Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Fiscal 2017 third quarter and nine months ended December 31, 2016. The company provides management, technology, consulting and engineering services; approximately 97% of revenue came from contracts whose end client was a U.S. government agency or department. It reported one operating segment and approximately 23,000 employees.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Year-over-year change | Nine months ended Dec. 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,404.6 million | +7.4% | $4,222.2 million | +6.0% |
| Operating income | $108.1 million | +2.9% | $355.1 million | +4.4% |
| Operating margin | 7.7% | Down 0.3 percentage points | 8.4% | Down 0.1 percentage points |
| Net income | $55.6 million | Down 48.6% | $186.2 million | Down 18.5% |
| Diluted EPS | $0.37 | Compared with $0.71 | $1.23 | Compared with $1.51 |
| Adjusted EBITDA margin (non-GAAP) | 8.7% | Compared with 9.3% | 9.5% | Compared with 9.7% |
Revenue growth reflected stronger client demand, increased consulting staff headcount and billability, and higher subcontractor and client-related expenses. Billable expenses grew faster than revenue: 20.6% in the quarter and 15.8% for the nine months. Operating income rose more slowly than revenue. Lower interest expense partly offset the effects of higher operating costs.
Net income comparisons were substantially affected by the prior-year release of uncertain tax-position reserves. The effective tax rate was 40.0% in the quarter and 38.7% for the nine months, versus a prior-year quarterly tax benefit and a 20.5% nine-month rate.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow: $283.0 million, versus $181.0 million. Free cash flow, as defined by the company (operating cash flow less property and equipment purchases), was $252.5 million, versus $135.2 million.
- Cash: $349.6 million at December 31, 2016, up from $187.5 million at March 31, 2016. Nine-month capital expenditures were $30.6 million.
- Debt: $1,564.0 million total debt, compared with $1,597.3 million at March 31, 2016. No revolving-credit borrowings were outstanding; $498.3 million of revolving capacity was available. Debt is secured by substantially all company assets, and the company reported compliance with its financial covenants.
- Liquidity: Management expects operating cash flow, cash on hand and revolver capacity to meet anticipated cash needs for the next 12 months. Days sales outstanding were 64 at December 31, versus 60 at March 31.
- Shareholder returns: Nine-month recurring dividends paid were $67.3 million. The quarterly dividend declared was $0.15 per share; on January 30, 2017, the company announced a $0.17 dividend. The board increased the share-repurchase authorization to $410 million on January 25, leaving approximately $300 million available under the program as of that date.
Material changes and developments
- Total backlog increased 12.0% year over year to $13.527 billion: $2.787 billion funded, $3.229 billion unfunded and $7.511 billion in priced options. The company cautions that backlog may not be realized on schedule or in full.
- A July 2016 credit amendment refinanced part of the Term Loan B with additional Term Loan A borrowings and lowered interest expense. In January 2017, management said it was exploring a possible Term Loan B repricing, subject to review and board approval, without intending to increase total debt.
- Carlyle sold its remaining shares during the quarter and held no shares at December 31, 2016; the related management agreement terminated December 6, 2016.
- On January 24, 2017, the company acquired Aquilent for approximately $250 million, subject to customary purchase-price adjustments and escrows. The purchase accounting allocation was not yet finalized in the filing.
Outlook, risks and contingencies
- The filing provides no specific financial guidance. Management cited demand-driven growth but emphasized uncertainty around federal budgets, appropriations and continuing resolutions; fiscal 2017 funding was operating under a continuing resolution set to expire April 28, 2017.
- Key risks include federal spending reductions or delayed awards, shifting agency priorities, competition and contract protests, changing contract mix, recruitment and retention of cleared staff, contract cost overruns, cybersecurity incidents, and audits or investigations of government-contract compliance.
- Government contract audits and reviews could lead to cost disallowances, repayment obligations, withheld payments, penalties, suspension or debarment. The company recorded a $197.7 million liability for its current best estimate of potential customer refunds and adjustments related to audits and reviews.
- Three remaining former-stockholder lawsuits seek approximately $241.5 million in alleged damages, potentially trebled under RICO, plus punitive damages, costs and fees. The cases were on appeal; management did not expect ongoing litigation, audits or investigations to materially adversely affect financial condition or results. No material litigation accrual was recorded.
- The company is assessing the impact of the new revenue-recognition standard, expected to be adopted April 1, 2018 using the full retrospective method.
Investor verification priorities
- Check whether the growth in funded backlog converts into funded work and revenue, given federal budget and continuing-resolution uncertainty.
- Assess whether higher billable expenses and subcontractor use continue to pressure operating margins.
- Monitor cash conversion and receivables, including the increase in DSO, as well as debt levels, interest costs and covenant headroom.
- Follow the Aquilent acquisition’s final purchase accounting, integration and contribution to results, and whether the proposed Term Loan B repricing proceeds.
- Track outcomes of government audits and the former-stockholder litigation, including any change to the recorded $197.7 million government-contract reserve or the company’s stated exposure assessment.