowable state income tax expense that in the aggregate increased revenue and operating income by approximately $10.1 million, which is $6.1 million net of taxes, which should be should have been allocated to prior quarters of fiscal 2012 in which the expense was incurred. This operating income figure does not take into account a partially offsetting effect related to incentive compensation expense.

The amount of the adjustment allocable to each prior quarter is not material to any of those prior quarter's financial statements and the aggregate adjustment is not material to the fourth quarter. Therefore, the Company recorded the correction of this error in the fourth quarter of fiscal 2012.

Turning now to our fiscal 2012 full-year results on slide six, Booz Allen's revenue increased by $268 million, or a 4.8% increase in revenue for fiscal 2012, over the prior year. Our revenue increase was primarily driven by improved deployment of direct consulting staff against funded backlog under existing contracts and funded backlog under new contracts in all markets, as well as other direct costs. We continue to grow revenue despite budget decreases and procurement delays by the US federal government.

In fiscal 2012 operating income increased to $387.4 million from $319.4 million in fiscal 2011 and adjusted operating income increased to $429.2 million from $392.5 million in fiscal 2011. The increase in adjusted operating income was primarily driven by growth in revenue and increased profitability, resulting from a decrease in incentive compensation costs. These increases were partially offset by unbillable staff compensation costs and unrecoverable expenses.

As discussed a few minutes ago related to the fourth-quarter results, full-year adjusted operating income excludes the net restructuring charge of $11.2 million associated with one-time termination benefits paid to departing employees as part of the plan to reduce certain personnel and infrastructure costs. These costs will primarily be paid in fiscal year 2013.

In fiscal 2012, net income increased to $240 million from $84.7 million in fiscal 2011 and adjusted net income increased to $227.2 million from $157.5 million in fiscal 2011. Adjusted EBITDA increased 9.8% to $488.1 million in fiscal 2012 compared with $444.4 million in fiscal 2011, primarily as a result of the growth in adjusted operating income.

Again, please note that full-year adjusted operating income and adjusted EBITDA exclude a net restructuring charge of $11.2 million. In fiscal 2012 diluted earnings per share increased to $1.70 per share from $0.66 per share in fiscal 2011.

In fiscal 2012 adjusted diluted earnings per share increased to $1.61 per share from $1.24 per share in fiscal 2011. Adjusted diluted earnings per share for fiscal 2012 excludes the effects of a $0.25 per share benefit related to the reversal of tax reserves during fiscal 2012 as compared to a benefit of $0.09 per share excluded from adjusted diluted earnings per share for fiscal 2011.

Now turning to cash flow. Cash is good, no question about that, but I am very proud of Booz Allen's excellent track record of generating cash from operating activities. This year you see significant cash benefits from our debt refinancing in February 2011 and from our very strong cash collections.

Our days sales outstanding were 65 days for fiscal 2012. Net cash provided by operating activities in fiscal 2012 was $360 million compared to $296.3 million in fiscal 2011. Free cash flow was $283.1 million in fiscal 2012 compared to $207.6 million in fiscal 2011. Free cash flow in fiscal 2012 benefited from a significant reduction in interest costs, which was offset by an increase in income tax payments.

As we have discussed on the past two earnings calls, we continually evaluate all options for the use of our cash, including net prepayments, payment of dividends, share repurchases, or the funding of acquisitions. And we are fortunate that our excellent cash position and credit worthiness give us great strength and agility in how we operate our business and deploy capital and cashed to create value for stockholders.

In December 2011, Booz Allen's Board of Directors approved a share repurchase program. At this point in time we have not exercised the option to repurchase any shares.

As Ralph pointed out, and as I am sure you saw in the headlines of our earnings press release, Booz Allen's Board of Directors authorized and declared a cash dividend in the amount of $0.09 per share, the second regular quarterly dividend issued by the Company. Additionally, the Board declared a special cash dividend of $1.50 per share, which we believe is a good way to return value to our stockholders at this time. Both the quarterly dividend and the special dividend are payable on June 29, 2012, to shareholders of record on June 11, 2012.

I want to assure you that we will continue to be good stewards of cash and will seek to use it to maximize value for our stockholders.

A good place to finish our discussion of fiscal 2012 is backlog, which is an important indicator of the health of our business. Our total backlog at fiscal year was a strong $10.8 billion.

As Ralph noted, this is slightly less than last year's $10.9 billion, but the most important component of backlog, funded backlog, went up. Funded backlog as of March 31, 2012, was $2.9 billion compared to $2.4 billion as of March 31, 2011.

I would like to turn back to Ralph who will talk briefly about Booz Allen's strategic positioning and growth strategy, and then I will finish the formal part of our discussion with a look at Booz Allen's guidance for fiscal 2013.

Thank you, Sam. Booz Allen is committed to being essential to our clients and differentiated from our competitors. We believe our success comes from superbly serving our clients in their core missions -- bringing innovative thinking to bear on client problems and opportunities and developing the solutions to help clients deliver more and better services to citizens and consumers.

In areas ranging from cyber and cloud-based services to health, finance, infrastructure, and intelligence surveillance reconnaissance we are seeing continued demand for our services from our federal government clients. Our commercial and international businesses are fast gaining traction. We are expanding our office in Abu Dhabi and have recently obtained our license to operate in Qatar, Kuwait, and Oman.

Our service offerings to international clients leverage our cyber and technology-based capabilities with a focus on online government services and cloud applications, enterprise resource planning, advanced resistant threat resolution, and geospatial systems. We have active commercial clients -- we have active commercial assignments helping clients increase revenue, achieve efficiencies, and manage risk.

Our clients include major commercial banks and investment banks, healthcare providers, and utilities. Some of these engagements will be featured in our annual report coming out next month. A good example of Booz Allen's differentiation can be seen in cyber in the way we think about the problem and opportunities, the way we integrate our capabilities, and the depth of our cyber talent base.

Our thinking about cyber is based on a framework for a dynamic defense of government and commercial networks and information assets. And the framework has four main components -- threat intelligence, incident response, integrated remediation, and preemptive response.

In January 2012, we formally launched the Booz Allen Cyber Solutions Network, an integrated secure network of cyber centers across the country that bring sophisticated capabilities and tools to our clients wherever they are located. The network virtually connects clients with thousands of cyber experts, technologies, and solutions through one unique network. This network of centers enables innovation and provides advanced fiber analytics, computer network defense, cyber product testing and evaluation, and advanced cyber training delivered through a virtually linked constellation of centers, labs, and stations.

We believe this is a strong competitive advantage for us. Our people have exceptional depth and breadth in cyber starting at the top with our Vice Chairman, Mike McConnell, and Chief Information Security Officer, Joe Mahaffee, and reaching to the thousands of employees who keep abreast of the state-of-the-art through our Booz Allen Cyber University, which operates in partnership with the University of Maryland University College.

For fiscal 2013 Booz Allen's leadership team has identified seven priority areas for investment we believe have significant growth potential. These include our commercial, international, and health market areas, as well as firm-wide capabilities in cyber, cloud-based services, engineering services, and enterprise effectiveness and efficiency. Looking further ahead we have launched a long-range strategy initiative to ensure that our decisions about business and market strategy, people programs, and infrastructure are guided by a clear roadmap for continued success.

I would now like to turn back to Sam to talk about our forecast.

Thank you, Ralph. We are now on slide nine. As I hope we have conveyed, we are proud of the results Booz Allen has delivered for our fourth quarter and full fiscal year 2012.

Given the uncertainty in the second half of Booz Allen's fiscal year, which coincides with the beginning of a new government fiscal year and is followed by the November elections, we are currently providing top-line guidance for only the first half of our fiscal year which we expect to have revenue growth that is relatively flat to low single digits. At the bottom line, for the full year we are forecasting diluted earnings per share to be in the range of $1.62 to $1.72 and adjusted diluted earnings per share on the order of $1.71 to $1.81 per share, maintaining our prior guidance.

Thank you, Sam and Ralph, and thank you all for listening to our summary of results and outlook. Before we take your questions I would like to note that Ralph will be delivering the keynote address at the Northern Virginia Technology Council Titans of Technology event on June 13. Ralph has been Booz Allen's Chairman and CEO for 13 years and he will be talking about leadership during these adventurous times.

Our Chief Operating Officer, Horacio Rozanski, and Senior Vice President and Controller, Kevin Cook, are here with Ralph and Sam to answer your questions as well. Lacey, at this point could you give instructions for those on the call?

(Operator Instructions) Nathan Rozof, Morgan Stanley.

Good morning, gentlemen. Thanks for taking my question.

I wanted to start off with just, Ralph, some thoughts from you on the overall demand outlook. Book to bill was obviously strong. Total backlog slipped a little bit but funded backlog was up, which is a good sign.

So as we think through the puts and takes in terms of the potential for sequestration or continuing resolution looming at the end of this year/early next year offset by a lot of investment you guys have been making in international as well as the seven key growth areas that you just identified, how should we think about the kind of trajectory of backlog and demand as we move through fiscal 2013?

Well, Nate, my crystal ball is maybe no better than yours. I think there is an awful lot of uncertainty out there that we are all expecting. We are in the middle of an election year, a lot of politics going on. We have some impending, shall we say, chaos near the end of the calendar year as a confluence of events certainly conspires there to create some challenges about what the way ahead looks like.

Having said that, I think our strategy has been to be prepared, to be ready, to be agile. That is the reason we took the restructuring that we took at the beginning of the year to put our organization in the right kind of financial shape and whatever, and that is why we have been investing in the areas we have been investing in. It's also why our continued focus has been on really the core mission of our clients.

And while we can't predict with any certainty exactly what the budget situation is going to be, whether sequestration will occur or not occur, we know that there are a lot of essential functions that are still going to have to be performed by our federal government clients and we want to be in the center of that. We want to be providing the most essential services in the most high quality fashion they can be provided and, therefore, be very relevant to whatever work is going on.

So for that reason we have a lot of confidence in how we have invested in cyber and cloud and the markets that we have invested in. That there is going to be still continued demand out there for Booz Allen services, even in turbulent times.

As to your reference about commercial and international, these same capabilities are very relevant there. Financial services, healthcare, the kind of things we are doing in cyber, the kind of things we are doing in cloud, all show increasing demand out there in the marketplace. The work that we are doing in the Middle East has been very, I think, productive for us and also shows every indication that there is continued and there is further demand out there that we are now reaching out to serve by expanding our presence in that geography.

So all of this says that while we are certainly prepared and know how to manage a business in a very agile fashion, we have some confidence out there that there are going to be continued opportunities for a firm of our caliber and our quality doing the kind of things we do and the way we do them. So I think our expectation is that we will continue to be a key player in this marketplace even in very challenging times.

Thanks, Ralph. Sam, I want to just turn to you for my follow-up. As we think through return of capital to shareholders you guys have now employed several different strategies with the buyback authorization, the regular dividend, and the one-time dividend announced today. How do you see the return of cash strategy evolving over time?

It will be a continuation of the strategy we followed, which is that we will look at all of our options. We will continue to think in terms of debt repayment, additional dividends, even acquisitions. I think anybody who is following the industry is aware that there is a coming consolidation. We certainly will look there to see if there is some strategic fits.

Certainly, Nate, as you know, we have not been acquisitive in the past so it would need to be something special but clearly we will continue to take a look at that. So in essence a continuation of the policy that we have followed, which we believe is both conservative and in the best interest of the shareholders.

Then just given that you haven't bought back shares on the buyback authorization, should we take that as an indication that there is a general preference for dividends over buybacks? And I will stop it there, thank you.

Well, as they say, actions speak louder than words so I think certainly to date that has been the case. We will continue to evaluate that. That comes down to there was a special committee of the Board set up to look at those issues, so we will continue to evaluate that option.

Great, thank you.

Carter Copeland, Barclays Capital.

Yes, good morning. A couple of quick questions.

First, I wondered if you might speak to the growth in the quarter and maybe for the full year. I wondered if you might be -- you said that you saw growth in all major markets. I wondered if you might give us a little color around what you are seeing in each one of those relative to the other and perhaps quantify, or at least speak to, the success you are having in commercial and international as a kind of first question.

Carter, it's Horacio. Good morning. I think you almost answered the question, which is we did see good growth across all the markets.

The intelligence market continues to be strong. In the civil market some areas of health and financial services were particularly bright stars. And across the fence we saw both growth and a transition of the portfolio towards more of a C4ISR type of activities, which as Ralph mentioned, are core to our clients' missions and an area where we think we can excel and continue to find opportunities.

Commercial and international are both -- I think Ralph spoke to them; there is not much to add. We see demand from the kinds of clients that we would like to have in our portfolio in terms of they are important to their industries, especially financial services and the healthcare. In the energy area we focused a lot of our efforts into the utilities market and we expect the growth there to continue. Still we would characterize it's early days and it's still an effort -- in its incubation stage, but the early returns are sort of what we expected to see and we feel like we are on plan there.

Same holds true for international. The work that we are doing is consistent with the capabilities that we thought we were going to be able to bring to bear, especially around cyber. We are building not just the footprint but the relationships and, ultimately, re-establishing a brand that we have had in that region for quite some time. So we feel good about international as well.

Just to clarify, and please correct me if I am wrong, it sounds like civil and intel are growing a bit faster than defense markets, as we, I think, would expect. And the commercial and international efforts, although growing, are off of a very small base and are not significant to the totals for the entire enterprise. But please correct me if I am wrong.

Carter, this is Sam. Let me just jump in. I think in the past we talked in terms of commercial and international being less than 2% of the total, and we said that we would provide more details on that once it did become significant.

It did break through the 2% barrier slightly and it is growing in double digits. We continue to invest heavily. But I think it's still, given that magnitude, it's a little early to start breaking that out and talking about that separately.

No that is great. The color is helpful.

I wanted to talk a little bit about -- I wanted you to talk a little bit about process and planning as we get closer to what will be your third and fourth quarter around sequestration. I mean we have dealt with elections before and we have dealt with continuing resolutions before, but the magnitude of the challenges it looks like we are headed toward are sort of unique in their potential severity.

And so when you add things like resource planning, headcounts, those sorts of things, how more specifically are you planning on these sorts of things for the back half of the year in terms of hiring and the like?

Well, I got to tell you at this point it seems like the best we could do would be to guess what is going to happen. So the thing about these businesses like a Booz Allen is to keep your costs as variable as possible.

As you know, we have started reducing our facilities footprint some time ago trying to ensure that our costs -- we minimized our fixed costs. So from our standpoint we feel like we trimmed our cost profile last February when we announced that restructuring.

We believe that will carry us through whatever turbulence we are going to see, but I think it's up to firms like ours to aggressively manage your cost base in response to what is happening in the market. And certainly we will continue to do that.

I know in the past we have looked at headcount as a good leading indicator of where the business may be. But as you progress into this environment does that usefulness go down as you hold that headcount tighter because of the uncertainty in trying to keep your costs more variable?

I think that is a fair assessment. In the past, as we have gone into the summer bid and proposal season we would add headcount to be prepared to both support the work while the existing staff turned to marketing and bid proposal. And also to be prepared for the new work that normally comes in by the end of government's fiscal year.

I think this year we will clearly take a more conservative approach until we see what is going to shake out around all of the, let's call it, political turmoil that we are looking at.

Per that question, I don't know if you saw in today's Journal there is an article -- I think it's in the Marketplace section -- where they talk about companies that are doing more hiring from within. Over the last couple of years we have been building -- and actually we are quoted in that article. We have been building a capability to deploy more effectively from within. We call it Inside First.

We have gone from 10% of our hiring, quote-unquote, being from within to north of 30% as the article points out. So we have greater capability to deploy resources across [the matrix] to the places where we can grow and so we are using capacity more effectively than really we ever have in the past.

That is great. Thank you for the color, gentlemen.

Tim McHugh, William Blair & Co.

Thank you. Just wanted to know if you could elaborate a little more in terms of during the quarter on the new contract wins versus the fairly strong funded backlog, exactly what you were seeing from clients. I mean the high-level take away seems to be it was tougher to win new contracts but you were able to convert more of the backlog into a funded backlog status. Just correct me if I am wrong and any more color you can give.

Well, I think during the quarter we held our own. There is two things driving the funded backlog number, if you will recall. I would think this year is more indicative of, it sounds strange, but more indicative of a normal funding pattern.

Last year you may recall the continued resolution didn't get lifted until mid-April, so as a result there was lot of funding that was let loose between April 15 and September 30. This year we saw -- because the continuing resolution was lifted in December, we saw, let's call it, a more traditional funding pattern.

So that is part of what gives us confidence around outlooking the first half of our fiscal year, the period from April 1 through September 30. But from our perspective, if you look at the traditional business metrics in terms of backlog, in terms of proposals outstanding, in terms of opportunities in the pipeline, it doesn't look so bad. You could make the case for continued growth.

But, of course, the issue is that we are going into such an uncertain market. While I have heard lots of opinions, I don't know anybody who has the facts around what will and will not happen and what will and will not get funded.

So we feel like we are in good shape from a business development pipeline. We feel like we have gotten our cost structure trimmed up to be prepared to go whichever way these things go. We will take a conservative approach until things do shake out. And we feel like our business model enables us to move quickly across the firm.

To provide a little more color and let them Sam catch his breath, you asked a question in terms of is it getting harder to win work. I wouldn't draw that conclusion. I don't think that the win rates or ability to actually win competitions has been affected in the quarter in any way, shape, or form.

I think what you are seeing is the uncertainty becoming delays in the awards themselves and then procurements that are out there that would be get awarded at one point, quote-unquote, slide to the right as clients trying to figure out whether we are going to have funding next year and whether it's worth releasing the work. Then the [protest] process is long and arduous, and so you are seeing that. But in terms of our ability to compete and win, we feel very good about that.

Okay. Then my follow-up would be on the commercial and international. The theory has been that those businesses should, at least in a mature state, deliver much better margins than your traditional government work.

Are you seeing that now? Are you in such a growth phase, an early growth phase, for those businesses that they are not substantially better margins than what you see in the government?

Well, I think you have to look at that -- let's look at it from our perspective. We have -- as you know, we do 50% of our business is cost-plus; we follow a standard cost model.

Using a standard cost basis, yes, the margins are certainly better. Then as you point out we are investing in those areas. It is expensive to deploy folks to the Middle East and we have been doing that. It's the cost of capture in the commercial market, particularly as you are starting up, are high as well.

Yes, we do see better margins. We are investing and will continue to invest. But, yes, we are pretty pleased with where we are in terms of the progress we are making and what the margin potential is.

But those margins can probably get even better as you get more and more scale, is that fair?

One of our great strengths, and Horacio can talk about this, is our strategic selling, which is that Booz Allen here -- because of our collaborative model everybody is taught from the get-go to bring all of our capabilities to bear. It's not just sell what you know but you sell what the firm does. That model has been incredibly successful for us in the US government market.

We now, of course, are bringing that to our commercial and international markets. What that means then is that you are -- actually your pure selling costs are lower because you are in there with clients; you are both satisfying their current needs and anticipating their future needs. That makes your business development costs much more efficient.

Okay, thank you.

Bill Loomis, Stifel Nicolaus.

Thank you and good morning. Sam, just on the backlog, it looks like -- I know you had an adjustment in the December quarter as well, I assume around (inaudible) and (inaudible), but it looks like this one was substantially larger, like $1.4 billion or something. Can you just confirm that and then what the outlook is going forward; why that was done this quarter?

You said $1.4 billion. I think hopefully it was in the neighborhood of $140 million, which is still a substantial number, but --

So, just to clear that up, Sam, so backlog was $2.2 billion in the December quarter, it's $10.8 billion this quarter and you had a 1.0 book to bill? So that should mean that backlog should be still around $12 billion, so what was the rest of the adjustment?

We will have to go back and take a look at those numbers, Bill. I will tell you that we did take a look at across our entire backlog list, let's call it, and made an assessment. There is certain work where we are just not seeing the conversion of either unfunded backlog and funded backlog or the exercise of priced options, and so we took those down.

We, again, applied judgment to say what do we think is going to happen there and it is consistent with what we have done in the past. I think again, just given the growth outlook that we are looking at, I think it was realistic to make the adjustments that we made.

So it was much broader than just the two contracts cited in the footnote and the press release?

Yes, yes. I think the biggest adjustment made on a contract, looking at the list last night, might have been in the $20 million range. Again, this would be money that on a backlog basis would have been spent over several years.

And then just looking at the headcount growth, the staffing headcount was down slightly and I guess that is in line with the revenue you expect over the next couple quarters. So a couple questions there.

One, why you have had such strong contract awards except for the December quarter over the last few quarters. Clients, you mentioned they are deferring, but, for example, on the awards this quarter. Why aren't we seeing at least 5% headcount growth given the large amount of awards that Booz Allen has been winning for the last year? What is going on with the client decision-making process?

I think we have talked a lot, Bill, about the uncertainty and this is sort of uncertainty playing out before your eyes. The clients are unsure as to what money they are going to have. They are holding on to funds. They are being slow in ramping up work and ramping up tasks, but the need is there.

And so we have taken a posture of maximizing the use of our current capacity and not trying to get ahead of the demand because the timing of that demand is a little bit unpredictable. I will point out to you that in a really good month we can hire 800 or 900 people; we have done it in the past. And so we don't feel like this is constraining our opportunity to capture everything that is out there, but we certainly in the current environment don't want to get in front of that and built a cost position that would be unwise.

And so we are playing the numbers very conservatively on the capacity of side, staying very, very close to the demand curve, and as the awards come we are not finding difficulties staffing them. So that is really to give you a sense of our posture.

Okay, thank you.

George Price, BB&T Capital Markets.

Thanks very much. Just I guess several of my questions have been answered, but what I wanted to follow up on a couple other things. First of all, congratulations, by the way, on the very strong cash flow.

But, Sam, I wondered if you could help me a little bit just on the tax benefit impact to revenue and operating profit in the quarter. I just wanted to make sure I understood how to look at that.

That was -- the $10.1 million that is. That was an area that you recognized in the quarter, so you took this adjustment in this quarter. Was that something, I guess, that you had factored into guidance that you gave last quarter?

Let's go back and really what we are talking about there -- of course, the tax expense was always there. George, as I am sure you know, within government contracts state income tax is an allowable cost. Frankly, we had been -- because we were burning off net operating losses really held over from the Carlyle transaction we have not been in a position to pay state income tax, or any income tax, for a number of years. So we should have been including that in our rate base in fiscal 2012 because we were starting to pay state income tax.

We picked that up late in the year as opposed to at the beginning of the year, frankly. So really what we were doing is -- not that we were adjusting income tax expense, but we were reflecting revenue on that expense to the degree it was related to our cost-plus contracts.

Now just to put that in context, Booz Allen, ever since I have been here, has followed a process; it's our partner culture that says first call on earnings is always the shareholders. After that then it's the partner culture, the partners would then split up what was left. So that goes back to an earlier time but we have actually followed that basic philosophy for at least the 17 years I have been here, and I am sure it went on many years before about.

As a result, as we were going through the year of course we were making adjustments to partner compensation, depending upon how our performance was, because we were absolutely committed to making our numbers, in essence. As a result of that with additional revenue created by the state income tax we actually were able to increase our incentive compensation pool on the order of $7 million, $8 million.

So it's not that that had a significant -- when you look at those two actions together it was not a significant impact on the quarter. On a net-net basis it was something on the order of $0.01 a share. I would just point out that we ended up $0.01 above the middle of the outlook that we chatted about at our last quarterly earnings call.

No, no, that clears it up. I guess probably should have started with the question of if you could quantify the offsetting comp expense, so understood.

On the fiscal 2013 guidance, I guess if I could ask a little bit more about that, could the relatively flat growth that you are guiding to for the first half of fiscal 2013, could that potentially encompass a slight decline? Do you still expect the typical seasonality of stronger growth in the back half and maybe how does EPS trend through the fiscal year, best guess?

As you know, we do not provide quarterly guidance. I will say that if you look on the -- if you go back to the traditional patterns, what would normally happen is that in the first quarter we are spending below our target cost rates. What happens there is that for financial reporting purposes we adjust our cost-plus revenue down to our actual rates for that quarter.

So what that does is that tends to reduce cost-plus revenue in Q1 which runs from April through June. That also tends to increase cost-plus revenue in Q2 running from July through September, because we are spending a lot of B&P and marketing money. Now that is counterintuitive to folks, but you have to understand the dynamic of having 54% of your business under cost-plus contracts.

Now, conversely, if you take a look at that, because still almost half of our business is [T&M] and fixed price, that same spending pattern has a tendency to drive up earnings on the T&M and fixed-price contracts in Q1 and, of course, drive down the earnings on those in Q2 when we are actually spending more B&N and marketing money. So I think I can -- without laying out, because we do not provide quarterly guidance -- hopefully folks are getting comfortable with that is the typical pattern that you see.

In terms of the back half, the normal patterns would be in the December quarter, October through December. Lots of holidays in there and lots of people wanting to take time off. That tends to dampen revenue a bit.

Then the fourth quarter there is not a lot of holidays in that quarter and people get back to work, so that is normally a pretty strong revenue and profitability quarter.

Now what is going to happen in the back half of this year, again, we will just have to wait and see what our clients are going to do. I think what is clear is that clients are still focused on getting their mission done, but where they have the option they are tending to hold on to their funding because they are just not sure what is going to happen after September 30. They don't know, we don't know; I am not sure anybody does.

Great, appreciate the color. Thank you.

Robert Spingarn, Credit Suisse.

Good morning, everyone. I think the first question, perhaps, it's best for Horacio. Horacio, could you describe the procurement environment since the quarter?

We have heard that order activity has slowed considerably for many of your peers since the beginning of April. Have you sees this at Booz? Then if you could add in the possibility for the traditional budget flush in the September quarter, or is this year too different for that?

You know, at this point we are not seeing anything different from what we have been talking about in terms of either significant slowdowns, in terms of money not being spent over the summer the way it typically is. We are anticipating the usual increases, as Sam said, in marketing and B&P that we see over the summer as clients try to race to their budget deadlines.

So that is pretty much what we are seeing. There isn't anything in particular that I could point to that happened since April 1 that isn't sort of a continuation of an environment and a trend that we have been seeing play out now for several quarters.

You think we get that big book-to-bill in the September quarter? You have done this several years in a row.

I was going to say, I have got to say that clearly, if the future follows the past, the answer to that would be yes. It seems as if there are proposals being prepared, but I just don't think we know at this point.

We are trying to make certain and I think we are trying to convey -- we used to have a marketing slogan that said we helped clients get ready for what is next and we take that to heart. We feel like we are ready for what is next. We are just not exactly sure what that is going to be in terms of funding.

Again, we have focused on making sure we have our capacity under control, making sure that we have got our headcount under control, our costs as variable as we can make them, and we will just have to see how this unfolds. We feel like that given the cost actions we have taken that we will be able to deliver at the bottom line. The question now is going to be what does the second half look like from a revenue standpoint.

Okay. Then, Sam, on that note just a couple of quick things financially. One on debt retirement and the other on guidance; I will start with the guidance.

Given that there is so much uncertainty in the second-half revenues, how do you get to a full-year earnings guidance number like you do? Where are the levers, or should I just consider the $0.10 spread in the guidance different revenue scenarios? Or is there something else that is levering there?

Again, let's go back. We took some $80 million out of the business in the March quarter. We have planned to put a reasonable amount of that back into the growth areas that we talked about earlier, and we are doing that. We have also held some of that in reserve so if, God forbid, something bad happens there then we have got some cost cushion to help us absorb whatever happens at the top line.

Now if the government shuts down for 30 days, I mean I think we would all know at that point all bets are off. But we are assuming that we are focusing on missions that matter. We do have clients who are mission focused. There is going to be an awful lot that gets done even through all the turbulence.

But, again, we just want to emphasize we feel like we have done everything we can to get ready to respond. We will just have to see how it unfolds.

Okay. So it sounds like you have got some decent contingency in your number there on the earnings side. Then the last thing is with the decision to go with the special dividend, and you also discussed some of your forward options on cash deployment, does this mean that the long-ago plan to deleverage to around $400 million by, I think it was the end of 2014 -- that is the way we had modeled it out anyway -- is this something that is not necessarily in the cards now?

Rob, I will tell you we will continue to look at all of our options. I think I have said in the past looking at the availability of credit, looking at interest rates, it does seem as if taking advantage of the credit markets is a nice way to manage our weighted average cost of capital. So we continue to look at all of those options.

Okay, thanks very much.

Sure.

That concludes the Q&A portion of the call. At this point I would like to turn the call back to Ralph Shrader for closing comments.

Thank you very much and thank all of you for taking the time to join us this morning. In closing, I would like to summarize really why I am confident about Booz Allen's continued success and that confidence is shared by our leadership team and our Board of Directors.

I think, as you have heard over the last few minutes, we keep emphasizing the fact that as a company and a corporation we really believe that we know how to manage this business, and that we have put ourselves in a position right now that no matter what contingency plays out we are in a strong position to take advantage of it. We are investing in areas that we think are high growth areas for us, but yet we are not going overboard. We are not overextending. We are playing back and waiting to see what might happen.

And I think that gives us a very strong position to be able to approach whatever game plays out as we come to the latter part of this year and puts us in a fine position to be able to take advantage of whatever scenario it is that actually results from the conditions that [exist then].

Given this, it's easy for me to say that I firmly believe that Booz Allen is an exceptional company. It's really our agility in the marketplace, the quality of our staff, the deep commitment to excellence, integrity, client success. We really have the strength, the reputation, and resilience that comes from nearly a century in this business, yet we don't rest on our laurels. We remain focused on the future.

We have both a perspective of history and the openness to change that enables us to seize new opportunities and deliver value day after day to our clients, to our employees, to our communities, and to our investors. So thank you very much for being a part of this discussion today.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.