Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2013 (the second quarter and first half of fiscal 2014). Financial statements are unaudited. The company provides management, technology, engineering, and analytics consulting, primarily to U.S. government clients; approximately 98% of revenue came from U.S. government agencies or their contractors. It had approximately 23,200 employees.
Financial performance and position
| Metric | Three months ended Sept. 30, 2013 | Six months ended Sept. 30, 2013 |
|---|---|---|
| Revenue | $1.378 billion; down 0.7% year over year | $2.806 billion; down 0.5% |
| Operating income / margin | $135.7 million / 9.8%, up from $102.0 million / 7.4% | $274.3 million / 9.8%, up from $216.8 million / 7.7% |
| Net income | $67.8 million, up 47.0% | $138.1 million, up 27.8% |
| Diluted EPS | $0.45, versus $0.27 | $0.93, versus $0.69 |
| Adjusted EBITDA (non-GAAP) | $153.8 million, versus $123.8 million | $311.9 million, versus $259.5 million |
- Cash flow: First-half operating cash flow was $139.6 million, versus $389.7 million a year earlier. Capital expenditures were $6.7 million, producing non-GAAP free cash flow of $132.9 million, versus $375.4 million. Management attributed the operating cash-flow decline mainly to unusually strong prior-year collections and slower customer payments in the current period.
- Liquidity and debt: September 30 cash was $427.2 million; total debt was $1.690 billion, down from $1.715 billion at March 31. The company reported no revolver borrowings at quarter-end and compliance with debt covenants. Current assets were $1.464 billion and current liabilities $876.0 million.
- Working capital: Days sales outstanding were 66, compared with 61 at March 31. Net accounts receivable was $968.4 million on the balance sheet, including $498.4 million of unbilled receivables.
- Capital returns: First-half recurring dividends declared totaled $0.20 per share. After quarter-end, the board declared a separate $1.00-per-share special dividend, payable November 29, 2013, as well as a $0.10 regular dividend.
Changes versus the prior comparable period
- Revenue was slightly lower, reflecting reduced billable hours amid softer demand and federal budget uncertainty. The acquisition of ARINC’s Defense Systems Engineering and Support division (BES) contributed $68.2 million of quarterly and $147.2 million of first-half revenue, partly offsetting the decline.
- Profitability improved despite nearly flat revenue. Management cited lower indirect costs, disciplined cost management, recovery of additional allowable expenses, reduced compensation and retirement-plan costs, and improved contract profitability. General and administrative expense fell 18.4% for the quarter and 15.0% for the half-year.
- Term Loan B was repriced in August without additional borrowing: its spread and floor were reduced, and its reported rate fell to 3.75% from 4.50% at March 31. First-half interest expense nevertheless rose 40.7% year over year, primarily due to debt incurred in the July 2012 recapitalization.
- Total backlog declined 6.4% year over year to $11.651 billion; funded backlog fell 8.4% to $3.220 billion. Twelve-month additions to funded backlog were $5.4 billion versus $5.9 billion. The filing also corrected BES unfunded and option backlog figures for prior reporting dates.
- Headcount was approximately 23,200, versus 24,000 a year earlier; consulting staff was approximately 21,000, versus 21,600.
Outlook, risks, and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management expected operating cash, existing cash, and revolver capacity to cover anticipated cash needs for the next 12 months.
- Federal budget exposure: Management highlighted sequestration, delayed appropriations and contract awards, government shutdown effects, continuing resolutions, spending reductions, and uncertainty around longer-term budget and debt-limit agreements. These factors can reduce or defer funding, task orders, and backlog conversion. Management noted mandated fiscal 2014 spending cuts of approximately $109 billion, including an estimated $52 billion for Defense.
- Backlog and contract risks: Backlog is not guaranteed revenue; funding, option exercise, program schedules, and the company’s ability to deploy staff affect conversion. Contract mix also matters: first-half revenue was 55% cost-reimbursable, 30% time-and-materials, and 15% fixed-price.
- Government compliance and contingencies: The company recorded approximately $180.4 million for its best estimate of potential refunds related to audits or reviews of post-fiscal-2007 contract costs, versus $156.2 million at March 31. Government investigations could result in repayments, penalties, or suspension/debarment. Seven remaining lawsuits tied to the 2008 acquisition allege approximately $348.7 million in damages, including $291.5 million sought to be trebled under RICO, plus other damages and fees; management did not expect a material adverse effect based on information available.
- Other items: The company drew $250 million on its revolver on October 15 as a precaution related to the federal debt limit and repaid it on October 18. The Term Loan B amendment generated $1.2 million of accelerated debt-cost amortization and $1.6 million of nondeferrable third-party costs. These were reflected in other expense and G&A, respectively.
Important facts for investors to verify
- Whether federal budget decisions and agency payment delays affect revenue, collections, and funded backlog conversion.
- Whether the backlog decline continues, and how much reported backlog is funded, converted to revenue, or dependent on options and future appropriations.
- Whether improved operating margins are sustainable as demand, staffing, contract mix, and cost reductions change.
- Cash conversion, receivable aging, unbilled receivables, and the increase in DSO.
- Debt repayment capacity and the cash impact of regular and special dividends, including related option dividend-equivalent payments.
- Developments in government audits and investigations, the $180.4 million contract-cost reserve, and the acquisition-related litigation.