Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018 (fiscal 2019 Q2). Comparisons are with the corresponding 2017 periods. The company provides consulting, technology, engineering, analytics, digital, mission operations, and cyber services; approximately 97% of six-month revenue was attributable to U.S. government end users.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $1,614.0 million, up 4.6% year over year | $3,260.8 million, up 6.4% |
| Operating income / margin | $143.8 million / 8.9%; prior year 8.6% | $305.4 million / 9.4%; prior year 8.5% |
| Net income | $92.7 million, up 25.9% | $196.9 million, up 36.5% |
| Diluted EPS | $0.64; prior year $0.49 | $1.36; prior year $0.96 |
| Adjusted EBITDA margin on revenue (non-GAAP) | 10.2%; prior year 9.7% | 10.5%; prior year 9.5% |
For the quarter, management attributed revenue growth to stronger client demand, increased consulting headcount and labor, and improved contract performance. Operating income growth also reflected strong operating performance. The effective tax rate fell to 22.7% from 33.4% for the quarter, mainly because of the 2017 Tax Act’s lower federal corporate rate. The six-month effective rate was 23.5%, compared with 33.6%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $274.6 million, compared with $178.1 million in the prior-year period. Capital expenditures were $39.7 million; company-defined free cash flow was $234.9 million, versus $141.1 million.
- At September 30, cash was $342.6 million and total debt was $1,786.8 million, versus $287.0 million and $1,818.6 million, respectively, at March 31. The revolving facility had no balance outstanding and $499.0 million of borrowing capacity was available.
- Six-month financing cash outflows included $98.4 million of share repurchases, $54.7 million of dividends, and $101.6 million of debt repayments; debt issuance proceeds were $62.1 million. The quarterly dividend was increased to $0.19 per share from $0.17.
- Accounts receivable, net, was $1,165.3 million; DSO was 70 days, up from 66 days at March 31, primarily due to billing and collection delays. Management said cash, operating cash flow, and revolving capacity should meet anticipated requirements for the next 12 months.
Business trends and material changes
- Total backlog reached $21.4 billion at September 30, up 28.1% year over year; funded backlog was $4.2 billion, up from $3.6 billion. Remaining performance obligations were $7.8 billion; the company expects to recognize more than half within 12 months and about three quarters within 24 months. Backlog is not a guarantee of future revenue and includes unfunded work and options.
- Headcount was approximately 25,300, up about 1,100 year over year. Cost of revenue rose 7.4% in the quarter, faster than revenue, largely reflecting higher compensation and headcount; billable expenses declined 1.1% as subcontractor use fell.
- The company amended its credit agreement in July: Term Loan A and revolving facility maturities were extended to July 2023, Term Loan A and revolving spreads were reduced, and a $400 million delayed-draw facility was added. The company reported compliance with its financial covenants.
- ASC 606 revenue recognition and ASU 2017-07 benefit-cost presentation were adopted retrospectively. The filing reports a cumulative $7.9 million increase to retained earnings from ASC 606 as of April 1, 2018.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management cited continuing demand, increased headcount, improved contract performance, and record second-quarter funded and total backlog. It cautioned that backlog conversion and results depend on funding, task-order awards, staffing, and contract performance.
- Key business risks include U.S. government budget and appropriation delays, possible spending reductions, competition and insourcing, contract-award timing, the ability to recruit and retain cleared talent, and government audits and investigations. The company expects federal spending caps to return in fiscal 2020 absent another budget agreement.
- The DOJ is conducting a civil and criminal investigation into certain government cost-accounting and indirect-cost charging practices; the SEC has also notified the company of an investigation believed related to the same matters. The company is cooperating but cannot reasonably estimate potential costs or losses and expects additional legal costs. Some current-period legal costs were offset by insurance reimbursements.
- The company recorded $179.9 million of liabilities for estimated potential government contract-cost audit adjustments, up from $168.6 million at March 31. Management says it believes the provision is appropriate. Other disclosed litigation includes a revived former-stockholder securities claim; damages are unknown. Management does not expect currently ongoing matters to materially affect results, but outcomes remain uncertain.
- A preliminary tax estimate indicates an approximately $28.9 million reduction in income tax expense in fiscal 2019 from an IRS-approved accounting-method change received after quarter-end; the filing says the related effect will be recorded in fiscal Q3. Tax Act assessments remain subject to refinement.
- The company expects adoption of the new lease standard in fiscal 2020 to add operating-lease right-of-use assets and liabilities to the balance sheet, potentially significantly; it does not anticipate a significant change in operating-lease expense recognition.
Important facts for investors to verify
- Whether revenue and backlog growth convert into funded work, billable staffing, and cash collection; monitor DSO and receivables.
- Updates on the DOJ and SEC investigations, related legal expenses and insurance recoveries, government audit reserves, and any potential payment or contracting consequences.
- Progress and final accounting treatment for the estimated $28.9 million tax benefit, as well as remaining Tax Act measurement-period assessments.
- Debt, interest expense, use of the delayed-draw and revolving facilities, covenant compliance, and the company’s capital returns relative to cash generation.
- Effects of federal budget decisions and the expected fiscal 2020 spending-cap environment on contract awards and backlog conversion.