Business Context and Reporting Period
Company: Booz Allen Hamilton Holding Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010 (Nine months ended)
Business Overview: A leading provider of management and technology consulting services primarily to U.S. government agencies in defense, intelligence, and civil markets. The company is an affiliate of The Carlyle Group.
Key Financial Metrics
| Metric | Nine Months Ended Dec 31, 2010 | Nine Months Ended Dec 31, 2009 |
|---|---|---|
| Revenue | $4,098.3 million | $3,770.1 million |
| Operating Income | $235.8 million | $151.0 million |
| Operating Margin | 5.75% | 4.01% |
| Net Income | $66.6 million | $20.5 million |
| Diluted EPS | $0.54 | $0.18 |
| Cash from Operations | $280.8 million | $219.4 million |
| Cash and Equivalents (Ending) | $457.8 million | $274.1 million |
| Total Debt (Gross) | $1,229.3 million | $1,568.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8.7% year-over-year, driven by new contract awards and the deployment of approximately 1,900 net additional consulting staff.
- Profitability Expansion: Operating income surged 56.1% due to improved contract mix (shift toward fixed-price contracts), reduced stock-based compensation, and lower accruals for incentive compensation.
- Debt Reduction: Total debt decreased by approximately $339 million. The company utilized proceeds from its Initial Public Offering (IPO) and cash on hand to repay $344.3 million of debt, primarily under the mezzanine credit facility.
- Capital Structure: Stockholders' equity increased by $374.9 million, largely due to $250.2 million in net proceeds from the IPO and over-allotment.
- Tax Rate: The effective tax rate dropped to 30.8% from 48.6% in the prior year, primarily due to an $11.0 million release of tax reserves related to expiring statutes of limitations.
Outlook, Commentary, and Risks
Management Commentary and Recent Events
- Refinancing Transaction: On February 3, 2011 (subsequent to the reporting period), the company completed a refinancing transaction. This included a new $1.0 billion senior secured term loan facility and a $275.0 million revolving credit facility, replacing the previous mezzanine and senior debt structures to reduce future interest expenses.
- Backlog: Total contract backlog grew 21.4% to $11.0 billion as of December 31, 2010, with funded backlog reaching $2.74 billion.
- Dividends: The company does not intend to declare or pay dividends for the foreseeable future due to restrictions in its credit agreements.
Risks and Contingencies
- Government Dependence: Approximately 98% of revenue is derived from U.S. government contracts, exposing the company to budget constraints, spending shifts, and regulatory investigations.
- Legal Proceedings: The company faces litigation from six former officers/stockholders regarding the 2008 acquisition, with aggregate alleged damages of approximately $348.7 million. Management does not expect a material adverse effect.
- Contract Audits: The company has recorded a liability of $95.3 million for potential refunds related to government contract audits.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the company's continued compliance with the new leverage and interest coverage ratios established in the February 2011 refinancing agreement.
- Backlog Realization: Monitor the conversion rate of the $3.4 billion unfunded backlog into funded revenue, given potential government budget delays.
- Contract Mix Impact: Assess the sustainability of the margin expansion driven by the shift to fixed-price contracts, which carry higher financial risk than cost-reimbursable contracts.
- Legal Exposure: Track the status of the pending litigation regarding the 2008 acquisition and any potential settlements.
- Interest Expense Volatility: Review the impact of the write-offs associated with the refinancing transaction on the Q1 2011 interest expense.