Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. The company provides consulting, technology, engineering, analytics, digital, mission operations and cyber services; it reports one operating segment and had approximately 24,600 employees. Unless indicated otherwise, financial figures below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended June 30, 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,646.8 million | $1,523.0 million | +8.1% |
| Operating income | $161.6 million | $126.7 million | +27.6% |
| Operating margin | 9.8% | 8.3% | +1.5 percentage points |
| Net income | $104.2 million | $70.6 million | +47.6% |
| Diluted EPS | $0.72 | $0.47 | — |
| Interest expense | $23.1 million | $18.7 million | +23.1% |
| Operating cash flow | $(27.0) million | $4.0 million | Declined |
| Capital expenditures | $20.5 million | $11.5 million | Increased |
| Free cash flow (company-defined) | $(47.5) million | $(7.5) million | Declined |
Revenue growth reflected stronger client demand, increased client staff headcount and labor, and improved contract performance. Management also cited strong operating performance. Headcount increased by approximately 1,100 year over year. The effective tax rate fell to 24.1% from 33.9%, primarily following the federal corporate tax-rate reduction under the 2017 Tax Act.
- Cash and liquidity: Cash was $149.7 million at June 30, down $137.2 million during the quarter from $287.0 million. The company attributed weak operating cash flow principally to higher days sales outstanding (74 versus 66 at March 31) amid revenue growth and delayed billing/collections, as well as payment timing.
- Debt: Total debt was $1.804 billion, compared with $1.819 billion at March 31. The company had no revolver borrowings at quarter-end and reported $499 million of available revolving capacity. It was in compliance with debt covenants.
- Shareholder returns: The company paid $27.4 million in dividends and repurchased approximately 1.0 million shares for $44.2 million during the quarter. The declared quarterly dividend was $0.19 per share.
- Margins and costs: Cost of revenue, billable expenses and G&A rose 6.8%, 5.7% and 6.4%, respectively—below revenue growth. As a share of revenue, cost of revenue was 47.7% versus 48.3%, billable expenses 29.0% versus 29.7%, and G&A 12.5% versus 12.7%.
Material changes and business indicators
- Revenue was 97% U.S. government-related, versus 98% in the comparable quarter. Defense, intelligence and civil U.S. government revenue were $758.0 million, $397.5 million and $435.5 million, respectively. Global commercial revenue rose to $55.9 million from $37.5 million.
- Total backlog rose 21.4% year over year to $17.1 billion: $2.8 billion funded, $4.1 billion unfunded and $10.1 billion in priced options. Backlog includes amounts that may not be funded or options that may not be exercised.
- Remaining performance obligations were $6.0 billion. The company expected to recognize more than half within 12 months and approximately three quarters within 24 months; these are timing expectations, not a revenue guarantee.
- The company retrospectively adopted ASC 606 and ASU 2017-07. ASC 606 increased retained earnings by a cumulative $7.9 million as of April 1, 2018. Adoption changed prior-period presentation: for the June 2017 quarter, reported revenue was adjusted upward by $29.4 million and operating income downward by $14.7 million, among other adjustments. Comparisons here use the adjusted prior-period figures in this filing.
Outlook, risks and unusual items
- Liquidity outlook: Management expected operating cash flow, existing cash and revolving-credit availability to meet anticipated cash needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Credit amendment after quarter-end: On July 23, 2018, the company amended its credit agreement, extending the Term Loan A and revolver maturity to the fifth anniversary of the amendment, reducing the applicable spread under specified leverage conditions, and providing for a delayed-draw Term Loan A facility of up to $400 million for business investment and shareholder returns. Term Loan B pricing was unchanged.
- Government dependence and funding: Heavy reliance on U.S. government customers exposes results to appropriations, budget constraints, procurement delays, contract competition, insourcing and changes in agency priorities. Backlog conversion depends on funding, task-order awards, option exercises and staffing capacity.
- Investigations and litigation: DOJ is conducting a civil and criminal investigation concerning certain government-contract cost accounting and indirect-cost charging practices; the SEC notified the company of a related investigation. The company is cooperating but cannot reasonably estimate potential costs or losses, and expects additional legal costs. It also faces related shareholder litigation and other government audits and inquiries.
- Government audit reserve: Recorded liabilities for potential adjustments/refunds related to government contract audits and reviews were approximately $173.3 million at June 30, 2018, up from $168.6 million at March 31.
- Tax matters: The company was still assessing certain Tax Act provisions. It contested approximately $11.5 million of D.C. tax assessments for fiscal 2013–2015 and had taken similar positions totaling $22.3 million for later years; it reported no reserve for those contested positions. A separate $10.2 million reserve related to acquired-business tax uncertainties remained.
- Other relevant risks include variable-rate debt and interest-rate exposure, fixed-price contract cost overruns, staffing and retention, and uncertainty in contract estimates. The company used $450 million of interest-rate swaps to hedge a portion of floating-rate debt.
Important facts for investors to verify
- Whether the higher days sales outstanding and negative operating cash flow reverse as billing and collections normalize.
- How the DOJ/SEC investigations, government audits and associated legal costs develop, including any potential financial or contracting consequences.
- How much unfunded backlog and priced options convert to funded work and revenue, and whether staffing can support that conversion.
- Debt-service costs, covenant headroom, the terms and use of the post-quarter $400 million delayed-draw facility, and the effects of continued dividends and repurchases on liquidity.
- Final tax-accounting assessments and the outcome of the contested tax positions.