Workforce dynamics remain paramount across the government market

Correlations between employee headcount growth and the financial performance of a company in the government market are not always exact, but there certainly is a relationship between the two.

Regardless of whether they are a  government technology and services provider, or a defense hardware and systems maker.

Here is a snapshot of how Booz Allen Hamilton and L3Harris Technologies explained the human capital landscape in their most recent earnings calls with investors held Friday.

Booz Allen Hamilton

Part of CEO Horacio Rozanski's opening remarks to analysts included this sentence: "Today, I am also excited to share that we have crossed the milestone of 30,000 Booz Allen employees."

That line is significant for a company like Booz Allen, which directly connects hiring and deployments of people to customers with the firm's revenue and profit growth. Client-facing staff headcount of 27,208 was 4.2% higher year-over-year for the fiscal second quarter ended Sept. 30.

During Booz Allen's fiscal second quarter call, Rozanski acknowledged this fact of life companies in every industry are dealing with -- managing costs in this elevated inflation environment is a priority to ensure there is room for other investments.

Within the context of Booz Allen, such investments include those being made in the talent and the technology areas the company wants to be a leading integrator of for government agencies.

How Booz Allen emphasizes the aspect of speed in its long-term strategy dubbed VoLT may also explain how the firm thinks about onboarding and deployment, which has been a priority for Kristine Martin Anderson since she became chief operating officer in June.

"One of the things Kristine has really has all of us focused on is not just on hiring, but on the process of going from hiring to somebody getting fully billable, which is a process that, frankly, used to take too long at Booz Allen," Rozanski said. "We're shortening that significantly. That allows us to get more revenue with a smaller bench, which drives billability, which then drives our ability to invest in talent, our ability to grow, and creates a bit of a virtuous circle here."

The McLean, Virginia-based technology integrator also has some cushion from the impacts of inflation given the nature of its business being mostly 75% of a cost-plus or time-and-materials nature. Chief Financial Officer Matt Calderone said that for the most part, "we can pass those (wages) through" to the customer.

"We see that every year. When salaries go up, and we're certainly seeing more of that this year than we have in the past," Calderone said.

For anyone curious: no updates on the integration of EverWatch quite yet from Booz Allen, which completed that $440 million acquisition in mid-October after having to defend it against a Justice Department antitrust lawsuit.

Second quarter revenue of $2.3 billion was 9.2% higher compared to the prior year period, while profit was up 6% year-over-year to $285.9 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

Booz Allen nudged up its full fiscal-year sales growth outlook to between 8% and 10%, compared to the prior guide of 5%-to-9%. Revenue in its 2022 fiscal year totaled $8.36 billion.

The firm also lifted its adjusted EBITDA guidance to the range of $975 million-to-$1.015 billion, up from the prior range of $950 million-to-$1,000 million. Adjusted EBITDA margin is now anticipated to fall between high-10% and low 11% versus the previous mid-to-high 10% outlook.

L3Harris Technologies

Salaries are the first and primary avenue most of us think about when considering the topic of companies investing in their employees, of which L3Harris has around 47,000 based in the U.S. and around the world.

Benefits are a second significant expenditure item for companies under the category of labor, and one also now under a different kind of microscope in a period of nearly 8% inflation at a four-decade high.

During L3Harris' third quarter call Friday, CEO Chris Kubasik indicated the company's focus on its workforce in 2023 will have an impact on the bottom line but that the moves are necessary.

L3Harris will have a larger merit increase pool and is holding health insurance co-pays flat year-over-year, Kubasik said on the call that coincides with the company's current open enrollment period.

"These (actions) cost money, and it's a decision that I and the leadership team made that we're going to spend more money on the workforce, and that does provide a headwind to the margins, which we're going to try to find a way to absorb," Kubasik told analysts. "But I'd rather make these investments now, keep the workforce engaged, motivated and focusing on the programs that they support."

In an accompanying investor letter on the third quarter, L3Harris said it has added nearly 6,000 new hires and around 850 new college graduates during this calendar year so far.

That letter also acknowledges the reality of L3Harris' own industry and many other sectors for 2022: a tightening human capital market compounded by rising wages and higher attrition across skill levels, partly because of increased labor mobility.

"A lot of our focus of the leadership team has been to keep the workforce engaged and motivated," Kubasik said. "I think we can all admit over the last couple of years, we found new ways to do work. The attrition was hard for, I think, every company, but it seems this industry in particular, that seems to have stabilized a little bit."

Regarding the supply chain dysfunctions Kubasik and his industry peers have often spoken of: he said the situation has improved but still not recovered in the way L3Harris expected. Inflation is also in the company's assumptions for 2023.

Melbourne, Florida-headquartered L3Harris now sees revenue for 2022 being 2% lower year-over-year as opposed to the prior outlook of 1% growth, which Kubasik said is more "deferrals versus lost sales."

The company also lowered its operating margin guidance to 15.5% versus the prior 16-to-16.25% range.

Sales in the third quarter climbed 3% year-over-year to $4.2 billion.