Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2016, the three months ended June 30, 2015, compared with the three months ended June 30, 2014. Booz Allen provides consulting, technology, and engineering services, primarily to U.S. government clients; approximately 98% of quarterly revenue came from contracts with U.S. government end clients. The company reported approximately 22,500 employees and one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $1,351.6 million | $1,322.3 million | +2.2% |
| Operating income | $126.1 million | $139.0 million | -9.3% |
| Operating margin | 9.3% | 10.5% | -1.2 percentage points |
| Net income | $64.3 million | $71.1 million | -9.6% |
| Diluted EPS | $0.43 | $0.47 | -8.5% |
| Cash from operations | $19.1 million | $91.7 million | -79.2% |
| Capital expenditures | $13.1 million | $2.7 million | Higher |
| Free cash flow (non-GAAP) | $6.0 million | $89.1 million | Lower |
Billable expenses rose 7.9% to $378.7 million, and general and administrative expenses rose 10.3% to $188.7 million. Cost of revenue declined 0.3% to $643.0 million. Management attributed margin pressure principally to higher indirect spending, including bid and proposal activity and investment in growth platforms, plus increased subcontractor and other direct costs. Cash and cash equivalents were $151.5 million at June 30, down from $207.2 million at March 31, 2015. Accounts receivable, including long-term unbilled receivables, totaled $899.0 million; days sales outstanding was 61, versus 59 at March 31.
Debt totaled $1,616.7 million, compared with $1,626.3 million at March 31. Term Loan A bore 2.69% interest and Term Loan B 3.75%; no revolving-credit borrowings were outstanding, with $497.0 million of revolver capacity available. The company reported compliance with debt covenants. The quarterly dividend declared per share was $0.13, versus $0.11 a year earlier. The company repurchased 1.2 million shares for $30.5 million during the quarter.
Material changes and operating developments
- Total backlog was $9.258 billion, down 4.4% from $9.682 billion a year earlier. Funded backlog was $2.388 billion, unfunded backlog $2.493 billion, and priced options $4.377 billion. Additions to funded backlog over the 12 months were $5.4 billion, versus $5.5 billion in the comparable period.
- The company’s largest ID/IQ contract expired July 8, 2015; certain task orders continued beyond expiration, with the latest ending in September 2016. Booz Allen was seeking to transition work to other existing contract vehicles.
- Contract mix shifted: cost-reimbursable contracts were 55% of revenue versus 56%; time-and-materials 24% versus 26%; fixed-price 21% versus 18%.
- Operating cash flow fell substantially, which management attributed mainly to increased payments of vendor payables and accrued expenses amid higher indirect spending and other costs. Capital spending increased, primarily for leasehold improvements.
Outlook, risks, contingencies, and unusual items
Management did not provide numerical earnings or revenue guidance. It said operating cash flows, cash on hand, and available revolving-credit capacity should cover anticipated cash needs for the next 12 months. Management described a strong pipeline of opportunities and increased investment and hiring to address demand, while emphasizing that results depend on contract awards, funding, and successful transition of work from the expired large ID/IQ contract.
- Government budgets, appropriations, spending reductions, continuing resolutions, delayed awards, and shifts in agency priorities could reduce or defer demand. The company noted uncertainty over fiscal 2016 appropriations and continuing budget constraints.
- Government audits, reviews, and investigations are an ongoing risk. The company recorded a $206.6 million liability for estimated potential customer refunds related to cost adjustments on contracts subsequent to fiscal 2008, versus $205.3 million at March 31. Management said it had recorded its best estimate of potential losses.
- Four remaining lawsuits brought by former officers and stockholders related to the 2008 acquisition sought approximately $291.7 million in alleged damages, with trebling sought under RICO, plus punitive damages, costs, and fees. Certain claims had been dismissed but remained subject to appeal. The company had no material accrual for these proceedings and did not expect them to materially affect financial condition or results, while noting outcomes were uncertain.
- The company remained contingently liable for up to $9.3 million of payments under two leases assigned to Strategy& if that entity defaults; no liability was recorded. Standby letters of credit and bank guarantees totaled $4.1 million.
- A contingent acquisition earnout liability of $4.5 million was recorded; the arrangement provides for payments of up to $9 million if performance thresholds are achieved in 2016 and 2017.
- A new revenue-recognition standard was expected to apply beginning April 1, 2018. Management was assessing its financial-statement effects and had not selected a transition method.
- On July 29, 2015, the company announced a regular quarterly dividend of $0.13 per share, payable August 31, 2015.
Most important facts for investors to verify
- Whether work and revenue from the expired largest ID/IQ contract were successfully transitioned, and how the transition affected subsequent backlog and margins.
- Whether operating cash flow recovers after the sharp year-over-year decline, including trends in collections, receivables, and vendor payments.
- Whether higher indirect, bid-and-proposal, and growth-platform spending generates contract wins and offsets the quarter’s margin decline.
- How government appropriations, contract awards, and funding delays affect funded backlog and demand, particularly given the company’s high U.S. government revenue concentration.
- Developments in government audits and the $206.6 million cost-disallowance reserve, and in the remaining acquisition-related litigation and appeals.
- Debt, covenant compliance, and the use of cash for dividends and repurchases in light of lower cash balances and substantial debt.