Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2022 ended September 30, 2021. Unless otherwise stated, dollar amounts are in millions. The company provides consulting, technology, analytics, engineering, mission and cyber services; approximately 98% of revenue came from U.S. government-related contracts in the period.
Financial performance
| Metric | Three months ended Sept. 30, 2021 | Year-over-year change | Six months ended Sept. 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $2,106.0 | +4.3% | $4,095.1 | +3.0% |
| Operating income | $218.4 | +5.4% | $359.6 | -9.9% |
| Operating margin | 10.4% | 10.3% prior year | 8.8% | 10.0% prior year |
| Net income | $154.8 | +13.8% | $246.9 | -7.0% |
| Diluted EPS | $1.14 | $0.98 prior year | $1.81 | $1.90 prior year |
| Adjusted EBITDA (non-GAAP) | $269.6 | $228.4 prior year | $507.8 | $441.4 prior year |
Quarterly revenue growth reflected operating performance and approximately $90 million of acquisition revenue, partly offset by unusually high staff utilization in the prior-year quarter. Six-month acquisition revenue was approximately $106 million. The six-month operating-income decline included $80.5 million of acquisition costs; acquired-intangible amortization also increased. Management’s adjusted measures exclude specified items and should be considered alongside GAAP results.
- Costs and mix: Fixed-price contracts rose to 23% of quarterly revenue from 19% a year earlier; cost-reimbursable contracts were 53% and time-and-materials 24%. Fixed-price work can offer higher margins but exposes the company to cost overruns.
- Cash flow: Six-month operating cash flow was $459.7 million, down from $566.0 million. Free cash flow, as defined by the company (operating cash flow less capital expenditures), was $430.1 million versus $527.9 million. Investing cash outflow was $811.3 million, principally reflecting acquisitions.
- Liquidity and debt: Cash was $788.7 million at September 30, versus $991.0 million at March 31. Total debt was $2,832.5 million, up from $2,356.6 million; the revolving facility had no outstanding balance and approximately $999.1 million of available capacity. The company reported compliance with debt covenants. Management expects cash, operating cash flow and revolving availability to cover anticipated needs for the next 12 months.
- Capital returns: The company paid $101.9 million in dividends and repurchased 2.4 million shares for $203.7 million in the first half. Remaining authorization was approximately $387.8 million at September 30. A quarterly dividend of $0.37 per share was announced after quarter-end.
Material changes and business developments
- The company acquired Liberty IT Solutions in June for approximately $669.1 million and acquired the remaining 60% of Tracepoint in September for approximately $120.0 million. The acquisitions expand digital transformation and cybersecurity capabilities. Preliminary purchase accounting recorded $399.5 million of acquired intangible assets and $441.7 million of goodwill; allocations remained subject to finalization.
- Remaining performance obligations were $8.1 billion, compared with $6.7 billion at March 31, 2021. Management expects to recognize approximately 70% within 12 months and 85% within 24 months. Total backlog was $29.0 billion, up 18% year over year, including approximately $2.1 billion acquired backlog. Backlog is not guaranteed revenue and includes unfunded work and options.
- The company issued $500 million of 4.00% senior notes due 2029 to help fund Liberty and related costs. Its credit agreement was amended, including extending the Term Loan A and revolving facility maturity to June 2026 and increasing revolving commitments to $1.0 billion.
- Cash declined during the half as acquisition spending, repurchases and dividends exceeded operating cash generation and financing inflows. Receivables increased to $1,511.6 million from $1,411.9 million at March 31.
Outlook, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management stated that available cash, operating cash flow and revolving credit capacity should meet expected requirements for the next 12 months. Backlog conversion depends on funding, contract awards, program timing and staffing.
- Government exposure: Dependence on U.S. government spending exposes results to appropriations delays, shutdowns, budget reductions, changing priorities, contract protests, insourcing and funding uncertainty. The company also faces competition for employees with specialized skills and security clearances.
- COVID-19 and workforce: The company cited possible impacts from ongoing pandemic conditions and its policy requiring employee vaccination, subject to medical or religious exemptions. It warned that the policy could affect staffing, contract performance and new business.
- Legal and audit matters: The DOJ closed its criminal investigation in May 2021, but related civil/regulatory matters and an SEC investigation were still described as ongoing; management could not estimate their ultimate costs or losses and expects additional legal costs. The company also disclosed pending government audits and investigations, including matters involving labor time reporting, procurement integrity and classified-information access.
- Tax contingency: The company is appealing a District of Columbia tax ruling. It paid $8.6 million under protest and recorded it as a long-term tax receivable. An adverse final resolution of the DC and similar tax positions for fiscal 2013–2020 could result in estimated tax expense of $40.2–$55.0 million, net of federal benefits. The IRS selected fiscal years 2016, 2017 and 2019 for examination.
- Other contingencies: The company recorded $276.9 million for estimated adjustments to claimed indirect costs. It said currently known audits, investigations and litigation were not expected to have a material adverse effect, while noting outcomes are uncertain and some losses cannot be estimated.
Important facts for investors to verify
- Whether acquired businesses deliver expected growth and integration benefits, and how final purchase-price allocations affect goodwill and amortization.
- Whether operating cash flow and margins recover, given lower first-half cash generation, acquisition costs and increased debt and interest expense.
- How much reported backlog is funded and converts to revenue on schedule; the filing’s remaining-performance-obligation and total-backlog figures measure different things.
- Developments and potential financial exposure from the DOJ-related civil/regulatory matters, government contract audits, and DC and IRS tax disputes.
- Effects of federal budget and funding decisions, COVID-19 and vaccination requirements, and the availability and retention of qualified cleared personnel.