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 27,600 employees work to solve hard
problems by making clients' missions their own, combining decades of consulting
and domain expertise with functional expertise in areas such as analytics,
digital solutions, engineering, and cyber, all fostered by a culture of
innovation that extends to all reaches of the company.
Through our dedication to our clients' missions, and a commitment to evolving
our business to address their client needs, we have longstanding relationships
with our clients, some more than 75 years. We support critical missions for a
diverse base of federal government clients, including nearly all of 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.

Financial and Other Highlights
During the second 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 11.0% from the three months ended September 30, 2019 to the
three months ended September 30, 2020, and increased 9.1% from the six months
ended September 30, 2019 primarily driven by sustained strength in client demand
and headcount growth to meet that demand. The Company also benefited from higher
staff utilization over the prior year period driven by fewer paid time off (PTO)
days taken by our employees. Revenue growth also increased to a lesser extent by
an increase in billable expenses.
Operating income increased 20.5% to $207.2 million in the three months ended
September 30, 2020 from $172.0 million in the three months ended September 30,
2019, which reflects an increase in operating margin to 10.3% from 9.5%.
Operating income increased 13.7% to $399.1 million in the six months ended
September 30, 2020 from $351.1 million in the six months ended September 30,
2019, while operating margin increased from 9.6% to 10.0%. The increases in the
operating income for three months and six months ended September 30, 2020 were
primarily driven by the same factors as growth in revenue, strong contract level
performance, ongoing cost management efforts, and reductions in certain types of
expenses, like travel and meetings. These were partially offset by the inability
to recognize revenue on, or bill for, fee on certain contracts involving a ready
workforce of approximately $7.0 million for the three months ended September 30,
2020 and approximately $19.0 million for the six months ended September 30,
2020. The Company also incurred incremental legal costs during the three and six
months ended September 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.
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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 currently extend past December 11, 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. However, going forward we do
not expect such non-reimbursed fees to have a material impact on earnings as the
majority of our affected workforce have returned to client site offices or may
do so prior to December 11, 2020. Through September 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.

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.
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•"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) research and development tax credit,
(iii) release of income tax reserves, (iv) loss on debt extinguishment and
(v) amortization of debt issuance costs, 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 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                           Six Months Ended
                                                               September 30,                               September 30,
(In thousands, except share and per share data)         2020                  2019                  2020                  2019
                                                                (Unaudited)                                 (Unaudited)
Revenue, Excluding Billable Expenses
Revenue                                            $  2,019,185          $  

1,819,577 $ 3,975,638 $ 3,644,753 Billable expenses

                                       603,652               539,846             1,152,729             1,091,021
Revenue, Excluding Billable Expenses               $  1,415,533          $  

1,279,731 $ 2,822,909 $ 2,553,732 Adjusted Operating Income Operating Income

$    207,221          $  

172,035 $ 399,108 $ 351,081



COVID-19 supplemental employee benefits (a)                 167                     -                   509                     -
Adjusted Operating Income                          $    207,388          $  

172,035 $ 399,617 $ 351,081 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income

$    136,081          $  

114,325 $ 265,410 $ 231,711 Income tax expense

                                       39,319                33,852                80,806                72,296
Interest and other, net (b)                              31,821                23,858                52,892                47,074
Depreciation and amortization                            21,015                19,632                41,747                39,653
EBITDA                                                  228,236               191,667               440,855               390,734

COVID-19 supplemental employee benefit (a)                  167                     -                   509                     -
Adjusted EBITDA                                    $    228,403          $  

191,667 $ 441,364 $ 390,734 Adjusted EBITDA Margin on Revenue

                          11.3  %               10.5  %               11.1  %               10.7  %
Adjusted EBITDA Margin on Revenue, Excluding
Billable Expenses                                          16.1  %               15.0  %               15.6  %               15.3  %
Adjusted Net Income
Net income                                         $    136,081          $  

114,325 $ 265,410 $ 231,711



COVID-19 supplemental employee benefits (a)                 167                     -                   509                     -
Research and development tax credit (c)                  (2,928)                    -                (2,928)                    -
Release of income tax reserves (d)                            -                     -                   (29)                    -
Loss on debt extinguishment (e)                          13,239                     -                13,239                     -
Amortization of debt issuance costs                         563                   602                 1,017                 1,059
Adjustments for tax effect (f)                           (3,640)                 (156)               (3,839)                 (275)
Adjusted Net Income                                $    143,482          $    114,771          $    273,379          $    232,495
Adjusted Diluted Earnings Per Share
Weighted-average number of diluted shares
outstanding                                         138,747,640           141,362,136           139,004,382           141,252,917

Adjusted Net Income Per Diluted Share (g) $ 1.03 $

0.81 $ 1.97 $ 1.65 Free Cash Flow Net cash provided by operating activities $ 425,606 $

    215,696          $    566,024          $    266,679
Less: Purchases of property, equipment and
software                                                (18,026)              (32,642)              (38,084)              (59,978)
Free Cash Flow                                     $    407,580          $    183,054          $    527,940          $    206,701

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


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(b)Reflects the combination of Interest expense and Other (expense) income, net
from the condensed consolidated statement of operations.
(c)Reflects tax credits, net of reserves for uncertain tax positions, recognized
in fiscal 2021 related to an increase in research and development credits
available for fiscal years 2016 to 2019.
(d)Release of pre-acquisition income tax reserves assumed by the Company in
connection with the Carlyle Acquisition.
(e)Reflects the loss on debt extinguishment resulting from the redemption of
Booz Allen Hamilton Inc.'s 5.125% Senior Notes due 2025 (the "2017 Senior
Notes"), including $9.0 million of the premium paid at redemption, and write-off
of the unamortized debt issuance cost. See Note 8 to our condensed consolidated
financial statements for more information.
(f)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.
(g)Excludes adjustments of approximately $0.8 million and $1.5 million of net
earnings for the three and six months ended September 30, 2020, respectively,
and excludes adjustments of approximately $0.6 million and $1.2 million of net
earnings for the three and six months ended September 30, 2019, respectively
associated with the application of the two-class method for computing diluted
earnings per share.
Factors and Trends Affecting Our Results of Operations
Our results of operations have been, and we expect them to continue to be,
affected by the following factors, which may cause our future results of
operations to differ from our historical results of operations discussed under
"- Results of Operations."
Business Environment and Key Trends in Our Markets
We believe that the following trends and developments in 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 beyond December 11, 2020 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, including as a result of the
U.S. presidential election;
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•the extent, nature and effect of the COVID-19 outbreak, including the impact on
federal budgets, current and pending procurements, supply chains, demand for
services, deployment and productivity of our employees and the economic and
societal impact of a pandemic;
•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;
•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
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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 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:

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                                       Three Months Ended            Six Months Ended
                                         September 30,                September 30,
                                     2020              2019        2020             2019
              Cost-reimbursable      56%               57%         56%              56%
              Time-and-materials     25%               23%         25%              23%
              Fixed-price            19%               20%         19%              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.
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 September 30, 2020 and 2019, we
employed approximately 27,600 and 27,000 people, respectively, of which
approximately 24,800 and 24,100, 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 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:
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                                            As of September 30,
                                            2020            2019
                                               (In millions)
                       Backlog:
                       Funded           $     4,482      $  4,383
                       Unfunded               6,159         5,365
                       Priced options        13,933        13,163
                       Total backlog    $    24,574      $ 22,911


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 September 30, 2020
and March 31, 2020, the Company had $8.4 billion and $6.3 billion, respectively,
of remaining performance obligations and we expect to recognize more than half
of the remaining performance obligations at September 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
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 September 30, 2019 to September 30, 2020.
Additions to funded backlog during the twelve months ended September 30, 2020
totaled $7.9 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 5.3% of total
backlog as of September 30, 2020 and any of the four preceding fiscal quarters.
We expect to recognize revenue from a substantial portion of funded backlog as
of September 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.
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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 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.
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Results of Operations
The following table sets forth items from our condensed consolidated statements
of operations for the periods indicated:
                                           Three Months Ended                                               Six Months Ended
                                              September 30,                      Percent                      September 30,                     Percent
                                        2020                 2019                Change                 2020                 2019                Change
                                    (Unaudited)          (Unaudited)                                (Unaudited)          (Unaudited)
                                             (In thousands)                                                  (In thousands)
Revenue                            $ 2,019,185          $ 1,819,577                  11.0  %       $ 3,975,638          $ 3,644,753                  9.1  %
Operating costs and expenses:
Cost of revenue                        942,597              843,942                  11.7  %         1,891,499            1,684,596                 12.3  %
Billable expenses                      603,652              539,846                  11.8  %         1,152,729            1,091,021                  5.7  %
General and administrative
expenses                               244,700              244,122                   0.2  %           490,555              478,402                  2.5  %
Depreciation and amortization           21,015               19,632                   7.0  %            41,747               39,653                  5.3  %
Total operating costs and expenses   1,811,964            1,647,542                  10.0  %         3,576,530            3,293,672                  8.6  %
Operating income                       207,221              172,035                  20.5  %           399,108              351,081                 13.7  %
Interest expense                       (19,787)             (25,863)                (23.5) %           (40,022)             (51,050)               (21.6) %
Other (expense) income, net            (12,034)               2,005                       NM           (12,870)               3,976                     

NM


Income before income taxes             175,400              148,177                  18.4  %           346,216              304,007                 13.9  %
Income tax expense                      39,319               33,852                  16.1  %            80,806               72,296                 11.8  %
Net income                         $   136,081          $   114,325                  19.0  %       $   265,410          $   231,711                 14.5  %


NM - Not meaningful.
Three Months Ended September 30, 2020 Compared to Three Months Ended
September 30, 2019
Revenue
Revenue increased to $2,019.2 million from $1,819.6 million, or an 11.0%
increase, primarily driven by sustained strength in client demand and headcount
growth to meet that demand. Total headcount as of September 30, 2020 increased
approximately 600 as compared to September 30, 2019. The Company also benefited
from higher staff utilization over the prior year period driven by fewer PTO
days taken by our employees. Revenue growth also increased to a lesser extent by
an increase in billable expenses.
Cost of Revenue
Cost of revenue increased to $942.6 million from $843.9 million, or an 11.7%
increase. The increase was primarily due to increases in salaries and
salary-related benefits of $65.1 million, driven by increased headcount and
annual base salary increases. Cost of revenue as a percentage of revenue was
46.7% and 46.4% for the three months ended September 30, 2020 and 2019,
respectively.
Billable Expenses
Billable expenses increased to $603.7 million from $539.8 million, or an 11.8%
increase, primarily attributable to an increase in the use of subcontractors
driven by client demand. The increase was partially offset by the decreases in
expenses from contracts which require the Company to incur direct and travel
expenses on behalf of clients compared to the prior year period. The impact of
COVID-19 drove volatility in the timing and magnitude of billable expenses
primarily associated with other direct and travel expenses incurred on behalf of
our clients. Billable expenses as a percentage of revenue were 29.9% and 29.7%
for the three months ended September 30, 2020 and 2019, respectively.
General and Administrative Expenses
General and administrative expenses increased to $244.7 million from $244.1
million, or a 0.2% increase, primarily due to increases in salaries and
salary-related benefits of $2.8 million, partially offset by decreases in other
business expenses and professional fees. General and administrative expenses as
a percentage of revenue were 12.1% and 13.4% for the three months ended
September 30, 2020 and 2019, respectively.
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Depreciation and Amortization
Depreciation and amortization increased to $21.0 million from $19.6 million, or
a 7.0% 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 $19.8 million from $25.9 million, or a 23.5%
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.
Other Expense (Income), net
Other expense (Income), net decreased to a $12.0 million net other expense from
a $2.0 million net other income primarily due to the loss on debt extinguishment
resulting from the redemption of the 2017 Senior Notes, including $9.0 million
of the premium paid at redemption, and write-off of the unamortized debt
issuance cost.
Income Tax Expense
Income tax expense increased to $39.3 million from $33.9 million, primarily due
to an increase in pre-tax income as compared to the prior year period. The
effective tax rate decreased to 22.4% for the three months ended September 30,
2020 from 22.8% for the three months ended September 30, 2019.

Six Months Ended September 30, 2020 Compared to Six Months Ended September 30,
2019
Revenue
Revenue increased to $3,975.6 million from $3,644.8 million, or a 9.1% increase,
primarily driven by sustained strength in client demand and headcount growth to
meet that demand. Revenue growth was also driven by an increase in billable
expenses.
Cost of Revenue
Cost of revenue increased to $1,891.5 million from $1,684.6 million, or a 12.3%
increase. The increase was primarily due to increases in salaries and
salary-related benefits of $143.5 million primarily driven by increased
headcount and annual base salary increases. Cost of revenue as a percentage of
revenue was 47.6% and 46.2% for the six months ended September 30, 2020 and
2019, respectively.
Billable Expenses
Billable expenses increased to $1,152.7 million from $1,091.0 million, or a 5.7%
increase, primarily attributable to an increase in use of subcontractors driven
by client demand. The increase was partially offset by decreases in expenses
from contracts which require the Company to incur direct and travel expenses on
behalf of clients compared to the prior year period. The impact of COVID-19
drove volatility in the timing and magnitude of billable expenses primarily
associated with other direct and travel expenses incurred on behalf of our
clients. Billable expenses as a percentage of revenue were 29.0% and 29.9% for
the six months ended September 30, 2020 and 2019, respectively.
General and Administrative Expenses
General and administrative expenses increased to $490.6 million from $478.4
million, or a 2.5% increase primarily due to increases in salary and salary
related benefits of $10.7 million, partially offset by decreases in other
business expenses and professional fees. General and administrative expenses as
a percentage of revenue were 12.3% and 13.1% for the six months ended
September 30, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization increased to $41.7 million from $39.7 million, or
a 5.3% 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 $40.0 million from $51.1 million, or a 21.6%
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 $4.0
million as a result of the repayment of the remaining Deferred Payment
Obligation balance in December 2019.
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Other Expense (Income), net
Other expense (Income), net decreased to a $12.9 million net other expense from
a $4.0 million net other income, primarily due to the loss on debt
extinguishment resulting from the redemption of the 2017 Senior Notes, including
$9.0 million of the premium paid at redemption, and write-off of the unamortized
debt issuance cost.
Income Tax Expense
Income tax expense increased to $80.8 million from $72.3 million, primarily due
to an increase in pre-tax income as compared to the prior year period. The
effective tax rate decreased to 23.3% for the six months ended September 30,
2020 from 23.8% for the six months ended September 30, 2019.

Liquidity and Capital Resources
The following table presents selected financial information as of September 30,
2020 and March 31, 2020 and for the first six months of fiscal 2021 and 2020:
                                                     September 30,        March 31,
                                                          2020              2020
                                                      (Unaudited)
                                                             (In thousands)

      Cash and cash equivalents                     $    1,275,190      $  

741,901
      Total debt                                         2,393,604        2,185,844

                                                            Six Months Ended
                                                              September 30,
                                                          2020              2019
                                                      (Unaudited)        (Unaudited)
                                                             (In thousands)

Net cash provided by operating activities $ 566,024 $ 266,679


      Net cash used in investing activities                (38,084)        

(59,978)


      Net cash provided by financing activities              5,349         

290,855

Total increase in cash and cash equivalents $ 533,289 $ 497,556




To date, COVID-19 has not had a significant impact on our liquidity, cash flows
or capital resources. However, the continued spread of COVID-19 has led to
disruption and volatility in the global capital markets, which, depending on
future developments, could impact our capital resources and liquidity in the
future. In the opinion of management, we will be able to meet our liquidity and
cash needs through a combination of cash flows from operating activities,
available cash balances, and available borrowing under the Revolving Credit
Facility.
From time to time, we evaluate alternative uses for excess cash resources once
our operating cash flow and required debt servicing needs have been met. Some of
the possible uses of our remaining excess cash at any point in time may include
funding strategic acquisitions, further investment in our business and returning
value to shareholders through share repurchases, quarterly dividends, and
special dividends. While the timing and financial magnitude of these possible
actions are currently indeterminable, the Company expects to be able to manage
and adjust its capital structure in the future to meet its liquidity needs.
Historically, we have been able to generate sufficient cash to fund our
operations, mandatory debt and interest payments, capital expenditures, and
discretionary funding needs. However, due to fluctuations in cash flows,
including as a result of the trends and developments described above under
"-Factors and Trends Affecting Our Results of Operations" relating 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;
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•capital expenditures which primarily relate to the purchase of computers,
business systems, furniture and leasehold improvements to support our
operations;
•the design, build-out, testing, and potential implementation and operation of
new financial management systems;
•commitments and other discretionary investments;
•debt service requirements for borrowings under our Secured Credit Facility and
interest payments for the Senior Notes; and
•cash taxes to be paid.
Our ability to fund our operating needs depends, in part, on our ability to
continue to generate positive cash flows from operations or, if necessary, raise
cash in the capital markets. In addition, from time to time we evaluate
conditions to opportunistically access the financing markets to secure
additional debt capital resources and improve the terms of our indebtedness.
Cash Flows
Cash received from clients, either from the payment of invoices for work
performed or for advances in excess of costs incurred, is our primary source of
cash. We generally do not begin work on contracts until funding is appropriated
by the client. Billing timetables and payment terms on our contracts vary based
on a number of factors, including whether the contract type is
cost-reimbursable, time-and-materials, or fixed-price. We generally bill and
collect cash more frequently under cost-reimbursable and time-and-materials
contracts, as we are authorized to bill as the costs are incurred or work is
performed. In contrast, we may be limited to bill certain fixed-price contracts
only when specified milestones, including deliveries, are achieved. In addition,
a number of our contracts may provide for performance-based payments, which
allow us to bill and collect cash prior to completing the work.
Accounts receivable is the principal component of our working capital and is
generally driven by revenue growth with other short-term fluctuations related to
the payment practices of our clients. Our accounts receivable reflects amounts
billed to our clients as of each balance sheet date. Our clients generally pay
our invoices within 30 days of the invoice date, although we experience a longer
billing and collection cycle with our global commercial customers. At any
month-end, we also include in accounts receivable the revenue that was
recognized in the preceding month, which is generally billed early in the
following month. Finally, we include in accounts receivable amounts related to
revenue accrued in excess of amounts billed, primarily on our fixed-price and
cost-reimbursable-plus-award-fee contracts. The total amount of our accounts
receivable can vary significantly over time, but is generally sensitive to
revenue levels and customer mix.
Operating Cash Flow
Net cash provided by operations is primarily affected by the overall
profitability of our contracts, our ability to invoice and collect cash from
clients in a timely manner, our ability to manage our vendor payments and the
timing of cash paid for income taxes. Continued uncertainty in global economic
conditions may also affect our business as customers and suppliers may decide to
downsize, defer, or cancel contracts, which could negatively affect the
operating cash flows. Net cash provided by operations was $566.0 million in the
six months ended September 30, 2020 compared to $266.7 million in the prior year
period, or a 112.2% increase. The increase in operating cash flows was primarily
due to strong cash collections of our revenue growth, working capital
management, and lower cash taxes due to the carryover of research and
development credits claimed in fiscal 2020. Lower cash disbursements also
contributed to second quarter performance, driven by cost management and lower
expenses attributable to COVID-19.
Investing Cash Flow
Net cash used in investing activities was $38.1 million in the six months ended
September 30, 2020 compared to $60.0 million in the prior year period, or a
36.5% 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 and are in the rigorous testing
phase prior to the implementation of a new financial management system.
Financing Cash Flow
Net cash provided by financing activities was $5.3 million in the six months
ended September 30, 2020 compared to $290.9 million in net cash provided by
financing activities in the prior year period. The decrease in net cash provided
by 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.
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•$100.0 million payment of our outstanding Revolving Credit Facility in the
current period, with no such payment in the prior year period.
•Increases in share repurchases of $101.6 million as compared to the prior year
period.
•Increases in dividends paid of $22.0 million as compared to the prior year
period.
The above were partially offset by net proceeds of $341.5 million received from
the issuance of the Senior Notes during the second quarter of fiscal 2021.
Dividends and Share Repurchases
On October 30, 2020, the Company announced a regular quarterly cash dividend in
the amount of $0.31 per share. The quarterly dividend is payable on December 2,
2020 to stockholders of record on November 16, 2020.
During the three and six months ended September 30, 2020, quarterly dividends of
$0.31 and $0.62 per share, respectively, were declared and paid totaling
$43.0 million and $86.8 million, respectively. During the three and six months
ended September 30, 2019, quarterly dividends of $0.23 and $0.46 per share,
respectively, were declared and paid totaling $32.4 million and $64.8 million,
respectively.
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 2021, the Company purchased 1.3 million shares of the
Company's Class A Common Stock for an aggregate of $96.4 million. As of
September 30, 2020, the Company had $388.5 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.
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 September 30, 2020, the Credit Agreement provided Booz Allen Hamilton with
a $1,326.8 million Term Loan A, a $386.2 million Term Loan B, and $500.0 million
in New Revolving Commitments with a sub-limit for letters of credit of $100.0
million (collectively, the "Secured Credit Facility"). As of September 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 and second 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
September 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 September 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 $11.3 million and
$9.7 million, respectively. These letters of credit and bank guarantees
primarily support insurance and bid and performance obligations. For both
September 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 $9.6 million and $6.2 million, respectively, was available to Booz Allen
Hamilton at September 30, 2020 and March 31, 2020. As of September 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 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 September 30, 2020 and March 31, 2020, we were
compliant with these covenants.
For the three months ended September 30, 2020 and 2019, interest payments of
$5.8 million and $13.9 million were made for Term Loan A and $1.9 million and
$4.4 million were made for Term Loan B, respectively. For the six months ended
September 30, 2020 and 2019, interest payments of $12.7 million and $27.2
million were made for Term Loan A and $4.1 million and $8.8 million were made
for Term Loan B, respectively.
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On August 24, 2020, Booz Allen Hamilton issued $700 million aggregate principal
amount of its 3.875% Senior Notes due 2028 (the "Senior Notes") under an
Indenture, dated as of August 24, 2020, 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
August 24, 2020, among Booz Allen Hamilton, the Subsidiary Guarantors and the
Trustee. A portion of the net proceeds from the sale of the Senior Notes was
used to redeem in full $350 million aggregate principal amount of the
outstanding 2017 Senior Notes at a redemption price of 102.56% of the principal
amount thereof, plus accrued and unpaid interest thereon to (but excluding) the
redemption date, and to pay all fees and expenses related to the foregoing. Booz
Allen Hamilton intends to use the remaining net proceeds from the sale of the
Senior Notes for working capital and other general corporate purposes. (See Note
8 in our condensed consolidated financial statements).
Borrowings under the Term Loans and, if used, the Revolving Credit Facility,
incur interest at a variable rate. In accordance with Booz Allen Hamilton's risk
management strategy, Booz Allen Hamilton executed a series of interest rate
swaps. As of September 30, 2020, Booz Allen Hamilton had interest rate swaps
with an aggregate notional amount of $1.0 billion. These instruments hedge the
variability of cash outflows for interest payments on the floating portion of
the Company's debt. The Company's objectives in using cash flow hedges are to
reduce volatility due to interest rate movements and to add stability to
interest expense (See Note 9 to our condensed consolidated financial
statements).
Capital Structure and Resources
Our stockholders' equity amounted to $972.0 million as of September 30, 2020, an
increase of $115.6 million compared to stockholders' equity of $856.4 million as
of March 31, 2020. The increase was primarily due to net income of $265.4
million for the six months ended September 30, 2020, stock-based compensation
expense of $25.6 million, and issuance of common stock of $9.1 million,
partially offset by $86.8 million in quarterly dividend payments and $105.6
million in treasury stock resulting from the repurchase of shares of our Class A
Common Stock during the six months ended September 30, 2020.
Off-Balance Sheet Arrangements
As of September 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 six months ended September 30, 2020 and 2019 were
$38.1 million and $60.0 million, respectively. The decrease in capital
expenditures reflects a shift away from facilities investment towards technology
and tools needed to support the virtual work environment. Additionally, we
continue to modernize our corporate information technology infrastructure and
are in the rigorous testing phase prior to the implementation of a new financial
management system. We believe we are on track for a successful implementation in
the next fiscal year, which will support the Company's growth into the future.
We expect capital expenditures to decrease in the second half of fiscal 2021 as
compared to the second half of 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:
•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;
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•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, or as a result of the U.S. presidential election;
•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 beyond December 11, 2020 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;
•risks associated with increased competition, new relationships, clients,
capabilities, and service offerings in our U.S. and international businesses;
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•risks related to changes to our operating structure, capabilities, or strategy
intended to address client needs, grow our business or respond to market
developments;
•the adoption by 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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