Booz Allen Hamilton Holding Corp (BAH) 2013 Q4 法說會逐字稿

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

Thank you, Shannon. Thank you all for joining us today for Booz Allen's fourth quarter and full-year fiscal 2013 earnings announcement. I'm Curt Riggle, Director of Investor Relations, and with me to talk about our business and financial results this morning is Ralph Shrader, our Chairman, Chief Executive Officer and President, Sam Strickland, Executive Vice President and Chief Financial Officer, and Horacio Rozanski, Executive Vice President and Chief Operating Officer. We hope you've had an opportunity to read the press release on our fourth-quarter and full-year earnings that we issued earlier this morning. We've also provided presentation slides on our website, and we are now on slide 1.

As shown on the disclaimer on slide 2, please keep in mind that some of the items that we will discuss this morning will include statements that may be considered forward-looking and, therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our Company's services, and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our fiscal 2013 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 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 an explanation of adjustments and other reconciliations to our non-GAAP measures, and to the most comparable GAAP measures, in the fiscal 2013 fourth-quarter and full-year slides. It is now my pleasure to turn over to our CEO, Ralph Shrader, and he will start on slide 3.

Thank you, Curt. Good morning, and thank all of you for joining us today. A lot has happened in our nation, our industry, and the financial markets since our last earnings call at the end of January. Sequestration officially took effect on March 1, and the lead-up to it created significant uncertainty. As we report today, the effects of sequestration on our firm have not been material from a financial results standpoint, but the impact on our clients and on citizens and businesses across the country is very real. As a business leader, I implore Congress to end the blunt instrument of sequestration and tackle the tough choices necessary so we can make smart cuts where appropriate and maintain an effective and steady level of funding for national priorities.

Political issues aside, I stand here today feeling both grateful and hopeful. I have the highest appreciation for our clients in the US government and military, who are charged with protecting national security and providing citizen services. Their professionalism and patriotic dedication to the mission in spite of uncertainty, budget cuts, and furloughs, is truly inspiring. I'm grateful to Booz Allen's people, who have been affected by structural change in our industry that requires our firm to reduce costs for compensation and overhead in order to be competitive in winning contracts and delivering work in this environment. Our employees' professionalism and dedication in doing more for less has been truly impressive. I'm proud of those in Booz Allen's management ranks, who have adapted to the changes in demand and cost pressures and are today managing a dynamic business productively and profitably.

The performance of many underlies the fiscal 2013 top and bottom line results we're announcing this morning. Here are the financial headlines for fiscal year 2013. Full-year revenue was $5.76 billion, compared with $5.86 billion in the prior year. Adjusted net income increased to $239.5 million from $227.2 million in the prior year period. Adjusted EBITDA increased 8.4% to $529 million, and adjusted diluted earnings per share increased by $0.04 to $1.65 per share. Furthermore, we paid a total of $8.36 per share in dividends this past fiscal year, and we are today announcing an 11% increase in our regular quarterly dividend. We ended fiscal 2013 with total backlog of $11.83 billion compared with a $2.8 billion in the prior year, and funded backlog of $2.51 billion compared with $2.9 billion in the prior year. These figures include backlog from acquisitions.

Booz Allen continued to grow our margins, operating income, and adjusted earnings, and we again generated very strong cash flow. During fiscal 2013, we acquired the defense engineering and support division of ARINC, also known as DSES, bringing approximately 1,000 talented new people into Booz Allen, and with them, specialized expertise in engineering, C4ISR, prototyping, specialized software development and analytics. Within our core business, Booz Allen has invested significantly in areas such as cyber; cloud; advanced analytics, including predictive intelligence; and engineering services such as hardware and software prototyping. At the beginning of April, we launched our Strategic Innovation group, more than 1,500 professionals strong, to drive new capabilities and expand our reach into new areas of our addressable market. We are investing steadily in commercial and international markets, and our commercial clientele in the United States is comprised primarily of financial services and energy companies. Our international clientele is comprised of government and private sector clients in the Middle East. In commercial and international markets, our cyber security and regulatory services are most in demand.

Booz Allen continues to win important work from our long-time US government clients in areas that are critical to our clients' core mission. Here are just a few of the major contracts and task orders we won during the fourth quarter. A $107.9 million award from the US Cyber Command to provide a wide range of strategic and analytic support services. A $19.2 million contract to provide the US Marine Corps headquarters with analytics, program assessment and evaluation support services. A series of contracts with the Department of Homeland Security, totaling $53.9 million, for analytics and engineering services for the Office of Intelligence Analysis, as well as support to the US Coast Guard and the US Immigration and Customs Enforcement Agency. A $10 million contract to provide mission support services for the Department of Interior and its Bureau of Safety and Environmental Enforcement. A $55 million subcontract to provide program management and engineering services to the US Naval Air Systems Command, and a $20 million contract to provide cloud technology services to an intelligence community client.

Our commitment to client service is the highest calling at Booz Allen, but our commitment to the communities in which we work and live comes very close. A case in point. One weekend last month more than 800 Booz Allen employees and friends across the US renovated 50 homes for low income residents. We particularly focused on helping the aged, veterans, and the disabled. That same weekend, Booz Allen team members rode in the Face of America bike ride from the Pentagon to Gettysburg to raise money to support veterans and wounded warriors, and Booz Allen sponsored and mentored 56 different student teams in the FIRST robotics competitions, ten of which advanced to the national championships in St. Louis that same weekend.

While that was a particularly busy period, it exemplifies the ongoing commitment to volunteerism and community involvement by Booz Allen and its people, and more broadly, the spirit of service we bring to all of our stakeholders. I'd like to close this section of the fiscal 2013 earnings call by again expressing my gratitude to Booz Allen's clients and employees for their exceptional work and selflessness in challenging times. Sam will now provide you with a closer look at the drivers of our financial results for the fourth quarter and full year of fiscal 2013, then Horacio will talk about our long-term business strategy.

Good morning and thank you for joining us. We are now on slide 4. As Ralph described a moment ago, our fiscal 2013 has been a challenging but successful year, one in which we have had to make cutbacks in the near term to help position for the long-term strength of our institution. We take pride in the way we have executed our business, and the outcome of that execution is demonstrated in the financial results that we present today. For the year, we maintained our annual revenue close to last year's level, and continued to expand margins and grow adjusted earnings. In these challenging times, I think that's a noteworthy accomplishment, and it's a result of our very proactive approach to managing the business to adapt to changing circumstances.

Now Horacio will talk about Vision 2020 and our efforts to position ourselves for long-term advantage and build our capabilities in areas where we see growth opportunities. We've been proactive in the short term too, starting as early as January 2012, when we took action to reduce cost in anticipation of revenue declines. Quarter by quarter since then, we've continued the effort to manage cost by aligning staffing levels much more closely against client demand, reducing infrastructure spending, and more carefully managing compensation. These changes have resulted in our evolution into a much more tightly managed business that is well-positioned to adjust quickly to the changes in our marketplace. The proof of that is reflected in our quarterly and full-year financial results, which showed improvement as the fiscal year progressed.

Now let's look at some of the key results and the factors that drove them. Gross revenue for full fiscal year 2013 was $5.76 billion, a 1% increase over fiscal year 2012. Inorganic revenue for the year was $100.1 million. Gross revenue for the fourth quarter was $1.55 billion, a 0.3% improvement over the prior year period. Inorganic revenue for the fourth quarter was $78.2 million.

Now I'd like to cover some of the detailed drivers of our financial performance during our full fiscal 2013 and in the fourth quarter. To date, we have not seen a material impact due to sequestration. As of today, we have been able to minimize the number of jobs lost by sequestration-related contract actions to approximately 100 across the firm by utilizing our effective resource management system to place staff on other work opportunities.

If you'll turn to slide 5, you'll see that there were a number of offsetting drivers that did impact gross revenue. On July 31 of 2011, we closed on the sale of our state and local transportation business. Year-over-year, that sale accounts for a 0.3% revenue decline in fiscal 2013 compared with fiscal 2012. In late November, we closed on our purchase of the former DSES engineering division of ARINC. For the full year 2013, DSES contributed a positive 1.7% of revenue. During the year, we managed staffing capacity very closely to minimize the cost of unbillable time. Headcount reductions during the year contributed an estimated 2.3% of revenue declines during the year, which was offset by 0.7% due to increases in billability. We also saw a decrease in billable expenses for the full year, which reduced revenue by 1.3%. These and other factors are highlighted on slide 5.

As we talk about managing our cost, it is important to note that by doing so, we are ensuring that we maintain a strong investment capability. We're continuing our focus on organic growth in our core business, and investments in growth areas like cyber and cloud in our Strategic Innovations Group, well as in our new commercial and international markets. We have talked in the past about the impact of indirect costs on revenue. To summarize, our goal is to manage the ratio of indirect costs to direct labor charges, in line with billing rates approved by the government. If indirect costs such as unbillable time, infrastructure, and facilities are too high for the level of direct labor we are able to generate, the additional cost will negatively affect the bottom line. Although it could positively affect revenue recognized on a cost reimbursable and ongoing fixed price jobs, if funding is available. If unbillable expenditures drive below a planned ratio, this will reduce revenue recognized on costs reimbursable and ongoing fixed price jobs while positively affecting the bottom line in the short run. For the full year, we were able to effectively manage our indirect costs, generally in line with annual budgets, so the revenue impact attributable to indirect cost was not material at year end. During the fourth quarter, expenses did increase as expected and as we discussed on our third-quarter call. The fourth quarter increase included the addition of additional incentive compensation and other allowable indirect expenses.

We can now turn to slide 6. Moving to other financial data, we saw an improvement in operating income generated in the second half as we gained greater control over unbillable costs through close management of our staffing needs and other actions we noted earlier. For the full fiscal year, adjusted operating income increased by 8.9% over fiscal 2012, and in the fourth quarter increased by 1.3%. In addition to savings from decreases in senior staff compensation costs and an infrastructure cost related to the cost reductions taken in January 2012, the increase in fiscal 2013 adjusted operating income was also driven by improvements in staff productivity, more effective management of unbillable costs and a decrease in stock-based compensation expenses.

For the full year, adjusted EBITDA increased 8.4% as a result of the same factors that drove adjusted operating income. Adjusted EBITDA increased 2.3% in the fourth quarter of fiscal 2013 compared to the prior-year period. In the fourth quarter of fiscal 2013, adjusted net income increased by 5.4% for the full year and declined by 6.5% over the prior year's fourth quarter. The full-year improvement reflects an adjustment in fiscal 2012 for the release of income tax reserves, which we discussed on this call in the second and third quarters of last year. The fourth-quarter decline was primarily driven by the increased interest expense of approximately $5.1 million net of tax related to the refinancing transaction associated with special dividend declared in July 2012. Adjusted diluted earnings per share saw an improvement of $0.04 per share for the full fiscal year. The fourth quarter of fiscal 2013 reflects a decrease on the order of $0.04 per share. The drivers of these changes are the same as those I cited for adjusted net income.

Now, let's turn to cash. Our strong free cash flow of $431.5 million for the year is up 52% over fiscal 2012. Days sales outstanding for the fourth quarter was 61 days, improved from 65 days in fourth quarter of fiscal 2012. Now, with the strong cash generation capability of our business, we regularly get questions about our plans for capital deployment. On this front, we take pride in our track record of delivering value for our shareholders. We used cash on hand to acquire a capability that positioned us well for growth, and for paying a $1.50 per share special dividend noted earlier. We were then able to take advantage of attractive financial markets to lower our weighted average cost of capital and fund a second special dividend in the amount of $6.50 per share that we paid in August. This track record continues today with today's announcement of an 11% increase in our regular quarterly dividend, now $0.10 per share.

As we have said often, we remain open to evaluating potential acquisition opportunities that are a cultural fit, and bring us additional client access and/or enhance our capabilities. Going forward, we will look to maintain a cash balance sufficient to operate the business, and we will continue to evaluate the most effective use of cash above that amount. We continually evaluate our capital structure, including potential increases to our regular dividend, acquisitions, share repurchases, special dividends and debt repayment. Although payments above the required principal payments in the current interest rate environment are not contemplated.

And now, our backlog figures. Booz Allen's total backlog as of March 31, 2013 was $11.8 billion, compared with total backlog of $10.8 billion as of March 31, 2012. Our funded backlog as of March 31, 2013 was $2.5 billion, compared with $2.9 billion as of March 31, 2012. Our unfunded backlog is up by approximately $400 million from the prior year. I'd like to now turn to Horacio, who will discuss our long-term strategy that we call Vision 2020, and what it means for our institution and our market position, and he will begin on slide 8.

Thank you, Sam, and good morning, everybody. You have heard us discuss what we call Vision 2020 now in several earnings calls. Today, I would like to provide some updates on where we are, where we're headed, and what this means for our business. We started this effort more than a year ago, with a broad discussion with our leaders about our aspirations as a firm, followed by extensive research and analysis on how our core markets may change over the coming years. At the same time, we took an objective look at our internal business, including service offerings, operating model, cost structure and pricing. Finally, we benchmark our people model against our competitors and other world-class companies to understand how we stack up. We left few stones unturned.

What emerged from Vision 2020 is a renewed focus for our business and a renewed vision statement. Allow me to read it to you. Booz Allen Hamilton is committed to ensuring that our clients succeed by integrating leading ideas and technologies into their missions. We strive to operate as a strong, independent public Company that acts with integrity and offers our people unparalleled professional opportunities to thrive in diverse, collaborative teams. The core of this vision is the idea that we can maximize results for our clients by leveraging together our premier consulting franchise, our deep client relationships, and an increased focus on engineering and technology. We're confident that this approach will drive new growth opportunities and strong financial results for our firm in the medium term, as well as a more defensible core business position in the immediate future.

To ensure that this vision becomes a reality, last fall we launched an ambitious change agenda, which is currently under way. The key element of our agenda is to strengthen our engineering and technical capabilities, both inorganically and through organic investment in innovation. You already know about our recent acquisitions in this space, and Ralph mentioned earlier the Strategic Innovation Group, or SIG, which we've created. The SIG will drive strategic consulting, emerging technologies and advanced engineering solutions across all our markets. The investments we've made in cyber, cloud, and engineering services will continue in the context of the SIG, together with new offerings such as rapid prototyping, organizational optimization and predictive analytics. We expect the combination of these organic and inorganic activities to spur the next wave of growth across all our markets. Rapid prototyping is a very good example of the potential we see. We have a strong reputation for this mission space, but only in a limited number of clients. Recent acquisitions give us new footprint and skill sets, and the SIG is hard at work at expanding our C4ISR prototyping solutions into new marketplaces. In short, while we're managing costs closely these days, we're continuing to invest heavily in areas where we see and believe we can move the needle.

Other elements of our Vision 2020 agenda are more inwardly focused -- our operating model, our organizational structure, and our people. On April 1, we launched a new org structure to streamline our matrix, reduce cost, and place more authority in the hands of our front line market leaders. This revised model is important in today's market, because it accelerates decision-making and enables us to better adapt to the needs of each individual client organization. Our leaders and staff are eagerly taking on their expanded responsibilities. We're also excited about other elements of our Vision 2020 agenda, which are being tested right now. Especially our people model and our functional communities, which will help us better develop our extraordinary diverse talent base. An engineering and technical track has been of particular interest to all our staff. While we call our strategy Vision 2020 to ensure a strong line of sight on long-term goals, we are already seeing benefits right now from efficiency of our new operating model, and I know you're interested in what it means for the near term in our fiscal 2014, so I'll turn the call back to Sam to talk about our forecast.

Thank you, Horacio. We are now on slide 9. Last quarter we elected to delay providing guidance for our fiscal year 2014 due to the uncertainty regarding the budget and how our clients would be affected by, and in turn accommodate, sequestration. Now with a full year Continuing Resolution in place and the across the board nature of the sequestration cuts in effect, more clarity exists for the first half of our fiscal year 2014, which coincides with the remainder of the current government fiscal year. It's important to note that uncertainty regarding the government's fiscal 2014 budget remains. That said, for the purpose of forecasting our business, we have assumed that the government fiscal year 2014 will start with a Continuing Resolution, as it has for the past several years, and that sequestration will remain in effect at least through our fiscal year 2014.

Through our ongoing conversations with clients and the actions they've taken to date, we believe we have enough insight into the situation to provide the following full-year guidance for our fiscal 2014, which began on April 1, 2013. At the top line for fiscal 2014, ending March 31, 2014, we expect a low single-digit decline in revenue as compared with the prior fiscal year. At the bottom line, our guidance for diluted earnings per share is to be in the range of $1.47 to $1.57 per share. Adjusted diluted earnings per share to be in the range of $1.55 to $1.65 per share. For fiscal 2014, we are expecting an effective tax rate of 40.5%, and a fully diluted share count of approximately 149 million shares.

Thank you, Sam, Ralph, and Horacio, and thank you all for listening to our summary of results and outlook. Our Senior Vice President and Corporate Controller, Kevin Cook, is here with us as well to answer your questions. Shannon, can you please provide instructions for the question-and-answer session of our call?

(Operator Instructions)

Our first question is from Bill Loomis of Stifel. You may begin.

Good quarter and good outlook. Ralph and Sam, just when you talk about sequestration, and that's factored into your 2014 guidance, and you've talked to customers and what they're planning, one thing we're hearing is that customers haven't heard from their bosses, so they're not being very specific on the cuts, particularly in the back half of the year, that sequestration will have, and it has been pretty slow in specific actions. Can you just tell us a little more about what you thought about in your fiscal 2014 guidance for the low single digit? Are you expecting that what clients have done so far is what will continue, and there's going to be no additional, more aggressive actions in the coming couple quarters?

Well, Bill, I guess it depends on how one defines aggressive action, of course. But as you can see, by forecasting a slight decline in revenue, we have baked in what we believe will be, let's call it a reasonable range of possible actions that the government could take, based on our conversations with our clients. So we've tried to make sure that we stress test our bottom line forecast to make sure that we can fall within that range as well. So, it obviously involves a bit of estimating what the clients are going to do, but we feel like we have a reasonable handle with --- let's call it sufficient contingencies baked into our outlook, that we're comfortable putting out this outlook.

Sam, just one follow-up on that. On fiscal 2014 revenue outlook, what is the organic growth in there, if we take DSES out? What would it be for fiscal 2014?

I don't know the percentage. I think DSES would probably add somewhere in the neighborhood of $200 million or so of revenue for fiscal 2014.

Okay. And they added $100 million in fiscal 2013?

Right. I'm sorry, that would be the net increase.

Net increase. Got it. Okay. Thanks a lot.

Thank you. Our next question is from George Price of BB&T Capital Markets. You may begin.

Just going back off of Bill's question to DSES, DSES came in -- so $100 million in revenue; I think for this year, you were talking about $110 million to $120 million. Can you kind of give us some color on what moved away in that revenue stream, and how you're thinking about that for DSES in fiscal 2014?

I think what moved away, there's -- DSES's billable expenses run somewhere in the 50% range, and those are a bit difficult to predict. So I believe that there were actually some of those billable expenses that were recognized earlier by DSES than the closing date, so those did not make it into our set of financial statements.

Okay. And so, I guess if I ballpark that, given the $100 million and the incremental $200 million, so about $300 million next year. So you're looking at roughly on an organic basis of 5 -- with a low single digit decline, 1% to 3%. So you're looking at roughly 5% to 6% organic decline year-over-year? Is that a reasonable way to look at it?

You know, I haven't done that math in a bit, but that's -- certainly if that math works, that's the way to calculate it, yes.

Last thing on GFY 2014, you've also talked about some of the revenue impact stemming from, I think, a lower mix of indirect versus direct labor, and, obviously, I think, that's been part of what's been behind your ability to manage margins so well in the environment. Is there any way to quantify that impact at all in terms of what that's doing in fiscal 2014?

Sorry, you're going to have to parse that question for me again. If you're talking about the margin compression, I don't -- we clearly don't get in public conversations around things at that level of detail. What's clear is that the success in this business is managing your indirect costs in relation to the direct labor you're able to sell. I mean, that's the key to managing a business profitably, and we're very focused on that. And certainly the change in our organizational structure that Horacio talked about earlier is to try to make sure we're well-positioned to be very agile in this environment, so we can respond to changes both that we expect and more importantly, that we don't expect that happen to us.

Okay. All right. Great. Thank you.

Thank you. Our next question is from Brian Gesuale of Raymond James. You may begin.

Nice job on the quarter. Just a couple of questions here. Wondering if you can, in your conversations with your customer base, if you can give us any color or differences between what your defense clientele is saying versus your civil clients, and how those markets are either converging or diverging?

This is Horacio. I'll take care of that. I don't know that the differences in clients are at the civil versus defense level, as much as they are inside each agency, and depending on the role they play and the mission that they occupy. And so, in the civil market, you have health clients that are doing extremely well. You have the VA, which has been exempted from sequestration, and their budgets aren't affected.

In defense, you have, again, the different services being affected differently by the changing environment, the draw down from Afghanistan, and so it's really more at the individual client level where we see differences. And a lot of what we're trying to do, as Sam pointed out, is adjust to each one of those individual client portfolios, And really go where the opportunities are and serve those clients with what they need as best as we know how.

Great. That's very helpful. Just a follow-up. Given your views for sequestration and continuing resolution, what do you expect the headcount cadence do be like over the next several quarters, maybe going out 12 months? When do we start to maybe see -- you guys have managed that very tightly. When's the right time to maybe start to expand that a little bit?

Well, there's a two-part answer to that question. We continually expand a number of staff in certain areas. There are growth areas within the firm we've talked about, in terms like cyber and cloud and some of our technology areas. At a macro level, we expect headcount to continue to decrease during the year, but clearly, we'll take a look at mid-year, let's see what funded backlog looks like as of September 30, for example. When we start to see that the market normalizes a bit, then I think we'd probably feel more comfortable saying, okay, let's start adding staff for growth. But make no mistake, we are adding staff in our investment areas now. We're just also cutting back staff in those areas where we're not seeing growth opportunities.

Sam, that's great. Thanks. Just one final one, and I'll jump out of the queue. The DSES was your first acquisition in quite a while. You've now had it for about six months. How's that integration going? Any things going better, or more synergies than you thought, or how should we think about that? And that's it. Thanks.

Well, I think we're -- as always, with any integration, there are always a few surprises here and there, but in general terms, I think we're very pleased with the way things have unfolded. We, in fact, got the capability that we were expecting to get, and that's the most important thing. The culture seems to fit pretty well. So, we're busy now trying to ensure that we can both protect the business that we have from DSES, and also leverage that throughout -- leverage their capabilities throughout the rest of our markets and vice versa. So, we're working those pretty hard, and so far we're pretty pleased.

Great. Thanks a lot.

(Operator Instructions)

Our next question is from Tim McHugh of William Blair. You may begin.

Given the other inputs you've given to us about fiscal 2014, it would appear you're looking for a continued margin improvement next year. Given the organic decline, can you give us some of the factors that are driving that?

Well, we will, again -- I do try and simplify the business so I can keep track of it, but the key is just managing your indirect cost in relation to your direct labor. So we will continue to work on the indirect cost side. We'll continue to invest in those areas where we think there are higher margins. So, it's just going to be through good, active management, managing very closely when it comes to both adding staff, and when we have new work and off-boarding staff when the work goes away. It's just going to be through aggressive cost management.

We will also take a look at, particularly, our incentive compensation. If you go back in our partnership culture, the institution is very used to its incentive compensation moving up and down based on the success of the business. As a shareholder, I think that's right. So we'll continue. That will be one of the levers we have as well.

Is it fair -- is the ability to take cost out, is it more weighted towards, it sounds like the indirect costs? It sounds like you have your staffing level pretty well aligned.

Correct.

And utilization. So it's more about the SG&A or indirect cost at this point?

Yes. And let's -- again, there are certain areas where we could drive utilization up, and we'll continue to look at that. Utilization is generally a function of how many excess staff you have. It's a function of --- let's call it the friction in the business, as staff move from one job to the next. And we have invested heavily in the last 18 months or so in getting -- we could see this coming, and we said, gee, that was an area where needed to improve. So we feel like we've gotten much better at redeploying staff quickly as jobs come and go.

That's particularly important for a business like Booz Allen, where we have a lot of active task orders. We're not sitting on five or six five-year task orders. We're sitting on 4,000, 5,000 active task orders, which are churning on a regular basis. So that ability to redeploy staff quickly is incredibly important, and it's something we've been investing in for the last, I would say, 18 to 24 months, and I'm not going to say we're perfect at it. I don't know that you ever get perfect at it, but I think we've gotten pretty good.

You guys took a fairly aggressive cut to the executive level and some of your partners a little over a year ago. As we look at those indirect costs, is there a point where it starts to get more painful to the organization to keep cutting in those areas, or do you feel like there's still a lot of room to do that?

Well, I think we -- it's always painful, Tim, as you can imagine, because of course generally you're dealing with people, right? That's the major cost in those businesses. So it's not something that we do lightly. It's something that we work very, very hard. But I would never say that it -- I mean, it's been painful, but having to make adjustments in partner core as we did last January, that is incredibly painful.

I think it's important to understand that while Sam talks about it being painful, which we all agree, we have a very, very solid cadre of top management talent in this organization, and it goes below the level of partner. We have a very strong cadre of folks that run all the way down through our Vice President and Principal Senior Associate levels that are very strong at managing this business.

The other thing that's important to us is client contract, client relationships, being deeply involved with our clients is a hallmark of how we operate, and so I don't think as an organization we're ever going to compromise the idea of being able to serve a client to be able to cut costs. I think that's one of the things we're very mindful of, is do we have the right team on the field and the right deployment of talent?

Sometimes, it's a matter of realigning that talent. I would like to think we're doing a much better job of realigning as opposed to simply cutting. One of the, perhaps, inferences to draw from your question is, would we cut more deeply to cut costs, just because we had to cut costs, at the risk of giving away some of these other items? And the answer to that is a flat-out no, because we value that too much, and indeed that really is the thing that distinguishes us in the market. So I think it's this deep talent reservoir that enables us the flexibility to do the things that we're doing, and I think we will continue to manage that and manage it effectively.

Okay. That's helpful. One last one on the margin. Just as we think about DSES's impact, is it fair to think that's still a lower margin, or as you blended that in, is it not really much of a difference versus the core legacy business?

Well, I think as we announced when we did the acquisition, because they tend to have a higher percentage of billable expenses than we do, and billable expenses generally drive less of a margin, their overall margins are slightly less than ours. They are still accretive to the business, however, and that is factored into our guidance.

You had great cash flow this year. Can you give us a sense for kind of CapEx or -- and if possible, if you have any sort of outlook, directionally, for free cash flow or operating cash flow for 2014?

Yes. Again, a couple of part answer. CapEx I think will be on the order of what they were this year. I think as we announced, as we talked about in the past, we set about four, five years ago to reduce our facilities footprint, and that then continues to reduce our need for capital expenditures. So that -- do not expect an increase there.

On the cash generation side, we did benefit greatly this year from a reduction in our days sales and receivables, so-called days sales outstanding. Whether -- at this point I don't see us continuing to drive that number down for fiscal 2014, so I think our outlook is for flat to perhaps modest growth in that number. That of course then dampens your cash generation capability.

So I think this year, fiscal year 2013, was an extraordinary year. I don't know that -- fiscal year 2014, unless -- given that we're looking at what could be a slight increase in our days sales outstanding, we'll probably see less cash flow generated next year.

Our next question is from Edward Caso of Wells Fargo Securities. You may begin.

Congratulations on executing well in the current environment. My question is around pricing. What are you seeing sort of on an apples-to-apples basis? And is the slow pace of decision making by your clients, given sequestration, the fewer furloughs and so forth, delaying some of those contract downward adjustments that might be felt? And how is that baked into your guidance? Thank you.

Well, the short answer is that we've baked that into our guidance. Clearly, we forecast a decline in our organic revenue, so that's reflected there. In terms of delays, I think it's pretty well-known that when the government is uncertain, it, as we all do, tends to not make any long-term actions. So there certainly have been delays in the awards.

I think we're cautiously optimistic that we'll start to see an uptick here as September 30 looms. We'll have to pay close attention to that. I think we have accommodated whatever margin pressures, and again, margin pressures will vary by market, clearly. And we've tried to make sure that was factored into our outlooks.

Can you help us out with interest expense assumption for fiscal year 2014, please?

Well, we have -- we're anticipating for fiscal year 2014 a stable interest rate environment in terms of debt paydown. We would pay down the amounts that we're required to. Again, I think as we have mentioned, we wouldn't -- at this point wouldn't look to do any early paydowns of our debt. Clearly, we would also at some point here in the future take a look at whether or not it would make sense to go after some repricing in our line of credit, if the markets would support that. But we'll just have to see.

So does that imply that you're assuming a higher adjusted operating margin? Is that fair to assume?

A higher adjusted operating margin?

Right. I'm trying to back into what your operating margin is.

Well, as I say, we have tried to factor that into all of our guidance. We have not in the past gotten into giving that other than a top and bottom line basis.

Thank you.

Thank you. Our next question is from George Price of BB&T Capital Markets. You may begin.

Thanks. Just a follow-up on a couple of things. First, looking at the -- talking about the commercial business, I'm assuming that you're still seeing good growth there, double-digit growth, if you could comment on that? Maybe where is that in terms of size. Would you anticipate that commercial and international together may get to a point in fiscal 2014 where you call that out and discuss that in a little bit more detail, or is that still too soon?

Well, we tend to look at the Commercial and International business together, I think as we have mentioned in the past. That continues to be less than 2% of our revenue, which is pretty modest, actually, while we are continuing to invest, while we are building the client base there. We believe the best approach is that we'll talk about that in greater detail as it becomes a more meaningful part of our business. So, at this point, we're focusing there. We're also focusing on our core Government business, which generates more than 98% of our revenue.

Okay. Maybe looking over the next quarter or two, can you give us maybe any additional color on how you see revenue and adjusted EBITDA trending, perhaps relative to the fourth quarter? I guess the question is really sort of implied in your guidance; maybe you want to break it up by first half versus second half. But do you see anything to call out in terms of how the business is going to -- is assumed to perform with the guidance in the first half versus the second half of 2014.

The short answer is no. We have, for good reason --- as you know, in this business, particularly given the regulated nature of our accounting practices and the fact that we're heavily cost reimbursable government contract, it's important that we manage this business on an annual basis. So, while as a public Company we have to report on a quarterly basis, you can be assured that we manage it on an annual basis. So, it doesn't behoove us to get into quarterly outlooks, simply because that's not the way we take our management actions.

Okay. Last thing is, the SIG investment certainly sounds very interesting as a potential differentiator. But I guess stepping back, given the current market, do you think that the current federal market, and based on the assumption that things are going to continue as they are for the next year or two, do you think this is a market that's going to really pay for and ensure return on that kind of investment?

I'm so glad you asked that question. I think our answer is absolutely. I think that, especially in a market like this one, a firm like ours is going to continue to succeed and stay ahead of the market by offering innovation and new thinking to our clients. There's been, especially at the early stages of the market turning, sort of a natural retrenchment on the part of clients. But the missions continue, and the missions now need to get done with less funding.

And clients, really across all of our markets, are receptive to ideas that allow them to do that. The government is very interested in cloud; the things we're doing around cyber are key. The issues of predictive intelligence, especially in the area of cyber, are of even more importance now than they were a couple of years ago, and they're going to continue to be of importance. We have a close to 100-year track record of trying to find those things and get in front of them and position ourselves to catch the market waves when they come.

I think that there's every reason to believe that elements of the market will continue to grow, and that's what the SIG is all about, is making sure that we deploy the right knowledge and the right people into the right places to take advantage of those opportunities, and as opposed to just competing in the same turf over the same things as elements of the market continue to commoditize, which is, again, not a new trend. It's something that's always happened.

So in that sense, the SIG is both new in the way that we're doing it and in the level of effort that we're putting behind it, and also tried and tested over many, many years -- really over many business cycles -- in terms of our approach to growing and winning in the marketplace.

Okay. All right. Horacio, I appreciate the commentary. Thank you.

Thank you. This ends the question-and-answer portion of our call. I would now like to turn the call over to Ralph Shrader for closing comments.

Thank you, Shannon. For all of you, I hope we've been able to convey our deep pride in these solid fiscal year results in what has certainly been a very challenging market. We managed to keep our revenue close to last year's level. We grew our margins, our operating income and adjusted earnings, and we again generated very strong cash flow.

As I mentioned earlier, we also were able to pay a total of $8.36 per share in dividends during the year, and our total shareholder return continues to be among the very top in the government services sector. I hope you can hear from us that we are very excited about and continuing to invest in the future, and we believe we have chartered the path with our Vision 2020 strategy. With that, I say, thank you very much for joining us and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.