Booz Allen Hamilton Holding Corp annual report, FY2022

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Booz Allen Hamilton Holding Corporation — FY2022 Form 10-K

Reporting period: Fiscal year ended March 31, 2022, compared primarily with fiscal 2021. The filing is an annual report, not a report for calendar 2021 Q4.

Business context

Booz Allen provides management and technology consulting, analytics, engineering, digital, mission operations, and cyber services. It reports as one operating segment and depends heavily on U.S. government work: 97% of FY2022 revenue came from contracts whose end client was a U.S. government agency or department. The company had approximately 29,300 employees.

Financial performance and liquidity

  • Revenue: $8.364 billion, up 6.4% from $7.859 billion. Growth reflected about $340.1 million from acquisitions and strong demand, partly offset by lower staff utilization. Revenue excluding billable expenses, a non-GAAP measure, was $5.890 billion, up from $5.533 billion.
  • Profitability: Operating income was $685.2 million, down 9.2%; operating margin declined to 8.2% from 9.6%. Net income fell 23.4% to $466.6 million, and diluted EPS declined to $3.44 from $4.37. The effective tax rate rose to 22.8% from 8.1%, primarily because FY2021 included a $76.8 million tax benefit from remeasuring loss carrybacks.
  • Adjusted results: Adjusted EBITDA was $934.9 million, versus $839.7 million; adjusted EBITDA margin on revenue was 11.2%, versus 10.7%. Adjusted diluted EPS was $4.21, versus $3.90. These are non-GAAP measures and exclude specified items.
  • Cash flow: Operating cash flow was $736.5 million, up 2.5%. Capital spending was $80.0 million; free cash flow, as defined by the company, was $656.6 million, versus $631.5 million.
  • Liquidity and debt: Cash and equivalents were $695.9 million. Total liquidity was approximately $1.7 billion, including $999.0 million of undrawn revolver capacity. Debt totaled $2.80 billion, up from $2.36 billion; the revolver had no outstanding balance at year-end. The company reported compliance with debt covenants. A 25-basis-point interest-rate increase was estimated to raise annual secured-facility interest expense by about $4.8 million, after swaps.
  • Balance-sheet items: Accounts receivable, net, was $1.623 billion, including $1.158 billion of current unbilled receivables. Goodwill was $2.022 billion, up from $1.581 billion, largely reflecting acquisitions.

Changes versus FY2021

  • General and administrative expense rose 11.8% to $1.159 billion, including approximately $95.5 million of acquisition costs. Total acquisition and divestiture costs were $97.5 million.
  • Depreciation and amortization increased 72.9% to $145.7 million, mainly from acquired intangible assets and the new financial management systems.
  • Revenue mix shifted: civil revenue increased to $2.619 billion from $2.183 billion; defense revenue was $3.955 billion versus $3.921 billion; intelligence revenue was $1.573 billion versus $1.549 billion. Commercial revenue was $216.3 million versus $205.8 million.
  • Fixed-price contracts represented 22% of revenue, up from 19%; cost-reimbursable contracts were 54%, down from 56%. Prime-contract revenue increased to 94% from 93%.
  • Total backlog increased 21.7% to $29.247 billion, including $3.710 billion funded, $9.925 billion unfunded, and $15.612 billion in priced options. Acquisitions contributed approximately $2.6 billion of backlog. Remaining performance obligations were $7.4 billion; management expected to recognize about 70% within 12 months and 85% within 24 months.

Outlook, management commentary, and material risks

  • The filing provides no specific revenue or earnings guidance. Management said operating cash flows, cash balances, and revolver availability should cover anticipated requirements for the next 12 months.
  • Management’s VoLT strategy emphasizes velocity, leadership, and technology, including innovation and selective acquisitions. New-contract win rate was 64% and recompete win rate 90%, versus 56% and 88% in FY2021.
  • The company agreed to acquire EverWatch for approximately $440 million, expected to close in FY2023 and be funded with cash on hand. It also agreed in April 2022 to divest its MENA management consulting business, subject to closing conditions.
  • Management estimated approximately $150 million of FY2023 cash taxes if the tax-law requirement to capitalize research and development costs takes effect as scheduled; proposed legislation to delay it was uncertain.
  • Key exposures include dependence on federal budgets and appropriations, contract awards and protests, staff hiring/utilization and security clearances, inflation and fixed-price cost overruns, cybersecurity and classified-information risks, and the possibility that unfunded backlog or options are not realized.
  • The DOJ’s criminal investigation into cost-accounting and indirect-cost practices was closed in May 2021; its civil investigation remained ongoing. The SEC had notified the company of an investigation it believed related to the same matters. The company could not reasonably estimate potential costs or losses. It recorded a $290.4 million provision for estimated adjustments to claimed indirect costs; audits and final resolutions remained pending for years after FY2011.
  • Other notable uncertainties include $79.9 million of reserves for uncertain tax positions and a contested District of Columbia tax assessment. The company said ongoing audits, reviews, investigations, and litigation were not expected, based on information then available, to materially adversely affect its financial condition or results.
  • FY2022 included implementation of new financial management systems and cost-accounting changes, which involved added expense and could lead to further costs subject to government audit. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.

Important facts for investors to verify

  • Whether civil/SEC investigations and government audits lead to additional costs, payment withholdings, or other findings beyond recorded reserves.
  • How much of the $29.2 billion backlog—especially unfunded backlog and priced options—converts to funded, profitable revenue, and whether staffing capacity supports that conversion.
  • Whether utilization and operating margins recover as acquisition and systems-related costs evolve, and how acquisitions contribute to growth and earnings.
  • Cash-tax impact of R&D capitalization, resolution of uncertain tax positions, and the company’s capacity to fund acquisitions, dividends, and repurchases while managing $2.8 billion of debt and variable-rate exposure.
  • Progress and final terms for the EverWatch acquisition and MENA divestiture, including closing conditions and realized strategic or financial benefits.