Booz Allen Hamilton Holding Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017. Although the request metadata says “2016 Q4,” this filing reports FY2017; it also includes unaudited quarterly results for FY2017 and FY2016. Unless noted, figures below are in U.S. dollars.
Business context
Booz Allen provides management and technology consulting, engineering, analytics, digital, mission operations, and cybersecurity services. It operates as one reportable segment. The business remains highly dependent on U.S. government work: 97% of FY2017 revenue was from contracts whose end client was a U.S. government agency or department. The company reported approximately 23,300 employees.
Financial and operating metrics
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Revenue | $5,804.3 million | $5,405.7 million | Up 7.4% |
| Operating income | $484.2 million | $444.6 million | Up 8.9%; operating margin 8.3%, versus 8.2% |
| Net income | $252.5 million | $294.1 million | Down 14.1% |
| Diluted EPS | $1.67 | $1.94 | Down 13.9% |
| Operating cash flow | $382.3 million | $249.2 million | Up 53.4% |
| Capital expenditures | $53.9 million | $66.6 million | Free cash flow, as defined by the company, was $328.4 million, versus $182.6 million |
| Cash and cash equivalents | $217.4 million | $187.5 million | At March 31 |
| Total debt | $1,663.3 million | $1,597.3 million | At March 31; debt is primarily floating-rate term loans and revolver borrowings |
| Liquidity | $587.4 million | — | At March 31, 2017: cash plus $370.0 million of stated revolver availability |
FY2017’s effective tax rate rose to 38.7% from 22.5%, chiefly because FY2016 benefited from a release of uncertain tax reserves. Interest expense declined 12.0% to $62.3 million, following debt amendments and refinancing.
- Backlog: $13.592 billion, up 15.1% year over year: $2.815 billion funded, $3.098 billion unfunded, and $7.679 billion priced options. The company cautions that unfunded backlog and options may not convert to revenue.
- Revenue mix: Defense clients generated $2.7 billion (46.6% of revenue), intelligence $1.3 billion (23.1%), civil government $1.6 billion (27.7%), and global commercial clients $152.1 million (2.6%). The U.S. Army alone represented approximately 14% of revenue.
- Contract mix: 50% cost-reimbursable, 26% time-and-materials, and 24% fixed-price. Approximately 91% of revenue was earned as a prime contractor.
- Q4 FY2017: Revenue was $1,582.1 million, operating income $129.2 million, and net income $66.3 million. Q4 FY2016 figures were $1,424.3 million, $104.5 million, and $65.5 million, respectively.
Material changes versus prior period
- Revenue growth reflected stronger client demand, higher consulting headcount and billability, and increased billable expenses, including subcontractors and client materials. Billable expenses rose 15.7%, faster than revenue.
- Operating income and margin improved, with management citing better contract performance, lower indirect spending, and administrative efficiencies.
- Net income declined despite higher operating income, principally because FY2016 had a substantially lower effective tax rate from reserve releases and tax credits.
- Operating cash flow increased to $382.3 million. Investing cash outflow rose to $300.9 million, primarily reflecting the Aquilent acquisition.
- Total backlog grew from $11.814 billion to $13.592 billion; funded backlog increased from $2.673 billion to $2.815 billion.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management said existing cash, operating cash flow, and revolver capacity were expected to cover anticipated cash needs for the next 12 months. Its Vision 2020 strategy emphasizes technical capabilities, talent, innovation, and commercial and international expansion.
- Government exposure: Federal budget delays, continuing resolutions, shutdowns, sequestration, spending reductions, agency insourcing, and shifting mission priorities could delay or reduce awards and funding. Government contracts may be terminated or options not exercised.
- Execution and compliance: Risks include competitive bidding and protests, contract cost overruns, estimates on fixed-price work, employee utilization and clearance availability, government audits and cost disallowances, and cybersecurity or classified-information incidents. The company had a $175.7 million reserve for potential contract-cost adjustments at March 31, 2017.
- Acquisition: Aquilent was acquired on January 24, 2017 for estimated consideration of $253.7 million. Preliminary purchase accounting included $199.8 million of goodwill and $69.0 million of customer-relationship intangibles; allocations remained subject to finalization. A $3.8 million impairment charge was recorded for acquired intangible assets from a historical acquisition.
- Tax and accounting items: FY2017 included $6.9 million of expense related to correcting immaterial prior-period misstatements concerning long-term-disability benefits and actuarial gains and losses. Management stated the corrections were immaterial. Income tax reserves increased to $11.6 million, including an acquisition-related uncertainty.
- Legal matters: Certain government audits and investigations were pending. Three remaining former-stockholder suits sought approximately $241.7 million in alleged damages, substantially all potentially subject to trebling under RICO, plus punitive damages, costs, and fees. Management did not expect currently known matters to materially affect financial condition or results, but outcomes are uncertain.
- Subsequent events: After year-end, the company issued $350 million of 5.125% senior notes due 2025 and used the proceeds to repay revolver borrowings. It also entered into $300 million of interest-rate swaps, effective in 2018, to hedge floating-rate exposure.
Important facts for investors to verify
- Whether the record backlog—especially unfunded backlog and priced options—converts to funded work and revenue on expected timelines.
- How much revenue growth can be sustained while billable expenses and subcontractor use grow faster than revenue.
- The effective tax rate absent the unusually favorable FY2016 reserve release, and the impact of the new acquisition-related tax reserves.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and the effect of the post-year-end notes and swaps.
- Developments in government audits, the $175.7 million contract-cost reserve, and the former-stockholder litigation.
- Aquilent’s integration, realization of expected benefits, and final purchase-price allocation.