Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015 (the company’s second quarter of fiscal 2016). Amounts are in U.S. dollars; financial statement figures are unaudited.
Business context
Booz Allen provides management consulting, technology and engineering services, primarily to U.S. government clients, and reports as one operating segment. Approximately 97% of quarterly revenue and 98% of six-month revenue came from contracts with U.S. government end clients. The company had approximately 22,200 employees.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $1.322 billion, up 1.3% year over year | $2.674 billion, up 1.8% |
| Operating income | $108.8 million, down 10.8%; operating margin 8.2% vs. 9.3% | $235.0 million, down 10.0%; operating margin 8.8% vs. 9.9% |
| Net income | $56.2 million, down 13.9% | $120.5 million, down 11.6% |
| Diluted EPS | $0.37 vs. $0.42 | $0.80 vs. $0.89 |
| Operating cash flow | Quarterly amount not clearly presented in the filing text | $88.7 million vs. $200.5 million |
| Free cash flow, company-defined | Quarterly amount not clearly presented in the filing text | $59.1 million vs. $191.6 million |
For the six-month period, capital expenditures were $29.6 million, compared with $8.9 million a year earlier. Cash and cash equivalents were $187.4 million at September 30, down from $207.2 million at March 31. Total debt was $1.602 billion, down from $1.626 billion; no revolving-credit borrowings remained outstanding at quarter-end, and approximately $498 million of revolving capacity was available. The company reported compliance with its debt covenants.
At September 30, total assets were $2.875 billion, total liabilities $2.606 billion, and stockholders’ equity $269.0 million. Accounts receivable, including long-term unbilled receivables, totaled $884.3 million. Days sales outstanding increased to 62 from 59 at March 31.
Changes versus prior comparable periods
- Revenue grew modestly, while operating income, operating margin, net income and diluted EPS declined.
- Higher general and administrative expense—up 17.6% for the quarter and 14.0% for the six months—reflected increased bid-and-proposal activity, strategic investment, professional fees and business expenses. Billable expenses also rose, primarily from subcontractors and other direct contract costs.
- Management attributed lower operating income mainly to indirect spending to pursue opportunities and transition work and staff from the company’s largest ID/IQ contract, which expired July 8, 2015. Some task orders continue through September 2016.
- Six-month operating cash flow fell 55.8% year over year. Management cited increased working-capital needs, higher receivables relative to revenue, changed billing terms on new contracts and government invoice-processing delays.
- Six-month financing cash outflow was lower than a year earlier, principally because the prior-year period included a special dividend and larger dividend-equivalent payments. The company repurchased 1.2 million shares for $30.5 million during the current six-month period.
- Total backlog rose 15.2% year over year to $12.550 billion. Funded backlog was $3.243 billion, unfunded backlog $2.906 billion and priced options $6.401 billion; backlog is not a guarantee of future revenue.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management expected operating cash flow, existing cash and revolving-credit availability to meet anticipated cash requirements for the next 12 months. On October 28, 2015, the company announced a regular quarterly dividend of $0.13 per share, payable November 30, 2015.
- Management cited uncertainty over federal budgets and appropriations: the government was operating under a continuing resolution scheduled to expire December 11, 2015. Reduced, delayed or redirected government spending could affect awards, funding and revenue. Contract transition, competition, hiring and retention, and the ability to convert backlog to revenue are additional risks.
- The company recorded approximately $211.9 million for estimated refunds or adjustments related to potential government audits of contract costs incurred after fiscal 2008. Audits could result in cost reductions or penalties; management considers its recorded provision appropriate.
- Four remaining former-officer/shareholder suits sought approximately $291.7 million in alleged damages, with trebling sought under RICO, plus punitive damages, costs and fees. The suits had been dismissed at the district-court level but remained subject to appeal. Management did not expect currently ongoing litigation, audits or investigations to materially affect financial condition or results, while acknowledging uncertain outcomes.
- Other disclosed exposures include a contingent lease liability with maximum undiscounted payments of $8.8 million, letters of credit and bank guarantees totaling $6.1 million, and a contingent acquisition earnout liability of $4.5 million. No amount was recorded for the lease contingency.
- A new revenue-recognition standard was expected to become effective for the company April 1, 2018. Management was assessing its effect and had not selected a transition method.
Important facts for investors to verify
- Whether federal appropriations and the continuing-resolution timetable affected contract awards, funding and task-order activity after the reporting date.
- Progress and costs of transitioning work from the expired largest ID/IQ contract, and the extent to which task orders and backlog convert into funded revenue.
- Whether receivables, DSO and operating cash flow improve, given the reported billing delays and working-capital needs.
- Future operating margins as bid-and-proposal investment, subcontractor costs and other indirect expenses evolve.
- Developments in government audits and the former-shareholder litigation, including any changes to recorded reserves or potential exposure.
- Debt repayment, share repurchases and dividends relative to cash generation and available liquidity.