Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2018 (fiscal 2019 Q3). Unless otherwise noted, financial amounts are in U.S. dollars. The company provides consulting, engineering, analytics, digital, mission operations, and cyber services; it reports one operating segment and had approximately 25,800 employees.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year change | Nine months ended Dec. 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,663.1 million | +13.1% | $4,924.0 million | +8.5% |
| Operating income | $161.9 million | +26.0% | $467.3 million | +20.4% |
| Operating margin | 9.7% | Up from 8.7% | 9.5% | Up from 8.6% |
| Net income | $132.0 million | +76.2% | $329.0 million | +50.1% |
| Diluted EPS | $0.92 | Up from $0.51 | $2.27 | Up from $1.46 |
- Quarterly revenue growth reflected stronger client demand, more client staff labor, improved contract performance, and one additional working day. Nine-month growth also included higher billable expenses.
- Quarterly operating margin benefited from lower cost of revenue and G&A as percentages of revenue, improved contract performance, and an $11.2 million reduction in expense following an amendment and remeasurement of the long-term disability plan. Management also cited incremental legal costs, partly offset by insurance reimbursements.
- Net income benefited substantially from lower income tax expense: the effective tax rate was 5.9% for the quarter and 17.2% for the nine months, compared with 29.6% and 32.3%, respectively, in the prior-year periods. The quarter included approximately $29.0 million of tax benefit from an IRS-approved accounting-method change and $1.3 million from another tax-method change. These items make reported net-income growth less indicative of underlying operating growth.
- Adjusted net income, a company-defined non-GAAP measure, was $103.0 million for the quarter versus $75.4 million, and $305.1 million for nine months versus $220.5 million. Adjusted diluted EPS was $0.72 and $2.12, respectively, compared with $0.51 and $1.49.
Cash flow, balance sheet, and capital allocation
- For the nine months, operating cash flow was $283.2 million, versus $246.9 million a year earlier. Capital expenditures were $58.1 million, producing company-defined free cash flow of $225.1 million versus $183.9 million. The filing attributes cash-flow pressure to billing and collection delays, partly offset by working-capital efficiencies.
- Cash was $211.9 million at December 31, 2018, down from $287.0 million at March 31, 2018. Total debt was $1.773 billion, down from $1.819 billion; cash less total debt implies net debt of approximately $1.561 billion.
- Accounts receivable, net, increased to $1.322 billion from $1.134 billion. Days sales outstanding rose to 76 from 66 at fiscal year-end, primarily because of billing and collection delays. Management warned that government shutdowns could further delay collections.
- The company reported $499.0 million of revolving-credit capacity available at December 31 and compliance with its financial covenants. It drew an additional $40 million on the revolver on January 30, 2019. Management expected operating cash flow, cash on hand, and revolver capacity to cover anticipated requirements for the next 12 months.
- Nine-month financing outflows included $181.4 million of share repurchases and $81.8 million of dividends. The company repurchased 3.6 million shares for $168.4 million during the first nine months and had $329.5 million remaining under its authorization at December 31. A quarterly dividend of $0.23 per share was announced for payment in February 2019.
Business outlook, backlog, and material risks
- Total backlog was $20.454 billion at December 31, up 22.7% year over year, including $3.545 billion funded, $4.501 billion unfunded, and $12.408 billion of priced options. Separately, remaining performance obligations were $6.2 billion; the company expected to recognize more than half within 12 months and approximately three quarters within 24 months. Backlog conversion is not assured and depends on funding, task-order awards, staffing, and contract execution.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cited sustained client demand, increased client staffing, improved contract performance, and near-record backlog.
- Approximately 96% of revenue came from U.S. government end users. Risks include federal budget uncertainty, appropriations delays and shutdowns, spending reductions, competition, contract award timing, and the ability to hire and deploy cleared personnel. The filing discussed the partial government shutdown ending January 25, 2019 and uncertainty over funding beyond February 15.
- The DOJ was conducting a civil and criminal investigation into certain cost-accounting and indirect-cost charging practices; the SEC had also notified the company of an investigation believed to relate to the same matters. The company said it was cooperating and could not reasonably estimate potential costs or losses. Management expected further legal costs.
- The company recorded $185.5 million of liabilities for estimated potential government-contract cost adjustments and refunds. It also disclosed ongoing audits and investigations and litigation, including a remaining Carlyle-acquisition-related securities claim with alleged damages unknown. Management did not expect currently identified proceedings to materially adversely affect results or financial condition, but outcomes remain uncertain.
- Other notable items: adoption of the new revenue standard was described as having an immaterial cumulative effect at adoption; adoption of the new lease standard in fiscal 2020 is expected to add a material right-of-use asset and lease liability to the balance sheet.
Important facts for investors to verify
- How much of the reported earnings increase reflects sustainable operations versus the discrete tax benefits and $11.2 million disability-plan expense reduction.
- Whether higher receivables and 76-day DSO convert to cash, particularly amid government payment-processing disruption.
- Conversion and funding of backlog and remaining performance obligations, including the substantial unfunded and option components.
- Potential outcomes, costs, insurance recoveries, and any contract or customer consequences from the DOJ and SEC investigations and related proceedings.
- Debt, interest-rate exposure, and capital returns: the company had $1.773 billion of debt, variable-rate borrowings partly hedged by $600 million of swaps, and continued substantial repurchases and dividends.