Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended September 30, 2012 (the second quarter and first half of fiscal 2013). Booz Allen provides management and technology consulting, primarily to U.S. government customers; approximately 99% of revenue came from U.S. government agencies or contractors. The company reported approximately 24,000 employees, down from 25,800 a year earlier.
Financial performance
| Metric | Three months ended Sep. 30, 2012 | Six months ended Sep. 30, 2012 |
|---|---|---|
| Revenue | $1,387.7 million; down 2.9% year over year | $2,820.1 million; down 1.9% |
| Operating income / margin | $102.0 million / 7.4%; margin up from 6.6% | $216.8 million / 7.7%; margin up from 6.7% |
| Net income | $46.1 million; down 38.8% | $108.1 million; down 14.6% |
| Diluted EPS | $0.27, versus $0.53 | $0.69, versus $0.90 |
| Operating cash flow | Not separately presented in the cash flow statement | $389.7 million, versus $177.1 million |
For the six months, capital expenditures were $14.4 million, free cash flow as defined by the company was $375.4 million, investing cash flow was negative $14.4 million, and financing cash flow was negative $370.8 million. Cash ended at $489.0 million, compared with $484.4 million at March 31, 2012. The operating cash flow improvement reflected stronger collections and lower days sales outstanding (57 days versus 65 at March 31); management noted that government payment timing was unusually favorable.
At September 30, total debt was $1,737.6 million, versus $965.4 million at March 31; cash was $489.0 million. The July refinancing established $725 million of Term Loan A, $1,025 million of Term Loan B and a $500 million revolving facility, with no revolver borrowings outstanding. Stated loan rates were 2.97% and 4.50%, respectively. The company reported compliance with financial covenants. Stockholders’ equity fell to $119.5 million from $1,185.2 million, primarily following special dividends.
Changes versus the prior comparable period
- Revenue declined, mainly because billable expenses and indirect costs allocated to cost-reimbursable work fell; modest growth in direct consulting labor partly offset this.
- Operating income and margins improved as cost controls reduced indirect and corporate spending, and stock compensation and acquired-intangible amortization declined.
- Net income fell despite higher operating income. Higher interest expense followed the refinancing, while the prior-year period benefited from releases of uncertain tax reserves; the effective tax rate was 40.0% in the quarter versus 11.9% a year earlier.
- Total backlog was $12.448 billion, down 3.2% year over year; funded backlog increased 2.3% to $3.516 billion. Consulting headcount also declined.
Capital allocation, outlook and risks
- The company declared $8.00 per share in special dividends during the first half, in addition to $0.18 per share in regular dividends. It paid approximately $1.098 billion in cash dividends and $37.7 million in dividend equivalents to option holders. A further $0.09-per-share regular dividend was declared after quarter-end.
- Management expected cash, operating cash flow and available revolver capacity to cover anticipated cash needs for the next 12 months. No quantified earnings or revenue guidance was provided.
- After quarter-end, the company agreed to acquire ARINC’s Defense Systems Engineering and Support division for approximately $154 million in cash, with closing expected in fiscal 2013’s third quarter. Expected fiscal-year transaction costs were $3.5–$4.0 million; $2.6 million had been accrued and recognized by September 30.
- Management highlighted federal budget uncertainty, potential sequestration beginning January 2, 2013, procurement delays, cost-cutting and insourcing, and competition as risks to funding and contract awards. Backlog is not guaranteed revenue and may be delayed, reduced or not funded.
- Government contract audits and investigations may result in repayments, penalties or suspension/debarment. The company recorded an estimated $143.7 million liability for potential contract-cost adjustments. Seven remaining former-officer/shareholder suits seek approximately $348.7 million in alleged damages, including amounts subject to trebling; management did not expect the matters to materially affect results, but outcomes remain uncertain.
Important facts for investors to verify
- Whether federal budget actions, including sequestration, affect contract funding, task orders and conversion of backlog into revenue.
- Whether the unusually strong collections and cash flow persist, and how working capital changes as government payment timing normalizes.
- The impact of higher debt and interest costs, refinancing terms, covenant headroom and the substantial dividend payments on financial flexibility.
- Progress, final cost and expected contribution of the ARINC DSES acquisition.
- Developments in government audits and investigations, the $143.7 million contract-cost reserve, and the former-officer/shareholder litigation.