Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended June 30, 2022. Comparisons are with the three months ended June 30, 2021 unless otherwise noted. The company provides consulting, technology, analytics, engineering, digital, mission operations and cyber services; it reports one segment and generated 97% of quarterly revenue from U.S. government customers.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change / context |
|---|---|---|---|
| Revenue | $2.250 billion | $1.989 billion | +13.1% |
| Revenue less billable expenses | $1.575 billion | $1.434 billion | +9.9% |
| Operating income | $207.2 million | $141.3 million | +46.7% |
| Operating margin | 9.2% | 7.1% | Up 2.1 percentage points |
| Net income | $138.1 million | $92.1 million | +49.9% |
| Diluted EPS | $1.03 | $0.67 | +53.7% |
| Adjusted EBITDA | $252.6 million | $238.1 million | Adjusted EBITDA margin on revenue was 11.2%, versus 12.0% |
| Operating cash flow | $(45.6) million | $(10.7) million | Cash used increased |
| Free cash flow | $(59.4) million | $(19.7) million | Company-defined non-GAAP measure |
Margins and cost drivers: Cost of revenue was 47.8% of revenue, down from 48.4%; billable expenses were 30.0%, up from 27.9%; and general and administrative expense was 11.2%, down from 15.2%. Lower prior-year acquisition costs, including $66.8 million related to Liberty, contributed to the G&A decline. Depreciation and amortization rose 44.5% to $40.1 million, primarily due to acquired intangible assets.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $497.8 million, down from $695.9 million at March 31, 2022. Total debt was $2.784 billion, compared with $2.800 billion; the balance included $68.4 million current debt and $2.715 billion long-term debt, net. The company reported $999 million of available revolving-credit capacity and compliance with its financial covenants. Total assets were $5.962 billion and stockholders’ equity was $1.099 billion.
Cash flow and capital returns: Operating cash use reflected working-capital movements, including a $205.4 million increase in accounts receivable, and other disbursements. The company attributed the year-over-year operating cash-flow change to higher disbursements and one-time payroll items, partly offset by strong collections. Investing cash use was $13.7 million, compared with $676.6 million a year earlier, when the Liberty acquisition was funded. Financing cash use was $138.7 million, including $73.4 million of share repurchases and $58.9 million of dividends paid. The quarterly dividend was $0.43 per share, up from $0.37. The board increased the share-repurchase authorization by $400 million to $2.560 billion after quarter-end.
Material changes and operating trends
- Revenue growth reflected higher employee headcount and salaries and increased billable expenses, partly offset by lower staff utilization. Approximately $103 million of revenue growth came from fiscal 2022 acquisitions. Total employee headcount was approximately 29,300, up about 750 year over year.
- Billable expenses rose 21.4%, including higher subcontractor, travel and other direct costs. Fixed-price contracts grew to 23% of revenue from 19%; cost-reimbursable contracts declined to 53% from 56%.
- U.S. government revenue was 97% of total, versus 98% in the prior-year quarter. Civil-client revenue increased to $757.7 million from $592.8 million; defense revenue was $1.020 billion and intelligence revenue was $408.9 million.
- Total backlog was $28.628 billion, up 6.8% year over year. Funded backlog was $4.020 billion. Remaining performance obligations were $7.5 billion; the company expects to recognize about 70% within 12 months and 85% within 24 months, while cautioning that backlog conversion is not assured.
- Interest expense rose 15.9% to $24.7 million, primarily reflecting the 2021 issuance of the 4.00% senior notes due 2029. Variable-rate term loans expose the company to rate changes; $550 million of interest-rate swaps hedge a portion of that exposure.
Outlook, risks, contingencies and unusual items
- Outlook and liquidity: No specific revenue or earnings guidance is provided in the filing. Management expects operating cash flow, cash on hand and revolver capacity to meet anticipated cash requirements for the next 12 months. The company estimated that mandatory five-year amortization of research and development costs under the Tax Cuts and Jobs Act could reduce fiscal 2023 operating cash flow by approximately $150 million; the actual impact depends on possible legislative changes and other factors.
- EverWatch transaction: The proposed acquisition for approximately $440 million was challenged by the DOJ, which sued on June 29, 2022 to block it. The parties agreed to delay closing until October 9, 2022 or an earlier court ruling on the injunction request. The company stated that consummation is uncertain; cash on hand was expected to fund the transaction if completed.
- Legal and government-contract exposure: The company reported ongoing audits and investigations involving labor time reporting, procurement integrity and classified-information access. It also disclosed the DOJ’s civil investigation into cost accounting and indirect-cost charging practices and a related SEC investigation; the DOJ closed its criminal investigation in May 2021. The company could not reasonably estimate the expected cost or loss. It recorded $295.6 million for estimated adjustments to claimed indirect costs. Management did not expect currently ongoing matters to have a material adverse effect, but outcomes remain uncertain.
- Tax dispute: The company is appealing a District of Columbia tax assessment of $11.7 million, net of federal benefits, relating to fiscal 2013–2015. An adverse final resolution involving the challenged positions and similar positions for fiscal 2013–2020 could result in estimated future tax expense of $40.2 million to $55.9 million, net of federal benefits; no reserves were maintained for these positions at quarter-end.
- Other risks: Results are exposed to federal budget and appropriations delays or cuts, contract awards and funding timing, competition, employee hiring and retention, lower utilization, inflation, COVID-19 effects, contract-cost estimates, and the ability to convert backlog into funded work. The company expects additional legal costs connected with the DOJ investigation and related matters but could not estimate their amount or insurance reimbursements.
- Other corporate updates: The planned MENA management-consulting divestiture was expected to close in fiscal 2023, subject to customary conditions and regulatory approvals. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent court and DOJ developments concerning the EverWatch injunction, and whether the acquisition closes or is abandoned.
- Operating cash conversion, accounts-receivable and unbilled-receivable balances, and the estimated fiscal 2023 cash impact of R&D cost amortization.
- Whether revenue growth and backlog translate into funded work and sustained margins, given lower utilization and rising billable expenses.
- Developments in the DOJ/SEC matters, government audits and the claimed-indirect-cost provision, including legal costs and any insurance recovery.
- Outcome of the District of Columbia tax appeal and potential exposure from similar tax positions in later years.
- Debt costs and sensitivity to variable interest rates, alongside continued dividends and share repurchases.