Curt Riggle Ralph W. Shrader - Chairman of the Board, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Nominating & Corporate Governance Committee, Chairman of The Board of Booz Allen Hamilton Holding Corp, Chief Executive Officer of Booz Allen Hamilton Holding Corp and President of Booz Allen Hamilton Holding Corp Samuel R. Strickland - Chief Financial Officer, Chief Accounting Officer, Chief Administrative Officer, Executive Vice President and Director Kevin Cook Horacio D. Rozanski - Chief Operating Officer and Executive Vice President

Carter Copeland - Barclays Capital, Research Division Robert Spingarn - Crédit Suisse AG, Research Division William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division Timothy McHugh - William Blair & Company L.L.C., Research Division Edward S. Caso - Wells Fargo Securities, LLC, Research Division Suzanne E. Stein - Morgan Stanley, Research Division Elizabeth Grenfell - BofA Merrill Lynch, Research Division George A. Price - BB&T Capital Markets, Research Division

Good morning. Thank you for standing by, and welcome to the Booz Allen Hamilton's earnings call covering second quarter results for fiscal 2014. [Operator Instructions] I'd now like to turn the call to Mr. Curt Riggle.

Thank you, Shannon, and thank you, all, for joining us for Booz Allen Second Quarter Fiscal 2014 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; and Sam Strickland, Executive Vice President and Chief Financial Officer. We hope you've had an opportunity to read the press release on our second quarter earnings that we issued earlier this morning. We have also provided presentation slides on our website, and we're 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 materially differ 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 2014 second quarter earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on today's call. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide investors with useful information. We include an explanation of the adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2014 second quarter slides. It is now my pleasure to turn the call over to our CEO, Ralph Shrader, and he will start on Slide 3.

Thank you, Curt. Good morning, everyone, and thank you, all, for joining us today. It's been 2 weeks since Congress ended the government shutdown and raised the debt ceiling, an enormous relief coming after great cost and disruption to our nation. Although the shutdown happened after the fiscal quarter covered by this earnings call, its significance merits our discussion here this morning. But I'd like to start with some good news for Booz Allen stockholders, employees and other stakeholders contained in the second quarter fiscal 2014 results we announced in the press release issued earlier this morning. Here are the financial headlines for the second quarter of fiscal year 2014. Second quarter revenue was $1.38 billion compared with $1.39 billion in the prior year period. Adjusted net income increased to $70.1 million from $55.7 million in the prior year period. Adjusted EBITDA increased 24.2% to $153.8 million, and adjusted diluted earnings per share increased by $0.08 to $0.47 per share. Booz Allen's total backlog as of September 30, 2013, was $11.65 billion compared with $12.45 billion in the prior year period, and funded backlog was $3.22 billion compared with $3.52 billion in the prior year period. We continue to grow our margins and operating income. We again grew net income and earnings and generated strong cash flow. Booz Allen is declaring a regular dividend of $0.10 per share payable on November 29 to stockholders of record as of November 11, 2013. And I'm pleased to announce that our Board of Directors approved a payment of a special dividend of $1 per share to stockholders of record as of November 11, 2013. The special dividend will also be paid on November 29 of 2013, and represents our continued commitment to return value to all of our investors. Although market conditions have…

Thank you, Ralph. During the second quarter and for the first half of fiscal 2014, we held top line revenue almost flat and continued to manage our business with the discipline that we established during the second half of our last fiscal year. This includes ensuring that our staffing capacity is appropriate for the demand that we see in the market, that we maximize productivity of our consulting staff and minimize the amount of unbillable time, and that we optimize our infrastructure cost and overhead expenses. Our employees are to be commended for the excellence they have achieved against these objectives. I would also like to recognize the success of our tactical selling efforts as we work with clients to seek out additional ways to help them be successful in these challenging and uncertain times. The impact of the government shutdown is not reflected in the results we're presenting today, but the modest impact it had on our financial position provides a perfect example of the importance of our longer-term business model and our ability to plan for unknowns in a difficult environment for our industry. As Ralph mentioned earlier, during the shutdown, we maintained roughly 90% of the pre-shutdown level of direct labor on billable work in support of our clients. The modest financial impact of the shutdown illustrates how closely we've aligned our work to the core missions of our clients, helping them to achieve their important mission objectives. On top of that, our tight controls on productivity and spending so far this year have given us the flexibility to cover the cost of those employees impacted by the shutdown, and we were able to keep them on the payroll performing administrative, training and other tasks. Like Ralph, I can't tell you how proud I was that we…

Thank you, Ralph and Sam. Before we open the lines for questions, I'd like to remind you that on October 7, we launched our Leadership Perspectives videos. These 6 videos provide insight into our business, our culture and some of the opportunities we see in the market. They can be accessed by visiting our Investor Relations website at investors.bah.com. At this time, our Chief Operating Officer, Horacio Rozanski; and Senior Vice President and Corporate Controller, Kevin Cook, are 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 Carter Copeland of Barclays.

Just a couple of quick ones. The first one, Sam, is given the impact of the shutdown on the coming quarter and your comments about the management of indirect cost, can you help us think through, just in general terms, about the -- just some color on the margin profile in Q3 versus Q4 if there are significant moving pieces there we should consider?

Carter, it's Kevin. So as you know, we provide annual guidance. We don't get into the quarterly descriptions of margins. But as Sam said in his remarks, what we're going to do is take some of the money that we saved in anticipation of not knowing what the government was going to do come October 1, and we're going to reinvest that back into the business in the second half. So clearly, our margins in the second half will be down, but we would expect to maintain our operating margin levels for the year at approximately where we were last year.

Okay. And is there -- I guess asking it another way, is there a difference in the profile and timing of those investments in Q3 versus Q4? Or should we consider that they're level loaded?

I would consider that they're level loaded.

Okay. And then just as a follow-on, with respect to the 3 end market verticals just -- I know you don't provide the breakouts of revenue, but in general terms, if you could kind of address what you're seeing in terms of defense, civil and intel in terms of relative differentials in those end markets. Any color there would be helpful.

I think we could characterize it as that defense remains, we think, reasonably robust, that civil is holding its own, and there is turbulence in the intel community.

Okay. And what about on the commercial side?

Well, commercial, the good news is it's ticked over 2% of revenue. But, Carter, I've got to tell you, we still think it's not significant enough to start discussing at this point. So we are making progress. We're continuing to invest. We're optimistic about the future. Let's, let it get a little more significant before we start talking about that.

Our next question is from Robert Spingarn of Credit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: I want to dig a little bit more into these margins. You had just excellent performance here in the first 2 quarters, and I understand, Kevin, what you just said that the margins will decline in the second half. So a $0.50 quarterly run rate should not be expected through the year, plus you pile on the uncertainty in the macro. But would it be fair to assume, especially since it sounds like the earnings impact of the shutdown is more modest than I would have expected, that barring a worse-than-expected outcome for you regarding sequester, et cetera, this guidance might be somewhat conservative for the second half?

Well, I don't know that I would characterize it as conservative, Rob. I mean, we're trying to not overcommit based on the uncertainty that's coming, and we really do need to reinvest back into the business. We've been running the business pretty lean and mean for the -- actually, about the past 3 quarters, and it's time for us to get back to our normal approach to investments. So I don't -- I wouldn't characterize as overly conservative. We're going to balance our indirect cost with our direct cost, as we do every year, to make sure that we fill up the buckets, if you will, against the provisional billing rates that we negotiate with the government each year. Robert Spingarn - Crédit Suisse AG, Research Division: So this decline is not about what you don't know or the uncertainty on the macro side in the top line, but it's about what you're planning to do, period?

I think that's the most of it. I'd hesitate to say that we're not wondering what could happen on January 15 or February 7, but I think most of it's, intentionally, what we're doing with investing back in the business. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then just 2 other quick ones. If you could characterize -- maybe this is for Horacio, what the booking environment looks like right now since Washington came together and made the deal. And then I have a question on M&A.

Rob, it's Horacio. I don't know that there is much to be said. The big booking season ended September 30, and so we're sort of back to where -- what you would expect to see this time of year. I don't know if there's anything -- any flashes of brilliance coming from us on this topic right now. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, but -- so when you have such a strong September quarter and this is starting to look like a trend here, we now have a couple of data points from the government services sector, you're saying right now, just a month into the new quarter, we're basically looking more like the first quarter? Or am I over-interpreting what you said?

I think we're looking like we always look after the big September 30 flush, and so the things are sort of back to what you would expect. And if you look back for the last several years, I think that's sort of the -- that's the pattern, we believe, for the industry and for us and for everybody. Robert Spingarn - Crédit Suisse AG, Research Division: Okay, okay. And then the last question is more of a strategic question, perhaps, for Ralph or Sam, and it has to do with a recent M&A transaction that we saw from a competitor buying a larger asset, but one that seems to have greater growth rates and margins than the average for the publicly traded companies. I'm wondering if that's the kind of thing you would have looked at? Or because of its size, would it have been too large, given your leverage, et cetera?

Yes. Well, it would not have been too large, given our leverage. It -- as we go back talking in terms of whether or not it fits within our strategy, whether or not it was reasonably priced and whether or not it fits within our culture. So it's not that we wouldn't have done something of that size.

Our next question is from Bill Loomis of Stifel. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Just looking at the revenue guidance in the second half, so just running some quick numbers, it looks like you're implying organic growth in the back half to get to the midpoint of roughly down 8% to 10%, but you talked about your backlog duration shrinking in response to, perhaps, a little bit lower book-to-bill than a year ago. So what's happening in the second half on the organic revenue side? I mean, that's a pretty significant decline in -- or deceleration -- further deceleration. Is there specific contract actions that are going on? Or are you just being cautious going into yet another budget uncertainty early next year?

Bill, it's Kevin. There's a couple of factors, as Sam mentioned earlier, 5 less consulting days. That's a nontrivial impact. Usually, if you look at the difference between the first and second half of the year, there's maybe 1, sometimes 2 days difference, 5 days given our shift to the government holiday schedule and the calendar itself is pretty significant difference between the second half and the first half. Additionally, the fact that we did have inorganic revenue in our second half last year for 4 of the 6 months, we won't have that this year. So that's another impact. And then there is probably some worry about the bookings discussion we just had, frankly. The -- you think about the third quarter, our third quarter, fourth calendar quarter, the government was shut down for 2 -- or half of October, and they're ramping up slowly. So I think we're wondering how that's going to manifest itself and what is going to happen from a bookings perspective come December as this budget committee does or doesn't deliver on their charter. So I think there's a lot of factors that led us to changing -- slightly changing that forecast, Bill. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then the second, when you talked about under -- you've been running lean and mean and, over the last few quarters, under-investing. What exactly do you mean by that? I'm sure you're not talking about bid or proposal activity, right? You're -- what else are you talking about when you say you have to reinvest back in the business?

Well, as we've discussed over the years, we make internal investments into areas that we expect our clients are going to require in the future, and they're going to be in higher growth areas. Sam mentioned a couple of them in his remarks. I think predictive intelligence, cloud computing, commercial, international -- excuse me, health care, all of those markets are ramping up. There are others that are flat and others that are declining, but we try to invest in capabilities that we know that our clients are going to need to buy in the future so that we're there ready with the capability when they go to market for support.

So, Bill, if I just put -- add a little color to that. If you think about our business, in order to invest, that means freeing people up from billable work. And I think we made a decision for the first half of the year, given the uncertainties surrounding September 30 and the political and macro environment, that we kept folks pretty billable in the first half of the year to make sure that we had ample financial flexibility to cover whatever would befall us on the back half of the year. And now what you're seeing is we're starting to ramp up hiring so that we actually have the resources to invest in these growth areas in terms of starting to develop the marketing for next year's government fiscal year-end push in terms of developing the intellectual capital and just the general capability that we're going to need to be successful in those areas. So that's really -- what you're seeing is that we feel like we were -- we manage very conservatively in the first half. Now in the back half, we're making sure that we take care of business in terms of getting ready for government -- or for our fiscal '14. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And you worked -- this was the plan last quarter because I know you said you weren't going to have tightrope margins you had in the first quarter again through the year, but you did even better, so that your plan -- was it before we went into the shutdown that -- or potential for shutdown, I guess, then going into the end of September that you were going to start these investments up in the September quarter?

Yes.

Our next question is from Tim McHugh of William Blair & Company. Timothy McHugh - William Blair & Company L.L.C., Research Division: Yes, the first thing I just want to ask, if you can elaborate on the comment about the intelligence sector being a little turbulent. Is that related to just the news we can all see out there on CNN today or just to be sure it's not related to any of the news that -- related to Booz Allen intelligence earlier in the year?

Well, I think it's -- I think it will -- we're certainly seeing it and would say industry-wide.

I don't think it's Booz-Allen-specific at all. I think this is more related to the budgets and the operating temple of those agencies and the way they're shifting their contracting. There's a lot of awards moving to the right. There is a lot of challenges that they're facing as they adjust their budgets, and so programs start and stop and move around. And it's -- so it's more of that level. It's not specific to either the policy issues that are being debated or certainly not specific to any Booz Allen event. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. And then can you also elaborate on -- Sam mentioned some of the pricing pressure related to more client-side work. I guess how do you -- does that -- are you at a point where you start to change even more some of the way you structure your operations? I know you've moved to a lot of hoteling already in the past few years, but is that a significant enough trend that, that's, I guess, more of a structural change as you think about how to run the business going forward?

Well, we will -- I mean, as you pointed out, we started moving to hoteling some 4 years ago, and I think that has -- that is firmly entrenched now. It's taken hold. We've sort of figured out how to do it. As a result of that, as we come out of facilities -- as leases come up, we are downsizing on an annual basis. So that's both reducing our fixed cost in terms of leaseholds, leases. It also helps us in terms of our capital expenses in terms of leasehold improvement. So we'll continue to manage that leasehold footprint to reflect whatever trend we're looking at, at the government, whatever trend we foresee.

Our next question is from Edward Caso of Wells Fargo.

I guess my question is, I'm trying to understand what sort of the base level of cash that the company wants to hold. I noticed you put out an 8-K the other day, saying you took down, late in the shutdown crisis, $250,000 -- $250 million for a few days, yet then now you've -- despite that concerned hedge there, you then preceded to do another $1 special dividend. So is there some guidepost you can offer us as to what the comfort level is in the cash? And I guess sort of help us understand when we might see another special dividend.

Ed, it's Kevin. I'll start at the back end of your question. We look at uses of cash every quarter, discuss it with the board. If there was an acquisition out there that we thought was fairly priced and added to our capabilities, that would probably be a focus area for us going forward. But at this time, there doesn't seem to be much out there, so we thought returning cash to the shareholders made sense. Related to the $250 million that we borrowed, it was more related to the debt ceiling debate than the shutdown. We were concerned that if the country defaulted, we had input from the banking sector that there would be significant disruption. And while we had a comfortable level of cash, if you need cash and you can't get it, that's not the position you want to be in. So we thought having that additional cash would be a prudent thing to do. That's the comment we got back from a lot of our bankers. I think we took that borrowing on the day after Columbus Day, and we repaid it on Friday, so once the debt ceiling deal was done. So as far as comfortable level of cash, we usually have, at a minimum, $100 million at the end of any month as a hedge against slowdowns from payment offices and things like that, but we do generate a good bit of cash, and when appropriate, we'll return it to the shareholders.

Great. My other question is around sort of pricing in general and the client, either using LPTA or effectively using LPTA. What are you seeing, especially as you look at your work, that is being re-competed? And maybe also discuss how much of your work will be up for re-compete in the next 12 months.

Ed, it's Horacio. I think again -- I'll do it like Kevin. I'll start with the back. There is nothing unusual in our pattern that I know of for next year in terms of level of work we competed being outside the norm. With regards to the first part of your question, the -- it's an interest -- I think we all expected the LPTA cycle to be a cycle. And so we are seeing -- some of the parts of the government that got into it very, very early are starting to see that LPTA makes sense for some things and not for others, and re-competing things when they come up, it's more on a best-value basis. We're seeing other parts of the government, where they got late to the LPTA party, still continuing to increase that. So it's not homogeneous across the government. I think on average, there are still -- we're still into the cycle where there's a desire and opportunity, given the budget situation, for clients to extract lowest possible price, but the reality is you can also extract lowest possible quality with that. And I think in the different agencies, they are taking different views on that. And again, I think it reinforces our view that at some point, the market will settle into the more commodity services away from the clients' mission as being things that are naturally prone to LPTA pricing and then the things that are closer to the mission that are more essential, that are more technical, requiring more of the best-value approach. And so we expect to continue to move in that direction, but the pace is uneven.

I'd like to just take a moment to lay out. At September 30, we had some 400 -- I think $427 million of cash on hand. We had 5 -- undrawn, untapped $500 million revolving line of credit at, let's say, very competitive rates, and we had a $300 million, let's call it, accordion under our term loan agreements. So when we took a look at that, that was well over $1 billion of capital that was available to us, more or less on demand. Under those circumstances and given what we saw, we felt like peeling off $150 million of that to pay a special dividend back to the shareholders made perfect sense to us and to the board, so still have lots of capital. We still generate lots of cash. So we're pretty comfortable with our capital position, even after the dividend.

Our next question is from Suzi Stein of Morgan Stanley.

Most of my questions have been answered, but can you provide an update on international, anything specific going on there?

Like Sam said, it's still a relatively small portion of our portfolio, and so we don't want to talk about it in too much detail. But in general, we are on track with our plans. Our business in the Middle East and North Africa is growing as we expected, and we are making good inroads both in branding ourselves and the services that we offer, both to our government sales and to commercial clients in that part of the world. So we are happy and optimistic with the way things are going.

And then maybe going back to the comments that you made on the M&A environment, is it pricing is too high? Or is there simply nothing out there that you're particularly interested in at this point?

Well, I think we are continuing to look and -- we're continuing to look. It's not that there is nothing out there. I wouldn't say that the environment is robust, but we are continuing to look. We're trying to make sure that folks know that we are interested in an acquisition if it, again, fits our criteria.

[Operator Instructions] Our next question is from Elizabeth Grenfell of Bank of America.

Just given the relatively short cycle of your business, how are you thinking about when revenues will bottom, given the defense budget backdrop?

Well, we plan 1 year at a time. So we're just now going into our planning cycle for our fiscal '15, which will end March 31, '15. So I think it's going to be difficult to answer that question until we get beyond the -- let's say, the January timeframe. My wildest hope would be that the congressional groups come together and reach budget agreement, and then we all march off with a stable spending environment, let's call, but I think that would be best for government operations and certainly would be good for our industry. Not sure what the chances that happening are, but we just don't know how much longer this -- let's call it, the political uncertainty will last. What's clear is that the missions that we're supporting are not going away, then the question becomes the availability of funds to devote to those missions. And I think that will dictate when the bottom comes, if it hasn't already come.

Well, I think you've also got the factor though that we talked about, which is that even during the government shutdown, 90% of our work continued on. So I mean, I think that's the clearest indication you could possibly have about the essential nature of the work that we do. And as long as we're on that end of the curve, I think that we're in reasonably stable territory given a very unstable political environment in which to operate, but I think that part is the strongest possible indicator we can have about the strength of our business flow.

Our next question is from George Price of BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: Most of them have been answered, but I was hoping perhaps -- you mentioned that there is turbulence in intel, and I was wondering if maybe you could give a little bit more color around what you mean by that and what specifically is driving it, budget drivers versus other drivers out there. Obviously, there's a lot of headlines on the intel space in general. If you could maybe give some of your perceptions on that, that'd be great.

George, it's Horacio. I -- what I -- I guess the way I would describe it, it is entirely driven by the budgetary situation in that part of the government. The intel community's budget challenges, I think, started after, perhaps, those of the Department of Defense or some of the large civil agencies. And so they are -- maybe I would describe it as 1 year to 2 years behind the cycle and beginning to face some of the same pricing pressures, delays in contracting challenges with awards and protest and all of the things that have become commonplace across other parts of the business. So that's -- it's really more than that. As I said before, it's not driven by the policy discussions that are in the papers. It's not driven by Booz-Allen-specific events. It's just the dynamic in some of those agencies.

I'm showing no further questions at this time. I would like to now turn the call back over to Ralph Shrader for closing remarks.

Well, thank you, Shannon, and thank all of you. I hope that we've been able to show that our effective management of Booz Allen's business and capital structure has given us the ability to serve our clients, support our employees and deliver value to our stockholders despite some significant market disruptions. We kept revenue close to last year's level and significantly grew our earnings, operating income and net income while continuing to generate strong cash flow. Going forward, we are investing in the future of our business and believe that we are well positioned to serve all of our stakeholders in these very turbulent times. Again, thank you, all, for joining us here today, and have a great day. Thanks.

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