Booz Allen Hamilton Holding Corporation — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended September 30, 2022 (fiscal 2023); unaudited. Amounts below are in U.S. dollars. The company provides consulting, technology, analytics, engineering, mission operations and cybersecurity services, primarily to U.S. government customers, and reports one operating segment.
Financial performance
| Metric | Three months ended Sep. 30, 2022 | Year-over-year | Six months ended Sep. 30, 2022 | Year-over-year |
|---|---|---|---|---|
| Revenue | $2.299 billion | +9.2% | $4.549 billion | +11.1% |
| Operating income | $223.9 million | +2.5% | $431.1 million | +19.9% |
| Operating margin | 9.7% | 10.4% prior year | 9.5% | 8.8% prior year |
| Net income attributable to common stockholders | $170.9 million | +10.4% | $309.2 million | +25.2% |
| Diluted EPS | $1.28 | $1.14 prior year | $2.31 | $1.81 prior year |
| Adjusted EBITDA (non-GAAP) | $285.9 million | +$16.3 million | $538.5 million | +$30.7 million |
| Adjusted EBITDA margin on revenue (non-GAAP) | 12.4% | 12.8% prior year | 11.8% | 12.4% prior year |
For the six-month period, operating cash flow was $227.1 million, down from $459.7 million; free cash flow, as defined by the company (operating cash flow less capital expenditures), was $197.4 million versus $430.1 million. The decline chiefly reflected cash taxes, including approximately $216 million paid. Capital expenditures were $29.7 million. Cash and cash equivalents were $756.5 million at September 30, 2022.
Total debt was $2.831 billion, compared with $2.800 billion at March 31, 2022. The company had $999 million of additional revolving-credit capacity available and reported compliance with debt covenants. Current assets were $2.718 billion and current liabilities $1.500 billion.
Changes and drivers
- Revenue growth reflected higher headcount, salary increases, strong demand and better staff utilization. Fiscal-year-to-date growth also included approximately $112 million from prior-year acquisitions. Headcount was about 30,000, up approximately 780 year over year.
- Operating margin fell in the quarter as cost of revenue and G&A grew faster than revenue; management cited compensation increases, inflationary pressure, higher unallowable spending and professional fees. For the six-month period, margin improved, supported by contract execution and cost management.
- Interest expense rose 16.9% in the quarter and 16.4% year to date, primarily because of higher interest rates.
- Other income included a $31.2 million pretax gain on the September 2022 sale of the Middle East and North Africa management consulting business. The prior-year comparison included a $5.7 million gain on remeasurement of the Tracepoint investment.
- On September 7, the company refinanced its secured loans with a $1.65 billion Term Loan A and a $1.0 billion revolving facility, extending their maturity to September 2027. The new term loan is variable-rate; $550 million of interest-rate swaps hedge a portion of floating-rate exposure.
Outlook, risks and unusual items
- No specific revenue or earnings forecast is provided in this filing. Management expects cash, operating cash flow and revolver availability to cover anticipated requirements for the next 12 months.
- Remaining performance obligations were $9.0 billion at September 30, up from $7.4 billion at March 31; the company expects to recognize about 70% within 12 months and 85% within 24 months. Total backlog, which also includes unfunded orders and options, was $31.8 billion. Backlog conversion is not assured and depends on funding, contract awards and staffing.
- Management estimated that the tax-law requirement to amortize research and development expenses could reduce fiscal 2023 operating cash flow by approximately $140 million; the actual effect depends on potential legislative changes and other factors. In October 2022, the company received a partial federal tax refund of approximately $175 million plus interest related to a carryback claim.
- The company completed the MENA divestiture during the quarter. It acquired EverWatch on October 14, 2022, after quarter-end, for approximately $440 million, net of post-closing adjustments and transaction costs.
- Key exposures include U.S. government budget and funding delays, inflation, competition, recruiting and retention, contract-estimate risk, and government audits and investigations. The company reported pending matters involving labor time reporting, procurement integrity and classified-information access, as well as a DOJ/SEC-related investigation; it said it could not estimate the long-term incremental legal costs, and expected additional costs. It reported no material accrual for ongoing proceedings.
- The company is contesting District of Columbia tax assessments. It reported a potential future tax expense of approximately $40.2 million to $58.3 million, net of federal benefits, if related positions for fiscal 2013–2020 are ultimately resolved adversely; no reserve was recorded for those positions.
- Estimated liabilities for claimed indirect costs subject to government audit were $304.6 million at quarter-end. A separate $6.9 million of debt-refinancing costs was expensed in G&A, and $3.4 million of prior debt-cost amortization/write-off was recognized in other expense.
Important facts for investors to verify
- Whether reported backlog and remaining performance obligations convert to funded work and revenue on the expected timetable.
- Operating-margin trends as compensation, inflation and hiring costs evolve; compare GAAP results with management’s non-GAAP adjustments.
- Cash generation after taxes and the actual impact of required R&D-cost amortization, including any legislative changes or refunds.
- Debt costs and leverage after the refinancing and EverWatch acquisition, including variable-rate exposure and covenant headroom.
- Updates on the DOJ/SEC-related matters, government audits, indirect-cost provisions and the contested tax assessments.
- The realized proceeds and final accounting effects of the MENA sale, and EverWatch’s post-acquisition contribution.