Booz Allen Hamilton Holding Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2016 (FY2016), with FY2015 comparison. The filing also reports FY2016 fourth-quarter results; it is not a calendar-year 2015 quarterly filing.
Business context
Booz Allen provides management, technology, consulting, engineering and related services. The business is managed as one operating segment and is heavily dependent on U.S. government work: 97% of FY2016 revenue came from contracts where the end client was a U.S. government agency. The company had approximately 22,600 employees. Its largest individual client was the U.S. Army, at approximately 15% of revenue.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Revenue | $5,405.7 million | $5,274.8 million | Up 2.5% |
| Operating income | $444.6 million | $458.8 million | Down 3.1% |
| Operating margin | 8.2% | 8.7% | Down 50 basis points |
| Net income | $294.1 million | $232.6 million | Up 26.5% |
| Diluted EPS | $1.94 | $1.52 | Up |
| Operating cash flow | $249.2 million | $310.0 million | Down 19.6% |
| Free cash flow (non-GAAP) | $182.6 million | $273.9 million | Down; capex increased |
- FY2016 fourth-quarter revenue was $1,424.3 million; operating income was $104.5 million and net income was $65.5 million.
- Net income benefited from income tax expense falling to $85.4 million from $153.3 million. The effective tax rate was 22.5%, versus 39.7%, primarily reflecting release of uncertain tax position reserves and tax credits. The company released approximately $56.9 million of pre-acquisition tax reserves.
- Cash and cash equivalents were $187.5 million at year-end, down from $207.2 million. Working capital was $249.9 million, versus $299.7 million. Accounts-receivable DSO rose to 60 days from 59.
- Total debt was $1,597.3 million, versus $1,612.8 million. The company reported $463.2 million of available revolving-credit capacity; $35 million drawn at year-end was repaid April 5, 2016. Debt is secured by substantially all company assets, and the company reported compliance with credit covenants.
- FY2016 revenue mix was 51% cost-reimbursable, 26% time-and-materials and 23% fixed-price. Cost-reimbursable share declined from 55% in FY2015, while fixed-price rose from 20%.
Material changes versus FY2015
- Revenue returned to growth after declining 3.7% in FY2015. Civil-government revenue increased to $1.4 billion from $1.2 billion; global commercial revenue rose to $122.2 million from $97.6 million. Defense and intelligence revenue were each approximately $2.6 billion and $1.3 billion, respectively, broadly flat in dollars.
- Billable expenses rose 7.6% to $1,513.1 million, principally due to increased subcontractor use and direct client expenses. General and administrative expenses rose 7.1% to $806.5 million, reflecting greater strategic investment, marketing and bid-and-proposal activity.
- Operating income and margin declined despite revenue growth, as indirect spending and billable expenses increased. The filing notes a partial offset from a net decrease in provisions for potential recovery of allowable expenses.
- Total backlog increased 26.2% to $11.814 billion from $9.360 billion. It comprised $2.673 billion funded, $2.546 billion unfunded and $6.595 billion of priced options; unfunded backlog and options are less certain and are not guaranteed revenue.
- Capital spending increased to $66.6 million from $36.0 million. Investing cash use also included the $51.1 million net cash acquisition of SPARC, LLC’s software services unit, acquired in November 2015.
Outlook, risks and unusual items
- Management described FY2017 priorities as continuing Vision 2020 investments, expanding technical capabilities and commercial/international markets, and deploying service offerings across the client base. The filing provides no numerical revenue or earnings guidance. Management expected fixed-price work to remain roughly 20%–25% of revenue in the near term.
- Management expected cash, operating cash flow and revolving-credit capacity to cover anticipated requirements for the next 12 months, including operations, working capital, capital expenditures, debt service and taxes.
- Key risks include dependence on U.S. government budgets and appropriations, sequestration and procurement delays, contract competition and protests, possible contract termination or reduced task orders, cost overruns on fixed-price work, employee hiring and clearance constraints, regulatory audits, and cybersecurity or classified-information incidents.
- The company recorded a $189.9 million liability for its current best estimate of potential refunds related to government audits or reviews of contract costs incurred after FY2009, down from $205.3 million. Management also disclosed pending audits and investigations involving labor time reporting, procurement integrity and classified-information access.
- Four remaining suits relating to the 2008 acquisition sought approximately $291.7 million in alleged damages, subject to trebling under RICO, plus punitive damages, costs and fees. The suits had been dismissed and were on appeal; management did not expect a material adverse effect. No material amounts were accrued for these proceedings.
- Other notable items: the contingent earnout liability was reduced from $4.5 million to zero after the company judged performance thresholds unlikely to be met. The company paid $0.54 per share in regular dividends during FY2016 and repurchased 2.1 million shares for $54.9 million.
Most important facts for investors to verify
- Whether backlog converts to funded work and revenue, particularly the $9.141 billion in unfunded backlog and priced options.
- Whether revenue growth can continue while operating margin and operating cash flow recover from FY2016 declines.
- The sustainability of the lower effective tax rate: FY2016 net income benefited from tax reserve releases and credits.
- Government audit outcomes, the adequacy of the $189.9 million cost-recovery reserve, and developments in the acquisition-related appeals.
- Debt repayment capacity, floating-rate exposure, covenant headroom and continued availability of revolving credit.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of March 31, 2016.