Booz Allen Hamilton Holding Corporation — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2011. The company provides management and technology consulting, primarily to U.S. government clients; approximately 98% of revenue came from U.S. government agencies or their contractors.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Year-over-year change | Nine months ended Dec. 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,442.7 million | Up 3.9% | $4,318.6 million | Up 5.4% |
| Operating income | $98.2 million | Up 30.7% | $290.0 million | Up 23.0% |
| Operating margin | 6.8% | Up 140 basis points | 6.7% | Up 96 basis points |
| Net income | $62.9 million | Up 165.9% | $189.3 million | Up 184.2% |
| Diluted EPS | $0.44 | Compared with $0.18 | $1.34 | Compared with $0.54 |
| Adjusted diluted EPS, non-GAAP | $0.40 | Compared with $0.27 | $1.17 | Compared with $0.86 |
- Operating-margin improvement reflected higher revenue and lower incentive compensation, stock-based compensation, and intangible amortization. Higher business-development spending and costs from delayed deployment of some staff partially offset the gains.
- Interest expense fell to $12.0 million for the quarter and $36.5 million for the nine months, chiefly following the February 2011 debt refinancing and repayment of prior debt.
- Cash from operations was $252.0 million for the nine months, down from $280.8 million. Capital expenditures were $65.6 million; company-defined free cash flow was $186.5 million, versus $219.4 million.
- Cash was $405.0 million at December 31, 2011, versus $192.6 million at March 31, 2011. Total debt was $972.7 million, down from $994.3 million; cash less debt was approximately $567.6 million net debt.
- Current assets were $1,537.7 million and current liabilities $837.5 million. The company had no revolving-credit borrowings and reported $272.7 million of available revolver capacity.
Changes, liquidity, and business indicators
- Total backlog grew 11% year over year to $12.2 billion, comprising $3.0 billion funded, $3.7 billion unfunded, and $5.5 billion of priced options. Management cautioned that backlog conversion is not assured and depends on funding, task orders, and contract performance.
- Revenue growth was primarily driven by direct consulting staff labor and improved staff deployment, including approximately 300 net additional consulting staff. Management reported strongest growth in health and finance services for civil agencies and classified intelligence work.
- Operating cash flow declined despite higher earnings, principally because cash tax payments rose. The company said its $153.6 million NOL carryforward was expected to be fully used by March 31, 2012, and forecast cash taxes in fiscal 2013 to exceed fiscal 2012 payments.
- Management said cash, operating cash flow, and available revolver capacity should cover anticipated needs for the next 12 months, including operations, capital spending, debt service, and taxes. The company was in compliance with its debt covenants; reported leverage and interest-coverage ratios were 1.68 and 12.69, respectively.
Outlook, risks, and unusual items
- No full-year revenue or earnings guidance was provided. Management cited federal budget pressure, uncertainty and delays in appropriations, shifting agency priorities, contract competition, possible insourcing, and the risk of delayed or reduced contract funding.
- After quarter-end, the company implemented a restructuring that reduced headcount by approximately 2%. It expected a $10–$14 million pretax charge in the March 2012 quarter, payable in cash, and approximately $2 million less stock-compensation expense; possible contract-cost recovery was still being evaluated. No restructuring cost was accrued at December 31.
- The board declared a $0.09-per-share cash dividend payable February 29, 2012, and said it intended to begin regular quarterly dividends, subject to future board decisions. It also authorized payment of approximately $19.4 million of accrued interest on the deferred payment obligation.
- Tax-reserve releases materially affected reported earnings: $11.1 million of federal reserves and related interest and penalties were released in the quarter after a statute of limitations expired; approximately $35.3 million of pre-acquisition tax positions were favorably settled during the nine months. A $5.9 million tax benefit also followed use of a capital-loss carryforward.
- The company recorded approximately $112.4 million for estimated refunds or adjustments related to government contract-cost audits after fiscal 2006. It said audits may lead to cost reductions or penalties.
- Seven remaining lawsuits by former officers and stockholders seek approximately $348.7 million in aggregate alleged damages, including $291.5 million sought to be trebled under RICO, plus punitive damages, costs, and fees. Management did not expect the cases to materially harm financial condition or results, but outcomes are uncertain.
- The company remained contingently liable for up to $38.6 million of undiscounted payments under certain leases assigned to Booz & Co. if that party defaults; no liability was recorded. Management also identified ordinary-course investigations, including labor time-charging matters, and warned of possible repayment, penalties, suspension, or debarment risks in government contracting.
Important facts for investors to verify
- Whether federal budget and appropriation developments support conversion of the $12.2 billion backlog into funded work and recognized revenue.
- Whether revenue growth, staff utilization, and operating-margin improvement persist as compensation and business-development costs evolve.
- Cash-tax requirements after expected exhaustion of NOL carryforwards, and the timing and extent of further uncertain-tax-position settlements.
- Debt repayment, covenant headroom, and cash use for the declared dividend, future dividends, and deferred-payment-obligation interest.
- Developments in government contract audits and investigations, the recorded $112.4 million audit-related liability, and the former-stockholder litigation.
- Actual restructuring charges, cash payments, workforce effects, and any recoveries under cost-reimbursable contracts.