Increased defense spending brightens Booz's prospects

Booz Allen Hamilton’s revenue and backlog of contracts are both on a growth trajectory just as defense spending is also on the upturn to help support an expanding governmant services market.

That and a focus on internal operational controls after a pair of incidents where employees made off with classified materials has led credit ratings agency Moody’s Investors Service to lift its outlook on Booz Allen from “negative” to “stable” in a Friday report.

The change is a reversal from the Moody’s rating in October 2016 -- stable to negative -- in the wake of former Booz employee and National Security Agency contractor Harold Martin being charged with stealing and storing classified information from intelligence agencies.

Moody’s said then that the Martin case carried a “potential for reputational and financial impact from the Federal Bureau of Investigation's recent criminal complaint” against Martin. That was three years after the 2013 incident where former NSA contractor Ed Snowden who made off with classified information about the agency’s metadata collection program. He is now living in Russia.

After Martin’s arrest, Booz Allen hired former FBI Director Robert Mueller to lead an external audit of the firm’s security, personnel and management practices.

That review was completed last year and a December 2017 firm statement noted that Mueller and law firm WilmerHale “identified areas in which Booz Allen, the broader government contracting industry, and government agencies could improve their ability to identify insider threats in the ways they go about hiring and supervising employees.”

Booz Allen added that it is “implementing each of the recommendations that we did not already have in place, and we have initiated discussions with industry peers and government clients to work together to address the challenge of strengthening practices related to insider threats.”

As Moody’s pointed out Friday, Booz Allen’s deep familiarity and long consulting heritage with agencies in classified and non-classified settings gives it positive profile and brand recognition.

That helps translate to employee recruitment and retention success, which the firm quantified in May as 5-percent growth in headcount for its last fiscal year ended March 31.

Booz Allen reported $6.17 billion in revenue for its last fiscal year and expects 6 percent-to-8 percent growth for its next fiscal year. CEO Horacio Rozanski said in a May 29 earnings call this is “one of the best markets we’ve seen in the last five years” with a two-year budget framework in place that raised defense and civilian spending caps.

Booz Allen’s revenue base is heavily weighted toward the defense and intelligence community, representing 70 percent of its revenue. But Moody’s also points out, the firm’s base of contracts is diverse in numbers as its largest contract was only around 2 percent of last fiscal year’s revenue.

The Moody’s rating boost for Booz Allen comes in the wake of the firm’s move to disclose long-term financial goals for the first time in its 100-plus-year history and 10 years as a public company.

In its June 6 investor day event, Booz Allen said it sees revenue increasing 6 percent-to-9 percent in each year over its next three fiscal years.

That timeline coincides with Booz Allen’s “Vision 2020” initiative to recast the firm as one with technological expertise in key priority areas along with one of knowledge of agency missions through its consulting work.

“We view the next three years as the payoff period for Vision 2020, but not the end of the story of Booz Allen. We view that as a continuing path of evolution,” Rozanski said at the investor day.

One headwind looms over Booz Allen in the ongoing Justice Department investigation started in August of last year into the firm’s indirect cost accounting practices, which Moody’s said “likely stems from a False Claims Act violation.”

Those cases typically result in a financial settlement between the contractor involved and the government. Any settlement would be manageable for a company of Booz Allen’s size, Moody’s said.

Booz Allen executives said at the time a resolution is “more likely to be years than months” away.