Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended September 30, 2011, the second quarter and first half of fiscal 2012. Booz Allen provides management and technology consulting primarily to U.S. government clients in defense, intelligence, and civil markets. Approximately 98% of revenue came from U.S. government agencies or other U.S. government contractors. The company had approximately 25,800 employees at September 30.
Financial performance and position
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $1,429.0 million, up 4.5% year over year | $2,875.9 million, up 6.2% |
| Operating income | $93.7 million, up 30.3%; operating margin 6.6% versus 5.3% | $191.8 million, up 19.4%; operating margin 6.7% versus 5.9% |
| Net income | $75.3 million versus $14.8 million | $126.5 million versus $43.0 million |
| Diluted EPS | $0.53 versus $0.12 | $0.90 versus $0.35 |
| Adjusted net income (non-GAAP) | $50.6 million versus $30.1 million | $108.6 million versus $71.8 million |
- For the six months, operating cash flow was $177.1 million versus $170.9 million; capital expenditures were $43.6 million, yielding reported free cash flow of $133.5 million versus $131.9 million.
- Cash and cash equivalents were $356.2 million at September 30, up from $192.6 million at March 31. Current assets were $1,471.4 million and current liabilities $831.6 million.
- Debt was $979.9 million carrying value ($985.0 million principal), down from $994.3 million at March 31. No revolving credit borrowings were outstanding; $272.8 million of capacity remained available. The company reported compliance with its covenants, including a 1.75x leverage ratio against a 3.9x maximum and 7.86x interest coverage against a 3.0x minimum.
- Total backlog was $12.855 billion at September 30, up 16.4% year over year: $3.438 billion funded, $3.349 billion unfunded, and $6.068 billion in priced options.
Material changes versus the prior comparable period
- Revenue growth was attributed mainly to deploying approximately 500 net additional consulting staff against funded backlog. Management cited growth in health and finance consulting for civil agencies and classified intelligence work.
- Operating margin improved as incentive and stock-based compensation costs and acquired-intangible amortization declined, and contract mix shifted toward fixed-price work. Increased business-development costs, subcontractor use, and administrative costs associated with delayed staff deployment partly offset the improvement.
- Interest expense fell substantially following the February 2011 refinancing and repayment of higher-cost debt: down $26.6 million in the quarter and $54.7 million for the first half versus the prior-year periods.
- Reported net income benefited from a roughly $24.0 million release of uncertain-tax-position reserves and a $5.9 million tax benefit tied to use of a capital-loss carryforward. The first-half results also included a gain on sale of the state and local transportation business; the company reported $23.3 million of sale proceeds.
- First-half cash taxes paid were $50.1 million versus $2.7 million a year earlier. Management said payments increased principally due to NOL utilization and expected cash taxes to continue rising as Section 382 limits apply.
Outlook, commentary, risks and contingencies
- Management expected operating cash flow, cash on hand, and available revolver capacity to cover anticipated cash needs for the next 12 months. It did not provide specific revenue or earnings guidance.
- Management identified federal budget pressure, delayed appropriations and procurement, spending-priority changes, government insourcing, increased price competition, and uncertainty in contract funding as risks to growth and backlog conversion. Backlog is not guaranteed revenue; options may not be exercised and unfunded work may not receive appropriations.
- Fixed-price work increased to 15% of revenue from 13% a year earlier, while time-and-materials declined to 31% from 36%. Fixed-price contracts may offer better margins but expose the company to cost overruns.
- Potential government contract cost adjustments remained a concern: the company recorded a $115.8 million liability for estimated net refunds related to audits or reviews of costs incurred after fiscal 2006. Government audits and investigations could also result in repayments, penalties, or suspension or debarment.
- Seven remaining former-officer/shareholder lawsuits sought approximately $348.7 million in aggregate alleged damages, including $291.5 million subject to claimed trebling under RICO, plus punitive damages, costs, and fees. Management did not expect currently known litigation, audits, or investigations to materially adversely affect financial condition or results, but outcomes are uncertain.
- The company also remained contingently liable for up to $41.4 million of future payments under assigned leases if Booz & Company defaults; no liability was recorded. The company stated it had no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether backlog converts to funded work and revenue, particularly amid federal budget and procurement uncertainty.
- How sustainable operating-margin gains are as fixed-price work, subcontractor usage, compensation costs, and staff deployment evolve.
- Underlying earnings after separating tax-reserve releases, the capital-loss tax benefit, sale-related items, and lower interest expense; compare GAAP results with the company’s non-GAAP measures.
- Cash-tax requirements and NOL utilization under Section 382, along with cash conversion, receivables, and capital spending.
- Debt repayment capacity and continued covenant compliance, plus the eventual outcomes of contract audits, investigations, and former-shareholder litigation.