BOOZ ALLEN HAMILTON HOLDING CORPORATION The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 filed with theSecurities and Exchange Commission onMay 21, 2021 , or Annual Report, and under Part II, "Item 1A. Risk Factors," and "- Special Note Regarding Forward Looking Statements" of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our fiscal year endsMarch 31 and, unless otherwise noted, references to years or fiscal are for fiscal years endedMarch 31 . See "-Results of Operations." Overview We are a leading provider of management and technology consulting, analytics, engineering, digital solutions, mission operations, and cyber services toU.S. and international governments, major corporations, and not-for-profit organizations. Our ability to deliver value to our clients has always been, and continues to be, a product of the strong character, expertise and tremendous passion of our people. Our approximately 28,600 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 80 years. We support critical missions for a diverse base of federal government clients, including nearly all of theU.S. government's cabinet-level departments, as well as increasingly for top-tier commercial and international clients. We support our federal government clients by helping them tackle their most complex and pressing challenges such as protecting soldiers in combat and supporting their families, advancing cyber capabilities, keeping our national infrastructure secure, enabling and enhancing digital services, transforming the healthcare system, and improving government efficiency to achieve better outcomes. We serve commercial clients across industries, including financial services, health and life sciences, energy, and technology. We have a presence in theMiddle East and other international markets. Financial and Other Highlights During the first quarter of fiscal 2022, the Company generated year over year revenue growth and increased client staff headcount. Revenue increased 1.7% from the three months endedJune 30, 2020 to the three months endedJune 30, 2021 . Growth was primarily driven by sustained client demand and headcount to meet that demand, partially offset by higher than normal staff utilization in the comparable prior year period driven by fewer paid time off (PTO) days taken by our employees which resulted in increases in our direct labor and corresponding generation of revenue. Operating income decreased 26.4% to$141.3 million in the three months endedJune 30, 2021 from$191.9 million in the three months endedJune 30, 2020 , while operating margin decreased from 9.8% to 7.1%. The decreases in operating income and operating margin for the three months endedJune 30, 2021 were primarily driven by acquisition costs of$66.8 million related to our acquisition ofLiberty IT Solutions, LLC ("Liberty"), as more fully described in Note 5 to Notes to Condensed Consolidated Financial Statements. These decreases were partially offset by strong contract performance and cost management of unallowable spending. The Company also incurred incremental legal costs during the three months endedJune 30, 2021 in response to theU.S. Department of Justice investigation and matters which purport to relate to the investigation, a portion of which was offset by the receipt of insurance reimbursements. We expect to incur additional costs in the future. Based on the information currently available, the Company is not able to reasonably estimate the expected long-term incremental legal costs or amounts that may be reimbursed associated with this investigation and these related matters. 23 -------------------------------------------------------------------------------- Table of Contents We are monitoring the evolving situation related to COVID-19 and vaccine rollout, and we continue to work with our stakeholders to assess further possible implications to our business. 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. ThroughJune 30, 2021 , we have withheld recognition of revenue associated with these amounts at risk of not being reimbursed under the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act"). We do not expect non-reimbursed fees to have a material impact on earnings in future periods. Although we cannot currently predict the overall impact of COVID-19 and vaccine rollout, the longer the duration of the event, the more likely it is that it could have an adverse effect on our business, financial position, results of operations, billable expenses, and/or cash flows. Non-GAAP Measures We publicly disclose certain non-GAAP financial measurements, including Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted Earnings Per Share, or Adjusted Diluted EPS, because management uses these measures for business planning purposes, including to manage our business against internal projected results of operations and measure our performance. We view Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS as measures of our core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP measures also provide another basis for comparing period to period results by excluding potential differences caused by non-operational and unusual or non-recurring items. In addition, we use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. We also utilize and discuss Free Cash Flow because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business, and measuring liquidity generally. We present these supplemental measures because we believe that these measures provide investors and securities analysts with important supplemental information with which to evaluate our performance, long term earnings potential, or liquidity, as applicable, and to enable them to assess our performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting principles generally accepted inthe United States , or GAAP, and when analyzing our performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of revenue to Revenue, Excluding Billable Expenses, operating income to Adjusted Operating Income, net income to Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income and Adjusted Diluted EPS, and net cash provided by operating activities to Free Cash Flow, (ii) use Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP and (iii) use Free Cash Flow in addition to, and not as an alternative to, net cash provided by operating activities as a measure of liquidity, each as defined under GAAP. We have defined the aforementioned non-GAAP measures as follows: •"Revenue, Excluding Billable Expenses" represents revenue less billable expenses. We use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. •"Adjusted Operating Income" represents operating income before financing transaction costs, supplemental employee benefits due to COVID-19, and acquisition-related costs, including significant acquisition amortization. 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 financing transaction costs , supplemental employee benefits due to COVID-19, and acquisition-related costs. "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 24 -------------------------------------------------------------------------------- Table of Contents 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) acquisition costs, (ii) financing transaction costs (iii) supplemental employee benefits due to COVID-19, (iv) significant acquisition amortization (v) release of income tax reserves, and (vi) amortization or write-off of debt issuance costs and debt 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 tax, we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. We view Adjusted Net Income as an important indicator of performance consistent with the manner in which management measures and forecasts the Company's performance and the way in which management is incentivized to perform. •"Adjusted Diluted EPS" represents diluted EPS calculated using Adjusted Net Income as opposed to net income. Additionally, Adjusted Diluted EPS does not contemplate any adjustments to net income as required under the two-class method as disclosed in the footnotes to the condensed consolidated financial statements. •"Free Cash Flow" represents the net cash generated from operating activities less the impact of purchases of property, equipment and software.
Below is a reconciliation of Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow to the most directly comparable financial measure calculated and presented in accordance with GAAP.
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Three Months Ended
June 30,
(In thousands, except share and per share data) 2021 2020
(Unaudited)
Revenue, Excluding Billable Expenses Revenue$ 1,989,066 $ 1,956,453 Less: Billable expenses 555,545 549,077 Revenue, Excluding Billable Expenses$ 1,433,521 $ 1,407,376 Adjusted Operating Income Operating Income$ 141,257 $ 191,887 Acquisition costs (a) 66,789 - Financing transaction costs (b) 2,348 - COVID-19 supplemental employee benefits (c) - 342 Significant acquisition amortization (d) 2,658 - Adjusted Operating Income$ 213,052 $ 192,229 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income$ 92,102 $ 129,329 Income tax expense 27,352 41,487 Interest and other, net (e) 21,803 21,071 Depreciation and amortization 27,745 20,732 EBITDA 169,002 212,619 Acquisition costs (a) 66,789 - Financing transaction costs (b) 2,348 - COVID-19 supplemental employee benefits (c) - 342 Adjusted EBITDA$ 238,139 $ 212,961 Adjusted EBITDA Margin on Revenue 12.0 % 10.9 % Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses 16.6 % 15.1 % Adjusted Net Income Net income$ 92,102 $ 129,329 Acquisition costs (a) 66,789 - Financing transaction costs (b) 2,348 - COVID-19 supplemental employee benefits (c) - 342 Significant acquisition amortization (d) 2,658 - Release of income tax reserves (f) - (29)
Amortization and write-off of debt issuance costs and debt discount
887 454
Adjustments for tax effect (g) (18,897) (199)
Adjusted Net Income $ 145,887 $ 129,897
Adjusted Diluted Earnings Per Share
Weighted-average number of diluted shares outstanding 136,392,343 139,172,454
Adjusted Net Income Per Diluted Share (h) $ 1.07 $ 0.93
Free Cash Flow
Net cash (used in) provided by operating activities $ (10,662) $ 140,418
Less: Purchases of property, equipment and software (9,008) (20,058)
Free Cash Flow $ (19,670) $ 120,360 (a)Represents costs associated with the acquisition efforts of the Company related to transactions for which the Company has entered into a letter of intent to acquire a controlling financial interest in the target entity. Acquisition costs primarily include costs associated with (i) due diligence activities, (ii) compensation expenses associated with
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employee retention, and (iii) legal and advisory fees associated with the
completion of the acquisition of Liberty, as disclosed in Note 5.
(b)Reflects expenses associated with debt refinancing activities incurred during
the first quarter of fiscal 2022.
(c)Represents the supplemental contribution to employees' dependent care FSA
accounts in response to COVID-19.
(d)Amortization expense associated with acquired intangibles from significant
acquisitions. Significant acquisitions include acquisitions which the Company
considers to be beyond the scope of our normal operations. Significant
acquisition amortization includes amortization expense associated with the
acquisition of Liberty for the first quarter of fiscal 2022.
(e)Reflects the combination of Interest expense and Other (expense) income, net
from the condensed consolidated statement of operations.
(f)Release of pre-acquisition income tax reserves assumed by the Company in
connection with the Carlyle acquisition.
(g)Reflects the tax effect of adjustments at an assumed effective tax rate of
26%, which approximates the blended federal and state tax rates, and
consistently excludes the impact of other tax credits and incentive benefits
realized.
(h)Excludes adjustments of approximately $0.5 million and $0.6 million of net
earnings for the three months ended June 30, 2021 and 2020, 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
Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan
Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget
Act of 2019, and address the ability 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;
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•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
presidential and administration transition;
•the extent, nature and effect of COVID-19, including the impact on federal
budgets, current and pending procurements, supply chains, demand for services,
deployment and productivity of our employees and the economic and societal
impact of a pandemic, and the expected continued volatility in billable
expenses;
•legislative and regulatory changes to limitations on the amount of allowable
executive compensation permitted under flexibly priced contracts following
implementation of interim rules adopted by federal agencies pursuant to the
Bipartisan Budget Act of 2013, which substantially further reduce the amount of
allowable executive compensation under these contracts and extend these
limitations to a larger segment of our executives and our entire contract base;
•efforts by 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 originally required nine automatic spending
cuts (referred to as "sequestration") of $109 billion
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annually from 2013 to 2021, half of which was intended to come from defense
programs, though less than $1 billion has been cut for defense programs per year
under the BCA. Mandatory sequestrations under the BCA were subsequently extended
by the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the
Bipartisan Budget Act of 2018, the Bipartisan Budget Act of 2019 and the CARES
Act, which did not specify an amount of savings required to be achieved through
sequestration after 2021 but apply an 8.3% reduction in defense spending in each
year from 2021 to 2030. 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.
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The table below presents the percentage of total revenue for each type of
contract:
Three Months Ended
June 30,
2021 2020
Cost-reimbursable 56% 56%
Time-and-materials 25% 26%
Fixed-price 19% 18%
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 June 30, 2021 and 2020, we
employed approximately 28,600 and 27,400 people, respectively, of which
approximately 25,500 and 24,500, respectively, were consulting staff.
Contract Backlog
We define backlog to include the following three components:
•Funded Backlog. Funded backlog represents the revenue value of orders for
services under existing contracts for which funding is appropriated or otherwise
authorized less revenue previously recognized on these contracts.
•Unfunded Backlog. Unfunded backlog represents the revenue value of orders
(including optional orders) for services under existing contracts for which
funding has not been appropriated or otherwise authorized.
•Priced Options. Priced contract options represent 100% of the revenue value of
all future contract option periods under existing contracts that may be
exercised at our clients' option and for which funding has not been appropriated
or otherwise authorized.
Our backlog does not include contracts that have been awarded but are currently
under protest and also does not include any task orders under IDIQ contracts,
except to the extent that task orders have been awarded to us under those
contracts.
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Table of Contents The following table summarizes the value of our contract backlog at the respective dates presented:
June 30, June 30,
2021 2020
(In millions)
Backlog:
Funded $ 3,493 $ 3,437
Unfunded 9,029 4,734
Priced options 14,295 14,846
Total backlog $ 26,817 $ 23,017 (1) Backlog presented includes backlog acquired from the Company's acquisition
of Liberty made during the three months ended
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 ofJune 30, 2021 andMarch 31, 2021 , the Company had$7.0 billion and$6.7 billion of remaining performance obligations, respectively. We expect to recognize approximately 70% of the remaining performance obligations atJune 30, 2021 as revenue over the next 12 months, and approximately 85% 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 endedMarch 31, 2021 , 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 theU.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 16.5% fromJune 30, 2020 toJune 30, 2021 . The change reflects$2.2 billion of backlog acquired as a result of the acquisition of Liberty. Additions to funded backlog during the twelve months endedJune 30, 2021 totaled$7.9 billion in comparison to$7.8 billion for the comparable period in 2020, 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 reduceU.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 theU.S. government's budgeting process and the use of continuing resolutions by theU.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 inU.S. government policies or priorities resulting from various military, political, economic or international developments; changes in the use ofU.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 theU.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 theU.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 theU.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 ofJune 30, 2021 and any of the four preceding fiscal quarters. 31 -------------------------------------------------------------------------------- Table of Contents We expect to recognize revenue from a substantial portion of funded backlog as ofJune 30, 2021 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 TheU.S. government's fiscal year ends onSeptember 30 of each year. While not certain, it is not uncommon forU.S. government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. In addition, we also have historically experienced higher bid and proposal costs in the months leading up to theU.S. government's fiscal year end as we pursue new contract opportunities being awarded shortly after theU.S. government fiscal year end as new opportunities are expected to have funding appropriated in theU.S. government's subsequent fiscal year. We may continue to experience this seasonality in future periods, and our future periods may be affected by it. While not certain, changes in the government's funding and spending patterns have altered historical seasonality trends, supporting our approach to managing the business on an annual basis. Seasonality is just one of a number of factors, many of which are outside of our control, which may affect our results in any period. Critical Accounting Estimates and Policies Our critical accounting estimates and policies are disclosed in the Critical Accounting Estimates and Policies section in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedMarch 31, 2021 . There were no other material changes to our critical accounting policies, estimates or judgments that occurred in the quarterly period covered by this report. 32 -------------------------------------------------------------------------------- Table of Contents 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 2021 2020 Change (Unaudited) (Unaudited) (In thousands) Revenue$ 1,989,066 $ 1,956,453 1.7 % Operating costs and expenses: Cost of revenue 962,719 948,902 1.5 % Billable expenses 555,545 549,077 1.2 % General and administrative expenses 301,800 245,855 22.8 % Depreciation and amortization 27,745 20,732 33.8 % Total operating costs and expenses 1,847,809 1,764,566 4.7 % Operating income 141,257 191,887 (26.4) % Interest expense (21,270) (20,235) 5.1 % Other (expense) income, net (533) (836) (36.2) % Income before income taxes 119,454 170,816 (30.1) % Income tax expense 27,352 41,487 (34.1) % Net income$ 92,102 $ 129,329 (28.8) % Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 Revenue Revenue increased to$1,989.1 million from$1,956.5 million , or a 1.7% increase, primarily driven by sustained client demand and headcount to meet that demand, partially offset by higher than normal staff utilization in the comparable prior year period driven by fewer PTO days taken by our employees which resulted in increases in our direct labor and corresponding generation of revenue. Total headcount as ofJune 30, 2021 increased approximately 1,200 as compared toJune 30, 2020 . Cost of Revenue Cost of revenue as a percentage of revenue was 48.4% and 48.5% for the three months endedJune 30, 2021 and 2020, respectively, The slight decrease in cost of revenue as a percentage of revenue was due to our growth in revenue outpacing our growth in cost of revenue. Cost of revenue increased to$962.7 million from$948.9 million , or a 1.5% increase. The increase was primarily due to increases in salaries and salary-related benefits of$38.2 million , driven by increased headcount and annual base salary increases. Billable Expenses Billable expenses as a percentage of revenue were 27.9% and 28.1% for the three months endedJune 30, 2021 and 2020, respectively. The slight decrease in billable expenses as a percentage of revenue was due to growth in revenue outpacing the growth in billable expenses. Billable expenses increased to$555.5 million from$549.1 million , or a 1.2% increase, primarily attributable to increases in expenses from contracts that require the Company to incur travel and other direct expenses on behalf of clients as compared to the prior year period, partially offset by a decrease in the use of subcontractors driven by client demand and timing of client needs. General and Administrative Expenses General and administrative expenses as a percentage of revenue were 15.2% and 12.6% for the three months endedJune 30, 2021 and 2020, respectively. General and administrative expenses increased to$301.8 million from$245.9 million , or a 22.8% increase, primarily due to$66.8 million of acquisition costs incurred during the first quarter of fiscal 2022, primarily associated with our acquisition of Liberty, partially offset by decreases in other business expenses and professional fees of$2.9 million . 33 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization increased to$27.7 million from$20.7 million , or a 33.8% increase, primarily due to increases in depreciation expense resulting from the implementation of our new financial management system onApril 1, 2021 , and intangible amortization related to the acquisition of Liberty in the first quarter of fiscal 2022. Interest Expense Interest expense increased to$21.3 million from$20.2 million , or a 5.1% increase, primarily due to increased expense related to the Senior Notes due 2029 and the Senior Notes due 2028. Income Tax Expense Income tax expense decreased to$27.4 million from$41.5 million , or a 34.1% decrease, primarily due to a decrease in pre-tax income as compared to the prior year period. The effective tax rate decreased to 22.9% for the three months endedJune 30, 2021 from 24.3% for the three months endedJune 30, 2020 . Liquidity and Capital Resources The following table presents selected financial information as ofJune 30, 2021 andMarch 31, 2021 and for the first three months of fiscal 2022 and 2021: June 30, March 31, 2021 2021 (Unaudited) (In thousands) Cash and cash equivalents$ 621,862 $ 990,955 Total debt 2,848,656 2,356,596 Three Months Ended June 30, 2021 2020 (Unaudited) (Unaudited) (In thousands)
Net cash (used in) provided by operating activities
140,418
Net cash used in investing activities (676,591)
(20,058)
Net cash provided by (used in) financing activities 318,160
(241,649)
Total decrease in cash and cash equivalents$ (369,093) $
(121,289)
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In the opinion of management, we will be able to meet our liquidity and cash needs through a combination of cash flows from operating activities, available cash balances, and available borrowing under the Revolving Credit Facility. From time to time, we evaluate alternative uses for excess cash resources once our operating cash flow and required debt servicing needs have been met. Some of the possible uses of our remaining excess cash at any point in time may include funding strategic acquisitions, further investment in our business and returning value to shareholders through share repurchases, quarterly dividends, and special dividends. While the timing and financial magnitude of these possible actions are currently indeterminable, the Company expects to be able to manage and adjust its capital structure in the future to meet its liquidity needs. Historically, we have been able to generate sufficient cash to fund our operations, mandatory debt and interest payments, capital expenditures, and discretionary funding needs. However, due to fluctuations in cash flows, including as a result of the trends and developments described above under "-Factors and Trends Affecting Our Results of Operations" relating toU.S. government shutdowns,U.S. government cost-cutting, reductions or delays in theU.S. government appropriations and spending process and other budgetary matters, it may be necessary from time-to-time in the future to borrow under our Secured Credit Facility to meet cash demands. While the timing and financial magnitude of these possible actions are currently indeterminable, we expect to be able to manage and adjust our capital structure to meet our liquidity needs. Our expected liquidity and capital structure may also be impacted by discretionary investments and acquisitions that we could pursue. We anticipate that cash 34 -------------------------------------------------------------------------------- Table of Contents 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 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 due 2029 and the Senior Notes due 2028; 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 used in operations was$10.7 million for the three months endedJune 30, 2021 compared to net cash provided by operations of$140.4 million in the prior year period. The decrease in operating cash flows was primarily driven by lower collections on accounts receivable, largely attributable to timing around receivables associated with the integration of our new enterprise financial system, as well as approximately$66.8 million of acquisition costs incurred and paid during the first quarter of fiscal 2022, primarily associated with our acquisition of Liberty. These impacts were partially offset by lower disbursements in the first quarter of fiscal 2022. Investing Cash Flow Net cash used in investing activities was$676.6 million in the three months endedJune 30, 2021 compared to$20.1 million in the prior year period. The increase in net cash used in investing activities was primarily due to the Company's acquisition of Liberty, partially offset by a decrease in capital expenditures over the prior period, driven by lower facilities expenses reflecting the investment in technology and tools needed to support the virtual work environment. We continue to modernize our corporate information technology infrastructure, including the implementation of our new financial management systems onApril 1, 2021 . 35 -------------------------------------------------------------------------------- Table of Contents Financing Cash Flow Net cash provided by financing activities was$318.2 million in the three months endedJune 30, 2021 compared to$241.6 million of net cash used in financing activities in the prior year period. The increase in net cash provided by financing activities was primarily due to net proceeds of$493.7 million received from the issuance of the 4.000% Senior Notes due 2029 and an$18.5 million decrease in payments on the Company's term loans over the prior year period. This was partially offset by a$100.0 million draw on the Revolving Credit Facility in the prior year and an increase in share repurchases of$37.9 million as compared to the prior year period. Dividends and Share Repurchases OnJuly 30, 2021 , the Company announced a regular quarterly cash dividend in the amount of$0.37 per share. The quarterly dividend is payable onAugust 31, 2021 to stockholders of record onAugust 16, 2021 . During the first quarter of fiscal 2022, a quarterly cash dividend of$0.37 per share was declared and paid totaling$51.6 million . During the first quarter of fiscal 2021, a quarterly cash dividend of$0.31 per share was declared and paid totaling$43.8 million . OnDecember 12, 2011 , the Board of Directors approved a share repurchase program, which was most recently increased to$1,710.0 million onJanuary 27, 2021 . 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 2022, the Company purchased 1.2 million shares of the Company's Class A Common Stock for an aggregate of$98.2 million . As ofJune 30, 2021 , the Company had approximately$496.3 million of remaining capacity under its repurchase program. Any determination to pursue one or more of the above alternative uses for excess cash is subject to the discretion of our Board of Directors, and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts, and our Credit Agreement as amended and other factors deemed relevant by our Board of Directors. Indebtedness OnJune 24, 2021 (the "Amendment Effective Date"),Booz Allen Hamilton Inc. ("Booz Allen Hamilton"),Booz Allen Hamilton Investor Corporation , and certain wholly-owned subsidiaries ofBooz Allen Hamilton , entered into the eighth amendment (the "Eighth Amendment") to the Credit Agreement dated as ofJuly 31, 2012 , as amended (the "Existing Credit Agreement" and, as amended, the "Credit Agreement"), with certain institutional lenders andBank of America, N.A ., as Administrative Agent and Collateral Agent. The Eighth Amendment added an additional tier in the pricing grid and extended the maturity applicable to both the Term Loan A (the "Term Loan A") and revolving credit facility (the "Revolving Credit Facility") toJune 24, 2026 , increased the aggregate principal amount of the Revolving Credit Facility and the letter of credit sublimit thereunder, and made certain other amendments to the financial covenants and other terms under the Existing Credit Agreement. The interest rate and maturity date applicable to the Term Loan B (the "Term Loan B" and, together with the Term Loan A, the "Term Loans") remained unchanged. Prior to the Eighth Amendment, approximately$1,289.8 million was outstanding under Term Loan A (the "Existing Tranche A Term Loans"). Pursuant to the Eighth Amendment, certain lenders under the Existing Credit Agreement converted their Existing Tranche A Term Loans into a new tranche of tranche A term loans (the "New Refinancing Tranche A Term Loans") in an aggregate amount, along with the New Refinancing Tranche A Term Loans advanced by certain new lenders, of approximately$1,289.8 million . The proceeds from the new lenders were used to prepay in full all of the Existing Tranche A Term Loans that were not converted into the New Refinancing Tranche A Term Loans. Voluntary prepayments of the New Refinancing Tranche A Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty. The other terms of the New Refinancing Tranche A Term Loans are generally the same as the Existing Tranche A Term Loans prior to the Eighth Amendment. Prior to the Eighth Amendment, approximately$500.0 million of revolving commitments (the "Existing Revolving Commitments") were available under the Existing Credit Agreement, with a sublimit for letters of credit of$100 million . Pursuant to the Eighth Amendment, certain lenders under the Existing Credit Agreement converted their Existing Revolving Commitments into a new tranche of revolving commitments (the "New Revolving Commitments" and the revolving credit loans made thereunder, the "New Revolving Loans") in an aggregate amount, along with the New Revolving Commitments of certain new lenders, of$1,000.0 million , with a sublimit for letters of credit of$200 million . As ofJune 30, 2021 , the Credit Agreement providedBooz Allen Hamilton with a$1,289.8 million Term Loan A, a$383.2 million Term Loan B, and$1,000.0 million in New Revolving Commitments with a sub-limit for letters of credit of$200.0 million (collectively, the "Secured Credit Facility"). As ofJune 30, 2021 , the maturity date of Term Loan B wasNovember 26, 2026 .Booz Allen Hamilton's obligations and the guarantors' guarantees under the Credit Agreement (the "Guarantee") are secured by a first priority lien on substantially all of the assets (including capital stock of subsidiaries) of Booz 36 -------------------------------------------------------------------------------- Table of Contents 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)$909 million and (y) 100% of consolidated EBITDA ofBooz Allen Hamilton , as of the end of the most recently ended four quarter period for which financial statements have been delivered pursuant to the Credit Agreement plus (ii) the aggregate principal amount under which pro forma consolidated net senior secured leverage remains less than or equal to 3.50:1.00. AtBooz Allen Hamilton's option, borrowings under the Term Loan A and the Revolving 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 (i) the administrative agent's prime corporate rate, (ii) the overnight federal funds rate plus 0.50%, and (iii) 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 1.125% to 2.00% for LIBOR loans and 0.125% to 1.00% for base rate loans, in each case based onBooz Allen Hamilton's consolidated total net leverage ratio. Unused commitments under the Revolving Credit Facility are subject to a quarterly fee ranging from 0.175% to 0.35% based onBooz Allen Hamilton's consolidated total net leverage ratio.Booz Allen Hamilton also agreed to pay customary letter of credit and agency fees.The applicable margin for Term Loan B is 1.75% for LIBOR loans and 0.75% for base rate loans.Booz Allen Hamilton occasionally borrows under the Revolving Credit Facility in anticipation of cash demands. For the three months endedJune 30, 2021 ,Booz Allen Hamilton accessed$60.0 million of its Revolving Credit Facility, which was repaid in full during the period. For the three months endedJune 30, 2020 ,Booz Allen Hamilton did not access its Revolving Credit Facility. As ofJune 30, 2021 andMarch 31, 2021 , there was no outstanding balance 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. As ofJune 30, 2021 andMarch 31, 2021 ,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$8.8 million and$9.8 million , respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. For bothJune 30, 2021 andMarch 31, 2021 , 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$12.1 million and$11.1 million , respectively, was available toBooz Allen Hamilton atJune 30, 2021 andMarch 31, 2021 . As ofJune 30, 2021 ,Booz Allen Hamilton had$999.1 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 ofJune 30, 2021 andMarch 31, 2021 , we were compliant with these covenants. For the three months endedJune 30, 2021 and 2020, interest payments of$4.9 million and$6.9 million were made for Term Loan A and$1.8 million and$2.2 million were made for Term Loan B, respectively. Borrowings under the Term Loans and, if used, the Revolving Credit Facility, incur interest at a variable rate. In accordance withBooz Allen Hamilton's risk management strategy,Booz Allen Hamilton executed a series of interest rate swaps. As ofJune 30, 2021 ,Booz Allen Hamilton had interest rate swaps with an aggregate notional amount of$700.0 million . These instruments hedge the variability of cash outflows for interest payments on the Term Loans and Revolving Credit Facility. 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). 37
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OnJune 17, 2021 ,Booz Allen Hamilton issued$500.0 million aggregate principal amounts of its 4.000% Senior Notes dueJuly 1, 2029 (the "Senior Notes due 2029") under an Indenture, dated as ofJune 17, 2021 amongBooz Allen Hamilton , certain subsidiaries ofBooz Allen Hamilton , as guarantors (the "Subsidiary Guarantors"), andWilmington Trust, National Association (in such capacity, the "Trustee"), as supplemented by the First Supplemental Indenture, dated as ofJune 17, 2021 , amongBooz Allen Hamilton , the Subsidiary Guarantors and the Trustee. The Senior Notes due 2029 and the related guarantees areBooz Allen Hamilton's and each Subsidiary Guarantors' senior unsecured obligations and rank equally in right of payment with all ofBooz Allen Hamilton's and the Subsidiary Guarantors' existing and future senior indebtedness and rank senior in right of payment to any ofBooz Allen Hamilton's and the Subsidiary Guarantors' future subordinated indebtedness. The net proceeds from the sale of the Senior Notes due 2029 were used to fund the acquisition of Liberty and to pay related fees and expenses. Interest is payable on the Senior Notes due 2029 semi-annually in cash in arrears onJuly 1 andJanuary 1 of each year, beginning onJanuary 1, 2022 . In connection with the issuance of the Senior Notes due 2029, the Company recognized$6.5 million of issuance costs, which were recorded as an offset against the carrying value of debt and will be amortized to interest expense over the term of the Senior Notes due 2029. OnAugust 24, 2020 ,Booz Allen Hamilton issued$700.0 million aggregate principal amount of its 3.875% Senior Notes due 2028 (the "Senior Notes due 2028").Booz Allen Hamilton used a portion of the net proceeds from the sale of the Senior Notes due 2028 to redeem in full$350 million aggregate principal amount of the outstanding Senior Notes due 2025 and used the remaining net proceeds from the sale of the Senior Notes due 2028 for working capital and other general corporate purposes. Capital Structure and Resources Our stockholders' equity amounted to$1,023.5 million as ofJune 30, 2021 , a decrease of$47.7 million compared to stockholders' equity of$1,071.2 million as ofMarch 31, 2021 . The decrease was primarily due to net income of$92.1 million for the three months endedJune 30, 2021 , stock-based compensation expense of$12.4 million , and issuance of common stock of$5.8 million , partially offset by$51.6 million in quarterly dividend payments and$111.4 million in treasury stock resulting from the repurchase of shares of our Class A Common Stock during the three months endedJune 30, 2021 . 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 expenditures. Our capital expenditures for the three months endedJune 30, 2021 and 2020 were$9.0 million and$20.1 million , respectively. The decrease in capital expenditures was primarily driven by lower facilities expenses reflecting the investment in technology and tools needed to support the virtual work environment. We continue to modernize our corporate information technology infrastructure, including the implementation of our new financial management systems onApril 1, 2021 . We expect capital expenditures to increase throughout the year as we shift away from a fully remote work environment. 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 17 to our condensed consolidated financial statements. Special Note Regarding Forward Looking Statements Certain statements contained or incorporated in this Quarterly Report on Form 10-Q, or Quarterly Report, include forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "should," "forecasts," "expects," "intends," "plans," "anticipates," "projects," "outlook," "believes," "estimates," "predicts," "potential," "continue," "preliminary," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. These forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include: •any issue that compromises our relationships with theU.S. government or damages our professional reputation, including negative publicity concerning government contractors in general or us in particular; •changes inU.S. government spending, including a continuation of efforts by theU.S. government to decrease spending for management support service contracts, and mission priorities that shift expenditures away from agencies or programs that we support, or as a result of theU.S. administration transition; 38 -------------------------------------------------------------------------------- Table of Contents •efforts byCongress and otherU.S. government bodies to reduceU.S. government spending and address budgetary constraints and theU.S. deficit, as well as associated uncertainty around the timing, extent, nature and effect of such efforts; •delayed funding of our contracts due to uncertainty relating to funding of theU.S. government and a possible failure of Congressional efforts to approve such funding and to craft a long-term agreement on theU.S. government's ability to incur indebtedness in excess of its current limits, or changes in the pattern or timing of government funding and spending; •U.S. government shutdowns, as a result of the failure by elected officials to fund the government; •failure to comply with numerous laws and regulations, including but not limited to, the Federal Acquisition Regulation ("FAR"), the False Claims Act, the Defense Federal Acquisition Regulation Supplement and FAR Cost Accounting Standards and Cost Principles; •the effects of COVID-19, and other pandemics or widespread health epidemics, including disruptions to our workforce and the impact on government spending and demand for our solutions; •our ability to compete effectively in the competitive bidding process and delays or losses of contract awards caused by competitors' protests of major contract awards received by us; •variable purchasing patterns underU.S. government General Services Administration Multiple Award schedule contracts, or GSA schedules, blanket purchase agreements and indefinite delivery, indefinite quantity, or IDIQ contracts; •the loss of 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 implementation and operation of new financial management systems; •an inability to attract, train, or retain employees with the requisite skills and experience; •an inability to timely hire, assimilate and effectively utilize our employees, ensure that employees obtain and maintain necessary security clearances and/or effectively manage our cost structure; •the loss of members of senior management or failure to develop new leaders; •misconduct or other improper activities from our employees or subcontractors, including the improper use or release of our clients' sensitive or classified information; •increased competition from other companies in our industry; •failure to maintain strong relationships with other contractors, or the failure of contractors with which we have entered into a sub- or prime- contractor relationship to meet their obligations to us or our clients; •inherent uncertainties and potential adverse developments in legal or regulatory proceedings, including litigation, audits, reviews, and investigations, which may result in materially adverse judgments, settlements, withheld payments, penalties, or other unfavorable outcomes including debarment, as well as disputes over the availability of insurance or indemnification; •failure to comply with specialU.S. government laws and regulations relating to our international operations; •risks associated with increased competition, new relationships, clients, capabilities, and service offerings in ourU.S. and international businesses; •risks related to changes to our operating structure, capabilities, or strategy intended to address client needs, grow our business or respond to market developments; 39 -------------------------------------------------------------------------------- Table of Contents •the adoption by theU.S. government of new laws, rules, and regulations, such as those relating to organizational conflicts of interest issues or limits; •risks related to completed and future acquisitions, including our ability to realize the expected benefits from such acquisitions; •the incurrence of additional tax liabilities, including as a result of changes in tax laws or management judgments involving complex tax matters; •risks inherent in the government contracting environment; •continued efforts to change how theU.S. government reimburses compensation related costs and other expenses or otherwise limits such reimbursements and an increased risk of compensation being deemed unreasonable and unallowable or payments being withheld as a result ofU.S. government audit, review, or investigation; •increased insourcing by variousU.S. government agencies due to changes in the definition of "inherently governmental" work, including proposals to limit contractor access to sensitive or classified information and work assignments; •the size of our addressable markets and the amount ofU.S. government spending on private contractors; •risks related to our indebtedness and credit facilities which contain financial and operating covenants; •the impact of changes in accounting rules and regulations, or interpretations thereof, that may affect the way we recognize and report our financial results, including changes in accounting rules governing recognition of revenue; and •other risks and factors listed under "Item 1A. Risk Factors" and elsewhere in this Quarterly Report. In light of these risks, uncertainties and other factors, the forward-looking statements might not prove to be accurate and you should not place undue reliance upon them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the information disclosed in the Quantitative and Qualitative Disclosures About Market Risk section in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 filed with theSecurities and Exchange Commission onMay 21, 2021 . 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 During the three months endedJune 30, 2021 , the Company implemented new accounting and procurement systems. As part of the implementation, we have designed new internal controls and modified and/or enhanced existing internal controls in order to align with the new systems and business processes. The Company does not believe this implementation has had or will have a material adverse effect on the Company's internal control over financial reporting in the future. Except as disclosed above, there have not been any additional 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. 40
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