BAH Q4 2013 Earning Transcript

7/30/2019 BAH Q4 2013 Earning Transcript

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Corrected Transcript

1-877-FACTSET www.callstreet.com

Total Pages: 18Copyright 2001-2013 FactSet CallStreet, LLC

22-May-2013

Booz Allen Hamilton Holding Corp. (BAH)Q4 2013 Earnings Call


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Corrected Transcript22-May-2013


2Copyright 2001-2013 FactSet CallStreet, LLC

CORPORATE PARTICIPANTSCurt RiggleDirector-Investor Relations, Booz Allen Hamilton Holding Corp.

Ralph W. ShraderChairman, President & Chief Executive Officer, Booz Allen HamiltonHolding Corp.

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz AllenHamilton Holding Corp.

Horacio D. RozanskiChief Operating Officer & Executive Vice President, Booz AllenHamilton Holding Corp.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTSWilliam R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc.

George A. PriceAnalyst, BB&T Capital Markets

Brian A. GesualeAnalyst, Raymond James & Associates, Inc.

Tim McHughAnalyst, William Blair & Co. LLC

Edward S. CasoAnalyst, Wells Fargo Securities LLC

......................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTIONOperator: Good morning. [Operator Instructions] And welcome to the Booz Allen Hamilton's earning call,

covering Fourth Quarter and Full Year Results for Fiscal 2013. [Operator Instructions] Later, there will be an

opportunity for questions.

I'd now like to turn the call to Mr. Curt Riggle.......................................................................................................................................................................................................................................................

Curt RiggleDirector-Investor Relations, Booz Allen Hamilton Holding Corp.

Thank you, Shannon, and thank you, all, for joining us today for Booz Allen's Fourth Quarter and Full Year Fiscal

2013 Earnings Announcement. I'm Curt Riggle, Director of Investor Relations, and with me to talk about our

business and financial results this morning is Ralph Shrader, our Chairman, Chief Executive Officer and

President; Sam Strickland, Executive Vice President and Chief Financial Officer; and Horacio Rozanski, Executive

Vice President and Chief Operating Officer.

We hope you've had an opportunity to read the press release on our fourth quarter and full year earnings that we

issued earlier this morning. We have also provided presentation slides on our website and we are now on Slide 1.

As shown on the disclaimer on Slide 2, please keep in mind, that some of the items that we will discuss this

morning will include statements that may be considered forward-looking and therefore, are subject to known and

unknown risks and uncertainties, which may cause our actual results, in future periods, to differ materially from

forecasted results.


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Those risks and uncertainties include, among other things, general economic conditions, the availability of

government funding for our company's services and other factors discussed in today's earnings release and set

forth under the forward-looking statements disclaimer included in our fiscal 2013 fourth quarter and full year

earnings release and in our SEC filings. We caution you not to place undue reliance on any forward-looking

statements that we may make today and remind you that we assume no obligation to update or revise the

information discussed on this call.

During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe

provide useful information for investors. We include an explanation of adjustments and other reconciliations to

our non-GAAP measures and to the most comparable GAAP measures in the fiscal 2013 fourth quarter and full

year slides.

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

Ralph W. ShraderChairman, President & Chief Executive Officer, Booz Allen Hamilton Holding Corp.

Thank you, Curt. Good morning and thank all of you for joining us today. A lot has happened in our nation, our

industry and the financial markets, since our last earnings call at the end of January. Sequestration officially took

effect on March 1 and the lead-up to it created significant uncertainty. As we report today, the effects of

sequestration on our firm have not been material from a financial results standpoint.

But the impact on our clients and on citizens and businesses across the country is very real. As a business leader, I

implore Congress to end the blunt instrument of sequestration and tackle the tough choices necessary so we can

make smart cuts where appropriate and maintain an effective and steady level of funding for national priorities.

Political issues aside, I stand here today feeling both grateful and hopeful. I have the highest appreciation for our

clients in the U.S. government and military, who are charged with protecting national security and providing

citizen services. Their professionalism and patriotic dedication to the mission, in spite of uncertainty, budget cuts

and furloughs, is truly inspiring.

I'm grateful to Booz Allen's people, who have been affected by structural change in our industry, that requires our

firm to reduce costs for compensation and overhead, in order to be competitive in winning contracts and

delivering work in this environment.

Our employees' professionalism and dedication in doing more for less, has been truly impressive. I'm proud of

those in Booz Allen's management ranks, who have adapted to the changes in demand and cost pressures and are

today, managing a dynamic business, productively and profitably. The performance of many underlies the fiscal

2013 top and bottom line results we're announcing this morning.

Here are the financial headlines for fiscal year 2013. Full year revenue was $5.76 billion, compared with $5.86

billion in the prior year. Adjusted net income increased to $239.5 million, from $227.2 million in the prior yearperiod. Adjusted EBITDA increased 8.4% to $529 million and adjusted diluted earnings per share increased by

$0.04, to $1.65 per share. Furthermore, we paid a total of $8.36 per share in dividends this past fiscal year and we

are today announcing an 11% increase in our regular quarterly dividend.

We ended fiscal 2013 with total backlog of $11.83 billion, compared with a $2.8 billion in the prior year and

funded backlog of $2.51 billion, compared with $2.9 billion in the prior year. These figures include backlog from

acquisitions.


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Booz Allen continued to grow our margins, operating income and adjusted earnings and we again generated very

strong cash flow. During fiscal 2013, we acquired the Defense Engineering and Support division of ARINC, also

known as DSES, bringing approximately 1,000 talented new people into Booz Allen. And with them, specialized

expertise in engineering, C4ISR, prototyping, specialized software development and analytics.

Within our core business, Booz Allen has invested significantly in areas such as cyber; cloud; advanced analytics,

including predictive intelligence; and engineering services, such as hardware and software prototyping.

At the beginning of April, we launched our Strategic Innovation Group, more than 1,500 professionals strong, to

drive new capabilities and expand our reach into new areas of our addressable market. We are investing steadily

in commercial and international markets and our commercial clientele in the United States is comprised primarily

of financial services and energy companies. Our international clientele is comprised of government and private

sector clients in the Middle East.

In commercial and international markets, our cybersecurity and regulatory services are most in demand. Booz

Allen continues to win important work from our long-time U.S. government clients, in areas that are critical to our

clients' core mission.

Here are just a few of the major contracts and task orders we won during the fourth quarter: a $107.9 million

award from the U.S. Cyber Command to provide a wide range of strategic and analytic support services; a $19.2

million contract to provide the U.S. Marine Corps Headquarters with analytics, program assessment and

evaluation support services; a series of contracts with the Department of Homeland Security totaling $53.9

million, for analytics and engineering services for the Office of Intelligence and Analysis, as well as support to the

U.S. Coast Guard and the U.S. Immigration and Customs Enforcement agency; a $10 million contract to provide

mission support services for the Department of Interior and its Bureau of Safety and Environmental Enforcement;

a $55 million subcontract to provide program management and engineering services to the U.S. Naval Air Systems

Command; and a $20 million contract to provide cloud technology services to an intelligence community client.

Our commitment to client service is the highest calling at Booz Allen, but our commitment to the communities inwhich we work and live, comes very close. A case in point, one weekend last month, more than 800 Booz Allen

employees and friends across the U.S., renovated 50 homes for low-income residents. We particularly focused on

helping the aged, veterans and the disabled.

That same weekend, Booz Allen team members rode in the Face of America bike ride from the Pentagon to

Gettysburg, to raise money to support veterans and wounded warriors. And Booz Allen sponsored and mentored

56 different student teams in the FIRST Robotics Competitions, 10 of which advanced to the national

championships in St. Louis, that same weekend.

While that was a particularly busy period, it exemplifies the ongoing commitment to volunteerism and community

involvement by Booz Allen and its people and more broadly, the spirit of service we bring to all of our

stakeholders. I'd like to close this section of the fiscal 2013 earnings call, by again expressing my gratitude to Booz

Allen's clients and employees for their exceptional work and selflessness in challenging times.

Sam will now provide you with a closer look at the drivers of our financial results for the fourth quarter and full

year fiscal 2013. Then, Horacio will talk about our long-term business strategy.......................................................................................................................................................................................................................................................


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Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp.

Good morning and thank you for joining us. We are now on Slide 4. As Ralph described a moment ago, our fiscal

2013 has been a challenging, but successful year, one in which we have had to make cutbacks in the near term, to

help position for the long-term strength of our institution. We take pride in the way we have executed our

business, and the outcome of that execution is demonstrated in the financial results that we present today.

For the year, we maintained our annual revenue close to last year's level and continued to expand margins and

grow adjusted earnings. In these challenging times, I think that's a noteworthy accomplishment, and it's a result

of our very proactive approach to managing the business to adapt to changing circumstances.

Now, Horacio will talk about Vision 2020 and our efforts to position ourselves for long-term advantage and build

our capabilities in the areas where we see growth opportunities. We've been proactive in the short term, too,

starting as early as January 2012, when we took action to reduce cost in anticipation of revenue declines.

Quarter-by-quarter since then, we've continued the effort to manage cost by aligning staffing levels much more

closely against client demand, reducing infrastructure spending and more carefully managing compensation.These changes have resulted in our evolution into a much more tightly managed business that is well positioned

to adjust quickly to the changes in our marketplace. The proof of that is reflected in our quarterly and full year

financial results, which showed improvement as the fiscal year progressed.

Now, let's look at some of the key results and the factors that drove them. Gross revenue for full fiscal year 2013

was $5.76 billion, a 1% increase over fiscal year 2012. Inorganic revenue for the year was $100.1 million. Gross

revenue for the fourth quarter was $1.55 billion, a 0.3% improvement over the prior year period. Inorganic

revenue for the fourth quarter was $78.2 million.

Now, I'd like to cover some of the detailed drivers of our financial performance during our full fiscal 2013 and in

the fourth quarter. To date, we have not seen a material impact due to sequestration. As of today, we have been

able to minimize the number of jobs lost by sequestration-related contract actions to approximately 100 across thefirm by utilizing our effective resource management system to place staff on other work opportunities.

If you'll turn to Slide 5, you'll see that there were a number of offsetting drivers that did impact gross revenue. On

July 31 of 2011, we closed on the sale of our state and local transportation business. Year-over-year, that sale

accounts for a 0.3% revenue decline in fiscal 2013 compared with fiscal 2012. In late November, we closed on our

purchase of the former DSES engineering division of ARINC. For the full year 2013, DSES contributed a positive

1.7% of revenue.

During the year, we managed staffing capacity very closely to minimize the cost of unbillable time. Headcount

reductions during the year contributed an estimated 2.3% of revenue declines during the year, which was offset by

0.7%, due to increases in billability. We also saw a decrease in billable expenses for the full year, which reduced

revenue by 1.3%. These and other factors are highlighted on Slide 5.

As we talk about managing our cost, it is important to note that by doing so, we are ensuring that we maintain a

strong investment capability. We're continuing our focus on organic growth in our core business and investments

in growth areas like cyber and cloud in our Strategic Innovations Group, as well as in our new commercial and

international markets.


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We've talked in the past about the impact of indirect costs on revenue. To summarize, our goal is to manage the

ratio of indirect cost to direct labor charges in line with billing rates approved by the government. If indirect costs,

such as unbillable time, infrastructure and facilities, are too high for the level of direct labor we are able to

generate, the additional cost will negatively affect the bottom line, although they could positively affect revenue

recognized on cost-reimbursable and ongoing fixed price jobs if funding is available.

If unbillable expenditures drive below a plan ratio, this will reduce revenue recognized on cost-reimbursable and

ongoing fixed price jobs, while positively affecting the bottom line in the short run. For the full year, we were able

to effectively manage our indirect costs, generally in line with annual budgets, so the revenue attributable to

indirect costs was not material at year end.

During the fourth quarter, expenses did increase as expected and as we discussed on our third quarter call. The

fourth quarter increase included the addition of additional incentive compensation and other allowable indirect

expenses.

We can now turn to Slide 6. Moving to other financial data, we saw an improvement in operating income

generated in the second half, as we gain greater control over unbillable cost, through close management of our

staffing needs and other actions we noted earlier.

For the full fiscal year, adjusted operating income increased by 8.9% over fiscal 2012 and in the fourth quarter it

increased by 1.3%. In addition to savings from decreases in senior staff compensation costs and in infrastructure

costs related to the cost reductions taken in January 2012, the increase in fiscal 2013 adjusted operating income

was also driven by improvements in staff productivity, more effective management of unbillable cost and a

decrease in stock-based compensation expenses.

For the full year, adjusted EBITDA increased 8.4%, as a result of the same factors that drove adjusted operating

income. Adjusted EBITDA increased 2.3% in the fourth quarter of fiscal 2013, compared to the prior year period.

In the fourth quarter of fiscal 2013, adjusted net income increased by 5.4% for the full year and declined by 6.5%

over the prior year's fourth quarter.

The full year improvement reflects an adjustment in fiscal 2012 for the release of income tax reserves, which we

discussed on this call in the second and third quarters of last year. The fourth quarter decline was primarily driven

by the increased interest expense of approximately $5.1 million net of tax, related to the refinancing transaction

associated with special dividend declared in July 2012.

Adjusted diluted earnings per share saw an improvement of $0.04 per share for the full fiscal year. The fourth

quarter of fiscal 2013 reflects a decrease on the order of $0.04 per share. The drivers of these changes are the

same as those I cited for adjusted net income.

Now, let's turn to cash. Our strong free cash flow of $431.5 million for the year is up 52% over fiscal 2012. Day

sales outstanding for the fourth quarter was 61 days, improved from 65 days in the fourth quarter of fiscal 2012.

Now, with the strong cash generation capability of our business, we regularly get questions about our plans for

capital deployment. On this front, we take pride in our track record of delivering value for our shareholders. We

used cash on hand to acquire a capability that positioned us well for growth and for paying $1.50 per share special

dividend noted earlier. We were then able to take advantage of attractive financial markets to lower our weighted

average cost of capital and fund a second special dividend in the amount of $6.50 per share, that we paid in

August. This track record continues today, with today's announcement of an 11% increase in our regular quarterly

dividend, now $0.10 per share.


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As we have said often, we remain open to evaluating potential acquisition opportunities that are a cultural fit and

bring us additional client access and/or enhance our capabilities. Going forward, we will look to maintain a cash

balance sufficient to operate the business and we will continue to evaluate the most effective use of cash above

that amount.

We continually evaluate our capital structure, including potential increases to our regular dividend, acquisitions,

share repurchases, special dividends and debt repayment. Although, payments above the required principal

payments in the current interest rate environment are not contemplated.

And now our backlog figures. Booz Allen's total backlog as of March 31, 2013 was $11.8 billion, compared with

total backlog of $10.8 billion as of March 31, 2012. Our funded backlog as of March 31, 2013 was $2.5 billion,

compared with $2.9 billion as of March 31, 2012. Our unfunded backlog is up by approximately $400 million from

the prior year.

I'd like to now turn to Horacio, who will discuss our long-term strategy that we call Vision 2020 and what it means

for our institution and our market position. And he will begin on Slide 8.

......................................................................................................................................................................................................................................................

Horacio D. RozanskiChief Operating Officer & Executive Vice President, Booz Allen Hamilton Holding Corp.

Thank you, Sam, and good morning, everybody. You've heard us discuss what we call Vision 2020, now on several

of our earnings calls. Today, I would like to provide some updates on where we are, where we're headed and what

this means for our business.

We started this effort more than a year ago, with a broad discussion with our leaders about our aspirations as a

firm, followed by extensive research and analysis in how our core markets may change over the coming years. At

the same time, we took an objective look at our internal business, including service offerings, operating model,

cost structure and pricing.

Finally, we benchmark our people model against our competitors and other world-class companies, to understand

how we stack up. We left few stones unturned. What emerged from Vision 2020, is a renewed focus for our

business and a renewed mission statement. Allow me to read it to you.

Booz Allen Hamilton is committed to ensuring that our clients succeed, by integrating leading ideas and

technologies into their missions. We strive to operate as a strong, independent public company, that acts with

integrity and offers our people unparalleled professional opportunities to thrive in diverse collaborative teams.

Now, the core of this vision is the idea that we can maximize results for our clients, by leveraging together our

premier consulting franchise, our deep client relationship and an increased focus on engineering and technology.

We're confident that this approach will drive new growth opportunities and strong financial results for our firm in

the medium term, as well as a more defensible core business position in the immediate future.

To ensure that this vision becomes a reality, last fall, we launched an ambitious change agenda, which is currently

underway. A key element of our agenda, is to strengthen our engineering and technical capabilities, both

inorganically and through organic investment in innovation. You already know about our recent acquisitions in

this space and Ralph mentioned earlier, the Strategic Innovation Group, or SIG, which we have created.


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The SIG will drive strategic consulting, emerging technologies and advanced engineering solutions across all our

markets. The investments we've made in cyber, cloud and engineering services, will continue in the context of the

SIG, together with new offerings, such as Rapid Prototyping, organizational optimization and predictive analytics.

We expect the combination of these organic and inorganic activities to spur the next wave of growth across all our

markets. Rapid Prototyping is a very good example of the potential we see. We have a strong reputation for thismission space, but only in a limited number of clients. Recent acquisitions give us new footprint and skill sets and

the SIG is hard at work at expanding our C4ISR prototyping solutions into new marketplaces.

So in short, while we're managing costs closely these days, we're continuing to invest heavily in areas where we see

and believe we can move the needle. Other elements of our Vision 2020 agenda are more inwardly focused; our

operating model, our organization structure and our people. On April 1, we launched a new work structure to

streamline our matrix, reduce cost and place more authority in the hands of our front-line market leaders.

This revised model is important in today's market, because it accelerates decision making and enables us to better

adapt to the needs of each individual client organization. Our leaders and staff are eagerly taking on their

expanded responsibilities.

We're also excited about other elements of our Vision 2020 agenda, which are being tested right now, especially

our people model, at our functional communities which will help us better develop our extraordinary diverse

talent base. An engineering and technical track has been of particular interest to all our staff.

While we call our strategy Vision 2020 to ensure a strong line of sight on long-term goals, we're already seeing

benefits right now from the efficiency of our new operating model. And I know you're interested in what it means

for the near term and in fiscal 2014, so I'll turn the call back to Sam to talk about our forecast.......................................................................................................................................................................................................................................................


Thank you, Horacio. We are now on Slide 9. Last quarter, we elected to delay providing guidance for our fiscalyear 2014, due to the uncertainty regarding the budget and how our clients would be affected by, and in turn,

accommodate sequestration.

Now, with a full year continuing resolution in place and the across-the-board nature of the sequestration cuts in

effect, more clarity exists for the first half of our fiscal year 2014, which coincides with the remainder of the

current government fiscal year. It's important to note, that uncertainty regarding the government's fiscal 2014

budget remains.

That said, for your purpose of forecasting our business, we have assumed that the government fiscal year 2014 will

start with a continuing resolution, as it has for the past several years and that sequestration will remain in effect at

least through our fiscal year 2014.

Through our ongoing conversations with clients and the actions they've taken to date, we believe we have enough

insight into the situation to provide the following full year guidance for our fiscal 2014, which began on April 1,

2013.

At the top line for fiscal 2014 ending March 31, 2014, we expect a low single-digit decline in revenue, as compared

with the prior fiscal year. At the bottom line, our guidance is for diluted earnings per share, is to be in the range of

$1.47 to $1.57 per share. Adjusted diluted earnings per share to be in the range of $1.55 to $1.65 per share.


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For fiscal 2014, we are expecting an effective tax rate of 40.5% and a fully diluted share count of approximately

149 million shares.......................................................................................................................................................................................................................................................

Curt RiggleDirector-Investor Relations, Booz Allen Hamilton Holding Corp.

Thank you, Sam, Ralph and Horacio and thank you, all, for listening to our summary of results and outlook. Our

Senior Vice President and Corporate Controller, Kevin Cook, is here with us as well to answer your questions.

Shannon, can you please provide instructions for the question-and-answer session of our call?......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTIONOperator: Thank you. [Operator Instructions] Our first question is from Bill Loomis of Stifel. You may begin.......................................................................................................................................................................................................................................................

William R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QHi. Thank you. Good quarter and good outlook. Just Ralph and Sam, just when you talk about sequestration and

that's factored into your 2014 guidance and look, you've talked to customers and what they're planning. One thing

we're hearing, is that customers haven't heard from their bosses, so they're not being very specific on the cuts,

particularly in the back half of the year that sequestration will have. And even though it's been pretty slow in the

specific actions, can you just tell us a little more about what you've thought about in your fiscal 2014 guidance, to

the low single-digit? Are you expecting that what clients have done so far is what will continue and there's going to

be no additional, more aggressive actions in the coming couple of quarters?......................................................................................................................................................................................................................................................


AWell, Bill, I guess it depends on how one defines aggressive action of course. But as you can see, by forecasting aslight decline in revenue, we have baked in what we believe will be the, let's call it, a reasonable range of possible

actions that the government could take, based on our conversations with our clients. So we've tried to make sure

that we stress test our bottom line forecast to make sure that we can fall within that range as well.

So it obviously involves a bit of estimating what the clients are going to do, but we feel like we have a reasonable

handle with, let's call it, sufficient contingencies baked into our outlook, that we're comfortable putting out this

outlook.......................................................................................................................................................................................................................................................

William R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc.

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

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. A

You know, I don't know the percentage. I think DSES would probably add somewhere in the neighborhood of

$200 million, or so, of revenue for fiscal 2014.


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William R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. And they added $100 million in fiscal 2013?......................................................................................................................................................................................................................................................


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

William R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QNet increase. Got it.......................................................................................................................................................................................................................................................


Yep.......................................................................................................................................................................................................................................................

William R. LoomisAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. Thanks a lot.......................................................................................................................................................................................................................................................

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

George A. PriceAnalyst, BB&T Capital Markets QGreat. Thanks very much. Just going back off of Bill's question to DSES. So DSES came in so $100 million in

revenue, I think, for this year, you were talking about $110 million to $120 million. Can you give us some color on

what moved away in that revenue stream? And how you're thinking about that for DSES in fiscal 2014?......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. AI think what moved away, there's DSES the reasonable DSES' billable expenses run somewhere in the 50%

range and those are a bit difficult to predict. So I believe that there were actually some of those billable expenses

that were recognized earlier by DSES than the closing dates, so those did not make it into our set of financial

statements.......................................................................................................................................................................................................................................................

George A. PriceAnalyst, BB&T Capital Markets QOkay. So I guess if I ballpark that, given the $100 million and the incremental $200 million, so that's $300million next year. So you're looking at roughly on an organic basis of 5% to with a low single-digit decline, 1% to

3%, so you're looking at roughly 5% to 6% organic decline year-over-year? Is that a reasonable way to look at it?......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. AI haven't done that math in a bit, but that's certainly, if that math works, that's the way to calculate it, yes.......................................................................................................................................................................................................................................................


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George A. PriceAnalyst, BB&T Capital Markets QOkay. Last thing on GFY 2014, you've also talked about some of the revenue impact stemming from, I think, a

lower mix of indirect versus direct labor. And obviously, I think that's been part of what's been behind your ability

to manage margins so well in the environment. Is there any way to quantify that impact at all, in terms of what

that's doing in fiscal 2014?......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. ASorry, you're going to have to parse that question for me again. If you're talking about the margin compression, I

don't we clearly don't get in public conversations around things at that level of detail. What's clear is that the

success in this business is managing your indirect cost in relation to the direct labor you're able to sell. That's the

key to managing a business profitably, and we're very focused on that.

And certainly, the change in our organizational structure that Horacio talked about earlier is tried to make sure

we're well positioned to be very agile in this environment so we can respond to changes both that we expect and,

more importantly, that we don't expect that happen to us.......................................................................................................................................................................................................................................................

George A. PriceAnalyst, BB&T Capital Markets QOkay. All right. Great. Thank you.......................................................................................................................................................................................................................................................

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

Brian A. GesualeAnalyst, Raymond James & Associates, Inc. QGood morning, guys. And nice job on the quarter. Just a couple of questions here. Wondering if you can in your

conversations with your customer base, if you can give us any color or differences between what your defenseclientele is saying versus your civil clients? And how those markets are either converging or diverging?......................................................................................................................................................................................................................................................

Horacio D. RozanskiChief Operating Officer & Executive Vice President, Booz Allen Hamilton Holding Corp. AThis is Horacio. I'll take care of that I don't know that the differences in clients are at the civil versus defense

level as much as they are inside each agency and depending on the role they play and the mission that they

occupy.

And so in the civil market, you have health clients that are doing extremely well. You have the VA, which has been

exempted from sequestration and their budgets are unaffected. In defense, you have, again, the different services

being affected differently by the changing environment, the drawdown from Afghanistan.

And so it's really more at the individual client level where we see differences. And a lot of what we're trying to do,

as Sam pointed out, is adjust to each one of those individual client portfolios and really go where the opportunities

are and serve those clients with what they need as best as we know how.......................................................................................................................................................................................................................................................

Brian A. GesualeAnalyst, Raymond James & Associates, Inc. Q


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Great. That's very helpful. Just a follow-up. Given your views for sequestration and continuing resolution, what do

you expect the head count cadence to be like over the next several quarters, maybe going out 12 months? When do

we start to maybe see you guys have managed that very tightly. When's the right time to maybe start to expand

that a little bit?......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. AWell, there's sort of a two-part answer to that question. We continually expand the number of staff in certain

areas. There are growth areas within the firm that we've talked about in terms like cyber and the cloud and some

of our technology areas. At a macro level, we expect head count to continue to decrease during the year. But

clearly, we'll take a look at mid-year, let's see what the funded backlog looks like as of September 30, for example.

But when we start to see that the market normalize a bit, then I think we'd probably feel more comfortable saying,

okay, let's start adding staff for growth. But make no mistake, we are adding staff in our investment areas now,

we're just also cutting back staff in those areas where we're not seeing growth opportunities.......................................................................................................................................................................................................................................................

Brian A. GesualeAnalyst, Raymond James & Associates, Inc.

QOkay, Sam, that's great. Thanks. And just one final one and I'll jump out of the queue. The DSES was your firstacquisition in quite a while. You've now had it for about six months. How's that integration going? Any things

going better that or more synergies than you thought? Or how should we think about that? And that's it. Thanks.......................................................................................................................................................................................................................................................


Well, I think we're as always with any integration there are always a few surprises here and there. But in general

terms, I think we're very pleased with the way things have unfolded. We, in fact, got the capability that we were

expecting to get and that's the most important thing.

The culture seems to fit pretty well, so we're busy now trying to ensure that we can both protect the business thatwe have from DSES and also leverage their capabilities throughout the rest of our markets and vice versa. So we're

working those pretty hard, and so far, we're pretty pleased.......................................................................................................................................................................................................................................................

Brian A. GesualeAnalyst, Raymond James & Associates, Inc. QGreat. Thanks a lot, guys.......................................................................................................................................................................................................................................................

Operator: Thank you. [Operator Instructions] Our next question is from Tim McHugh of William Blair. You may

begin.......................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC QThank you. First, just wanted to ask, given the other inputs you've given to us about fiscal 2014, it would appear

like you're looking for a continued margin improvement next year. I guess given the organic decline, can you give

us some of the factors that are driving that?......................................................................................................................................................................................................................................................


13/18






Well, we will, again, I do try and simplify the business so I can keep track of it, but the key is just managing your

indirect cost in relation to your direct labor. So we will continue to work the indirect cost side. We'll continue to

invest in those areas where we think there are higher margins. So it's just going to be through good active

management, managing very closely when it comes to both adding staff and when we have new work and off-boarding staff when the work goes away. So it's just going to be through aggressive cost management.

Clearly, we will also take a look at, particularly, our incentive compensation, which if you go back in our with our

partnership culture, the institution is very used to its incentive compensation moving up and down based on the

success of the business. And you know, as a shareholder, I think that's right. So we'll continue. That will be one of

the levers we have as well.......................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC QIs it fair is the ability to take costs out, is it more weighted towards the it sounds like the indirect costs? It

sounds like you have your staffing level pretty well aligned.........................................................................................................................................................................................................................................................


Well, correct.......................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC Q... and utilization, so it's more about the SG&A, or indirect cost at this point?......................................................................................................................................................................................................................................................

Samuel R. Strickland

CFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp.

ARight. Yeah. So and let's again, there are certain areas where we could drive utilization up and we'll continueto look at that. Utilization is generally a function of how many excess staff you have. It's a function of the let's

call it the friction in the business as staff move from one job to the next. And we have invested heavily in the last

Horacio, 18 months or so, in getting we could see this coming and we said, jeez, that was an area that we needed

to improve. So we feel like we've got much better at redeploying staff quickly as jobs come and go.

That's particularly important for a business like Booz Allen, where we have a lot of active task orders. We're not

sitting on five or six, five-year task orders, we're sitting on 4,000, 5,000 active task orders, which are churning on

a regular basis. So that ability to redeploy staff quickly is incredibly important, and it's something we've been

investing in for the last, I would say, 18 to 24 months. And I'm not going to say we're perfect at it. I don't know

that you ever get perfect at it, but I think we've gotten pretty good.......................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC QYou guys took a fairly aggressive cut to the executive level and some of your partners a little over a year ago. As we

look at those indirect costs, is there a point where it starts to get more painful for the organization to keep cutting

in those areas? Or do you feel like there's still a lot of room to do that?......................................................................................................................................................................................................................................................


14/18






Well, I think we it's always painful, Tim, as you can imagine, because of course, generally, you're dealing with

people, right? We're not going to.........................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC QRight.......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. AThere's not that's the major cost in those businesses. So it's not something that we do lightly; it's something that

we work very, very hard. But I would never say that it it's been painful having to make adjustments, even in the

partner corps as we did last January; that is incredibly painful.......................................................................................................................................................................................................................................................


ABut I think it's important to understand that, while Sam talks about it being painful, which we all agree, we have avery, very solid cadre of top management talent in this organization and it goes below the level of partner.

So we have a very strong cadre of folks that run all the way down through our vice president and principal senior

associate levels that are very strong at managing this business. The other thing that's important to us is that client

contact, client relationships, being deeply involved with our clients is a hallmark of how we operate.

And so I don't think as an organization we're ever going to compromise the idea of being able to serve a client to

be able to cut costs. I think that's one of the things that we're very mindful of, is do we have the right team on the

field and the right deployment of talent. Sometimes it's a matter of re-aligning that talent and I would like to think

that we're doing a much better job of re-aligning as opposed to simply cutting. Because one of the, perhaps,inferences to draw from your question, is would we cut more deeply to cut costs just because we had to cut cost at

the risk of giving away some of these other items? And the answer to that is a flat out no, because we value that too

much and, indeed, that really is the thing that distinguishes us in the market.

So I think it's this deep talent reservoir that enables us the flexibility to do the things that we're doing and I think

we will continue to manage that and manage it effectively.......................................................................................................................................................................................................................................................

Tim McHughAnalyst, William Blair & Co. LLC QOkay. That's helpful. And one last one on the margins. Just as we think about DSES' impact, is it fair to think

that's still a lower margin? Or as you've blended that in, is it not really much of a difference versus the core legacy

business?......................................................................................................................................................................................................................................................


Well, I think as we announced when we did the acquisition, because they tend to be have a higher percentage of

billable expenses than we do and billable expenses generally drive less of the margin, their overall margins are

slightly less than ours. They are still accretive to the business, however, and that is factored into our guidance.


15/18





Tim McHughAnalyst, William Blair & Co. LLC QOkay. And then just cash, you had great cash flow this year. Can you give us a sense for CapEx? And if possible, if

you have any outlook directionally for free cash flow or operating cash flow for 2014?......................................................................................................................................................................................................................................................


Yeah. Again, a couple of part answer. CapEx, I think will be on the order of what they were this year. I think as we

announced, as we've talked about in the past, we said about, oh, four or five years ago, to reduce our facilities

footprint and that then continues to reduce our need for capital expenditures. So that we do not expect an

increase there.

On the cash generation side, we did benefit greatly this year from a reduction in our day sales of receivables, so

called day sales outstanding. At this point, I don't see us continuing to drive that number down for fiscal 2014, so I

think our outlook is for flat to perhaps a modest growth in that number. And that of course, then dampens your

cash generation capability.

So I think this year, FY 2013 was an extraordinary year. I don't know that so FY 2014 unless given that we're

looking at what could be a slight increase in our day sales outstanding, we'll probably see less cash flow generated

next year.......................................................................................................................................................................................................................................................

Operator: Thank you. Our next question is from Edward Caso of Wells Fargo Securities. You may begin.......................................................................................................................................................................................................................................................

Edward S. CasoAnalyst, Wells Fargo Securities LLC QGood morning and congratulations on executing well in the current environment. My question is around pricing.

What are you seeing on an apples-to-apples basis? And is the slow pace of decision making by your clients, given

sequestration, the fewer furloughs and so forth, delaying some of those contract downward adjustments thatmight be felt? And how is that baked into your guidance? Thank you.......................................................................................................................................................................................................................................................


Well, Ed, the short answer is, is that we've baked that into our guidance. Clearly, where we've forecast a decline in

our organic revenue and so that's reflected there. In terms of delays, I think it's pretty well known that the

government has when the government is uncertain, it, as we all do, tends to not make any long-term actions. So

there certainly have been delays in the awards. I think we're cautiously optimistic that we'll start seeing uptick

here as September 30 looms, so we'll just have to pay close attention to that.

But I think we have accommodated whatever margin pressures. And again, margin pressures will vary by market

clearly and we've tried to make sure that that's factored into our outlooks.......................................................................................................................................................................................................................................................

Edward S. CasoAnalyst, Wells Fargo Securities LLC QCan you help us out with the interest expense assumption for FY 2014, please?......................................................................................................................................................................................................................................................


16/18






Well, we're anticipating for FY 2014 a stable interest rate environment. In terms of debt pay down, we would pay

down the amounts that we're required to. Again, I think as we've mentioned, we wouldn't at this point, wouldn't

look to do any early pay downs of our debt. Clearly, we would also, at some point here in the future, take a look at

whether or not it would make sense to go after some re-pricing in our line of credit, if the markets would supportthat. But we'll just have to see.......................................................................................................................................................................................................................................................

Edward S. CasoAnalyst, Wells Fargo Securities LLC QSo does that imply that you're assuming a higher adjusted operating margin? Is that fair to assume?......................................................................................................................................................................................................................................................


A higher adjusted operating margin?......................................................................................................................................................................................................................................................

Edward S. CasoAnalyst, Wells Fargo Securities LLC QRight. Trying to back in to what your operating margin is.......................................................................................................................................................................................................................................................


Well as I say, we've tried to factor that into all of our guidance. We have not in the past gotten into giving that at a,

other than a top and a bottom line basis, Ed.......................................................................................................................................................................................................................................................

Edward S. CasoAnalyst, Wells Fargo Securities LLC QOkay. Thank you.......................................................................................................................................................................................................................................................

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

George A. PriceAnalyst, BB&T Capital Markets QHi. Thanks. Just a follow-up on a couple of things. First, looking at the talking about the commercial business,

has the I'm assuming that you're still seeing good growth there, double-digit growth. If you could comment on

that? Maybe where is that in terms of size? Would you anticipate that commercial and international together may

get to a point in fiscal 2014, where you call that out and discuss that in a little bit more detail? Or is that still too

soon?......................................................................................................................................................................................................................................................


Well, we tend to look at the commercial and international business together. As I think we've mentioned in the

past, that continues to be less than 2% of our revenue, which is pretty modest actually. While we continuing to

invest, while we are building the client base there, we believe the best approach is that we'll talk about that in

greater detail as it becomes a more meaningful part of our business.


17/18





So at this point, we're focusing there. We're also focusing on our core government business, which generates more

than 98% of our revenue.......................................................................................................................................................................................................................................................

George A. PriceAnalyst, BB&T Capital Markets QOkay. Maybe looking over the next quarter or two, can you give us maybe any additional color on how you seerevenue and adjusted EBITDA trending, perhaps relative to the fourth quarter? The question is really sort of

implied in your guidance and maybe you want to break it up by first half versus second half? But do you see

anything to call out in terms of how the business is assumed to perform with the guidance on the first half versus

the second half of 2014?......................................................................................................................................................................................................................................................

Samuel R. StricklandCFO, Director, Chief Administrative Officer & EVP, Booz Allen Hamilton Holding Corp. ARight. The short answer is no. We have, for good reason as you know, in this business particularly given the

regulated nature of our accounting practices and the fact that we're heavily a cost-reimbursable government

contract, it's important that we manage this business on an annual basis. So while, as a public company, we have

to report on a quarterly basis, you can be assured that we manage it on an annual basis.

So it doesn't behoove us to get into quarterly outlook, simply because that's not the way we take our management

actions.......................................................................................................................................................................................................................................................

George A. PriceAnalyst, BB&T Capital Markets QOkay. Last thing is, the SIG investment certainly sounds very interesting as a potential differentiator. But I guess

stepping back, given the current market, do you think that the current federal market and based on the

assumption that things are going to continue as they are for the next year or two, do you think this is a market

that's going to really pay for and ensure a return on that kind of investment?......................................................................................................................................................................................................................................................

Horacio D. RozanskiChief Operating Officer & Executive Vice President, Booz Allen Hamilton Holding Corp. AI'm so glad you asked that question. I think our answer is absolutely. I think that, especially in a market like this

one, a firm like ours is going to continue to succeed and stay ahead of the market by offering innovation and new

thinking to our clients. There's been a especially at the early stages of the market turning, a natural

retrenchment on the part of clients, but the missions continue and the missions now need to get done with less

funding. And clients, really across all of our markets, are receptive to ideas that allow them to do that.

The government is very interested in cloud. The things we're doing around cyber are key. The issues of predictive

intelligence, especially in the area of cyber, are of even more importance now than they were a couple of years ago

and are going to continue to be of importance. And we have a close to 100-year track record of trying to find those

things and get in front of them and position ourselves to catch the market waves when they come.

So I think that there's every reason to believe that elements of the market will continue to grow. And that's what

the SIG is all about, is making sure that we deploy the right knowledge and the right people into the right places to

take advantage of those opportunities. And as opposed to just competing in the same turf over the same things as

elements of the market continue to commoditize, which is, again, not a new trend, is something that's always

happened.


18/18



1 877 FACTSET www callstreet com

18Copyright 2001 2013 FactSet CallStreet LLC

So in that sense, the SIG is both new in the way that we're doing it and in the level of effort that we're putting

behind it and also tried and tested over many, many years, really over many business cycles, in terms of our

approach to growing and winning in the marketplace.......................................................................................................................................................................................................................................................

George A. Price

Analyst, BB&T Capital Markets

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

Operator: Thank you. This ends the question-and-answer portion of our call. I would now like to turn the call

over to Ralph Shrader for closing comments.......................................................................................................................................................................................................................................................


Thank you, Shannon. For all of you, I hope we've been able to convey our deep pride in these solid fiscal year

results, in what has certainly been a very challenging market. We've managed to keep our revenue close to last

year's level. We grew our margins, our operating income and adjusted earnings. And we again, generated very

strong cash flow.

As I mentioned earlier, we also were able to pay a total of $8.36 per share in dividends during the year and our

total shareholder return continues to be among the very top in the government services sector. I hope you can

hear from us that we are very excited about, and continuing to invest in, the future. And we believe we have

charted the path with our Vision 2020 strategy.

So with that, I say thank you very much for joining us and have a great day.......................................................................................................................................................................................................................................................

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

wonderful day.

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BAH Q4 2013 Earning Transcript