Booz Allen Hamilton Holding Corporation — Form 10-Q
Reporting period: Three months ended June 30, 2014, the first quarter of fiscal 2015. The unaudited filing compares results with the three months ended June 30, 2013. The company provides consulting, technology and engineering services and reports one operating segment; approximately 98% of quarterly revenue came from U.S. government contracts or government contractors.
Key financial results
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,322.3 million | $1,427.7 million | (7.4%) |
| Operating income | $139.0 million | $138.7 million | 0.3% |
| Operating margin | 10.5% | 9.7% | Up 0.8 percentage points |
| Net income | $71.1 million | $70.3 million | 1.1% |
| Diluted EPS | $0.47 | $0.48 | Down $0.01 |
| Net cash from operations | $91.7 million | $73.8 million | Up 24.2% |
| Free cash flow (company-defined) | $89.1 million | $71.4 million | Up 24.7% |
Cost of revenue fell 8.1% to $645.0 million, and billable expenses fell 11.8% to $351.0 million, reflecting lower headcount and subcontractor/direct expenses. General and administrative expense was nearly flat at $171.1 million; as a share of revenue, it rose to 12.9% from 12.0%. The effective tax rate was 40.3%, versus 40.4%. Quarterly dividends declared were $0.11 per share, compared with $0.10.
Financial position and cash flow
- Cash and cash equivalents were $319.4 million at June 30, up from $260.0 million at March 31, 2014. Current assets were $1.301 billion and current liabilities were $856.0 million.
- Total debt was $1.655 billion, versus $1.659 billion at March 31; no borrowings were outstanding on the $500 million revolving facility. The company reported compliance with debt covenants.
- Operating cash flow was $91.7 million; capital expenditures were $2.7 million; financing activities used $29.6 million. Cash increased by $59.5 million during the quarter.
- Accounts receivable, including long-term unbilled receivables, totaled $915.0 million. Days sales outstanding were 63, compared with 60 at March 31.
Material changes and management commentary
- Revenue declined as federal clients remained cautious about spending, reducing consulting staff and billable hours; lower subcontractor use also reduced revenue. Employee count was approximately 22,100, down from 23,400 a year earlier.
- Despite lower revenue, operating income was slightly higher and operating margin improved. Management attributed this to disciplined indirect-cost control, maintained contract profitability, and lower compensation-related costs, among other factors.
- Total backlog declined 10.8% year over year to $9.682 billion: funded backlog was $2.347 billion, unfunded backlog $2.569 billion, and priced options $4.766 billion. Funded backlog additions over the prior 12 months were $5.5 billion, versus $5.4 billion.
- Management cited stronger proposal volume and seasonally strong award activity, including funded-backlog growth, and expected contract-award pace to increase through the remainder of the U.S. government fiscal year. It did not provide specific revenue or earnings guidance, and cautioned that backlog may not convert to revenue as expected.
Debt, unusual items, risks and contingencies
- A May 2014 credit-agreement amendment shifted approximately $168.4 million of principal from Term Loan B to Term Loan A, extended Term Loan A and revolver maturities to May 2019, and amended covenants. Term Loan B matures in July 2019. The refinancing generated $1.2 million of accelerated debt-cost/discount expense and $2.0 million of third-party costs expensed in general and administrative expense.
- After quarter-end, the company announced a special cash dividend of $1.00 per share, in addition to a regular $0.11 quarterly dividend, payable August 29, 2014. Related option holders were to receive dividend equivalents under plan terms.
- Government contract audits and reviews are a significant exposure. The company recorded an approximately $189.0 million liability for potential adjustments to indirect costs after fiscal 2007 and reduced that reserve by $7.9 million during the quarter. Management said it believed reserves were adequate.
- Six remaining lawsuits arising from the 2008 acquisition sought approximately $348.7 million in aggregate alleged damages, including $291.5 million subject to a request for treble damages, plus punitive damages, costs and fees. Management did not expect the cases to materially adversely affect the company; no material amounts were accrued for these proceedings.
- Key business risks include federal budget reductions and sequestration, delayed appropriations and awards, contract competition and protests, insourcing, workforce retention and security-clearance needs, government audits and compliance requirements, and the possibility that backlog will not be funded or converted to revenue. The filing identifies no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether federal demand, awards and funded backlog improve enough to offset the 7.4% revenue decline and year-over-year contraction in total backlog.
- Whether the improved operating margin and cash flow are sustainable, given lower headcount, cost changes and working-capital timing.
- Debt service, covenant headroom and the cash and liquidity effects of the $1.00 special dividend and dividend-equivalent obligations.
- Developments in government cost audits and the acquisition-related litigation, including whether reserves or outcomes change materially.