Booz Allen Hamilton Holding Corporation — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2020; fiscal year ends March 31. The company provides consulting, technology, analytics, engineering, cyber, and mission services, primarily to U.S. government customers. Approximately 97% of revenue came from U.S. government-related contracts in the quarter and nine-month period.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $1,904.0 million | $1,849.4 million | $5,879.7 million | $5,494.2 million |
| Operating income | $184.3 million | $169.0 million | $583.4 million | $520.1 million |
| Operating margin | 9.7% | 9.1% | 9.9% | 9.5% |
| Net income | $144.4 million | $112.0 million | $409.8 million | $343.7 million |
| Diluted EPS | $1.03 | $0.79 | $2.93 | $2.42 |
Quarterly revenue rose 3.0% and nine-month revenue rose 7.0% year over year. Management attributed growth mainly to client demand, increased headcount, and higher staff utilization. Quarterly operating income increased 9.0%; nine-month operating income increased 12.2%. Adjusted EBITDA was $205.4 million for the quarter and $646.8 million for nine months; adjusted EBITDA margin on revenue was 10.8% and 11.0%, respectively. These are non-GAAP measures.
For the nine months, operating cash flow was $799.0 million, compared with $366.5 million a year earlier. Free cash flow, as defined by the company, was $744.9 million versus $275.7 million. Management cited strong collections, working-capital management, lower cash taxes, and lower COVID-related expenses. Investing cash outflow was $122.9 million, including a $72.2 million strategic minority investment; capital expenditures were $54.0 million. Financing cash outflow was $76.7 million, including $143.4 million of share repurchases and $129.9 million of dividends.
Balance sheet, debt, and liquidity
At December 31, 2020, cash and cash equivalents were $1,341.3 million; reported debt carrying value was $2,375.0 million, compared with $2,185.8 million at March 31, 2020. The company had $499.0 million available under its $500 million revolving credit facility and no revolver borrowings outstanding. It reported compliance with debt covenants. Total liabilities were $4,294.9 million and stockholders’ equity was $1,073.3 million.
In August 2020, the company issued $700 million of 3.875% senior notes due 2028, used part of the proceeds to redeem $350 million of 2017 notes, and recorded a $13.2 million debt-extinguishment loss. It had $1.0 billion notional of interest-rate swaps. Management expects operating cash flow, cash balances, and available revolver capacity to meet anticipated cash requirements for the next 12 months.
Changes, outlook, and significant matters
- Operating margin improved year over year in both reported periods. For nine months, cost of revenue grew faster than revenue, reflecting higher salaries, benefits, and headcount; lower travel and other expenses helped support margins.
- The effective tax rate fell to 13.0% for the quarter and 20.0% for nine months, versus 23.6% and 23.7%. The quarter included a $10.2 million release of uncertain tax reserves following expiration of a statute of limitations.
- Remaining performance obligations were $7.5 billion at December 31, up from $6.3 billion at March 31. Management expects more than half to be recognized as revenue within 12 months and approximately three quarters within 24 months; conversion is not assured, including because some work depends on future government funding.
- COVID-19 continued to affect work locations, travel, and billable expenses. The company planned to deliver most services by telework for the foreseeable future and noted that some employees unable to work remotely might remain affected by site restrictions. CARES Act reimbursements are limited and do not currently extend beyond March 31, 2021; the company withheld recognition of revenue for amounts considered at risk of non-reimbursement.
- Management reported incremental legal costs related to the DOJ investigation and related matters, partially offset by insurance reimbursements, and said future costs cannot be reasonably estimated. The DOJ is conducting a civil and criminal investigation into certain cost-accounting and indirect-cost charging practices; the SEC is also investigating matters the company believes are related. Government audits and investigations could result in payment withholding, penalties, or suspension or debarment. The company reported a $248.2 million provision for estimated claimed indirect-cost adjustments.
- On January 27, 2021, the board increased the share repurchase authorization to $1.71 billion, with approximately $746.5 million remaining capacity after the increase. The company also announced a quarterly dividend of $0.37 per share payable March 2, 2021.
Investor verification points
- Track revenue growth, staffing, utilization, and margin trends, particularly as COVID-related travel and billable expenses normalize.
- Assess backlog quality and funding: the $7.5 billion of remaining performance obligations and broader backlog include amounts dependent on appropriations, task orders, and options.
- Monitor cash conversion and working capital, including collections of unbilled receivables and the sustainability of unusually strong operating cash flow.
- Review debt, interest-rate exposure, capital returns, and liquidity needs alongside the company’s buybacks, dividends, and strategic investment.
- Follow developments in the DOJ and SEC investigations, government audits, the $248.2 million claimed-indirect-cost provision, and the unresolved tax matters; the filing does not provide a clear estimate of potential losses or future investigation costs.