Booz Allen Hamilton Holding Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless noted.
Business context
Booz Allen provides management consulting, technology, engineering, and related services, primarily to U.S. government defense, intelligence, and civil agencies. Government work generated 98% of FY2014 revenue. The company operated as one reportable segment and employed approximately 22,700 people at year-end.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $5.479 billion | $5.758 billion | Down 4.9% |
| Operating income | $460.6 million | $446.2 million | Up 3.2% |
| Operating margin | 8.4% | 7.7% | Up 0.7 percentage points |
| Net income | $232.2 million | $219.1 million | Up 6.0% |
| Diluted EPS | $1.54 | $1.45 | Up 6.2% |
| Cash from operations | $332.7 million | $464.7 million | Down 28.4% |
| Capital expenditures | $20.9 million | $33.1 million | |
| Free cash flow, company-defined | $311.8 million | $431.5 million |
Cost management lifted operating income and margin despite lower revenue. Net income benefited in part from a lower effective tax rate, 39.0% versus 40.5%. Interest expense rose 11.0% to $78.0 million. FY2014 billable expenses were $1.487 billion; general and administrative expenses were $742.5 million.
At March 31, 2014, cash was $260.0 million, working capital was $338.9 million, and total debt was approximately $1.659 billion, including current maturities. The company had $497.6 million of available revolving-credit capacity and reported compliance with debt covenants. Debt was secured by substantially all company assets.
Total backlog was $9.838 billion, down 14.7% from $11.535 billion a year earlier. Funded backlog declined 8.7% to $2.290 billion; unfunded backlog was $2.343 billion and priced options were $5.205 billion. Management cautions that backlog, especially unfunded amounts and options, may not convert to revenue.
Fourth-quarter FY2014 revenue was $1.400 billion, operating income $89.2 million, and net income $46.9 million. In fourth-quarter FY2013, the respective figures were $1.545 billion, $112.9 million, and $54.8 million.
Material changes and management commentary
- Revenue fell primarily because of lower demand, reduced employee headcount and billable expenses, the October 2013 government shutdown, and weather-related closures. The BES acquisition contributed approximately $103 million of FY2014 revenue, partly offsetting the decline.
- Employee count declined from approximately 24,500 to 22,700; consulting staff declined from approximately 22,000 to 20,600. Management reported improved staff productivity and lower indirect spending.
- Operating margin improved through cost discipline, improved contract profitability, and recovery of additional allowable expenses. Cost of revenue fell 5.4% and G&A fell 11.0%.
- Operating cash flow decreased mainly because of higher cash taxes and payment timing. Accounts-receivable days sales outstanding improved slightly to 60 from 61.
- Defense revenue was approximately 49.4% of FY2014 revenue, intelligence 25.5%, civil government 22.5%, and commercial and international 2.6%. The U.S. Army alone represented approximately 16%.
- Revenue mix was 55% cost-reimbursable, 28% time-and-materials, and 17% fixed-price. Management said the shift toward fixed-price contracts during the year was expected to remain relatively stable in FY2015.
Outlook, risks, and unusual items
The filing provides no quantified company revenue or earnings guidance. Management expected contract-award activity to increase through the remainder of the U.S. government fiscal year following January 2014 appropriations, while emphasizing continuing uncertainty. It identified cyber security, advanced analytics, technology integration, and health care as areas of demand and described plans to expand commercial and Middle East and North Africa operations.
- Federal spending exposure: Sequestration, agency cost cutting, delayed appropriations, shutdowns, insourcing, and changing mission priorities could reduce awards, funding, task orders, or contract renewals.
- Backlog and workforce: Backlog contracted materially, and revenue growth depends on converting funded work and hiring, retaining, and deploying cleared staff.
- Contract and compliance risks: Fixed-price work can expose the company to overruns; government audits may disallow costs or withhold payments. The company recorded a $189.8 million liability for its current estimate of potential refunds related to audits or reviews of contract costs incurred after FY2007.
- Legal matters: Six former officers and stockholders seek approximately $348.7 million in alleged damages, including amounts sought to be trebled under RICO, plus punitive damages and fees. Management did not expect the matters or other identified proceedings to materially affect results; no material litigation accrual was recorded.
- San Antonio administrative agreement: A 2012 proposed debarment was lifted under an Air Force agreement requiring compliance enhancements and quarterly reporting during its three-year term.
- Cybersecurity and sensitive information: The company identifies cyber attacks, security breaches, and mishandling of classified information as significant operational and reputational risks.
- Debt and interest rates: Variable-rate debt creates interest-rate exposure; a hypothetical 1% rate increase was estimated to raise FY2014 interest expense by approximately $8.1 million.
- Subsequent refinancing: On May 7, 2014, the company shifted approximately $170 million from Term Loan B to Term Loan A, extended Term Loan A and revolver maturities to May 31, 2019, and amended covenants for greater flexibility. Rates were unchanged; approximately $3 million of related costs were expected to be expensed in the June 2014 quarter.
- Shareholder distributions: FY2014 included $2.00 per share in special dividends, in addition to regular quarterly dividends of $0.10 per share. Total cash distributions and dividend equivalents were $401.9 million. Future dividends remain at board discretion.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at March 31, 2014.
Important facts for investors to verify
- Whether the 14.7% backlog decline and lower funded backlog lead to further revenue contraction or stabilize as new awards and funding arrive.
- How much of the $9.838 billion backlog is ultimately funded, exercised, converted to revenue, and earned profitably.
- Whether operating-margin gains are sustainable as headcount, contract mix, compensation costs, and federal demand change.
- The outcome of government audits, the adequacy of the $189.8 million contract-cost reserve, and any developments in the former-stockholder litigation.
- Post-refinancing debt balances, covenant headroom, cash generation, and the effect of variable interest rates.
- The sustainability of dividends and the company’s capacity to fund distributions alongside debt service and operating needs.