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, 2019 filed with the Securities and Exchange 25 -------------------------------------------------------------------------------- Commission onMay 28, 2019 , 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, digital solutions, engineering, mission operations, and cyber expertise 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 27,200 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 financial services, health and life sciences, energy, and transportation to solve the hardest and most consequential challenges, including through our cybersecurity products and services. Our international clients are primarily in theMiddle East andSoutheast Asia . Financial and Other Highlights EffectiveApril 1, 2019 , the Company adopted Accounting Standard Codification (ASC) No. 842 Leases (Topic 842), using the modified retrospective transition approach and, as a result, comparative information for the prior fiscal year has not been retrospectively adjusted. See Note 2 to our accompanying condensed consolidated financial statements for more information on the impact of the adoption of this accounting standard. During the third quarter of fiscal 2020, the Company generated year over year revenue growth, delivered improved earnings over the prior year period, and increased client staff headcount. Revenue increased 11.2% from the three months endedDecember 31, 2018 to the three months endedDecember 31, 2019 and increased 11.6% from the nine months endedDecember 31, 2018 to the nine months endedDecember 31, 2019 primarily driven by sustained strength in client demand and headcount growth. Revenue also benefited from higher billable expenses as compared to the prior year period. Operating income increased 4.4% to$169.0 million in the three months endedDecember 31, 2019 from$161.9 million in the three months endedDecember 31, 2018 , while operating margin decreased to 9.1% from 9.7% in the comparable period. Operating income increased$52.8 million to$520.1 million in the nine months endedDecember 31, 2019 from$467.3 million in the nine months endedDecember 31, 2018 , while operating margin was 9.5% for both periods. The increase in the current quarter operating income was primarily driven by the same factors as growth in revenue as well as improved contract performance compared to the prior year period. The Company also benefited from an$11.2 million reduction in expense in the prior year period as a result of an amendment and associated revaluation of our long term disability plan liability. The Company also incurred incremental legal costs during the three and nine months endedDecember 31, 2019 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. 26 -------------------------------------------------------------------------------- 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. 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 before certain other items, including transaction costs, fees, losses, and expenses, including fees associated with debt prepayments. "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) amortization or write-off of debt issuance costs and write-off of original issue discount, (iii) release of income tax reserves, and (iv) re-measurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act (the "2017 Tax Act") in each case net of the tax effect where appropriate calculated using an assumed effective tax rate. We prepare Adjusted Net Income 27
-------------------------------------------------------------------------------- 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. We view net income excluding the impact of the re-measurement of the Company's deferred tax assets and liabilities as a result of the 2017 Tax Act as an important indicator of performance consistent with the manner in which management measures and forecasts the Company's performance and the way in which management is incentivized to perform. • "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 thefootnotes 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.
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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.
Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands, except share and per
share data) 2019 2018 2019 2018
(Unaudited) (Unaudited)
Revenue, Excluding Billable Expenses Revenue$ 1,849,441 $ 1,663,112 $ 5,494,194 $ 4,923,957 Billable expenses 600,522 510,047 1,691,543 1,465,831 Revenue, Excluding Billable Expenses$ 1,248,919 $ 1,153,065 $ 3,802,651 $ 3,458,126 Adjusted Operating Income Operating Income$ 169,045 $ 161,932 $ 520,126 $ 467,295 Transaction expenses (a) 1,069 - 1,069 3,660 Adjusted Operating Income$ 170,114 $ 161,932 $ 521,195 $ 470,955 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income$ 112,026 $ 132,037 $ 343,737 $ 328,954 Income tax expense 34,697 8,232 106,993 68,569 Interest and other, net (b) 22,322 21,663 69,396 69,772 Depreciation and amortization 20,655 17,780 60,308 50,359 EBITDA 189,700 179,712 580,434 517,654 Transaction expenses (a) 1,069 - 1,069 3,660 Adjusted EBITDA$ 190,769 $ 179,712 $ 581,503 $ 521,314 Adjusted EBITDA Margin on Revenue 10.3 % 10.8 % 10.6 % 10.6 % Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses 15.3 % 15.6 % 15.3 % 15.1 % Adjusted Net Income Net income$ 112,026 $ 132,037 $ 343,737 $ 328,954 Transaction expenses (a) 1,069 - 1,069 3,660 Release of income tax reserves (c) - (462 ) - (462 ) Re-measurement of deferred tax assets/liabilities (d) - (28,972 ) - (27,908 ) Amortization or write-off of debt issuance costs and write-off of original issue discount 886 533 1,945 2,401 Adjustments for tax effect (e) (509 ) (139 ) (784 ) (1,576 ) Adjusted Net Income$ 113,472 $ 102,997 $ 345,967 $ 305,069 Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 141,558,427 143,056,900 141,348,635 143,832,886 Adjusted Net Income Per Diluted Share (f)$ 0.80 $ 0.72 $ 2.45 $ 2.12 Free Cash Flow Net cash provided by operating activities$ 99,780 $ 8,636 $ 366,459 $ 283,203 Less: Purchases of property, equipment and software (30,734 ) (18,404 ) (90,712 ) (58,076 ) Free Cash Flow$ 69,046 $ (9,768 ) $ 275,747 $ 225,127 (a) Fiscal 2020 and fiscal 2019 reflect debt refinancing costs incurred in connection with the refinancing transactions consummated onNovember 26, 2019 andJuly 23, 2018 , respectively. 29
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(b) Reflects the combination of Interest expense and Other income (expense),
net from the condensed consolidated statement of operations.
(c) Release of pre-acquisition income tax reserves assumed by the Company in
connection with the Carlyle Acquisition.
(d) Reflects the adjustments made to the provisional income tax benefitassociated with the re-measurement of the Company's deferred tax assets
and liabilities as a result of the 2017 Tax Act.
(e) 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.
(f) Excludes adjustments of approximately
earnings for the three and nine months ended December 31, 2019 ,
respectively, and excludes adjustments of approximately $0.8 million and
$2.1 million of net earnings for the three and nine months ended
for computing diluted earnings per share.
30-------------------------------------------------------------------------------- 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 Tax Payer 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 the U.S. government and to craft a
long-term agreement on the U.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 the U.S. government in the period before
the end of the U.S. government's fiscal year on September 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 future U.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 overall U.S. governmentspending 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;
• 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 theselimitations to a
larger segment of our executives and our entire contract base;
• efforts by the U.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 by U.S.
government agencies of government contractors' performance under
U.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;
31-------------------------------------------------------------------------------- • negative publicity and increased scrutiny of government
contractors
in general, including us, relating to U.S. governmentexpenditures
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 by U.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 the U.S. government on the ability of federal
agencies to use lead system integrators, in response to cost,
schedule and performance problems with large defenseacquisition
programs where contractors were performing the lead system
integrator role;
• increasingly complex requirements of the Department ofDefense and
the U.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 the Department of
Defense and civilian agency clients continue to gain traction,
whereby 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 the U.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 various
U.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 the U.S. government or any of our significant
U.S. government clients could have a material adverse effect on our business and
results of operations. In particular, the Department 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
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 the U.S. government and could have a
material adverse effect on our business and results of operations.
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
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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.
The table below presents the percentage of total revenue for each type of
contract:
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
Cost-reimbursable 57% 54% 57% 53%
Time-and-materials 23% 23% 23% 24%
Fixed-price 20% 23% 20% 23%
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 compete 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.
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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, 2019 and 2018, we
employed approximately 27,200 and 25,800 people, respectively, of which
approximately 24,300 and 23,100, 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 revenuevalue 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 underexisting
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.
The following table summarizes the value of our contract backlog at the
respective dates presented:
As of
December 31,
2019 2018
(In millions)
Backlog:
Funded $ 3,521 $ 3,545
Unfunded 5,308 4,501
Priced options 13,128 12,408
Total backlog $ 21,957 $ 20,454
Our total backlog consists of remaining performance obligations, certain orders
under contracts for which the period of performance has expired, and unexercised
option periods and other unexercised optional orders. As of December 31, 2019 ,
the Company had $6.7 billion of remaining performance obligations and we expect
to recognize more than half of the remaining performance obligations 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, 2019 , 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 7.3% from December 31, 2018 to December 31, 2019 .
Additions to funded backlog during the twelve months ended December 31, 2019
totaled $7.3 billion in comparison to $7.2 billion for the comparable period, 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.
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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 5.2% of total
backlog as of December 31, 2019 and any of the four preceding fiscal quarters.
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 directsubcontractor
expenses, travel expenses, and other expenses incurred to perform on
contracts.
• General and Administrative Expenses. General andadministrative
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, leaseholdimprovements,
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
The U.S. government's fiscal year ends on September 30 of each year. While not
certain, it is not uncommon for U.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. It is also common
for the expiration of periods of performance under U.S. government contracts to
correspond to the end of the U.S. government's fiscal year, which may result in
us not recognizing revenue for such associated backlog thereafter. In addition,
we also have historically experienced higher bid and proposal costs in the
months leading up to the U.S. government's fiscal year end as we pursue new
contract opportunities being awarded shortly after the U.S. government fiscal
year end as new opportunities are expected to have funding appropriated in the
U.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.
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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 ended March 31, 2019 . Effective April 1,
2019 , we adopted Topic 842 using the modified retrospective transition approach.
Refer to Note 2 and Note 11 to our accompanying condensed consolidated financial
statements for information related to our adoption of new accounting standards
and for additional information related to leases. 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.
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
2019 2018 Change 2019 2018 Change
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(In thousands) (In thousands)
Revenue $ 1,849,441 $ 1,663,112 11.2 % $ 5,494,194 $ 4,923,957 11.6 %
Operating costs and
expenses:
Cost of revenue 813,500 750,680 8.4 % 2,498,096 2,285,062 9.3 %
Billable expenses 600,522 510,047 17.7 % 1,691,543 1,465,831 15.4 %
General and administrative
expenses 245,719 222,673 10.3 % 724,121 655,410 10.5 %
Depreciation and
amortization 20,655 17,780 16.2 % 60,308 50,359 19.8 %
Total operating costs and
expenses 1,680,396 1,501,180 11.9 % 4,974,068 4,456,662 11.6 %
Operating income 169,045 161,932 4.4 % 520,126 467,295 11.3 %
Interest expense (24,231 ) (22,036 ) 10.0 % (75,281 ) (67,357 ) 11.8 %
Other income (expense),
net 1,909 373 NM 5,885 (2,415 ) NM
Income before income taxes 146,723 140,269 4.6 % 450,730 397,523 13.4 %
Income tax expense 34,697 8,232 NM 106,993 68,569 56.0 %
Net income $ 112,026 $ 132,037 (15.2 )% $ 343,737 $ 328,954 4.5 %
NM - Not meaningful.
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
Revenue
Revenue increased to $1,849.4 million from $1,663.1 million , or an 11.2%
increase, primarily driven by sustained strength in client demand and headcount
growth. Revenue also benefited from higher billable expenses as compared to the
prior year period. Total headcount as of December 31, 2019 increased
approximately 1,400 compared to December 31, 2018 .
Cost of Revenue
Cost of revenue increased to $813.5 million from $750.7 million , or an 8.4%
increase. The increase was primarily due to increases in salaries and
salary-related benefits of $65.9 million . The increase in salaries and
salary-related benefits was driven by increased headcount and annual base salary
increases. Cost of revenue as a percentage of revenue was 44.0% and 45.1% for
the three months ended December 31, 2019 and 2018, respectively.
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Billable Expenses
Billable expenses increased to $600.5 million from $510.0 million , or a 17.7%
increase, primarily attributable to an increase in the use of subcontractors in
the current quarter driven by client demand and an increase in contracts which
require the Company to incur direct expenses on behalf of clients over the prior
year period. Billable expenses as a percentage of revenue were 32.5% and 30.7%
for the three months ended December 31, 2019 and 2018, respectively.
General and Administrative Expenses
General and administrative expenses increased to $245.7 million from $222.7
million , or a 10.3% increase, primarily due to increases in salaries and
salary-related benefits of $7.6 million , driven by an increase in headcount
growth as well as annual base salary increases and an increase in other business
expenses and professional fees of $14.7 million . General and administrative
expenses as a percentage of revenue were 13.3% and 13.4% for the three months
ended December 31, 2019 and 2018, respectively.
Depreciation and Amortization
Depreciation and amortization increased to $20.7 million from $17.8 million , or
a 16.2% increase, primarily due to increases in depreciation expense resulting
from the effects of higher capital expenditures in fiscal 2019.
Interest Expense
Interest expense increased to $24.2 million from $22.0 million , or a 10.0%
increase, primarily as a result of increases in interest expense related to the
$400 million Delayed Draw Facility (as defined below), which the Company drew
down in April 2019 .
Income Tax Expense
Income tax expense increased to $34.7 million from $8.2 million , primarily due
to an increase in pre-tax income as compared to the prior year period and the
re-measurement of deferred income taxes in the third quarter of fiscal 2019. The
effective tax rate increased to 23.6% for the three months ended December 31,
2019 from 5.9% for the three months ended December 31, 2018 .
Nine Months Ended December 31, 2019 Compared to Nine Months Ended December 31,
2018
Revenue
Revenue increased to $5,494.2 million from $4,924.0 million , or an 11.6%
increase, primarily driven by sustained strength in client demand and headcount
growth. Revenue also benefited from higher billable expenses as compared to the
prior year period.
Cost of Revenue
Cost of revenue increased to $2,498.1 million from $2,285.1 million or a 9.3%
increase. The increase was primarily due to increases in salaries and
salary-related benefits of $188.1 million driven by increased headcount and
annual base salary increases, and higher incentive compensation and retirement
plan contributions of $21.0 million . Cost of revenue as a percentage of revenue
was 45.5% and 46.4% for the nine months ended December 31, 2019 and 2018,
respectively.
Billable Expenses
Billable expenses increased to $1,691.5 million from $1,465.8 million or a 15.4%
increase, primarily attributable to an increase in the use of subcontractors in
the current year driven by client demand and an increase in contracts which
require the Company to incur direct expenses on behalf of clients over the prior
year period. Billable expenses as a percentage of revenue were 30.8% and 29.8%
for the nine months ended December 31, 2019 and 2018, respectively.
General and Administrative Expenses
General and administrative expenses increased to $724.1 million from $655.4
million , or a 10.5% increase, primarily due to increases in salaries and
salary-related benefits of $36.3 million , driven by an increase in headcount
growth as well as annual base salary increases, and an increase in other
business expenses and professional fees of $29.1 million . General and
administrative expenses as a percentage of revenue were 13.2% and 13.3% for the
nine months ended December 31, 2019 and 2018, respectively.
Depreciation and Amortization
Depreciation and amortization increased to $60.3 million from $50.4 million , or
a 19.8% increase, primarily due to increases in depreciation expense resulting
from the effects of higher capital expenditures in fiscal 2019 and fiscal 2020.
37
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Interest Expense
Interest expense increased to $75.3 million from $67.4 million , or an 11.8%
increase, primarily as a result of increases in interest expense related to the
$400 million Delayed Draw Facility which the Company drew down in April 2019 .
Income Tax Expense
Income tax expense increased to $107.0 million from $68.6 million , or a 56.0%
increase, primarily due to an increase in pre-tax income as compared to the
prior year period and the re-measurement of deferred income taxes in fiscal
2019. The effective tax rate increased to 23.7% from 17.2% for the nine months
ended December 31, 2019 and 2018, respectively.
We have been engaged in a project to review and improve the method by which we
identify expenditures that qualify for the research and development tax credit.
This project is ongoing; however, we expect to complete the review and implement
changes in our methodology in the fourth quarter of fiscal 2020. After
completion, we expect to record a tax benefit in our tax provision, which could
potentially have a material impact on our condensed consolidated financial
statements. Assuming adequate levels of taxable income, our improved methodology
for identifying expenditures that qualify for the research and development tax
credit could provide tax benefits in future years that are expected to lower our
future effective tax rate.
Liquidity and Indebtedness
The following table presents selected financial information as of December 31,
2019 and March 31, 2019 and for the first nine months of fiscal 2020 and 2019:
December 31, March 31,
2019 2019
(Unaudited)
(In thousands)
Cash and cash equivalents $ 696,821 $ 283,990
Total debt 2,104,510 1,759,761
Nine Months Ended
December 31,
2019 2018
(Unaudited) (Unaudited)
(In thousands)
Net cash provided by operating activities $ 366,459 $ 283,203
Net cash used in investing activities (90,712 ) (58,096 ) Net cash provided by (used in) financing activities 137,084 (300,206 ) Total increase (decrease) in cash and cash equivalents$ 412,831 $
(75,099 )
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: • operating expenses, including salaries; 38 --------------------------------------------------------------------------------
• 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. 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$366.5 million in the nine months endedDecember 31, 2019 compared to$283.2 million in the prior year period, or a 29.4% increase. The increase in operating cash flows was primarily due to the collection of our revenue and net income growth. Investing Cash Flow Net cash used in investing activities was$90.7 million in the nine months endedDecember 31, 2019 compared to$58.1 million in the prior year period, or a 56.1% increase. The increase in net cash used in investing activities was primarily due to an increase in capital expenditures over the prior period primarily related to investments in our facilities and infrastructure and information technology. Financing Cash Flow Net cash provided by financing activities was$137.1 million in the nine months endedDecember 31, 2019 compared to$300.2 million in net cash used in financing activities in the prior year period. The increase in net cash provided by financing activities was primarily due to proceeds of$400 million from drawing down on our Delayed Draw Facility and a$144.2 million decrease in share repurchases compared to the prior year period, partially offset by the repayment of the remaining deferred payment obligation balance of$80.0 million . Dividends and Share Repurchases OnJanuary 31, 2020 , the Company announced a regular quarterly cash dividend in the amount of$0.31 per share. The quarterly dividend is payable onFebruary 28, 2020 to stockholders of record onFebruary 14, 2020 . 39 --------------------------------------------------------------------------------
The following table summarizes the cash distributions recognized in the condensed consolidated statement of cash flows:
Three Months Ended Nine Months Ended
December 31, December 31,
2019 2018 2019 2018
Quarterly dividends (1) $ 38,095 $ 27,148 $ 102,943 $ 81,807
Dividend equivalents (2) - - - 268
Total distributions $ 38,095 $ 27,148 $ 102,943 $ 82,075
(1) For fiscal 2020, amounts represent quarterly dividends that were declared
and paid during the third quarter of $0.27 per share, and $0.23 per share for
both the first and second quarters. For fiscal 2019, amounts represent quarterly
dividends that were declared and paid of $0.19 per share.
(2) Dividend equivalents are distributions made to option holders equal to the
previously declared special dividends.
On December 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 . 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 2020, the Company purchased 0.4 million shares of the
Company's Class A Common Stock for an aggregate of $28.4 million . Following the
aforementioned repurchases, as of December 31, 2019 , the Company had $629.8
million remaining under the 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
On November 26, 2019 (the "Amendment Effective Date"), Booz Allen Hamilton Inc.
("Booz Allen Hamilton") and Booz Allen Hamilton Investor Corporation
("Investor"), and certain wholly-owned subsidiaries of Booz Allen Hamilton ,
entered into the Seventh Amendment (the "Seventh Amendment") to the Credit
Agreement (as amended, the "Credit Agreement"), dated as of July 31, 2012 among
Booz Allen Hamilton , Investor, certain wholly-owned subsidiaries of Booz Allen
Hamilton and Bank of America, N.A ., as Administrative Agent and Collateral Agent
and the other lenders and financial institutions from time to time party thereto
(as previously amended by the First Amendment to the Credit Agreement, dated as
of August 16, 2013 , the Second Amendment to the Credit Agreement, dated as of
May 7, 2014 , the Third Amendment to the Credit Agreement, dated as of July 13,
2016 , the Fourth Amendment to the Credit Agreement, dated as of February 6,
2017 , the Fifth Amendment to the Credit Agreement, dated as of March 7, 2018 ,
and the Sixth Amendment to the Credit agreement, dated July 23, 2018 ). Pursuant
to the Seventh Amendment, the Company 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 to November 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,
subject to a 1.00% premium payable in connection with certain repricing
transactions within the first six months after the Seventh Amendment. 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.
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As of December 31, 2019 , the Credit Agreement provided Booz Allen Hamilton with
a $1,382.2 million Term Loan A, a $389.1 million Term Loan B, and $500.0 million
in New Revolving Commitments with a sub-limit for letters of credit of $100.0
million . As of December 31, 2019 , the maturity date of Term Loan A and the
termination date for the Revolving Credit Facility was July 23, 2023 and the
maturity date of Term Loan B was November 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) of Booz 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 of Booz 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.
At Booz 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 on Booz
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 on Booz 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 2020, Booz Allen Hamilton accessed no amounts of its $500.0 million
Revolving Credit Facility. During the first, second and third quarters of fiscal
2019, Booz Allen Hamilton accessed a total of $70.0 million of its $500.0
million Revolving Credit Facility. As of December 31, 2019 and March 31, 2019 ,
there were no amounts outstanding under 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 of December 31, 2019 and March 31, 2019 , 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 $10.6 million and
$9.5 million , respectively. These letters of credit and bank guarantees
primarily support insurance and bid and performance obligations. At December 31,
2019 and March 31, 2019 , approximately $0.9 million and $1.0 million ,
respectively, of these instruments reduced the available borrowings under the
Revolving Credit Facility. The remainder is guaranteed under a separate $15.0
million facility established in fiscal 2015 of which $5.3 million and $6.5
million , respectively, was available to Booz Allen Hamilton at December 31, 2019
and March 31, 2019 . As of December 31, 2019 , 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 of December 31, 2019 and March 31, 2019 , we were
compliant with these covenants. In addition, from time to time we evaluate, and
we currently are evaluating, conditions in the financing markets for
opportunities to improve the terms of indebtedness, including indebtedness under
the Credit Agreement. Such improvements could include a reduction of the
effective interest, an extension of our maturity, or improvements to the
covenants and other provisions governing our outstanding indebtedness.
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For the three months ended December 31, 2019 and 2018, interest payments of
$12.0 million and $10.5 million were made for Term Loan A and $3.7 million and
$4.4 million were made for Term Loan B, respectively. For the nine months ended
December 31, 2019 and 2018, interest payments of $39.2 million and $31.6 million
were made for Term Loan A and $12.5 million and $12.4 million were made for Term
Loan B, respectively.
Senior Notes
On April 25, 2017 , Booz Allen Hamilton issued $350 million aggregate principal
amount of its 5.125% Senior Notes (the "Senior Notes") due 2025 under an
Indenture, dated as of April 25, 2017 , among Booz Allen Hamilton , certain
subsidiaries of Booz Allen Hamilton , as guarantors (the "Subsidiary
Guarantors"), and Wilmington Trust, National Association , as trustee (the
"Trustee"), as supplemented by the First Supplemental Indenture, dated as of
April 25, 2017 , among Booz Allen Hamilton , the Subsidiary Guarantors and the
Trustee. For both the three months ended December 31, 2019 and 2018, Booz Allen
Hamilton made interest payments of $8.9 million for the Senior Notes. For both
the nine months ended December 31, 2019 and 2018, Booz Allen Hamilton made
interest payments of $17.9 million for the Senior Notes.
Borrowings under the Term Loans and, if used, the Revolving Credit Facility,
incur interest at a variable rate. In accordance with Booz Allen Hamilton's risk
management strategy, between April 6, 2017 and April 4, 2019 , Booz Allen
Hamilton executed a series of interest rate swaps. As of December 31, 2019 , Booz
Allen Hamilton had interest rate swaps with an aggregate notional amount of $1
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 10 to our condensed
consolidated financial statements).
Capital Structure and Resources
Our stockholders' equity amounted to $915.0 million as of December 31, 2019 , an
increase of $239.6 million compared to stockholders' equity of $675.4 million as
of March 31, 2019 . The increase was primarily due to net income of $343.7
million for the nine months ended December 31, 2019 , stock-based compensation
expense of $26.8 million , and issuance of common stock of $10.8 million ,
partially offset by $102.9 million in quarterly dividend payments and $30.9
million in treasury stock resulting from the repurchase of shares of our Class A
Common Stock during the nine months ended December 31, 2019 .
Off-Balance Sheet Arrangements
As of December 31, 2019 , 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 ended December 31, 2019 and 2018 were
$90.7 million and $58.1 million , respectively. The increase in capital
expenditures over the prior year primarily relates to investments in our
facilities and infrastructure, and information technology. We expect capital
expenditures for fiscal 2020 to increase from fiscal 2019 as a result of
continuing investments in these areas.
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 19 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:
• efforts by Congress and other U.S. government bodies to reduce U.S. government spending and address budgetary constraints, including automatic
sequestration required by the Budget Control Act of 2011 (as subsequently
amended) and the
the timing, extent, nature and effect of such efforts;
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• delayed funding of our contracts due to uncertainty relating to funding of
the U.S. government and a possible failure of Congressional efforts to
approve such funding and to craft a long-term agreement on the U.S.
government's ability to incur indebtedness in excess of its current
limits, or changes in the pattern or timing of government funding andspending (including those resulting from or related to cuts associated
with sequestration);
• any issue that compromises our relationships with the
damages our professional reputation, including negative publicity
concerning government contractors in general or us in particular;
• changes in
by the
contracts, and mission priorities that shift expenditures away from
agencies or programs that we support;
•
to fund the government;
• the size of our addressable markets and the amount of
spending on private contractors;
• 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;
• 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;
• 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;
• 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
unallowable or payments being withheld as a result of
audit, review, or investigation;
• 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;
• changes in estimates used in recognizing revenue;
• an inability to attract, train, or retain employees with the requisite
skills and experience;
• an inability to timely hire, assimilate and effectively utilize ouremployees, 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 insourcing by various
the definition of "inherently governmental" work, including proposals to
limit contractor access to sensitive or classified information and work
assignments;
• 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;
• 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;
• risks inherent in the government contracting environment;
43
--------------------------------------------------------------------------------• risks related to changes to our operating structure, capabilities, or
strategy intended to address client needs, grow our business or respond to
market developments;
• risks associated with increased competition, new relationships, clients,
capabilities, and service offerings in our U.S. and international
businesses;
• failure to comply with special
relating to our international operations;
• risks related to our indebtedness and credit facilities which contain
financial and operating covenants;
• the adoption by the
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;
• an inability to utilize existing or future tax benefits for any reason,
including as a result of a change in laws or regulations;
• variable purchasing patterns under
purchase agreements and indefinite delivery, indefinite quantity, or IDIQ,
contracts;
• the impact of changes in accounting rules and regulations, orinterpretations 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, 2019 filed with theSecurities and Exchange Commission onMay 28, 2019 . 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. 44
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