Financials

Expenses

The School’s total operating expenses for fiscal 2015 were $660 million, up by $15 million, or 2.3 percent, from the prior year. This increase was primarily driven by spending aimed at positioning HBP and HBX for future growth, and was partially offset by decreased expenses in Executive Education.

Although HBS characterizes these publishing, digital learning, and executive program costs as operating expenses, they would in large part be considered as cost of goods sold in a profit-seeking enterprise. Expenses charged to HBP, HBX, and Executive Education include direct costs for staff compensation, specialized outside professional services in functional areas such as information technology (I.T.) and marketing, and residence expenses for executive program participants.

HBP and Executive Education delivered strong operating leverage on sales growth in fiscal 2015. 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.

Faculty research expenses at HBS—more than 15 percent of the operating budget—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. The School’s total spending for faculty research support in fiscal 2015 rose by $6 million, or 5 percent, from the prior year to $123 million.

Salaries & Benefits

Employee compensation is the School’s largest expense, comprising more than 40 percent of total operating costs. Salaries and benefits expense increased 7 percent in fiscal 2015 to $294 million, from $276 million in the prior year.

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 decreased by three FTEs to 231 in fiscal 2015, from 234 FTEs a year earlier. HBS also continued to expand its administrative staff, which grew to a budgeted 1,541 FTEs, from 1,447 in fiscal 2014.

In addition to supporting core academic programs and assisting in I.T. infrastructure development, the majority of the staff positions added in fiscal 2015 were focused on realizing income growth potential in HBP, Executive Education, and HBX, as well as supporting Campaign-driven growth in External Relations.

Fellowships

HBS categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity and Cash Flows. Making education at HBS affordable to a broader cross-section of applicants, regardless of their country of origin or their financial resources, is a longstanding 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 can 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, one of the School’s longstanding goals is to assist 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 record of annual increases in financial aid, average fellowship support per student increased 4 percent in fiscal 2015 to $32,919, from $31,710 in the prior year. Over the past five fiscal years, the School’s average two-year MBA fellowship award has grown from $48,375 for the Class of 2011 to $65,000 for the Class of 2016.

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 2015, including assistance for Doctoral candidates and a limited number of Executive Education participants, as well as for MBA students, increased by $1 million from fiscal 2014 to $44 million. Funding for fellowships comes from restricted endowment and current use giving by HBS alumni and friends, and is supplemented by unrestricted funds as necessary.

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.

HBP continued to make growth-focused investments in fiscal 2015, and the scale of its operations further expanded as revenues grew. However, in anticipation of greater pressure on margins, HBP worked diligently to reduce costs during the year. As a result, the School’s total publishing and printing expenses for fiscal 2015 decreased by $1 million from fiscal 2014 to $65 million.

Space & Occupancy

The HBS campus includes 34 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, and 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. The School’s space and occupancy expense for fiscal 2015 increased by $2 million from the prior year to $68 million.

Professional Services

Professional services expense for fiscal 2015 decreased by $5 million from the prior year to $52 million. This decrease primarily resulted from lower spending in the Campaign and reduced costs for Executive Education program development. It also reflected the School’s fiscal 2015 adoption of GAAP, which requires the capitalization of I.T. project costs that were previously reported as operating expenses.

Supplies & Equipment and Other Expenses

Spending in the Other Expenses category, which includes items such as travel and catering, decreased by $5 million in fiscal 2015, to $71 million. This decrease primarily reflected comparably higher spending in the prior fiscal year related to asset write-downs associated with the demolition of Kresge Hall and the renovation of Baker Hall. Supplies and equipment expense rose by $3 million from the prior year to $7 million, primarily because of GAAP-related spending re-categorization.

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 HBS balance sheet historically has been only modestly leveraged, and debt leverage remained low in fiscal 2015. The School’s total capital expenses were $81 million in fiscal 2015, compared with $92 million in the prior year. As in fiscal 2014, these investments were primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $7 million in building debt in fiscal 2015, an increase of $1 million from the prior year.

As a result, the School’s year-end fiscal 2015 building debt-to-asset ratio decreased to 1.8 percent, from 2 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—decreased by $1 million from fiscal 2014 to $26 million.

The School’s debt service expense consists of interest payments to the University and is covered by using cash from operations. Fiscal 2015 debt service expense was flat with the prior year at $5 million. As in fiscal 2014, 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 2015, the same percentage as in the prior year.

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 2015 for these assessments increased by $1 million from the prior year to $20 million.

Depreciation

Reflecting the School’s conversion to GAAP in fiscal 2015, this year’s Statement of Activity and Cash Flows includes depreciation expense for the first time. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The School’s depreciation expense for fiscal 2015 increased by $1 million from the prior year to $34 million. This report does not include a reconciliation to non-GAAP results for prior years. The conversion to GAAP primarily affected Space and Occupancy, Supplies and Equipment, and Professional Services, where costs previously accounted for as operating expenses have been re-categorized as depreciation expenses.

Cash Before Capital Activities

The School’s cash from operations increased in fiscal 2015 by $16 million from the prior year to $47 million. As in fiscal 2014, this cash was largely generated by margin contributions from Executive Education and HBP, as well as generous giving to the School by alumni and friends. In addition, depreciation contributed $34 million to the School’s cash flow in fiscal 2015, compared with $33 million in the prior year. The School’s fiscal 2014 cash before capital activities included a $9 million, non-cash write-off for accelerated depreciation related to the closing of Kresge Hall and the renovation of Baker Hall. There were no comparable non-cash items in fiscal 2015.

Net Capital Expenses

During fiscal 2015, the School’s capital investments continued to focus on expanding Executive Education residence and academic space in the northeast corner of the campus. HBS also made a significant initial investment in Klarman Hall, and continued to move forward on numerous projects related to the renewal and maintenance of buildings, infrastructure, and I.T. systems across the campus, as well as energy efficiency measures.

The School’s fiscal 2015 net capital expenses decreased by $7 million from the prior year to $52 million. This decline in part reflected comparably higher expenditures in fiscal 2014. These prior-year expenditures were associated with Executive Education facilities investment, including the completion of Tata Hall and the Executive Education Precinct Tunnel, initial construction of the Ruth Mulan Chu Chao Center and the related demolition of Kresge Hall, as well as initial renovation work at Baker Hall.

Fiscal 2015 net capital expenses were also down from fiscal 2014 because of an increase in the use of gifts for capital projects. This decline was partially offset by $9 million in pre-funding of fiscal 2016 capital projects. In fiscal 2014, net capital expenses were reduced by $16 million in capital project pre-funding. This item is described in the accompanying Statement of Activity and Cash Flows as “Change in Capital Project Pre-Funding.”

Changes in Debt & Other

The School’s debt and other expenses decreased $3 million in fiscal 2015, compared with an increase of $3 million in fiscal 2014.

Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2015 marked the School’s seventh consecutive year with no new borrowings. Debt principal payments increased to $7 million, from $6 million in fiscal 2014.

Capitalization of endowment income—or cash used to purchase endowment units—was a $3 million and a $5 million use of cash in fiscal 2015 and 2014, respectively. In compliance with federal and state legal requirements, the School’s objective is to spend as much of the endowment distribution as possible in any given year, according to the terms of each gift. Funds unspent as a result of gift restrictions are reinvested in the endowment.

Decapitalization of endowment income—or cash drawn from endowment appreciation—was a $5 million and a $21 million source of cash in fiscal 2015 and 2014, respectively. In compliance with the law, HBS accesses the investment appreciation within existing endowment accounts when the terms of the gift require funds to be withdrawn at a rate higher than the University’s payout rate in any given year. Decapitalizations in fiscal 2014 were unusually high as a result of 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.

Other non-reserve activity in fiscal 2015 was positive $2 million, compared with negative $7 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 to capitalize on unforeseen strategic opportunities. More than 50 percent of the School’s revenues come from Executive Education and HBP—business units that are highly sensitive to the economy.

Consequently, maintaining an ample balance of unrestricted reserves outside of the endowment is crucial in providing HBS with sufficient liquidity to fulfill its educational and research mission on a long-term basis. Driven by the School’s continued healthy cash from operations, fiscal 2015 was a successful year in this regard. HBS sustained its operations while investing in the campus and in strategic innovation, and still concluded the year with a strong unrestricted reserves balance of $125 million.