Booz Allen Hamilton Holding Corporation — Form 10-Q
Reporting period: Three and nine months ended December 31, 2015 (fiscal 2016 third quarter). Comparative periods ended December 31, 2014. The company provides consulting, technology and engineering services; approximately 97% of revenue came from U.S. government contracts. It reported one operating segment and approximately 22,600 employees.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $1,307.7 million, up 0.2% | $3,981.4 million, up 1.3% |
| Operating income | $105.1 million, down 0.1%; 8.0% margin vs. 8.1% | $340.1 million, down 7.1%; 8.5% margin vs. 9.3% |
| Net income | $108.1 million vs. $52.8 million | $228.6 million vs. $189.2 million |
| Diluted EPS | $0.71 vs. $0.35 | $1.51 vs. $1.24 |
| Operating cash flow | $92.3 million vs. $27.5 million | $181.0 million vs. $228.1 million |
| Free cash flow (non-GAAP) | $76.0 million vs. $19.0 million | $135.2 million vs. $210.6 million |
At December 31, cash and cash equivalents were $167.1 million, down from $207.2 million at March 31. Total debt was $1,587.2 million, down from $1,626.3 million; net debt was approximately $1,420.1 million. Current assets were $1,134.2 million and current liabilities $793.5 million. The company had $498.2 million of revolver capacity available and reported compliance with debt covenants. Nine-month capital expenditures were $45.8 million; acquisition spending was $50.6 million.
Material changes and drivers
- Quarterly revenue was nearly flat. Higher indirect spending—including bid and proposal, marketing, recruiting and administrative activity—supported revenue on cost-reimbursable contracts, but shifted staff time away from billable work.
- For the nine months, general and administrative expense rose 14.0% to $597.6 million, while billable expenses rose 3.1% to $1,097.7 million. Management attributed higher overhead to growth investments and pursuit of a strong opportunity pipeline; this contributed to lower year-to-date operating income and margin.
- Net income benefited substantially from the release of $50.9 million of pre-acquisition uncertain tax reserves after statute-of-limitations expirations. The quarterly effective tax rate was negative 22.9%, versus 39.0% a year earlier; the nine-month rate was 20.5%, versus 39.1%. Adjusted net income, a non-GAAP measure excluding specified items including the reserve release, was $61.8 million for the quarter and $185.2 million year to date.
- Total backlog reached $12.1 billion, up 20.0% year over year: $2.7 billion funded, $2.8 billion unfunded and $6.6 billion in priced options. Management cautions that backlog may not be realized on schedule or in full.
- The company acquired SPARC, LLC’s software services unit for a preliminary purchase price of $53 million, subject to working-capital adjustments; $35.1 million of preliminary goodwill was recorded.
- Year-to-date operating cash flow fell 20.6%, primarily reflecting comparison with a large prior-year reduction in receivables and increased working-capital needs. Investing cash outflow increased with the acquisition and higher facility-related capital spending.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management expected operating cash flow, existing cash and revolver availability to cover anticipated cash needs for the next 12 months. It cited continued investment and higher bid and proposal activity to pursue a strong pipeline. On January 27, 2016, the company announced a $0.15 per-share quarterly dividend, payable February 29; the quarter’s declared dividend was $0.13 per share.
Key risks include federal budget uncertainty, delayed or reduced contract funding, competition and contract-award protests, difficulty hiring and deploying cleared staff, government audits and investigations, and the possibility that backlog or priced options will not convert to revenue. Government audits of costs incurred after fiscal 2008 could result in adjustments; the company recorded an estimated $208.0 million liability for potential refunds. Four remaining suits related to the 2008 Carlyle acquisition seek approximately $291.7 million in alleged damages, potentially trebled under RICO, plus other damages and fees. Management said it did not expect these matters to materially affect results, but outcomes are uncertain. The company also disclosed pending government audits and investigations, including matters involving labor time reporting, procurement integrity and classified-information access.
The new revenue-recognition standard was expected to become effective for the company April 1, 2018; management was still evaluating its impact and transition method. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings increase reflects the one-time tax-reserve release, and how GAAP results compare with management’s non-GAAP measures.
- Whether increased overhead and investment spending produce sustained growth in billable work, operating margins and contract awards.
- How funded backlog converts to revenue and cash, particularly given federal funding, option-exercise and contract-timing risks.
- The development of the $208.0 million government-contract audit reserve, pending investigations and acquisition-related litigation.
- Debt repayment, liquidity and capital allocation—including dividends, share repurchases, acquisitions and capital expenditures.