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Booz Allen Hamilton Holding (NYSE:BAH)

Q2 2013 Earnings Call

October 31, 2012 8:00 am ET

Executives

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

Horacio D. Rozanski - Chief Operating Officer and Executive Vice President

Analysts

George A. Price - BB&T Capital Markets, 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

Operator

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering second quarter fiscal 2013 results. [Operator Instructions]

I'd now like to turn the call over to Mr. Curt Riggle. Please proceed, sir.

Curt Riggle

Great. Thank you, Rhonda. And thank you, all, for joining us today for Booz Allen's Second Quarter Fiscal 2013 Earnings Announcement. I'm Curt Riggle, Director of Investor Relations. And with me to talk about our financial results this morning is Ralph Shrader, our Chairman, Chief Executive Officer and President; and Sam Strickland, Executive Vice President and Chief Financial Officer.

We hope you'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 are now on Slide 1.

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

As shown on the disclaimer on Slide 2, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and therefore, are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results.

Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's services and other factors discussed in today's earnings release and set forth under the forward-looking statement disclaimer included in our fiscal 2013 second quarter earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today's call, we will also discuss some non-GAAP financial measures and other metrics we believe provide useful information for investors. We included an explanation of our adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fiscal 2013 second quarter slides.

It is now my pleasure to turn over to our CEO, Ralph Shrader, and he will start on Slide 3.

Ralph W. Shrader

Well, thank you, Curt, and good morning. Thanks to all of you for joining us here on this Halloween morning following the incredible storm. I do hope everyone is safe and as dry as possible here on the East Coast. I don't know how many of the costumed superheroes will be able to knock on your doors tonight, but I know you agree that our emergency personnel and electric repair crews seem to be the real superheroes in the area this week.

11 days from now, we'll hopefully be drier and brighter, and we salute the heroes who secure our nation and its allies, our American veterans and active-duty military. As we approach our firm's centennial, Booz Allen is proud to have continuously served our clients in the U.S. armed services for 72 years and to again, this year, be named the best company to work for, for veterans.

Last month, in the important end of government fiscal year award cycle, Booz Allen won mission-critical contracts to support the U.S. Department of Defense and all of the armed services. We won numerous contracts to support vital programs in the civil agencies and the intelligence community as well.

In terms of financial results, despite the challenging macro environment for government contractors in this last quarter, Booz Allen grew our margins and adjusted earnings and we generated strong cash flow. As a result of our capital deployment actions for the 12 months ending September 30, 2012, we have delivered an impressive 68% total return to our shareholders.

Here are the financial headlines for our fiscal 2013 second quarter. Second quarter revenue was $1.39 billion, down from $1.43 billion in the prior year period. Net income for the quarter decreased to $46.1 million from $75.3 million in the prior year, while adjusted net income increased to $55.7 million from $50.6 million in the prior year period. Adjusted EBITDA increased 8.2% to $123.8 million, and adjusted diluted earnings per share increased by 8.3% to $0.39 per share.

Now it's important to understand that GAAP earnings from the prior year period, at both the aggregate and per share level, reflected a substantial increase attributable to the release of a significant income tax reserve and the realization of a gain from the sale of our state and local transportation business in the quarter ending September 30, 2011. Additionally, the current year's quarter includes onetime charges associated with the July 2012 refinancing transaction that we discussed on our August 1 earnings call. Adjusted net income, adjusted EBITDA and adjusted EPS remove these onetime and unusual items, and therefore, Booz Allen believes these metrics are useful tools to help you better evaluate our ongoing business results.

We ended the second quarter of fiscal 2013 with total backlog above $12 billion, and our funded backlog for the second quarter of fiscal 2013 was $3.52 billion, up from $3.44 billion in the prior year period. Our book-to-bill ratio for the second quarter was a superb 2.6, demonstrating strong demand from our clients for our services.

Today, we are announcing our fourth regular quarterly cash dividend in the amount of $0.09 per share. You may remember that on our August 1 earnings call, I said we had sufficient cash on hand to pursue an opportunistic acquisition strategy in this time of potential industry consolidation. Two weeks ago, we announced a definitive purchase agreement to acquire the Defense Systems Engineering and Support division of ARINC, known as DSES, which is being fully paid with available cash on hand.

We are very excited about this. The acquisition adds to Booz Allen's engineering capabilities and brings us additional scale and specialized expertise in C4ISR, prototyping, specialized software development and analytics, all areas where we see further growth potential and client demand, and that complement our existing capabilities. For example, DSES supports key Navy and Air Force weapons platforms, aviation and navigation systems with systems engineering, and the development and fielding of software-intensive operational systems.

I've often said when asked about acquisitions that we would only pursue another company that was a strong fit for our business and our culture, and our management team feels very confident that DSES will be both an excellent addition to our current capabilities and a driver of our growth plans in a way that is consistent with Booz Allen's long-term strategy.

We're guiding our business on a steady course, navigating today's rough market conditions with a focus on the future and real excitement about this future. Booz Allen is delivering top quality to our clients, providing rewarding work and strong culture for our people, giving back to our community and generating value for our shareholders.

Evidence of Booz Allen's success in winning and performing important work can be found in some of the major contract awards and task orders we have recently won: a single-award contract worth $159.8 million from the National Science Foundation to provide support for transformation, program management, enterprise services and solution engineering and integration services to the NSF Office of Information & Resource Management; a $91 million task order from the Army's Software Engineering Center for analytical, technical and software development support; a $26 million task order from the Air Force headquarters for business process reengineering and IT services in support of installations, logistics and mission support; a $184 million contract vehicle award from the National Institutes of Health, National Heart, Lung and Blood Institute for IT support services; and a number of new contracts with commercial financial institutions, energy and health care companies.

These are just a few of the new and recompeted contracts we've won in the past quarter, and they span all of our major market areas. Booz Allen is a people business, and we are committed to providing our talented employees with rewarding work and career opportunities supporting our clients with missions that matter.

Last month, Booz Allen was named by Working Mother magazine for the 14th consecutive year to its list of the 100 Best Companies to work for. During the past quarter, we were again named the Consulting Magazine's Best Companies to work for and received a new recognition from LATINA Magazine as one of the top companies providing career opportunities for Hispanic women.

Our people give generously to the communities in which they work and live. And a new program we're especially proud focuses on mentoring around technology. The overall initiative, which we call Time to Inspire, connects talented Booz Allen employees with young people through 3 key programs: first, appropriately enough, is FIRST Robotics, in which our employees coach teams of students, primarily at the high school level; second is Safe and Secure Online, an innovative program that teach cybersecurity skills to children so they can protect themselves online; and third, Innovations for Learning, in which our employees tutor first and second grade students across the country in reading over the phone and Internet connection.

In addition to helping young people across the country, our goal with the Time to Inspire initiative is to encourage other companies to join us in mentoring the next generation. Booz Allen has been helping our clients prepare for the future for 98 years, and we're focused on the future close to home in our firm as well. I'll talk more about our Vision 2020 strategy in just a few minutes, after Sam provides a more detailed discussion of the present, specifically of our financial performance for the second quarter and first half of fiscal 2013, which ended a month ago on September 30.

Samuel R. Strickland

Good morning, and thank you for joining us. We are very proud of how we've managed the business this year. Under challenging market conditions, we have delivered significant returns for investors. We believe our focus on serving clients, tactical selling and cost management, as well as our ongoing investment in growth opportunities, will continue to drive our future success. And all the while, we're generating a strong cash flow that will keep our options open going forward.

Let's turn to Slide 4 for a closer look at our second quarter of fiscal 2013, in which we saw a decrease of 2.9% in our top line revenue over the prior year period. The decrease in revenue was primarily the result of a decrease in billable expenses and a lower ratio of indirect cost to direct labor compared to the prior year period. Reductions in indirect cost have a direct correlation to the amount of revenue recognized under cost-reimbursable contracts. The lower rate of indirect cost is primarily attributable to the cost reduction actions the company implemented in late fiscal 2012 and the continued cost management at our business.

It's also important to point out our continued improvement in other measures below the top line, despite very challenging conditions in the government sector. In the second quarter of fiscal 2013, operating income increased to $102 million from $93.7 million in the prior year period, and adjusted operating income increased to $109.3 million from $100 million in the prior year period. The improvement in adjusted operating income was primarily driven by more effective deployment of Booz Allen's consulting staff.

More broadly, we have continued our strong focus on cost management and saw further improvement in the second quarter. As we noted last quarter, the slower spending on indirect cost is beneficial and is part of our management strategy to maintain flexibility within our operations and avoid cost overruns that could negatively impact our bottom line. While this does negatively affect revenue, the actions we've taken are having the expected results and are beneficial to our bottom line.

In the second quarter of fiscal 2013, net income decreased to $46.1 million from $75.3 million in the prior year period, while adjusted net income increased to $55.7 million from $50.6 million in the prior year period. Adjusted EBITDA increased 8.2% to $123.8 million in the second quarter of fiscal 2013 compared with $114.5 million in the prior year period. In the second quarter of fiscal 2013, diluted earnings per share decreased to $0.27 per share from $0.53 per share in the prior year period. Adjusted diluted earnings per share increased to $0.39 per share compared to $0.36 per share in the prior year period.

As Ralph noted earlier, there are a number of unusual nonrecurring items in both the current quarter and the comparable period of our last fiscal year that were affecting the GAAP net income and EPS numbers. Specifically, in the second quarter of fiscal 2012, we released a $23.6 million income tax reserve and we recognized a $5.7 million net gain on the sale of our state and local transportation business.

In the current quarter, we incurred $2.7 million in transaction fees and accelerated $7.2 million of debt financing cost as a result of our July 2012 debt refinancing to effect the special dividend. Each of these 3 transactions are added back to come up with our adjusted net income, adjusted earnings per share and adjusted diluted earnings per share metrics for the current quarter and the comparable period of our last fiscal year.

I mentioned a reversal of a significant income tax reserve during the second quarter of last fiscal year as one of these major adjustments. You can see in Exhibit 1 of our earnings press release that our income tax expense for the current quarter is more than $20 million higher than in the prior year quarter, and that is primarily because of last year's reserve reversal. I want to note that our tax rate this year is generally the same as it was last year without the reserve reversal, approximately 40%, and this tax rate is factored into the EPS forecast that I'll discuss later.

Now let's talk about cash. For some time, we've been asked what we plan to do with our cash, and we're very pleased with how we've deployed our cash since our last earnings call. We've created strong shareholder value with the issuance of a special dividend in late August in addition to our regular dividend. And we've made what we believe is an excellent strategic investment in the anticipated purchase of the Defense Systems Engineering and Support division from ARINC, which is expected to close in late November.

Assuming a close of November 30, 2012, DSES is expected to add between $110 million and $120 million in revenue during fiscal 2013. However, accretion to earnings this fiscal year is likely to be mostly offset by transaction and integration cost. We do expect the transaction to be accretive to earnings in fiscal 2014, which begins April 1, 2013. I want to emphasize that even after a special dividend and using cash on hand to fund the DSES acquisition, we will retain a healthy cash balance with strong cash flow, and if necessary, we have additional access to cash through our currently untapped $500 million revolver.

Our historical focus on organic growth in our core business and investments in growth areas like cyber, cloud, commercial and international markets continues. And as we have said for many quarters, we remain open to evaluating potential acquisition opportunities. As we demonstrated with DSES, we will consider only companies that are a cultural fit and bring us additional client access and/or enhance our capabilities.

Let's go through the basic numbers regarding cash. Our day sales outstanding were 57 days for the quarter ended September 30, 2012, reflecting very strong cash collections. Net cash provided by operating activities in the first half of fiscal 2013 was $389.7 million compared to $177.1 million in the prior year period. Free cash flow was $375.4 million in the first half of fiscal 2013 compared to $133.5 million in the prior year period, a 181% increase.

Free cash flow has benefited from an increase in cash from operations and the decrease in capital spending, which is primarily related to the reduced capital outlays associated with the leasehold improvements to build out our Washington Metro offices for hoteling that we completed last winter.

And finally, on the basic numbers, let's finish up with specifics on our contract wins. As Ralph mentioned, our book-to-bill ratio in the quarter was 2.6, indicating a strong pace of new awards as clients continue to acknowledge and seek the value of our services. Our total backlog at the end of the second quarter was a strong $12.45 billion. Additionally, our funded backlog continued to rise both sequentially and year-over-year, and as of September 30, 2012, was $3.52 billion, an all-time record high compared with $3.44 billion as of 1 year ago and $2.58 billion at the end of our first quarter of fiscal 2013.

Now let's take a look at our cumulative performance for fiscal year-to-date. We are now on Slide 5. Booz Allen's revenue was $2.82 billion for the 6 months ended September 30, 2012, compared to $2.88 billion for the prior year period, a decrease of 1.9%. Net income for the first half of fiscal 2013 was $108.1 million compared to $126.5 million for the prior year period, and adjusted net income for the first half of fiscal 2013 was $121.7 million compared to $108.6 million.

Adjusted EBITDA for the first half of 2013 was $259.5 million compared to $237.4 million in the prior year period. Diluted earnings per share for the first half of fiscal 2013 was $0.69 per share compared with $0.90 per share in the prior year period, and adjusted diluted earnings per share was $0.85 per share, up from $0.77 per share in the first 6 months of fiscal 2012.

I'd like to turn back to Ralph, who will talk briefly about Booz Allen's strategic positioning and differentiation, and I will finish the formal part of our presentation with guidance for fiscal 2013. We are now on Slide 6.

Ralph W. Shrader

Thank you, Sam. We recognize the reality of current market conditions. We've been managing our business with care and precision to ensure that Booz Allen delivers the best value to our clients and to our shareholders. We've been forthright about our prospects and forecasts, so you can have confidence in what we say about the near future. What we're even more excited about lies further ahead. Booz Allen is focused on the future, moving with speed and determination with the throttle down.

We're excited about our investment in growth areas of our business, such as finance and health in the civil [ph] market, engineering services and C4ISR in the defense market, special access programs in the intelligence market and our emerging business in commercial and international markets. We are balancing our historic focus on organic growth with strategically aligned inorganic growth, illustrated most recently by our DSES acquisition.

We believe there are significant growth avenues available to our firm by combining a deeper technical portfolio with our legendary consulting heritage and mission understanding. This is the core idea behind our long-range strategic planning initiative, known internally as Vision 2020. Vision 2020 is about capturing the best of our past, looking to the future and implementing changes to make Booz Allen even more successful going forward.

It's important to note that we are not waiting for the year 2020 or for our strategic planning to be completed before moving out on this agenda. Our acquisition of DSES is clearly in line with our intent to enhance our technical capabilities. Later this week, we'll be discussing with our Board of Directors the kind of leadership roles and construct to best serve our business going forward.

Over the next 90 days, we're looking at enhancements to our cost structure, infrastructure and people models that we plan to implement at the start of our next fiscal year on April 1, 2013. As I told our new DSES colleagues in welcoming them to Booz Allen, I've been with the firm for 38 years, and every day that I come to work here, I'm so proud of the work we do for our clients and of the talent and teamwork of Booz Allen people. I'm incredibly excited about the future that we are charting for Vision 2020, and I'm confident it will deliver results for our clients, our people and our investors.

I'd now like to turn back to Sam to talk about our forecast, and then we look forward to taking your questions.

Samuel R. Strickland

Thank you, Ralph. We are now on Slide 7. We are very excited about our Vision 2020 long-range strategy, but I know what you're interested in on the phone this morning, and that's the nearer future, which is the second half of the current fiscal year. Next week at this time, the election will be over, and we are confident that Booz Allen has taken steps to ensure that we have the flexibility and financial resources to perform well, no matter what the outcome of the election or the severity of the fiscal cliff.

At the bottom line for the full year, we are reaffirming our forecast for diluted earnings per share to be in the range of $1.40 to $1.50 per share and adjusted diluted earnings per share on the order of $1.60 to $1.70 per share. At the top line, assuming the continuation of current macroeconomic trends and no sequestration, we expect revenue growth to remain flat for the second half of our fiscal 2013. This guidance is inclusive of the DSES acquisition, which is expected to close by the end of November.

As I've said before, our overall EPS outlook reflects our confidence in our ability to manage our business with agility and precision, as illustrated by the cost restructuring actions taken in the fourth quarter of fiscal 2012 and our ongoing careful cost management of the business, which we believe will continue to translate into improvements in operating margins. Now these EPS estimates are based on fiscal 2013 estimated average diluted shares outstanding of approximately 144.5 million.

Curt Riggle

All right. Thank you, Sam and Ralph, and thank you, all, for listening to our summary of results and outlook. Related to our discussion about Booz Allen's thrust in the area of engineering services, more information is available on the Investor page of Booz Allen's website or by going directly to boozallen.com\engineering. Our Chief Operating Officer, Horacio Rozanski; and Senior Vice President and Controller, Kevin Cook, are here with Ralph and Sam to answer your questions.

Rhonda, can you please provide instructions for the question-and-answer portion of our call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Price with BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

Just first thing I wanted to do is just confirm some of the elements of the guidance. The revenue growth remaining flat, Sam, in fiscal second half of this year, so equal to the fiscal second half '12 revenue, right? That's -- it's year-over-year growth you are talking about, not on a quarter-over-quarter basis?

Samuel R. Strickland

Yes.

George A. Price - BB&T Capital Markets, Research Division

Okay. All right. And I think, as you said, that does include DSES.

Samuel R. Strickland

Yes.

George A. Price - BB&T Capital Markets, Research Division

And I was wondering too, could you maybe give us a little bit more details as to the expected transaction and integration expenses for DSES in the second half of '13 in terms of how much those expenses are. Maybe how they break down between the 2 types and between the 2 quarters.

Samuel R. Strickland

We haven't gotten to that fine grain. We clearly had acquisition expenses in the second quarter associated with that transaction. Those were a few million dollars, so we'd expect something like that in the back half as well.

George A. Price - BB&T Capital Markets, Research Division

So kind of a few million per quarter?

Samuel R. Strickland

Yes, something along those lines, George. We haven't -- I mean, at this point, we've -- I think we have finished our integration planning. We've got our integration checklist. We don't feel like that the amounts involved will be material, but probably will absorb most of the earnings that we'll generate out of DSES over the last 4 months of our fiscal year.

George A. Price - BB&T Capital Markets, Research Division

Okay. And then lastly, just on the fiscal '13 guidance, you maintained your EPS guidance. You've got $0.85 in adjusted EPS in the first half of '13. And EPS usually is good or better in the second half of the fiscal year, notwithstanding the current uncertainties. Is it fair to say you think you're tracking toward the upper end of that $1.60 to $1.70 EPS guidance?

Samuel R. Strickland

The -- we're -- of course, we work carefully with our lawyers, and we do provide the range for a purpose. So I think traditionally, we've had a history of coming in, in the middle of that range, George. But clearly, particularly given this environment, we feel pretty comfortable sticking with the range that we have out there.

Operator

Your next question comes from the line of Bill Loomis with Stifel, Nicolaus.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Sam, just looking at the cash flow, the DSOs obviously look like record lows for you guys. Is that sustainable?

Samuel R. Strickland

That's an excellent question, Bill, and we'd like to think so. Clearly, there was a bit of -- there's an emphasis by current administration to get cash out in the second fiscal quarter. I think that's -- that amazingly showed up in the GDP numbers for the second quarter. It's our understanding at least that they intend to keep that program in place for at least a year. Your guess is as good as ours that -- as to whether that will continue. But we would expect then, given the guidance, that it will be in place for at least a year. That, we'll have to see.

William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just on the -- looking at your utilization, I mean, consulting headcount is down about a little over 7% year-over-year, revenues down only 3%. Is that just because of the better utilization and what you've implemented at the beginning of the year? And do you see the revenue drops or headcount reductions continuing at a greater pace than revenue would suggest?

Samuel R. Strickland

No. I think that we feel like -- I will tell you, in the past, one of the ways we drove growth was hiring ahead of demand. And I think, clearly, in this environment, we've just recognized that, that's not prudent because our clients are facing great uncertainty and so therefore, it's very difficult for us to predict. So we're now hiring to -- against what we call sold and funded RECs [ph] . So I would not expect the headcount to continue to decrease. I will say that one of the things we did -- one of the reasons we took the cost action was to make sure we got our staffing levels trimmed up to reflect the business we had, not the business that we were hoping for or we're predicting when we were growing.

Operator

Your next question comes from the line of Tim McHugh with William Blair Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I just want to ask if you could talk a little bit about just your initial plans at least for the integration of the acquisition into the matrix and how you're going to treat that just from an organizational structure, as well as culturally, whether it'll get blended in or you're going to leave it as a separate entity. Just kind of curious given it's your first acquisition, how you're going to approach that.

Horacio D. Rozanski

It's Horacio Rozanski. Let me take a cut at that. We're -- because it's our first acquisition, we're putting a lot of focus and resource on getting it right. It is important that we take the same conservative approach to the integration that we take to making acquisitions, that we take to running the business in this environment. Our current thinking is, for the time being, we want to just transition DSES into our system and our infrastructure without trying to integrate it in the matrix, at least for the balance of this fiscal year. Once we are confident that things are stable with our first -- our thought of our first step is to do sales integration more than organizational integration. Let's find ways to go to market together that enhance both sides. They have client positions that we can take advantage of in terms of bringing new capabilities. We have client positions where we are very confident their capabilities can actually enhance our revenues, and so that's going to be the second step. Once we are in a place where we feel we understand them well enough, they understand us well enough, we will then take advantage of that and figure out how much to integrate into the matrix, where to do it and so forth. Along that road, it's interesting, they have a very diverse geographic footprint that matches very well with ours. It so happens that a number of their leases are coming up, and we're going to take advantage of that and begin to co-locate people to create savings. As I said, we're going to create revenue growth. Another area that we're excited by is, as part of the Vision 2020 initiative that Ralph talked about, there's quite a bit of interest in expanding our career model on the Booz Allen traditional business to include a technical track. It so happens that DSES runs a fully scaled up, fully experienced technical track, and so we're interested in seeing whether that's something we could pull [ph] over. So we see a lot of opportunities, and there's a lot of enthusiasm internally for integration. But we're going to take it slow and make sure that we get it right along the way.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay, great. And then just a numbers question on the acquisition or 2 parts to it, I guess. One is, just to be clear, in the adjusted EPS that you guys presented, will you be excluding in -- the intangible amortization?. And secondly, what type of profit margin, I guess, not so much in the second half of this year, but more so looking out to next year, should we normally expect the acquisition to contribute?

Samuel R. Strickland

Yes. Good questions, Tim. At this point, we do not intend to exclude the amortization of intangibles for purposes of calculating adjusted earnings per share. What we have tried to do with the adjusted numbers is to carve out the impacts of the Carlyle acquisition and then carve out the -- let's call it the nonrecurring items, both good and bad. And we feel like that -- this is -- it's not our intent for this to be our last acquisition, so we feel like going forward, we will have other acquisitions and we just really would get -- we would start confusing things if we started excluding items associated with the acquisition in terms of calculating our adjusted numbers, so we don't intend to go forward with that. In the future, we don't intend to do that. As for the margins, let me say that DSES for this calendar year, just to put that out there, will have revenue on the order of $350 million. Again, it tends to be more heavily billable-expense-oriented than we are, so the margins are slightly lower than ours. We will provide formal guidance for all of Booz Allen for our fiscal '14 when we do our next quarterly earnings call, which should be sometime around the end of January, the 1st of February.

Operator

[Operator Instructions] Your next question comes from the line of Edward Caso with Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

My question is on the December quarter award activity. What have you seen so far? Historically, you have a pretty good December quarter, which is usually a light quarter, and I was wondering if you were seeing that trend again this year.

Samuel R. Strickland

Well, I think it's hard for us to predict the quarter right now simply because, as you know, Ed, the government is cleaning up from September 30. We don't see anything abnormal, either positive or negative, when it comes to awards at this point. But frankly, it's hard to tell because an awful lot of the contracting staff on -- particularly on the government side, spends an awful lot of October just getting all the paperwork in place from the September 30 awards.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

And then, you indicated -- a different question. Employee attrition, could you give us an update, both on a total percentage basis and on a voluntary basis?

Samuel R. Strickland

I don't know that we have done that. We certainly don't break that down on a quarterly basis. We fell like our attrition is pretty much in line with industry.

Operator

[Operator Instructions] We do have a follow-up that comes from the line of Mr. George Price with BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

Just wanted to follow up on a couple of things. One thing, Sam, just the comment you made about giving fiscal '14 guidance next quarter. And I guess, we'll obviously get more detail on the expectations for the DSES impact. But obviously, you've chosen for the second half of fiscal '13 not to try and enter the fray in terms of the potential impact of sequestration on your business. Obviously, I know that's a big unknown, but it still looms out there. And I guess the question is twofold. One, how did you think about it for the second half of '13? And second is, I guess, given -- assuming that it doesn't get dealt with before January, which I don't think is an unreasonable assumption despite what is in the press, how are you going to tackle it when you give fiscal '14 guidance?

Samuel R. Strickland

Well, the easy answer to that, George, is to say I'll let you know when we get there, but -- once we know more facts. Our view on sequestration, corporately, is plan for the worst and hope for the best. So we've taken the steps we think that we can take to get ready for sequestration, but of course, the big problem is that I don't know that our clients have done an awful lot of work to get ready for sequestration. I think there has been some planning that has been done. And what you hear is you hear about across-the-board cuts. But how that ultimately lays out, I think it's just difficult for us to predict. But of course, what we've done is, in terms of putting together a situation room [ph] , is to make sure that we have mechanisms for collecting and disseminating information and decisions as quickly as possible should that case occur. But in terms of what impact that's going to have on our FY '14 guidance, honestly, we'll just have to wait and see. We don't have an official corporate view of what's going to happen. I think the one that seems -- for me personally, that seems to make the most sense is that something will be done somewhere around the January 1 time frame that will push the ball to April 1 and give the new Congress and the new administration, which could be a continuation of the old administration, an opportunity to deal with this. That, to me, is -- would be not a bad outcome because I don't expect any sort of a solution between now and January 1. But even knowing that would give us a fair amount more insight into what our FY '14 is going to look like than we have right now. As you can imagine, what's creating a problem for us now is the uncertainty in the market because our clients, not knowing how much money they have to spend, are reluctant to commit it -- much of it, very long term. So I think -- I'm not sure how long this will take, but we're pretty optimistic that once this settles down, we'll know what our clients will be procuring. We are positioning ourselves and investing in those areas, and we'll be ready to reserve -- to resume with the growth curve. But right now, there's just an awful lot of turbulence that we've got to work through, one of the reasons we're keeping our cost structure very lean and mean, and it is costing us something at the revenue line. It just seems to us to be prudent to make certain that we are financially very secure and healthy as we get ready for what's next.

George A. Price - BB&T Capital Markets, Research Division

No, I understand, and I certainly think you guys are doing a good job in terms of running the business in a tough time, although I don't -- I'm not sure a short-term punt [ph] is really going to help with the uncertainty, but that's a longer conversation. I guess the last thing, shifting gears maybe to a different part of your business. Just wondering if maybe you could talk a little bit more about the commercial side. You noted some wins recently in your focus sectors there: financial, health and energy. Maybe you could talk a little bit more about those, about what you're seeing companies focusing on in those areas at this point, maybe in the context of the broader macro uncertainty and how big is that business now, et cetera.

Horacio D. Rozanski

George, let me take a cut at that. It's Horacio. First of all, we are very pleased with, both in commercial and international, the focused strategy that we've taken, and we still believe our early returns from that strategy. The core of our business revolves our cyber capabilities and our ability to push that into the 3 verticals that you described. In addition to that, especially at this point, in energy, and we expect a similar thing in health, there's great interest from clients in terms of helping compliance and regulatory efforts take off. We're doing a lot of work in utilities in the nuclear side of things in terms of helping them think about and manage and comply with existing regulations, cyber and otherwise. Certainly, what's happened recently with the banks and the largest denial-of-service attack in history suggests that we're on the right track in terms of our capabilities. We are launching some innovative things. We've done the partnership with RSA that I think you've seen. In addition to that, we are focusing on some pilots around different ways of delivering our services, different revenue models. And again, all of those show very promising results. We -- I guess it is in the course of the -- is it the current quarter, we opened our office in Abu Dhabi officially. And we are seeing, once again from those clients, both private and public sector, great interest in our -- what we can bring on the cyber defense capabilities for them. So it's all systems go. We are throttled down, I borrowed from Ralph's earlier remarks, and feeling good that our focused strategy is going to pay off in the medium term.

George A. Price - BB&T Capital Markets, Research Division

Okay. And can you size -- can you give us any update on size of that business, maybe what you think it ends the year on a kind of a run-rate basis maybe?

Samuel R. Strickland

Yes. What we've said in the past, and I think what we'll stick with, is when it become significant, when it becomes material, we'll talk about it, but it's still less than 2% of the business. And while we -- we've had growth in certain areas, and while we continue to have success, it's still a fairly small piece of the business. So I think that's the amount of guidance we'll give. At some point, we're hopeful it will be a very good business and we can talk more about it. But right now, I think we've probably covered enough.

Operator

And your next question is a follow-up from the line of Edward Caso with Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Have you seen any de-obligation? We're starting to hear some more chatter on that front.

Samuel R. Strickland

Ed, I think Curt Riggle is anticipating that, so he's actually done some research. Curt, let me see if I get this right. For the quarter ended September 30, we had about right around $20 million more de-obligations than we had in the September '11 quarter. So $20 million on the one hand sounds like a lot of money. On the other hand, given the amount of awards during the quarter, that was pretty small.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Okay. Can you talk a little bit about your recompete efforts? What your win rates are? Where they were compared to recent past? And then maybe sort of what kind of pricing pressure that you're seeing over whatever time frame? We hear that it's being difficult to sort of rebid business with the same workforce.

Samuel R. Strickland

I don't know that we have talked about win rates, either competitive or recompetes or -- in the past, I think ours are certainly consistent with other numbers that I've heard in the industry. In terms of the pricing, which I think is your real question, certainly, in certain markets, we see pricing pressures. In certain markets, we see the need to rotate to less expensive staff. Honestly, we think that's likely to be a, let's call it, certainly no more than a medium-term phenomena, as clients are, as you would expect in these times, wanting to get more bang for their buck. And there is a natural tendency, given the division between the contracting staff and the technical staff, there's a natural tendency to want to move towards a lower price, technically acceptable. Oftentimes, that translates into more junior, less experienced staff. And of course, I think then the technical side starts to understand that you do get what you pay for. So while we're seeing that in certain areas and we're certainly capable of being competitive in those environments, we have always tried to focus our expansion, our investments on areas where there really is an appreciation that you get what you pay for, and so we'll tend to focus on locating best value acquisitions. So that said, I mean, it's clear we are seeing that, as is every other contractor that we're aware of. We feel like we're being as successful there as we have always been. And again, I do think it's a, let's call it, a shorter-term phenomena. It will take 1 year or 2 or so. Again, I think once the budgetary environment settles down and people again start focusing on, "Okay, we've got a mission. Let's get it done," I think you'll see some of that pressure to just do -- what I'll call to just do the low cost, technically acceptable, which is very a difficult concept to define. I think you'll see that pressure abate.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Last question. On the ARINC business that you're acquiring, curious how fungible the workforce is. I mean that's one of the nice aspects of Booz Allen has been the workforce fungibility. How specifics skilled are these people relative to the projects they're working on? And so that ties into the last question, which is seems like some of the work they do would be susceptible to LPTA, and you therefore, would have to make personnel adjustments.

Samuel R. Strickland

Well, let me -- the good news about the DSES personnel is that they're very highly billable because they do, let's call it, less transactional selling than we do in Booz Allen. They end up having higher billability rates. So -- but we do feel like the capabilities they have transport easily into our markets. It's not known. While we don't have a precise number, we have an engineering services business that is several hundreds of millions of dollars. So what's great about DSES is that, while ours will tend to be focused in the Army, for example, theirs tends to be focused in the Air Force and the Navy. And it happens to be in the Air Force clients where -- in Air Force areas like Dayton, where we have a large presence, and in Navy clients where we either have a large presence or have been marketing heavily, think the enabled warfare centers. So we would expect to be able to use some of that staff to help us both make market penetration and let's say, share capabilities. But we're not looking to deploy large numbers of their staff back into our markets. We're really looking forward to going to market with those folks, as opposed to pulling them up by the roots and pulling them out of their present markets.

Operator

That concludes the question-and-answer portion of the call. At this time, I'd like to turn the call back over to Ralph Shrader for some closing remarks.

Ralph W. Shrader

Well, thanks to all of you for joining us this morning. I know it's been quite a wild week with the significant storm here on the East Coast, and it certainly promises to be a wild week ahead of a different kind, as we have election day to deal with next week. So the financial markets and the pressures affecting our industry sector have been wild for quite some time. In fact, probably long enough for it to become the new normal.

I hope the key message you take away this morning is that Booz Allen is leading from the center and guiding our business on a steady course in these very challenging times. We're focused, first and foremost, on delivering excellence and value to our clients. We're committed to continuing to be an employer of choice and a good corporate citizen. And for you, our investors, we're focused on improving our bottom line and our margins. We're building on our proven track record of strong cash generation and capital deployment to deliver a strong return on your investment in our company. So I'd like to close just by saying thank you.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.

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