Booz Allen Hamilton (BAH) - 2023 Q3 - Quarterly Report

Revenue and Financial Performance - Revenue for the three months ended December 31, 2022, was $2.28 billion, a 12.1$2.03 billion in the same period in 2021[12] - Total revenue for the nine months ended December 31, 2021, was $1,074,254 thousand, with retained earnings of$1,981,715 thousand[24] - Total revenue for Q3 2022 was $2.277 billion, a 12$2.031 billion in Q3 2021[38] - Revenue for Q4 2022 was $2.28 billion, a 12.1$2.03 billion in Q4 2021[112] - Revenue increased 12.1% year-over-year for the three months ended December 31, 2022, and 11.4% for the nine months ended December 31, 2022, driven by headcount growth, salary increases, and strong demand for solutions[106] - Revenue for the three months ended December 31, 2022, was $2.28 billion, an increase from$2.03 billion in the same period in 2021[12] - Total revenue for 2022 increased to $2,277,074 thousand, up 12$2,030,520 thousand in 2021[38] Net Income and Earnings - Net income for the three months ended December 31, 2022, was $30.7 million, a 76.2$128.8 million in the same period in 2021[12] - Net income for the nine months ended December 31, 2022, was $339.56 million, compared to$375.78 million in the same period in 2021[18] - Net income for the nine months ended December 31, 2021 was $375.9 million[24] - Net income attributable to common stockholders decreased by 76.0$30.69 million, compared to $128.85 million in the same period in 2021[12] Operating Income and Expenses - Operating income for the three months ended December 31, 2022, was$58.6 million, a 66.9% decrease compared to $177.2 million in the same period in 2021[12] - Operating income decreased 66.9$58.6 million in the three months ended December 31, 2022, reflecting a decrease in operating margin from 8.7% to 2.6%[106] - Operating income for the three months ended December 31, 2022, was $58.64 million, down from$177.21 million in the same period in 2021[12] - General and administrative expenses increased 60.8% for the three months ended December 31, 2022, primarily due to a $124.0 million reserve related to a DOJ investigation[141] - The company's operating margin decreased from 8.8$6.35 billion, a 5.3% increase from $6.03 billion as of March 31, 2022[9] - Total current assets as of December 31, 2022, were$2.29 billion, a 6.6% decrease from $2.45 billion as of March 31, 2022[9] - Goodwill as of December 31, 2022, was$2.34 billion, a 15.6% increase from $2.02 billion as of March 31, 2022[9] - Total liabilities as of December 31, 2022, were$5.14 billion, up from $4.98 billion as of March 31, 2022[9] - Total stockholders' equity at December 31, 2022, was$1.21 billion, down from $1.22 billion at September 30, 2022[20] - Total stockholders' equity as of December 30, 2021 was$1.07 billion[24] Debt and Financing - Long-term debt, net of current portion, as of December 31, 2022, was $2.78 billion, a 1.8$2.73 billion as of March 31, 2022[9] - Total long-term debt, net of current portion, increased to $2,780.5 million as of December 31, 2022, from$2,731.7 million as of March 31, 2022[63] - The company refinanced its credit agreement, securing a $1,639.7 million Term Loan A and a$1,000.0 million revolving credit facility[66] - Total borrowings as of December 31, 2022, amounted to $44.219 million, compared to$20.598 million in 2021, reflecting a significant increase in debt[69] - Interest expense for the nine months ended December 31, 2022, was $85.028 million, up from$69.201 million in the same period in 2021[72] Cash Flow and Investments - Net cash provided by operating activities decreased to $365.67 million in 2022 from$481.15 million in 2021[18] - Payments for business acquisitions, net of cash acquired, were $440.07 million in 2022, down from$780.21 million in 2021[18] - Net cash used in investing activities was $440.06 million in 2022, compared to$835.25 million in 2021[18] - Net cash used in financing activities increased to $250.6 million for the nine months ended December 31, 2022, driven by higher debt repayments and lower proceeds from debt refinancing[155] - Cash and cash equivalents decreased to$370.94 million as of December 31, 2022, from $695.91 million as of March 31, 2022[9] Share Repurchases and Dividends - The company repurchased 1.0 million shares of Class A Common Stock for$86.4 million during the nine months ended December 31, 2022[21] - Cash dividends paid increased to $173.22 million in 2022 from$151.66 million in 2021[18] - The company repurchased 3.4 million shares of Class A Common Stock for $286.3 million during the nine months ended December 31, 2021[24] - Dividends declared were$1.11 per share of common stock, totaling $151.7 million[24] - The company declared quarterly cash dividends of$0.43 and $1.29 per share for the three and nine months ended December 31, 2022, totaling$57.3 million and $173.2 million, respectively[156] Acquisitions and Divestitures - The company completed the acquisition of EverWatch Corp. for$444.8 million in October 2022[51] - The acquisition of EverWatch resulted in a preliminary goodwill of $324.7 million, primarily due to specialized workforce and expected synergies[52] - The company divested its MENA management consulting business, recognizing a pre-tax gain of$31.2 million[55] - The divestiture of the Managed Threat Services (MTS) business resulted in a pre-tax gain of $4.6 million[55] - Goodwill increased to$2,337.6 million as of December 31, 2022, up from $2,021.9 million as of March 31, 2022, driven by the EverWatch acquisition[57] Legal and Tax Matters - The company recorded a$124.0 million reserve in the third quarter of fiscal 2023 related to the U.S. Department of Justice investigation[106] - The company incurred incremental legal costs during the three and nine months ended December 31, 2022, in response to the U.S. Department of Justice investigation[106] - The company is contesting tax assessments from the District of Columbia Office of Tax and Revenue for fiscal years 2013 through 2015, amounting to $11.7 million[81] - The company received a partial federal tax refund of approximately$174.0 million plus interest in October 2022, reducing the long-term income tax receivable[81] Employee Compensation and Benefits - Stock-based compensation expense increased to $50.99 million in 2022 from$45.19 million in 2021[18] - Total stock-based compensation expense for the three months ended December 31, 2022 was $18.8 million, with$17.998 million attributed to restricted stock and other awards[88][91] - As of December 31, 2022, there was $66.4 million of total unrecognized compensation cost related to unvested stock-based compensation agreements, expected to be amortized over the next 4.84 years[91] - Total expenses for employee matching contributions under the ECAP plan were$139.1 million for the nine months ended December 31, 2022, up from $128.2 million in 2021[82] Revenue Sources and Contracts - The company's revenue is derived from cost-reimbursable, time-and-materials, and fixed-price contracts, with significant reliance on U.S. government contracts[34] - Revenue recognition under the Estimate-at-Completion (EAC) process involves subjective estimates of future activity and cost drivers, which can impact profitability[35] - U.S. government clients accounted for 97$1.044 billion (46%)[41] - Global commercial clients revenue decreased to $55.8 million in Q3 2022 from$64.0 million in Q3 2021[41] - Prime contractor revenue increased to $2.151 billion (94$1.914 billion (94%) in Q3 2021[42] - Remaining performance obligations stood at $8.1 billion as of December 31, 2022, with 70$27.761 billion[129] - Additions to funded backlog during the twelve months ended December 31, 2022 totaled $9.6 billion, compared to$8.5 billion in the prior year[129] - The company expects to recognize approximately 70% of the remaining performance obligations ($8.1 billion) as revenue over the next 12 months, and 85$550.0 million to hedge against interest rate volatility[75] - The company estimates that $11.6 million will be reclassified as a decrease to interest expense over the next 12 months due to interest rate swaps[78] - The company's interest rate swaps have staggered maturities ranging from June 30, 2023, to June 30, 2025[75] - The fair value of current derivative instruments as of December 31, 2022 was$11.483 million, classified under Level 2 inputs[93] COVID-19 and Business Impact - The company is monitoring the evolving situation related to COVID-19 and its potential impact on business operations[108] Non-GAAP Financial Measures - The company uses non-GAAP financial measures such as Revenue, Excluding Billable Expenses, Adjusted Operating Income, and Adjusted EBITDA for business planning and performance measurement[109] - Adjusted Operating Income for Q4 2022 was $215.8 million, up 11.0$194.4 million in Q4 2021[112] - Adjusted EBITDA for Q4 2022 was $244.1 million, a 9.8$222.2 million in Q4 2021[113] - Adjusted EBITDA Margin on Revenue was 10.7% in Q4 2022, compared to 10.9% in Q4 2021[113] - Adjusted Net Income for Q4 2022 was $142.5 million, up 4.0$137.0 million in Q4 2021[113] - Free Cash Flow for Q4 2022 was $116.9 million, a significant improvement from a negative$0.5 million in Q4 2021[113] Government Contracts and Budget Impact - Substantially all of the company's revenue is derived from services provided under contracts and task orders with the U.S. government, primarily by client staff and, to a lesser extent, subcontractors[120] - The Bipartisan Budget Act of 2013 and subsequent acts apply an 8.3% reduction in defense spending annually from 2021 to 2030, potentially impacting the company's services to the Department of Defense[120] - The company faces risks from U.S. government budget restrictions, cost-cutting initiatives, and potential delays in procurement due to budget process delays[117] - Changes in U.S. government spending mix, with lower spending on defense and increased spending on cybersecurity and healthcare, could impact the company's revenue[117] - The company's revenue is diversified across a large portfolio of contracts and clients, reducing potential volatility but still subject to material adverse effects from reductions in U.S. government services[120] Employee and Talent Management - The company employed approximately 31,100 employees as of December 31, 2022[27] - The company's ability to hire, retain, and deploy talent aligned with client needs is critical for revenue growth[126] - Total headcount as of December 31, 2022 increased by approximately 1,680 compared to December 31, 2021[138] Cost of Revenue and Expenses - Cost of revenue increased 12.3% and 11.8% for the three and nine months ended December 31, 2022, primarily due to salary increases and headcount growth[139] - Billable expenses increased 14.3% and 13.9% for the three and nine months ended December 31, 2022, driven by higher subcontractor usage and client demand[140] - Depreciation and amortization expense increased by 6.2% for the three months and 15.5% for the nine months ended December 31, 2022, primarily due to intangible amortization from acquisitions in fiscal 2022 and 2023[142] - Interest expense increased by 35.3% for the three months and 22.9% for the nine months ended December 31, 2022, driven by an overall increase in rates[143] - Net other income increased to $14.6 million for the three months and$38.1 million for the nine months ended December 31, 2022, driven by gains from divestitures and debt refinancing[143] - Income tax expense decreased by 65.0% for the three months and 0.3% for the nine months ended December 31, 2022, with an effective tax rate increase to 25.6% and 23.3%, respectively[144] Capital Expenditures and Investments - Capital expenditures for the nine months ended December 31, 2022, were $51.4 million, slightly down from$51.6 million in the same period of 2021[164] Contingent Liabilities and Guarantees - The company was contingently liable under open standby letters of credit and bank guarantees totaling $6.1 million as of December 31, 2022[98] - The company had$14.9 million available under a separate $20 million facility for guarantees as of December 31, 2022[98] Fair Value Measurements - The fair value of current derivative instruments as of December 31, 2022 was$11.483 million, classified under Level 2 inputs[93] - The company's total assets measured at fair value as of December 31, 2022 were $37.393 million, with$19.392 million classified under Level 1 inputs[93] - The carrying amount of the New Term Loan A as of December 31, 2022 was $1.639 billion, with an estimated fair value of$1.602 billion[97] - The fair value of the 3.88% Senior Notes due 2028 as of December 31, 2022 was $624.092 million, compared to a carrying amount of$700 million[97] - The fair value of the 4.00% Senior Notes due 2029 as of December 31, 2022 was $443.125 million, compared to a carrying amount of$500 million[97] Postretirement Plans and Other Comprehensive Income - Postretirement plans and derivatives designated as cash flow hedges showed a net current-period other comprehensive income (loss) of $(62) million for the three months ended December 31, 2022[86] - The unfunded status of the post-retirement medical plan was$118.4 million as of December 31, 2022[82] Tax and Legal Reserves - The company incurred $124.0 million in legal matter reserves related to a U.S. Department of Justice investigation in Q4 2022[112][113] - Acquisition and divestiture costs were$19.1 million in Q4 2022, up from $5.3 million in Q4 2021[112][113] - Significant acquisition amortization was$14.1 million in Q4 2022, compared to $11.9 million in Q4 2021[112][113] Revenue by Contract Type - The company generates revenue under three types of contracts: Cost-Reimbursable (53$1,211,589 thousand, representing 53% of total revenue, consistent with 2021[38] - Fixed-price revenue for 2022 was $492,994 thousand, representing 22$572,491 thousand, up 18% from $484,718 thousand in 2021[38] Revenue by Client Segment - U.S. government revenue accounted for 97$1,043