Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2020 (second quarter of fiscal 2021). Comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
Booz Allen provides consulting, analytics, engineering, digital, mission operations, and cybersecurity services. The company reports one operating segment, had approximately 27,600 employees, and generated approximately 97% of revenue from U.S. government-related contracts. Its fiscal year ends March 31.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $2,019.2 million, up 11.0% from $1,819.6 million | $3,975.6 million, up 9.1% from $3,644.8 million |
| Operating income and margin | $207.2 million; 10.3%, versus $172.0 million and 9.5% | $399.1 million; 10.0%, versus $351.1 million and 9.6% |
| Net income | $136.1 million, up 19.0% from $114.3 million | $265.4 million, up 14.5% from $231.7 million |
| Diluted EPS | $0.98, versus $0.80 | $1.90, versus $1.63 |
| Adjusted diluted EPS (non-GAAP) | $1.03, versus $0.81 | $1.97, versus $1.65 |
For the six-month period, operating cash flow was $566.0 million, compared with $266.7 million; capital expenditures were $38.1 million, compared with $60.0 million. Free cash flow, a non-GAAP measure, was $527.9 million versus $206.7 million. Management attributed stronger cash flow chiefly to collections, working-capital management, lower cash taxes, and lower COVID-related expenses. The filing’s non-GAAP reconciliation reports second-quarter operating cash flow of $425.6 million and free cash flow of $407.6 million, versus $215.7 million and $183.1 million, respectively, in the prior-year quarter.
At September 30, cash and cash equivalents were $1,275.2 million, total debt was $2,393.6 million, and stockholders’ equity was $972.0 million. Cash exceeded debt by approximately $1,118.4 million. The $500 million revolving facility had no borrowings and approximately $499 million of capacity available; the company reported compliance with its debt covenants. Interest expense fell 23.5% in the quarter and 21.6% year to date, primarily with lower LIBOR and repayment of a deferred payment obligation.
Material changes and notable items
- Growth was driven by client demand and headcount expansion; staff utilization also benefited from fewer paid time off days. Operating-income growth reflected contract performance and cost management, including lower travel and meeting costs.
- U.S. government defense revenue increased to $1,000.3 million from $845.3 million in the quarter; intelligence revenue declined to $396.1 million from $405.2 million. Time-and-materials contracts rose to 25% of quarterly revenue from 23%; cost-reimbursable contracts were 56% and fixed-price contracts 19%.
- Remaining performance obligations were $8.4 billion, up from $6.3 billion at March 31, 2020. Management expected more than half to be recognized over the following 12 months and approximately three quarters over 24 months. Total backlog was $24.6 billion, up 7.3% year over year; backlog includes unfunded work and unexercised options and is not assured to convert to revenue.
- In August 2020, the company issued $700 million of 3.875% notes due 2028 and redeemed $350 million of 5.125% notes due 2025. The redemption contributed a $13.2 million loss on debt extinguishment, including a $9.0 million premium and write-off of unamortized issuance costs. The balance of proceeds was designated for working capital and general corporate purposes.
- Cash dividends paid in the first half totaled $86.8 million ($0.62 per share); share repurchases totaled $116.3 million in cash flows, including $96.4 million for 1.3 million open-market shares. A $0.31-per-share quarterly dividend was announced for payment in December 2020.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected operating cash flow, existing cash, and available revolver capacity to cover anticipated needs for the next 12 months. It expected capital expenditures to decrease in the second half of fiscal 2021 compared with the second half of fiscal 2020.
- COVID-19 continued to affect work location, billable expenses, and employees unable to perform work at restricted client sites. The company withheld revenue recognition for certain potentially unreimbursed costs; management said it did not expect future non-reimbursed fees to materially affect earnings, but noted uncertainty and potential adverse effects if disruption continued. CARES Act reimbursements were limited and did not then extend beyond December 11, 2020.
- The company remained subject to a DOJ civil and criminal investigation, and an SEC investigation it believes relates to the same cost-accounting and indirect-cost matters. It could not reasonably estimate potential costs or losses. The company reported a $237.5 million provision for estimated adjustments to claimed indirect costs. Management said it did not expect ongoing audits, investigations, and litigation currently known to have a material adverse effect, while acknowledging outcomes could be adverse.
- Other key exposures include reliance on U.S. government funding and appropriations, contract award and backlog conversion risk, government audits and compliance requirements, talent availability, and variable-rate debt. Approximately $1.0 billion of interest-rate swaps hedged variable-rate exposure. Management said COVID-19 had not significantly affected liquidity to date.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist, particularly as staffing, compensation, contract mix, and utilization change.
- How much of the $8.4 billion of remaining performance obligations and $24.6 billion of backlog is funded and converts to revenue on schedule.
- Developments in the DOJ and SEC investigations, related legal costs and insurance recoveries, and the adequacy of the claimed-indirect-cost provision.
- COVID-19 effects on client-site work, reimbursement of affected employee costs, and the timing of government funding and contract awards.
- Debt levels, interest-rate exposure, capital returns, and delivery of the planned financial-management system implementation.