Booz Allen Hamilton Holding Corporation — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended December 31, 2022; comparisons are with the periods ended December 31, 2021 unless stated otherwise. The company provides consulting, technology, analytics, engineering, cyber and related services, primarily to U.S. government clients; it reported approximately 31,100 employees.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $2,277.1 million; +12.1% | $6,825.7 million; +11.4% |
| Operating income / margin | $58.6 million / 2.6%; prior year $177.2 million / 8.7% | $489.8 million / 7.2%; prior year $536.8 million / 8.8% |
| Net income attributable to common stockholders | $31.0 million; prior year $128.9 million | $340.2 million; prior year $375.9 million |
| Diluted GAAP EPS | $0.23; prior year $0.95 | $2.54; prior year $2.76 |
| Adjusted EBITDA (non-GAAP) | $244.1 million; prior year $222.2 million | $782.6 million; prior year $730.0 million |
| Adjusted diluted EPS (non-GAAP) | $1.07; prior year $1.02 | $3.55; prior year $3.35 |
Revenue growth reflected headcount gains, salary increases, demand and higher utilization; EverWatch contributed approximately $28.6 million in the quarter. Approximately 97% of revenue came from U.S. government end users. Revenue mix was 53% cost-reimbursable, 25% time-and-materials and 22% fixed-price for the quarter.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was $365.7 million versus $481.2 million; free cash flow, a non-GAAP measure, was $314.3 million versus $429.5 million. Management attributed lower operating cash flow mainly to higher cash taxes and interest, despite collections broadly tracking revenue growth.
- Cash and equivalents were $370.9 million at December 31, 2022, down from $695.9 million at March 31, 2022. Debt was $2.82 billion, compared with $2.80 billion; approximate net debt was $2.45 billion.
- The company reported $999.0 million of available revolving-credit capacity and compliance with debt covenants. Management expects cash, operating cash flow and revolver capacity to meet anticipated needs for the next 12 months.
- Interest expense increased 35.3% for the quarter and 22.9% year to date, primarily reflecting higher rates. A September refinancing extended the term loan and revolver maturities to September 2027; the term loan bears variable-rate interest. $550 million of interest-rate swaps hedge part of variable-rate exposure.
- Nine-month investing cash use was $440.1 million, including the $444.8 million EverWatch acquisition, partly offset by business-sale proceeds. Financing cash use was $250.6 million, including dividends and debt repayments.
Changes, unusual items and outlook
- A $124.0 million reserve for the ongoing DOJ matter was recorded in Q3 general and administrative expense and is identified by management as the low end of the probable-loss range. This drove much of the sharp decline in reported quarterly operating income and profit. The company cannot estimate possible losses above the reserve; an adverse outcome could materially affect results.
- Reported nine-month other income included gains from the MENA and Managed Threat Services divestitures and deconsolidation of an AI software business. The combined gains were $44.6 million. EverWatch added $324.7 million of preliminary goodwill; its purchase-price allocation remains subject to finalization.
- Management cited strong contract-level performance and cost management, alongside pressure from inflation and higher unallowable spending. It expects further legal costs related to the DOJ investigation but cannot estimate their long-term amount or insurance reimbursements.
- The company estimated that the requirement to amortize U.S. research and development costs for tax purposes could reduce FY2023 operating cash flow by approximately $140 million; the actual impact depends in part on possible Congressional action and Treasury guidance.
- Remaining performance obligations were $8.1 billion at December 31, 2022, versus $7.4 billion at March 31, 2022; management expects about 70% to be recognized as revenue within 12 months and 85% within 24 months. These amounts are not a guarantee of revenue. Total backlog was $30.0 billion, including unfunded work and unexercised options.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company highlighted risks from federal budget delays or reductions, shutdowns, contract awards and funding, hiring and retention, inflation, competition, audits and investigations, and contract cost-estimation risk.
Key facts for investors to verify
- How the DOJ settlement discussions progress, whether the $124.0 million reserve changes, and the potential exposure above the recorded amount.
- Whether revenue growth converts into margins and cash flow after the one-time reserve and acquisition/divestiture effects.
- The timing and funding of backlog conversion, particularly the unfunded and option components, amid federal budget uncertainty.
- Cash-tax effects of R&D cost amortization and the related assumptions behind management’s approximately $140 million estimate.
- Variable-rate borrowing costs, debt levels and covenant headroom; also note the separate unresolved D.C. tax dispute, for which the company disclosed potential future tax expense of $40.2 million to $58.8 million if specified positions are resolved adversely and no related reserve.