Booz Allen Hamilton Holding Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Financial amounts below are in U.S. dollars unless noted.
Business context
Booz Allen provides management consulting, technology and engineering services, principally to U.S. government defense, intelligence and civil agencies. Government clients accounted for 98% of FY2015 revenue. The company reported approximately 22,500 employees and operated as one reportable segment.
Key financial results
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $5,274.8 million | $5,478.7 million | Down 3.7% |
| Operating income | $458.8 million | $460.6 million | Down 0.4% |
| Operating margin | 8.7% | 8.4% | Up 0.3 percentage points |
| Net income | $232.6 million | $232.2 million | Up 0.2% |
| Diluted EPS | $1.52 | $1.54 | Down 1.3% |
| Operating cash flow | $310.0 million | $332.7 million | Down 6.8% |
| Free cash flow (non-GAAP) | $273.9 million | $311.8 million | Down 12.2% |
- Revenue mix: defense 48.4%, intelligence 24.9%, U.S. civil agencies 23.5%, and commercial and international clients 3.2%. Commercial and international revenue rose to $167.2 million from $141.8 million.
- Cash and cash equivalents were $207.2 million, down from $260.0 million. Working capital was $314.2 million.
- Debt totaled $1,626.3 million, compared with $1,658.9 million a year earlier; net debt was approximately $1,419.1 million. The $500 million revolving facility was undrawn at year-end, with $494.8 million of borrowing capacity available. The company reported compliance with debt covenants.
- Total backlog was $9.36 billion, down 4.9% year over year; funded backlog increased approximately 18% to $2.69 billion. Unfunded backlog was $2.12 billion and priced options were $4.55 billion.
- Approximately 55% of revenue came from cost-reimbursable contracts, 25% from time-and-materials and 20% from fixed-price contracts. Management expected fixed-price work to remain roughly 20% of revenue, while noting contract awards could change the mix.
Changes and quarterly results
FY2015 revenue declined for a third consecutive year, following a 4.9% decline in FY2014. Management attributed the latest decrease primarily to lower federal demand, fewer average employees and billable hours, and reduced subcontractor and other direct expenses. Despite lower sales, cost reductions and lower depreciation helped lift operating margin. General and administrative expense rose 1.4%, reflecting higher bid-and-proposal activity, professional fees and investment in capabilities and growth markets.
Fourth-quarter FY2015 revenue was $1,342.9 million versus $1,399.8 million in the prior-year quarter; operating income was $92.6 million versus $89.2 million, and net income was $43.4 million versus $46.9 million. Diluted EPS was $0.29 versus $0.30.
Funded backlog growth and $5.7 billion of additions to funded backlog were positive developments, but total backlog continued to contract. Average headcount fell year over year to approximately 22,500 from 22,700, although management reported sequential headcount increases in the most recent quarters.
Cash flow, financing and capital returns
- Operating cash flow was $310.0 million; capital expenditure was $36.0 million, up from $20.9 million in FY2014. Investing cash outflow was $60.6 million, including $24.5 million net cash paid for acquisitions.
- Financing cash outflow was $302.2 million, including $215.1 million of cash dividends, $47.1 million of dividend equivalents and $62.1 million of share repurchases. Dividends included a $1.00-per-share special dividend and regular quarterly dividends.
- The May 2014 debt amendment shifted borrowing toward lower-rate Term Loan A, reduced FY2015 interest expense to $71.8 million from $78.0 million, and extended Term Loan A and revolving facility maturities to May 2019. Term Loan B matures in July 2019.
- Management said cash, expected operating cash flow and revolving capacity should cover anticipated needs for the next twelve months. The board’s dividend and repurchase decisions remain discretionary and subject to debt restrictions and other factors.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management described continued investment under its Vision 2020 strategy in innovation, engineering, cyber, commercial and international capabilities, while emphasizing disciplined cost management.
- Federal budget reductions, sequestration, delayed appropriations, shutdowns, agency insourcing and shifts in mission priorities could reduce or delay awards and funding. The company’s substantial government concentration makes it particularly exposed to these risks.
- The largest ID/IQ contract, which represented approximately 12% of FY2015 revenue, was due to expire July 8, 2015. Some task orders extended beyond that date, and the contract was being replaced by new multiple-award vehicles. Management also expected GSA professional-services schedule consolidation to have a negligible revenue impact, but the transition could affect contract access.
- Backlog is not guaranteed revenue: unfunded amounts and options depend on appropriations and client decisions. Total backlog excludes unawarded work under ID/IQ vehicles.
- Government audits and investigations included matters involving labor time reporting, procurement integrity and classified-information access. The company recorded a $205.3 million liability for its estimate of potential contract-cost audit adjustments for periods after FY2007. Management stated it believed reserves were adequate and did not expect known proceedings to materially affect results.
- Four remaining suits brought by former officers and stockholders sought approximately $291.7 million in alleged damages, potentially trebled under RICO, plus other damages and fees. The company did not expect a material adverse effect; two other suits were settled after year-end, on April 16, 2015.
- A $4.5 million contingent earnout liability arose from an acquisition, with up to $9 million payable if specified 2016 and 2017 performance targets are met. Management identified no goodwill or intangible-asset impairment in FY2015.
- A new revenue-recognition standard was expected to apply beginning in FY2018 or FY2019, depending on the effective date; management was still assessing its effect and transition method.
Most important facts for investors to verify
- Whether the expiring major ID/IQ contract was replaced successfully and related work and task orders were retained.
- Whether funded backlog converts into revenue, and whether total backlog stabilizes after its multiyear decline.
- How federal spending, appropriations and agency priorities affect demand, hiring and utilization.
- Whether the $205.3 million government-contract audit reserve proves adequate and whether pending investigations lead to adjustments, penalties or payment delays.
- Debt repayment, interest-rate exposure and the sustainability of dividends and repurchases alongside operating cash needs.
- The outcome of the remaining former-stockholder litigation and the eventual adoption impact of the revenue-recognition standard.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of March 31, 2015.