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spk11: Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's earnings call covering second quarter results for fiscal year 2021. At this time, all participants are on the listen-only mode. Later, there will be an opportunity for questions. I would now like to turn the call over to Mr. Ruben Day.
spk00: Thank you. Good morning, and thank you for joining us for Booz Allen's second quarter 2021 earnings announcements. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on slide two. I'm Ruben Day, Head of Investor Relations, and with me to talk about our business and financial results are Horacio Radansky, our President and Chief Executive Officer, and Lloyd Howell, Executive Vice President, Chief Financial Officer, and Treasurer. As shown on the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and therefore are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's services, and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our second quarter fiscal 2021 earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call. During today's call, We will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal year 2021 slides. It is now my pleasure to turn the call over to our CEO, Horacio Rosanzi. We are now on slide five.
spk12: Horacio Rosanzi Thank you, Robin. And welcome to our team. We're glad to have you on board. And good morning, everyone. Thank you for joining the call. Lloyd and I are excited to announce Booz Allen's fiscal year 2021 second quarter results this morning. Our firm's performance in this very challenging year has been truly outstanding. And we are proud to discuss the collective accomplishments of the more than 27,000 professionals who work every day in support of our clients, each other, and this institution. As you saw in our press release this morning, we delivered excellent second quarter results across all metrics. The numbers support our three-year investment thesis objectives and our growth plan for this fiscal year. When our fiscal year opened, only weeks into the disruptions of COVID-19, we recommitted to flawless execution, even amid uncertainty. And that's exactly what we have delivered. Strong growth at the top and bottom lines, a profit margin that is above historical norms, strong cash generation, and continued success in recruiting talent, building our pipeline, and capturing opportunities. Our growth in the second quarter was fueled by continued strength in our defense and civil businesses. This reflects the value clients place on our offerings and on the talent of our team. Our intelligence business has stabilized in the first half of this fiscal year, despite facing unique challenges due to the pandemic. We have a new leader in place and feel confident about future growth. And finally, in global commercial, we expect a modest decline this fiscal year driven by overall economic conditions. Looking at the first half of the fiscal year, our financial results show that to date, Booz Allen has successfully navigated the complexities of COVID-19. we continued to execute against the proven strategy, made operational adjustments as needed, and supported our people in new ways so they could focus on clients' critical missions. Our unique combination of the right strategy, operating model, people, and culture created a first-half performance that exceeded even our own expectations. And so today, We are pleased to narrow our guidance range for fiscal year 2021 revenue and raise guidance for full year adjusted EBITDA margin, adjusted diluted earnings per share, and operating cash. Lloyd will walk through our performance and updated guidance in more detail in a few minutes. First, I'll talk briefly about where our management team is focused, both near and long term. Let's start with the near term. Since our fiscal year began, we have talked with you about three areas of uncertainty in the second half. First, the course and impacts of COVID-19 in the fall and winter, and especially now as infections are spiking again across the country. Second, the potential for funding disruption after the current continuing resolution expires December 11th. And third, the outcome and implications of next week's election. These macro variables are major sources of uncertainty for both our country and our industry. But based on our operating and financial performance in the first half and the strength of our balance sheet, I believe Booz Allen is well positioned to outperform our market despite the potential turbulence in the coming months. As I noted last quarter, we believe these dynamics in the macro environment could create opportunities as well. This year, we anticipated and planned for increased volatility in the economy, financial markets, and federal budget outlook. This allows us to scan the market from a position of strength, looking for opportunities to build our business, forge strategic partnerships, invest in capabilities, deploy capital, and so on. As always, the overriding objective is to maximize value for our firm and our shareholders. With that as a segue, let me shift to the long term. Here at Booz Allen, our work is never done. Beyond the excellent operational performance of our team, our business leaders are making great progress on several future-oriented initiatives. For example, We continue to shape our portfolio of business towards high value work where emerging technologies meet needs at the center of clients' missions. Our strategic review is progressing and we expect to share results with you next summer. We continue to develop and deploy our option value initiatives. We are constantly evaluating and strengthening our employee value proposition including making good progress against the race and social equity agenda we shared with you last quarter. And we are modernizing and investing in our IT and financial infrastructure to support new ways of working, new business lines, and additional growth. Taken together, these efforts are designed to make our firm even stronger and more successful in the years to come. Staying focused on the future while at the same time managing unexpected disruptions and normal ups and downs of business cycles is the job of every leader in this firm. Having said that, none of this, none of this would be possible without the entire Booz Allen team. They deserve tremendous credit for our first half performance, our position of strength as we head into what could be a challenging few months, and our continued progress on strategic initiatives. So before I turn the call over to Lloyd, let me close with a few words directly to my colleagues who are listening. You'll remember back in April, with our Pandemic Resilience Fund, We made a safe bet. If the firm had your back, you would have the firm's back. You would give Booz Allen and our clients your very best. And in the last seven months, you've done that, and then some. You invented new ways of working practically overnight. You continued to go into critical client facilities with masks and all the right precautions to make sure important missions got done without interruption. You came up with creative ways to connect with each other and build community. You showed courage to both ask for help and to give help to those in need. And you executed all business functions with great precision and skill. Truth is, what we've faced together in 2020 was simply unthinkable a year ago. As problem solvers, you have risen to the challenge. You have persevered through it all. And as great as we knew you to be, you've exceeded our expectations. So on behalf of the entire leadership team, and in front of our external stakeholders, please accept our gratitude. We are in it together, and our firm is better for it. Thank you for all you have done and all you will continue to do.
spk08: And with that, Lloyd, over to you. Thanks, Horacio, and good morning, everyone. Let me start by echoing your thanks to our colleagues. This firm has truly rallied to meet the challenges of 2020. It shows in the financial results we're announcing this morning and in many other ways that numbers can't easily capture. We are now halfway through our fiscal year, an extraordinary six-month period for the country as well as our company. In these challenging times, our clients have continued to rely on Booz Allen's leadership and capabilities in support of their missions. I am enormously proud of our performance. Our outstanding second quarter results maintain and build on our first quarter performance, showcasing our reliability and execution. Consistent with our position as the industry leader, we continue to see robust organic growth, with headcount expanding and total backlog reaching a new record high. Our balance sheet is exceptionally strong, and this gives us great confidence that our firm can manage any potential challenges in the next few months. Thanks to our prudent financial management, we also have the ability to take advantage of opportunities as they emerge, whether in the debt, equity, or M&A markets. I'll now run through our second quarter results. Please turn to slide six. Starting at the top line, revenue and revenue excluding billable expenses increased 11 percent and 10.6 percent, respectively, compared to the same quarter last year. The primary driver of our growth was ongoing demand for our services. We benefited from staff utilization above historic norms that was driven by fewer PTO days taken by our employees. Turning to headcount, we ended the quarter with 27,638 employees, up 654 or 2.4 percent year-over-year, and up 257 since the end of June. In a challenging labor market, we are pleased with our performance to date. On slide seven, you'll see that total backlog increased 7 percent to $24.6 billion. Funded backlog was up 2 percent to $4.5 billion. Unfunded backlog grew 15 percent to $6.2 billion, and price options rose 6 percent to $13.9 billion. Our book-to-bill for the quarter was 1.8 times, and our last 12 months' book-to-bill was 1.2 times. The quarterly number is lower than our recent second quarters and, frankly, slightly lower than our expectations. That said, we expect continued volatility with our quarterly book-to-bill pattern as we continue to pursue larger and more technically complex bids. First half book-to-bill was 2.0 times, in line with our historical norm. Our bookings expectation for the full fiscal year remains unchanged, with a number of large award opportunities in our second half pipeline. Year-to-date, COVID-19 has not slowed the award environment. While credit is due to the diligence of our team at Booz Allen, we must also acknowledge the efforts of our clients and contracting officers, many of whom continue to work remotely through the busy government year-end procurement season. Moving to the bottom line, adjusted EBITDA for the second quarter was $228 million, up 19% year-over-year. adjusted EBITDA margin was 11.3 percent, our highest quarterly result since 2015. These increases in adjusted EBITDA and adjusted EBITDA margin were driven by top line growth, strong contract level performance, ongoing cost management efforts, and reductions in certain types of expenses, like travel and meetings. These were partially offset by our inability to bill for fee on shift work performed in our defense, and intelligence markets. In the quarter, the negative fee impact was approximately $7 million. Going forward, we expect unbilled fee to have a negligible impact to earnings as the majority of affected staff have returned to client site offices or are expected to do so shortly. Second quarter net income and adjusted net income grew 19 percent and 25 percent year over year. to $136 million and $143 million, respectively. Diluted earnings per share increased 23 percent to 98 cents, while adjusted diluted earnings per share increased 27 percent to $1.03. These increases were primarily due to revenue growth and adjusted EBITDA margin improvement, with support from lower interest expenses and reduced share count due to our share repurchase program. Transitioning to cash, we generated $426 million in operating cash during the second quarter, an increase of 97 percent over the prior year. This represents the strongest quarterly operating cash result since our IPO. Cash ended the quarter at $1.3 billion. Operating cash flow performance was primarily due to the overall growth of the business, working capital management, and lower cash taxes due to the carryover of R&D credits we claimed at the end of last year. Lower cash disbursements also contribute to the second quarter performance, driven by cost management and lower expenses attributable to COVID. Capital expenditures for the quarter were $18 million. This year, we continue to prioritize technology and tools that enable a virtual work environment. Also, we are nearing implementation of our next generation financial system, which will support the company's growth into the future. Please turn to slide eight. During the quarter, we repurchased $30 million worth of shares at an average price of $76 per share, including dividends, we returned a total of $73 million to shareholders. We are exiting the second quarter with $1.3 billion in cash on the balance sheet. We continue to view our balance sheet as a strategic asset, especially in times of volatility. We are committed to preserving and maximizing shareholder value through patient, disciplined capital allocation. We see ourselves as well-placed to quickly capitalize upon opportunities as they may arise over the coming months. In our investment thesis, we set a 70 to 80 percent ADEPS growth target over a three-year period ending this fiscal year, supported by $1.4 billion in capital deployment. We are well positioned to meet our ADEPS goal organically, as reflected in our updated fiscal year guidance. As a result, while deploying the remainder of our capital target remains our objective, we will remain patient and disciplined toward our deployment strategy to meet this objective. Today, we are announcing that the company has authorized a quarterly dividend of 31 cents per share payable on December 2nd to stockholders of record on November 16th. On August 24th, we issued $700 million in senior notes that are due in 2028. We used the proceeds to pay down our $350 million in senior notes due in 2025 and to strengthen our balance sheet while meaningfully reducing the interest rate. Before opening the line for questions, I'll briefly touch on our view of the rest of the year and our guidance. Please move to slide nine. We are very pleased to be raising our expectations for the fiscal year. even with ongoing uncertainties related to COVID-19, the federal budget, and next week's election. This improved outlook is the product of several things, our excellent first half performance, the fundamental strength of our institution, and our confidence in the skill and agility of our leaders and teams. Throughout the rest of the fiscal year, we'll make operational adjustments as needed and stand ready to jump on opportunities that emerge. Let me run through the numbers. For the full fiscal year, we are tightening our revenue range and expect growth between 7 and 9 percent. We now expect adjusted EBITDA margin for the year to be in the low to mid-10 percent range. We have raised and narrowed the range for adjusted diluted earnings per share to be between $3.60 and $3.75. The ADEPS guidance is based on 136 million to 140 million weighted average shares outstanding and a tax rate in the range of 20 to 23 percent. On operating cash, we are forecasting between $600 million and $650 million for the full year. And finally, our outlook for capital expenditures is unchanged at $80 million to $100 million. As we look into our fiscal year's second half and prepare for an eventual return to normalcy, we will spend a portion of the funding that we previously set aside for weathering the pandemic. We expect to hire aggressively to sustain our growth and plan to reward our talent for their impressive execution to date. We will also implement our new financial system that further supports our business leaders. we will continue to invest in our people and our long-term growth initiatives. Our updated guidance reflects the traditional seasonality of some of our expenses and anticipated return to more typical patterns of labor utilization, ongoing strategic investments, and the aforementioned uncertainty around COVID, the election, and the overall budget and funding environment. The next few months will be difficult to navigate, however, As our new guidance indicates, we remain confident in our ability to adapt, execute, and win, regardless of the environment. In closing, we are extremely proud of our second quarter results. Despite the challenges we all now face daily, our people have responded with energy and dedication. As we head into the second half, the entire management team is excited about our continued success and focused on maintaining our industry leadership for the remainder of the year and beyond. With that, Ruben, let's open the lines for questions.
spk11: Thank you, sir. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. Due to the absence of time, we ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Sheila Kayaglu from Jefferies. Please go ahead.
spk06: Thank you. Good morning, Horacio and Lloyd. Horacio, we always appreciate your opening remarks, so thank you very much, and it's evident in the company's performance. Thank you, Sheila.
spk08: Thank you.
spk06: One question for you, Horacio, is what's driving profitability increases, not only in the quarter, but your three-year framework? Can you talk about some of the option value programs, or have they not been embedded into the near-term outlook just yet? Thanks.
spk12: Great question, and thank you for doing that. Let me set maybe a little bit of context and then go deeper into that question. I couldn't be more pleased with the performance of the business in the first half, especially under the current circumstances. I think it speaks to certainly the commitment that our clients have to the mission, to the brains and the heart that our people brought forward. And I think it also speaks to the fact that we have both an operating model and a strategy that works well in good times, but really can shine in challenging times. And I think that's what we're beginning to to see. In that context, over the last three years, as Lloyd always points out, it's really been disciplined execution, operational excellence, and the ability to drive the business towards this Vision 2020 target of mission technology intersection at the center of what's most important to our clients. That has really driven both our growth and our profitability, and I think that's what continues to drive it today. I'm excited about the options value portfolio. There's a number of initiatives there. We're making good progress across the portfolio, and I think we'll have more to say about that in the future. I'll tell you as an anecdote, for example, we were concerned going into the year about Rec.gov because it's a tourism-driven business. It turns out the national parks has been the one area of tourism that has really done well, and so we have, in fact, leapfrogged a little bit of what we expected to see in terms of both growth and profitability in that program. But having said that, the option value portfolio is still a very small portion of our business. and one where we are optimistic will grow and become more relevant in the coming years. Right now, this is really being driven by the excellent performance of the team.
spk06: Thank you very much, Horacio. I'll leave it at that.
spk12: Thanks.
spk11: Thank you. Our next question comes from the line of Carter Copeland from Mellius Research. Please go ahead.
spk03: Hey, good morning. Just a couple of questions. A couple of quick ones. Horacio, I wondered if you could speak to kind of what this ongoing environment is revealing in terms of trends around retention and any challenges around hiring or if that's all going as usual despite the challenge. And then as a follow-up, a second question, in terms of commercial and your comments there, do you expect a bounce in that portion of the business next year? Or is that just going to take longer as we sort our way on the back end of COVID?
spk12: I'll get started. Lloyd might want to jump in as well. Carter, on your first question, I'll say nothing is business as usual at this point. Everything has had to be reinvented and retooled to match the current environment. We saw some decreases in attrition as a result of the environment. I'm obviously pleased. with those, and it's a challenging labor market. It continues to be. I know some sectors of the economy don't look this way, but the talent that we look for, especially the technology talent, is still in very high demand. And I'm pleased with the performance through the first six months. I think we've hired a lot of great people, again, a lot of the right people to help us grow our business. and I think the future looks bright as it relates to the talent pool that we are looking for. I think what we've done, frankly, over the last six months, if anything, has strengthened our brand in the talent markets, and I think that will pay dividends not just now but in the out years. What was your second? Oh, sorry, global commercial. So, you know, we expected going into this year to be challenging for our global commercial business, both in our international, which is mostly Middle East footprint, and our U.S. domestic footprint. I think what happened in the international business in some ways has been a little more dire than we expected, especially given the disruptions in Beirut, where a lot of our talent resides. and that's a business that is in transition for us. But having said that, the results in the U.S., which is largely a cyber business, have been potentially better than we expected. So when you put it all together, I think that that business is balancing itself in the right direction. It's still only about 3% of our total revenue base, but it plays an important strategic role, an important branding role to the overall portfolio. And as we've always said, the margins are also strong.
spk03: That's great. Thank you for the call, Horacio.
spk11: Of course. Thank you. Our next question comes from the line of Matt Sharp from Morgan Stanley. Please go ahead.
spk04: Hey, good morning, gentlemen, and nice quarter. Thank you. Horacio, this question's for you. With 5G becoming a top priority for the DoD and Booz Allen's strengths in systems integration, How are you thinking about the opportunity there? Could we see this potentially emerge as an option value initiative for the company? And are there any other emerging areas within the DOD or broader federal government that you see as potentially rising to that sort of option value initiative level for the company?
spk12: Sure. Matt, just to be sure, you're asking about 5G? Yes, sir. Okay, great. Absolutely, you were breaking up a little bit. I think Lori is feeling a little lonely here in the Q&A section, but I'll get started. I'll get us started. I think the answer is absolutely. I think 5G is emerging as an important set of technology. It's really a family of technologies. It's not one thing. It's not just millimeter wave, and that family of technologies is of increased importance importance not just in the commercial market, but across the government, including DOD. There's cyber implications of 5G. There's operational implications of 5G. There's the ability to move both processing and information to the edge in a way that it would advantage many missions. And I am proud of the fact that, you know, much like everything else in our innovation agenda, we saw this relatively early. We began to position for it, and we have some really interesting work going on across the government that in my mind begins to define us as a thought leader in this area, much like we are a thought leader in AI. And by the way, these two technologies ultimately do travel together. So more to think about that, more to say about that. If you ask me, is that a big part of the portfolio, they're not. We're not scaling there like we have scaled on AI already, but I think the future is bright, and I think we're well positioned. Great. Thank you. Sure.
spk11: Thank you. Our next question comes from the line of Gavin Parsons from Goldman Sachs. Please go ahead.
spk13: Hey, good morning. Morning. Morning. Or maybe a bit of a higher-level question. In the past, you said your growth is not constrained by demand, but kind of more so by your ability to hire and then ramp up the work. So I'm just curious, when you think about growth pacing or maybe planning for growth, do you say, we want to grow 6% to 10% this year, and we'll hire to make that happen? Or is it, we think we can hire and integrate enough people to grow 6% to 10%, so that's our target?
spk12: You know, that's a really good question, and I think the answer is yes. You know, we've narrowed to 79. We're proud of the fact that we're going to have a strong growth here in the middle of a pandemic and with very strong profitability. But I think that sort of the broader answer to the question is we still see very strong demand signals for the type of work that we're doing for the type of capability that we bring to to our clients, we are being choosy, if you will, in terms of both the work that we choose to pursue and the people that we're hiring to make sure that they are consistent with this intersection of core mission issues and next generation technology because we believe that is both the most promising and the most resilient part of the market as the market experiences some turbulence. The numbers that we're putting out are not the very most we could possibly grow if we were less discriminated about the work that we're doing. These are the numbers that give us both excellent financial performance in the near term, but we believe sustainability into the medium and long term.
spk13: And then maybe following on that and looking at backlog growth over the last few years and just a lot of that being driven by priced options, do those priced options have a finite life that you need to execute on within a certain timeframe or funding expires? And I'm just kind of thinking about that in the context of maybe a more challenged budget environment ahead where the contracting officers might have to make more difficult decisions on what to fund.
spk08: I'll jump in here. You know, we see priced options as a leading indicator in a couple different ways. One, our clients' confidence regarding what they'd like to do or, you know, tasks they'd like to turn on. And then secondly, their satisfaction with Booz Allen and our delivery up to that point. The timing of them is really dictated by the contract, the underlying contract. So there's some variability depending upon the period of performance. But by and large, if you look at the unfunded and priced options portions of our backlog, they tend to convert anywhere between 60 and 70 percent, funded obviously at or near 100. So as Hiratsu has always said, we don't feel demand constrained at all. In fact, what this quarter indicates with an increase to $24.6 billion, We've got the work. It then turns to, can we attract, onboard, and deploy the talent to convert that backlog? Got it. Thank you.
spk11: Thank you. Our next question comes from the line of Louis DePalma from William Blair. Please go ahead.
spk01: Horacio, Lloyd, and Ruben, good morning. Good morning. During the quarter, you announced snap attack and followed your previous internal development of MODSI. If you experience significant success with these types of internal development efforts, should we expect for you to double down on internal R&D? And is the Defense Department and the overall federal government growing more receptive to this type of procurement versus traditional procurement?
spk12: I think the short form of the answer is yes, with the following color to it. We've been talking for quite some time about the fact that digital assets, whether it's data or software, are becoming a bigger part of the value that is created for our clients. And so we've been part of this digital transformation that is sweeping through the federal government. And the government and DOD in particular are trying to think hard about how to procure these types of capabilities and these types of assets in a way that they can do it faster, more reliably, more repeatably, because this moves at digital speed. And I think Booz Allen is honestly, maybe a little immodestly, doing a great job across the board, not just in terms of coming up with our own proprietary solutions, but of partnering with other technology firms to make sure that their proprietary solutions can actually add mission value. It's this intersection of mission and technology where we excel is the ability to take not just one piece of software or one technology, but a portfolio of to solve a meaningful mission problem, you know, whether it is a cyber defense of critical infrastructure, whether it is using AI to improve customer service or to improve intelligence production. It's never really one thing. It's a combination of a number of things. And inside that combination, technologies such as Mozi, can play both an important role in advancing the mission, but also give us an additional layer of differentiation. So that's, you know, that's how we look at it. It's in the overall context as opposed to, you know, we have this one piece of software or this one unique capability.
spk01: Sounds good. Thanks.
spk12: Sure.
spk11: Thank you. Our next question comes from the line of Kaivon Rumor from Cowan. Please go ahead.
spk09: Yes, thank you, and Horacio, terrific results as usual. So, Lloyd, you have terrific revenue growth, and yet this is the sixth quarter in a row that your year-over-year headcount growth has decelerated 2.4%. That's way below where your revenues are. Where does that have to be to kind of keep the revenues more or less, you know, in the range you're talking about? And what are you doing to hire that in what has to be a very tough environment?
spk08: Yeah, well, thank you, Guy. First, let me say we're very pleased with our ability to source and attract the talent that we have, and particularly given the unique circumstances that I think we're all facing into. From an arithmetic standpoint, even at 2.4%, with a combination of increased salary, a broader base of staff that's available, and frankly, utilization rates that are unprecedented, the conversion of that certainly places us in our forecasted range of 7 to 9%. Our work's never done. We know that we're going to have to remain as aggressive and diligent in finding this technical staff. We're working closely with our business leaders, our recruiting engine, to increase the yield. But given how we forecasted the remainder of the year, we're confident that we'll be able to bring on the right talent.
spk09: Terrific. And the second question is, your DNA ratios are really terrific. And you mentioned that, you know, there is a benefit to COVID in terms of less travel and less meeting expense. Can you talk a little bit about, you know, the net benefits of COVID to your P&L?
spk08: Yeah, you know, it's a great question. It's an awkward one to answer without sounding callous regarding the impact that it's had. on our workforce and people. But the bottom line financially is that our people are not taking PTO as they were pre-COVID. That translates into higher utilization. As you mentioned in your question, there are savings on travel, conferences, meals, other discretionary expenses, and ultimately we're seeing a reduction in overhead expenses. We feel we're well positioned from a P&L perspective for the balance of the year, certainly as we weigh into the uncertainties that Horacio and I have talked about. Our resilience program that we stood up at the beginning of the year, we still have a significant portion that remains to ride through the next spike if it comes to that. And we've learned a lot in terms of the current environment regarding telework. As you heard in my prepared remarks around CapEx, our investment in our infrastructure. So we see a strong P&L, which will give us the strength and the resiliency as we navigate the next few months.
spk09: Thank you. Chris, I can jump in.
spk12: I would connect, actually, your two questions in the following way. It You know, the strength of the first half and the way in which we've managed the business with focus and with discipline actually allows us to do two things in the second half. One, we're happy to raise ADEP's guidance, of course, but two, it also frees up resources for us to recruit more aggressively, to invest in key capabilities more aggressively, and to position us for future growth even more aggressively than we would have otherwise.
spk09: Terrific. Thank you. Thank you.
spk11: Thank you. Our next question comes from the line of Matt Akers from Barclays. Please go ahead.
spk05: Hey, good morning, guys. Thanks for the question. Maybe one for you, Lloyd. I was wondering if you could just comment on free cash flow kind of beyond fiscal 21. I'm sure you don't want to give guidance yet for 22, but just thinking of this year, there's, you know, working capital benefit, potentially some one-time items around the CARES Act that maybe don't repeat next year. So maybe if you could just talk about, you know, confidence and ability to grow free cash flow beyond 21 and kind of what the big moving pieces are there.
spk08: Sure. Thank you. I'm going to keep my comments to this fiscal year, but let me say that I couldn't be pleased with our ability to generate cash. It really has been helped by one-time events, but also our core cash growth and effective working capital has really been the underlying story. What we see now is that collections were very high. We saw less in cash taxes that were paid, flat payables, and then reduction in disbursements via PTO, medical, travel, and corporate salaries. We expect in the second half for that to normalize a bit. So when you look at what we are forecasting in terms of operating cash for the year, that's how we get to the 600 to 650. I believe that with the improvements that we've made over the past couple of years that they truly are now institutionalized. We're always never satisfied, so we'll be looking for ways to continue to improve on that. But I think it tees us up well for the future.
spk05: Okay, thanks. And then I guess I apologize if I missed this earlier, but I guess the run rate impact you're seeing now from the employees on kind of ready state, you're just getting reimbursed at cost versus earning a profit. I think that was like a $6 million a month. earlier in the year. Can you give us an update what that is at this point?
spk08: Are you referring to our inability to invoice for fee tied to the CARES Act? Yeah. Oh, yeah. So we originally forecasted, I think it was $5 to $7 million per month, and we saw in Q1 that it was more of like $4 million per month, and in Q2 it dropped off even more, and that's really a function of folks returning to support their clients in their space as well as our space, originally in a shift work arrangement. So as we said in our prepared remarks, we don't see that being significant going forward. We're in close discussions with our clients and contracting officers to make sure we're both seeing it the same way. All credit due to our clients and our people to manage that.
spk05: Great. Thank you.
spk11: Thank you. Our next question comes from the line of John Raviv from Citi. Please go ahead.
spk07: Hey, good morning, guys. It's Con Cancel. Good morning. Thanks for the question. Can you just talk a little bit about your underlying health portfolio? with respect to the capabilities that you have there and how they're positioned to address any potential shift in spending priorities? And then kind of zooming out back a little bit to capital deployment, you know, the types of capabilities that you guys are looking for and can add opportunistically.
spk12: I guess I'll start. You know, we're nested in our civil business primarily is an outstanding health business organization. that is really a leader in this industry, especially in helping our clients drive their digital transformation, which is, of course, a major issue affecting healthcare. It also has a tremendous level of actual health expertise on the science side, on the epidemiology side, on the care delivery side and then the insurance payment and so forth. And so it's been called to help already as COVID has redrawn the health environment around the nation and it will continue to do so. So we see continued growth and opportunity in our health portfolio certainly over the many coming years as this is a national priority together with the other national priorities we support. And I think, I can't remember what the second question was. I think it was for you.
spk08: I'll take the capital deployment. John, you know, we continue to deploy capital, as we say, in a patient and disciplined manner, both in the short, near, and long term. And with a balance sheet that we view as a strategic asset, it really tees us up well Our priorities around capital deployment haven't changed. Regarding M&A, as we've always said, we've got a traditional focus on capability tuck-ins. In today's environment, we're looking at a lot of potential deals, and we're leaning forward in trying to source additional deals but holding the bar high. The nature of the companies that we're looking at, as it has always been, are technical in nature, supporting the areas that we've long focused on, be it cybersecurity, most recently AI, digital, and so forth. And I don't see that changing. Clients are demanding more and more. support in those areas. And then rounding out our capital deployment strategy, of course, it includes share repurchases and dividends. So we're looking at all options. We maintain that given the increase in volatility and the strength of our balance sheet, that'll tee us up well to meet our capital deployment objective. Got it. Thanks, Nicola.
spk11: Thank you. Our next question comes from the line of Dan Arnstein from JPMorgan. Please go ahead.
spk10: Hey, good morning, everyone. Good morning. I wanted to kind of ask about the election that's coming up in just a couple of days here. I mean, how have you kind of prepared for the outcome of the election and the potential you know, change in administration and leadership in Washington? And maybe how do you kind of think about how you approach the back half of the year if there is, you know, a change in leadership for your customers?
spk12: Let me start, and maybe we'll want to add as well, the You know, we've been looking, we look very closely at the priorities that both campaigns are talking about, how they're thinking about the future of our country, what a new administration or a second term would look like. And, of course, there's differences, and those are widely reported, and we are aware of those. But, you know, there's also some issues, and when we talk to our clients who are top of mind, to them and will not change. The cybersecurity of our critical infrastructure is a great example. Just in the last couple days, you probably saw the headlines about nation-state attacks on hospital networks in this country as COVID cases and hospitalizations surge. 5G, we talked a little bit about before and the rise of China and the technological competition with China, the importance of AI as a transformative force both in national defense and in civil society over the coming years, the need to digitally transform our government both for effectiveness of mission but also for efficiencies. And then that's just the weight tops. Then you get into the energy and space and so many other issues. Those issues are here to stay. And Booz Allen has been working for many years now to be a thought leader and a driver of creation of value inside the mission across all those issues and then some. So that's what we're focused on. We're focused on making sure that we're working with our clients directly on their most important problems, directly on their most resilient and sustained problems, and that we add real value to to those. That's always been our approach to it. We'll know more about the election next week, of course, but come what may, we're very focused on serving our clients against our most durable challenges and, like I said, making a real difference for them.
spk08: I would just add that given our years of experience, decades, this is not a new dynamic to our business. for a lot of the reasons that Horacio just pointed to, but just the pragmatics of what a transition, should it come to that, looks like. The government doesn't pivot on a dime, and a lot of the programs that we currently support, to Horacio's point, are increasingly tied to their missions, which is politically agnostic. In cases where we have seen a party transition, With our single P&L, our portfolio where we have a very robust civil federal business, if the agenda were to shift, we have a history of also shifting resources to where the puck is going to be, so to speak. So we feel that we've got a very resilient model, years of experience, and relationships with our clients to allow us to ride through any transitions that may occur.
spk10: Great. Thanks.
spk11: Thank you. Our last question comes from the line of Joseph Denardi from CFO. Please go ahead.
spk02: Thanks. Good morning. Good morning. Yeah, good morning. You mentioned in your prepared remarks that QQ bookings were lower than expected, but the expectation for full-year bookings is still intact. Can you just explain that a little bit, like what happened in the quarter that you weren't expecting? And then When should we assume that you guys kind of return to industry-leading book-to-bill in order to support industry-leading organic growth?
spk08: Sure. Well, the first thing, Joe, is as Harassian have always maintained, we're not demand-constrained at all. And the timing of bookings is really a consequence of these increased number of large awards that will come and go depending upon a different timing than what we've seen in our historic pattern. So in Q1, we had a big couple of wins that bumped up book to bill. Those larger procurements didn't come to pass in Q2. But, you know, we don't see that as a problem as much as just a timing issue. So we feel that we've got plenty of demand strength in the market that's really going to, over time, keep us in the pole position, if you will, in terms of our top-line performance performance. And the challenge is always going to be, can we bring on the talent that sort of backs up these larger pursuits and supports our clients?
spk02: Okay, that's helpful. And I think the initial expectation to start the year was that COVID would weigh on margins and that contributed to the initial 10% guidance. Now, given where you are, Is that largely because COVID has not been impactful? And how should we think about kind of the margin headwind that you all face next year, assuming we get back to a more normal environment? Can you continue to grow margins off this higher base? Thank you.
spk08: Sure. I mean, we're very pleased with our margins, especially in this sort of unprecedented time. And I think there are a couple of drivers that have gotten us there, certainly our top line growth and contract level performance, the fact that in this time we're seeing very high employee utilization, which is also driving margin, and then the management of unallowables and other discretionary costs that I've talked about are a lot lower. You know, we are always have maintained that We're interested in top and bottom line growth, and we see margins as a means to that end, not the end. And so we're expecting over time, and I think there's a national debate now around the virus and its impact, that we will eventually return to something that's a new normal sort of pre-COVID, but the timing of which is hard to really estimate. But for the balance of this fiscal year, our re-forecast of low to mid-10s, we feel very confident that we'll be able to finish the year in that range. Male Speaker 1 Okay. Thank you.
spk11: Male Speaker 2 Thank you. This concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Horacio Rosansky, President and CEO, for closing remarks.
spk12: Horacio Rosansky Thank you, everyone, for the conversation this morning. We're entering November, and with it comes not only an election and the holiday season, but actually also a meaningful anniversary for our firm. Tuesday, November 17th, marks 10 years since our initial public offering, when Booz Allen Hamilton shares opened at $17 a share. I'll never forget going out on the road in the summer of 2010 with our former CEO and CFO, Ralph Schrader and Sam Strickland, to tell potential investors the story of this company that Ed Booth founded in 1914. As I reflected on this recently, two things came to mind. The first is just how transformative the last decade has been. Through our Vision 2020 strategy, we carefully positioned ourselves right at the intersection of technology and mission. And over 10 years, this market differentiation significantly expanded our revenues, our profit margins, and our earnings, as you saw this morning. In fact, from an investor's perspective, total shareholder returns adjusted for reinvested dividends have been in excess of 900% over the decade. And the second point I reflected on was how much Booz Allen has not changed since our IPO. The core of this institution, our commitment to clients and to people, our purpose, our values, they carry through history because each generation of leaders is a steward of these fundamentals. These qualities set the standard for success at Booz Allen and are the foundation of our financial strength. So as we celebrate this incredible journey, I want to conclude today's call by thanking our analysts and our investors for your insights and support over the last decade. And I'm especially grateful to those of you who've been following us since the IPO. We have learned from each interaction with you. And the past 10 years have made us a better firm. And as we said this morning, our work is never done. So with energy and optimism, Booz Allen will strive in the coming decade to continue building on this proud record. So thank you again for joining us this morning. Have a great day and a happy Halloween.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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