Booz Allen Hamilton Holding Corp quarterly report, Q1 FY2020

Booz Allen Hamilton Holding Corp. — Form 10-Q Summary

Reporting period: Three months ended June 30, 2019, the first quarter of fiscal 2020. Comparisons are with the three months ended June 30, 2018, unless otherwise noted. The company provides consulting, technology, analytics, engineering, digital, mission operations, and cyber services; it reports one segment and derives 97% of revenue from U.S. government end users.

Financial performance and liquidity

Metric	Q1 FY2020	Q1 FY2019	Change
Revenue	$1,825.2 million	$1,646.8 million	+10.8%
Operating income	$179.0 million	$161.6 million	+10.8%
Operating margin	9.8%	9.8%	Unchanged
Net income	$117.4 million	$104.2 million	+12.7%
Diluted EPS	$0.83	$0.72	+$0.11
Net cash from (used in) operations	$51.0 million	$(27.0) million	Improved
Free cash flow (non-GAAP)	$23.6 million	$(47.5) million	Improved

• Revenue growth reflected stronger client demand, increased client staff headcount and labor, and higher billable expenses. Headcount rose about 1,800 year over year to 26,400.
• Cost of revenue grew 7.0%, slower than revenue, while billable expenses rose 15.4% and general and administrative expenses rose 13.8%. Higher subcontractor use contributed to billable expense growth. Operating income also benefited from improved contract performance.
• Cash and equivalents were $649.1 million at June 30, 2019, versus $284.0 million at March 31. Total debt was $2,141.2 million, up from $1,759.8 million; the company drew the $400 million delayed-draw term loan facility in April. Cash exceeded operating cash flow plus investing outlays, so the quarter-end cash increase was primarily financing-driven. Net debt was approximately $1.49 billion.
• The company had $499 million of available revolving credit capacity and reported compliance with debt covenants. Management said existing cash, operating cash flow, and revolving capacity should meet anticipated cash needs for the next 12 months.
• Current assets were $2.12 billion and current liabilities $1.21 billion at quarter-end. Accounts receivable, net, was $1.41 billion; days sales outstanding were 73, compared with 74 at March 31.
• The effective tax rate was 24.7%, versus 24.1%. Capital expenditures were $27.3 million, compared with $20.5 million; management expects fiscal 2020 capital expenditures to increase from fiscal 2019.

Material changes and operating indicators

• Total backlog reached $19.855 billion, up 16.2% from $17.082 billion a year earlier; funded backlog was $3.195 billion, unfunded backlog $4.351 billion, and priced options $12.309 billion. Remaining performance obligations were $6.2 billion; the company expects to recognize more than half within 12 months and about three-quarters within 24 months. Backlog is not guaranteed to convert to revenue.
• Cost-reimbursable contracts increased to 56% of revenue from 52%; time-and-materials declined to 23% from 25%, and fixed-price to 21% from 23%. The U.S. government accounted for 97% of revenue in both periods.
• Shareholders received $32.4 million in dividends, at $0.23 per share, versus $27.4 million at $0.19 per share a year earlier. The company repurchased 92,528 shares for $5.9 million and had $652.3 million remaining under its repurchase authorization at June 30. A $0.23 quarterly dividend was announced July 29.
• Adoption of lease accounting on April 1 resulted in recognition of lease right-of-use assets and liabilities. At June 30, operating lease liabilities totaled $317.8 million. The company stated adoption had no material impact on earnings or cash flows; prior-year balance-sheet figures were not recast.

Management commentary, outlook, and risks

• Management cited continued client demand, higher staffing, improved contract performance, and record first-quarter backlog. The filing provides no specific full-year revenue or earnings guidance; management cautions that quarterly results are not necessarily indicative of the full year.
• The company expects cash, operating cash flow, and available borrowing capacity to cover anticipated requirements over the next 12 months. Potential uses of excess cash include acquisitions, business investment, dividends, and share repurchases.
• Government funding uncertainty, continuing resolutions, possible budget cuts or sequestration, delayed task orders, contract competition, and the ability to recruit and deploy cleared employees could affect backlog conversion and results. Contract estimates are judgmental; changes may affect profitability, though estimate adjustments were not material in the quarter.
• The company is cooperating with a DOJ civil and criminal investigation concerning certain government cost-accounting and indirect-cost practices; the SEC has also notified the company of an investigation it believes relates to the same matters. The company cannot reasonably estimate potential costs or losses, expects additional legal costs, and reported that some current-quarter costs were offset by insurance reimbursements.
• Government audits and reviews could lead to payment withholdings, repayments, penalties, or suspension or debarment. The company recorded approximately $202 million for its current best estimate of potential customer refunds related to contract-cost audits and reviews. Management does not expect ongoing proceedings to have a material adverse effect based on information currently available.
• The company contests District of Columbia tax assessments of about $11.4 million and has taken similar positions totaling $27.4 million for later years, without reserves for these positions. Management does not expect resolution to materially adversely affect results, cash flows, or financial condition.

Important facts for investors to verify

• Whether revenue growth, staffing expansion, and backlog translate into funded work and sustained margins.
• How much of the $19.855 billion backlog and $6.2 billion of remaining performance obligations converts to revenue on schedule, particularly given government funding uncertainty.
• The effect of the $400 million borrowing on interest expense, leverage, and debt reduction; total debt rose to $2.14 billion.
• Developments and potential financial consequences of the DOJ and SEC investigations, related litigation, insurance recoveries, and the $202 million government contract audit reserve.
• Cash conversion and working-capital trends, including receivables, billable expenses, and the expected increase in capital expenditures.