Booz Allen Hamilton Holding Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012. The filing also reports fourth-quarter results; this is not a calendar-year 2011 quarterly filing.
Business context and reporting period
Booz Allen provides management and technology consulting, principally to U.S. government clients in defense, intelligence and civil markets. It reported one operating segment and derived 98% of FY2012 revenue from U.S. government work. The U.S. Army was its largest individual client at approximately 17% of revenue. The company reported about 25,000 employees and was pursuing growth in cyber, healthcare, analytics, commercial and international work.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $5.859 billion | $5.591 billion |
| Operating income and margin | $387.4 million; 6.6% | $319.4 million; 5.7% |
| Net income | $240.0 million | $84.7 million |
| Diluted EPS | $1.70 | $0.66 |
| Net cash from operations | $360.0 million | $296.3 million |
| Capital expenditures | $76.9 million | $88.8 million |
| Free cash flow (non-GAAP) | $283.1 million | $207.6 million |
| Cash and cash equivalents at year-end | $484.4 million | $192.6 million |
| Working capital at year-end | $743.2 million | $494.3 million |
| Debt outstanding at year-end | $965.4 million carrying value; $970.0 million principal | $994.3 million carrying value |
FY2012 diluted net margin was approximately 4.1%, versus approximately 1.5% in FY2011. Adjusted EBITDA, a non-GAAP measure, was $488.1 million versus $444.4 million; adjusted diluted EPS was $1.61 versus $1.24. The company generated $283.1 million in free cash flow after capital expenditures.
At March 31, 2012, funded backlog was $2.898 billion, unfunded backlog $2.681 billion and priced options $5.225 billion, for total backlog of $10.804 billion. The $275 million revolving facility had $272.8 million of available capacity and no borrowings outstanding. Current assets were $1.658 billion and current liabilities $914.4 million.
Material changes versus the prior comparable period
- Revenue grew 4.8%; operating income increased 21.3% and operating margin expanded 90 basis points. Management cited better deployment of consulting staff against funded backlog, lower incentive and stock-based compensation, and lower intangible amortization. Higher business-development costs and deployment delays partly offset the improvement.
- Net income rose to $240.0 million from $84.7 million. Interest expense fell to $48.1 million from $131.9 million, primarily reflecting the February 2011 refinancing at lower rates; FY2011 also included substantial refinancing-related expense in “other, net.”
- Operating cash flow increased 21.5%. Cash taxes paid rose to $89.3 million from $7.7 million, principally as the company used its federal and most state NOL carryforwards; it also prepaid $46.8 million of FY2013 income taxes.
- Total backlog declined 1.1%, while funded backlog increased 21.1% to $2.898 billion. Unfunded backlog and priced options decreased.
- In Q4, revenue was $1.541 billion and net income $50.6 million. The company recorded a $10.1 million revenue and operating-income adjustment related to recovery of allowable state income tax expense from earlier FY2012 quarters; management said the adjustment was not material to those quarters or Q4.
Outlook, commentary, risks and unusual items
- Outlook: No specific financial guidance was provided. Management expected operating cash, existing cash and available revolver capacity to meet anticipated requirements for the next 12 months. Its stated growth focus included cyber, advanced analytics, technology integration and healthcare, alongside selective commercial and international expansion.
- Government exposure and budgets: The company warned that federal spending restraint, possible defense reductions under the Budget Control Act, continuing resolutions, insourcing, procurement delays and shifts in agency priorities could reduce or delay awards, funding and revenue. Backlog includes unfunded work and unexercised options and is not a guarantee of revenue.
- Contract and workforce risks: Contract profitability depends on estimates of costs, performance and award fees; fixed-price work exposes the company to cost overruns. Consulting-staff attrition rose to 21% from 19%, and hiring, utilization and security-clearance availability affect growth and margins.
- San Antonio matter: The Air Force proposed debarment of the San Antonio office in February 2012 after a former government employee improperly retained and shared sensitive procurement information. An April 13, 2012 administrative agreement lifted the proposed debarment and restored eligibility to compete for federal work, subject to a three-year compliance agreement and reporting obligations.
- Contingencies: The company recorded a $127.2 million liability for estimated potential adjustments to contract costs incurred after FY2006. Seven remaining suits by former officers and stockholders alleged approximately $348.7 million in damages, including amounts subject to trebling; management did not expect a material adverse effect and had recorded no accrual for those proceedings. Outcomes remain uncertain.
- Restructuring and capital returns: A Q4 restructuring reduced overall headcount by approximately 2% and generated a $15.7 million pretax charge, net of $4.5 million of recoverable revenue; $11.1 million remained accrued at year-end. The company paid a $0.09-per-share dividend in February 2012 and subsequently declared a $1.50 special dividend plus a $0.09 regular dividend, payable June 29, 2012.
- Debt and rates: Debt was secured by substantially all assets and subject to financial covenants. The company reported compliance at year-end: consolidated leverage ratio 1.60 versus a maximum 3.75, and interest coverage 15.85 versus a minimum 3.25. Management estimated a 1 percentage-point rate increase would add about $3.6 million to annual interest expense.
Most important facts for investors to verify
- Whether FY2012 growth and margin improvement persist as U.S. government budgets and contract awards tighten.
- How much of backlog converts to funded, profitable revenue, particularly unfunded backlog and priced options.
- Current status and compliance with the Air Force administrative agreement, and any resulting impact on contract awards or reputation.
- Developments in government contract audits and the $127.2 million estimated cost-adjustment liability, as well as the former-stockholder litigation.
- Debt amortization, floating-rate exposure, covenant headroom and the capacity to sustain dividends, especially after the special dividend.
- Whether the increase in attrition and the restructuring affect employee utilization, delivery capacity and future growth.