Booz Allen Hamilton Holding Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019; figures are compared with fiscal 2018 unless otherwise noted. The filing is an annual report, not a standalone Q4 filing. Fourth-quarter figures are included below.
Business context
Booz Allen provides consulting, analytics, digital, engineering, mission operations and cybersecurity services. It operates as one reportable segment and is highly dependent on U.S. government work: 96% of FY2019 revenue was from contracts whose end client was a U.S. government agency or department. The company had approximately 26,100 employees and reported record total backlog.
Financial performance and liquidity
- Revenue: $6.704 billion, up 8.7%. Growth reflected stronger client demand, increased consulting headcount and labor, improved contract performance, and higher billable expenses. Revenue excluding billable expenses, a non-GAAP measure, was $4.699 billion versus $4.306 billion.
- Profitability: Operating income was $602.4 million, up 15.9%; operating margin increased to 9.0% from 8.4%. Net income was $418.5 million, up 38.7%; diluted EPS was $2.91 versus $2.03. Adjusted EBITDA was $674.6 million and adjusted diluted EPS was $2.76; these are non-GAAP measures.
- Taxes and unusual items: Effective tax rate fell to 18.8% from 29.8%, reflecting the 2017 Tax Act and a $27.9 million deferred-tax remeasurement benefit. A long-term disability plan amendment reduced expense by $11.2 million. FY2019 also included $3.7 million of debt-refinancing transaction expenses.
- Cash flow: Operating cash flow was $499.6 million, up from $369.1 million. Capital expenditures were $94.7 million, versus $78.4 million; free cash flow, as defined by the company, was $404.9 million versus $290.7 million.
- Balance sheet and liquidity: At March 31, 2019, cash was $284.0 million, working capital was $520.1 million, and total debt was $1.760 billion (long-term debt, net of current portion, was $1.702 billion). Reported liquidity was approximately $1.2 billion, including cash, $499 million of revolver availability and the $400 million delayed-draw facility. The delayed-draw facility was fully drawn on April 23, 2019, for general corporate purposes.
- Shareholder returns: FY2019 dividends declared were $0.80 per share; the company repurchased 5.1 million shares for $239.8 million. A $0.23-per-share quarterly dividend was declared after year-end.
Changes versus the prior period
- Revenue accelerated to 8.7% growth from 6.2%; operating income rose 15.9%, compared with 2.7% growth in FY2018.
- Net income increased 38.7%, aided by lower taxes as well as stronger operating results.
- Total backlog rose 20.6% to $19.321 billion. Funded backlog increased to $3.436 billion from $2.685 billion, while unfunded backlog declined to $3.687 billion from $4.161 billion; priced options rose to $12.198 billion from $9.174 billion.
- Cash from operations improved, but accounts receivable increased and days sales outstanding rose to 70 from 66, primarily due to slower billing and collections.
- Government-related audit reserves increased to $195.3 million from $168.6 million.
Outlook, commentary and key risks
- Management expects cash from operations, cash on hand and revolver capacity to meet anticipated requirements for the next 12 months. It expects FY2020 capital expenditures to increase from FY2019, reflecting continued investment in facilities, infrastructure, financial systems and IT. The filing provides no specific revenue or earnings guidance.
- Remaining performance obligations were $5.8 billion; management expected to recognize more than half over the next 12 months and about three-quarters over 24 months. This is distinct from total backlog, which includes unfunded amounts and unexercised options and may not convert to revenue.
- The principal concentration risk is federal contracting: government budget delays, shutdowns, shifting mission priorities, insourcing, procurement changes, contract protests and competition could delay or reduce awards and funding. Hiring, retention, security-clearance availability and contract cost estimates also affect growth and margins.
- The DOJ is conducting a civil and criminal investigation into certain cost-accounting and indirect-cost charging practices; the SEC notified the company of a related investigation. Booz Allen said it was cooperating but could not reasonably estimate the expected cost or potential loss. The filing reports no material accrual for these proceedings; separately, it records $195.3 million for potential government contract-cost adjustments.
- Debt and interest-rate exposure remain material. Borrowings under the secured credit facility are partly variable-rate; the company used interest-rate swaps and reported compliance with financial covenants at year-end. It also identified potential risks from government funding delays and the planned phaseout of LIBOR.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Track the DOJ and SEC investigations, related legal costs, outcomes and any changes to the $195.3 million government audit reserve.
- Assess how much of the $19.3 billion total backlog is funded and converts to revenue, and whether hiring and deployment keep pace with demand.
- Monitor receivables, billing and collections after DSO rose to 70, along with the adequacy of the doubtful-account allowance.
- Review post-April 23, 2019 debt and liquidity after the $400 million delayed-draw borrowing, including interest costs, covenant headroom and capital returns.
- Separate recurring earnings from the tax remeasurement benefit and disability-plan amendment benefit; consider the company’s non-GAAP adjustments alongside GAAP results.
- Evaluate exposure to federal budget decisions, contract renewals and protests, as well as the company’s ability to sustain margins amid wage growth and changing contract mix.