Booz Allen Hamilton Holding Corporation — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended March 31, 2013; “2012 Q4” in the request does not match the filing’s reporting period. Booz Allen provides management, technology, engineering, and consulting services, primarily to U.S. government clients. Government-related work generated 99% of FY2013 revenue; defense was 55%, intelligence 23%, and civil 22%. The U.S. Army was the largest single client at approximately 16% of revenue. The company reports one operating segment.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $5.758 billion | $5.859 billion | Down 1.7% |
| Operating income | $446.2 million | $387.4 million | Up 15.2% |
| Operating margin | 7.8% | 6.6% | Up 120 basis points |
| Net income | $219.1 million | $240.0 million | Down 8.7% |
| Diluted EPS | $1.45 | $1.70 | Down |
| Operating cash flow | $464.7 million | $360.0 million | Up 29.1% |
| Capital expenditures | $33.1 million | $76.9 million | Down |
| Free cash flow (non-GAAP) | $431.5 million | $283.1 million | Up |
At March 31, 2013, cash was $350.4 million, working capital was $459.7 million, and total debt was $1.715 billion, versus $484.4 million, $739.2 million, and $965.4 million, respectively, a year earlier. The current ratio was approximately 1.5. The $500 million revolving facility had $497.2 million available and no borrowings outstanding. Total backlog was $11.830 billion, up 9.5%, but funded backlog fell 13% to $2.509 billion; unfunded backlog was $3.056 billion and priced options were $6.265 billion.
Material changes and unusual items
- Revenue declined amid government budget uncertainty, cost reduction measures, and reduced headcount and billable hours. The November 2012 acquisition of ARINC’s Defense Systems Engineering and Support business contributed $100.1 million of revenue and added approximately $1.4 billion to backlog.
- Operating income and margin improved as the company reduced indirect and compensation costs. Net income nevertheless declined, in part because interest expense increased 46.2% to $70.3 million after the July 2012 refinancing and effective tax rate rose to 40.5% from 30.2%.
- In the fourth quarter, a $29.5 million revenue and operating-income benefit from revised estimates of recoverable indirect expenses was more than offset by approximately $38.6 million of additional discretionary incentive compensation. Q4 revenue was $1.545 billion, operating income $112.9 million, and net income $54.8 million.
- The July 2012 refinancing raised term debt to $1.75 billion and funded, alongside cash on hand, a $874.8 million special dividend. FY2013 declared special dividends totaled $1.112 billion; recurring cash dividends totaled $48.7 million. These distributions substantially reduced stockholders’ equity, to $226.8 million from $1.185 billion.
- Cash provided by operations increased, while investing cash use rose to $190.5 million, primarily due to the $155.1 million DSES acquisition. Financing cash use was $408.2 million, reflecting dividends and dividend equivalents, partly offset by refinancing proceeds.
Outlook, risks, and contingencies
Management expects cash from operations, cash on hand, and revolving-credit availability to cover anticipated needs for the next 12 months. It considered a debt repricing transaction reasonably likely during calendar 2013, subject to market conditions and board discretion; this is not formal earnings guidance. The company also launched its Strategic Innovation Group on April 1, 2013 and identified cyber, analytics, cloud services, engineering, and international expansion as strategic areas.
Key risks include U.S. government spending reductions and sequestration, delayed appropriations, contract termination or nonrenewal, competitive bidding and protests, lower funded backlog conversion, contract cost-estimation and audit exposure, employee recruitment and security-clearance constraints, and cybersecurity threats. Variable-rate debt creates interest-rate exposure. Debt is secured by substantially all assets and subject to financial covenants; the company reported compliance at year-end.
The company reported a $156.2 million reserve for potential government contract cost adjustments and audits. It disclosed ongoing audits and investigations, including matters involving labor time reporting, procurement integrity, and classified-information access. Six former officers and stockholders continued to seek approximately $348.7 million in aggregate alleged damages, including amounts sought to be trebled under RICO; management did not expect the identified matters to materially affect financial condition or results. The San Antonio office’s proposed debarment was lifted in April 2012, subject to a three-year Air Force administrative agreement and compliance reporting. The auditor issued unqualified opinions on the financial statements and internal controls; acquired DSES was excluded from the internal-control assessment.
Important facts for investors to verify
- How much of the $11.830 billion backlog—particularly unfunded backlog and priced options—can be funded, exercised, and converted into profitable revenue.
- Whether sequestration, agency budget reductions, and cost-cutting affect awards, task orders, and the company’s largest defense and Army exposure.
- Debt repayment, interest-rate sensitivity, covenant headroom, and the company’s stated potential 2013 repricing plans.
- Whether the indirect-cost recovery and incentive-compensation adjustments, government audit reserves, and contract estimates remain appropriate.
- Developments in the Air Force administrative agreement, government audits and investigations, and former-stockholder litigation.
- The sustainability of operating-margin gains and cash flow given falling revenue, lower funded backlog, and the significant FY2013 dividends.