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MarketScreener Homepage  >  Equities  >  Nyse  >  Booz Allen Hamilton Holding Corporation    BAH

BOOZ ALLEN HAMILTON HOLDING CORPORATION

(BAH)
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BOOZ ALLEN HAMILTON : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/31/2020 | 08:59am EDT
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 ended March 31,
2020 filed with the Securities and Exchange Commission on May 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 ends March 31 and, unless otherwise noted, references to years
or fiscal are for fiscal years ended March 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 to U.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 27,400 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 the U.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 in Europe, the Middle East and Southeast Asia.



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Financial and Other Highlights
During the first 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 7.2% from the three months ended June 30, 2019 to the three
months ended June 30, 2020 primarily driven by sustained strength in client
demand and headcount growth to meet that demand. Revenue growth this quarter was
also impacted by lower-than-typical billable expenses, primarily due to the
COVID-19 outbreak.
Operating income increased 7.2% to $191.9 million in the three months ended
June 30, 2020 from $179.0 million in the three months ended June 30, 2019, while
operating margin remained flat at 9.8%. The increase in the current quarter
operating income was primarily driven by the same factors as growth in revenue
as well as strong contract level performance and effective cost management, all
of which were partially offset by the inability to recognize revenue on, or bill
for, fee on certain contracts involving a ready workforce of approximately $12.0
million. The Company also incurred incremental legal costs during the three
months ended June 30, 2020 in response to the U.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 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 extend past September 30, 2020. 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 and we currently expect that
going forward approximately $2 million to $4 million per month for the fee on
certain contracts involving a ready workforce may not be reimbursed or may
exceed reimbursements in the near term. Through June 30, 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, 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 and/or cash flows.


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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 in the
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) supplemental
             employee benefits due to the COVID-19 outbreak, (ii) release of
             income tax reserves, and (iii) amortization or write-off of debt
             issuance costs and write-off of original issue discount, in each
             case net of the tax effect where appropriate calculated using an
             assumed effective tax rate. We prepare Adjusted Net Income to
             eliminate the impact of items, net of



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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.



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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
                                                                      June 30,
(In thousands, except share and per share data)                 2020             2019
                                                                     (Unaudited)
Revenue, Excluding Billable Expenses
Revenue                                                    $  1,956,453$  1,825,176
Billable expenses                                               549,077          551,175
Revenue, Excluding Billable Expenses                       $  1,407,376$  1,274,001
Adjusted Operating Income
Operating Income                                           $    191,887$    179,046
COVID-19 supplemental employee benefits (a)                         342                -
Adjusted Operating Income                                  $    192,229$    179,046

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income

                                                 $    129,329$    117,386
Income tax expense                                               41,487           38,444
Interest and other, net (b)                                      21,071           23,216
Depreciation and amortization                                    20,732           20,021
EBITDA                                                          212,619          199,067
COVID-19 supplemental employee benefits (a)                         342                -
Adjusted EBITDA                                            $    212,961$    199,067
Adjusted EBITDA Margin on Revenue                                  10.9 %           10.9 %

Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses

                                                           15.1 %           15.6 %
Adjusted Net Income
Net income                                                 $    129,329$    117,386
COVID-19 supplemental employee benefits (a)                         342                -
Release of income tax reserves (c)                                  (29 )              -

Amortization or write-off of debt issuance costs and write-off of original issue discount

                                454              457
Adjustments for tax effect (d)                                     (199 )           (119 )
Adjusted Net Income                                        $    129,897$    117,724

Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 139,172,454 141,129,301 Adjusted Net Income Per Diluted Share (e)

                  $       0.93$       0.83
Free Cash Flow
Net cash provided by operating activities                  $    140,418$     50,983
Less: Purchases of property, equipment and software             (20,058 )        (27,336 )
Free Cash Flow                                             $    120,360$     23,647


(a)    Represents the supplemental contribution to employees' dependent care FSA
       accounts in response to the COVID-19 outbreak.


(b)    Reflects the combination of Interest expense and Other (expense) income,
       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.



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(d)    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.


(e)    Excludes adjustments of approximately $0.6 million of net earnings for
       both the three months ended June 30, 2020 and 2019, associated with the
       application of the two-class method for computing diluted earnings per
       share.





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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 the U.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 other U.S. government actions to approve funding
             of the U.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 of Congress to determine how to allocate the available
             budget authority and pass appropriations bills to fund both U.S.
             government departments and agencies that are, and those that are
             not, subject to the caps;


•            budget deficits and the growing U.S. national debt increasing
             pressure on the U.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 reduce U.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. 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;


•            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;


•            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 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;



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•            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 to U.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 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 defense acquisition
             programs where contractors were performing the lead system
             integrator role;


•            increasingly complex requirements of the Department of Defense 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,
             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 Department 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



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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. The table below presents the percentage of total revenue for each type of contract:


                    Three Months Ended
                         June 30,
                     2020        2019
Cost-reimbursable    56%         56%
Time-and-materials   26%         23%
Fixed-price          18%         21%


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.


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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 June 30, 2020 and 2019, we
employed approximately 27,400 and 26,400 people, respectively, of which
approximately 24,500 and 23,600, 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. The following table summarizes the value of our contract backlog at the respective dates presented:

                  As of June 30,
                 2020        2019
                   (In millions)
Backlog:
Funded         $  3,437$  3,195
Unfunded          4,734       4,351
Priced options   14,846      12,309
Total backlog  $ 23,017$ 19,855

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 both June 30, 2020 and March 31, 2020, the Company had $6.3 billion of remaining performance obligations and we expect to recognize more than half of the remaining performance obligations at June 30, 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


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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 15.9% from June 30, 2019 to June 30, 2020. Additions
to funded backlog during the twelve months ended June 30, 2020 totaled $7.8
billion in comparison to $7.3 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.
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 June 30, 2020 and any of the four preceding fiscal quarters.
We expect to recognize revenue from a substantial portion of funded backlog as
of June 30, 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
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

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


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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 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.
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, 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.
Results of Operations
The following table sets forth items from our condensed consolidated statements
of operations for the periods indicated:
                                         Three Months Ended
                                              June 30,              Percent
                                        2020            2019         Change
                                     (Unaudited)     (Unaudited)
                                           (In thousands)
Revenue                             $ 1,956,453$ 1,825,176       7.2  %
Operating costs and expenses:
Cost of revenue                         948,902         840,654      12.9  %
Billable expenses                       549,077         551,175      (0.4 )%

General and administrative expenses 245,855 234,280 4.9 % Depreciation and amortization

            20,732          20,021       3.6  %
Total operating costs and expenses    1,764,566       1,646,130       7.2  %
Operating income                        191,887         179,046       7.2  %
Interest expense                        (20,235 )       (25,187 )   (19.7 )%
Other (expense) income, net                (836 )         1,971        NM
Income before income taxes              170,816         155,830       9.6  %
Income tax expense                       41,487          38,444       7.9  %
Net income                          $   129,329$   117,386      10.2  %


NM - Not meaningful.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenue
Revenue increased to $1,956.5 million from $1,825.2 million, or a 7.2% increase,
primarily driven by sustained strength in client demand and headcount growth to
meet that demand. Revenue growth this quarter was also impacted by
lower-than-typical billable expenses, primarily due to the COVID-19 outbreak.
Total headcount as of June 30, 2020 increased approximately 1,000 as compared to
June 30, 2019.
Cost of Revenue
Cost of revenue increased to $948.9 million from $840.7 million, or a 12.9%
increase. The increase was primarily due to increases in salaries and
salary-related benefits of $78.4 million primarily driven by increased headcount
and annual base salary increases. Cost of revenue as a percentage of revenue was
48.5% and 46.1% for the three months ended June 30, 2020 and 2019, respectively.

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Billable Expenses
Billable expenses decreased to $549.1 million from $551.2 million, or a 0.4%
decrease, primarily attributable to the impact of COVID-19 which drove
volatility in the timing and magnitude of billable expenses primarily associated
with other direct expenses incurred on behalf of our clients. Billable expenses
as a percentage of revenue were 28.1% and 30.2% for the three months ended
June 30, 2020 and 2019, respectively.
General and Administrative Expenses
General and administrative expenses increased to $245.9 million from $234.3
million, or a 4.9% increase, primarily due to increases in salaries and
salary-related benefits of $7.9 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 $2.2 million. General and administrative
expenses as a percentage of revenue were 12.6% and 12.8% for the three months
ended June 30, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization increased to $20.7 million from $20.0 million, or
a 3.6% 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 $20.2 million from $25.2 million, or a 19.7%
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 in December 2019.
Income Tax Expense
Income tax expense increased to $41.5 million from $38.4 million, primarily due
to an increase in pre-tax income as compared to the prior year period. The
effective tax rate decreased to 24.3% for the three months ended June 30, 2020
from 24.7% for the three months ended June 30, 2019.

Liquidity and Capital Resources The following table presents selected financial information as of June 30, 2020 and March 31, 2020 and for the first three months of fiscal 2021 and 2020:

                                                         June 30,        March 31,
                                                           2020            2020
                                                        (Unaudited)
                                                              (In thousands)
Cash and cash equivalents                              $   620,612$   741,901
Total debt                                               2,067,193       2,185,844

                                                            Three Months Ended
                                                                 June 30,
                                                           2020            2019
                                                        (Unaudited)     (Unaudited)
                                                              (In thousands)
Net cash provided by operating activities              $   140,418$    50,983
Net cash used in investing activities                      (20,058 )       (27,336 )

Net cash provided by (used in) financing activities (241,649 ) 341,463 Total increase (decrease) in cash and cash equivalents $ (121,289 )$ 365,110

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,


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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 to U.S.
government shutdowns, U.S. government cost-cutting, reductions or delays in the
U.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;


• 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, and we
currently are evaluating, conditions to opportunistically access the financing
markets to secure additional debt capital resources and improve the terms of our
indebtedness, including an extension of our maturity or improvements to the
covenants and other provisions governing our outstanding 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 $140.4 million in the
three months ended June 30, 2020 compared to $51.0 million in the prior year
period,

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or a 175.4% increase. The increase in operating cash flows was primarily due to
effective working capital management driven by strong cash collections of our
revenue and effective management of vendor payables. Net income growth,
including lower interest expense, also contributed to the increase in operating
cash.
Investing Cash Flow
Net cash used in investing activities was $20.1 million in the three months
ended June 30, 2020 compared to $27.3 million in the prior year period, or a
26.6% decrease. The decrease in net cash used in investing activities was due to
a decrease in capital expenditures over the prior period, reflecting 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, including to prepare for the
implementation of a new financial management system.
Financing Cash Flow
Net cash used in financing activities was $241.6 million in the three months
ended June 30, 2020 compared to $341.5 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:
•      $400.0 million draw on our Delayed Draw Facility in the prior period, with
       no such draw in the current period.


•      $100.0 million payment of our outstanding Revolving Credit Facility in the
       current period, with no such payment in the prior period.

$73.7 million increase in share repurchases compared to the prior period.



Dividends and Share Repurchases
On July 29, 2020, the Company announced a regular quarterly cash dividend in the
amount of $0.31 per share. The quarterly dividend is payable on August 14, 2020
to stockholders of record on August 28, 2020.
During the first quarter of fiscal 2021, a quarterly dividend of $0.31 per share
was declared and paid totaling $43.8 million. During the first quarter of fiscal
2020, a quarterly dividend of $0.23 per share was declared and paid totaling
$32.4 million.
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 the first quarter of fiscal 2021, the Company purchased 0.9
million shares of the Company's Class A Common Stock for an aggregate of $66.4
million. As of June 30, 2020, the Company had $418.5 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, dated as of July 31, 2012, as amended (the "Credit Agreement") with
certain institutional lenders, and Bank 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 to November 26,
2026. The applicable margin and maturity date applicable to the Term Loan A (
the"Term Loan A") remained unchanged.

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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.
As of June 30, 2020, the Credit Agreement provided Booz Allen Hamilton with
a $1,345.2 million Term Loan A, a $387.1 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 June 30, 2020, 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 quarters of fiscal 2021 and 2020,
Booz Allen Hamilton accessed no amounts of its $500.0 million Revolving Credit
Facility. As of March 31, 2020, $100.0 million was outstanding on the Revolving
Credit Facility which was repaid in June 2020. As of June 30, 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 of June 30, 2020 and March 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 $9.6 million and $9.7
million, respectively. These letters of credit and bank guarantees primarily
support insurance and bid and performance obligations. For both June 30, 2020
and March 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 $11.3 million and
$6.2 million, respectively, was available to Booz Allen Hamilton at June 30,
2020 and March 31, 2020. As of June 30, 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

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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 June 30, 2020 and March 31, 2020, we were
compliant with these covenants.
For the three months ended June 30, 2020 and 2019, interest payments of $6.9
million and $13.3 million were made for Term Loan A and $2.2 million and $4.4
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 due 2025 (the "Senior Notes") 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. A portion of the proceeds was used to repay all outstanding loans under
the Revolving Credit Facility. For both the three months ended June 30, 2020 and
2019, Booz Allen Hamilton made interest payments of $9.0 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 June 30, 2020, 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 9 to our condensed
consolidated financial statements).
Capital Structure and Resources
Our stockholders' equity amounted to $882.5 million as of June 30, 2020, an
increase of $26.1 million compared to stockholders' equity of $856.4 million as
of March 31, 2020. The increase was primarily due to net income of $129.3
million for the three months ended June 30, 2020, stock-based compensation
expense of $10.8 million, and issuance of common stock of $4.4 million,
partially offset by $43.8 million in quarterly dividend payments and $75.5
million in treasury stock resulting from the repurchase of shares of our Class A
Common Stock during the three months ended June 30, 2020.
Off-Balance Sheet Arrangements
As of June 30, 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 three months ended June 30, 2020 and 2019 were
$20.1 million and $27.3 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,
including to prepare for the implementation of a new financial management
system. We expect capital expenditures to decrease in the near term and overall
in fiscal 2021 as compared to fiscal 2020. 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:

                                       38

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•      any issue that compromises our relationships with the U.S. government or
       damages our professional reputation, including negative publicity
       concerning government contractors in general or us in particular;


•      changes in U.S. government spending, including a continuation of efforts
       by the U.S. government to decrease spending for management support service
       contracts, and mission priorities that shift expenditures away from
       agencies or programs that we support;


•      efforts by Congress and other U.S. government bodies to reduce U.S.
       government spending and address budgetary constraints and the U.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
       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 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 under U.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 special U.S. government laws and regulations
       relating to our international operations;



                                       39

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•      risks associated with increased competition, new relationships, clients,
       capabilities, and service offerings in our U.S. and international
       businesses;


•      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 the U.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 the U.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 of
       U.S. government audit, review, or investigation;


•      increased insourcing by various U.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 of U.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 ended
March 31, 2020 filed with the Securities and Exchange Commission on May 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.

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