Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the first quarter of fiscal 2014. Comparisons are with the three months ended June 30, 2012, unless otherwise stated. Booz Allen provides management, technology, engineering, and analytics services, primarily to U.S. government clients; approximately 99% of quarterly revenue came from U.S. government agencies or their contractors.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $1,427.7 million | $1,432.4 million | Down 0.3% |
| Operating income | $138.7 million | $114.7 million | Up 20.9% |
| Operating margin | 9.7% | 8.0% | Up 170 basis points |
| Net income | $70.3 million | $61.9 million | Up 13.5% |
| Diluted EPS | $0.48 | $0.43 | Up |
| Operating cash flow | $73.8 million | $74.0 million | Approximately flat |
- Operating margin improved as cost of revenue and general and administrative expenses declined, reflecting cost and capacity management, lower headcount, and recovery of additional allowable expenses. Billable expenses increased, partly reflecting the DSES acquisition.
- Interest expense rose to $20.7 million from $11.2 million, primarily due to debt incurred in the July 2012 refinancing and recapitalization. The effective tax rate was 40.4%, versus 39.9%.
- Cash and cash equivalents were $385.4 million at June 30, 2013, compared with $350.4 million at March 31, 2013. Total debt was $1.704 billion, down from $1.715 billion. The $500 million revolving facility was undrawn, and the company reported compliance with its debt covenants.
- Investing cash outflow was $2.4 million, principally capital expenditures. Financing cash outflow was $36.4 million, including $13.9 million in cash dividends, $13.9 million in dividend-equivalent payments to option holders, and $11.6 million of debt repayment. Management said available cash, operating cash flow, and revolver capacity should cover anticipated needs for the next 12 months.
- Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $71.4 million, compared with $70.1 million.
Material changes and operating indicators
- Revenue was nearly flat despite modestly lower demand and reduced billable hours in an uncertain federal budget environment. The DSES acquisition contributed $78.9 million of revenue in the quarter.
- Headcount was approximately 23,400, down from 24,100 a year earlier; consulting staff numbered approximately 21,100, compared with 22,000.
- Total backlog was $11.272 billion at June 30, 2013, up 10.1% year over year. Funded backlog was $2.192 billion, down 14.9%; additions to funded backlog over the preceding 12 months were $5.4 billion versus $6.0 billion. Management attributed the weaker funded backlog conversion to market uncertainty, fewer funded awards, and fewer exercised and funded options.
- Quarterly dividends declared were $0.10 per share, versus $1.59 a year earlier, which included a $1.50 special dividend. A regular $0.10 quarterly dividend was announced for payment on August 30, 2013.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management described federal spending reductions, sequestration, budget delays, and procurement uncertainty as pressures that could reduce or delay contract awards and funding. It also cited opportunities in cybersecurity, analytics, technology integration, and healthcare.
- Management said a debt repricing, potentially including maturity extensions and greater operating flexibility, was reasonably likely to be pursued during calendar 2013, subject to market conditions and board discretion.
- Government contract audits and reviews may result in cost reductions, repayments, penalties, or restrictions on future contracting. The company recorded an estimated $167.5 million liability for potential adjustments relating to audits or reviews of contract costs incurred after fiscal 2007.
- Seven remaining lawsuits related to the 2008 acquisition sought approximately $348.7 million in aggregate alleged damages, including $291.5 million sought to be trebled under RICO, plus other damages and fees. Management did not expect these matters or other currently known proceedings to materially adversely affect financial condition or results; outcomes remain uncertain.
- The company also remained contingently liable on certain assigned leases, with maximum potential undiscounted payments of $22.0 million; no liability was recorded. Management reported no off-balance-sheet arrangements and no material changes to the risk factors described in its latest annual report.
Important facts for investors to verify
- Whether government budget actions and procurement delays continue to weaken funded backlog conversion and billable demand.
- How much of total backlog converts to funded work and revenue, given that unfunded backlog and priced options depend on future appropriations or client action.
- Whether improved operating margins persist while revenue is flat and headcount declines, and how the DSES business affects margins and subcontractor costs.
- Debt service, covenant headroom, and the outcome and terms of any proposed debt repricing.
- Developments in government audits and the acquisition-related litigation, including whether recorded reserves remain adequate.