Booz Allen Hamilton Holding Corporation — Form 10-Q
Reporting period: Three months ended June 30, 2011, the first quarter of fiscal 2012. Comparisons are with the three months ended June 30, 2010 unless noted. The company provides management and technology consulting, primarily to U.S. government clients; 97% of revenue came from U.S. government agencies or contractors.
Key financial results
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,446.8 million | $1,341.9 million | +7.8% |
| Operating income | $98.1 million | $88.7 million | +10.6% |
| Operating margin | 6.8% | 6.6% | +0.2 percentage points |
| Net income | $51.1 million | $28.2 million | +81.5% |
| Diluted EPS | $0.37 | $0.23 | — |
| Adjusted EBITDA (non-GAAP) | $122.9 million | $121.5 million | — |
| Cash from operations | $53.8 million | $10.0 million | — |
| Free cash flow (non-GAAP) | $36.2 million | $(6.2) million | — |
Figures are rounded. Adjusted EBITDA and free cash flow are non-GAAP measures; the filing provides reconciliations.
Balance sheet, debt and liquidity
- At June 30, 2011, cash and cash equivalents were $228.5 million, up from $192.6 million at March 31, 2011. Current assets were $1,376.8 million and current liabilities were $808.2 million.
- Total debt, net of discount, was $987.1 million, down from $994.3 million at March 31; no borrowings were outstanding on the $275 million revolving facility, with $273.1 million available after letters of credit. Debt bears stated rates of approximately 2.8% to 4.0% and is secured by substantially all company assets.
- The company reported compliance with its debt covenants. Its June 30 leverage ratio was 1.79 against a maximum of 3.9; net interest coverage was 5.36 against a minimum of 3.0.
- Capital expenditures were $17.6 million. Management said operating cash, cash balances and revolving capacity should cover anticipated cash needs for the next 12 months.
Material changes and operating performance
- Revenue growth was attributed principally to deploying about 900 net additional consulting staff against funded backlog. Direct consulting staff labor revenue grew 7.0%; total backlog increased 18.1% year over year to $11.2 billion. Funded backlog was $2.45 billion, unfunded backlog $2.96 billion and priced options $5.80 billion.
- Operating margin improved as contract mix shifted toward fixed-price work, subcontractor fees increased, and amortization and incentive and stock-based compensation costs declined. These benefits were partly offset by higher business-development costs and delays deploying staff amid the government’s fiscal 2011 budget process.
- Interest expense declined to $12.3 million from $40.4 million, mainly following repayment of mezzanine debt and refinancing at lower rates in February 2011. Net income growth therefore substantially exceeded revenue growth.
- Operating cash flow improved year over year, supported by profitability and working-capital movements. Cash taxes were reduced by about $34 million, principally through use of net operating losses; management expected cash taxes to rise during the rest of fiscal 2012 as Section 382 limits apply.
- Revenue mix shifted year over year: cost-reimbursable 53% versus 51%, time-and-materials 32% versus 36%, and fixed-price 15% versus 13%.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cited government budget constraints, delayed appropriations, spending changes, insourcing, competitive pressure and contract award or funding delays as risks. Backlog is not guaranteed revenue: unfunded work and priced options depend on future funding and client action.
- On July 29, 2011, the company completed the sale of its state and local transportation consulting business for $28.5 million in cash, subject to adjustments. It expected to recognize a gain in fiscal 2012’s second quarter, subject to final purchase-price allocation.
- The company reported a July 2011 illegal attack involving files posted online from a government-agency learning system. It was investigating and working on remediation; management did not expect net remediation costs, after anticipated insurance, to materially affect results based on information then available.
- The non-compete agreement with Booz & Company expired July 31, 2011. The company said it could pursue commercial and international markets, including financial services, healthcare, energy and the Middle East.
- Potential refunds to customers related to post-fiscal-2006 contract-cost audits were accrued at $106.6 million at June 30, up from $100.2 million at March 31. Management said it had reserved adequately for known government-contract matters.
- Seven remaining lawsuits brought by former officers and stockholders alleged approximately $348.7 million in damages, including $291.5 million sought to be trebled under RICO, plus other damages and costs. Management did not expect the cases to have a material adverse effect, while acknowledging uncertain outcomes. Separate ordinary-course matters seek damages up to $26.2 million or unspecified amounts.
- The company remained contingently liable for certain leases assigned to Booz & Company, with maximum undiscounted future payments of $44.5 million; no liability was recorded because payment was not considered likely. The IRS was appealing proposed research-credit adjustments; management did not anticipate a material financial-position impact.
Important facts for investors to verify
- Whether funded backlog converts to revenue on schedule, and whether government appropriations, contract awards and option exercises support the reported backlog.
- Whether staff hiring, retention and deployment sustain growth, and whether the shift toward fixed-price contracts improves margins without adding material cost-overrun risk.
- Whether operating cash flow remains strong as cash taxes rise and working-capital needs change.
- Debt repayment, covenant headroom and the company’s ability to service secured borrowings under potential government-spending pressure.
- Developments in contract-cost audits, the former-stockholder litigation, the cybersecurity incident and the transportation-business sale gain.