Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021, the first quarter of fiscal 2022. Comparisons are with the three months ended June 30, 2020, unless stated otherwise. The company provides consulting, technology, analytics, engineering, mission operations, and cyber services; approximately 98% of quarterly revenue was from U.S. government customers.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $1,989.1 million | $1,956.5 million | +1.7% |
| Operating income | $141.3 million | $191.9 million | -26.4% |
| Operating margin | 7.1% | 9.8% | -2.7 percentage points |
| Net income | $92.1 million | $129.3 million | -28.8% |
| Diluted EPS | $0.67 | $0.92 | Lower |
| Adjusted operating income (non-GAAP) | $213.1 million | $192.2 million | Higher |
| Adjusted EBITDA (non-GAAP) | $238.1 million | $213.0 million | Higher |
| Operating cash flow | -$10.7 million | $140.4 million | Lower |
| Free cash flow (non-GAAP) | -$19.7 million | $120.4 million | Lower |
Revenue growth reflected sustained client demand and increased headcount, partly offset by unusually high employee utilization in the prior-year quarter. Reported operating income included $66.8 million of acquisition costs, principally related to Liberty IT Solutions. The company attributed lower cash from operations mainly to lower receivable collections, including timing associated with its new financial system, and paid acquisition costs. Adjusted measures exclude specified costs and should be considered alongside GAAP results.
Financial position, liquidity, and capital allocation
- Cash and cash equivalents were $621.9 million at June 30, 2021, down from $991.0 million at March 31, 2021. Accounts receivable, net, rose to $1.673 billion from $1.412 billion.
- Total debt was $2.849 billion, compared with $2.357 billion at March 31. The company issued $500 million of 4.00% senior notes due 2029 to help fund the Liberty acquisition and related expenses. It reported no revolver borrowings outstanding at quarter-end, with $999.1 million of revolver capacity available, and stated that it was in compliance with its debt covenants.
- Investing cash outflow was $676.6 million, largely reflecting the Liberty acquisition. Financing cash inflow was $318.2 million, including net proceeds from the new notes. The company paid $51.6 million in dividends and repurchased $98.2 million of shares in open-market transactions.
- The quarterly dividend was $0.37 per share; a further $0.37 dividend was announced on July 30, payable August 31, 2021. Approximately $496.3 million remained under the share repurchase authorization at June 30.
Material changes and business developments
- Liberty IT Solutions was acquired on June 11 for approximately $668.7 million, net of working-capital adjustments. Preliminary purchase accounting recorded $344.0 million of goodwill and $311.0 million of intangible assets, with the allocation still subject to finalization. The acquired business added approximately $2.2 billion to backlog.
- Total backlog was $26.8 billion at June 30, up from $23.0 billion a year earlier; the filing says the increase includes Liberty’s backlog. Remaining performance obligations were $7.0 billion, versus $6.7 billion at March 31. The company expects to recognize about 70% of June 30 remaining performance obligations within 12 months and 85% within 24 months; these amounts are not a guarantee of revenue.
- General and administrative expense increased 22.8%, primarily due to acquisition costs. Depreciation and amortization increased 33.8%, reflecting the new financial management system and Liberty-related amortization. Interest expense rose 5.1%.
- Employees numbered approximately 28,600 at quarter-end, compared with 27,400 a year earlier. Total revenue remained heavily concentrated in U.S. government work.
Outlook, risks, and contingencies
Management expects operating cash, existing cash, and available revolver capacity to be sufficient for anticipated cash requirements over the next 12 months. It expects capital expenditures to increase during the year as the company shifts away from a fully remote work environment. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management continued to monitor COVID-19 impacts, including employee inability to work at certain client locations. It had withheld recognition of revenue at risk of non-reimbursement under the CARES Act and did not expect non-reimbursed fees to materially affect future earnings, while warning that prolonged impacts could adversely affect the business and cash flows.
- The company cited federal budget and appropriations uncertainty, contract award or funding delays, competition, staffing and clearance needs, contract execution and estimation risks, and the possibility that backlog may not convert to revenue on schedule or at all.
- The company reported ongoing government audits and investigations involving areas including labor time reporting, procurement integrity, and classified information access. The DOJ closed its criminal investigation on May 12, 2021, but related matters and an SEC investigation the company believes concerns the same subject matter remained. The company could not estimate potential long-term legal costs or losses and expected additional legal costs.
- Estimated liabilities for adjustments to claimed indirect costs were $272.0 million at June 30, up from $263.2 million at March 31. Management said it believed the provision was appropriate. Other legal proceedings were not considered material individually, but outcomes remain uncertain.
- The company was contesting District of Columbia tax assessments of approximately $11.7 million, net of federal tax benefits, and disclosed approximately $38.6 million of potential future tax expense from similar positions if resolved adversely. It maintained no reserves for those contested positions.
Important facts for investors to verify
- Whether receivables and operating cash flow normalize after the collection timing effects associated with the new financial system.
- Liberty’s post-acquisition performance, integration costs, final purchase-price allocation, and realization of expected benefits.
- Progress converting backlog and remaining performance obligations into funded work and recognized revenue, particularly given federal funding uncertainty.
- Any material developments, costs, or financial exposure from the DOJ-related matters, SEC investigation, government audits, and indirect-cost reviews.
- Debt levels, interest costs, covenant compliance, and liquidity after the acquisition and share repurchases.