Booz Allen Hamilton says Justice Department probe could take years to resolve

Key Points
  • Booz Allen Hamilton expects a Department of Justice investigation into its cost accounting could take years to resolve.
  • The comment contributed to a sell-off of Booz Allen shares Monday.
  • Booz Allen is working with the government on the investigation and the company has not been charged with any wrongdoing.
Booz Allen Hamilton Cyber Solution Center.
Jeffrey MacMillan | Washington Post | Getty Images

Booz Allen Hamilton said Monday that it expects a Department of Justice investigation into its cost accounting could take years to resolve.

On an earnings call with analysts, Chief Executive Horacio Rozanski warned, "The timeline tor resolution remains uncertain, but given the complexity of cost accounting issues and the fact that we are still in the early stages of the investigation, we believe it is more likely to be years than months."

That commentary contributed to a more than 4 percent plunge for the stock in trading Monday.

The consulting firm, which derives nearly all of its revenue from government agency contracts, disclosed in June that it is under both criminal and civil investigation by the DOJ for how it calculated costs billed to the U.S. government.

"We continue to believe that the DOJ's focus is on certain elements of the company's cost accounting and indirect cost charging practices with the U.S. government," said Rozanski. "We do not believe our GAAP accounting or financial reporting practices are the focus."

Consulting firms charge for both direct and indirect costs. Direct costs include a contractor's salary; indirect costs include office space, equipment and marketing expenses.

Booz Allen reiterated that it is working with the federal government to resolve the issue. It has not been charged with any wrongdoing. In June, the company said its own internal and external audit processes had not identified any significant material weaknesses or erroneous cost charging.

On the call Monday Rozanski said, "We do not believe there has been negative impact to our client relationships, nor is there any indication of negative impact on our ability to perform on existing contracts, bid on new ones, or recruit and retain talent."

For the fiscal first quarter of 2018, Booz Allen reported adjusted earnings of 53 cents per share, beating consensus estimates from Thomson Reuters by 6 cents. Revenue of $1.49 billion fell short of expectations for $1.52 billion. Full-year EPS guidance of $1.83 to $1.93 compared with analyst estimates of $1.88, while the company expects revenue to grow 4 to 7 percent for the year.

But that outlook does not factor in potential costs or the need to put aside reserves associated with the DOJ's investigation because "at this early stage we cannot reasonably estimate the cost," according to Chief Financial Officer Lloyd Howell.

In other words, there are many unknowns. "We believe in the near-term, management will continue to bid successfully on new projects and report book-to-bill greater than 1.0x," wrote Brian Ruttenbur, a senior equity research analyst at Drexel Hamilton in a post-earnings note. "However, because of the investigation uncertainty and the unknown outcome for the company, we are maintaining a hold rating on shares of BAH."

This is not the first time Booz Allen Hamilton has garnered unwanted attention. The consulting giant, which gleans about half its sales from defense contracts and nearly another quarter from intelligence agencies, employed Edward Snowden, who exposed the NSA's vast surveillance operations by leaking secret files to news outlets in 2013. And last fall, an employee working under an NSA contract was charged with stealing classified information.

Shares of Booz Allen Hamilton are down about 17 percent since the June 15 disclosure.