Booz Allen Hamilton Holding Corporation — Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended December 31, 2014. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Business context and results
The company provides consulting, technology and engineering services, primarily to U.S. government customers. Government agencies or government contractors generated approximately 97% of third-quarter revenue and 98% for the first nine months. The company reported one operating segment and approximately 22,300 employees.
| Metric | Quarter ended Dec. 31, 2014 | Prior-year quarter | Nine months ended Dec. 31, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1,304.7 | $1,273.2 | $3,931.8 | $4,078.9 |
| Operating income | $105.3 | $97.0 | $366.3 | $371.4 |
| Operating margin | 8.1% | 7.6% | 9.3% | 9.1% |
| Net income | $52.8 | $47.2 | $189.2 | $185.3 |
| Diluted EPS | $0.35 | $0.31 | $1.24 | $1.24 |
Financial position, cash flow and liquidity
- At December 31, cash was $197.4 million, down from $260.0 million at March 31, 2014. Current assets were $1,154.5 million and current liabilities $808.9 million.
- Total debt was $1,635.9 million, including $51.9 million current and $1,584.1 million long term. No amounts were drawn on the $500 million revolving facility. The company reported compliance with its debt covenants.
- For the first nine months, operating cash flow was $228.1 million, down from $292.3 million. Investing cash outflow was $41.4 million, including $23.9 million for acquisitions; financing cash outflow was $249.2 million. Cash declined $62.6 million over the period.
- Nine-month capital expenditures were $17.5 million; company-defined free cash flow was $210.6 million, versus $280.0 million a year earlier. The filing also reports third-quarter free cash flow of $19.0 million, versus $147.1 million in the prior-year quarter.
- Accounts receivable, net, including long-term unbilled receivables, totaled $863.0 million. Days sales outstanding was 61 at December 31, compared with 60 at March 31.
Material changes versus comparable periods
- Third-quarter revenue rose 2.5% and net income rose 12.0%, with management attributing the improvement partly to comparison with the prior-year quarter, which was affected by a 16-day federal government shutdown.
- Nine-month revenue fell 3.6%, which management attributed to weaker federal demand, a slower contract-award pace following the shutdown, lower consulting headcount and fewer billable hours. Headcount was approximately 22,300, versus 22,700 a year earlier.
- Nine-month operating income declined 1.4% despite a 20-basis-point increase in operating margin. Management cited lower revenue, partly offset by cost control, reduced compensation and retirement costs, lower amortization, and improved fixed-price contract revenue in the third quarter.
- Fixed-price contracts rose to 22% of quarterly revenue from 19%; cost-reimbursable contracts were 53% versus 55%. Total backlog declined 3.0% year over year to $10.1 billion: $2.7 billion funded, $2.7 billion unfunded and $4.7 billion in priced options.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected cash from operations, existing cash and revolving-credit availability to meet anticipated cash needs for the next 12 months.
- Management highlighted federal budget reductions and sequestration, delayed appropriations and awards, insourcing, competitive pricing, contract-performance and staffing needs, government audits, and cybersecurity and classified-information risks. Backlog may not be funded or converted to revenue on schedule, or at all.
- The company recorded approximately $200.0 million for potential refunds or adjustments arising from government audits of contract costs incurred after fiscal 2007. Management stated it believes reserves are adequate.
- Six remaining lawsuits related to the 2008 Carlyle acquisition seek aggregate alleged damages of approximately $348.7 million, including $291.5 million subject to a RICO treble-damages claim, plus punitive damages, costs and fees. Management did not expect the matters to materially adversely affect results or financial condition; no material amounts were accrued for these proceedings.
- Other exposures include ordinary-course government investigations and a contingent liability of up to $10.6 million for two leases assigned to Strategy&, for which no liability was recorded. The filing states no off-balance-sheet arrangements.
- After quarter-end, the board increased the share-repurchase authorization to up to $180 million. The company also announced a $0.13-per-share quarterly dividend payable in February 2015. During the nine months, it paid $147.2 million of special dividends and repurchased 1.0 million shares from a Carlyle affiliate for $25.1 million.
- The company is evaluating the new revenue-recognition standard, effective for it beginning April 1, 2017; the effect and transition method had not been determined.
Most important facts for investors to verify
- Whether federal spending, contract awards and funded-backlog conversion recover sufficiently to reverse the nine-month revenue decline.
- The composition and realization risk of the $10.1 billion backlog, particularly unfunded orders and priced options.
- Whether margins can be sustained as contract mix, staffing levels and government pricing pressures change.
- Cash generation and capital allocation capacity given $1.64 billion of debt, dividend commitments and the expanded repurchase authorization.
- Developments in government cost audits and the acquisition-related lawsuits, including whether recorded reserves remain adequate.