Booz Allen Hamilton Holding Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019 (fiscal 2020). The company provides consulting, analytics, engineering, digital, mission operations and cybersecurity services; approximately 96% of quarterly revenue came from U.S. government customers.
Financial performance
| Metric | Quarter ended Dec. 31, 2019 | Year-over-year change | Nine months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1.849 billion | +11.2% | $5.494 billion | +11.6% |
| Operating income | $169.0 million | +4.4% | $520.1 million | +11.3% |
| Operating margin | 9.1% | Down from 9.7% | 9.5% | Flat |
| Net income | $112.0 million | −15.2% | $343.7 million | +4.5% |
| Diluted EPS | $0.79 | Down from $0.92 | $2.42 | Up from $2.27 |
Quarterly revenue growth reflected client demand and headcount growth, with higher billable expenses also contributing. Operating income benefited from revenue growth and improved contract performance, but margin declined. Quarterly net income fell primarily because the prior-year quarter included a $29.0 million tax benefit from remeasuring deferred taxes under the 2017 Tax Act; the effective tax rate was 23.6% versus 5.9%. Nine-month effective tax rates were 23.7% versus 17.2%.
For the quarter, billable expenses rose 17.7%, faster than revenue, largely due to greater subcontractor use and client-related direct expenses. For the nine months, revenue excluding billable expenses was $3.803 billion, up from $3.458 billion. Adjusted EBITDA was $190.8 million for the quarter and $581.5 million for the nine months; these are company-defined non-GAAP measures.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $366.5 million, up from $283.2 million. Capital spending was $90.7 million, compared with $58.1 million; company-defined free cash flow was $275.7 million, versus $225.1 million.
- Cash was $696.8 million at December 31, 2019, up from $284.0 million at March 31, 2019. Total debt was $2.105 billion, up from $1.760 billion. The company had no revolver borrowings and reported $499.0 million of available revolving-credit capacity.
- The November 2019 Term Loan B refinancing reduced its applicable margin and extended maturity to November 2026. Term Loan A and the revolver mature in July 2023; $350 million of 5.125% senior notes are due in 2025. The company reported compliance with debt covenants.
- Cash uses during the nine months included $102.9 million in dividends, $37.2 million in share repurchases and repayment of the $80.0 million deferred payment obligation. The company announced a quarterly dividend of $0.31 per share, payable February 28, 2020.
Management expects operating cash flow, existing cash and revolver capacity to cover anticipated cash needs for the next 12 months. Fiscal 2020 capital expenditures were expected to increase from fiscal 2019 as investment continued in facilities, infrastructure and information technology.
Business trends, outlook and risks
- Headcount was approximately 27,200, up from 25,800 a year earlier. Total backlog was $22.0 billion, up 7.3% year over year; funded backlog was $3.5 billion, versus $3.5 billion, while unfunded backlog and priced options made up the balance. Remaining performance obligations were $6.7 billion; management expected more than half to be recognized within 12 months. Backlog is not assurance of future revenue, as funding, options and task orders may change.
- Management expected to complete a review of research-and-development tax-credit eligibility in fiscal Q4 2020 and anticipated a tax benefit that could have a material impact on the financial statements; the filing did not quantify it.
- The company faces budget, appropriations and shutdown uncertainty, contract delays or cancellations, competition, hiring and retention challenges, and potential changes in federal contracting and spending priorities. Government customers’ audits and investigations can result in withheld payments, repayments, penalties or contracting restrictions.
- The DOJ is conducting a civil and criminal investigation concerning certain cost-accounting and indirect-cost charging practices; the SEC is conducting a related investigation. The company is cooperating but cannot reasonably estimate any resulting loss or future legal costs. It reported incremental legal costs, partly offset by insurance reimbursements, and expects additional costs.
- The company recorded $217.6 million for estimated adjustments to claimed indirect costs. It also disclosed contested D.C. tax assessments of $11.4 million, plus similar positions totaling $33.5 million for later years, with no related reserves; management did not expect these matters to materially adversely affect results, cash flow or financial condition.
Most important facts for investors to verify
- Whether revenue and backlog convert into funded work, particularly given the company’s heavy U.S. government concentration.
- Whether subcontractor and billable-expense growth continues to pressure operating margins.
- Developments, costs and potential financial exposure from the DOJ/SEC investigations and the indirect-cost audit provision.
- The size and timing of the anticipated R&D tax-credit benefit and the outcome of the D.C. tax matters.
- Cash generation, capital spending, debt reduction and shareholder distributions relative to the increased debt balance.