Booz Allen Hamilton Holding Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019 (fiscal 2020 second quarter). Comparisons are with the corresponding 2018 periods unless noted. Amounts are in U.S. dollars.
Business context
Booz Allen provides consulting, analytics, digital, engineering, mission operations, and cybersecurity services. It reported one operating segment and approximately 27,000 employees. U.S. government customers generated 97% of revenue for both the quarter and six-month period; defense, intelligence, and civil agencies accounted for 47%, 22%, and 28% of quarterly revenue, respectively.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $1.820 billion; up 12.7% | $3.645 billion; up 11.8% |
| Operating income | $172.0 million; up 19.7% | $351.1 million; up 15.0% |
| Operating margin | 9.5%, versus 8.9% | 9.6%, versus 9.4% |
| Net income | $114.3 million; up 23.3% | $231.7 million; up 17.7% |
| Diluted EPS | $0.80, versus $0.64 | $1.63, versus $1.36 |
Quarterly growth reflected client demand, higher headcount, an extra workday, and higher billable expenses. Management also cited improved contract performance. Quarterly cost of revenue rose in line with revenue; general and administrative expense grew more slowly than revenue. For the six-month period, cost of revenue as a percentage of revenue fell to 46.2% from 47.1%, while billable expenses rose to 29.9% from 29.3%.
Non-GAAP measures: Adjusted EBITDA was $191.7 million for the quarter, with a 10.5% margin on revenue, versus $163.8 million and 10.2%. For six months, it was $390.7 million, with a 10.7% margin, versus $341.6 million and 10.5%. These are company-defined measures and should be considered alongside GAAP results.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $266.7 million, down 2.9% from $274.6 million. Management attributed the decrease mainly to payment timing and higher income tax payments.
- Capital expenditures were $60.0 million, versus $39.7 million. Company-defined free cash flow was $206.7 million, versus $234.9 million.
- Cash was $781.5 million at September 30, up from $284.0 million at March 31. The increase included $400 million drawn under the delayed-draw term loan facility in April.
- Total debt was $2.123 billion, up from $1.760 billion at March 31. The company had $499 million of available revolving-credit capacity and no revolving borrowings. Debt maturities were in 2023 for the term loans and 2025 for $350 million of 5.125% senior notes. The company reported compliance with debt covenants.
- Current assets were $2.163 billion and current liabilities $1.211 billion. The company said cash, operating cash flow, and revolver capacity should meet anticipated cash needs over the next 12 months.
Backlog, outlook, and material changes
- Total backlog reached $22.9 billion at September 30, up 7.2% year over year and described by management as a second-quarter record. It included $4.4 billion funded, $5.4 billion unfunded, and $13.2 billion in priced options. Backlog is not a guarantee of future revenue.
- Remaining performance obligations were $7.6 billion; management expected more than half to be recognized within 12 months and about three quarters within 24 months.
- No quantified revenue or earnings guidance was provided in the supplied filing text. Management expected fiscal 2020 capital expenditures to increase from fiscal 2019.
- Headcount rose by about 1,600 year over year to approximately 27,000. U.S. government revenue concentration remained high, and contract funding depends on government appropriations and task-order awards.
- Effective April 1, 2019, the company adopted the new lease accounting standard. At September 30 it reported $250.8 million of operating lease right-of-use assets and $315.7 million of lease liabilities; prior-year balance-sheet figures were not recast.
- A $0.27-per-share quarterly dividend was announced November 1, payable December 2, 2019. The company had $652.3 million remaining under its share-repurchase authorization at September 30.
Risks, contingencies, and unusual items
- The DOJ was conducting a civil and criminal investigation, and the SEC had notified the company of an investigation it believed related to the same matters, involving government cost accounting and indirect-cost charging. The company was cooperating but could not reasonably estimate potential costs or losses; it expected additional legal costs. Some current-period legal costs were offset by insurance reimbursements.
- The company recorded $207.9 million for estimated potential refunds or adjustments related to government contract-cost audits, up from $195.3 million at March 31. It also disclosed pending audits and investigations involving labor time reporting, procurement integrity, and classified-information access.
- The company contested District of Columbia tax assessments of approximately $11.4 million and reported similar positions totaling $33.5 million for later years; it maintained no reserves for those contested positions. It stated it did not expect resolution to materially adversely affect results, cash flows, or financial condition.
- Other risks include federal budget delays or cuts, contract award and funding uncertainty, competition, staffing and security-clearance needs, fixed-price cost overruns, and potential consequences of government audits or investigations. Management stated ongoing proceedings were not expected to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether funded backlog and remaining performance obligations convert into revenue on the expected schedule, given appropriations and task-order risks.
- Developments, potential costs, insurance recoveries, and financial consequences of the DOJ and SEC investigations and related litigation.
- Whether cash generation remains adequate as debt rose following the $400 million draw and capital expenditures increased.
- Changes in government audit reserves, contract profitability estimates, and the resolution of contested tax positions.
- The continuing effect of lease-accounting adoption and the company’s government-customer concentration on comparability and risk.