Booz Allen Hamilton Holding Corporation (BAH) Q2 2014 Earnings Report, Transcript and Summary

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 changed significantly since Booz Allen went public 3 years ago, one thing has not changed: Booz Allen's commitment to deliver for our clients, our employees, our shareholders and our community. We have made a continuing commitment to tell you what we expect to do and then to deliver on those promises. The second quarter of our fiscal 2014, which ended September 30, 2013, represents our 12th consecutive quarter of strong bottom line results. The recent government shutdown is significant even though it happened just after this reported quarter drew to a close. There are 3 things I hope you will take away from our response to the shutdown, which shows how we believe Booz Allen stands apart. The 3 things relate to the work we do focused on our clients' core mission, the value we place on supporting our people and the financial flexibility we've built through careful management. First is our focus on our clients' core mission. We've talked about this for a long time that Booz Allen's strategy is to focus on our clients' essential missions, not on peripheral or back-office operations. The fact that approximately 90% of our client work continued through the shutdown demonstrates how closely we have aligned our work with essential client personnel and essential missions. The second thing I want to point out about Booz Allen's difference, as illustrated during the shutdown, is our commitment to our people. I'm going to quote directly from an e-mail from one of our employees and would note that this is just one of many that expressed a similar viewpoint. The quote is, "I work at a client site and wanted to let you know what an impact the decision to extend administrative coverage has had on our staff. Everyone was impressed by this decision. Thank you also for the updates and guidance you provided over the last few weeks." The third point I'd like to make about Booz Allen's response to the shutdown relates to our financial management. In the first half of fiscal 2014, careful management of cost, balance of demand and capacity in the business and high productivity on the part of our employees put us in a solid financial position that made easier leadership decision to support employees who were affected by stop-work orders by covering their cost to perform administrative tasks while they were unable to perform client work. We did not furlough a single employee due to the government shutdown. Sam will also talk about the expected impact of the shutdown on our financial results for the balance of the year when he discusses the forecast. Back to our performance for the second quarter of fiscal 2014. I should note that this quarter coincides with the end of the federal government's fiscal year. Booz Allen won contracts to perform important work for our clients across civil, security and defense markets. Here are just a few of the significant contracts and task orders we won during the second quarter: a series of contracts with the United States Army totaling approximately $366 million to support the Army Corps of Engineers, Army Forces Command, Army Materiel Command and Communications-Electronics Command with engineering, technical intelligence, IT, cloud and training services; a series of contracts totaling over $100 million from the Department of Veterans Affairs for information technology and engineering services; a blanket purchasing agreement with a ceiling of $6 billion to support the Department of Homeland Security's national protection and programs directorate with continuous monitoring services; contracts worth over $20 million to support programs at the Defense Intelligence Agency. Booz Allen's service to clients and our commitment to the community came together in the tragic mass shootings at the Washington Navy Yard on September 16, where more than 100 Booz Allen employees worked side by side with clients. We were very fortunate to find all of our employees safe and accounted for by the end of that terrible day. Our clients and other teammates were not so fortunate, and Booz Allen managers and staff on our Washington office, adjacent to the Navy Yard, jumped into action. Our people aided fellow employees and clients during the lockdown, provided safe office space and computer support to those evacuated from the Navy Yard, arranged transportation for those whose cars were in lockdown areas, and then turned to focus on healing and support to families and friends of the fallen and injured. Booz Allen is working closely with the Tragedy Assistance Program for Survivors, or TAPS, Navy Yard relief fund, providing volunteers for TAPS programs. We know this will be a very difficult holiday season for those directly affected, and Booz Allen will be making financial -- a financial donation to the TAPS Navy Yard relief fund with each card that we send. The holiday season inspires our people to be even more generous of their time, talent and resources to help others, serving meals to the poor, aiding the sick and putting smiles on the faces of needy children across our nation. We have announced, for calendar year 2014, the Booz Allen Hamilton Centennial Community Challenge to inspire our employees to reach an even higher goal of 100 hours of community service as individuals and of 100,000 hours of community service together across the firm. Before I close this segment and turn the microphone to Sam, I want to invite all of you to share an upcoming event, marking the start of Booz Allen's 100th anniversary year. Together with members of the firm's leadership team, I will have the privilege of ringing the opening bell at the New York Stock Exchange on January 2, 2014, to mark the first business day of our centennial. As many of you know, New York Stock Exchange live streams bell events on their website. So I hope you will join us in celebrating this important milestone. Sam will now provide you with a closer look at the details and drivers of our financial results for the second quarter of fiscal 2014.

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 could support our staff this way. In addition to being the right thing to do, we believe that this will help us retain high-performing people and further differentiate Booz Allen Hamilton as an employer of choice. With that backdrop, let's look at some of our key results in the second quarter and the factors that drove them. We can now turn to Slide 4. Gross revenue for the second quarter of fiscal 2014 was $1.38 billion, a decrease of 0.7% compared with the year ago quarter. Inorganic revenue for the quarter was approximately $68.2 million. The decline in revenue was primarily driven by modest declines in demands for our services due to client delays and award activity and funding actions in an uncertain federal budget environment. Fewer billable hours, combined with the need to manage cost and capacity, has resulted in a reduction in headcount over the prior year. However, higher consulting staff productivity, higher billable expenses and the revenue from acquisitions helped minimize the impact of headcount declines. This reflects the timing of our move to more carefully manage capacity during the second half of last year and coincides with the slowing in the decline in demand that we've seen more recently. Moving to other financial data. We saw continued, strong year-over-year improvement in operating income and adjusted operating income generated in the second quarter, both driven primarily by our management of staff deployment and indirect cost. Net income increased 47.1% to $67.8 million over the second quarter of fiscal 2013, and adjusted net income increased 25.9% to $70.1 million over the prior year. Adjusted EBITDA increased 24.2% to $153.8 million in the second quarter. The increase was driven by the same factors that drove adjusted operating income. Diluted earnings per share in the second quarter was $0.45 compared to $0.27 in the second quarter of fiscal 2013. Adjusted diluted earnings per share was $0.47 in the second quarter compared to $0.39 in the prior year period. Now let's take a look at our cumulative performance for the fiscal year-to-date. We are now on Slide 5. Booz Allen's revenue was $2.81 billion for the 6 months ended September 30, 2013, compared to $2.82 billion for the prior year period, a decrease of 0.5%. Diluted earnings per share for the first half of fiscal 2014 was $0.93 per share compared with $0.69 in the prior year period; and adjusted diluted earnings per share was $0.97, up from $0.85 in the first 6 months of fiscal 2013. As we've discussed in the past, we operate our business on an annual basis with a goal of achieving the ratio of indirect cost to direct labor reflected in our forward pricing rates within the U.S. government. Our aggressive cost management during the first half of our fiscal year allowed us to maintain our staff on the payroll during the government shutdown and continues to provide flexibility to respond to uncertainty during the second half of our fiscal year. As we look towards the second half, we anticipate deploying available indirect budget to ramp up our organic investment in areas such as predictive intelligence, cloud-related capabilities to help clients extract value from data, mission solutions to help clients deliver large-scale systems and engineering services, such as rapid prototyping. We are also continuing our efforts in the commercial and international markets. We will continue to manage our capacity, staff productivity, infrastructure and indirect expenses to achieve the proper balance and the ratio of indirect cost to direct labor by year end. During the quarter, we amended our July 2012 credit agreement to reduce the interest rate and provide greater operational and financial flexibility without an increase in borrowing. The incremental interest savings during our fiscal 2014 will be largely offset by transaction-related expenses but will generate approximately $7.5 million of interest savings in fiscal 2015, assuming required principal payments. As Ralph noted, we are announcing today a regular cash dividend of $0.10 per share and a special dividend of $1 per share. Both are payable on November 29 to shareholders of record as of November 11. Relative to our uses of cash, we will pursue acquisitions when we identify companies whose capabilities are aligned to our strategy, are reasonably priced and are a cultural fit. And when accumulated cash balances exceed the near- to mid-term needs of the business and we don't foresee other valuable uses of our excess cash, we will consider returning cash to investors. Now let's turn to further details about cash. Net cash provided by operating activities in the first half of fiscal 2014 was $139.6 million compared to $389.7 million in the prior year period. Free cash flow in the first half of fiscal 2014 was $132.9 million compared to $375.4 million in the prior year period. Free cash flow in the prior year period had benefited from exceptionally strong cash collections as the U.S. government substantially increased its pace of payment before the close of its fiscal year on September 30, 2012. And now our backlog figures. At the end of our fiscal second quarter, total backlog was $11.65 billion, a 6.4% decrease from the prior year period. Funded backlog decreased by 8.4%. Unfunded backlog decreased by 1%, and priced options decreased by 7.7%. Our book-to-bill for the quarter was 1.6x. We have not been immune to pricing pressures, which translate to lower backlog and revenues as procurement officials seek lower prices to accommodate budget reductions. Given the government's desire to achieve price reductions, we've seen a reduction in experience requirements and have seen a continuing shift to performing work at client sites to reduce the facilities cost included in our rates. An additional dynamic that is reflected in our backlog is a period of performance compression trend that we have been seeing over the last several quarters. Contracts and task orders have been awarded for shorter durations but with an overall increase in dollar value for shorter-duration tasking. When looking into the year-over-year changes in our September backlog, while total backlog was down by 6.4% over the second quarter of our fiscal year 2013, we have an increase of over 14% in the combination of funded and unfunded backlog for contracts and task orders that are less than 12 months in duration. Funded and unfunded backlog associated with work that is less than 12 months duration represents roughly 40% of our total backlog. The reduction in total backlog, therefore, is predominantly driven by declines in longer-duration work and, to a lesser extent, by the decrease in backlog associated with priced options, which is the outcome of the ongoing budget uncertainty as clients try to shorten the duration of their commitments. Based on these facts, we feel we have reasonable visibility into the next 12 months. We also see this trend continuing at similar levels at proposal pipeline, which indicates that while the situation is stabilized, the focus on shorter-duration work will likely be with us until clients have more certainty in their budget priorities. Now let's turn to Slide 6 to review our guidance. Given the bottom line results we have achieved in our first half, we are reaffirming our previous earnings guidance for fiscal 2014, which calls for diluted earnings per share in the range of $1.47 to $1.57, and adjusted diluted earnings per share in the range of $1.55 to $1.65. This includes $0.02 per share of negative impact from the government shutdown. With the continuing uncertainty in the federal budget planning and the impact of the government shutdown in October 2013, we now anticipate a 3% to 5% decline in revenue for fiscal 2014. This is revised down from our previous guidance, which was for a low-single-digit decline in revenue for fiscal 2014. Now there are a number of factors impacting our second half revenue. We estimate the impact of the government shutdown that ended October 16 to be roughly a $30 million decline in third quarter revenue. There are 5 fewer workdays in the second half of our fiscal 2014 than there were in the first half. This is due to differences in calendar workdays plus our shift to align to the 10 government holidays, which adds more holidays to the second half of our fiscal year. The revenue impact -- this revenue impact is approximately $94 million. We maintain our expectation that sequestration will remain in effect at least through the end of our fiscal 2014, which ends on March 31, 2014. Additionally, this guidance does not include any provision for the possible shutdown when the current, continuing resolution expires on January 15, 2014, or the failure to craft a long-term solution in place of the temporary increase to the U.S. government's ability to incur indebtedness in excess of its current limits, which expires on February 7, 2014. This is because we cannot estimate either the probability or duration of such an event. And now I'll hand the call back to Curt.

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.