Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Business and period: This filing covers the three and six months ended September 30, 2014, the second quarter and first half of fiscal 2015. Booz Allen provides consulting, technology, and engineering services, primarily to U.S. government customers; approximately 98% of revenue came from U.S. government contracts or government contractors. The company reported one operating segment and approximately 22,100 employees.
Financial performance
| Metric | Three months ended September 30, 2014 | Six months ended September 30, 2014 |
|---|---|---|
| Revenue | $1.305 billion; down 5.3% year over year | $2.627 billion; down 6.4% |
| Operating income / margin | $122.0 million / 9.3%, versus $135.7 million / 9.8% | $261.0 million / 9.9%, versus $274.3 million / 9.8% |
| Net income | $65.3 million; down 3.7% | $136.4 million; down 1.3% |
| Diluted EPS | $0.42, versus $0.45 | $0.89, versus $0.93 |
| Adjusted diluted EPS (non-GAAP) | $0.44, versus $0.47 | $0.94, versus $0.97 |
| Operating cash flow | $108.8 million | $200.5 million, versus $139.6 million |
| Free cash flow (non-GAAP) | $102.5 million | $191.6 million, versus $132.9 million |
For the six months, capital expenditures were $8.9 million. Cash declined $18.2 million to $241.8 million, as financing outflows—particularly dividends and debt repayments—exceeded operating cash generation.
Balance sheet and liquidity
- At September 30, 2014, total debt was $1.646 billion, including $46.7 million classified as current; cash was $241.8 million, implying net debt of approximately $1.404 billion.
- The company had no revolving-credit borrowings outstanding at quarter-end and reported compliance with debt covenants. Its amended facilities included a $500 million revolver, Term Loan A maturing May 2019, and Term Loan B maturing July 2019.
- Management stated that cash, expected operating cash flow, and available revolver capacity should cover anticipated needs for the next 12 months. Debt is secured by substantially all company assets.
- Cash dividends paid in the first half totaled $179.5 million, including a $1.00-per-share special dividend, plus $46.8 million of dividend equivalents paid to option holders. A regular quarterly dividend of $0.11 per share was announced for payment in November 2014.
Changes and operating trends
- Management attributed lower revenue primarily to federal spending pressures and the lingering effects of slower contract awards after the prior October’s government shutdown. Reduced consulting headcount—approximately 22,100 versus 23,200 a year earlier—and fewer billable hours contributed; subcontractor and other billable expenses also fell.
- Despite declining revenue, management cited high consulting-staff productivity and disciplined indirect-cost management. First-half operating margin improved slightly year over year, while second-quarter margin fell.
- Cost of revenue and billable expenses declined, but general and administrative expense increased as a share of revenue. Interest expense fell year over year, reflecting prior debt repricing. Effective tax rates were 37.8% for the quarter and 39.1% for the first half, helped by state tax credits.
- Total backlog was $10.9 billion at September 30, down 6.5% year over year. Funded backlog was $3.337 billion, compared with $3.220 billion a year earlier; unfunded backlog was $2.844 billion and priced options were $4.711 billion. Additions to funded backlog over the prior 12 months were $5.4 billion, unchanged from the comparable period.
- In May 2014, the company amended its credit agreement, including extending Term Loan A and revolver maturities and revising covenants. It paid approximately $168.4 million of Term Loan B principal as part of the amendment.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management reported seasonally strong award activity and higher proposal volume, with funded and unfunded backlog growth at the close of the U.S. government fiscal year, while emphasizing ongoing federal budget and demand challenges.
- Key risks include government budget reductions, sequestration, delayed appropriations and awards, contract competition and protests, insourcing, staffing and clearance constraints, contract-cost recoverability, cybersecurity incidents, and government audits or investigations. Backlog may not be funded or converted to revenue on schedule.
- The company recorded a $196.3 million liability for its current estimate of potential refunds arising from government reviews and audits of contract costs incurred after fiscal 2007. It disclosed pending government audits and investigations, including matters involving labor time reporting, procurement integrity, and classified-information access.
- Six remaining lawsuits brought by former officers and stockholders seek approximately $348.7 million in alleged damages, including $291.5 million sought to be trebled under RICO, plus other amounts. Management did not expect the cases to materially affect financial condition or results; no material accrual was recorded.
- Potential contingent liability under two leases assigned to Strategy& was up to $11.9 million of undiscounted future payments; no amount was recorded. Management also disclosed that the new revenue-recognition standard will apply beginning fiscal 2018 and that its financial impact was still being assessed.
- Two nonmaterial acquisitions in healthcare informatics and services for the Centers for Medicare and Medicaid Services were agreed to in October 2014, after quarter-end.
Important facts for investors to verify
- Whether federal award activity and the reported backlog translate into funded work and revenue, particularly given the 6.5% year-over-year reduction in total backlog.
- Whether margin performance can be sustained as revenue and consulting headcount change, and as bid-and-proposal spending and government contract mix evolve.
- The status and potential financial impact of government audits, the $196.3 million contract-cost reserve, and the former-stockholder litigation.
- Debt repayment capacity and covenant headroom, while considering the substantial dividend and dividend-equivalent distributions and the company’s secured debt.
- The cash-flow comparison: first-half operating cash flow improved, but the filing attributes much of the increase to collections and timing factors; assess whether that level is repeatable.