Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 30, 2017 (fiscal 2018). The company provides consulting, technology, engineering, analytics, digital, mission operations, and cybersecurity services; approximately 97% of revenue came from contracts with U.S. government end users.
Financial performance and position
- Revenue: Second-quarter revenue was $1.542 billion, up 10.6% year over year; six-month revenue was $3.036 billion, up 7.7%. Management attributed growth primarily to client demand, higher staff levels and billable expenses. Revenue excluding billable expenses, a non-GAAP measure, rose 7.5% to $1.059 billion in the quarter and 6.3% to $2.100 billion for six months.
- Profit and margins: Second-quarter operating income rose 7.5% to $126.5 million, while operating margin declined to 8.2% from 8.4%. Six-month operating income rose 7.7% to $266.0 million, with margin steady at 8.8%. Net income increased 12.9% to $70.9 million for the quarter and 15.2% to $150.5 million for six months. Diluted EPS was $0.47 and $1.00, respectively.
- Cash flow: Six-month operating cash flow was $178.1 million, down 18.0% from $217.1 million, primarily because of higher cash taxes. Capital expenditures increased to $37.0 million from $15.1 million; non-GAAP free cash flow was $141.1 million versus $201.9 million. Cash and equivalents rose to $330.0 million from $217.4 million at March 31, 2017.
- Liquidity and debt: Total debt was $1.847 billion, compared with $1.663 billion at March 31; cash less reported debt was approximately $1.517 billion. The $500 million revolving facility had no borrowings at quarter-end, with $498.8 million available. The company reported compliance with its debt covenants. It expects cash, operating cash flow and revolver capacity to cover anticipated needs for the next 12 months.
- Other metrics: Accounts receivable, net, was $1.026 billion; DSO was 65 days, up from 60 days at March 31, though management said it improved four days from the prior quarter. Total backlog reached $16.685 billion, up 22.3% year over year, including $3.590 billion funded. Backlog is not guaranteed to convert to revenue.
Changes from the prior comparable period
- Quarterly revenue and net income grew, but operating margin narrowed as billable expenses grew 17.9%, faster than revenue growth of 10.6%; subcontractor use and client-billed expenses increased.
- Interest expense rose 42.1% for the quarter and 21.9% for six months, primarily reflecting the April 2017 issuance of $350 million of 5.125% senior notes due 2025.
- The effective tax rate fell to 33.2% for the quarter and 33.9% for six months, from 35.7% and 38.1%, respectively. The reduction primarily reflected newly recognized excess stock-award tax benefits ($2.4 million in the quarter; $9.3 million year to date), which may cause period-to-period tax-rate volatility.
- During the six months, the company repurchased 4.5 million shares for $154.0 million and paid $50.9 million in dividends. The board subsequently increased repurchase authorization to $610 million; approximately $301.4 million remained available as of November 2, 2017. The declared quarterly dividend was $0.17 per share.
Outlook, risks and unusual items
- The filing gives no quantified revenue or earnings guidance. Management cited strong client demand, increased headcount and record backlog, and expected temporary delays at one customer payment center to be mitigated by fiscal year-end 2018.
- Government budget reductions, delayed appropriations, shutdowns, changing agency priorities, contract competition and the ability to recruit and deploy cleared staff could affect awards, funding, margins and backlog conversion.
- The DOJ informed the company in June 2017 of a civil and criminal investigation into certain government cost-accounting and indirect-cost charging practices. The SEC also notified the company of an investigation believed related to the same matters. The company is cooperating but cannot estimate potential costs or losses; it incurred incremental legal costs and expects additional costs.
- A putative securities class action alleges misrepresentations relating to the matters under investigation. The company intends to defend the suit; potential costs or losses cannot currently be estimated. The filing also reports other government audits and investigations.
- The company recorded approximately $170.8 million for potential customer refunds related to government contract-cost audits and reviews. Management stated it believes the provision is appropriate. A separate $10.8 million District of Columbia tax assessment is being contested; no reserve was recorded, and management did not expect a material adverse effect.
- Interest-rate swaps with $450 million aggregate notional value hedge part of the variable-rate debt exposure. The company also reported that adoption of the forthcoming revenue-recognition standard was expected to have limited recognition effects overall, while certain contract-option, legally enforceable contract and upfront-material arrangements could change timing or presentation.
Important facts for investors to verify
- Developments, potential exposure and legal costs associated with the DOJ and SEC investigations and the related securities class action.
- Whether the $170.8 million government contract-cost reserve remains adequate as audits and reviews progress.
- Conversion of the $16.685 billion backlog into funded work and revenue, particularly unfunded backlog and priced options.
- Cash collection trends, DSO and operating cash flow following higher tax payments and payment-center delays.
- Debt, interest expense and capital returns, including the effect of repurchases and dividends on liquidity and leverage.