Booz Allen Hamilton Holding Corporation — Form 10-Q summary
Reporting period: Quarter and nine months ended December 31, 2017 (fiscal 2018 Q3). The company provides consulting, engineering, analytics, digital, mission-operations and cybersecurity services; approximately 97% of revenue came from contracts whose end users were U.S. government agencies or departments. Figures below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $1,499.9 million | $1,404.6 million | $4,535.6 million | $4,222.2 million |
| Operating income | $118.1 million | $108.1 million | $384.0 million | $355.1 million |
| Operating margin | 7.9% | 7.7% | 8.5% | 8.4% |
| Net income | $69.8 million | $55.6 million | $220.2 million | $186.2 million |
| Diluted EPS | $0.47 | $0.37 | $1.47 | $1.23 |
| Interest expense | $20.6 million | $14.2 million | $60.3 million | $46.8 million |
- Revenue increased 6.8% in Q3 and 7.4% year to date, principally from stronger client demand and higher consulting headcount; year-to-date growth also reflected higher billable expenses. Headcount was approximately 24,700, up about 1,700 year over year.
- Operating income rose 9.2% in Q3 and 8.2% year to date. Management cited improved contract profitability, partly offset year to date by business-support and staff onboarding costs. Q3 cost of revenue grew faster than revenue, while lower billable expenses as a share of revenue helped the quarterly mix.
- Net income growth outpaced pre-tax income growth as the effective tax rate fell to 28.8% in Q3 from 40.0%, and to 32.4% year to date from 38.7%. The change reflects the 2017 Tax Act and recognition of share-based-compensation tax benefits.
- For the nine months, operating cash flow was $246.9 million, down from $283.0 million. Capital expenditure was $63.1 million, versus $30.6 million; the company-reported non-GAAP free cash flow was $183.9 million, versus $252.5 million. Management attributed lower operating cash flow mainly to higher cash taxes and continuing collection-processing effects at a customer payment center.
- Cash was $289.5 million at December 31, 2017, versus $217.4 million at March 31, 2017. Total debt was $1,832.3 million, versus $1,663.3 million; no revolver borrowings were outstanding, and $498.6 million of revolving capacity was available. The company reported compliance with debt covenants.
- Accounts receivable, net, was $1,045.3 million current, with an additional $59.4 million long-term unbilled receivable. DSO was 68 days, up from 60 days at March 31, 2017; management cited revenue growth, billing timing and administrative collection delays.
Changes, capital allocation and outlook
- In April 2017, the company issued $350 million of 5.125% senior notes due 2025. Interest expense increased following the issuance. It also entered into $450 million of interest-rate swaps to hedge a portion of floating-rate debt.
- During the nine months, the company repurchased 5.3 million shares for $184.5 million and paid $75.7 million in dividends. Remaining repurchase authorization was $270.9 million. A quarterly dividend of $0.19 per share was announced on February 5, 2018.
- Total backlog reached $16.7 billion, up 23.2% year over year, including $2.9 billion funded, $4.2 billion unfunded and $9.6 billion in priced options. Management described backlog as near record, but cautioned that conversion depends on funding, task-order awards, program schedules and staffing; backlog is not a guarantee of revenue.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management expects cash, operating cash flow and available revolving capacity to meet anticipated cash needs for the next 12 months.
- Management expected the 2017 Tax Act’s deferred-tax remeasurement to be completed in Q4 FY2018; a one-time, non-cash tax expense or benefit could be material. Revenue-recognition standard Topic 606 was expected to take effect April 1, 2018; the company anticipated no material financial-statement impact, while noting its assessment and implementation work remained underway.
Risks, contingencies and unusual items
- The DOJ is conducting a civil and criminal investigation into certain cost-accounting and indirect-cost charging practices; the SEC notified the company of a related investigation. The company is cooperating but could not estimate potential costs or losses. It reported incremental legal costs and expects further costs, with some costs offset by insurance reimbursements.
- A putative securities class action and a shareholder derivative action relate to matters purportedly connected to the investigations. The company could not estimate potential costs or losses; the derivative case was stayed pending the securities litigation.
- The company recorded a $171.7 million liability for estimated potential refunds or adjustments arising from government contract-cost audits and reviews. Government audits or investigations could also result in withheld payments, penalties, repayment obligations, or suspension or debarment.
- Management highlighted uncertainty around U.S. government appropriations, budget limits, spending reductions and possible shutdowns. These could delay or reduce contract funding and awards. Other risks include contract competition, fixed-price cost overruns, hiring and clearance constraints, and cybersecurity or compliance issues.
- The company was contesting $10.8 million, net of associated tax benefits, in District of Columbia tax assessments for fiscal 2013–2015. It reported no reserve for these contested positions and did not expect a material adverse effect. Ordinary-course litigation was also disclosed; management did not expect currently known matters to materially affect financial condition or results, though outcomes remain uncertain.
Important facts for investors to verify
- Progress and potential financial, operational or reputational consequences of the DOJ and SEC investigations, and related shareholder litigation.
- Whether backlog, particularly unfunded backlog and priced options, converts into funded work and recognized revenue.
- Collection trends and receivables: DSO rose to 68 days, while operating cash flow and free cash flow declined year over year.
- Debt levels, variable-rate exposure, covenant compliance and the effect of interest expense on earnings and cash flow.
- Final deferred-tax accounting under the 2017 Tax Act and the quantified adoption effects, if any, of Topic 606.