Booz Allen Announces 3Q Fiscal 2014 Financial Results

January 31, 2014

Year-to-date results consistent with annual guidance
Third quarter revenue was $1.27 billion
Adjusted EBITDA was $115 million
Adjusted Diluted Earnings per Share was $0.33 per share
$1.00 Special dividend and $0.10 quarterly dividend declared – both payable on February 28, 2014

McLean, VA — Booz Allen Hamilton Holding Corporation (NYSE:BAH), the parent company of management and technology consulting firm Booz Allen Hamilton, Inc., today announced preliminary results for the third quarter of fiscal 2014. The firm saw revenue declines during the third quarter as a result of the October government shutdown and related uncertainties in the government contracting environment, and earnings declines over the prior year period, which were anticipated and mitigated by strong first half performance. Booz Allen reported total backlog of $10.37 billion as of December 31, 2013.  Additionally, the Company’s full-year guidance remains consistent with prior expectations. Booz Allen’s fiscal year runs from April 1 to March 31, with the third quarter of fiscal 2014 ending December 31, 2013. 

Revenue in the third quarter of fiscal 2014 was $1.27 billion, compared with $1.39 billion in the prior year period, a decrease of 8.6 percent.  In the third quarter of fiscal 2014, net income declined to $47.2 million from $56.2 million in the prior year period, and Adjusted Net Income decreased to $49.5 million from $59.7 million in the prior year period. Diluted earnings per share (EPS) was $0.31 for the third quarter of fiscal 2014, compared with $0.38 in the prior year period; Adjusted Diluted Earnings per Share was $0.33 for the current quarter, compared with $0.41 in the prior year period.

The Company authorized and declared a regular quarterly cash dividend of $0.10 per share, and a special dividend of $1.00 per share, both payable on February 28, 2014, to stockholders of record on February 10, 2014.

Third quarter revenue was impacted by the government shutdown between October 1, 2013, and October 16, 2013. However, the Company anticipated continued uncertainty in the federal budgeting environment and effectively managed indirect costs during the first half of the fiscal year to ensure financial strength and flexibility during the second half of the fiscal year.   Financial results for the first half reflected these actions, as the Company recognized improvements over the comparable prior fiscal year in all reported operating metrics, excluding the decline in revenue. Within the third quarter, the Company was able to maintain operations through the shutdown without the need to furlough any impacted staff.  Additionally, during the third quarter, the Company was able to increase efforts that utilized indirect costs such as investments in growth areas and building additional staffing capacity in the Defense market, and through continued investment in critical skill areas such as engineering, software/systems development, and analytics. These actions contributed to higher indirect costs during the three months ended December 31, 2013, and are consistent with financial expectations as reflected in the results for the nine months ended December 31, 2013. 

Ralph W. Shrader, Booz Allen’s Chairman & Chief Executive Officer, said, “We manage our business on an annual basis, and our nine-month performance in this fiscal year reflects our ability to absorb impacts of events such as the October government shutdown.  Our high productivity and strong management of cost during the first half of the year is enabling us to weather this business disruption and continue to deliver results to our clients and shareholders while investing in the future.

“Looking ahead to the end of the current fiscal year, we are tightening the range for our bottom line guidance, reflecting our commitment to deliver on our original earnings guidance. 

“Our solid financial position also has afforded us the opportunity to continue to invest in the future – building deeper capabilities in engineering, analytics, cyber, and other innovation areas, as well as in our commercial and international businesses.  Given the recent passage of the Consolidated Appropriations Act, we are cautiously optimistic for greater stability in our core government business as well, as we celebrate our 100th year in 2014.”

FINANCIAL REVIEW

Third Quarter Fiscal 2014 – Below is a summary of Booz Allen’s results for the fiscal 2014 third quarter and the key factors driving those results:

• Booz Allen’s 8.6 percent decrease in revenue in the third quarter of fiscal 2014 compared with the prior year period was primarily the result of headcount reductions and a corresponding reduction in billable hours due to continued uncertainty in the federal budgetary environment.  Revenue declines were additionally a result of a reduction of $62.2 million in billable expenses and a reduction of approximately $30 million due to the impact of the October government shutdown.  An increase in revenue from acquisitions of approximately $53.7 million during the quarter ended December 31, 2013, as compared to the prior period, helped to offset the impact of these factors.   
• In the third quarter of fiscal 2014, operating income decreased to $97.0 million from $116.6 million in the prior year period, and Adjusted Operating Income decreased to $99.1 million from $120.8 million in the prior year period.  The decline in operating income and Adjusted Operating Income was driven by the combination of headcount reductions, an increase in unbillable labor as a result of the government shutdown, and activities associated with investments in growth areas that increased in line with expectations.
• In the third quarter of fiscal 2014, net income decreased to $47.2 million from $56.2 million in the prior year period, and Adjusted Net Income decreased to $49.5 million from $59.7 million in the prior year period.  Adjusted EBITDA decreased to $115.0 million in the third quarter of fiscal 2014, compared with $135.8 million in the prior year period.  The decreases in net income, Adjusted Net Income and Adjusted EBITDA were driven by the same factors as operating income and Adjusted Operating Income.  
• In the third quarter of fiscal 2014, diluted EPS decreased to $0.31 from $0.38 in the prior year period; Adjusted Diluted EPS decreased to $0.33 from $0.41 in the prior year period. These metrics were driven by the same factors as net income, Adjusted Net Income and Adjusted EBITDA.

Funded backlog as of December 31, 2013, was $2.50 billion, compared with $3.15 billion as of December 31, 2012. Booz Allen’s total backlog, as of December 31, 2013, was $10.37 billion, compared with $12.68 billion as of December 31, 2012.  The quarter’s backlog numbers reflect the impact of the government shutdown on the pace of contract awards and shortened average period of performance on awarded contracts.

Nine Months Ended December 31, 2013 – Booz Allen’s cumulative performance for the three quarters of fiscal 2014 has resulted in:

• Revenue of $4.08 billion for the nine months ended December 31, 2013, compared with $4.21 billion for the prior year period, a decrease of 3.2 percent;
• Net income for the nine months ended December 31, 2013, of $185.3 million, compared with $164.2 million for the prior year period;
• Adjusted Net Income for the cumulative three quarters of fiscal 2014 of $192.8 million compared with $181.4 million in the prior year period;
• Adjusted EBITDA for the nine months ended December 31, 2013, of $426.8 million compared with $395.3 million for the nine months ended December 31, 2012; and
• Diluted EPS of $1.24 and Adjusted Diluted EPS of $1.30 for the cumulative three quarters of fiscal 2014, compared with $1.08 and $1.26, respectively, for the cumulative three quarters of fiscal 2013.

Net cash provided by operating activities for the nine months ended December 31, 2013, was $292.3 million compared with $398.9 million in the prior year period.  Free cash flow for the nine months ended December 31, 2013, was $280.0 million, compared with $378.3 million in the prior year period.

FINANCIAL OUTLOOK

We are narrowing the range for earnings in line with our previous guidance for fiscal 2014, which now calls for diluted EPS in the range of $1.50 to $1.54, and Adjusted Diluted EPS in the range of $1.58 to $1.62.  In addition, we are projecting a mid-single-digit percentage decline in revenue.

These EPS estimates are based on fiscal year 2014 estimated average diluted shares outstanding of approximately 149.0 million shares.

Conference Call Information

Analysts and institutional investors may participate on the call by dialing (877) 375-9141 International: (253) 237-1151. The conference call will be webcast simultaneously to the public through a link on the investor relations section of the Booz Allen Hamilton web site at investors.boozallen.com. A replay of the conference call will be available online at investors.boozallen.com beginning at 11 a.m. EST on January 31, 2014, and continuing for 30 days.

BAHPR-FI

Non-GAAP Financial Information

“Adjusted Operating Income” represents Operating Income before (i) certain stock option-based and other equity-based compensation expenses, (ii) adjustments related to the amortization of intangible assets, and (iii) any extraordinary, unusual, or non-recurring items.  Booz Allen prepares Adjusted Operating Income to eliminate the impact of items it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature.

“Adjusted EBITDA” represents net income before income taxes, net interest and other expense and depreciation and amortization and before certain other items, including: (i) certain stock option-based and other equity-based compensation expenses, (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, and (iii) any extraordinary, unusual or non-recurring items. Booz Allen prepares Adjusted EBITDA to eliminate the impact of items it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature.

“Adjusted Net Income” represents net income before: (i) certain stock option-based and other equity-based compensation expenses, (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, (iii) adjustments related to the amortization of intangible assets, (iv) amortization or write-off of debt issuance costs and write-off of original issue discount and (v) any extraordinary, unusual or non-recurring items, in each case net of the tax effect calculated using an assumed effective tax rate. Booz Allen prepares Adjusted Net Income to eliminate the impact of items, net of taxes, it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature.

“Adjusted Diluted EPS” represents diluted EPS calculated using Adjusted Net Income as opposed to Net Income. Additionally, Adjusted Diluted EPS does not contemplate any adjustments to net income as required under the two-class method of calculating EPS as required in accordance with GAAP.

“Free Cash Flow” represents the net cash generated from operating activities less the impact of purchases of property and equipment.

Booz Allen utilizes and discusses in this release Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS because management uses these measures for business planning purposes, including managing its business against internal projected results of operations and measuring its performance. Management views Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS as measures of the core operating business, which exclude the impact of the items detailed in the supplemental exhibits, as these items are generally not operational in nature. These supplemental performance measures also provide another basis for comparing period to period results by excluding potential differences caused by non-operational and unusual or non-recurring items. Booz Allen also utilizes and discusses Free Cash Flow in this release because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business and measuring liquidity generally. Booz Allen presents these supplemental measures because it believes that these measures provide investors and securities analysts with important supplemental information with which to evaluate Booz Allen’s performance, long term earnings potential, or liquidity, as applicable, and to enable them to assess Booz Allen’s performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in Booz Allen’s industry.  Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under GAAP and when analyzing Booz Allen’s performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of Operating and Net Income to Adjusted Operating Income, Adjusted EBITDA and Adjusted Net Income, and cash flows to Free Cash Flows and the explanatory footnotes regarding those adjustments, (ii) use Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to Operating Income, Net Income or Diluted EPS as a measure of operating results, each as defined under GAAP, and (iii) use Free Cash Flows, in addition to, and not as an alternative to, Net Cash Provided by Operating Activities as a measure of liquidity, each as defined under GAAP. Exhibit 4 includes a reconciliation of Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow to the most directly comparable financial measure calculated and presented in accordance with GAAP.

No reconciliation of the forecasted range for Adjusted Diluted EPS to Diluted EPS for any period during fiscal 2014 is included in this release because we are unable to quantify certain amounts that would be required to be included in the GAAP measure without unreasonable efforts and we believe such reconciliations would imply a degree of precision that would be confusing or misleading to investors.

Forward Looking Statements

Certain statements contained in this press release and in related comments by our management include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Examples of forward-looking statements include information concerning Booz Allen’s preliminary financial results, financial outlook and guidance, including forecasted revenue, Diluted EPS, and Adjusted Diluted EPS, future quarterly dividends, and future improvements in operating margins, as well as any other statement that does not directly relate to any historical or current fact.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “forecasts,” “expects,” “intends,” “plans,” “anticipates,” “projects,” “outlook,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “preliminary,” or the negative of these terms or other comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct.

These forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

These risks and other factors include: cost cutting and efficiency initiatives, budget reductions, Congressionally mandated automatic spending cuts, and other efforts to reduce U.S. government spending, including automatic sequestration required by the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and Consolidated Appropriations Act of 2014), which have reduced and delayed contract awards and funding for orders for services especially in the current political environment or otherwise negatively affect our ability to generate revenue under contract awards, including as a result of reduced staffing and hours of operation at U.S. government clients; delayed funding of our contracts due to uncertainty relating to and a possible failure of Congressional efforts to craft a long-term agreement on the U.S. government’s ability to incur indebtedness in excess of its current limits prior to February 7, 2014, the date on which legislation relating to the U.S. government’s debt limit expires, or changes in the pattern or timing of government funding and spending (including those resulting from or related to cuts associated with sequestration or other budgetary cuts made in lieu of sequestration); current and continued uncertainty around the timing, extent, nature, and effect of Congressional and other U.S. government action to address budgetary constraints, including, but not limited to, uncertainty around the outcome of Congressional efforts to craft a long-term agreement on the U.S. government’s ability to incur indebtedness in excess of its current limits; any issue that compromises our relationships with the U.S. government or damages our professional reputation, including negative publicity concerning government contractors in general or us in particular; changes in U.S. government spending, including a continuation of efforts by the U.S. government to decrease spending for management support service contracts, and mission priorities that shift expenditures away from agencies or programs that we support; the size of our addressable markets and the amount of U.S. government spending on private contractors; failure to comply with numerous laws and regulations; our ability to compete effectively in the competitive bidding process and delays or losses of contract awards caused by competitors' protests of major contract awards received by us; the loss of General Services Administration Multiple Award schedule contracts, or GSA schedules, or our position as prime contractor on government-wide acquisition contract vehicles, or GWACs; changes in the mix of our contracts and our ability to accurately estimate or otherwise recover expenses, time, and resources for our contracts; our ability to generate revenue under certain of our contracts; our ability to realize the full value of and replenish our backlog and the timing of our receipt of revenue under contracts included in backlog; changes in estimates used in recognizing revenue; an inability to attract, train, or retain employees with the requisite skills, experience, and security clearances; an inability to hire, assimilate, and deploy enough employees to serve our clients under existing contracts; an inability to timely and effectively utilize our employees; failure by us or our employees to obtain and maintain necessary security clearances; the loss of members of senior management or failure to develop new leaders; misconduct or other improper activities from our employees or subcontractors, including the improper use or release of our clients' sensitive or classified information; increased insourcing  by various U.S. government agencies due to changes in the definition of “inherently governmental” work, including proposals to limit contractor access to sensitive or classified information and work assignments; increased competition from other companies in our industry; failure to maintain strong relationships with other contractors; inherent uncertainties and potential adverse developments in legal or regulatory proceedings, including litigation, audits, reviews, and investigations, which may result in materially adverse judgments, settlements, withheld payments, penalties, or other unfavorable outcomes including debarment, as well as disputes over the availability of insurance or indemnification; continued efforts to change how the U.S. government reimburses compensation related and other expenses or otherwise limit such reimbursements, including recent rules that expand the scope of existing reimbursement limitations, such as a reduction in allowable annual employee compensation to certain contractors as a result of the Bipartisan Budget Act of 2013, and an increased risk of compensation being deemed unallowable or payments being withheld as a result of U.S. government audit, review or investigation; internal system or service failures and security breaches, including, but not limited to, those resulting from external cyber attacks on our network and internal systems; risks related to changes to our operating structure, capabilities, or strategy intended to address client needs, grow our business or respond to market developments; risks associated with new relationships, clients, capabilities, and service offerings in our U.S. and international businesses; failure to comply with special U.S. government laws and regulations relating to our international operations; risks related to our indebtedness and credit facilities which contain financial and operating covenants; the adoption by the U.S. government of new laws, rules, and regulations, such as those relating to organizational conflicts of interest issues or limits; risks related to completed and future acquisitions, including our ability to realize the expected benefits from such acquisitions; an inability to utilize existing or future tax benefits, including those related to our stock-based compensation expense, for any reason, including a change in law; and variable purchasing patterns under U.S. government GSA schedules, blanket purchase agreements and indefinite delivery, indefinite quantity contracts.   Additional information concerning these and other factors can be found in our filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K, filed with the SEC on May 23, 2013.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.  All such statements speak only as of the date made and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.