Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended June 30, 2017, the first quarter of fiscal 2018, compared with the three months ended June 30, 2016. Booz Allen provides consulting, engineering, analytics, digital, mission-operations and cybersecurity services. It reported one operating segment, approximately 23,400 employees, and substantial dependence on U.S. government work: about 97% of quarterly revenue was from contracts whose end user was a U.S. government agency or department.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,493.6 million | $1,422.7 million | +5.0% |
| Revenue excluding billable expenses (non-GAAP) | $1,041.9 million | $990.5 million | +5.2% |
| Operating income | $139.5 million | $129.3 million | +7.9% |
| Operating margin | 9.3% | 9.1% | +0.2 percentage points |
| Net income | $79.5 million | $67.8 million | +17.3% |
| Diluted EPS | $0.53 | $0.45 | Up $0.08 |
| Adjusted EBITDA margin (non-GAAP) | 10.4% | 10.1% | +0.3 percentage points |
| Operating cash flow | $4.0 million | $11.6 million | Down 65.7% |
| Free cash flow (non-GAAP) | $(7.5) million | $5.5 million | Declined |
Cost of revenue rose 6.3%, faster than revenue, while general and administrative expense declined 0.7%. The company attributed operating-income improvement to stronger demand, increased headcount and direct-labor productivity, lower spending, and G&A cost control. The effective tax rate fell to 34.5% from 40.2%, primarily reflecting a $6.9 million discrete excess tax benefit from adoption of new share-based-payment accounting guidance; this helped lift net income and may make the tax rate variable across periods.
Cash and cash equivalents were $337.5 million at June 30, up from $217.4 million at March 31, 2017. Total debt was $1.862 billion, compared with $1.663 billion at March 31. Current assets were $1.507 billion and current liabilities $945.3 million. The company had no revolver borrowings at quarter-end and reported $498.8 million of available revolver capacity. It was in compliance with debt covenants.
Operating cash flow was pressured by higher receivables and a $13.6 million one-time tax payment related to the Aquilent acquisition, as well as collection delays. Capital expenditures were $11.5 million, versus $6.2 million a year earlier. Accounts-receivable days sales outstanding increased to 69 from 60 at March 31, 2017.
Material changes and notable items
- Revenue growth reflected client demand, increased staff headcount and direct-client labor productivity, partly offset by lower spending on certain contracts. Headcount was approximately 23,400, versus 22,500 a year earlier.
- Total backlog rose 17.1% year over year to $14.069 billion. Funded backlog was $2.517 billion, unfunded backlog $3.243 billion, and priced options $8.309 billion. Management cautioned that backlog is not a guarantee of future revenue.
- In April 2017, Booz Allen Hamilton Inc. issued $350 million of 5.125% senior notes due 2025. Proceeds helped repay revolver borrowings; remaining proceeds were intended for working capital and general corporate purposes, potentially including repayment of deferred payment obligations. The secured term loans were variable-rate debt; the company entered into $450 million of interest-rate swaps beginning in April 2018.
- The company repurchased about 970,000 shares for $33.9 million in the quarter and paid $25.4 million in dividends. The quarterly dividend was $0.17 per share, and the filing reports a subsequent declaration of the same amount for payment on August 31, 2017.
- The January 2017 Aquilent acquisition remained subject to preliminary purchase-price allocation estimates. It included $69 million of customer-relationship intangibles and $199.8 million of goodwill; the company continued to assess valuation and tax-related assumptions.
Outlook, risks and contingencies
Management expected cash from operations, existing cash and revolver capacity to meet anticipated requirements for the next 12 months, including operating costs, working capital, capital spending and debt service. The filing gives no specific earnings or revenue guidance. Management highlighted uncertainty around federal budgets, appropriations, contract awards and spending patterns; competition and contract mix; hiring and retention of cleared staff; and the ability to convert backlog into funded work and revenue. Because about 97% of revenue was tied to U.S. government end users, budget reductions, shutdowns, delayed funding, audits or changes in agency priorities could materially affect results.
On June 7, 2017, the company was notified that the Department of Justice was conducting a civil and criminal investigation into certain cost-accounting and indirect-cost-charging practices on U.S. government work. The company said it was cooperating, but could not estimate the investigation’s cost or potential loss. A putative securities class action filed in June alleged misrepresentations concerning the company’s business, results and government-contract compliance; the company said it intended to defend itself and could not estimate potential loss. The company also disclosed a $178.3 million liability for estimated potential government-contract cost adjustments and refunds. It stated that other ongoing litigation and reviews were not expected to have a material adverse effect, while acknowledging uncertain outcomes.
The filing also describes a $241.7 million alleged-damages figure, largely subject to a claim for trebling, in former-stockholder litigation. A July 13, 2017 appellate ruling affirmed dismissal except for one plaintiff’s securities-fraud claim, which was remanded for an opportunity to amend; the remaining claim’s damages were unknown as of August 3, 2017.
Important facts for investors to verify
- Updates, scope and potential financial impact of the DOJ investigation, the securities class action and related government audits.
- Whether receivables and DSO improve as billing and collections catch up, and whether operating cash flow recovers.
- How much of unfunded backlog and priced options is funded, exercised and ultimately converted to revenue.
- The durability of earnings growth apart from the $6.9 million tax benefit, and the effect of future share-based-payment tax items.
- Debt, variable-rate exposure, swap coverage and planned use of senior-note proceeds, including any deferred-payment-obligation repayment.
- Final Aquilent purchase-accounting and tax-reserve estimates, and the adequacy of the $178.3 million government-contract reserve.