BOOZ ALLEN HAMILTON HOLDING CORPORATION The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 filed with theSecurities and Exchange Commission onMay 26, 2020 , or Annual Report, and under Part II, "Item 1A. Risk Factors," and "- Special Note Regarding Forward Looking Statements" of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our fiscal year endsMarch 31 and, unless otherwise noted, references to years or fiscal are for fiscal years endedMarch 31 . See "-Results of Operations." Overview We are a leading provider of management and technology consulting, analytics, engineering, digital solutions, mission operations, and cyber services toU.S. and international governments, major corporations, and not-for-profit organizations. Our ability to deliver value to our clients has always been, and continues to be, a product of the strong character, expertise and tremendous passion of our people. Our approximately 27,600 employees work to solve hard problems by making clients' missions their own, combining decades of consulting and domain expertise with functional expertise in areas such as analytics, digital solutions, engineering, and cyber, all fostered by a culture of innovation that extends to all reaches of the company. Through our dedication to our clients' missions, and a commitment to evolving our business to address their client needs, we have longstanding relationships with our clients, some more than 75 years. We support critical missions for a diverse base of federal government clients, including nearly all of theU.S. government's cabinet-level departments, as well as increasingly for top-tier commercial and international clients. We support our federal government clients by helping them tackle their most complex and pressing challenges such as protecting soldiers in combat and supporting their families, advancing cyber capabilities, keeping our national infrastructure secure, enabling and enhancing digital services, transforming the healthcare system, and improving government efficiency to achieve better outcomes. We serve commercial clients across industries including aerospace, financial services, health and life sciences, energy, and transportation. Our international clients are primarily inEurope , theMiddle East andSoutheast Asia . Financial and Other Highlights During the third quarter of fiscal 2021, the Company generated year over year revenue growth, delivered improved earnings over the prior year period, and increased client staff headcount. Revenue increased 3.0% from the three months endedDecember 31, 2019 to the three months endedDecember 31, 2020 , and increased 7.0% from the nine months endedDecember 31, 2019 to the nine months endedDecember 31, 2020 . Growth in both periods was primarily driven by growth in client demand and headcount to meet that demand. The Company also benefited from higher staff utilization over the prior year periods driven by fewer paid time off (PTO) days taken by our employees which resulted in increases in our direct labor and corresponding generation of revenue growth. Revenue growth for the quarter was negatively impacted by lower billable expenses, while the year-to-date period benefited from an overall increase in billable expenses. For the three months endedDecember 31, 2020 billable expenses declined primarily due to lower subcontractor costs driven by the timing of client needs and lower direct cost purchases for clients, including COVID-19 related travel. For the nine months endedDecember 31, 2020 , the increase in billable expenses was primarily attributable to an increase in use of subcontractors driven by client demand, partially offset by decreases in expenses from contracts which require the Company to incur direct and travel expenses on behalf of clients. The impact of COVID-19 drove volatility in the timing and magnitude of billable expenses. 26
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Operating income increased 9.0% to$184.3 million in the three months endedDecember 31, 2020 from$169.0 million in the three months endedDecember 31, 2019 , which reflects an increase in operating margin to 9.7% from 9.1%. Operating income increased 12.2% to$583.4 million in the nine months endedDecember 31, 2020 from$520.1 million in the nine months endedDecember 31, 2019 , while operating margin increased from 9.5% to 9.9%. The increases in the operating income for three months and nine months endedDecember 31, 2020 were primarily driven by the same factors as growth in revenue, strong contract level performance, ongoing cost management efforts, and reductions in certain types of expenses, like travel and meetings. These were partially offset by the inability to recognize revenue on, or bill for, fee on certain contracts involving a ready workforce of approximately$2.0 million for the three months endedDecember 31, 2020 and approximately$21.0 million for the nine months endedDecember 31, 2020 . The Company also incurred incremental legal costs during the three and nine months endedDecember 31, 2020 in response to theU.S. Department of Justice investigation and matters which purport to relate to the investigation, a portion of which was offset by the receipt of insurance reimbursements. We expect to incur additional costs in the future. Based on the information currently available, the Company is not able to reasonably estimate the expected long-term incremental legal costs or amounts that may be reimbursed associated with this investigation and these related matters. We are monitoring the evolving situation related to the COVID-19 outbreak and vaccine rollout and we continue to work with our stakeholders to assess further possible implications to our business and to take actions in an effort to mitigate adverse consequences. To protect employee health and safety while COVID-19 remains a threat, we plan to continue to deliver a majority of our services to clients via telework for the foreseeable future. In cases where telework options or effectiveness are limited, we are working closely with clients to achieve safe return plans guided by federal, state and local policies and advice from other experts. We are also working closely with our clients, where classified work is concentrated, to retain continuity of service and ensure a ready workforce. We expect to continue to be impacted by the inability of certain employees to perform their contract requirements at their designated work locations due to facility closures or restrictions as a result of COVID-19 and cannot perform such work remotely. While the CARES Act contains a provision that allows federal contractors to seek specified reimbursement for certain employees who are unable to perform their contract requirements due to government restrictions and we have been reimbursed for certain of these costs, such provision does not require the government to reimburse a contractor and reimbursements are also subject to limitations and do not currently extend pastMarch 31, 2021 . As a result, we believe that some of our costs incurred prior to the passage of the CARES Act for certain employees who are unable to perform their contract requirements due to government restrictions will not be reimbursed. However, going forward we do not expect such non-reimbursed fees to have a material impact on earnings as the majority of our affected workforce have returned to client site offices or may do so prior toMarch 31, 2021 . ThroughDecember 31, 2020 , we have withheld recognition of revenue associated with these amounts at risk of not being reimbursed. Although we cannot currently predict the overall impact of the COVID-19 outbreak and vaccine rollout, the longer the duration of the event, the more likely it is that it could have an adverse effect on our business, financial position, results of operations, billable expenses, and/or cash flows. 27
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Non-GAAP Measures We publicly disclose certain non-GAAP financial measurements, including Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted Earnings Per Share, or Adjusted Diluted EPS, because management uses these measures for business planning purposes, including to manage our business against internal projected results of operations and measure our performance. We view Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS as measures of our core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP measures also provide another basis for comparing period to period results by excluding potential differences caused by non-operational and unusual or non-recurring items. In addition, we use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. We also utilize and discuss Free Cash Flow because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business, and measuring liquidity generally. We present these supplemental measures because we believe that these measures provide investors and securities analysts with important supplemental information with which to evaluate our performance, long term earnings potential, or liquidity, as applicable, and to enable them to assess our performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting principles generally accepted inthe United States , or GAAP, and when analyzing our performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of revenue to Revenue, Excluding Billable Expenses, operating income to Adjusted Operating Income, net income to Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income and Adjusted Diluted EPS, and net cash provided by operating activities to Free Cash Flow, (ii) use Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP and (iii) use Free Cash Flow in addition to, and not as an alternative to, net cash provided by operating activities as a measure of liquidity, each as defined under GAAP. We have defined the aforementioned non-GAAP measures as follows: •"Revenue, Excluding Billable Expenses" represents revenue less billable expenses. We use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. •"Adjusted Operating Income" represents operating income before transaction costs, fees, losses, and expenses, including fees associated with debt prepayments and supplemental employee benefits due to the COVID-19 outbreak. We prepare Adjusted Operating Income to eliminate the impact of items we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. •"Adjusted EBITDA" represents net income before income taxes, net interest and other expense and depreciation and amortization and before certain other items, including transaction costs, fees, losses, and expenses, including fees associated with debt prepayments and supplemental employee benefits due to the COVID-19 outbreak. "Adjusted EBITDA Margin on Revenue" is calculated as Adjusted EBITDA divided by revenue. "Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses" is calculated as Adjusted EBITDA divided by Revenue, Excluding Billable Expenses. The Company prepares Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses to eliminate the impact of items it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature. •"Adjusted Net Income" represents net income before: (i) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, (ii) supplemental employee benefits due to the COVID-19 outbreak, (iii) research and development tax credit, (iv) release of income tax reserves, (v) loss on debt extinguishment and (vi) amortization of debt issuance costs, in each case net of the tax effect where 28
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appropriate calculated using an assumed effective tax rate. We prepare Adjusted Net Income to eliminate the impact of items, net of tax, we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. •"Adjusted Diluted EPS" represents diluted EPS calculated using Adjusted Net Income as opposed to net income. Additionally, Adjusted Diluted EPS does not contemplate any adjustments to net income as required under the two-class method as disclosed in the footnotes to the condensed consolidated financial statements. •"Free Cash Flow" represents the net cash generated from operating activities less the impact of purchases of property, equipment and software.
Below is a reconciliation of Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow to the most directly comparable financial measure calculated and presented in accordance with GAAP.
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Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands, except share and per share data) 2020 2019 2020 2019
(Unaudited) (Unaudited)
Revenue, Excluding Billable Expenses
Revenue $ 1,904,020 $
1,849,441
577,059 600,522 1,729,788 1,691,543
Revenue, Excluding Billable Expenses $ 1,326,961 $ 1,248,919 $ 4,149,870 $ 3,802,651
Adjusted Operating Income
Operating Income $ 184,257 $ 169,045 $ 583,365 $ 520,126
Transaction expenses (a) - 1,069 - 1,069
COVID-19 supplemental employee benefits (b) 68 - 577 -
Adjusted Operating Income $ 184,325 $
170,114
$ 144,371 $ 112,026 $ 409,781 $ 343,737 Income tax expense 21,612 34,697 102,418 106,993 Interest and other, net (c) 18,274 22,322 71,166 69,396 Depreciation and amortization 21,113 20,655 62,860 60,308 EBITDA 205,370 189,700 646,225 580,434 Transaction expenses (a) - 1,069 - 1,069 COVID-19 supplemental employee benefits (b) 68 - 577 - Adjusted EBITDA$ 205,438 $ 190,769 $ 646,802 $ 581,503 Adjusted EBITDA Margin on Revenue 10.8 % 10.3 % 11.0 % 10.6 % Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses 15.5 % 15.3 % 15.6 % 15.3 % Adjusted Net Income Net income$ 144,371 $ 112,026 $ 409,781 $ 343,737 Transaction expenses (a) - 1,069 - 1,069 COVID-19 supplemental employee benefits (b) 68 - 577 - Research and development tax credit (d) - - (2,928) - Release of income tax reserves (e) - - (29) - Loss on debt extinguishment (f) - - 13,239 - Amortization and write-off of debt issuance costs and debt discount 705 886 1,722 1,945 Adjustments for tax effect (g) (201) (509) (4,040) (784) Adjusted Net Income$ 144,943 $ 113,472 $ 418,322 $ 345,967 Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 138,886,119
141,558,427 138,932,125 141,348,635
Adjusted Net Income Per Diluted Share (h)
0.80 $ 3.01 $ 2.45
Free Cash Flow
Net cash provided by operating activities $ 232,935 $ 99,780 $ 798,959 $ 366,459
Less: Purchases of property, equipment and
software (15,949) (30,734) (54,033) (90,712)
Free Cash Flow $ 216,986 $ 69,046 $ 744,926 $ 275,747 (a)Fiscal 2020 debt refinancing costs incurred in connection with the
refinancing transactions consummated on
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(c)Reflects the combination of Interest expense and Other (expense) income, net from the condensed consolidated statement of operations. (d)Reflects tax credits, net of reserves for uncertain tax positions, recognized in fiscal 2021 related to an increase in research and development credits available for fiscal years 2016 to 2019. (e)Release of pre-acquisition income tax reserves assumed by the Company in connection with the Carlyle acquisition. (f)Reflects the loss on debt extinguishment resulting from the redemption ofBooz Allen Hamilton Inc.'s 5.125% Senior Notes due 2025 (the "2017 Senior Notes"), including$9.0 million of the premium paid at redemption, and write-off of the unamortized debt issuance cost. See Note 8 to our condensed consolidated financial statements for more information. (g)Reflects the tax effect of adjustments at an assumed effective tax rate of 26%, which approximates the blended federal and state tax rates, and consistently excludes the impact of other tax credits and incentive benefits realized. (h)Excludes adjustments of approximately$0.9 million and$2.3 million of net earnings for the three and nine months endedDecember 31, 2020 , respectively, and excludes adjustments of approximately$0.6 million and$1.8 million of net earnings for the three and nine months endedDecember 31, 2019 , respectively associated with the application of the two-class method for computing diluted earnings per share. Factors and Trends Affecting Our Results of Operations Our results of operations have been, and we expect them to continue to be, affected by the following factors, which may cause our future results of operations to differ from our historical results of operations discussed under "- Results of Operations." Business Environment and Key Trends in Our Markets We believe that the following trends and developments in theU.S. government services industry and our markets may influence our future results of operations: •uncertainty around the timing, extent, nature and effect of Congressional and otherU.S. government actions to approve funding of theU.S. government, address budgetary constraints, including caps on the discretionary budget for defense and non-defense departments and agencies, as established by the Bipartisan Budget Control Act of 2011 ("BCA") and subsequently adjusted by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget Act of 2019 and address the ability ofCongress to determine how to allocate the available budget authority and pass appropriations bills to fund bothU.S. government departments and agencies that are, and those that are not, subject to the caps; •budget deficits and the growingU.S. national debt increasing pressure on theU.S. government to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions; •cost cutting and efficiency initiatives, current and future budget restrictions, continued implementation of Congressionally mandated automatic spending cuts and other efforts to reduceU.S. government spending could cause clients to reduce or delay funding for orders for services or invest appropriated funds on a less consistent or rapid basis or not at all, particularly when considering long-term initiatives and in light of current uncertainty around Congressional efforts to approve funding of theU.S. government and to craft a long-term agreement on theU.S. government's ability to incur indebtedness in excess of its current limits and generally in the current political environment, there is a risk that clients will not issue task orders in sufficient volume to reach current contract ceilings, alter historical patterns of contract awards, including the typical increase in the award of task orders or completion of other contract actions by theU.S. government in the period before the end of theU.S. government's fiscal year onSeptember 30 , delay requests for new proposals and contract awards, rely on short-term extensions and funding of current contracts, or reduce staffing levels and hours of operation; •delays in the completion of futureU.S. government's budget processes, which have in the past and could in the future delay procurement of the products, services, and solutions we provide; •changes in the relative mix of overallU.S. government spending and areas of spending growth, with lower spending on homeland security, intelligence, defense-related programs as certain overseas operations end and continued increased spending on cybersecurity, Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), advanced analytics, technology integration and healthcare, including as a result of theU.S. presidential election; 31
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•the extent, nature and effect of the COVID-19 outbreak, including the impact on federal budgets, current and pending procurements, supply chains, demand for services, deployment and productivity of our employees and the economic and societal impact of a pandemic, and the expected continued volatility in billable expenses; •legislative and regulatory changes to limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of interim rules adopted by federal agencies pursuant to the Bipartisan Budget Act of 2013, which substantially further reduce the amount of allowable executive compensation under these contracts and extend these limitations to a larger segment of our executives and our entire contract base; •efforts by theU.S. government to address organizational conflicts of interest and related issues and the impact of those efforts on us and our competitors; •increased audit, review, investigation and general scrutiny byU.S. government agencies of government contractors' performance underU.S. government contracts and compliance with the terms of those contracts and applicable laws; •the federal focus on refining the definition of "inherently governmental" work, including proposals to limit contractor access to sensitive or classified information and work assignments, which will continue to drive pockets of insourcing in various agencies, particularly in the intelligence market; •negative publicity and increased scrutiny of government contractors in general, including us, relating toU.S. government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information; •U.S. government agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts; •increased competition from other government contractors and market entrants seeking to take advantage of certain of the trends identified above, and an industry trend towards consolidation, which may result in the emergence of companies that are better able to compete against us; •cost cutting and efficiency and effectiveness efforts byU.S. civilian agencies with a focus on increased use of performance measurement, "program integrity" efforts to reduce waste, fraud and abuse in entitlement programs, and renewed focus on improving procurement practices for and interagency use of IT services, including through the use of cloud based options and data center consolidation; •restrictions by theU.S. government on the ability of federal agencies to use lead system integrators, in response to cost, schedule and performance problems with large defense acquisition programs where contractors were performing the lead system integrator role; •increasingly complex requirements of theDepartment of Defense and theU.S. intelligence community, including cybersecurity, managing federal health care cost growth and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare; and •increasing small business regulations across theDepartment of Defense and civilian agency clients continue to gain traction, agencies are required to meet high small business set aside targets, and large business prime contractors are required to subcontract in accordance with considerable small business participation goals necessary for contract award. Sources of Revenue Substantially all of our revenue is derived from services provided under contracts and task orders with theU.S. government, primarily by our consulting staff and, to a lesser extent, our subcontractors. Funding for our contracts and task orders is generally linked to trends in budgets and spending across variousU.S. government agencies and departments. We provide services under a large portfolio of contracts and contract vehicles to a broad client base, and we believe that our diversified contract and client base lessens potential volatility in our business; however, a reduction in the amount of services that we are contracted to provide to theU.S. government or any of our significantU.S. government clients could have a material adverse effect on our business and results of operations. In particular, theDepartment of Defense is one of our significant clients, and the BCA (as amended by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018 and the Bipartisan Budget Act of 2019), provides for automatic spending cuts (referred to as sequestration) totaling approximately$1.2 trillion between 2013 and 2021, including an estimated$500 billion in federal defense spending cuts over this time period. The Bipartisan Budget Act of 2019 raised BCA spending caps on defense spending by$90 billion for government fiscal 2020, and$81 billion for government fiscal 2021. For 32
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non-defense funding, the Bipartisan Budget Act of 2019 raised BCA spending caps by$78 billion for government fiscal 2020 and$72 billion for government fiscal 2021. While the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018 and the Bipartisan Budget Act of 2019 all negated and raised budget limits put in place by the BCA for both defense and non-defense spending, there can be no assurance that any spending cuts implemented in the future would be similarly negated. This could result in a commensurate reduction in the amount of services that we are contracted to provide to theDepartment of Defense and could have a material adverse effect on our business and results of operations, and given the uncertainty of when and how these automatic reductions required by the BCA may return and/or be applied, we are unable to predict the nature or magnitude of the potential adverse effect. Contract Types We generate revenue under the following three basic types of contracts: •Cost-Reimbursable Contracts. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract, up to a ceiling based on the amount that has been funded, plus a fixed fee or award fee. As we increase or decrease our spending on allowable costs, our revenue generated on cost-reimbursable contracts will increase, up to the ceiling and funded amounts, or decrease, respectively. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-fixed-fee and cost-plus-award-fee, both of which reimburse allowable costs and provide for a fee. The fee under each type of cost-reimbursable contract is generally payable upon completion of services in accordance with the terms of the contract. Cost-plus-fixed-fee contracts offer no opportunity for payment beyond the fixed fee. Cost-plus-award-fee contracts also provide for an award fee that varies within specified limits based upon the client's assessment of our performance against a predetermined set of criteria, such as targets for factors like cost, quality, schedule, and performance. •Time-and-Materials Contracts. Under contracts in this category, we are paid a fixed hourly rate for each direct labor hour expended, and we are reimbursed for billable material costs and billable out-of-pocket expenses inclusive of allocable indirect costs. We assume the financial risk on time-and-materials contracts because our costs of performance may exceed negotiated hourly rates. To the extent our actual direct labor, including allocated indirect costs, and associated billable expenses decrease or increase in relation to the fixed hourly billing rates provided in the contract, we will generate more or less profit, respectively, or could incur a loss. •Fixed-Price Contracts. Under a fixed-price contract, we agree to perform the specified work for a predetermined price. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. Some fixed-price contracts have a performance-based component, pursuant to which we can earn incentive payments or incur financial penalties based on our performance. Fixed-price level of effort contracts require us to provide a specified level of effort (i.e., labor hours), over a stated period of time, for a fixed price. The amount of risk and potential reward varies under each type of contract. Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category. In addition, we are typically reimbursed for other contract direct costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-reimbursable contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a predetermined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings but generally involve greater financial risk because we bear the impact of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period's profitability. Changes in contract type as a result of re-competes and new business could influence the percentage/mix in unanticipated ways. 33
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The table below presents the percentage of total revenue for each type of
contract:
Three Months Ended Nine Months Ended
December 31, December 31,
2020 2019 2020 2019
Cost-reimbursable 57% 57% 56% 57%
Time-and-materials 24% 23% 25% 23%
Fixed-price 19% 20% 19% 20%
Contract Diversity and Revenue Mix
We provide services to our clients through a large number of single award
contracts, contract vehicles, and multiple award contract vehicles. Most of our
revenue is generated under indefinite delivery/indefinite quantity, or IDIQ,
contract vehicles, which include multiple award government wide acquisition
contract vehicles, or GWACs, and General Services Administration Multiple Award
Schedule Contracts, or GSA schedules, and certain single award contracts. GWACs
and GSA schedules are available to all U.S. government agencies. Any number of
contractors typically competes under multiple award IDIQ contract vehicles for
task orders to provide particular services, and we earn revenue under these
contract vehicles only to the extent that we are successful in the bidding
process for task orders.
We generate revenue under our contracts and task orders through our provision of
services as both a prime contractor and subcontractor, as well as from the
provision of services by subcontractors under contracts and task orders for
which we act as the prime contractor. The mix of these types of revenue affects
our operating margin. Substantially all of our operating margin is derived from
direct consulting staff labor, as the portion of our operating margin derived
from fees we earn on services provided by our subcontractors is not significant.
We view growth in direct consulting staff labor as the primary driver of
earnings growth. Direct consulting staff labor growth is driven by consulting
staff headcount growth, after attrition, and total backlog growth.
Our People
Revenue from our contracts is derived from services delivered by consulting
staff and, to a lesser extent, from our subcontractors. Our ability to hire,
retain, and deploy talent with skills appropriately aligned with client needs is
critical to our ability to grow our revenue. We continuously evaluate whether
our talent base is properly sized and appropriately compensated, and contains an
optimal mix of skills to be cost competitive and meet the rapidly evolving needs
of our clients. We seek to achieve that result through recruitment and
management of capacity and compensation. As of December 31, 2020 and 2019, we
employed approximately 27,600 and 27,200 people, respectively, of which
approximately 24,700 and 24,300, respectively, were consulting staff.
Contract Backlog
We define backlog to include the following three components:
•Funded Backlog. Funded backlog represents the revenue value of orders for
services under existing contracts for which funding is appropriated or otherwise
authorized less revenue previously recognized on these contracts.
•Unfunded Backlog. Unfunded backlog represents the revenue value of orders
(including optional orders) for services under existing contracts for which
funding has not been appropriated or otherwise authorized.
•Priced Options. Priced contract options represent 100% of the revenue value of
all future contract option periods under existing contracts that may be
exercised at our clients' option and for which funding has not been appropriated
or otherwise authorized.
Our backlog does not include contracts that have been awarded but are currently
under protest and also does not include any task orders under IDIQ contracts,
except to the extent that task orders have been awarded to us under those
contracts.
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The following table summarizes the value of our contract backlog at the respective dates presented:
As of December 31,
2020 2019
(In millions)
Backlog:
Funded $ 3,620 $ 3,521
Unfunded 5,971 5,308
Priced options 13,695 13,128
Total backlog $ 23,286 $ 21,957
Our total backlog consists of remaining performance obligations, certain orders
under contracts for which the period of performance has expired, and unexercised
option period and other unexercised optional orders. As of December 31, 2020 and
March 31, 2020 , the Company had $7.5 billion and $6.3 billion , respectively, of
remaining performance obligations and we expect to recognize more than half of
the remaining performance obligations at December 31, 2020 as revenue over the
next 12 months, and approximately three quarters over the next 24 months. The
remainder is expected to be recognized thereafter. However, given the
uncertainties discussed below, as well as the risks described in "Item 1A. Risk
Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31,
2020 , we can give no assurance that we will be able to convert our backlog into
revenue in any particular period, if at all. Our backlog includes orders under
contracts that in some cases extend for several years. The U.S. Congress
generally appropriates funds for our clients on a yearly basis, even though
their contracts with us may call for performance that is expected to take a
number of years to complete. As a result, contracts typically are only partially
funded at any point during their term and all or some of the work to be
performed under the contracts may remain unfunded unless and until the U.S.
Congress makes subsequent appropriations and the procuring agency allocates
funding to the contract.
We view growth in total backlog and consulting staff headcount as the two key
measures of our potential business growth. Growing and deploying consulting
staff is the primary means by which we are able to achieve profitable revenue
growth. To the extent that we are able to hire additional consulting staff and
deploy them against funded backlog, we generally recognize increased revenue.
Total backlog increased by 6.1% from December 31, 2019 to December 31, 2020 .
Additions to funded backlog during the twelve months ended December 31, 2020
totaled $7.9 billion in comparison to $7.3 billion for the comparable period in
2019, as a result of the conversion of unfunded backlog to funded backlog, the
award of new contracts and task orders under which funding was appropriated, and
the exercise and subsequent funding of priced options. We report internally on
our backlog on a monthly basis and review backlog upon occurrence of certain
events to determine if any adjustments are necessary.
We cannot predict with any certainty the portion of our backlog that we expect
to recognize as revenue in any future period and we cannot guarantee that we
will recognize any revenue from our backlog. The primary risks that could affect
our ability to recognize such revenue on a timely basis or at all are: program
schedule changes, contract modifications, and our ability to assimilate and
deploy new consulting staff against funded backlog; cost-cutting initiatives and
other efforts to reduce U.S. government spending, which could reduce or delay
funding for orders for services; and delayed funding of our contracts due to
delays in the completion of the U.S. government's budgeting process and the use
of continuing resolutions by the U.S. government to fund its operations. The
amount of our funded backlog is also subject to change, due to, among other
factors: changes in congressional appropriations that reflect changes in U.S.
government policies or priorities resulting from various military, political,
economic or international developments; changes in the use of U.S. government
contracting vehicles, and the provisions therein used to procure our services
and adjustments to the scope of services, or cancellation of contracts, by the
U.S. government at any time. In our recent experience, none of the following
additional risks have had a material negative effect on our ability to realize
revenue from our funded backlog: the unilateral right of the U.S. government to
cancel multi-year contracts and related orders or to terminate existing
contracts for convenience or default; in the case of unfunded backlog, the
potential that funding will not be made available; and, in the case of priced
options, the risk that our clients will not exercise their options.
In addition, contract backlog includes orders under contracts for which the
period of performance has expired, and we may not recognize revenue on the
funded backlog that includes such orders due to, among other reasons, the tardy
submission of invoices by our subcontractors and the expiration of the relevant
appropriated funding in accordance with a predetermined expiration date such as
the end of the U.S. government's fiscal year. The revenue value of orders
included in contract backlog that has not been recognized as revenue due to
period of performance expirations has not exceeded approximately 5.3% of total
backlog as of December 31, 2020 and any of the four preceding fiscal quarters.
We expect to recognize revenue from a substantial portion of funded backlog as
of December 31, 2020 within the next twelve months. However, given the
uncertainties discussed above, as well as the risks described in Part I,
Item 1A, of our
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Annual Report on Form 10-K , we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all. Operating Costs and Expenses Costs associated with compensation and related expenses for our people are the most significant component of our operating costs and expenses. The principal factors that affect our costs are additional people as we grow our business and are awarded new contracts, task orders, and additional work under our existing contracts, and the hiring of people with specific skill sets and security clearances as required by our additional work. Our most significant operating costs and expenses are described below. •Cost of Revenue. Cost of revenue includes direct labor, related employee benefits, and overhead. Overhead consists of indirect costs, including indirect labor relating to infrastructure, management and administration, and other expenses. •Billable Expenses. Billable expenses include direct subcontractor expenses, travel expenses, and other expenses incurred to perform on contracts. •General and Administrative Expenses. General and administrative expenses include indirect labor of executive management and corporate administrative functions, marketing and bid and proposal costs, and other discretionary spending. •Depreciation and Amortization. Depreciation and amortization includes the depreciation of computers, leasehold improvements, furniture and other equipment, and the amortization of internally developed software, as well as third-party software that we use internally, and of identifiable long-lived intangible assets over their estimated useful lives. Seasonality TheU.S. government's fiscal year ends onSeptember 30 of each year. While not certain, it is not uncommon forU.S. government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. In addition, we also have historically experienced higher bid and proposal costs in the months leading up to theU.S. government's fiscal year end as we pursue new contract opportunities being awarded shortly after theU.S. government fiscal year end as new opportunities are expected to have funding appropriated in theU.S. government's subsequent fiscal year. We may continue to experience this seasonality in future periods, and our future periods may be affected by it. While not certain, changes in the government's funding and spending patterns have altered historical seasonality trends, supporting our approach to managing the business on an annual basis. Seasonality is just one of a number of factors, many of which are outside of our control, which may affect our results in any period. Critical Accounting Estimates and Policies Our critical accounting estimates and policies are disclosed in the Critical Accounting Estimates and Policies section in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedMarch 31, 2020 . There were no other material changes to our critical accounting policies, estimates or judgments that occurred in the quarterly period covered by this report. Recent Accounting Pronouncements See Note 2 to our accompanying condensed consolidated financial statements for information related to our adoption of new accounting standards and for information on our anticipated adoption of recently issued accounting standards. 36
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Results of Operations
The following table sets forth items from our condensed consolidated statements
of operations for the periods indicated:
Three Months Ended Nine Months Ended
December 31, Percent December 31, Percent
2020 2019 Change 2020 2019 Change
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(In thousands) (In thousands)
Revenue $ 1,904,020 $ 1,849,441 3.0 % $ 5,879,658 $ 5,494,194 7.0 %
Operating costs and expenses:
Cost of revenue 866,771 813,500 6.5 % 2,758,270 2,498,096 10.4 %
Billable expenses 577,059 600,522 (3.9) % 1,729,788 1,691,543 2.3 %
General and administrative
expenses 254,820 245,719 3.7 % 745,375 724,121 2.9 %
Depreciation and amortization 21,113 20,655 2.2 % 62,860 60,308 4.2 %
Total operating costs and expenses 1,719,763 1,680,396 2.3 % 5,296,293 4,974,068 6.5 %
Operating income 184,257 169,045 9.0 % 583,365 520,126 12.2 %
Interest expense (20,878) (24,231) (13.8) % (60,900) (75,281) (19.1) %
Other (expense) income, net 2,604 1,909 36.4 % (10,266) 5,885 NM
Income before income taxes 165,983 146,723 13.1 % 512,199 450,730 13.6 % Income tax expense 21,612 34,697 (37.7) % 102,418 106,993 (4.3) % Net income$ 144,371 $ 112,026 28.9 %$ 409,781 $ 343,737 19.2 % NM - Not meaningful. Three Months EndedDecember 31, 2020 Compared to Three Months EndedDecember 31, 2019 Revenue Revenue increased to$1,904.0 million from$1,849.4 million , or a 3.0% increase, primarily driven by growth in client demand and headcount to meet that demand. The Company also benefited from higher staff utilization over the prior year period driven by fewer PTO days taken by our employees which resulted in increases in our direct labor and corresponding generation of revenue growth. Total headcount as ofDecember 31, 2020 increased approximately 390 as compared toDecember 31, 2019 . Revenue growth for the quarter was negatively impacted by lower billable expenses. Cost of Revenue Cost of revenue increased to$866.8 million from$813.5 million , or a 6.5% increase. The increase was primarily due to increases in salaries and salary-related benefits of$55.3 million , driven by increased headcount and annual base salary increases. Cost of revenue as a percentage of revenue was 45.5% and 44.0% for the three months endedDecember 31, 2020 and 2019, respectively. Billable Expenses Billable expenses decreased to$577.1 million from$600.5 million , or a 3.9% decrease, primarily attributable to a decrease in the use of subcontractors driven by client demand and timing of client needs, and decreases in expenses from contracts which require the Company to incur travel and other direct expenses on behalf of clients as compared to the prior year period. The impact of COVID-19, including on travel, drove volatility in the timing and magnitude of billable expenses. Billable expenses as a percentage of revenue were 30.3% and 32.5% for the three months endedDecember 31, 2020 and 2019, respectively. General and Administrative Expenses General and administrative expenses increased to$254.8 million from$245.7 million , or a 3.7% increase, primarily due to increases in salaries and salary-related benefits of$12.4 million , partially offset by decreases in other business expenses and professional fees of$8.9 million . General and administrative expenses as a percentage of revenue were 13.4% and 13.3% for the three months endedDecember 31, 2020 and 2019, respectively. 37
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Depreciation and Amortization Depreciation and amortization increased to$21.1 million from$20.7 million , or a 2.2% increase, primarily due to increases in depreciation expense resulting from the effects of higher capital expenditures in fiscal 2020. Interest Expense Interest expense decreased to$20.9 million from$24.2 million , or a 13.8% decrease, primarily due to a decrease in 1 Month LIBOR, the benchmark interest rate under our Secured Credit Facility, and a reduction in expense of$2.0 million as a result of the repayment of the remaining Deferred Payment Obligation balance inDecember 2019 . Other Expense (Income), net Other expense (Income), net increased to a$2.6 million net other income from a$1.9 million net other income primarily due to the net gain of$3.1 million recognized from the sale of certain company assets. Income Tax Expense Income tax expense decreased to$21.6 million from$34.7 million , primarily due to the release of$10.2 million in reserves for uncertain tax positions related to the acquisition of eGovHoldings, Inc. (d/b/a/Aquilent ), established in the fourth quarter of fiscal 2017, due to the expiration of the statute of limitations. This was partially offset by an increase in pre-tax income as compared to the prior year period. The effective tax rate decreased to 13.0% for the three months endedDecember 31, 2020 from 23.6% for the three months endedDecember 31, 2019 . Nine Months EndedDecember 31, 2020 Compared to Nine Months EndedDecember 31, 2019 Revenue Revenue increased to$5,879.7 million from$5,494.2 million , or a 7.0% increase, primarily driven by growth in client demand and headcount to meet that demand. The Company also benefited from higher staff utilization over the prior year periods driven by fewer PTO days taken by our employees which resulted in increases in our direct labor and corresponding generation of revenue growth. Revenue growth for the year-to-date period benefited from an overall increase in billable expenses. Cost of Revenue Cost of revenue increased to$2,758.3 million from$2,498.1 million , or a 10.4% increase. The increase was primarily due to increases in salaries and salary-related benefits of$198.8 million primarily driven by increased headcount and annual base salary increases. Cost of revenue as a percentage of revenue was 46.9% and 45.5% for the nine months endedDecember 31, 2020 and 2019, respectively. Billable Expenses Billable expenses increased to$1,729.8 million from$1,691.5 million , or a 2.3% increase, primarily attributable to an increase in use of subcontractors driven by client demand. The increase was partially offset by decreases in expenses from contracts which require the Company to incur direct and travel expenses on behalf of clients compared to the prior year period. The impact of COVID-19 drove volatility in the timing and magnitude of billable expenses. Billable expenses as a percentage of revenue were 29.4% and 30.8% for the nine months endedDecember 31, 2020 and 2019, respectively. General and Administrative Expenses General and administrative expenses increased to$745.4 million from$724.1 million , or a 2.9% increase primarily due to increases in salary and salary related benefits of$23.1 million , partially offset by decreases in other business expenses and professional fees of$10.0 million . General and administrative expenses as a percentage of revenue were 12.7% and 13.2% for the nine months endedDecember 31, 2020 and 2019, respectively. Depreciation and Amortization Depreciation and amortization increased to$62.9 million from$60.3 million , or a 4.2% increase, primarily due to increases in depreciation expense resulting from the effects of higher capital expenditures in fiscal 2020. Interest Expense Interest expense decreased to$60.9 million from$75.3 million , or a 19.1% decrease, primarily due to a decrease in 1 Month LIBOR, the benchmark interest rate under our Secured Credit Facility, and a reduction in expense of$6.0 million as a result of the repayment of the remaining Deferred Payment Obligation balance inDecember 2019 . 38
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Other Expense (Income), net Other expense (Income), net decreased to a$10.3 million net other expense from a$5.9 million net other income, primarily due to the loss on debt extinguishment resulting from the redemption of the 2017 Senior Notes, including$9.0 million of the premium paid at redemption, and write-off of the unamortized debt issuance cost. This was partially offset by net gains of$5.1 million recognized from the Company's sale of certain customer contracts and other assets. Income Tax Expense Income tax expense decreased to$102.4 million from$107.0 million , primarily due to the release of$10.2 million in reserves for uncertain tax positions related to the acquisition of eGovHoldings, Inc. (d/b/a/Aquilent ), established in the fourth quarter of fiscal 2017, due to the expiration of the statute of limitations. This was partially offset by an increase in pre-tax income as compared to the prior year period. The effective tax rate decreased to 20.0% for the nine months endedDecember 31, 2020 from 23.7% for the nine months endedDecember 31, 2019 . Liquidity and Capital Resources The following table presents selected financial information as ofDecember 31, 2020 andMarch 31, 2020 and for the first nine months of fiscal 2021 and 2020: December 31, March 31, 2020 2020 (Unaudited) (In thousands) Cash and cash equivalents$ 1,341,301 $ 741,901 Total debt 2,375,007 2,185,844 Nine Months Ended December 31, 2020 2019 (Unaudited) (Unaudited) (In thousands) Net cash provided by operating activities$ 798,959
Net cash used in investing activities (122,855)
(90,712)
Net cash provided by (used in) financing activities (76,704)
137,084
Total increase in cash and cash equivalents$ 599,400
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In the opinion of management, we will be able to meet our liquidity and cash needs through a combination of cash flows from operating activities, available cash balances, and available borrowing under the Revolving Credit Facility. From time to time, we evaluate alternative uses for excess cash resources once our operating cash flow and required debt servicing needs have been met. Some of the possible uses of our remaining excess cash at any point in time may include funding strategic acquisitions, further investment in our business and returning value to shareholders through share repurchases, quarterly dividends, and special dividends. While the timing and financial magnitude of these possible actions are currently indeterminable, the Company expects to be able to manage and adjust its capital structure in the future to meet its liquidity needs. Historically, we have been able to generate sufficient cash to fund our operations, mandatory debt and interest payments, capital expenditures, and discretionary funding needs. However, due to fluctuations in cash flows, including as a result of the trends and developments described above under "-Factors and Trends Affecting Our Results of Operations" relating toU.S. government shutdowns,U.S. government cost-cutting, reductions or delays in theU.S. government appropriations and spending process and other budgetary matters, it may be necessary from time-to-time in the future to borrow under our Secured Credit Facility to meet cash demands. While the timing and financial magnitude of these possible actions are currently indeterminable, we expect to be able to manage and adjust our capital structure to meet our liquidity needs. Our expected liquidity and capital structure may also be impacted by discretionary investments and acquisitions that we could pursue. We anticipate that cash provided by operating activities, existing cash and cash equivalents, and borrowing capacity under the Revolving Credit Facility will be sufficient to meet our anticipated cash requirements for the next twelve months, which primarily include: 39
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•operating expenses, including salaries; •working capital requirements to fund the growth of our business; •capital expenditures which primarily relate to the purchase of computers, business systems, furniture and leasehold improvements to support our operations; •the design, build-out, testing, and potential implementation and operation of new financial management systems; •commitments and other discretionary investments; •debt service requirements for borrowings under our Secured Credit Facility and interest payments for the Senior Notes; and •cash taxes to be paid. Our ability to fund our operating needs depends, in part, on our ability to continue to generate positive cash flows from operations or, if necessary, raise cash in the capital markets. In addition, from time to time we evaluate conditions to opportunistically access the financing markets to secure additional debt capital resources and improve the terms of our indebtedness. Cash Flows Cash received from clients, either from the payment of invoices for work performed or for advances in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the client. Billing timetables and payment terms on our contracts vary based on a number of factors, including whether the contract type is cost-reimbursable, time-and-materials, or fixed-price. We generally bill and collect cash more frequently under cost-reimbursable and time-and-materials contracts, as we are authorized to bill as the costs are incurred or work is performed. In contrast, we may be limited to bill certain fixed-price contracts only when specified milestones, including deliveries, are achieved. In addition, a number of our contracts may provide for performance-based payments, which allow us to bill and collect cash prior to completing the work. Accounts receivable is the principal component of our working capital and is generally driven by revenue growth with other short-term fluctuations related to the payment practices of our clients. Our accounts receivable reflects amounts billed to our clients as of each balance sheet date. Our clients generally pay our invoices within 30 days of the invoice date, although we experience a longer billing and collection cycle with our global commercial customers. At any month-end, we also include in accounts receivable the revenue that was recognized in the preceding month, which is generally billed early in the following month. Finally, we include in accounts receivable amounts related to revenue accrued in excess of amounts billed, primarily on our fixed-price and cost-reimbursable-plus-award-fee contracts. The total amount of our accounts receivable can vary significantly over time, but is generally sensitive to revenue levels and customer mix. Operating Cash Flow Net cash provided by operations is primarily affected by the overall profitability of our contracts, our ability to invoice and collect cash from clients in a timely manner, our ability to manage our vendor payments and the timing of cash paid for income taxes. Continued uncertainty in global economic conditions may also affect our business as customers and suppliers may decide to downsize, defer, or cancel contracts, which could negatively affect the operating cash flows. Net cash provided by operations was$799.0 million in the nine months endedDecember 31, 2020 compared to$366.5 million in the prior year period, or a 118.0% increase. The increase in operating cash flows was primarily due to strong cash collections of our revenue growth, working capital management, and lower cash taxes due to the carryover of research and development credits claimed in fiscal 2020. Lower cash disbursements also contributed to third quarter performance, driven by cost management and lower expenses primarily attributable to COVID-19. Investing Cash Flow Net cash used in investing activities was$122.9 million in the nine months endedDecember 31, 2020 compared to$90.7 million in the prior year period, or a 35.4% increase. The increase in net cash used in investing activities was due to a$72.2 million strategic minority investment made by the Company during the three months endedDecember 31, 2020 . This was partially offset by a decrease in capital expenditures over the prior period as well as proceeds from the sale of certain Company assets. The decrease in capital expenditures reflects a shift away from facilities investment towards technology and tools needed to support the virtual work environment. Additionally, we continue to modernize our corporate information technology infrastructure and are in the rigorous testing phase prior to the implementation of a new financial management system. 40
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Financing Cash Flow Net cash used in financing activities was$76.7 million in the nine months endedDecember 31, 2020 compared to$137.1 million in net cash provided by financing activities in the prior year period. The increase in net cash used in financing activities was primarily due to the following: •Increases in share repurchases of$106.2 million as compared to the prior year period •Increases in dividends paid of$26.9 million as compared to the prior year period •Proceeds of$400.0 million from drawing down on our Delayed Draw Facility in the prior year period, not present in the current year The above were partially offset by: •Net proceeds of$341.5 million received from the issuance of the Senior Notes during the second quarter of fiscal 2021 •Repayment of the remaining deferred payment obligation balance of$80.0 million in the prior year period, not present in the current year Dividends and Share Repurchases OnJanuary 29, 2021 , the Company announced a regular quarterly cash dividend in the amount of$0.37 per share. The quarterly dividend is payable onMarch 2, 2021 to stockholders of record onFebruary 12, 2021 . During the three and nine months endedDecember 31, 2020 , quarterly dividends of$0.31 and$0.93 per share, respectively, were declared and paid totaling$43.0 million and$129.9 million , respectively. During the three and nine months endedDecember 31, 2019 , quarterly dividends of$0.27 and$0.73 per share, respectively, were declared and paid totaling$38.1 million and$102.9 million , respectively. OnDecember 12, 2011 , the Board of Directors approved a$30.0 million share repurchase program, which was further increased by the Board of Directors on (i)January 27, 2015 to$180.0 million , (ii)January 25, 2017 to$410.0 million , (iii)November 2, 2017 to$610.0 million , (iv)May 24, 2018 to$910.0 million , and (v)May 23, 2019 to$1,310.0 million . OnJanuary 27, 2021 , the Board of Directors approved an additional increase to our share repurchase authorization of$400.0 million to$1,710.0 million . The Company may repurchase shares pursuant to the program by means of open market repurchases, directly negotiated repurchases or through agents acting pursuant to negotiated repurchase agreements. During fiscal 2021, the Company purchased 1.6 million shares of the Company's Class A Common Stock for an aggregate of$123.4 million . As ofJanuary 27, 2021 , giving effect to the increase in the share repurchase authorization, the Company had approximately 746500000 of remaining capacity under its repurchase program. Any determination to pursue one or more of the above alternative uses for excess cash is subject to the discretion of our Board of Directors, and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts, and our Credit Agreement as amended and other factors deemed relevant by our Board of Directors. Indebtedness OnNovember 26, 2019 (the "Amendment Effective Date"),Booz Allen Hamilton Inc. ("Booz Allen Hamilton") andBooz Allen Hamilton Investor Corporation ("Investor"), and certain wholly-owned subsidiaries ofBooz Allen Hamilton , entered into the Seventh Amendment (the "Seventh Amendment") to the Credit Agreement, dated as ofJuly 31, 2012 , as amended (the "Credit Agreement") with certain institutional lenders, andBank of America, N.A ., as Administrative and Collateral Agents. The Seventh Amendment reduced the applicable margin applicable to the Term Loan B ("Term Loan B" and, together with the Term Loan A, the "Term Loans") from 2.00% to 1.75% for LIBOR loans and from 1.00% to 0.75% for base rate loans and extended the maturity of the Term Loan B toNovember 26, 2026 . The applicable margin and maturity date applicable to the Term Loan A (the "Term Loan A") remained unchanged. Prior to the Seventh Amendment, approximately$389.0 million was outstanding under Term Loan B. Pursuant to the Seventh Amendment, certain lenders converted their existing Term Loan B loans into a new tranche of Term Loan B loans in an aggregate amount, along with Term Loan B loans advanced by certain new lenders, of approximately$389.0 million (the "New Refinancing Tranche B Term Loans"). The proceeds from the new lenders were used to prepay in full all of the existing Term Loan B loans that were not converted into the new Term Loan B tranche. Voluntary prepayments of the New Refinancing Tranche B Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty. The other terms of the New Refinancing Tranche B Term Loans are generally the same as the existing Term Loan B prior to the Seventh Amendment. 41
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As ofDecember 31, 2020 , the Credit Agreement providedBooz Allen Hamilton with a$1,308.3 million Term Loan A, a$385.2 million Term Loan B, and$500.0 million in New Revolving Commitments with a sub-limit for letters of credit of$100.0 million (collectively, the "Secured Credit Facility"). As ofDecember 31, 2020 , the maturity date of Term Loan A and the termination date for the Revolving Credit Facility wasJuly 23, 2023 and the maturity date of Term Loan B wasNovember 26, 2026 .Booz Allen Hamilton's obligations and the guarantors' guarantees under the Credit Agreement are secured by a first priority lien on substantially all of the assets (including capital stock of subsidiaries) ofBooz Allen Hamilton , Investor and the subsidiary guarantors, subject to certain exceptions set forth in the Credit Agreement and related documentation. Subject to specified conditions, without the consent of the then-existing lenders (but subject to the receipt of commitments), the Term Loans or the Revolving Credit Facility may be expanded (or a new term loan facility or revolving credit facility added to the existing facilities) by up to (i) the greater of (x)$627 million and (y) 100% of consolidated EBITDA ofBooz Allen Hamilton , as of the end of the most recently ended four quarter period for which financial statements have been delivered pursuant to the Credit Agreement plus (ii) the aggregate principal amount under which pro forma consolidated net secured leverage remains less than or equal to 3.50:1.00. AtBooz Allen Hamilton's option, borrowings under the Secured Credit Facility bear interest based either on LIBOR (adjusted for maximum reserves, and subject to a floor of zero) for the applicable interest period or a base rate equal to the highest of (x) the administrative agent's prime corporate rate, (y) the overnight federal funds rate plus 0.50%, and (z) three-month LIBOR (adjusted for maximum reserves, and subject to a floor of zero) plus 1.00%), in each case plus an applicable margin, payable at the end of the applicable interest period and in any event at least quarterly. The applicable margin for Term Loan A and borrowings under the Revolving Credit Facility ranges from 1.25% to 2.00% for LIBOR loans and 0.25% to 1.00% for base rate loans, in each case based onBooz Allen Hamilton's consolidated total net leverage ratio. The applicable margin for Term Loan B is 1.75% for LIBOR loans and 0.75% for base rate loans. Unused commitments under the Revolving Credit Facility are subject to a quarterly fee ranging from 0.20% to 0.35% based onBooz Allen Hamilton's consolidated total net leverage ratio.Booz Allen Hamilton occasionally borrows under the Revolving Credit Facility in anticipation of cash demands. During the first, second and third quarters of fiscal 2021 and 2020,Booz Allen Hamilton accessed no amounts of its$500.0 million Revolving Credit Facility. As ofMarch 31, 2020 ,$100.0 million was outstanding on the Revolving Credit Facility which was repaid inJune 2020 . As ofDecember 31, 2020 , no amounts were outstanding on the Revolving Credit Facility. The Credit Agreement requires quarterly principal payments of 1.25% of the stated principal amount of Term Loan A until maturity and quarterly principal payments of 0.25% of the stated principal amount of Term Loan B until maturity.Booz Allen Hamilton also has agreed to pay customary letter of credit and agency fees. As ofDecember 31, 2020 andMarch 31, 2020 ,Booz Allen Hamilton was contingently liable under open standby letters of credit and bank guarantees issued by its banks in favor of third parties that totaled$10.3 million and$9.7 million , respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. For bothDecember 31, 2020 andMarch 31, 2020 , approximately$0.9 million , of these instruments reduced the available borrowings under the Revolving Credit Facility. The remainder is guaranteed under a separate$20.0 million facility of which$10.5 million and$6.2 million , respectively, was available toBooz Allen Hamilton atDecember 31, 2020 andMarch 31, 2020 . As ofDecember 31, 2020 ,Booz Allen Hamilton had$499.0 million of capacity available for additional borrowings under the Revolving Credit Facility. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include limitations on the following, in each case subject to certain exceptions: (i) indebtedness and liens; (ii) mergers, consolidations or amalgamations, liquidations, wind-ups or dissolutions, and disposition of all or substantially all assets; (iii) dispositions of property; (iv) restricted payments; (v) investments; (vi) transactions with affiliates; (vii) change in fiscal periods; (viii) negative pledges; (ix) restrictive agreements; (x) line of business; and (xi) speculative hedging. The events of default include the following, in each case subject to certain exceptions: (a) failure to make required payments under the Secured Credit Facility; (b) material breaches of representations or warranties under the Secured Credit Facility; (c) failure to observe covenants or agreements under the Secured Credit Facility; (d) failure to pay or default under certain other material indebtedness; (e) bankruptcy or insolvency; (f) certain Employee Retirement Income Security Act, or ERISA events; (g) certain material judgments; (h) actual or asserted invalidity of the Guarantee and Collateral Agreements or the other security documents or failure of the guarantees or perfected liens thereunder; and (i) a change of control.Booz Allen Hamilton is required to meet certain financial covenants at each quarter end, namely Consolidated Net Total Leverage and Consolidated Net Interest Coverage Ratios. As ofDecember 31, 2020 andMarch 31, 2020 , we were compliant with these covenants. For the three months endedDecember 31, 2020 and 2019, interest payments of$5.6 million and$12.0 million were made for Term Loan A and$1.9 million and$3.7 million were made for Term Loan B, respectively. For the nine months endedDecember 31, 2020 and 2019, interest payments of$18.3 million and$39.2 million were made for Term Loan A and$6.0 million and$12.5 million were made for Term Loan B, respectively. 42
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OnAugust 24, 2020 ,Booz Allen Hamilton issued$700 million aggregate principal amount of its 3.875% Senior Notes due 2028 (the "Senior Notes") under an Indenture, dated as ofAugust 24, 2020 , amongBooz Allen Hamilton , certain subsidiaries ofBooz Allen Hamilton , as guarantors (the "Subsidiary Guarantors"), andWilmington Trust, National Association as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture, dated as ofAugust 24, 2020 , amongBooz Allen Hamilton , the Subsidiary Guarantors and the Trustee. A portion of the net proceeds from the sale of the Senior Notes was used to redeem in full$350 million aggregate principal amount of the outstanding 2017 Senior Notes at a redemption price of 102.56% of the principal amount thereof, plus accrued and unpaid interest thereon to (but excluding) the redemption date, and to pay all fees and expenses related to the foregoing.Booz Allen Hamilton intends to use the remaining net proceeds from the sale of the Senior Notes for working capital and other general corporate purposes. (See Note 8 in our condensed consolidated financial statements). Borrowings under the Term Loans and, if used, the Revolving Credit Facility, incur interest at a variable rate. In accordance withBooz Allen Hamilton's risk management strategy,Booz Allen Hamilton executed a series of interest rate swaps. As ofDecember 31, 2020 ,Booz Allen Hamilton had interest rate swaps with an aggregate notional amount of$1.0 billion . These instruments hedge the variability of cash outflows for interest payments on the floating portion of the Company's debt. The Company's objectives in using cash flow hedges are to reduce volatility due to interest rate movements and to add stability to interest expense (See Note 9 to our condensed consolidated financial statements). Capital Structure and Resources Our stockholders' equity amounted to$1,073.3 million as ofDecember 31, 2020 , an increase of$216.9 million compared to stockholders' equity of$856.4 million as ofMarch 31, 2020 . The increase was primarily due to net income of$409.8 million for the nine months endedDecember 31, 2020 , stock-based compensation expense of$41.0 million , and issuance of common stock of$13.4 million , partially offset by$129.9 million in quarterly dividend payments and$132.6 million in treasury stock resulting from the repurchase of shares of our Class A Common Stock during the nine months endedDecember 31, 2020 . Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have any material off-balance sheet arrangements. Capital Expenditures Since we do not own any of our facilities, our capital expenditure requirements primarily relate to the purchase of computers, management systems, furniture, and leasehold improvements to support our operations. Direct facility and equipment costs billed to clients are not treated as capital expenses. Our capital expenditures for the nine months endedDecember 31, 2020 and 2019 were$54.0 million and$90.7 million , respectively. The decrease in capital expenditures reflects a shift away from facilities investment towards technology and tools needed to support the virtual work environment. Additionally, we continue to modernize our corporate information technology infrastructure and are in the rigorous testing phase prior to the implementation of a new financial management system. We believe we are on track for a successful implementation in the next fiscal year, which will support the Company's growth into the future. Given the uncertainty surrounding the COVID-19 outbreak, we may adjust our capital expenditures in fiscal 2021 to support our business operations as we further develop our long term strategy on a safe return to work. Commitments and Contingencies We are subject to a number of reviews, investigations, claims, lawsuits, and other uncertainties related to our business. For a discussion of these items, refer to Note 18 to our condensed consolidated financial statements. Special Note Regarding Forward Looking Statements Certain statements contained or incorporated in this Quarterly Report on Form 10-Q, or Quarterly Report, include forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "should," "forecasts," "expects," "intends," "plans," "anticipates," "projects," "outlook," "believes," "estimates," "predicts," "potential," "continue," "preliminary," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. These forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include: •any issue that compromises our relationships with theU.S. government or damages our professional reputation, including negative publicity concerning government contractors in general or us in particular; 43
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•changes inU.S. government spending, including a continuation of efforts by theU.S. government to decrease spending for management support service contracts, and mission priorities that shift expenditures away from agencies or programs that we support, or as a result of theU.S. presidential election; •efforts byCongress and otherU.S. government bodies to reduceU.S. government spending and address budgetary constraints and theU.S. deficit, as well as associated uncertainty around the timing, extent, nature and effect of such efforts; •delayed funding of our contracts due to uncertainty relating to funding of theU.S. government and a possible failure of Congressional efforts to approve such funding and to craft a long-term agreement on theU.S. government's ability to incur indebtedness in excess of its current limits, or changes in the pattern or timing of government funding and spending; •U.S. government shutdowns, as a result of the failure by elected officials to fund the government; •failure to comply with numerous laws and regulations, including but not limited to, the Federal Acquisition Regulation ("FAR"), the False Claims Act, the Defense Federal Acquisition Regulation Supplement and FAR Cost Accounting Standards and Cost Principles; •the effects of the COVID-19 outbreak, and other pandemics or widespread health epidemics, including disruptions to our workforce and the impact on government spending and demand for our solutions; •our ability to compete effectively in the competitive bidding process and delays or losses of contract awards caused by competitors' protests of major contract awards received by us; •variable purchasing patterns underU.S. government GSA schedules, blanket purchase agreements and indefinite delivery, indefinite quantity, or IDIQ contracts; •the loss of General Services Administration Multiple Award schedule contracts, or GSA schedules, or our position as prime contractor on government-wide acquisition contract vehicles, or GWACs; •changes in the mix of our contracts and our ability to accurately estimate or otherwise recover expenses, time, and resources for our contracts; •changes in estimates used in recognizing revenue; •our ability to realize the full value of and replenish our backlog, generate revenue under certain of our contracts, and the timing of our receipt of revenue under contracts included in backlog; •internal system or service failures and security breaches, including, but not limited to, those resulting from external or internal cyber attacks on our network and internal systems; •risks related to the potential implementation and operation of new financial management systems; •an inability to attract, train, or retain employees with the requisite skills and experience; •an inability to timely hire, assimilate and effectively utilize our employees, ensure that employees obtain and maintain necessary security clearances and/or effectively manage our cost structure; •the loss of members of senior management or failure to develop new leaders; •misconduct or other improper activities from our employees or subcontractors, including the improper use or release of our clients' sensitive or classified information; •increased competition from other companies in our industry; •failure to maintain strong relationships with other contractors, or the failure of contractors with which we have entered into a sub- or prime- contractor relationship to meet their obligations to us or our clients; •inherent uncertainties and potential adverse developments in legal or regulatory proceedings, including litigation, audits, reviews, and investigations, which may result in materially adverse judgments, settlements, withheld payments, penalties, or other unfavorable outcomes including debarment, as well as disputes over the availability of insurance or indemnification; •failure to comply with specialU.S. government laws and regulations relating to our international operations; •risks associated with increased competition, new relationships, clients, capabilities, and service offerings in ourU.S. and international businesses; 44
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•risks related to changes to our operating structure, capabilities, or strategy intended to address client needs, grow our business or respond to market developments; •the adoption by theU.S. government of new laws, rules, and regulations, such as those relating to organizational conflicts of interest issues or limits; •risks related to completed and future acquisitions, including our ability to realize the expected benefits from such acquisitions; •the incurrence of additional tax liabilities, including as a result of changes in tax laws or management judgments involving complex tax matters; •risks inherent in the government contracting environment; •continued efforts to change how theU.S. government reimburses compensation related costs and other expenses or otherwise limit such reimbursements and an increased risk of compensation being deemed unreasonable and unallowable or payments being withheld as a result ofU.S. government audit, review, or investigation; •increased insourcing by variousU.S. government agencies due to changes in the definition of "inherently governmental" work, including proposals to limit contractor access to sensitive or classified information and work assignments; •the size of our addressable markets and the amount ofU.S. government spending on private contractors; •risks related to our indebtedness and credit facilities which contain financial and operating covenants; •the impact of changes in accounting rules and regulations, or interpretations thereof, that may affect the way we recognize and report our financial results, including changes in accounting rules governing recognition of revenue; and •other risks and factors listed under "Item 1A. Risk Factors" and elsewhere in this Quarterly Report. In light of these risks, uncertainties and other factors, the forward-looking statements might not prove to be accurate and you should not place undue reliance upon them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the information disclosed in the Quantitative and Qualitative Disclosures About Market Risk section in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 filed with theSecurities and Exchange Commission onMay 26, 2020 . Item 4. Controls and Procedures Disclosure Controls and Procedures Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 45
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