Booz Allen Hamilton Holding Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2013; fiscal 2014 third quarter. The company provides management, technology, engineering and analytics services, primarily to U.S. government clients. Approximately 98% of revenue came from U.S. government agencies or contractors. It had about 22,700 employees at quarter-end.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2013 | Year-over-year change | Nine months ended Dec. 31, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,273.2 million | Down 8.6% | $4,078.9 million | Down 3.2% |
| Operating income | $97.0 million | Down 16.8% | $371.4 million | Up 11.4% |
| Operating margin | 7.6% | Down from 8.4% | 9.1% | Up from 7.9% |
| Net income | $47.2 million | Down 16.0% | $185.3 million | Up 12.8% |
| Diluted EPS | $0.31 | Down from $0.38 | $1.24 | Up from $1.08 |
- Cash flow: Nine-month operating cash flow was $292.3 million, down 26.7% from $398.9 million. Management attributed the decline mainly to less timely customer collections, including delays associated with sequestration, the shutdown and furloughs at government payment offices. Capital expenditures were $12.3 million; company-defined free cash flow was $280.0 million, versus $378.3 million.
- Cash and working capital: Cash was $403.2 million at December 31, 2013, up from $350.4 million at March 31, 2013. Accounts receivable, net, was $886.3 million, down from $1,029.6 million; days sales outstanding increased to 66 from 61 at March 31.
- Debt: Total debt was $1,674.5 million, down from $1,715.2 million at March 31. There were no revolving-credit borrowings at quarter-end; the facility provides $500 million of capacity. The company reported compliance with its debt covenants. Its August 2013 credit-agreement amendment repriced Term Loan B.
- Dividends: The company paid a $1.00-per-share special dividend and a $0.10 regular dividend in the quarter. Nine-month cash dividends paid were $186.8 million, with a further $52.1 million of dividend equivalents paid to option holders.
Material changes versus the prior comparable period
- Quarterly revenue and operating income declined amid lower billable hours, reduced demand and subcontractor use, the October 2013 government shutdown, and federal budget uncertainty. Approximately $9 million of shutdown-related staff time was unbillable; management said it did not furlough or terminate staff in response.
- Nine-month operating income and net income increased despite lower revenue. Management cited indirect-cost discipline, lower salaries and retirement contributions, and improved contract profitability. The quarter’s margin was weaker, reflecting higher indirect costs, including investment in growth areas and staffing capacity.
- The acquisition of ARINC’s Defense Systems Engineering and Support business contributed $53.7 million of quarterly revenue and $200.8 million of nine-month revenue compared with the prior-year periods.
- Backlog weakened: total backlog was $10.367 billion at December 31, down 18.2% year over year; funded backlog was $2.498 billion, down 20.7%. The company cited fewer funded awards, lower conversion of unfunded backlog, and fewer exercised and funded options.
- Workforce declined to approximately 22,700 from 24,800 a year earlier. The company said headcount reductions reflected lower demand and capacity management.
Outlook, risks and unusual items
- Following passage of the fiscal 2014 Consolidated Appropriations Act in January 2014, management expected the pace of awards and funding obligations to increase during the remainder of the U.S. government fiscal year. This is an expectation, not a guarantee; the filing gives no quantified revenue or earnings guidance.
- Management expected existing cash, operating cash flow and revolving-credit availability to cover anticipated cash needs over the next 12 months. It also noted that budget delays and cash-flow fluctuations could require future revolver borrowings.
- Key risks include federal spending reductions and sequestration, delayed appropriations and contract awards, dependence on government clients, competition and contract protests, hiring and retaining cleared talent, contract-performance and cost-estimation risks, and audits or investigations that could result in repayment, penalties, suspension or debarment.
- The company recorded an estimated $184.5 million liability for potential refunds related to government audits or reviews of contract costs incurred after fiscal 2007, versus $156.2 million at March 31, 2013. Management said it believed reserves were adequate.
- Seven remaining lawsuits arising from the 2008 acquisition sought approximately $348.7 million in alleged damages, including $291.5 million subject to claimed trebling under RICO, plus punitive damages, costs and fees. No material amounts were accrued; management did not expect a material adverse effect, while acknowledging the outcome was uncertain.
- Potential lease exposure was up to $17.3 million of undiscounted future payments; no liability was recorded based on management’s assessment. The company reported no off-balance-sheet arrangements and no material change to its previously disclosed risk factors.
- After quarter-end, the company announced another $0.10 regular and $1.00 special dividend per share, payable February 28, 2014. The special dividend also required dividend-equivalent adjustments for certain option holders.
Important facts for investors to verify
- Whether federal contract awards and funding accelerated as management anticipated, and whether funded backlog stabilized or continued to decline.
- Whether receivable collections improved, given lower operating cash flow and the increase in days sales outstanding.
- How lower demand, workforce levels, hiring in growth areas and indirect-cost investment affect revenue and margins in subsequent periods.
- Whether the $184.5 million government-contract reserve remains adequate as audits and reviews progress, and the status and potential exposure of the acquisition-related litigation.
- The cash and debt effects of recurring and special dividends, option-holder dividend equivalents, and any future use of the revolving facility.