BAH — Q3 2026 Financial Report Analysis

Overview

Booz Allen Hamilton's revenue fell 3.9% to $2.78 billion in the quarter ended September 30, 2026 (its fiscal Q2 2027; Booz Allen's fiscal year ends March 31, so this is calendar Q3 2026). The cause was civilian government work: revenue from Civil and Commercial customers dropped 15.1% to $702 million, while National Security (defense plus intelligence) edged up 0.6% to $2.08 billion. The 10-Q puts the decline down to "a slowed procurement environment in the prior year, which resulted in a slower start to programs in the current year, predominantly from civil customers, leading to reduced headcount and billable expenses." Operating profit fell 13%, but net income still rose 3.4% to $181 million and diluted EPS rose 5.6% to $1.50. That rise came from a 9.0% tax rate, down from 24.9% a year ago, not from the business itself.

Results at a glance

Operating margin is the share of revenue left after running the business, before interest and tax. "Billable expenses" are subcontractor, travel and other non-labor costs Booz Allen passes through to the customer at a lower margin than its own staff's work; revenue excluding them is the better guide to how much of its own staff's work it sold.

Where the revenue went

National Security now combines what Booz Allen used to report as separate Defense and Intelligence lines. Its growth was small, and it includes revenue from two acquisitions made this fiscal year: Defy Security (cybersecurity, bought April 6, 2026 for $235 million) and Ultra I&C Mission Solutions (encryption and edge-computing products for defense, bought August 24, 2026 for about $729 million). The filing does not say how much revenue either added, so the organic decline (excluding acquisitions) is larger than the reported 3.9%, by an amount we can't measure from the filing.

Most of the revenue drop was pass-through costs. Billable expenses fell 11% ($918 million to $821 million), which the 10-Q attributes to "decreases in other direct expenses and subcontractor expenses, driven by customer demand and timing of customer needs." Revenue excluding these pass-through costs fell only 0.8%. That is less of a hit to profit than the headline suggests, because pass-through revenue carries little margin.

The workforce is shrinking. Total headcount fell to about 31,000 from 32,500, and billable customer staff to 28,200 from 29,600 (-4.7%). Cost of revenue fell 1%, which the filing explains as "decreases in salaries and related benefits due to overall headcount reductions."

Why profit fell before tax

Operating income dropped 13% to $245 million. Three lines account for it:

• Cost of revenue rose to 48% of revenue from 46%. Revenue fell 3.9% while cost of revenue (mostly staff pay) fell only 1%.
• General and administrative costs rose 6% to $328 million. The year-to-date explanation is "professional fees associated with the Company's acquisitions." The earnings release puts this quarter's acquisition-related "other corporate expenses" at $17 million, against none a year ago.
• Depreciation and amortization rose 24% to $51 million, "primarily due to the amortization of acquired intangible assets from Defy Security and Ultra Mission Solutions." Acquisition amortization was $22 million, up from $12 million.

Below operating income, net interest expense rose 8% to $52 million (less interest earned on a smaller cash balance). Other income was $6 million against a $2 million loss a year ago, helped by "an additional gain of $10 million from an earnout associated with the group of contracts sold in the fourth quarter of fiscal 2026." An earnout is a payment that depends on how a sold business performs after the sale.

Pre-tax income fell 14.6% to $199 million.

Takeaway: Booz Allen's EPS rose this quarter because of its tax rate, not its business. Pre-tax income fell 14.6% as civilian work kept shrinking and acquisition costs arrived before acquisition profits. The open question for the next two quarters is whether the newly bought product businesses and the defense pipeline (1.5x book-to-bill) can deliver the roughly 5-12% second-half revenue growth that the full-year guidance now requires.

What the headline numbers hide

• Most of the EPS growth is the tax rate. The effective tax rate fell to 9.0% from 24.9%, which the 10-Q attributes to "tax planning strategies to maximize tax benefit for foreign derived deduction eligible income" (a federal deduction for income tied to sales to foreign customers). At last year's rate, tax on $199 million of pre-tax income would have been about $50 million rather than $18 million. That gap of roughly $31 million, about $0.26 a share, is more than the entire $0.08 EPS increase. Booz Allen's full-year guidance assumes a 16-19% tax rate, so a 9% quarter shouldn't be expected to repeat every quarter.
• Buybacks helped a little. Diluted shares fell 2.7% to 119.6 million. Repurchases slowed to $99 million in the quarter, from $207 million a year ago, as cash went to acquisitions.
• The adjusted EPS figure (+18.1%) benefits from the same tax rate. Adjusted EPS of $1.76 adds back $17 million of acquisition costs and $22 million of acquisition amortization, net of tax, but it starts from GAAP net income. The 9% tax rate is therefore in the adjusted number too. Adjusted EBITDA, a profit measure that is not affected by taxes, fell 3.4% to $313 million; its margin rose slightly to 11.3% from 11.2%.
• One-off items in both years. This year: $17 million of acquisition costs (an expense) and a $10 million earnout gain (income). For the first half, the comparison is distorted by an $86 million release of tax reserves in fiscal Q1 2026, after an IRS examination closed. That release is why first-half net income is down 15% (to $379 million) and first-half EPS is down 12.6% (to $3.13), while first-half adjusted EPS is up 20.2%.
• Cash conversion is good for the half, weaker for the quarter. First-half operating cash flow was $575 million, 1.5x net income, with the 10-Q citing "strong working capital management and lower tax payments." In the quarter alone, operating cash flow was $294 million against $421 million a year ago, and free cash flow (operating cash flow minus capital spending) was $263 million against $395 million.
• Receivables rose, mostly because of an acquisition. Accounts receivable rose to $2,348 million from $2,063 million at March 31, but Defy Security brought $221 million of receivables with it. The cash-flow statement shows only a $46 million organic increase in receivables over six months. That isn't alarming, though it ran against falling revenue. Long-term unbilled receivables (revenue already recognized but not yet billable) rose to $142 million from $58 million, and the filing says most of that also came from Defy.
• Debt is up. Booz Allen issued $1.2 billion of new senior notes, paid off its Term Loan A-1 and spent $934 million on acquisitions in the half. Cash fell to $334 million from $728 million at March 31. Net debt is $4.08 billion, 3.3x trailing adjusted EBITDA, up from 2.5x a year ago.

Backlog and the contracting environment

Total backlog (the estimated value of contracts already won, including unexercised options) rose 1.9% to $40.9 billion. That includes about $164 million acquired with Ultra. Funded backlog, the portion for which money has actually been appropriated, rose 5.0% to $5.7 billion. The quarterly book-to-bill of 1.5x means new orders were worth 1.5 times the revenue billed in the quarter; the trailing-twelve-month figure is 1.1x.

The 10-Q is direct about the federal environment. It says agencies continue "independent reviews of their contract portfolios" under efficiency-focused executive orders and that Booz Allen has "had, and may in the future have, certain of our contracts impacted, reduced or canceled." It adds that "the slowed procurement environment and reductions in contract value have had a negative effect on our ability to convert backlog to revenue." Other risks it lists:

• Government funding runs only through December 11, 2026 under a continuing resolution (a stopgap that keeps spending at existing levels), with no full-year appropriations agreed and a possible shutdown.
• An April 30, 2026 executive order pushes agencies toward fixed-price contracts, where the contractor keeps any savings but absorbs any cost overruns, and directs them to renegotiate their ten largest contracts that are not fixed-price. Booz Allen says it supports the shift. Fixed-price work rose to 20% of revenue from 19%.
• A January 7, 2026 executive order could restrict buybacks and dividends for defense contractors the Secretary of War identifies as underperforming. Proposed legislation would go further. Booz Allen paid $71 million in dividends and $99 million in buybacks this quarter.

Guidance and outlook

Management raised and narrowed its fiscal 2027 guidance (year ending March 31, 2027):

The EPS raise is far larger than the EBITDA raise: the bottom of the EPS range rose 8.3%, while the bottom of the EBITDA range rose 1.6%. That points to items below operating profit, rather than stronger operations, as the main source of the extra EPS: the guidance assumes a 16-19% tax rate, and the first half ran at 15.8%.

The revenue range is the more demanding part. First-half revenue was $5,578 million, down 4.1%. By our arithmetic, reaching $11.3-$11.6 billion requires second-half revenue of about $5.7-$6.0 billion, roughly 5-12% above the same half a year earlier (the prior-year base is implied from the guidance's growth range, since this 10-Q doesn't restate it). Ultra will contribute for a full half and funded backlog is up 5%, so that is possible. But it depends on civilian agencies stopping their decline and on the December 11 funding deadline passing without a shutdown.

Our view: the defense and intelligence business is holding up, and the company is buying its way into higher-margin product work. The civil business is still shrinking at a double-digit rate. Reported EPS is being supported by tax planning and fewer shares, and those are less durable than operating growth. The next quarter (October-December 2026) is the first full test of whether acquisitions plus defense demand can return revenue to growth.