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Booz Allen Hamilton Corp. (NYSE:BAH)

F2Q12 Earnings Call

November 3, 2011; 10:30 am ET

Executives

Ralph Shrader - Chairman, Chief Executive Officer & President

Sam Strickland - Executive Vice President & Chief Financial Officer

Curt Riggle - Director of Investor Relations

Analysts

Nathan Rozof - Morgan Stanley

Brian Gesuale - Raymond James

Tim Mchugh - William Blair & Company

Carter Copeland - Barclays Capital

Bill Loomis - Stifel Nicolaus

Chavell (ph) - Credit Suisse

Michael Lewis - Lazard Capital

George Price - BB&T Capital

Presentations

Operator

Good morning. Thank you for standing by and welcome to Booz Allen Hamilton’s earnings call covering second quarter fiscal 2012 results. (Operator Instructions)

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

Curt Riggle

Thank you Grada and thank you all for joining us today for Booz Allen's second quarter and year-to-date fiscal 2012 earnings announcement. I am Curt Riggle, Director of Investor Relations and with me to talk about our financial results this morning is Ralph Shrader, our Chairman, Chief Executive Officer and President; and Sam Strickland, Executive Vice President and Chief Financial Officer.

We hope you’ve had an opportunity to read the press release on our second quarter earnings that we issued earlier this morning. We’ve also provided presentation slides on our website and we are now on slide two.

On today’s call, Ralph will provide you with an overview of our business performance and strategic positioning. Sam will then discuss our financial results in detail, including our income statement, balance sheet, cash flow and backlog. Ralph and Sam will discuss the guidance for the remainder of the fiscal year 2012, which began on April 1, 2011.

As shown in the disclaimer on slide three, please keep in mind that some of the items we will discuss this morning will include statements that maybe considered forward looking and therefore our subject to known and unknown risks and uncertainties, which may cause our actual results in future period 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 services and other factors discussed in today’s earnings release and set forth under the forward-looking statements disclaimer included in our fiscal 2012 second quarter earnings release and in our SEC filings.

We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call.

During today’s call we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include reconciliations to our non-GAAP measures to the most comparable GAAP measure in our fiscal 2012-second quarter earnings release and in these slides.

It is now my pleasure to turn over to our CEO, Ralph Shrader. And he will start on slide four.

Ralph Shrader

Thank you, Curt. Good morning and thank you for joining us today. There’s no question these are challenging times for the global and national economy. Now more than every there are heightened expectations for business to deliver quality products and services, to create jobs and contribute to the economy and to be physically and socially responsible. Booz Allen is committed to be the consultant of choice to our clients, the employer of choice for talented people, a good corporate citizen and an investment of choice.

We completed the second quarter, and first half of fiscal year 2012 with solid growth in revenue and profitably. During this period we continued to grow our federal government business, despite challenging conditions in that market and grew across all of our major federal markets, civil, defense and intelligent, with our greatest growth in areas related to health and cyber. Additionally we launched our focused expansion strategy into commercial and international markets when our non-compete agreement ended on July 31, 2011.

In the past three months we opened our New Your office across from Bryant Park, expanded in San Francisco in Charlotte and began to grow our headcount in Abu Dhabi. Booz Allen long track record of organic revenue growth going back two decades, extends further with today’s report of our fiscal 2012 Q2 and half year results.

Our second quarter revenue increased to $1.43 billion, up from $1.37 billion in the second quarter of fiscal 2011. Net income for the quarter increased to $75.3 million, up from $14.8 million in the prior year period. Adjusted EBITDA increased to $114.5 million up from $101.3 million from the second quarter of fiscal 2011 and adjusted diluted earnings per share increased by $0.11 for the quarter to $0.36 per share.

The end of the government’s fiscal year is always a defining moment for those who serve the federal market and I’m very pleased to report that Booz Allen’s total backlog grew to a record $12.86 billion as of September 30, 2011, the closing day of our second quarter, which coincides with the end of the government’s fiscal year.

This record backlog level, which represents an increase of 16.4% of the last year at this time, shows Booz Allen’s competitive success and proven ability to win new contract awards and defend re-competes of our existing contacts. A backlog of this magnitude gives us confidence for the future.

Booz Allen’s powerful combination of stability and agility benefit our clients, our people and our investors. Our single P&L structure and collaborative culture enables us to easily move leaders and resources to growth markets. To borrow a hockey metaphor, we skate to where the puck is going to be.

Three weeks ago in the demonstration of our agility, we announced leadership team moves that put proven leaders in position to what we believe will drive further growth. We named Mike McConnell, Vice Chairman of Booz Allen and broadened his responsibilities to drive cyber capabilities across all of our markets, civil, defense, intelligent, commercial and international. We moved Executive Vice President, Rich Wilhelm, to lead our intelligence business and Taps Senior Vice President Karen Dahut to lead our growing analytics capability.

Booz Allen’s focus is helping clients succeed in their core mission and improve enterprise effectiveness and efficiency. There is no question that the essential missions of government must be performed even in lien times and Booz Allen will be there to help our clients deliver on these core missions.

In September alone we won numerous mission critical contracts and major task orders and had a book-to-bill ratio of 2.15 for the quarter. These recent wins included a $40.3 million contract award from the National Institutes of Health to support programs and planning for children’s health; a $117 million task order from the department of defense to provide technology and systems engineering services to help count our improvised explosive devices.

A $96.7 million award from the army material command for software architecture support. We won a $100 million ID IQ Award from the treasury department to assist this office of terrorism and financial intelligence with financial thread analysis and the $500 million ID IQ Award from the FBI for technical engineering and analysis services. Booz Allen’s people are our product and our firm continues to be recognized as an employer of choice.

In the past quarter we were named one of the top firms to work for by Consulting Magazine and vault.com and we were named the best company by Working Mother Magazine for the 13th consecutive year. Booz Allen believes that good business and good citizenship go hand in hand and we were proud to accept the BCA 10 Award from the Business Committees on the Arts in New York on October 5, as one of the best companies in America supporting the arts.

Next week is Veterans Day, which has great meaning for us at Booz Allen. Nearly a third of our employees are veterans and we have an active and successful military recruiting program, evidenced by our top ranking by GI Jobs on your 2011 list of military friendly employers. Booz Allen employees bring specialized knowledge and deep commitment to serve those who serve.

Our support to veterans and wounded warriors goes well beyond the boundaries of work. 1000’s of Booz Allen employees volunteer and raise funds to help veterans and wounded warriors with issues ranging from successful career transitions to family support to health and well being.

This spirit of service has defined Booz Allen for nearly a century. I was recently going through some historical materials and read with great pride stories about the military service of our founding partner Edwin Booz in World War I and World War II. He led our first assignment from the department of the Navy in 1940. I know he would be proud that we have continuously served the Navy ever since.

In September we won four awards totaling $375 million from the Navy Space and Naval Warfare systems command. We believe that our new contract awards and backlog will drive revenue going forward.

To look back on our just completed second quarter and first half of fiscal 2012 in greater detail, I’d like to turn to our Chief Financial Officer, Sam Strickland.

Sam Strickland

Good morning and thank you for joining us. These have been wild times in the global economy and in our own market sector and I am proud to be able to report that Booz Allen has performed well in delivering top and bottom line growth, delivering earnings per share in line with our annual guidance and generating strong cash flow.

As Curt mentioned in his opening summary, in addition to GAAP results, Booz Allen also reports certain non-GAAP measures such as adjusted operating income, adjusted net income, adjusted EBITDA, adjusted diluted earnings per share and free cash flow. We believe these metrics provide better insight into our operational results, because they remove the effects of non-recurring or unusual items.

Now, lets turn to slide five for a closer look at our second quarter results for fiscal 2012, which shows a 4.5% increase in revenue over the prior-year period; most notably all of our major markets continued to grow.

I am very happy this morning to report positive top and bottom line growth for Booz Allen. In the second quarter of fiscal 2012, operating income increased to $93.7 million from $71.9 million in the prior year period and adjusted operating income increased to $100 million compared to $88.9 million in the prior year period.

The improvement in operating income was driven by the continued growth in revenue, increased profitability resulting from decreases in incentives and stock based compensation costs, lower amortization of intangible assts, a shift in contract mix towards fixed price contracts and improved profitability on sub contractual arrangements.

The profitability increases were partially offset by a significant investment in business development costs, moving up to the end of the governments fiscal year, as well as un-billable staff compensation cost incurred in advance of demand.

Adjusted EBITDA increased 13% to $114.5 million in the second quarter of fiscal 2012 compared with $101.3 million in the prior year period for the reasons cited above, which drive the corresponding increase in operating income.

Net income increase to $75.3 million from $14.8 million in the prior year period and adjusted net income increased to $50.6 million from $30.1 million in the prior year period. The increase in net income was driven by the increase in operating income, a decrease in interest costs, the gain from sale of State and Local transportation business of July 2011 and the release of certain income tax reserves, which reduced our effective tax rate.

In the second quarter of fiscal 2012, diluted earnings per share increased to $0.53 per share from $0.12 per share in the prior year period, while adjusted diluted earnings per share increased to $0.36 per share from $0.25 in the prior year period.

Turning to our cash, Booz Allen has a long and successful track record of generating cash from operating activities and the very strong cash collections. Free cash flow was $97.2 million in the second quarter of fiscal 2012, compared to $138.1 million in the prior year period. The primary driver in this change was higher federal and state taxes paid this year, because we expect fiscal 2012 taxable income to exceed the maximum annual available tax benefits from our net operating loss carried forward.

In August on our last earnings call I noted that going forward we would require more cash for the payment of taxes, so this has been factored into our plan. In that past quarter Booz Allen continued to generate cash from strong receivables collection as evidenced by an average day sales outstanding for the second quarter of fiscal 2012 for 68 days. I’ll say more about our cash position shortly in a discussion of year-to-date results.

Our backlog story like our cash story is a good one. Total backlog as of September 30, 2011 was $12.86 million compared with $11.05 billion as of September 30, 2010, an increase of 16.4% and as Ralph noted, a record high for Booz Allen.

Funded backlog was $3.44 billion as of September 30, 2011, up 2% compared to the $3.12 billion as of September 30, 2010. Our funded backlog increased to $3.35 billion as of September 30, 2011 up 17.5% compared with the $2.85 billion as of September 30, 2010. Priced options under existing contracts in the second quarter of fiscal 2012 increased by nearly 20 percent compared to the prior year period.

Lets take a look at our key performance for the fiscal year-to-date; we are now on slide six. Booz Allen’s revenue was $2.88 billion for the six months ended September 30, 2011 compared to $2.71 billion for the prior year period, an increase of 6.2%. Net income for the first half of fiscal 2012 was $126.5 million, compared to $43 million for the prior year period and Adjusted Net Income for the first half of fiscal 2012 was $108.6 million compared to $71.8 million last year.

Adjusted EBITDA for the first half of fiscal 2012 was $237.4 million compared to $222.9 million in the prior year period. Diluted earnings per share for the first half of fiscal 2012 was $0.90 per share and adjusted diluted earnings per share was $0.77 per share, compared with $0.35 and $0.59 per share respectively for the first six months of fiscal 2011.

Net cash provided by operating activities increased to $177.1 million for the first half of fiscal 2012 from $170.9 million in the first half of fiscal 2011, while free cash flow increased to $133.5 million compared to $131.9 million for the comparable period. As discussed previously, cash flow was affected by an increase in tax payments of approximately $47.4 million in the six months ended September 30, 2011 compared to the prior year.

As a result of the refinancing of our credit facilities in February 2011, which resulted in a reduction in outstanding debt and lower interest rates, Booz Allen realized a reduction in interest expense of $54.7 million in the six months ended September 30, 2011, compared to the prior year period.

As discussed on our August earnings call, we are continuing to evaluate all options for the future use of our cash and are fortunate that our strong cash position gives us both the stability and flexibility on how we operate our business and create value for share holders.

From time-to-time we evaluate alternative uses for excess cash resources, including debt repayments, payment of dividends, share repurchases or funding of acquisitions. Any determination to pursue one or more of these alternative uses for excess cash is subject to the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that maybe imposed by applicable law or contracts in our senior secured credit agreements as amended and the public factors deemed relevant by our Board of Directors. I want to assure you we will be good stewards of this cash and will seek to use the cash to maximize return to our shareholders.

Now I’d like to turn it back to Ralph, who will talk briefly about Booz Allen’s strategic positioning and differentiation and then I will finish the formal part of our discussion with Booz Allen’s guidance for the second half of fiscal 2012. We are now on slide seven.

Ralph Shrader

Thank you Sam. Each year Booz Allen takes a close look at our overall strategic positioning and key leadership roles, our detailed market strategy and segmentation, as well as implications for our people’s strategy and infrastructure.

The leadership moves are discussed earlier resulting from this examination. We affirm the key elements of our strategy to pursue quality growth, not growth for growth sake and the focus on markets and services in which Booz Allen is truly differentiated and which are aligned with our clients core mission.

For NSA the core mission is code making and code breaking; for NS3 NIH it is healthcare; for the FBI law enforcement; for financial services the protection of assets and transactions. This is important work and in these lien times we believe clients will prioritize to spend their funds on core mission rather than peripheral support roles.

We believe clients will pay for quality and not look for the lowest cost provider. When it comes to work that support their core mission. This is our suite spot. We are aligning our leadership talent and internal investment in areas that help clients with today’s most pressing needs, such as cyber, health and efficiency and effectiveness.

In Cyber security Booz Allen has industry leading talent and a compelling approach to security, focused on dynamic defense. That is cyber defenses that are as nimble and sophisticated as the attacks. Additionally, we are building a unique cyber solutions network that unites distributed centers in laboratories to provide access to any Booz Allen cyber capability at any time.

The first center to come online was our cyber analytics center, focusing on forensics and malware detection. By January we will have eight more centers fully integrated and operational and we’ll continually add centers and capabilities to the Booz Allen cyber solutions network, all virtually connected to deliver unmatched capabilities to our clients.

Health is our fastest growing area and expands multiple markets, civil government, military and veterans health and commercial health. Across government we are helping clients adjust to the new reality of budget constrains and increased expectations are here to say and make advanced position for the future with a combined focus on mission refinement, operational efficiencies and cost savings.

We call the approach E3, Enterprise, Effectiveness and Efficiency. As we have for 97 years, Booz Allen makes our clients mission our mission. Managing our own business well is key to our continued ability to serve clients, attract and retain the best people and give back to our community and to our investors.

I’ll now turn it back to Sam for a look at our forecast.

Sam Strickland

Thank you Ralph. We are now on slide eight. In August we forecasted top line growth for the first half of fiscal 2012 to be in the range of mid-single digits and as you’ve seen, our revenue growth was 6.2%. We continue to forecast revenue growth and margin improvements with higher growth rates expected overall for the second half of the year, included the ramp up expected into the fourth quarter as we deploy staff against recent contract awards.

This also reflects our current expectations for continued growth, despite the challenging federal budgets environment. We are increasing our diluted earnings per share guidance, which is now expected to be in the range of $1.56 to $1.66 per share and we are reaffirming our guidance for adjusted diluted earnings per share, which is expected to be in the range of $1.55 to $1.65 per share.

The increase to the diluted earnings per share forecast reflects the gain from the sale of our state and local transportation business in July 2011 and the release of certain income tax reserves also during our second quarter. These non-recurring items are excluded from our calculation of adjusted diluted earnings per share.

Overall, our EPS outlook reflects expectations that bottom line performance will continue to benefit from revenue growth, with increasing operating margins and reduced interest expense. These earnings per share estimates are based on the fiscal year 2012 estimated average diluted shares outstanding of approximately 140.6 million shares.

Curt Riggle

Thank you Sam and thank you all for listening to our summary of results and outlook. Our Chief Operating Officer, Horacio Rozanski and our Senior Vice President and Controller Kevin Cook are also here with us today to answer your questions.

Before we open the line for questions, I would like to mention our Analyst and Investor Day on December 13 from 10 o’clock till 2 o’clock at our McLean, Virginia headquarters. More information is available on our website on the investor page.

Greta, please provide instructions for those on the call for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Nathan Rozof with Morgan Stanley. Please proceed.

Nathan Rozof - Morgan Stanley

Hi guys, thanks. Congrats on a strong quarter, particularly related to the funded backlog. I wanted to focus on two things that pertain to the contracting environment. First off, just given all the puts and takes that seem to be going on in the federal contracting process this year, how should we think – I wanted to explore how we should think about this in terms of the impact on Booz’s business and specifically you know last year we saw award activity delayed by client uncertainty. Meanwhile we are hearing the contract sizes are getting smaller and funding duration seem to be getting shorter.

So what my question was is, as we look forward given that contractors are seemingly going to need to kind of come back to the contracting officers more often for awards – if funding awards are getting shorter, are we going to see any sort of change in the seasonality or the pace of contracting awards kind of looking forward through this next government fiscal year or are we going to see the same type of back end loaded government fiscal as we’ve seen in that past or just any variation there off.

Sam Strickland

(Inaudible) I’m going to take a stab at answering what’s a very difficult question, and then the honest answer is, if you could tell us exactly what’s going to happen with the continued resolution, I could answer your question with a great deal of precision.

Nathan Rozof - Morgan Stanley

Yes.

Sam Strickland

I don’t think we know that things are moving through the hill, you have the super committee working its way through it’s process, I think there’s been some good news about defensive operations moving forward, but I don’t know that there is any real knowledge as to how the legislative process is going to deal with budgets this year and that is really what’s going to drive like it has in prior yeas, the sort of the seasonality of the funding.

In the mean time, we feel very fortunate that we’ve had a formal success in this last quarter with the end of the government fiscal year and feel like we are well positioned to continue to grow and continue to do the right thing about our clients as all this other stuff gets sorted out.

Nathan Rozof - Morgan Stanley

Okay great, you actually leaped right into my second question, which was given the very strong growth in funded backlog, I think up 10% year-over-year and when I look at the strong kind of bookings performance in the quarter, it looks like you had a trailing 12 month book-to-bill of like 1.35, which is also very good.

Last year we saw that, kind of a similarly very strong performance in 2Q, really dive strength in revenue growth in the back half of the year and I just wanted to touch base and see if there was anything that had changed or any reason we shouldn’t expect the strong funded backlog performance to similarly translate into improving growth in the second half of this year. Thank you.

Sam Strickland

Well, Ned I think as we said, we do expect the growth grate in the second half of our fiscal year to be higher than in the first half and that’s a pattern we also saw in fiscal 2011. As you say, the funded backlog is there in place. I’m also encouraged by the – I think it was about 17% increase in the un-funded backlog and as you know funded and unfounded are closely linked and that they are awarded, you know they are ordered work, its just not all of it gets funded at one point in time.

So yes, we do expect improvement in our growth rate in the back half of the year. I think as Ralph here points out, there’s an awful lot of confusion and turbulence that will be in the market, but that’s why we are very confident by having our funded backlog in place, because we believe that will, much like it did last year, carry us through the back half mark of our fiscal year.

Ralph Shrader

Nad, let me just comment that, same talks about the confidence it’s generated. I mean I certainly believe that we are in a lot better shape having a solid backlog at this point in time, particularly funded, that obviously is something you can build on.

At the same time, nobody really knows what’s going to happen as the month of November creeps along and we get towards budget discussions and everything else and I guess the best outcome for us is actually an answer, even if the answer is a somewhat draconian answer, I think the major factors and influence business going forward actually were uncertainty is actually paralyzing.

So if we could you know get to something where one way or another there is a resolution, a resolution to go forward, to go back, to stay in place, whatever it maybe and I think a lot of the clients are at least going to have certainty about he environment they are working in and then they can go from there. So I would say that’s really a key trigger point I’d look at is, how much certainty comes out of this discussion as opposed to the ambiguity that drifted on for so long last year.

Sam Strickland

All right. Thanks Ralph, thanks gentlemen.

Operator

And your next question comes from the like of Brian Gesuale with Raymond James, please proceed.

Brian Gesuale - Raymond James

Hey guys, this is Mathew (ph) here speaking for Brian, taking my questions. I just the first question is in relation to the bookings with them being quite strong this quarter. If you could just little a flavor with regards to how much of it approximately or just kind of qualitatively in terms of the like of the new work versus add-on or re-compete kind of work and then in general in terms is would you say it – would you characterize the booking this quarter as in-line flush activity from the fiscal year end or slightly below or average or something along liens of that.

Ralph Shrader

One of the things, its Ralph here again. One of the things we focused on this last quarter very strongly was on an effort we called tactical selling and it was really taking the time to think through what were our major client issues and how could we work with them to define tasks and opportunities where we could help them with those issues, and take advantage of the fact that we are going to the end of the year and they have money left of the books.

And that has really driven our efforts, I think that may be a significant driver for the funded backlogs, certainly part of the incident and also the unfunded and it patterns around really the rest of the business.

Some of it was new, some of it was out and some of it was – and a lot of it was taken advantage over pre existing idea hues, which as you know we don’t count into our backlog numbers until they become older tasks. And so that’s really the pattern of the business. There isn’t particular lumpiness that says you know all of it came in one place or another place or its driven by a certain factor. It’s a continuation of an effort working broadly across the client base successfully to identify problems, so we can help.

Sam Strickland

Ralph, I would think its safe to say that we saw basically a pattern that’s rather typical for us at the end of the year. So I mean, there were no anomalies in this patter this year compared to the past year, that’s the best we can characterize from.

Brian Gesuale - Raymond James

Okay, thank you. And then I guess next question is somewhat relation to this. In terms of, you know you guys have obviously the strong books over the last couple of quarters and in terms of what your staffing plans are towards the end of the year, in terms of hiring more folks and maybe just a little talk on in terms of what you are seeing from a labor environment with regards to turnover and just competitive competition there. Thank you.

Sam Strickland

We saw a good increase in head count in this last quarter in anticipation of the increase in backlog and the increase in business in the second half and this is a patter that we’ve seen in the last couple years, where we take advantage.

You know the summer is always a good time to recruit, because people are more likely to change jobs in between school years and so the combination of that and the kind of the new funding patterns we’ve seen in the last couple of years drove strong hiring this last quarter, so we feel like we are well positioned to take advantage of what we have.

Operator

And the next question comes form the line of Tim Mchugh with William Blair & Company. Please proceed.

Tim Mchugh - William Blair & Company

Yes, thanks for taking my question, just wanted to ask on the commercial and kind of international expansion opportunities and I guess in the midst of the uncertainty above kind of the global economy. Is that an impediment or you so new in kind of that expansion opportunity that has not having any influence on your growth there?

Ralph Shrader

Well, I think you probably characterized it correctly and that is since we were sort of reinitializing that market there, we sort of have somewhat unlimited potential for growth and so its not like we have a market that’s been caped or anything like that, but I think there’s just a lot of things out there now.

Clearly you know the market itself I’m sure is being impacted by the overall economy conditions, but we are such a small piece of it at this point in time and we are so specialized in terms of the issues we play in. You know its not having any real impact on us at all at this point, we’ve got plenty of opportunity out there.

Tim Mchugh - William Blair & Company

Is it trending as you would have thought I guess a couple of months into it now or is it too early to tell.

Ralph Shrader

I don t know, I think its too early to call anything a trend. I think that what we can see is we are pursuing the business that we were planning to pursue. We are pursuing it in the way we panned to pursue it and we are seeing results that are consistent with what our expectations were. So I mean I think, we sort of feel like it’s quote on track.

Tim Mchugh - William Blair & Company

Okay and then just one numbers questions if I could. The share count for the full year you gave in your guidance, it’s lower than kind of the Q2 average. Are you assuming future repurchases or is that just reflective of the ones you did in the quarter?

Sam Strickland

I think that’s just reflective of the ones we did in the quarter. You know the repurchases in the quarter were really the cashless exercise of options.

Tim Mchugh - William Blair & Company

Okay. Thank you.

Operator

And you next question comes from the like of Carter Copeland with Barclays Capital. Please proceed.

Carter Copeland - Barclays Capital

Good morning gentlemen.

Sam Strickland

Good morning.

Carter Copeland - Barclays Capital

Just a couple of quick ones; first on the language around the outlook for the remaining two quarters of the year, you talked about a ramp up in to the fourth quarter in terms of the growth rate. I wondered if – is that meant to tell us that the growth rate will accelerate into Q4 from Q3 or are we reading too much into that.

Sam Strickland

No, I think that’s right, and again if you follow the patter we showed last year, Q4 you know we should be a stronger quarter than Q3. In other words, the March quarter is a stronger quarter than the December quarter and there’s not any big holidays in the big holiday seasons in the first quarter, in the March quarter. So yes, we would expect things to be rocking along pretty good by them.

Clearly we will you know to make our outlook come true, what we will have of course we’ll have revenue growth in the December quarter, just that it will still accelerate in the March quarter.

Carter Copeland - Barclays Capital

And with respect to the commentary that suggested you saw growth in all areas, do you anticipate this will be case in the back half of the year as well.

Sam Strickland

Yes, across the major markets. Now, you know within each of those markets, you Booz Allen is truly a portfolio business. We don’t have a lot of big task orders. So we have markets that – you know some markets frankly are shrinking, some markets are flat and some markets are growing very, very nicely, but overall across all of our major makers we were growing.

Carter Copeland - Barclays Capital

It’s only at the sub-market level you have to…

Sam Strickland

I’m sorry, yes, that’s the market level.

Carter Copeland - Barclays Capital

Okay, great. Thank you Sam

Sam Strickland

Sure

Operator

Your next question comes from Bill Loomis with Stifel Nicolaus. Please proceed.

Bill Loomis - Stifel Nicolaus

Hi, thanks you. Good quarter. Just looking at the sense from your comments on the profitability in terms of lower incentive comp and stock compensation, can you go into that into a little more detail and do you expect that to reverse and impact margins in the back half and then as a follow on, just a broader margin question, what are some of the levers that you can continue to pull here in terms of improving efficiencies and profitability and so forth over the next several quartets. Thank you.

Sam Strickland

Yes, let see Bill, talking in terms of the incentive compensation and stock compensation, there are two pieces to that; one of which is called the run out of the stock compensation cost associated with the Carlyle transaction and we take that out for adjusted operating income purposes. But you know that was just – we had an accelerated amortization of that and that’s just been coming down each year.

I think what you are really drive at is we did reduce our incentive compensation accruals for the year and frankly, that was based on the amount of the money that we spent in our bit and proposal marketing cost and to some degree staff carrying cost in the second quarter.

You know we are ahead of our spend plan there and we do operate this thing as a partnerships utility. Obviously we’ve been a corporation for many, many, many, many years, but the notion is that you know if we over spend in one area, then it goes right up to compensation and back. You know we are adjusting our compensation to make sure that we’ve got you know those costs to accommodate it in our annual outlook. If we have a more robust second half than we expect, then we’ve look too and then we’ll take another look at that.

Bill Loomis - Stifel Nicolaus

Any other margin levels you might have in the coming quarters.

Sam Strickland

Well, the margin levels you know continue to be what I would call more aggressive fee bidding; more aggressive loading of fees on subcontracts. We have seen that it’s interesting now and we saw quite a shift to fixed price work. I think in about the second quarter last year now the shift seems to be late for the TNM and going in to FSP and Cost Plus and those are tending to cancel each other out. So we will see how that goes.

You know we have a very different time; we can’t go out and look for fixed price contracts. But I mean its, we draw a look for what our clients need done and while we will try to influence that type of contracts we get to – they make those decisions themselves. So we’ll see; that may not be as much of an improvement from that as we had say here in the last year.

But you know we think they are ample levers, you know including the control of our cost and so forth as we grow to continue to drive the modest improvement in operation margins that we talked about in the past.

Bill Loomis - Stifel Nicolaus

Okay, thank you.

Sam Strickland

Sure

Operator

And your next question comes from the line of Rob Spingarn with Credit Suisse. Please proceed.

Chavell (ph) - Credit Suisse

Hi it’s actually Chavell (ph) in for Rob. I just had a quick question. I guess you talked about this a little bit. We wanted to drill down a bit on your margins as well. I guess particularly you referred to improve profitability on some contact arrangements. I just wanted to drill down this a bit and see how we should think about this for the remainder of the years. Is it something you expect to continue and specifically what was it referring to.

Sam Strickland

Well, I think what we’ve talked about in the past is that we were targeting a 22% increase in our operating margins on an annual basis. Why we think we well continue on that vector; so that’s really what we are looking at here. We did much better than that last year which now is possible this year, but we haven’t factored that into our thinking at this point.

Chavell (ph) - Credit Suisse

Okay and do you expect this to continue. I mean is it getting better for subcontractor arrangements here? Is this something that you are continuing to…

Sam Strickland

Well you have to go back and for those of us who have been planning this for while, you know we never marked up subcontractors in the past and it really goes back to our consulting heritage and consulting firms didn’t worry about past through costs. And shame on us, but it did have an advantage. It made us a very attractive contractor.

So as we contemplated operating, you know splitting off from the commercial business and operating as a public company, we said my goodness, you know there’s a certainly room between where other firms are and where we are in terms of how much we mark up subs. So we have nee slowly moving that up. Clearly you’ve got a backlog that’s priced one way. So we have been focusing on trying to take a little bit more.

Because you if your – if you want to plan a contractor, you are responsible for the work of that subcontractor and you are responsible for making sure that subcontractor actually gets paid. So there is real business with that. But we are trying to tweak our rates, our key is there a bit.

Chavell (ph) - Credit Suisse

Okay, thank you.

Operator

Your next question comes from the line of Michael Lewis with Lazard Capital. Please proceed.

Michael Lewis - Lazard Capital

Good morning and thank you. My first question has to do with your intelligence mark. I think its about a little bit north of 20%, your revenue and as you all know DNI clappers been out last few weeks talking about intelligent and expectations that the market will come down and what I’m most concerned about is the contractor support service and wanted to find out what your thinking with regard to any potentially impact of there’s.

Sam Strickland

You know we have been focused and will continued to be focused on this area that Ralph talked about in the opening comments about core mission and the notion that if we are working and supporting the core mission of the intelligence community as supposed to peripheral services, there is both going to be support for that to continue and the need for that to continue as well as a real desire for that to continue at a certain quality.

And we believe our business is very much aimed in that direction and continue to evolve in that direction. So you know there’s market pressure. I’m sure we’ll have to figure out to evolve and adapt to it, but we are not seeing ourselves as hugely vulnerable to big cuts at this point based on what’s know now for those very reasons.

Michael Lewis - Lazard Capital

Okay, that’s fare. If I could shift gears, Sam I was wondering if you can give us what your forecast plan is for full year tax rate, DNA and interest expense. Thank you.

Sam Strickland

Lets see, I don’t have those at the tip of my…

Kevin Cook

It’s Kevin. The full year tax rate is estimated at this point at 33.5% down from the prior estimate due to the uncertain tax reserves that were released in the second quarter. We will continue to monitor that and adjust a quarter as we go.

The interest, as you know we have roughly 500 million term loan B at 4% and I don’t see that changing over the next six months and we have roughly $0.5 billion at LIBOR plus two and a quarter. So you can see in our 10-Q when it’s posted in the next day or so what that rate was for Q2. I don’t expect the one of three month LIBOR to go too crazy, so I would expect that would just stay about 3% for the second half.

And then don’t forget that you got the differed payment obligation interest that is a non-cash hit on the P&L, but its roughly 10.25% on $80 million. So you can do the math on that one. I think if you add those three things up, we have very little OID amortization in there, so round up.

Michael Lewis - Lazard Capital

You think it would be safe to say that the most recent quarter is pretty representative of what’s run on a quarterly basis.

Sam Strickland

Yes.

Michael Lewis - Lazard Capital

Okay thank you.

Operator

And your next question comes form the like of Jethro Solomon with BB&T Capital please proceed.

George Price - BB&T Capital

Hi, it’s actually George Price at BB&T, good morning. A couple of follow ups; just on the second half growth exceptions, I was wondering, given the environment and what’s transpired over the last quarter, is your confidents and comfort I guess on the ‘higher growth’ in the second half at all, is that lover than it was a quarter ago.

Sam Strickland

I don’t quite know how to answer that, honestly. We feel pretty comfortable, we got a backlog there, we’ve got work order, we’ve got people in the house. So you know, at least as I look at it, it seems like most of the turmoil that’s going to take place in that market is probably going to take place in the governments, you know not this governments fiscal year, but the next governments fiscal year. So yes, I mean there is no guarantees and clearly there is lot of political uncertainty, but we are pretty comfortable with our outlook.

George Price - BB&T Capital

So I guess then, for those of us who might have been expecting a little bit more granular color of what was hired in the second half of fiscal 12. Its more of a timing issues of third quarter versus fourth rater than a confidence in how much higher its going to be, is that fare.

Sam Strickland

Yes.

George Price - BB&T Capital

Okay thanks. Second question is just, was curious if you can may be comment a little bit, especially following the comments on debt, comment a little bit on uses of cash, great cash flow obviously, you know what – how do you see you using that? Do you see the potential for example for a dividend?

Sam Strickland

I think as I mentioned we are looking at all the options. Ultimately it’s a call of the Board of Directors. You know we need to go though those conversations. At this point I mean we, historical we had paid down debt and as you know we paid down often lot of debt since we did the original Carlyle transaction, so we would continue to look at that.

I will have to say paying down 3.5% average debt doesn’t particularly excite me. We will take a look at dividends; we’ll take a look frankly at share repurchases. I mean its clear tat one of the issues in the market is the lack of liquidity, by say when the stock price gets down and some of the prices we’ve seen this quarter, boy, its hard not to do something there as well. And frankly, if there is an acquisition that you know it comes about, we would consider doing that.

So we continue to look at all of our options. On acquisitions I will tell you its, we are not out. As you know we have not done acquisitions. We have looked at the events if we found something that was a good strategic fit and a reasonable price, then we’d add adverse to acquisitions. So we are continuing to look at all of those continuing to discus the best approach with our board and we will provide clarity as soon as we walked in on a final approach there.

George Price - BB&T Capital

If the back end is sleeping a little more add some recent industry events. There has been some discussion by people in both, the industry side and government about the need for government to more closely coordinate with areas of commercial industry, particularly around financial – you know key critical infrastructure financials and that sort of thing is in terms of cyber.

Given your background and focus and having obviously government also having retained that commercial cyber piece after display, with CMed that’s right, in (Inaudible) Colorado. My question is are you seeing any potential you know meeting for opportunities, where you know a government might – you know there might be something coming down the pipe where the government actually reaches out and its an opportunity for you to get involved in that.

Sam Strickland

I think the short form of the answer would be that a lot of our strategy around commercial and cyber is based on the expectation that there is going to have to be much closer coordination between industry and government. And we are beginning to see early signs of progress there and either side also is going to be able to tackle or solve this issue.

If you have been reading, some of my writings and things like that, it’s clear that we have stated both the point of view and a position on bill capacities to assist across a broad spectrum and so we feel that if and when that comes to pass we are well positioned.

In the meantime across financial servers and other industries, there is industry wide initiatives that don’t yet involve the government that we are participating in and trying to both shape the thinking and those are our initiatives to make it happen. So that’s very much on our mind and very much part of what we are doing.

Ralph Shrader

I would say that you know having Mike McConnell now guiding all of our cyber activates across the firm allows us a maximal opportunity really to capitalize on firm wide capability there and also Mike’s background and experience in the intelligent community of the government side.

So I mean, I think that we actually foresee opportunities and we think we positioned our resources in a way to allow us to optimism those opportunities across the board.

George Price - BB&T Capital

Great, thank you for taking my questions.

Operator

This concludes the question-and-answer portion of the call. I would now like to turn the call over to the Ralph Shrader for closing remarks.

Ralph Shrader

Well, thank you very much and thank all of you for joining us this morning. I hope you can tell from our comments, we have considerable pride in Booz Allen’s performance for fiscal 2012 to-date. Our top and bottom line growth, our earnings per share, cash flow results show our strength and our resilience in this somewhat challenging market.

Our Matrix Origination, single P&L structure, but that’s quickly moved with the markets to seize the right opportunities across federal, civil, defense and intelligent agencies as well as commercial and international markets. We believe Booz Allen is well positioned and stands apart from its peer group. Our management consultant heritage induce our people with an intense deduction to serve our clients and help them succeed.

This is a very different orientation than companies that are focused on just selling to customers. Our deep technology, engineering and athletics equities enables us to understand and rise to the challenges that our governments and industry clients will face in the 21st century.

Booz Allen is committed to deliver work of the highest value that directly supports our clients core missions and to perform it with the utmost entirety. In good times and bad, this has been our formula for success.

So thanks to all of you. We appreciate your time and your attention here today.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now discount. Have a great day.

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