Booz Allen Hamilton
Booz Allen Hamilton Holding Corp (Form: 10-Q, Received: 01/27/2016 12:30:58)


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________ 
FORM 10-Q
 ___________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File No. 001-34972
 ___________________________________
Booz Allen Hamilton Holding Corporation
(Exact name of registrant as specified in its charter)
 ___________________________________
Delaware
 
26-2634160
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
8283 Greensboro Drive, McLean, Virginia
 
22102
(Address of principal executive offices)
 
(Zip Code)
(703) 902-5000
Registrant’s telephone number, including area code
(Former name, former address, and former fiscal year if changed since last report.)
___________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý      No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý      No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
  
ý
  
Accelerated filer
  
¨
 
 
 
 
Non-accelerated filer
  
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
  
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Shares Outstanding
as of January 25, 2016
Class A Common Stock
148,788,170

Class B Non-Voting Common Stock

Class C Restricted Common Stock

Class E Special Voting Common Stock






TABLE OF CONTENTS
 
 
 
 
ITEM 1
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
 
 
ITEM 1
 
 
 
ITEM 1A
 
 
 
ITEM 2
 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
ITEM 5
 
 
 
ITEM 6





PART I. FINANCIAL INFORMATION

Item 1 .
Financial Statements
BOOZ ALLEN HAMILTON HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
December 31,
2015
 
March 31,
2015
 
(Unaudited)
 
 
 
(Amounts in thousands, except
share and per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
167,104

 
$
207,217

Accounts receivable, net of allowance
845,175

 
857,310

Prepaid expenses and other current assets
121,904

 
98,681

Total current assets
1,134,183

 
1,163,208

Property and equipment, net of accumulated depreciation
126,048

 
111,367

Intangible assets, net of accumulated amortization
223,026

 
219,382

Goodwill
1,361,550

 
1,304,231

Other long-term assets
121,701

 
79,305

Total assets
$
2,966,508

 
$
2,877,493

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
72,625

 
$
57,063

Accounts payable and other accrued expenses
432,999

 
481,815

Accrued compensation and benefits
242,849

 
279,239

Other current liabilities
45,004

 
30,877

Total current liabilities
793,477

 
848,994

Long-term debt, net of current portion
1,514,576

 
1,569,272

Other long-term liabilities
277,698

 
272,729

Total liabilities
2,585,751

 
2,690,995

Commitments and contingencies (Note 18)


 


Stockholders’ equity:
 
 
 
Common stock, Class A — $0.01 par value — authorized, 600,000,000 shares; issued, 153,137,421 shares at December 31, 2015 and 150,237,675 shares at March 31, 2015; outstanding, 148,777,465 shares at December 31, 2015 and 147,238,282 shares at March 31, 2015
1,531

 
1,502

Special voting common stock, Class E — $0.003 par value — authorized, 25,000,000 shares; issued and outstanding, 0 shares at December 31, 2015 and 1,851,589 shares at March 31, 2015

 
6

Treasury stock, at cost — 4,359,956 shares at December 31, 2015 and 2,999,393 shares at March 31, 2015
(106,893
)
 
(72,293
)
Additional paid-in capital
231,340

 
174,985

Retained earnings
275,356

 
104,457

Accumulated other comprehensive loss
(20,577
)
 
(22,159
)
Total stockholders’ equity
380,757

 
186,498

Total liabilities and stockholders’ equity
$
2,966,508

 
$
2,877,493

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1



BOOZ ALLEN HAMILTON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands,
except per share data)
 
(Amounts in thousands,
except per share data)
Revenue
$
1,307,663

 
$
1,304,686

 
$
3,981,421

 
$
3,931,824

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
630,189

 
641,541

 
1,899,376

 
1,928,967

Billable expenses
355,401

 
366,371

 
1,097,741

 
1,064,994

General and administrative expenses
200,809

 
176,327

 
597,611

 
524,368

Depreciation and amortization
16,148

 
15,191

 
46,617

 
47,233

Total operating costs and expenses
1,202,547

 
1,199,430

 
3,641,345

 
3,565,562

Operating income
105,116

 
105,256

 
340,076

 
366,262

Interest expense
(17,762
)
 
(17,863
)
 
(52,937
)
 
(54,544
)
Other, net
555

 
(777
)
 
309

 
(1,080
)
Income before income taxes
87,909

 
86,616

 
287,448

 
310,638

Income tax (benefit) expense
(20,146
)
 
33,809

 
58,871

 
121,432

Net income
$
108,055

 
$
52,807

 
$
228,577

 
$
189,206

Earnings per common share (Note 3):
 
 
 
 
 
 
 
Basic
$
0.72

 
$
0.35

 
$
1.54

 
$
1.28

Diluted
$
0.71

 
$
0.35

 
$
1.51

 
$
1.24

Dividends declared per share
$
0.13

 
$
0.11

 
$
0.39

 
$
1.33


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2




BOOZ ALLEN HAMILTON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
 
(Amounts in thousands)
 
(Amounts in thousands)
Net income
$
108,055

 
$
52,807

 
$
228,577

 
$
189,206

Change in postretirement plan costs, net of tax
534

 
86

 
1,582

 
257

Comprehensive income
$
108,589

 
$
52,893

 
$
230,159

 
$
189,463


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3



BOOZ ALLEN HAMILTON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended
December 31,
 
2015
 
2014
 
(Amounts in thousands)
Cash flows from operating activities
 
 
 
Net income
$
228,577

 
$
189,206

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
46,617

 
47,233

Stock-based compensation expense
17,809

 
19,954

Excess tax benefits from stock-based compensation
(30,055
)
 
(48,452
)
Amortization of debt issuance costs and loss on extinguishment
6,276

 
9,538

Losses on dispositions and impairments
61

 
1,396

Changes in assets and liabilities:
 
 
 
Accounts receivable
15,885

 
73,088

Prepaid expenses and other current assets
16,083

 
15,008

Other long-term assets
(54,925
)
 
773

Accrued compensation and benefits
(6,936
)
 
(31,390
)
Accounts payable and other accrued expenses
(50,765
)
 
(56,419
)
Accrued interest
2,148

 
7,467

Other current liabilities
4,505

 
1,582

Other long-term liabilities
(14,283
)
 
(926
)
Net cash provided by operating activities
180,997

 
228,058

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(45,829
)
 
(17,466
)
Cash paid for business acquisitions, net of cash acquired
(50,618
)
 
(23,907
)
Net cash used in investing activities
(96,447
)
 
(41,373
)
Cash flows from financing activities
 
 
 
Net proceeds from issuance of common stock
4,368

 
3,699

Stock option exercises
6,399

 
4,272

Excess tax benefits from stock-based compensation
30,055

 
48,452

Repurchases of common stock
(34,600
)
 
(33,369
)
Cash dividends paid
(57,678
)
 
(195,924
)
Dividend equivalents paid to option holders
(31,707
)
 
(47,006
)
Debt issuance costs

 
(8,610
)
Repayment of debt
(189,500
)
 
(219,188
)
Proceeds from debt issuance
148,000

 
198,438

Net cash used in financing activities
(124,663
)
 
(249,236
)
Net decrease in cash and cash equivalents
(40,113
)
 
(62,551
)
Cash and cash equivalents––beginning of period
207,217

 
259,994

Cash and cash equivalents––end of period
$
167,104

 
$
197,443

Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
40,396

 
$
36,552

Income taxes
$
113,422

 
$
114,276

Supplemental disclosures of non-cash investing and financing activities
 
 
 
Assets acquired under capital lease
$
6,800

 
$

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4



BOOZ ALLEN HAMILTON HOLDING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables in thousands, except share and per share data or unless otherwise noted)
December 31, 2015
1. BUSINESS OVERVIEW
Organization
Booz Allen Hamilton Holding Corporation, including its wholly owned subsidiaries, or Holding or the Company, is an affiliate of The Carlyle Group, or Carlyle, and was incorporated in Delaware in May 2008. The Company provides management consulting, technology, and engineering services to the U.S. government in the defense, intelligence, and civil markets. Additionally, the Company provides its management and technology consulting services to major corporations, institutions, not-for-profit organizations, and international clients. The Company reports operating results and financial data in one operating segment. The Company is headquartered in McLean, Virginia, with approximately 22,600 employees as of December 31, 2015 .
2. BASIS OF PRESENTATION
The Company prepared the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, or Quarterly Report, in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The Company followed the accounting policies used and disclosed in the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended March 31, 2015 filed with the Securities and Exchange Commission on May 21, 2015, or Annual Report, and policies stated within this Quarterly Report. The Company’s fiscal year ends on March 31 and unless otherwise noted, references to fiscal year or fiscal are for fiscal years ended March 31 .
The interim financial information in this Quarterly Report reflects all adjustments, consisting of normal recurring adjustments except as otherwise disclosed, necessary for a fair presentation of the Company’s results of operations for the interim periods. The results of operations for the nine months ended December 31, 2015 are not necessarily indicative of results to be expected for the full fiscal year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include contractual and regulatory reserves, valuation and lives of tangible and intangible assets, contingent consideration related to business acquisitions, impairment of long-lived assets, accrued liabilities, revenue recognition, bonus and other incentive compensation, stock-based compensation, realization of deferred tax assets, provisions for income taxes, and postretirement obligations. Actual results experienced by the Company may differ materially from management's estimates.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new standard that will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB approved a one-year delay in the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the effective date is not permitted. With the one-year delay enacted, the new standard will be effective for the Company beginning on April 1, 2018 (i.e., beginning with the first quarter fiscal 2019 interim financial statements). The new standard may be adopted retrospectively for all periods presented, or adopted using a modified retrospective approach. Under the retrospective approach, the fiscal 2018 and 2017 financial statements would be adjusted to reflect the effects of adopting the new standard in those periods. Under the modified retrospective approach, the new standard would only be adopted for the period beginning April 1, 2018 to new contracts and those contracts that are not yet complete at April 1, 2018, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require performance. Management is still in the process of determining which transition method to utilize in order to adopt the new standard and still assessing what effect the adoption of this standard may have on the timing of our revenue recognition and our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB during the nine months ended December 31, 2015 and through the filing date did not or are not believed by management to have a material impact on the Company's present or historical condensed consolidated financial statements.

5



3. EARNINGS PER SHARE
The Company computes basic and diluted earnings per share amounts based on net income for the periods presented. The Company uses the weighted average number of common shares outstanding during the period to calculate basic earnings per share, or EPS. Diluted EPS adjusts the weighted average number of shares outstanding to include the dilutive effect of outstanding common stock options and other stock-based awards.
The Company currently has outstanding shares of Class A Common Stock. On September 30, 2015, the Company purchased, at par value, all issued and outstanding shares of Class E special voting common stock in connection with the exercise of the final tranche of rollover options during the second quarter of fiscal 2016. Class E Special Voting Common Stock shares are not included in the calculation of EPS as these shares represent voting rights only and are not entitled to participate in dividends or other distributions. During fiscal 2015, the Company converted all issued and outstanding shares of Class B Non-Voting Common Stock and Class C Restricted Common Stock into shares of Class A Common Stock on a one-for-one basis. Unvested Class A Restricted Common Stock holders are entitled to participate in non-forfeitable dividends or other distributions. These unvested shares participated in the Company's dividends declared and were paid in the first, second, and third quarters of fiscal 2016 and 2015 . As such, EPS is calculated using the two-class method whereby earnings are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of unvested restricted shares. A reconciliation of the income used to compute basic and diluted EPS for the periods presented are as follows:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Earnings for basic computations (1)
$
106,548

 
$
52,010

 
$
225,430

 
$
186,275

Weighted-average Class A Common Stock outstanding
147,428,588

 
146,664,977

 
146,291,184

 
144,482,223

Weighted-average Class B Non-Voting Common Stock outstanding

 

 

 
293,071

Weighted-average Class C Restricted Common Stock outstanding

 

 

 
504,112

Total weighted-average common shares outstanding for basic computations
147,428,588

 
146,664,977

 
146,291,184

 
145,279,406

Earnings for diluted computations (1)
$
106,568

 
$
52,025

 
$
225,481

 
$
186,275

Dilutive stock options and restricted stock
2,472,337

 
4,014,108

 
3,210,274

 
4,960,430

Average number of common shares outstanding for diluted computations
149,900,925

 
150,679,085

 
149,501,458

 
150,239,836

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.72

 
$
0.35

 
$
1.54

 
$
1.28

Diluted
$
0.71

 
$
0.35

 
$
1.51

 
$
1.24

(1) During the three months ended December 31, 2015 and 2014 , approximately 2.1 million and 2.2 million participating securities were paid dividends totaling $0.3 million and $0.3 million , respectively. During the nine months ended December 31, 2015 and 2014 , approximately 2.1 million and 2.2 million participating securities were paid dividends totaling $0.7 million and $2.9 million , respectively. For the three and nine months ended December 31, 2015 there were undistributed earnings of $1.3 million and $2.4 million respectively, allocated to the participating class of securities in basic earnings per share, and $1.2 million and $2.3 million , respectively, to diluted earnings per share. For the three months ended December 31, 2014 there were undistributed earnings of $0.6 million allocated to the participating class of securities in basic earnings per share, and $0.5 million to diluted earnings per share. The allocated undistributed earnings and the dividends paid comprise the difference between net income presented on the condensed consolidated statements of operations and earnings for basic and diluted computations for the three and nine months ended December 31, 2015, and the three months ended December 31, 2014, while only the dividends paid comprise the difference in net income for the nine months ended December 31, 2014, as there were  no  undistributed earnings.
The EPS calculation for the three and nine months ended December 31, 2015 excludes 0.5 million and 0.6 million options, respectively, as their impact was anti-dilutive. The EPS calculation for the three and nine months ended December 31, 2014 excludes 0.1 million and 0.3 million options, respectively, as their impact was anti-dilutive.

6



4. GOODWILL
On October 31, 2015, the Company acquired the software services unit of SPARC, LLC, a Charleston, SC software development firm for a preliminary purchase price per the agreement of $53 million , subject to finalizing the working capital adjustments. Pursuant to the terms of the agreement, the acquisition was accounted for using the purchase method of accounting which requires the total purchase price consideration to be allocated to the assets acquired and liabilities assumed based on estimates of their estimated fair values. The excess of purchase consideration over the amounts assigned to tangible and intangible assets acquired and liabilities assumed, based on the preliminary purchase price allocation of $35.1 million , was recognized as goodwill. As part of the acquisition the Company also acquired a capital lease. The lease is valued at $6.8 million and is included within other current liabilities on the condensed consolidated balance sheet.
As of December 31, 2015 and March 31, 2015 , goodwill was $1,361.6 million and $1,304.2 million , respectively. The increase in the carrying amount of goodwill is primarily attributable to the preliminary purchase price allocation associated with the acquisition of the software services unit of SPARC, LLC. In addition, during the third quarter, the Company released $50.9 million of uncertain tax positions associated with the acquisition of the Company by the Carlyle Group in July 2008, or the Acquisition. Of the $50.9 million , $21.4 million were tax related indemnification assets that offset the deferred payment obligation, with a corresponding adjustment to goodwill. See Note 8 and Note 10 for further information.

5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:  
 
December 31,
2015
 
March 31,
2015
Current
 
 
 
Accounts receivable–billed
$
352,172

 
$
318,464

Accounts receivable–unbilled
493,163

 
539,203

Allowance for doubtful accounts
(160
)
 
(357
)
Accounts receivable, net
845,175

 
857,310

Long-term
 
 
 
Unbilled receivables
41,484

 
18,496

Total accounts receivable, net
$
886,659

 
$
875,806


Unbilled amounts represent sales for which billings have not been presented to customers at quarter-end or year-end. These amounts are usually billed and collected within one year. Long-term unbilled receivables not anticipated to be billed and collected within one year, and are primarily related to retainage, holdbacks, and long-term rate settlements to be billed at contract closeout, are included in other long-term assets as accounts receivable in the accompanying condensed consolidated balance sheets. The Company recognized a provision (benefit) for doubtful accounts (including certain unbilled reserves) of $1.1 million and $(0.01) million for the three months ended December 31, 2015 and 2014 , respectively, and $0.3 million and $(1.0) million for the nine months ended December 31, 2015 and 2014 , respectively. The Company does not have material exposure to accounts receivable credit risk, because the Company's accounts receivable are primarily with the U.S. Government and its agencies.

6. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consisted of the following:  
 
December 31,
2015
 
March 31,
2015
Vendor payables
$
188,191

 
$
215,995

Accrued expenses
244,808

 
265,820

Total accounts payable and other accrued expenses
$
432,999

 
$
481,815

Accrued expenses consisted primarily of the Company’s reserve related to potential cost disallowance in conjunction with government audits. Refer to Note 18 for further discussion of this reserve.


7



7. ACCRUED COMPENSATION AND BENEFITS
Accrued compensation and benefits consisted of the following:  
 
December 31,
2015
 
March 31,
2015
Bonus
$
56,330

 
$
82,237

Retirement
62,136

 
29,285

Vacation
97,826

 
115,657

Stock-based compensation liability (Note 15)
2,278

 
31,732

Other
24,279

 
20,328

Total accrued compensation and benefits
$
242,849

 
$
279,239

As of December 31, 2015 and March 31, 2015 , the Company recorded a stock-based compensation liability of $2.3 million and $31.7 million , respectively, expected to be paid within one year, related to special dividends paid in July and December 2009, June and August 2012, November 2013, and February and August 2014. Rollover options vested and not yet exercised that would have had an exercise price below zero as a result of the dividends were reduced to one cent, with the remaining reduction to be paid in cash upon exercise of the options. Payments of the special dividends to the Company's Second Amended and Restated Equity Incentive Plan, or EIP, option holders are linked to vesting. Refer to Note 15 for further discussion of the special dividends.

8. DEFERRED PAYMENT OBLIGATION
Pursuant to an Agreement and Plan of Merger, or the Merger Agreement, dated as of May 15, 2008, and subsequently amended, The Carlyle Group indirectly acquired all of the issued and outstanding stock of the Company. In connection with this transaction, on July 31, 2008 the Company established a Deferred Payment Obligation, or DPO, of $158.0 million , payable 8.5 years after the closing date, less any settled claims. Pursuant to the Merger Agreement, $78.0 million of the $158.0 million DPO was required to be paid in full to the selling shareholders. On December 11, 2009, in connection with a recapitalization transaction, $100.4 million was paid to the selling shareholders, of which $78.0 million was the repayment of that portion of the DPO, with approximately $22.4 million representing accrued interest.
The remaining $80.0 million is available to indemnify the Company for certain pre-acquisition tax contingencies, related interest and penalties, and other matters pursuant to the Merger Agreement. Any amounts remaining after the settlement of claims will be paid out to the selling shareholders. During the quarter ended December 31, 2015 , the Company effectively settled approximately $50.9 million of its pre-acquisition uncertain tax positions, thereby relieving an amount of approximately $21.4 million that was previously indemnified under the DPO. As of December 31, 2015, there were no estimated indemnified amounts recorded against the DPO.
A reconciliation of the principal balance of the DPO to the amount recorded in the condensed consolidated balance sheets for the periods presented are as follows:  
 
 
December 31, 2015
 
March 31, 2015
Deferred payment obligation
 
$
80,000

 
$
80,000

Indemnified pre-acquisition uncertain tax positions
 
(21,407
)
 
(20,586
)
Release of indemnified pre-acquisition uncertain tax positions
 
21,407

 

Accrued interest
 
3,326

 
1,304

Amount recorded in the consolidated balance sheets
 
$
83,326

 
$
60,718



8



9. DEBT
Debt consisted of the following:  
   
December 31, 2015
 
March 31, 2015
   
Interest
Rate
 
Outstanding
Balance
 
Interest
Rate
 
Outstanding
Balance
Term Loan A
2.82
%
 
$
755,145

 
2.68
%
 
$
796,024

Term Loan B
3.75
%
 
832,056

 
3.75
%
 
830,311

Total
 
 
1,587,201

 
 
 
1,626,335

Less: Current portion of long-term debt
 
 
(72,625
)
 
 
 
(57,063
)
Long-term debt, net of current portion
 
 
$
1,514,576

 
 
 
$
1,569,272


On May 7, 2014, the Company entered into the Second Amendment to the Credit Agreement, dated as of July 31, 2012 (as previously amended by the First Amendment to the Credit Agreement, dated as of August 16, 2013). The Credit Agreement, as amended, provides the Company with an $830.0 million Term Loan A and an $841.2 million Term Loan B, and a $500.0 million revolving credit facility, with a sublimit for letters of credit of $100.0 million . The outstanding obligations under the Credit Agreement, as amended, are secured by a security interest in substantially all of the assets of the Company, subject to certain exceptions set forth in the Credit Agreement, as amended, and related documentation. The rates for Term Loan A and Term Loan B, as amended, remain unchanged. The Second Amendment also extended the maturity date of Term Loan A and the revolving credit facility to May 31, 2019. The maturity date for Term Loan B remained unchanged at July 31, 2019. The Company also amended its existing debt covenants to provide for greater operational and financial flexibility.
The Company occasionally borrows under the revolving credit facility in anticipation of cash demands. On October 29, 2015 the Company's wholly-owned subsidiary Booz Allen Hamilton Inc. accessed $93.0 million of its $500.0 million revolving credit facility to support month-end transactions and the acquisition of the software services unit of SPARC, LLC. On November 4, 2015, the Company repaid the $40.0 million borrowed from the revolving credit facility. On November 25, 2015 Booz Allen Hamilton Inc. accessed an additional $30 million from the revolving credit facility to support month-end transactions. The Company repaid $53 million on November 30, 2015 and the remaining $30 million balance on December 4, 2015.
The Credit Agreement, as amended, requires quarterly principal payments of 1.25% of the stated principal amount of Term Loan A, with annual incremental increases to 1.875% , 2.50% , 3.125% , and 13.0% , prior to Term Loan A's maturity date of May 31, 2019. As a result of paying approximately $168.4 million of Term Loan B principal in connection with the Second Amendment, no additional principal payments are required until the remaining balance is due on Term Loan B's maturity date of July 31, 2019. The revolving credit facility matures on May 31, 2019, at which time any outstanding principal balance is due in full. As of December 31, 2015 and March 31, 2015 , there were no amounts outstanding on the revolving credit facility.
The interest rate on borrowings under Term Loan A is LIBOR plus a 2.50% spread. The spread ranges from 2.00% to 2.75% based on the Company's total leverage ratio. The interest rate on borrowings under Term Loan B is LIBOR plus a 3.0% spread with a 0.75% floor. The spread ranges from 2.00% to 3.00% based upon either an ABR or LIBOR borrowing. The revolving credit facility margin and commitment fee are subject to the leveraged based pricing grid, as set forth in the Credit Agreement, as amended.
The total outstanding debt balance is recorded in the accompanying condensed consolidated balance sheets, net of unamortized discount of $11.4 million and $13.7 million as of December 31, 2015 and March 31, 2015 , respectively. As of December 31, 2015 and March 31, 2015 , the Company was in compliance with all of the Credit Agreement's debt covenants.

10. INCOME TAXES
The Company’s effective income tax rate was (22.9)% and 39.0% for the three months ended December 31, 2015 and 2014 , respectively, and 20.5% and 39.1% for the nine months ended December 31, 2015 and 2014 , respectively. The decrease in the effective tax rate for the three and nine months ended December 31, 2015 as compared to the same period last year is primarily due to the reduction in income tax reserves for uncertain tax positions as a result of expiring statute of limitations. Based on management's conclusion that the uncertain tax positions related to the statute lapse were effectively settled, $50.9 million of tax reserves associated with pre-acquisition uncertain tax positions, which includes $3.2 million of interest and penalties that were incurred by the Company subsequent to the Acquisition, were released, which reduced the income tax provision for the three and nine months ended December 31, 2015. The three and nine months effective tax rates of (22.9)% and 20.5% differ from the statutory rate of 35.0% primarily due to the release of tax reserves, offset by the state income taxes and the effect of permanent rate differences, which primarily relate to meals and entertainment.

9



The Company is also subject to taxes imposed by various taxing authorities including state and foreign jurisdictions. Tax years related to state and foreign jurisdictions that remain open and subject to examination are not considered to be material. Additionally, due to statute of limitations expirations and potential audit settlements, it is reasonably possible that a portion of the remaining reserves recorded on previously recognized tax benefits may be effectively settled by March 31, 2016.


11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:  
 
December 31,
2015
 
March 31,
2015
Income tax reserve
$
8,011

 
$
58,444

Deferred rent
63,989

 
34,732

Deferred payment obligation
80,000

 
59,414

Postretirement benefit obligations
117,379

 
111,624

Other (1)
8,319

 
8,515

Total other long-term liabilities
$
277,698

 
$
272,729

(1) Balance at December 31, 2015 and March 31, 2015 includes a contingent earnout liability of $4.5 million related to business acquisitions. Refer to Note 16 for further discussion.

12. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
The Company sponsors the Employees’ Capital Accumulation Plan, or ECAP, which is a qualified defined contribution plan that covers eligible U.S. and international employees. ECAP provides for distributions, subject to certain vesting provisions, to participants by reason of retirement, death, disability, or termination of employment. Effective April 1, 2014 the Company transitioned from a discretionary employer contribution to an annual matching contribution of up to 6% of eligible annual income as determined by the Internal Revenue Code for the ECAP. Total expense recognized under ECAP was $27.0 million and $26.2 million for the three months ended December 31, 2015 and 2014 , respectively, and $81.4 million and $81.4 million for the nine months ended December 31, 2015 and 2014 , respectively. The Company-paid contributions were $14.6 million and $14.9 million for the three months ended December 31, 2015 and 2014 , respectively, and $46.6 million and $53.1 million for the nine months ended December 31, 2015 and 2014 , respectively.
Defined Benefit Plan and Other Postretirement Benefit Plans
The Company maintains and administers a postretirement medical plan and a defined benefit retirement plan for current, retired, and resigned officers.
The components of net postretirement medical expense for the Officer Medical Plan were as follows:  
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
1,426

 
$
1,022

 
$
4,277

 
$
3,064

Interest cost
1,126

 
892

 
3,379

 
2,676

Net actuarial loss
884

 
145

 
2,652

 
436

Total postretirement medical expense
$
3,436

 
$
2,059

 
$
10,308

 
$
6,176

As of December 31, 2015 and March 31, 2015 , the unfunded status of the post-retirement medical plan was $112.7 million and $107.3 million , respectively, which is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.    

10



13. ACCUMULATED OTHER COMPREHENSIVE LOSS
All amounts recorded in other comprehensive loss are related to the Company's post-retirement plan. The following table represents a rollforward of amounts recognized in accumulated other comprehensive loss, net of tax:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Beginning of period
$
(21,111
)
 
$
(6,465
)
 
$
(22,159
)
 
$
(6,636
)
    Amounts reclassified from accumulated other comprehensive loss
534

 
86

 
1,582

 
257

       Net current-period other comprehensive loss
534

 
86

 
1,582

 
257

End of period
$
(20,577
)
 
$
(6,379
)
 
$
(20,577
)
 
$
(6,379
)

The following table presents the reclassifications out of accumulated other comprehensive loss to net income:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Amortization of net actuarial loss included in net periodic benefit cost (See Note 12)
 
 
 
 
 
 
 
Total before tax
$
884

 
$
144

 
$
2,652

 
$
432

Tax benefit
(350
)
 
(58
)
 
(1,070
)
 
(175
)
Net of tax
$
534

 
$
86

 
$
1,582

 
$
257


14. STOCKHOLDERS’ EQUITY
Common Stock
The common stock shares activity consisted of the following:  
 
Class A
Common Stock
 
Class B
Non-Voting
Common Stock
 
Class C
Restricted
Common Stock
 
Class E
Special Voting
Common Stock
 
Treasury
Stock
Balance at March 31, 2014
143,962,073

 
582,080

 
935,871

 
4,424,814

 
609,625

Issuance of common stock
1,365,008

 

 

 

 

Stock options exercised
3,392,643

 

 

 
(2,573,225)

 

Share exchange (1)
1,517,951

 
(582,080)

 
(935,871)

 

 

Repurchase of common stock (2)

 

 

 

 
2,389,768

Balance at March 31, 2015
150,237,675

 

 

 
1,851,589

 
2,999,393

Issuance of common stock
365,986

 

 

 

 

Stock options exercised (3)
2,533,760

 

 

 
(1,851,589
)
 

Repurchase of common stock (4)

 

 

 

 
1,360,563

Balance at December 31, 2015
153,137,421

 

 

 

 
4,359,956

(1)
At the annual meeting of stockholders held on July 31, 2014, the stockholders approved a proposal to amend and restate the certificate of incorporation, which had the effect of converting all issued and outstanding shares of Class B Non-Voting Common Stock and Class C Restricted Common Stock into shares of Class A Common Stock on a one-for-one basis. The conversion was effected on August 13, 2014 when the Company filed its third amended and restated certificate of incorporation with the Secretary of State of the State of Delaware. As a result of the conversion, there were no shares of Class B Non-Voting Common Stock and Class C Restricted Common Stock outstanding at such time.
(2)
On November 5, 2014, the Company entered into an agreement with an affiliate of The Carlyle Group to repurchase 1.0 million shares of the Company's Class A Common Stock. The shares were repurchased at a price of $25.10 per

11



share in a private non-underwritten transaction. On February 2, 2015, the Company entered into a similar agreement with an affiliate of the Carlyle Group to repurchase an additional 1.0 million shares of our Class A common stock pursuant to the repurchase program. The shares were repurchased from the Underwriter at a price of $28.36 per share. The repurchase of common stock above also reflects shares repurchased on June 30, 2014 to cover the minimum statutory withholding taxes on restricted stock awards that vested on June 30, 2014, shares repurchased on September 12, 2014 to cover the minimum statutory withholding taxes on rollover stock options exercised on September 12, 2014 and shares repurchased on multiple dates to cover the minimum statutory withholding taxes on accelerated restricted stock vesting for departing officers.
(3)
On September 30, 2015, the Company purchased, at par value, all issued and outstanding shares of Class E special voting common stock in connection with the exercise of the final tranche of rollover options during the second quarter of fiscal 2016.
(4)
During the first quarter of fiscal 2016 , the Company purchased 1.2 million shares of the Company’s Class A Common Stock in a series of open market transactions for $30.5 million . Additionally, the Company repurchased shares on June 30, 2015 to cover the minimum statutory withholding taxes on restricted stock awards and restricted stock units that vested on June 30, 2015, and repurchased shares to cover the minimum statutory withholding taxes on accelerated restricted stock vesting for departing officers.
For the quarterly offering period that closed on December 31, 2015 , 51,157 Class A Common Stock shares were purchased by employees under the Company's Employee Stock Purchase Plan, or ESPP. Since the program's inception, 1,677,359 shares have been purchased by employees.

15. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense recognized in the condensed consolidated statements of operations:  
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
954

 
$
2,303

 
$
3,237

 
$
6,601

General and administrative expenses
5,334

 
4,764

 
14,572

 
13,353

Total
$
6,288

 
$
7,067

 
$
17,809

 
$
19,954


The following table summarizes the total stock-based compensation expense recognized in the condensed consolidated statements of operations by the following types of equity awards:    
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Equity Incentive Plan Options
$
792

 
$
1,241

 
$
2,035

 
$
4,022

Class A Restricted Common Stock
5,496

 
5,826

 
15,774

 
15,932

Total
$
6,288

 
$
7,067

 
$
17,809

 
$
19,954


As of December 31, 2015 , there was $25.3 million of total unrecognized compensation cost related to unvested stock-based compensation agreements. The unrecognized compensation cost as of December 31, 2015 is expected to be fully amortized over the next 4.25 years. Absent the effect of accelerating stock compensation cost for any departures of employees who may continue to vest in their equity awards, the following table summarizes the unrecognized compensation cost and the weighted average period the cost is expected to be amortized.

12



 
 
December 31, 2015
 
 
Unrecognized Compensation Cost
 
Weighted Average Remaining Period to be Recognized (in years)
Equity Incentive Plan Options
 
$
4,300

 
3.41
Class A Restricted Common Stock
 
20,951

 
2.20
Total
 
$
25,251

 
 
Equity Incentive Plan
As of December 31, 2015 , there were 5,953,555 EIP options outstanding, of which 1,733,945 were unvested.
Grants of Restricted Stock Units and Class A Restricted Common Stock
On October 28, 2015, the Board of Directors granted 2,808 shares of Class A Restricted Common Stock to a new member of the Board of Directors. The aggregate value was estimated at $0.1 million based on the stock price of $30.30 on the grant date.
On October 28, 2015, the Board of Directors granted 5,775 Restricted Stock Units to certain newly hired employees. The aggregate value was estimated at $0.2 million based on the stock price of $30.30 on the grant date.
On December 15, 2015, the Board of Directors granted 35,590 Restricted Stock Units to certain newly hired and current officers. The aggregate value was estimated at $1.0 million based on the stock price of $29.50 on the grant date.
Special Dividends
The Compensation Committee, acting as the Administrator of the Officers' Rollover Stock Plan and the EIP have discretion in how to effect the required adjustment to keep option holders whole in the event of a distribution of dividends that trigger certain anti-dilution clauses within the respective plans. In the event the Board of Directors elects to grant option holders a cash payment equal to the amount of the special dividend, the Company accrues a stock-based compensation liability as the EIP options are scheduled to be vested. Rollover Options are fully vested; therefore the liability associated with these options was fully recorded on the condensed consolidated balance sheet. As of December 31, 2015, the rollover options were fully exercised and the liability was fully settled.
Total compensation expense recorded in conjunction with the payment of the dividend equivalents to EIP option holders for the three and nine months ended December 31, 2015 was $0.1 million and $0.2 million , respectively, as compared to $0.1 million and $0.9 million recorded for the three and nine months ended December 31, 2014 , respectively. Future compensation expense related to the payment of the dividend equivalents to EIP option holders not yet recognized in the statement of operations is $0.2 million and is expected to be recognized over 1.5 years.
As of December 31, 2015 and March 31, 2015 , the Company calculated a total recorded and unrecorded stock-based compensation liability of $3.9 million and $35.8 million , respectively, related to the special dividends paid in July and December 2009, June and August 2012, November 2013 and February and August 2014, as follows:
 
December 31, 2015
 
March 31, 2015
 
EIP Options
 
Rollover Options
 
Total
 
EIP Options
 
Rollover Options
 
Total
Current liability (1)
$
2,278

 
$

 
$
2,278

 
$
3,697

 
$
28,035

 
$
31,732

(1)     Included in accrued compensation and benefits (Note 6).
As of December 31, 2015 , $1.6 million related to EIP options will be recorded as liabilities as the options vest over the next 3.25 years. As of March 31, 2015 , there was an unrecorded liability of $4.1 million related to EIP options.

16. FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3).

13



A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The financial instruments measured at fair value in the accompanying consolidated balance sheets consist of the following:
 
Recurring Fair Value Measurements
as of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents
$
32,329

 
$

 
$

 
$
32,329

Money market funds (1)

 
134,775

 

 
134,775

Total cash and cash equivalents
$
32,329

 
$
134,775

 
$

 
$
167,104

Liabilities:
 
 
 
 
 
 
 
Contingent earnout liability (2)

 

 
4,500

 
4,500

Total liabilities
$

 
$

 
$
4,500

 
$
4,500

The following table set forth by levels represents the Company's fair value measurements as of March 31, 2015 .
 
Recurring Fair Value Measurements
as of March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents
$
48,942

 
$

 
$

 
$
48,942

Money market funds (1)

 
158,275

 

 
158,275

Total cash and cash equivalents
$
48,942

 
$
158,275

 
$

 
$
207,217

Liabilities:
 
 
 
 
 
 
 
Contingent earnout liability (2)

 

 
4,500

 
4,500

Total liabilities
$

 
$

 
$
4,500

 
$
4,500

(1)    Level two cash and cash equivalents are invested in money market funds that are intended to maintain a stable net asset value of $1.00 per share by investing in liquid, high quality U.S. dollar-denominated money market instruments. Depending on our short-term liquidity needs, we make regular transfers between money market funds and other cash equivalents.
(2) On October 9, 2014, the Company entered into a contingent consideration arrangement in connection with a business acquisition. Under the arrangement, the Company agreed to pay up to a maximum of $9 million in cash to the seller if certain financial performance thresholds are achieved in calendar years 2016 and 2017. The fair value of the contingent consideration liability as of March 31, 2015 and December 31, 2015 was $4.5 million and is a Level 3 fair value measurement recorded within other long-term liabilities. It was valued using a Monte Carlo simulation and the key input besides projected cash flows was volatility, estimated as 30% based on the asset volatility of comparable publicly-traded companies. An increase (decrease) in volatility in isolation would result in a lower (higher) fair value measurement. Since the initial recording of this liability as a part of the purchase accounting, there have been no subsequent changes in fair value recorded to-date. Any future changes in the fair value of this contingent consideration liability will be recognized in earnings during the applicable period.
The fair value of the Company's debt instruments approximates its carrying value at December 31, 2015 and March 31, 2015 . The fair value of debt is determined based on interest rates available for debt with terms and maturities similar to the Company's existing debt arrangements (Level 2 inputs).
The following table presents a summary of changes in the fair value of the Company's contingent earnout liability categorized as Level 3 for the fiscal year ended December 31, 2015 :
 
Contingent Earnout Liability
Balance at March 31, 2015
$
4,500

Issuances

Balance at December 31, 2015
$
4,500


14



17. RELATED-PARTY TRANSACTIONS
The Carlyle Group is the largest shareholder of the Company. From time to time, and in the ordinary course of business: (1) other Carlyle portfolio companies engage the Company as a subcontractor or service provider, and (2) the Company engages other Carlyle portfolio companies as subcontractors or service providers. Revenue and cost associated with these related parties for the three months ended December 31, 2015 were $36,000 and $29,000 , respectively, and $140,000 and $110,000 for the nine months ended December 31, 2015 , respectively. Revenue and cost associated with these related parties for the three months ended December 31, 2014 were $312,000 and $233,000 , respectively, and $961,000 and $719,000 for the nine months ended December 31, 2014 , respectively.
In addition, investment vehicles affiliated with The Carlyle Group participated in a lender syndicate in the Company’s outstanding debt in the amount of $41.4 million and $47.0 million at December 31, 2015 and March 31, 2015 , respectively. The participation by such investment vehicles in the syndication of the Company's debt was done on an arm’s length basis.
On July 31, 2008, the Company entered into a management agreement, or Management Agreement, with TC Group V US, L.L.C., or TC Group, a company affiliated with Carlyle. On June 7, 2012, TC Group assigned all of its right, title and interest in, and obligations under, the management agreement to Carlyle Investment Management L.L.C., or Carlyle Investment Management. In accordance with the Management Agreement, Carlyle Investment Management provides the Company with advisory, consulting, and other services and the Company pays Carlyle Investment Management an aggregate annual fee of $1.0 million , plus expenses. For the three months ended December 31, 2015 and 2014 , the Company incurred $250,000 in advisory fees in each period. For the nine months ended December 31, 2015 and 2014 , the Company incurred $750,000 in advisory fees in each period.

18. COMMITMENTS AND CONTINGENCIES
Leases
As a result of the Acquisition, the Company assigned a total of nine leases to Booz & Co, which has subsequently changed its name to Strategy&. The Company remains liable for one lease, which expires in March 2017, for a facility located in London under the terms of the original lease should Strategy& default on its obligations. All other leases assigned to Strategy& have expired. There were no events of default under these leases as of December 31, 2015 or March 31, 2015 . The maximum potential amount of undiscounted future payments is $5.5 million . Based on the Company’s assessment of the likelihood of future payment, no amounts have been recorded related to the Company’s contingent liability on such leases.
Letters of Credit and Third-Party Guarantees
As of December 31, 2015 and March 31, 2015 , the Company was contingently liable under open standby letters of credit and bank guarantees issued by our banks in favor of third parties that totaled $5.5 million and $5.3 million , respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. At December 31, 2015 and March 31, 2015 , approximately $1.8 million and $5.2 million of these instruments reduce the available borrowings under the revolving credit facility. The remainder are guaranteed under a separate $5.0 million facility established in fiscal 2015 of which $1.3 million and $4.9 million , respectively, was available to the Company at December 31, 2015 and March 31, 2015 .
Government Contracting Matters
For the three and nine months ended December 31, 2015 approximately 97% , and for the three and nine months ended December 31, 2014 approximately 97% and 98% respectively, of the Company’s revenue was generated from contracts where the end client was an agency or department of the U.S. government, including contracts where Booz Allen performed in either a prime or subcontract position, and regardless of the geographic location in which the work was performed. Contracts with the U.S. government are subject to extensive legal and regulatory requirements and, from time to time and in the ordinary course of business, agencies of the U.S. government investigate whether the Company’s operations are conducted in accordance with these requirements and the terms of the relevant contracts by using investigative techniques such as subpoenas or civil investigative demands. U.S. government investigations of the Company, whether related to the Company’s U.S. government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines, or penalties being imposed upon the Company, or could lead to suspension or debarment from future U.S. government contracting. Management believes it has recorded the appropriate provision for any losses that may be experienced from any investigation of which it is aware. The Defense Contract Management Agency Administrative Contracting Officer has negotiated annual final indirect cost rates through fiscal year 2008. Audits of subsequent years may result in cost reductions and/or penalties. Management believes it has recorded the appropriate provision for the estimated losses that may be experienced from any such reductions and/or penalties. As of December 31, 2015 and March 31, 2015 , the Company has recorded a liability of approximately $208.0 million and $205.3 million , respectively, for its current best estimate of amounts to

15



be refunded to customers for potential adjustments from such audits or reviews of contract costs incurred subsequent to fiscal year 2008.
Litigation
The Company is involved in legal proceedings and investigations arising in the ordinary course of business, including those relating to employment matters, relationships with clients and contractors, intellectual property disputes, and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount. Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, management does not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on the Company’s financial condition and results of operations. As of December 31, 2015 , there are no material amounts accrued in the condensed consolidated financial statements related to these proceedings.
Six former officers and stockholders who had departed the company prior to July 31, 2008, the date on which we became majority owned by Carlyle and certain of its affiliated investment funds, as described in the Company’s Annual Report, or the Acquisition, have filed a total of nine suits in various jurisdictions, with original filing dates ranging from July 3, 2008 through December 15, 2009, against the Company and certain of the Company’s current and former directors and officers. Three of these suits were amended on July 2, 2010 and then further amended into one consolidated complaint on September 7, 2010. Another two of the original nine suits were consolidated into one complaint on September 24, 2014. Each of the suits arises out of the Acquisition and alleges that the former stockholders are entitled to certain payments that they would have received if they had held their stock at the time of the Acquisition. Some of the suits also allege that the Acquisition price paid to stockholders was insufficient. The various suits assert claims for breach of contract, tortious interference with contract, breach of fiduciary duty, civil Racketeer Influenced and Corrupt Organizations Act, or RICO, violations, violations of the Employee Retirement Income Security Act, and/or securities and common law fraud. Three of these suits have been dismissed with all appeals exhausted. The two suits that were consolidated into one action on September 24, 2014 were settled on April 16, 2015. One of the remaining suits has been dismissed by the United States District Court for the Southern District of California and is on appeal before the United States Court of Appeals for the Ninth Circuit. The other three remaining suits that were previously consolidated on September 7, 2010 have been dismissed by the United States District Court for the Southern District of New York and have been appealed by the plaintiffs. As of December 31, 2015 and March 31, 2015 , the aggregate alleged damages sought in these four remaining suits was approximately $291.7 million (which is sought to be trebled pursuant to RICO) plus punitive damages, costs, and fees.
Although the outcome of any of these cases is inherently uncertain and may be materially adverse, based on current information, management does not expect them to have a material adverse effect on our financial condition and results of operations.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2015 filed with the Securities and Exchange Commission on May 21, 2015, 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.”

16



Overview
We are a leading provider of management consulting, technology, and engineering services to the U.S. government in the defense, intelligence, and civil markets. Additionally, we provide management and technology consulting services to major corporations, institutions, not-for-profit organizations, and international clients. We are a well-known, trusted and long-term partner to our clients, who seek our expertise and objective advice to address their most important and complex problems. Leveraging our 100-year consulting heritage and a talent base of approximately 22,600 people, we deploy our deep domain knowledge, functional and technical expertise, expanding set of capabilities, and experience of innovative client service to help our clients achieve their objectives. We have a collaborative culture, supported by our operating model, which helps our professionals identify and respond to emerging trends across the markets we serve and deliver enduring results for our clients. Today, we serve substantially all of the cabinet-level departments of the U.S. government, clients in selected commercial markets, and international clients. Major government clients include the Department of Defense, all branches of the U.S. military, the U.S. Intelligence Community, and civil agencies such as the Department of Homeland Security, the Department of Health and Human Services, and the Department of the Treasury. We support these clients in addressing complex and pressing challenges such as combating global terrorism, improving cyber capabilities, transforming the healthcare system, improving efficiency and managing change within the government. In the commercial sector, we serve U.S. clients primarily in the financial services, healthcare, energy, retail, and automotive markets. Our international clients are primarily in the Middle East and south-east Asia.

Financial and Other Highlights
During the third quarter of fiscal 2016, the Company made further progress on its long term growth strategy by continuing to invest in key capabilities and markets while also increasing spending on bid and proposal activity to address a strong pipeline of opportunities. Total headcount also grew by approximately 275 employees as compared to the prior year period.
Revenue was relatively flat at a 0.2% increase from the three months ended December 31, 2014 to the three months ended December 31, 2015 and increased 1.3% from the nine months ended December 31, 2014 to the nine months ended December 31, 2015 . Confidence in the government contracting environment led the Company to increase indirect spending over the prior year period which also had the effect of increasing revenue on cost reimbursable contracts. For the nine months ended December 31, 2015, there was an increase in billable expenses of $32.7 million due to an increase in our use of subcontractors and other direct expenses incurred to perform on contracts. Billable expenses declined over the quarter to date period.
Operating income also remained relatively flat at a 0.1% decrease to $105.1 million in the three months ended December 31, 2015 from $105.3 million in the three months ended December 31, 2014 , which reflects a 10 basis point decrease in operating margin to 8.0% from 8.1% in the comparable period. Operating income decreased 7.1% to $340.1 million in the nine months ended December 31, 2015 from $366.3 million in the nine months ended December 31, 2014 , which reflects a 78 basis point decrease in operating margin to 8.5% from 9.3% in the comparable period. The decrease in operating income was primarily attributable to the increase in indirect spending as discussed above. The increased spending was primarily the result of increased bid and proposal, marketing, recruiting, and administrative activities to address a strong pipeline of opportunities, and meet strong demand.

Non-GAAP Measures
We publicly disclose certain non-GAAP financial measurements, including Adjusted Operating Income, Adjusted EBITDA, 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 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. 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. Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting

17



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 operating and net income to Adjusted Operating Income, Adjusted EBITDA and Adjusted Net Income, and net cash provided by operating activities to Free Cash Flows, and the explanatory footnotes regarding those adjustments, each as defined under GAAP, (ii) use Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to, operating income, net income or diluted EPS, as measures of operating results, and (iii) use Free Cash Flows 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:
"Adjusted Operating Income" represents operating income before (i) adjustments related to the amortization of intangible assets, and (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments. We prepare Adjusted Operating Income to eliminate the impact of items we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature.
"Adjusted EBITDA" represents net income before income taxes, net interest and other expense, and depreciation and amortization and before certain other items, including transaction costs, fees, losses, and expenses, including fees associated with debt prepayments. We prepare Adjusted EBITDA 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 Net Income" represents net income before: (i) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, (ii) adjustments related to the amortization of intangible assets, (iii) amortization or write-off of debt issuance costs and write-off of original issue discount, and (iv) any extraordinary, unusual, or non-recurring items, in each case net of the tax effect 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 financial statements.
"Free Cash Flow" represents the net cash generated from operating activities less the impact of purchases of property and equipment.

18



Below is a reconciliation of Adjusted Operating Income, Adjusted EBITDA, 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
December 31,
 
Nine Months Ended
December 31,
(Amounts in thousands, except share and per share data)
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Adjusted Operating Income
Operating Income
$
105,116

 
$
105,256

 
$
340,076

 
$
366,262

Amortization of intangible assets (a)
1,056

 
1,057

 
3,169

 
3,169

Transaction expenses (b)

 

 

 
2,039

Adjusted Operating Income
$
106,172

 
$
106,313

 
$
343,245

 
$
371,470

EBITDA & Adjusted EBITDA
 
 
 
 
 
 
 
Net income
$
108,055

 
$
52,807

 
$
228,577

 
$
189,206

Income tax (benefit) expense
(20,146
)
 
33,809

 
58,871

 
121,432

Interest and other, net
17,207

 
18,640

 
52,628

 
55,624

Depreciation and amortization
16,148

 
15,191

 
46,617

 
47,233

EBITDA
121,264

 
120,447

 
386,693

 
413,495

Transaction expenses (b)

 

 

 
2,039

Adjusted EBITDA
$
121,264

 
$
120,447

 
$
386,693

 
$
415,534

Adjusted Net Income
 
 
 
 
 
 
 
Net income
$
108,055

 
$
52,807

 
$
228,577

 
$
189,206

Amortization of intangible assets (a)
1,056

 
1,057

 
3,169

 
3,169

Transaction expenses (b)

 

 

 
2,039

Release of income tax reserves (c)
(47,667
)
 

 
(47,667
)
 

Amortization or write-off of debt issuance costs and write-off of original issue discount
1,307

 
1,306

 
3,910

 
5,267

Adjustments for tax effect (d)
(945
)
 
(945
)
 
(2,832
)
 
(4,190
)
Adjusted Net Income
$
61,806

 
$
54,225

 
$
185,157

 
$
195,491

Adjusted Diluted Earnings Per Share
 
 
 
 
 
 
 
Weighted-average number of diluted shares outstanding
149,900,925

 
150,679,085

 
149,501,458

 
150,239,836

Adjusted Net Income Per Diluted Share (e)
$
0.41

 
$
0.36

 
$
1.24

 
$
1.30

Free Cash Flow
 
 
 
 
 
 
 
Net cash provided by operating activities
$
92,310

 
$
27,529

 
$
180,997

 
$
228,058

Less: Purchases of property and equipment
(16,267
)
 
(8,535
)
 
(45,829
)
 
(17,466
)
Free Cash Flow
$
76,043

 
$
18,994

 
$
135,168

 
$
210,592

(a)
Reflects amortization of intangible assets resulting from the Acquisition of our Company by The Carlyle Group.
(b)
Reflects debt refinancing costs incurred in connection with the refinancing transaction consummated on May 7, 2014.
(c)
Release of pre-acquisition income tax reserves assumed by the Company in connection with the Acquisition of our Company by The Carlyle Group.
(d)
Reflects tax effect of adjustments at an assumed marginal tax rate of 40%.
(e)
Excludes an adjustment of approximately $1.5 million and $3.0 million of net earnings for the three and nine months ended December 31, 2015 , respectively, and excludes an adjustment of approximately $0.8 million and $2.9 million of net earnings for the three and nine months ended December 31, 2014 , respectively, associated with the application of the two-class method for computing diluted earnings per share.

19



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 address budgetary constraints, caps on the discretionary budget for defense non-defense departments and agencies, as established by the Bipartisan Budget Control Act 2011 and subsequently adjusted by the American Tax Payer Relief Act of 2012, the Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015, and 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 uncertainty around Congressional efforts 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 and defense-related programs as certain overseas operations end, and continued increased spending on cyber-security, Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), advanced analytics, technology integration and healthcare;
legislative and regulatory changes to limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of interim rules adopted by federal agencies pursuant to the Bipartisan Budget Act of 2013 published on June 24, 2014, 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;

20



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 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; and
increasingly complex requirements of the Department of Defense and the U.S. Intelligence Community, including cyber-security, 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.
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 Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015), provides for automatic spending cuts totaling approximately $1.2 trillion between 2013 and 2021, and requires an estimated $500 billion in federal defense spending cuts over this time period. The Bipartisan Budget Act of 2015 raised existing spending caps on defense spending by $25 billion and $15 billion for government fiscal years 2016 and 2017, respectively, but did not address spending caps beyond fiscal 2017. A reduction in the amount of services that we are contracted to provide to the Department of Defense could have a material adverse effect on our business and results of operations, and given the uncertainty of when and how these automatic reductions may 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 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 a time-and-materials contract, 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. 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 pre-determined price. To the extent our actual direct and allocated indirect costs decrease or increase

21



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 pre-determined 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 an unanticipated way.
The table below presents the percentage of total revenue for each type of contract:
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Cost-reimbursable (1)
49%
 
53%
 
51%
 
55%
Time-and-materials
27%
 
25%
 
26%
 
26%
Fixed-price (2)
24%
 
22%
 
23%
 
19%
 
(1)
Includes both cost-plus-fixed-fee and cost-plus-award-fee contracts.
(2)
Includes fixed-price level of effort contracts.
Contract Diversity and Revenue Mix
We provide services to our clients through a large number of single award contracts and contract vehicles and multiple award contract vehicles. Most of our revenue is generated under indefinite delivery/indefinite quantity, or ID/IQ, contract vehicles, which include multiple award government wide acquisition contract vehicles, or GWACs, and General Services Administration Multiple Award Schedule Contracts, or GSA schedules, and certain single award contracts. GWACs and GSA schedules are available to all U.S. government agencies. Any number of contractors typically compete under multiple award ID/IQ contract vehicles for task orders to provide particular services, and we earn revenue under these contract vehicles only to the extent that we are successful in the bidding process for task orders.
We generate revenue under our contracts and task orders through our provision of services as both a prime contractor and subcontractor, as well as from the provision of services by subcontractors under contracts and task orders for which we act as the prime contractor. The mix of these types of revenue affects our operating margin. Substantially all of our operating margin is derived from direct consulting staff labor, as the portion of our operating margin derived from fees we earn on services provided by our subcontractors is not significant. We view growth in direct consulting staff labor as the primary driver of earnings growth. Direct consulting staff labor growth is driven by consulting staff headcount growth, after attrition, and total backlog growth.
Our People
Revenue from our contracts is derived from services delivered by consulting staff and, to a lesser extent, from our subcontractors. Our ability to hire, retain, and deploy talent with skills appropriately aligned with client needs is critical to our ability to grow our revenue. We continuously evaluate whether our talent base is properly sized and appropriately compensated, and contains an optimal mix of skills to be cost competitive and meet the rapidly evolving needs of our clients. We seek to achieve that result through recruitment and management of capacity and compensation. As of December 31, 2015 and 2014 , we employed approximately 22,600 and 22,300 people, respectively, of which approximately 20,300 and 20,300 , respectively, were consulting staff.

22



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 for services under existing contracts for which funding has not been appropriated or otherwise authorized.
Priced Options. Priced contract options represent 100% of the undiscounted 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.
Backlog does not include any task orders under ID/IQ contracts, including GWACs and GSA schedules, except to the extent that task orders have been awarded to us under those contracts.
The following table summarizes the value of our contract backlog at the respective dates presented:  
 
As of December 31,
 
2015
 
2014
 
(In millions)
Backlog:
 
 
 
Funded
$
2,693

 
$
2,672

Unfunded (1)
2,825

 
2,673

Priced options
6,556

 
4,714

Total backlog
$
12,074

 
$
10,059

 

(1)
Amount as of December 31, 2014 reflects a reduction by management to the revenue value of orders for services under one then existing single award ID/IQ contract the Company has had for several years, based on an established pattern of funding under this contract by the U.S. government.
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. 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 20.0% from December 31, 2014 to December 31, 2015 . Additions to funded backlog during the twelve months ended December 31, 2015 totaled $5.3 billion in comparison to $5.5 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. Funded 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 pre-determined expiration date such as the end of the U.S. government's fiscal year. The revenue value of orders included in funded backlog that has not been recognized as revenue due to period of performance expirations has not exceeded approximately 7.7% of funded backlog as of the end of any of the four fiscal quarters preceding the fiscal quarter ended

23



December 31, 2015 . 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.
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.
Critical Accounting Estimates and Policies
There have been no material changes during the period covered by this Quarterly Report to the information 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new standard that will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB approved a one-year delay in the effective date of the standard to January 1, 2018, with an option that would permit companies to adopt the standard as early as the original effective date. Early adoption prior to the effective date is not permitted. With the one-year delay enacted, the new standard will be effective for the Company beginning on April 1, 2018 (i.e., beginning with the first quarter fiscal 2019 interim financial statements). The new standard may be adopted retrospectively for all periods presented, or adopted using a modified retrospective approach. Under the retrospective approach, the fiscal 2018 and 2017 financial statements would be adjusted to reflect the effects of adopting the new standard in those periods. Under the modified retrospective approach, the new standard would only be adopted for the period beginning April 1, 2018 to new contracts and those contracts that are not yet complete at April 1, 2018, with a cumulative catch-up adjustment recorded to beginning retained earnings for existing contracts that still require performance. Management is still in the process of determining which transition method to utilize in order to adopt the new standard and still assessing what effect the adoption of this standard may have on the timing of our revenue recognition and our financial statements.
Other recent accounting pronouncements issued by the FASB during the nine months ended December 31, 2015 and through the filing date did not or are not believed by management to have a material impact on the Company's present or

24



historical condensed consolidated financial statements.

Results of Operations
The following table sets forth items from our condensed consolidated statements of operations for the periods indicated:
 
Three Months Ended
December 31,
 
Percent
 
Nine Months Ended
December 31,
 
Percent
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(Unaudited)
 
(Unaudited)
 
 
 
(Unaudited)
 
(Unaudited)
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
Revenue
$
1,307,663

 
$
1,304,686

 
0.2
 %
 
$
3,981,421

 
$
3,931,824

 
1.3
 %
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
630,189

 
641,541

 
(1.8
)%
 
1,899,376

 
1,928,967

 
(1.5
)%
Billable expenses
355,401

 
366,371

 
(3.0
)%
 
1,097,741

 
1,064,994

 
3.1
 %
General and administrative expenses
200,809

 
176,327

 
13.9
 %
 
597,611

 
524,368

 
14.0
 %
Depreciation and amortization
16,148

 
15,191

 
6.3
 %
 
46,617

 
47,233

 
(1.3
)%
Total operating costs and expenses
1,202,547

 
1,199,430

 
0.3
 %
 
3,641,345

 
3,565,562

 
2.1
 %
Operating income
105,116

 
105,256

 
(0.1
)%
 
340,076

 
366,262

 
(7.1
)%
Interest expense
(17,762
)
 
(17,863
)
 
(0.6
)%
 
(52,937
)
 
(54,544
)
 
(2.9
)%
Other, net
555

 
(777
)
 
(171.4
)%
 
309

 
(1,080
)
 
(128.6
)%
Income before income taxes
87,909

 
86,616

 
1.5
 %
 
287,448

 
310,638

 
(7.5
)%
Income tax expense
(20,146
)
 
33,809

 
(159.6
)%
 
58,871

 
121,432

 
(51.5
)%
Net income
$
108,055

 
$
52,807

 
104.6
 %
 
$
228,577

 
$
189,206

 
20.8
 %

Three Months Ended December 31, 2015 Compared to Three Months Ended December 31, 2014
Revenue
Revenue was relatively flat at a 0.2% increase to $1,307.7 million from $1,304.7 million . Revenue results reflected higher indirect spending over the prior year period which also had the effect of increasing revenue on cost reimbursable contracts. The increased indirect spending was focused primarily on bid and proposal, marketing, recruiting, and administrative activities which resulted in a related decline in billable hours. A reduction in certain provisions for the potential recovery of allowable expenses also contributed to the increase in revenue. The increases were offset by a decline in billable expenses attributable to a decline in certain subcontractor services. Conversions to funded backlog during the twelve months ended December 31, 2015 totaled $5.3 billion in comparison to $5.5 billion for the comparable year. The revenue conversion was 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.
Cost of Revenue
Cost of revenue decreased to $630.2 million from $641.5 million , or a 1.8% decrease. The decrease was primarily due to a decrease in salaries and salary-related benefits of $12.5 million. The decrease in salaries and salary-related benefits was due to a decrease in medical insurance expense as well as an increase in consulting staff time spent on strategic investment and bid and proposal activities, in lieu of direct contract activities, over the prior year period. As proposal activity is a general and administrative activity, this contributes to a decrease within cost of revenue. Cost of revenue as a percentage of revenue was 48.2% and 49.2% for the three months ended December 31, 2015 and 2014 , respectively.
Billable Expenses
Billable expenses decreased to $355.4 million from $366.4 million , or a 3.0% decrease. The overall decrease was primarily due to a decrease in subcontractor-related expenses and other direct expenses of $10.3 million incurred to perform on contracts. Billable expenses as a percentage of revenue were 27.2% and 28.1% for the three months ended December 31, 2015 and 2014 , respectively.

25



General and Administrative Expenses
General and administrative expenses increased to $200.8 million from $176.3 million , or a 13.9% increase. This increase was primarily due to an increase in salaries and salary-related benefits of $14.7 million primarily due to an increase in consulting staff time spent on strategic investment and bid and proposal activities, in lieu of direct contract activities, over the prior year period. In addition, there was an increase in professional fees and other business expenses of $10.1 million. General and administrative expenses as a percentage of revenue were 15.4% and 13.5% for the three months ended December 31, 2015 and 2014 , respectively.
Depreciation and Amortization
Depreciation and amortization increased to $16.1 million from $15.2 million , or a 6.3% increase.
Interest Expense
Interest expense decreased to $17.8 million from $17.9 million , or a 0.6% decrease.
Income Tax Expense
Income tax expense (benefit) decreased to $(20.1) million from $33.8 million , or a 159.6% decrease. This decrease was primarily due to a decrease in the effective tax rate in the current quarter. The effective tax rate decreased to (22.9)% from 39.0% primarily due to the release of uncertain tax position reserves and certain income tax credits recognized during the three months ended December 31, 2015.

Nine Months Ended December 31, 2015 Compared to Nine Months Ended December 31, 2014
Revenue
Revenue increased to $3,981.4 million from $3,931.8 million , or 1.3% . Revenue results reflected higher indirect spending over the prior year period which also had the effect of increasing revenue on cost reimbursable contracts. The increased indirect spending was focused primarily on bid and proposal, marketing, recruiting, and administrative activities which resulted in a related decline in billable hours. During the period, there was also an increase in billable expenses due to an increase in our use of subcontractors and other direct expenses incurred to perform on contracts partially offset by declining efforts in certain subcontractor services. Conversions to funded backlog during the twelve months ended December 31, 2015 totaled $5.3 billion in comparison to $5.5 billion for the comparable year. The revenue conversion was 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.
Cost of Revenue
Cost of revenue decreased to $1,899.4 million from $1,929.0 million , or a 1.5% decrease. The decrease was primarily due to a decrease in salaries and salary-related benefits of $27.1 million. In addition there were decreases in incentive and stock-based compensation of $5.9 million. The decrease in salaries and salary-related benefits was due to a decrease in medical insurance expense as well as an increase in consulting staff time spent on strategic investment and bid and proposal activities, in lieu of direct contract activities, over the prior year period. As proposal activity is a general and administrative activity, this contributes to a decrease within cost of revenue. Cost of revenue as a percentage of revenue was 47.7% and 49.1% for the nine months ended December 31, 2015 and 2014 , respectively.
Billable Expenses
Billable expenses increased to $1,097.7 million from $1,065.0 million , or a 3.1% increase. The overall increase was primarily due to an increase in subcontractor-related expenses and other direct expenses of $31.0 million incurred to perform on contracts, partially offset by declining efforts in certain subcontractor services. Billable expenses as a percentage of revenue were 27.6% and 27.1% for the nine months ended December 31, 2015 and 2014 , respectively.
General and Administrative Expenses
General and administrative expenses increased to $597.6 million from $524.4 million , or a 14.0% increase. The increase was primarily due to an increase in salary and salary-related benefits of $47.5 million primarily due to an increase in consulting staff time spent on strategic investment and bid and proposal activities, in lieu of direct contract activities, over the prior year period. In addition, there was an increase in professional fees and other business expenses of $30.0 million. The increased spending was primarily the result of increased bid and proposal costs to address a strong pipeline of opportunities and an increase in investment spending on growth platforms. The increases were partially offset by a decrease in incentive compensation of $5.5 million. General and administrative expenses as a percentage of revenue were 15.0% and 13.3% for the nine months ended December 31, 2015 and 2014 , respectively.

26



Depreciation and Amortization
Depreciation and amortization decreased to $46.6 million from $47.2 million , or a 1.3% decrease, primarily due to a decrease in depreciation expense resulting from the effect of lower capital expenditures in prior years.
Interest Expense
Interest expense decreased to $52.9 million from $54.5 million , or a 2.9% decrease, primarily as a result of the Second Amendment to the Credit Agreement consummated in May 2014. The Company increased its borrowing under Term Loan A by approximately $168.4 million, the proceeds of which were used to pay outstanding principal on the Term Loan B which has a higher interest rate than Term Loan A.
Income Tax Expense
Income tax expense decreased to $58.9 million from $121.4 million , or a 51.5% decrease. This decrease was primarily due to a decrease in the effective tax rate in the current quarter and a decrease in the year to date pre-tax income as compared to the same prior year period. The effective tax rate decreased to 20.5% from 39.1% primarily due to the release of uncertain tax position reserves and certain income tax credits recognized in the current quarter.

Liquidity and Capital Resources
We have historically been able to generate sufficient cash to fund our operations, debt payments, capital expenditures, and discretionary funding needs. We had $167.1 million and $207.2 million in cash and cash equivalents as of December 31, 2015 and March 31, 2015 , respectively. 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 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 senior secured loan facilities to meet cash demands. We anticipate that cash provided by operating activities, existing cash and cash equivalents, and borrowing capacity under our 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;
debt service requirements for borrowings under our senior secured loan facilities; and
cash taxes to be paid.
From time to time we evaluate alternative uses for excess cash resources once our operating cash flow needs and required debt amortization have been met. Some of the possible uses of our remaining excess cash at any point in time may include funding acquisitions, further investment in our business and voluntary debt prepayments, as well as initiatives intended to return value to stockholders in the form of payment of recurring and special dividends and share repurchases. On December 12, 2011, the Board of Directors authorized the repurchase of up to $30.0 million of our shares. On January 27, 2015, the share repurchase authorization was increased to $180.0 million. During the first quarter of fiscal 2016 , the Company purchased 1.2 million shares of the Company’s Class A Common Stock in a series of open market transactions for an aggregate of $30.5 million. Following the aforementioned repurchase of 1.2 million shares, our repurchase of 1.0 million shares of our Class A Common Stock on November 5, 2014 and an additional 1.0 million shares of our Class A Common Stock on February 2, 2015, the Company currently has approximately $96.0 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 senior secured credit agreement, as amended, and other factors deemed relevant by our Board of Directors.

27



The following table summarizes the cash distributions recognized in the condensed consolidated statement of cash flows:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2015
 
2014
 
2015
 
2014
Recurring dividends (1)
$
19,408

 
$
16,432

 
$
57,678

 
$
48,676

Special dividends (2)

 

 

 
147,248

Dividend equivalents (3)
28,113

 
209

 
31,707

 
47,006

Total distributions
$
47,521

 
$
16,641

 
$
89,385

 
$
242,930

(1) Amounts represent recurring dividends of $0.13 per share and $0.11 per share that were declared and paid during fiscal 2016 and fiscal 2015, respectively.
(2) Amounts represent a special dividend of $1.00 per share that was declared and paid for during fiscal 2015.
(3) Dividend equivalents are distributions made to option holders equal to the previously declared special dividends.
On January 27, 2016, the Company announced a regular quarterly cash dividend in the amount of $0.15 per share, payable on February 29, 2016 to stockholders of record on February 10, 2016.
For each special dividend declared, the Board of Directors, acting as the Administrator of the Officers' Rollover Stock Plan and the Amended and Restated Equity Incentive Plan, or EIP, is required to make a determination under the respective plan's antidilution provision to adjust the outstanding options. In the event the Board of Directors elects to grant option holders a cash payment equal to the amount of the special dividend, the Company accrues a stock-based compensation liability as the respective option's stock compensation expense is recorded in the statement of operations. This obligation will be settled on the options' mandatory exercise date for Rollover options and on the later of the date the dividend is paid or vesting for the EIP options. The stock-based compensation liability as of December 31, 2015 includes all special dividends declared through December 31, 2015 . As of December 31, 2015 and March 31, 2015 , the Company calculated a total recorded and unrecorded stock-based compensation liability of $3.9 million and $35.8 million , respectively, related to the special dividends paid in July and December 2009, June and August 2012, November 2013, and February and August 2014.
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 reflect amounts billed to our clients as of each balance sheet date. Our clients generally pay our invoices within 30 days of the invoice date. At month-end, we bill to customers accounts receivables reclassed from our unbilled account that was recognized along with corresponding revenue in the preceding month. Finally, we include in accounts receivable amounts related to revenue accrued in excess of amounts billed, primarily on our fixed-price and cost-plus-award-fee contracts. The total amount of our accounts receivable can vary significantly over time, but is generally sensitive to revenue levels. Total accounts receivable (billed and unbilled combined, net of allowance for doubtful accounts) days sales outstanding or DSO, which we calculate by dividing total accounts receivable by revenue per day during the relevant fiscal quarter, was 62 as of December 31, 2015 and 59 as of March 31, 2015 .

28



The table below sets forth our net cash flows for the periods presented:  
 
Nine Months Ended
December 31,
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
 
(In thousands)
Net cash provided by operating activities
$
180,997

 
$
228,058

Net cash used in investing activities
(96,447
)
 
(41,373
)
Net cash used in financing activities
(124,663
)
 
(249,236
)
Total decrease in cash and cash equivalents
$
(40,113
)
 
$
(62,551
)
Net Cash from Operating Activities
Net cash from operations is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from clients in a timely manner, and our ability to manage our vendor payments. Net cash provided by operations was $181.0 million in the nine months ended December 31, 2015 compared to $228.1 million in the prior year period, or a 20.6% decrease. The decrease in net cash provided by operations was driven primarily by the significant reduction in accounts receivable achieved in the prior year period as well as an increase in working capital needs.
Net Cash from Investing Activities
Net cash used in investing activities was $96.4 million in the nine months ended December 31, 2015 compared to $41.4 million in the prior year period, or a 133.1% increase. The increase in net cash used in investing activities was due to the Company's acquisition of the software services unit of SPARC, LLC as well as an increase in capital expenditures over the prior year primarily due to leasehold improvements related to the reconfiguration of our facilities footprint.
Net Cash from Financing Activities
Net cash used in financing activities was $124.7 million in the nine months ended December 31, 2015 compared to $249.2 million in the prior year period, or a 50.0% decrease. The decrease in net cash used in financing activities was primarily due to a lack of a special cash dividend paid in fiscal 2016 as compared to fiscal 2015 and a decrease in the payment of dividend equivalents to option holders primarily due to the timing of such payments. These decreases were partially offset by increased principal payments of $41.5 million on our debt as compared to $20.7 million in the first nine months of last year. With the May 2014 debt amendment, there were no quarterly principal payments required in the first quarter of fiscal 2015, which results in one less quarterly payment in the first half of fiscal 2015 in comparison to the first half of fiscal 2016. In addition, beginning in September of fiscal 2016 the quarterly payment increased by an additional $5 million.
Indebtedness
On May 7, 2014, the Company entered into the Second Amendment to the Credit Agreement, dated as of July 31, 2012 (as previously amended by the First Amendment to the Credit Agreement, dated as of August 16, 2013). The Credit Agreement, as amended, provides the Company with an $830.0 million Term Loan A and an $841.2 million Term Loan B, and a $500.0 million revolving credit facility, with a sublimit for letters of credit of $100.0 million .
Our debt totaled $1,587.2 million and $1,626.3 million as of December 31, 2015 and March 31, 2015 , respectively. The interest rate in effect for Term Loan A was 2.82% and for Term Loan B was 3.75% as of December 31, 2015 . The interest rate in effect for Term Loan A was 2.68% and for Term Loan B was 3.75% as of March 31, 2015 . As of December 31, 2015 and March 31, 2015 , there were no amounts outstanding under our revolving credit facility of $500.0 million . As of December 31, 2015 and March 31, 2015 , the Company was in compliance with all of the Credit Agreement's debt covenants.
We occasionally borrow under our revolving credit facility in anticipation of cash demands. On October 29, 2015 our wholly-owned subsidiary Booz Allen Hamilton Inc. accessed $93.0 million of its $500.0 million revolving credit facility to support month-end transactions and the acquisition of the software services unit of SPARC, LLC. On November 4, 2015, we repaid the $40.0 million borrowed from the revolving credit facility. On November 25, 2015 Booz Allen Hamilton Inc. accessed an additional $30 million from the revolving credit facility to support month-end transactions. We repaid $53 million on November 30, 2015 and the remaining $30 million balance on December 4, 2015.


29



Absent any prepayment accelerations of Debt Issuance Costs, or DIC, or the effect of changes in interest rates, the following table summarizes the estimated annual amortization expense of DIC using the effective interest rate method:
 
DIC Amortization Expense
 
Total
2016
2017
2018
2019
2020
Thereafter
 
(in thousands)
Term Loan A
$
4,702

$
422

$
1,621

$
1,463

$
1,109

$
87

$

Term Loan B
6,296

407

1,677

1,752

1,830

630


Revolver
6,331

462

1,853

1,853

1,853

310


Total
$
17,329

$
1,291

$
5,151

$
5,068

$
4,792

$
1,027

$

The Credit Agreement, as amended, requires quarterly principal payments of 1.25% of the stated principal amount of Term Loan A, with annual incremental increases to 1.875% , 2.50% , 3.125% , and 13.0% , prior to Term Loan A's maturity date of May 31, 2019. As a result of paying approximately $168.4 million of Term Loan B principal in connection with the May 7, 2014 Second Amendment, no additional principal payments are required until the remaining balance is due on Term Loan B's maturity date of July 31, 2019. The revolving credit facility matures on May 31, 2019, at which time any outstanding principal balance will be due in full.
The interest rate on borrowings under Term Loan A is LIBOR plus a 2.50% spread. The spread ranges from 2.00% to 2.75% based on the Company's total leverage ratio. The interest rate on borrowings under Term Loan B is LIBOR plus a 3.0% spread with a 0.75% floor. The spread ranges from 2.00% to 3.00% based upon either an ABR or LIBOR borrowing. The revolving credit facility margin and commitment fee are subject to the leveraged based pricing grid, as set forth in the Credit Agreement, as amended. As of December 31, 2015 and March 31, 2015 , the Company was contingently liable under open standby letters of credit and bank guarantees issued by our banks in favor of third parties that totaled $5.5 million and $5.3 million , respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. At December 31, 2015 and March 31, 2015 , approximately $1.8 million and $5.2 million of these instruments reduce the available borrowings under the revolving credit facility. The remainder are guaranteed under a separate $5.0 million facility established in fiscal 2015 of which $1.3 million and $4.9 million , respectively, was available to the Company at December 31, 2015 and March 31, 2015 . As of December 31, 2015 and March 31, 2015 , we had $498.2 million and $494.8 million, respectively, of capacity available for additional borrowings under the revolving credit facility.
The loans under the Credit Agreement, as amended, are secured by substantially all of our assets and none of such assets will be available to satisfy the claims of our general creditors. The Credit Agreement, as amended, contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following, in each case subject to certain exceptions: a maximum net total leverage ratio; a minimum net interest coverage ratio; limitations on indebtedness and liens; mergers, consolidations or amalgamations, or liquidations, wind-ups or dissolutions; dispositions of property; restricted payments; investments; transactions with affiliates; sale and lease back transactions; change in fiscal periods; negative pledges; restrictive agreements; limitations on line of business; limitations on speculative hedging and limitations on changes of names and jurisdictions. In addition, we are required to meet certain financial covenants at each quarter end, namely Consolidated Net Total Leverage and Consolidated Net Interest Coverage Ratios. As of December 31, 2015 , we were compliant with these covenants.
Capital Structure and Resources
Our stockholders’ equity amounted to $380.8 million as of December 31, 2015 , an increase of $194.3 million compared to stockholders’ equity of $186.5 million as of March 31, 2015 . The increase is primarily due to net income of $228.6 million in the nine months ended December 31, 2015 and stock-based compensation expense of $17.8 million , partially offset by $57.7 million in recurring and special dividend payments and a $34.6 million increase in treasury stock resulting from the repurchase of 1.4 million shares of our Class A Common Stock during the nine months ended December 31, 2015 .
Off-Balance Sheet Arrangements
As of December 31, 2015 , we did not have any 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, business systems, furniture, and leasehold improvements to support our operations. Direct facility and equipment costs billed to clients are not treated as capital expenses. Our capital expenditures for the nine months ended December 31, 2015 and 2014 were $45.8 million and $17.5 million ,respectively, and the majority of such capital expenditures related to facilities infrastructure, equipment, and information technology. Expenditures for facilities infrastructure and equipment are

30



generally incurred to support new and existing programs across our business. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure.
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
This Quarterly Report on Form 10-Q, or Quarterly Report, including information incorporated by reference into this Quarterly Report, contains 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: cost cutting and efficiency initiatives, budget reductions, Congressionally mandated automatic spending cuts, and other efforts to reduce U.S. government spending, including automatic sequestration required by the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and the Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015)), which have reduced and delayed contract awards and funding for orders for services especially in the current political environment or otherwise negatively affect our ability to generate revenue under contract awards, including as a result of reduced staffing and hours of operation at U.S. government clients; delayed funding of our contracts due to uncertainty relating to and a possible failure of Congressional efforts 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 (including those resulting from or related to cuts associated with sequestration or other budgetary cuts made in lieu of sequestration); current and continued uncertainty around the timing, extent, nature, and effect of ongoing Congressional and other U.S. government action to address budgetary constraints, including, but not limited to, uncertainty around the outcome of Congressional efforts to craft a long-term agreement on the U.S. government’s ability to incur indebtedness in excess of its current limits, and the U.S. deficit; any issue that compromises our relationships with the U.S. government or damages our professional reputation, including negative publicity concerning government contractors in general or us in particular; changes in U.S. government spending, including a continuation of efforts by the U.S. government to decrease spending for management support service contracts, and mission priorities that shift expenditures away from agencies or programs that we support; the size of our addressable markets and the amount of U.S. government spending on private contractors; failure to comply with numerous laws and regulations; our ability to compete effectively in the competitive bidding process and delays or losses of contract awards caused by competitors' protests of major contract awards received by us; the loss of General Services Administration Multiple Award schedule contracts, or GSA schedules, or our position as prime contractor on government-wide acquisition contract vehicles, or GWACs; changes in the mix of our contracts and our ability to accurately estimate or otherwise recover expenses, time, and resources for our contracts; our ability to generate revenue under certain of our contracts; our ability to realize the full value of and replenish our backlog and the timing of our receipt of revenue under contracts included in backlog; changes in estimates used in recognizing revenue; an inability to attract, train, or retain employees with the requisite skills, experience, and security clearances; an inability to hire, assimilate, and deploy enough employees to serve our clients under existing contracts; an inability to timely and effectively utilize our employees; failure by us or our employees to obtain and maintain necessary security clearances; the loss of members of senior management or failure to develop new leaders; misconduct or other improper activities from our employees or subcontractors, including the improper use or release of our clients' sensitive or classified information; increased insourcing by various 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; increased competition from other companies in our industry; failure to maintain strong relationships with other contractors; 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; continued efforts to change how the U.S. government reimburses compensation related and other expenses or otherwise limit such reimbursements, including recent rules that expand the scope of existing reimbursement limitations, such as a reduction in allowable annual employee compensation to certain contractors as a result of the Bipartisan Budget Act of 2013, and an increased risk of compensation being deemed unallowable or payments being withheld as a result of U.S. government audit, review or investigation; internal system or service failures and security breaches, including, but not limited to, those resulting from external cyber attacks on our network and internal systems; risks related to changes to our operating structure, capabilities, or strategy intended to address client needs, grow our business or

31



respond to market developments; risks associated with new relationships, clients, capabilities, and service offerings in our U.S. and international businesses; failure to comply with special U.S. government laws and regulations relating to our international operations; risks related to our indebtedness and credit facilities which contain financial and operating covenants; 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; an inability to utilize existing or future tax benefits, including those related to our stock-based compensation expense, for any reason, including a change in law; variable purchasing patterns under U.S. government GSA schedules, blanket purchase agreements and indefinite delivery, indefinite quantity, or ID/IQ, contracts; and other risks and factors described in Part II, “Item 1A. Risk Factors” and elsewhere in this Quarterly Report.
In light of these risks, uncertainties and other factors, the forward-looking statements contained in this Quarterly Report 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.

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