Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2016. Comparisons are with the corresponding 2015 periods. Financial amounts are in U.S. dollars.
Business context and reporting period
Booz Allen 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. The company reported one operating segment and approximately 22,800 employees.
Financial performance and liquidity
| Metric | Three months ended September 30, 2016 | Six months ended September 30, 2016 |
|---|---|---|
| Revenue | $1,394.9 million; up 5.5% | $2,817.6 million; up 5.4% |
| Operating income | $117.7 million; up 8.1% | $247.0 million; up 5.1% |
| Operating margin | 8.4%, versus 8.2% | 8.8%, unchanged |
| Net income | $62.8 million; up 11.8% | $130.6 million; up 8.4% |
| Diluted EPS | $0.41, versus $0.37 | $0.86, versus $0.80 |
- Revenue and costs: Growth reflected higher client staff headcount and billability. Billable expenses rose 12.7% in the quarter and 13.5% for six months, mainly from increased subcontractor use and client-related direct expenses. General and administrative expense declined 6.6% and 3.2%, respectively.
- Cash flow: Six-month operating cash flow was $217.1 million, compared with $88.7 million. Capital expenditures were $15.1 million, versus $29.6 million; reported free cash flow, a non-GAAP measure, was $201.9 million, versus $59.1 million.
- Cash and debt: At September 30, cash was $307.2 million and total debt was $1,563.1 million, compared with $187.5 million and $1,597.3 million at March 31. The company had $498.3 million of revolving-credit capacity available.
- Dividends: The declared quarterly dividend was $0.15 per share, compared with $0.13 in the prior-year quarter. The company announced another $0.15 dividend payable November 30, 2016.
Material changes versus the prior comparable period
- Revenue growth and higher direct staff activity contributed to increased operating income. Quarterly operating margin improved 20 basis points; the six-month margin was unchanged year over year.
- Interest expense declined 16.6% for the quarter and 7.4% for six months, primarily following the July 2016 credit-agreement amendment. Net income also benefited from a lower effective tax rate, mainly due to federal and state tax credits.
- Operating cash flow increased substantially year over year, reflecting timely collections, lower indirect spending and lower required tax payments. Cash increased by $119.7 million over the six months.
- Total backlog rose 8.7% year over year to $13.644 billion, including $3.332 billion funded, $3.297 billion unfunded and $7.015 billion in priced options.
Outlook, risks and unusual items
- Management outlook: Management expected operating cash, existing cash and available revolving-credit borrowing capacity to cover anticipated cash requirements for the next 12 months. The company estimated fiscal 2017 interest savings of approximately $5 million to $10 million from the refinancing, subject to future LIBOR movements. No revenue or earnings guidance was provided in the supplied filing text.
- Refinancing: The July amendment shifted approximately $441 million of borrowing from Term Loan B to Term Loan A, reduced interest spreads, extended Term Loan A and revolver maturities to June 2021 and Term Loan B maturity to June 2023, and provided greater covenant flexibility. It resulted in approximately $5.5 million of accelerated debt-cost amortization and $3.4 million of third-party fees, recorded in other expense and general and administrative expense, respectively. The company reported covenant compliance at quarter-end.
- Government funding exposure: The filing cited uncertainty around federal budgets and appropriations, including a continuing resolution scheduled to expire December 9, 2016, as potential causes of delayed funding, awards or task orders. Backlog is not guaranteed to convert to revenue.
- Contingencies: The company recorded a $196.1 million liability for estimated potential government contract cost adjustments and refunds. Government audits and investigations could lead to payment withholdings, repayments, penalties, or suspension or debarment. Management did not expect ongoing matters to materially adversely affect results, but outcomes remain uncertain.
- Litigation: Four remaining suits related to the 2008 Carlyle acquisition seek approximately $291.7 million in alleged damages, with claims for trebling under RICO and additional punitive damages, costs and fees. A petition for U.S. Supreme Court review had been filed in one matter; three other suits were on appeal. Management did not expect a material adverse effect based on information available.
- Other risk and accounting matters: The new revenue recognition standard was expected to take effect for the company on April 1, 2018; management was still assessing its impact and transition method. The company also identified risks including contract competition, staffing and security-clearance requirements, government cost controls, audits, and cybersecurity.
Important facts for investors to verify
- Whether federal appropriations and agency spending support conversion of the reported backlog into funded work and revenue.
- How subcontractor and billable-expense growth affects margins as revenue expands.
- Debt balances, interest savings, covenant headroom and compliance following the July refinancing.
- Cash-flow sustainability, given the role of collections, working capital and tax-payment timing in the six-month improvement.
- Developments in government cost audits and the acquisition-related lawsuits, including potential exposure beyond recorded reserves.
- The eventual financial and revenue-timing effects of adopting the new revenue recognition standard.