Financials
Supplemental Financial Information
Expenses
The School’s total operating expenses for fiscal 2014 came in precisely on budget at $597 million, up by $55 million, or 10.1 percent, from the prior year. Approximately $35 million of this increased spending reflected the growing scope of the School’s core operations. This expansion is being driven, in part, by strategic initiatives such as HBX, The Campaign for Harvard Business School, and multifaculty, cross-disciplinary research.
The School also incurred new costs in fiscal 2014 for I.T. infrastructure to support increased alumni engagement, as well as FIELD enhancements in the MBA Program. MBA tuition and fees recover only a minor portion of these costs.
The balance of this year’s increase in expenses consisted of investments in Executive Education and HBP, primarily aimed at positioning these groups for future growth. Although HBS characterizes publishing and executive program costs as “expenses,” they would in large part be considered “cost of goods sold” in a profit-seeking enterprise.
Expenses charged to HBP and Executive Education include direct costs for staff compensation, specialized outside professional services in functional areas such as I.T. and marketing, and residence expenses for executive program participants. Both groups delivered strong operating leverage on revenue growth in fiscal 2014. As a result, despite incurring higher expenses and making significant growth-focused investments, each group provided important income contributions to the School’s operations for the year.
The School’s total spending for faculty research support in fiscal 2014 rose by $7 million, or 7 percent, from the prior year to $117 million. This increase reflected, in part, the opening of an eighth HBS global research center in Istanbul, Turkey. It also was driven by an increasing diversity in the methodologies and approaches faculty members bring to bear in conducting research with power in practice, including multiyear, cross-unit initiatives like the U.S. Competitiveness Project.
Faculty research expenses at HBS cut across several line items in the Statement of Activity and Cash Flows. The cost of faculty research includes a portion of faculty salary and benefits expense. It also includes direct costs for research support staff and travel, and for the School’s network of global research centers. In addition, HBS allocates a portion of the costs associated with library resources, campus facilities, technology, and administration to faculty research.
Salaries & Benefits
Employee compensation is the School’s largest expense, comprising nearly 50 percent of total operating costs. Salaries and benefits expense increased 8 percent in fiscal 2014 to $276 million, from $255 million in the prior year. This marked slightly higher year-over-year growth than in fiscal 2013, primarily driven by an increase in the size of the faculty and staff.
The total number of faculty at HBS, as measured in full-time equivalents (FTEs), can rise or fall in any given year as a result of retirements, departures, and fluctuations in recruiting activity. Net of retirements and departures, the School’s faculty increased by 7 FTEs to 234 in fiscal 2014, from 227 FTEs a year earlier. HBS also continued to expand its administrative staff, which grew to a budgeted 1,447 FTEs, from 1,335 in the prior year.
In addition to supporting core academic programs and assisting in I.T. infrastructure development, the majority of the staff positions added in fiscal 2014 were focused on generating future income growth. Nearly one-third of the School’s newly recruited staff are involved in launching and scaling HBX, while others are working in HBP, Executive Education, and Campaign-related External Relations positions.
Fellowships
HBS categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity and Cash Flows. Attracting the most talented MBA Program applicants, regardless of their country of origin or their financial resources, is a long-standing goal of the School. The prospect of entering or returning to the workforce with high levels of education debt can deter strong MBA candidates from applying to HBS and restrict their career choices upon graduation. This is particularly true for younger students, women, those from outside the United States, and students whose early career paths have not enabled them to reduce their undergraduate loans.
Consequently, the School assists students in minimizing their debt at graduation by ensuring that fellowship support at least keeps pace with tuition and fees. Extending the School’s long-term commitment to annual increases in financial aid, average fellowship support per student increased 3 percent in fiscal 2014 to $31,710, from $30,725 in the prior year. Over the past five fiscal years, the School’s average two-year MBA fellowship award has grown from $49,246 for the Class of 2010 to $64,000 for the Class of 2015.
Approximately half of the School’s MBA students currently receive fellowships, which cover an average of more than 50 percent of a student’s total tuition. Total fellowship expense for fiscal 2014, including assistance for Doctoral candidates and a limited number of Executive Education participants, as well as for MBA students, increased by $3 million from fiscal 2013 to $43 million. Funding for fellowships comes primarily from restricted endowment and current use giving by HBS alumni and friends.
Publishing & Printing
Publishing and printing expense includes HBP’s production costs plus a small amount of spending related to the School’s printed materials and publications. HBP’s continuing growth in a fast-changing and highly competitive publishing environment reflects, in part, the success of the group’s long-term program of strategic investment in digital infrastructure and content. Reflecting this investment, along with HBP’s larger operational scale, the School’s total publishing and printing expenses for fiscal 2014 increased by $4 million from fiscal 2013 to $71 million.
Space & Occupancy
The HBS campus includes 35 buildings encompassing nearly 1.8 million square feet of occupied space. Space and occupancy expense includes costs related to maintaining and operating the School’s buildings and campus infrastructure. In addition, facilities improvement and renovation costs that do not qualify as capital expenses are generally categorized as space and occupancy.
Also included in space and occupancy are expenses related to dining facilities and other campus services, as well as costs associated with leased space that houses HBP’s operations and HBX, as well as the School’s global research offices. In addition, residence expenses for executive program participants are reported under this category. Largely reflecting the addition of Tata Hall, the build-out of Crimson Commons, and the development of the HBX Live studio, the School’s space and occupancy expenses for fiscal 2014 increased by $3 million from the prior year to $51 million.
Professional Services
Professional services expense for fiscal 2014 increased by $17 million from the prior year to $57 million. This increase was primarily driven by spending for external resources related to the Campaign launch and related alumni website, the HBX rollout, and Executive Education’s implementation of a new CRM platform.
I.T. Investment
| (in millions) | ||||
|---|---|---|---|---|
| FY 14 | FY 13 | FY 12 | FY11 | FY 10 |
| $ 79 | 68 | 54 | 50 | 40 |
Supplies & Equipment and Other Expenses
Spending in the Other Expenses category, which includes items such as travel and catering, increased by $5 million in fiscal 2014 to $64 million. This increase primarily reflected higher technical services and catering costs. Supplies and equipment expense rose by $2 million from the prior year to $11 million.
University Assessments
University assessments cover essential services provided to HBS by the University, including payroll and benefits administration, processing of accounts receivable and payable, and legal services. The amount charged to HBS in any given year is primarily calculated as a percentage of the School’s total expenses. As expected, the School’s expense in fiscal 2014 for these assessments increased by $1 million from the prior year to $19 million.
Debt Service
HBS finances major capital projects with a mix of three sources of funding. The most important sources are gifts and unrestricted reserves of internally generated cash. The School also makes strategic use of debt financed through the University as a means of optimizing its capital structure.
Relying on the University as its banker provides HBS, as well as the other Harvard schools, with access to debt on a triple-A-rated tax-exempt basis. The School borrows only to finance qualified capital projects, carefully considering the interest rate environment, expectations for the performance of the Harvard endowment, and the availability of University debt.
Reflecting this cautious approach, the School’s balance sheet historically has been only modestly leveraged, and debt leverage remained low in fiscal 2014. HBS increased its capital investments during the year to $98 million, from $78 million in the prior year. As in fiscal 2013, this growth was primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $6 million in building debt in fiscal 2014, compared with $8 million a year earlier.
As a result, the School’s year-end fiscal 2014 building debt-to-asset ratio decreased to 2.0 percent, from 2.5 percent in the prior year. Other University debt—mainly consisting of repayment obligations to the University for mortgage loans made by HBS as a faculty recruiting incentive—increased by $4 million from fiscal 2013 to $27 million.
The School’s debt service expense consists of interest payments to the University and is covered by using cash from operations. Fiscal 2014 debt service expense declined by $1 million from the prior year to $5 million. As in fiscal 2013, this expense was mainly associated with borrowings to finance prior years’ campus expansion. The interest portion of the School’s debt service amounted to slightly less than 1 percent of total operating expenses in fiscal 2014.
Building Debt Outstanding
| (in millions) | ||||
|---|---|---|---|---|
| FY 14 | FY 13 | FY 12 | FY11 | FY 10 |
| $ 85 | 91 | 99 | 103 | 112 |
Cash Before Capital Activities
The School’s cash from operations decreased in fiscal 2014 by $9 million from the prior year to $36 million. As in fiscal 2013, this cash was largely generated by margin contributions from Executive Education and HBP, as well as the HBS community’s generous giving to the School. In addition, use of restricted current use gifts plus cash drawn from endowment appreciation contributed $56 million to the School’s cash flow in fiscal 2014, compared with $22 million in fiscal 2013.
This unusually large year-over-year increase in Restricted Current Use Gifts and Endowment Appreciation included a one-time $17 million use of funds in the School’s endowment reserve, which was established more than 10 years ago to finance upcoming capital projects. The net result was a $25 million increase in cash available for capital activities to $92 million, from $67 million in fiscal 2013.
Net Capital Expenses
As noted above, the School’s fiscal 2014 capital expenses increased by $20 million from the prior year to $98 million. This growth was primarily associated with Executive Education facilities investment, including the completion of Tata Hall and the tunnel connecting it to the rest of the campus, initial construction of the Chao Center and the related demolition of Kresge Hall, and the initial renovation work at Baker Hall. In addition, HBS continued to invest in numerous projects focused on the renewal and maintenance of buildings, infrastructure, and I.T. systems across the campus.
On a net basis, capital expenses for fiscal 2014 were $64 million, down from $93 million in the prior year. This reflected an increase in use of gifts for capital projects, as well as a $17 million change in capital project funding planned for fiscal 2015. This item is listed in the Statement of Activity and Cash Flows as Change in Capital Project Funding.
Net Debt & Other Expenses
Because gifts and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2014 marked the School’s sixth consecutive year with no new borrowings. Debt principal payments decreased to $6 million, from $8 million in fiscal 2013.
Other Non-Reserve Activity in fiscal 2014 was negative $6 million, compared with negative $2 million in the prior year. Together with the School’s fiscal 2014 debt principal payments, the negative $6 million in fiscal 2014 Other Non-Reserve Activity resulted in a decrease of $12 million in Net Debt and Other, compared with a decrease of $10 million in the prior year.
Ending Balance, Unrestricted Reserves
Together with a mix of internally generated cash, gifts, and debt, HBS relies on unrestricted reserves to finance major campus expansion projects and capitalize on unforeseen strategic opportunities. More than 56 percent of the School’s revenues come from Executive Education and HBP—groups that are highly sensitive to the economy.
Consequently, maintaining an ample balance of unrestricted reserves outside the endowment is crucial in providing HBS with sufficient liquidity to fulfill its educational and research mission on a long-term basis. Reflecting the School’s continued healthy cash from operations, as well as the one-time $17 million withdrawal from endowment reserves, fiscal 2014 was a successful year in this regard. HBS sustained its operations while investing in the campus and in strategic innovation, while still concluding the year with a strong unrestricted reserves balance of $99 million.
