Booz Allen Hamilton Holding Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018. Although the request references 2017 Q4, this filing is an annual report; it also reports fiscal Q4 results for the three months ended March 31, 2018. Amounts are in U.S. dollars.
Business context
Booz Allen provides management and technology consulting, engineering, analytics, digital, mission operations, and cybersecurity services. It reported one operating segment and approximately 24,600 employees. The U.S. government remained the principal end client, generating 97% of FY2018 revenue. The company’s strategy emphasizes technical capabilities, talent, innovation, and expansion in commercial and international markets.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $6.172 billion | $5.804 billion | +6.3% |
| Operating income | $520.1 million | $484.2 million | +7.4% |
| Operating margin | 8.4% | 8.3% | +0.1 percentage point |
| Net income | $305.1 million | $252.5 million | +20.8% |
| Diluted EPS | $2.05 | $1.67 | +22.8% |
| Operating cash flow | $369.1 million | $382.3 million | -3.4% |
| Capital expenditures | $78.4 million | $53.9 million | Higher |
| Free cash flow (non-GAAP) | $290.7 million | $328.4 million | Lower |
- Revenue growth reflected increased client demand, client-staff labor, headcount, and billable expenses. Management cited improved contract profitability as a contributor to higher operating income.
- Net income benefited from a lower effective tax rate: 30.3% versus 38.7%. The rate included effects of the 2017 Tax Act and $14.5 million of excess share-based compensation tax benefits recognized in earnings.
- Interest expense increased 32.1% to $82.3 million, primarily following issuance of $350 million of 5.125% senior notes in April 2017.
- Cash and cash equivalents were $287.0 million; total debt was $1.819 billion. Working capital was $452.6 million. Revolver capacity was $500 million, with $498.6 million available at year-end. The company reported compliance with debt covenants.
- Operating cash flow declined amid higher cash taxes and working-capital needs, including growth in receivables. Days sales outstanding rose to 65 from 60.
- FY2018 contract mix was 51% cost-reimbursable, 25% time-and-materials, and 24% fixed-price. Fixed-price work offers potential for higher margins but exposes the company to cost overruns.
Material changes and operating indicators
- Total backlog rose 17.9% to $16.020 billion from $13.592 billion. Funded backlog declined to $2.685 billion from $2.815 billion; unfunded backlog increased to $4.161 billion and priced options to $9.174 billion. Management cautions that unfunded backlog and options are less certain and may not convert to revenue.
- Global commercial revenue grew to $197.0 million from $152.1 million, while remaining 3.2% of total revenue. Defense revenue was $2.83 billion, intelligence $1.49 billion, and civil government $1.65 billion.
- Headcount increased to approximately 24,600 from 23,300. New-contract win rate was 63%, versus 62%; recompete win rate was 87%, versus 90%.
- FY2018 fiscal fourth-quarter revenue was $1.636 billion, operating income $136.0 million, net income $84.9 million, and diluted EPS $0.58. The comparable FY2017 quarter reported revenue of $1.582 billion and net income of $66.3 million.
- The company acquired cybersecurity firm Morphick in October 2017. There were no material acquisitions during FY2018; the prior-year acquisition of Aquilent drove much of the FY2017 investing cash outflow.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said existing cash, operating cash flow, and revolver capacity were expected to meet anticipated requirements for the next 12 months. It expected FY2019 capital expenditures to increase from FY2018 to support growth, facilities, systems, and technology.
- Key business risks include dependence on U.S. government spending and appropriations, shutdowns and continuing resolutions, contract competition and bid protests, insourcing, cost-reimbursement limits, contract performance and estimation risk, and the ability to recruit and retain cleared technical staff. Cybersecurity incidents, regulatory scrutiny, and customer concentration also pose risks.
- The DOJ is conducting a civil and criminal investigation into certain cost-accounting and indirect-cost charging practices; the SEC informed the company it is conducting a related investigation. Booz Allen said it was cooperating, but could not reasonably estimate potential costs or losses. FY2018 legal costs increased, partly offset by insurance reimbursements; further costs were expected.
- The company recorded a $168.6 million liability for its best estimate of potential government contract cost adjustments and refunds. Management said it had recorded appropriate provisions, but audit outcomes could differ.
- A shareholder securities class action related to the investigation was dismissed without prejudice in February 2018. A derivative action was stayed pending securities litigation. A separate former-stockholder claim was amended in April 2018; alleged damages were unknown. Management did not expect currently ongoing matters to materially affect financial condition or results, but noted outcomes are uncertain.
- The 2017 Tax Act accounting was provisional. The company recorded a $9.1 million tax benefit from deferred-tax remeasurement and said further guidance and analysis could change the amounts. No material goodwill impairment was recorded; goodwill was $1.581 billion.
- The board declared $0.70 per share in FY2018 dividends and authorized a higher share-repurchase limit after year-end. These capital returns remain subject to board discretion, cash needs, and debt restrictions.
Important facts for investors to verify
- Progress and any financial or regulatory consequences of the DOJ and SEC investigations, including the adequacy of the $168.6 million contract-audit reserve and potential insurance recovery.
- How much of the $16.020 billion backlog—particularly unfunded backlog and priced options—converts into funded work and recognized revenue.
- Whether receivables, DSO, and operating cash flow improve as revenue grows, and whether increased FY2019 capital spending is realized as planned.
- Debt-service capacity and exposure to variable rates; the company had $450 million of interest-rate swaps, scheduled to begin reducing rate exposure in FY2019.
- Final tax effects of the 2017 Tax Act and any resulting changes to the effective tax rate or deferred tax balances.
- The full audited statements and notes: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of March 31, 2018.