Booz Allen Hamilton Holding Corp quarterly report, Q1 FY2017

Booz Allen Hamilton Holding Corporation — Form 10-Q

Reporting period: First quarter of fiscal 2017, the three months ended June 30, 2016. Comparisons are with the three months ended June 30, 2015 unless stated otherwise. The company provides management, technology, consulting, and engineering services; approximately 98% of quarterly revenue came from contracts whose end client was a U.S. government agency or department.

Financial performance and liquidity

Metric	Q1 FY2017	Q1 FY2016	Change
Revenue	$1,422.7 million	$1,351.6 million	+5.3%
Operating income	$129.3 million	$126.1 million	+2.5%
Operating margin	9.1%	9.3%	Down 20 basis points
Net income	$67.8 million	$64.3 million	+5.5%
Diluted EPS	$0.45	$0.43	+$0.02
Operating cash flow	$11.6 million	$19.1 million	Down 39.0%
Free cash flow	$5.5 million	$6.0 million	Lower year over year

• Billable expenses rose 14.2%, faster than revenue, reflecting increased subcontractor use and more contracts requiring client expenses. Cost of revenue rose 2.2%; G&A rose 0.6%.
• Cash and cash equivalents were $180.0 million at June 30. Debt was $1,608.3 million, compared with $1,597.3 million at March 31. The company reported $438.3 million of available revolver capacity.
• Accounts receivable, including billed and unbilled amounts, was $1,020.4 million. DSO increased to 65 days from 60 at March 31; management attributed weaker operating cash flow mainly to higher receivables.
• Current assets were $1,210.2 million and current liabilities $895.4 million. The quarterly dividend declared per share was $0.15, up from $0.13 a year earlier.

Material changes and management commentary

• Management attributed revenue growth to improved client-staff billability and increased client demand. Operating income also benefited from more efficient management of indirect spending, but the operating margin declined as billable expenses grew more quickly.
• Total backlog reached $12.016 billion at June 30, up 29.8% from $9.258 billion a year earlier: funded backlog was $2.639 billion, unfunded backlog $2.873 billion, and priced options $6.504 billion. Backlog is not guaranteed revenue and depends on funding, awards, staffing, and option exercise.
• Contract mix shifted year over year: cost-reimbursable contracts were 49% of revenue versus 55%; time-and-materials were 27% versus 24%; fixed-price were 24% versus 21%.
• On July 13, 2016, the company amended its credit agreement, borrowing about $441 million under Term Loan A to partially prepay Term Loan B. The amendment reduced borrowing spreads, extended Term Loan A and revolver maturities to June 2021 and Term Loan B maturity to June 2023, and increased covenant flexibility. Management expected $5 million to $10 million of interest savings in fiscal 2017, subject to LIBOR movements.
• The amendment is expected to result in approximately $6 million of accelerated debt-cost and discount amortization in the September 2016 quarter, reported in other expense, and approximately $3 million of non-deferrable third-party debt costs and creditor fees in G&A.
• Management said cash from operations, existing cash, and revolver capacity should meet anticipated cash requirements for the next 12 months. No specific revenue or earnings forecast was provided in the filing.

Risks, contingencies, and unusual items

• The business is highly exposed to U.S. government budgets, appropriations, procurement timing, contract competition, and potential spending reductions or insourcing. Government contract audits and investigations may lead to disallowed costs, repayment demands, penalties, payment withholding, suspension, or debarment.
• The company recorded a $192.0 million liability for its current best estimate of potential refunds or adjustments from government contract audits and reviews, up from $189.9 million at March 31.
• Four remaining lawsuits related to the 2008 acquisition seek approximately $291.7 million in alleged damages, potentially trebled under RICO, plus punitive damages, costs, and fees. Management did not expect the matters to materially adversely affect financial condition or results, but outcomes are uncertain.
• Other unusual items included a $0.8 million fair-value loss on contingent acquisition consideration. The liability was estimated at $0.8 million at June 30, with payments potentially up to $9 million if specified 2016 and 2017 performance thresholds are met.
• The company was in compliance with its financial covenants at June 30. Its loans are secured by substantially all company assets. Management was still assessing the impact and transition method for the new revenue-recognition standard, effective for the company beginning April 1, 2018.

Important facts for investors to verify

• Whether backlog converts to funded, staffed work and revenue, particularly given government budget and procurement uncertainty.
• Whether receivables, DSO, and operating cash flow improve after the quarter’s cash-flow decline.
• The impact of the July debt refinancing on actual interest expense, covenant headroom, and leverage, alongside the disclosed expected savings and one-time costs.
• Developments in government audits and the adequacy of the $192.0 million cost-disallowance reserve.
• Progress and potential exposure in the acquisition-related lawsuits, and any material change in the contingent consideration estimate.