BAH-2015.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
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¨ | 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)
___________________________________
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| | |
Delaware | | 26-2634160 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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.
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Large accelerated filer | | ý | | Accelerated filer | | ¨ |
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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 July 24, 2015 |
Class A Common Stock | 146,479,086 |
|
Class B Non-Voting Common Stock | — |
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Class C Restricted Common Stock | — |
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Class E Special Voting Common Stock | 1,851,590 |
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TABLE OF CONTENTS
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ITEM 1 | | |
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ITEM 2 | | |
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ITEM 3 | | |
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ITEM 4 | | |
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ITEM 1 | | |
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ITEM 1A | | |
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ITEM 2 | | |
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ITEM 3 | | |
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ITEM 4 | | |
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ITEM 5 | | |
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ITEM 6 | | |
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
BOOZ ALLEN HAMILTON HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| June 30, 2015 | | March 31, 2015 |
| (Unaudited) | | |
| (Amounts in thousands, except share and per share data) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 151,476 |
| | $ | 207,217 |
|
Accounts receivable, net of allowance | 867,441 |
| | 857,310 |
|
Prepaid expenses and other current assets | 109,996 |
| | 98,681 |
|
Total current assets | 1,128,913 |
| | 1,163,208 |
|
Property and equipment, net of accumulated depreciation | 111,880 |
| | 111,367 |
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Intangible assets, net of accumulated amortization | 216,701 |
| | 219,382 |
|
Goodwill | 1,303,832 |
| | 1,304,231 |
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Other long-term assets | 91,853 |
| | 79,305 |
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Total assets | $ | 2,853,179 |
| | $ | 2,877,493 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 62,250 |
| | $ | 57,063 |
|
Accounts payable and other accrued expenses | 457,761 |
| | 481,815 |
|
Accrued compensation and benefits | 236,326 |
| | 279,239 |
|
Other current liabilities | 60,038 |
| | 30,877 |
|
Total current liabilities | 816,375 |
| | 848,994 |
|
Long-term debt, net of current portion | 1,554,488 |
| | 1,569,272 |
|
Other long-term liabilities | 274,662 |
| | 272,729 |
|
Total liabilities | 2,645,525 |
| | 2,690,995 |
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Commitments and contingencies (Note 16) |
|
| |
|
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Stockholders’ equity: | | | |
Common stock, Class A — $0.01 par value — authorized, 600,000,000 shares; issued, 150,612,184 shares at June 30, 2015 and 150,237,675 shares at March 31, 2015; outstanding, 146,252,228 shares at June 30, 2015 and 147,238,282 shares at March 31, 2015 | 1,506 |
| | 1,502 |
|
Special voting common stock, Class E — $0.003 par value — authorized, 25,000,000 shares; issued and outstanding, 1,844,504 shares at June 30, 2015 and 1,851,589 shares at March 31, 2015 | 6 |
| | 6 |
|
Treasury stock, at cost — 4,359,956 shares at June 30, 2015 and 2,999,393 shares at March 31, 2015 | (106,893 | ) | | (72,293 | ) |
Additional paid-in capital | 184,959 |
| | 174,985 |
|
Retained earnings | 149,711 |
| | 104,457 |
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Accumulated other comprehensive loss | (21,635 | ) | | (22,159 | ) |
Total stockholders’ equity | 207,654 |
| | 186,498 |
|
Total liabilities and stockholders’ equity | $ | 2,853,179 |
| | $ | 2,877,493 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
BOOZ ALLEN HAMILTON HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
| (Amounts in thousands, except per share data) |
Revenue | $ | 1,351,604 |
| | $ | 1,322,297 |
|
Operating costs and expenses: | | | |
Cost of revenue | 643,032 |
| | 645,001 |
|
Billable expenses | 378,650 |
| | 350,972 |
|
General and administrative expenses | 188,661 |
| | 171,069 |
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Depreciation and amortization | 15,117 |
| | 16,232 |
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Total operating costs and expenses | 1,225,460 |
| | 1,183,274 |
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Operating income | 126,144 |
| | 139,023 |
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Interest expense | (17,490 | ) | | (18,864 | ) |
Other, net | (68 | ) | | (1,110 | ) |
Income before income taxes | 108,586 |
| | 119,049 |
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Income tax expense | 44,280 |
| | 47,934 |
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Net income | $ | 64,306 |
| | $ | 71,115 |
|
Earnings per common share (Note 3): | | | |
Basic | $ | 0.44 |
| | $ | 0.49 |
|
Diluted | $ | 0.43 |
| | $ | 0.47 |
|
Dividends declared per share | $ | 0.13 |
| | $ | 0.11 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
BOOZ ALLEN HAMILTON HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) |
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
| (Amounts in thousands) |
Net income | $ | 64,306 |
| | $ | 71,115 |
|
Change in postretirement plan costs, net of tax | 524 |
| | 85 |
|
Comprehensive income | $ | 64,830 |
| | $ | 71,200 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
BOOZ ALLEN HAMILTON HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
| (Amounts in thousands) |
Cash flows from operating activities | | | |
Net income | $ | 64,306 |
| | $ | 71,115 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 15,117 |
| | 16,232 |
|
Stock-based compensation expense | 6,265 |
| | 6,062 |
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Excess tax benefits from stock-based compensation | (3,673 | ) | | (1,658 | ) |
Amortization of debt issuance costs and loss on extinguishment | 2,072 |
| | 5,381 |
|
Losses on dispositions and impairments | 29 |
| | 345 |
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Changes in assets and liabilities: | | | |
Accounts receivable | (10,131 | ) | | 19,195 |
|
Prepaid expenses and other current assets | (11,023 | ) | | (4,519 | ) |
Other long-term assets | (13,841 | ) | | 7,484 |
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Accrued compensation and benefits | (41,530 | ) | | (48,869 | ) |
Accounts payable and other accrued expenses | (24,159 | ) | | (16,378 | ) |
Accrued interest | 2,116 |
| | 7,945 |
|
Other current liabilities | 30,821 |
| | 31,974 |
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Other long-term liabilities | 2,727 |
| | (2,583 | ) |
Net cash provided by operating activities | 19,096 |
| | 91,726 |
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Cash flows from investing activities | | | |
Purchases of property and equipment | (13,140 | ) | | (2,652 | ) |
Net cash used in investing activities | (13,140 | ) | | (2,652 | ) |
Cash flows from financing activities | | | |
Net proceeds from issuance of common stock | 1,379 |
| | 1,276 |
|
Stock option exercises | 871 |
| | 1,208 |
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Excess tax benefits from stock-based compensation | 3,673 |
| | 1,658 |
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Repurchases of common stock | (34,600 | ) | | (4,632 | ) |
Cash dividends paid | (19,052 | ) | | (16,048 | ) |
Dividend equivalents paid to option holders | (3,593 | ) | | (4,472 | ) |
Debt issuance costs | — |
| | (8,610 | ) |
Repayment of debt | (10,375 | ) | | (168,438 | ) |
Proceeds from debt issuance | — |
| | 168,438 |
|
Net cash used in financing activities | (61,697 | ) | | (29,620 | ) |
Net (decrease) increase in cash and cash equivalents | (55,741 | ) | | 59,454 |
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Cash and cash equivalents––beginning of period | 207,217 |
| | 259,994 |
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Cash and cash equivalents––end of period | $ | 151,476 |
| | $ | 319,448 |
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Supplemental disclosures of cash flow information | | | |
Cash paid during the period for: | | | |
Interest | $ | 13,286 |
| | $ | 8,736 |
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Income taxes | $ | 1,314 |
| | $ | 3,438 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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)
June 30, 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 22,500 employees as of June 30, 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 three months ended June 30, 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 for annual reporting periods beginning after December 15, 2017, 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. A final accounting standards update is pending. 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 three months ended June 30, 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.
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 and Class E Special Voting Common Stock. 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. 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. 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 quarter 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 June 30, |
| 2015 | | 2014 |
Earnings for basic computations (1) | $ | 63,595 |
| | $ | 70,265 |
|
Weighted-average Class A Common Stock outstanding | 145,251,780 |
| | 142,188,210 |
|
Weighted-average Class B Non-Voting Common Stock outstanding | 0 |
| | 538,270 |
|
Weighted-average Class C Restricted Common Stock outstanding | 0 |
| | 918,939 |
|
Total weighted-average common shares outstanding for basic computations | 145,251,780 |
| | 143,645,419 |
|
Earnings for diluted computations (1) | $ | 63,608 |
| | $ | 70,292 |
|
Dilutive stock options and restricted stock | 4,019,541 |
| | 5,981,749 |
|
Average number of common shares outstanding for diluted computations | 149,271,321 |
| | 149,627,168 |
|
Earnings per common share | | | |
Basic | $ | 0.44 |
| | $ | 0.49 |
|
Diluted | $ | 0.43 |
| | $ | 0.47 |
|
(1) During the three months ended June 30, 2015 and 2014, approximately 1.6 million and 1.7 million participating securities were paid dividends totaling $211,000 and $191,000, respectively. Additionally, for the three months ended June 30, 2015 there were undistributed earnings of $500,000 and $487,000 allocated to the participating class of securities in basic and diluted earnings per share, respectively. For the three months ended June 30, 2014 there were undistributed earnings of $659,000 and $632,000 allocated to the participating class of securities in basic and diluted earnings per share, respectively. The allocated undistributed earnings and the dividends paid comprise the difference between net income presented on the condensed consolidated statements of operations for the three months ended June 30, 2015 and 2014 and earnings for basic and diluted computations.
The EPS calculation for the three months ended June 30, 2015 and 2014 excludes 562,000 and 212,000 options, respectively, as their impact was anti-dilutive.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
|
| | | | | | | |
| June 30, 2015 | | March 31, 2015 |
Current | | | |
Accounts receivable–billed | $ | 365,289 |
| | $ | 318,464 |
|
Accounts receivable–unbilled | 502,874 |
| | 539,203 |
|
Allowance for doubtful accounts | (722 | ) | | (357 | ) |
Accounts receivable, net | 867,441 |
| | 857,310 |
|
Long-term | | | |
Unbilled receivables | 31,562 |
| | 18,496 |
|
Total accounts receivable, net | $ | 899,003 |
| | $ | 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 $2.9 million and $(452,000) for the three months ended June 30, 2015 and 2014, respectively. Because the Company's accounts receivable are primarily with the U.S. Government and its agencies, the Company does not have material exposure to accounts receivable credit risk.
5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consisted of the following:
|
| | | | | | | | |
| | June 30, 2015 | | March 31, 2015 |
Vendor payables | | $ | 208,486 |
| | $ | 215,995 |
|
Accrued expenses | | 249,275 |
| | 265,820 |
|
Total accounts payable and other accrued expenses | | $ | 457,761 |
| | $ | 481,815 |
|
Accrued expenses consisted primarily of the Company’s reserve related to potential cost disallowance in conjunction with government audits. Refer to Note 16 for further discussion of this reserve.
6. ACCRUED COMPENSATION AND BENEFITS
Accrued compensation and benefits consisted of the following:
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| | | | | | | |
| June 30, 2015 | | March 31, 2015 |
Bonus | $ | 17,309 |
| | $ | 82,237 |
|
Retirement | 41,268 |
| | 29,285 |
|
Vacation | 120,837 |
| | 115,657 |
|
Stock-based compensation liability (Note 13) | 30,350 |
| | 31,732 |
|
Other | 26,562 |
| | 20,328 |
|
Total accrued compensation and benefits | $ | 236,326 |
| | $ | 279,239 |
|
As of June 30, 2015 and March 31, 2015, the Company recorded a stock-based compensation liability of $30.4 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 is linked to vesting. Refer to Note 13 for further discussion of the special dividends.
7. DEBT
Debt consisted of the following:
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| | | | | | | | | | | | | |
| June 30, 2015 | | March 31, 2015 |
| Interest Rate | | Outstanding Balance | | Interest Rate | | Outstanding Balance |
Term Loan A | 2.69 | % | | $ | 785,856 |
| | 2.68 | % | | $ | 796,024 |
|
Term Loan B | 3.75 | % | | 830,882 |
| | 3.75 | % | | 830,311 |
|
Total | | | 1,616,738 |
| | | | 1,626,335 |
|
Less: Current portion of long-term debt | | | (62,250 | ) | | | | (57,063 | ) |
Long-term debt, net of current portion | | | $ | 1,554,488 |
| | | | $ | 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). As of June 30, 2015, the Credit Agreement, as amended, provided 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 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 June 30, 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 $12.9 million and $13.7 million as of June 30, 2015 and March 31, 2015, respectively. As of June 30, 2015 and March 31, 2015, the Company was in compliance with all of the Credit Agreement's debt covenants.
8. INCOME TAXES
The Company’s effective income tax rate was 40.8% and 40.3% for the three months ended June 30, 2015 and 2014, respectively. The effective tax rate of 40.8% differs from the statutory rate of 35.0% primarily due to state income taxes and the effect of permanent rate differences, which primarily relate to meals and entertainment.
9. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
|
| | | | | | | | |
| | June 30, 2015 | | March 31, 2015 |
Income tax reserve | | $ | 58,714 |
| | $ | 58,444 |
|
Deferred rent | | 34,713 |
| | 34,732 |
|
Deferred payment obligation | | 59,144 |
| | 59,414 |
|
Postretirement benefit obligations | | 113,408 |
| | 111,624 |
|
Other (1) | | 8,683 |
| | 8,515 |
|
Total other long-term liabilities | | $ | 274,662 |
| | $ | 272,729 |
|
(1) Balance at June 30, 2015 includes a contingent earnout liability of $4.5 million related to business acquisitions. Refer to Note 14 for further discussion.
10. 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 $28.3 million and $27.3 million for the three months ended June 30, 2015 and 2014, respectively. The Company-paid contributions were $16.2 million and $21.6 million for the three months ended June 30, 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 June 30, |
| 2015 | | 2014 |
Service cost | $ | 1,426 |
| | $ | 1,021 |
|
Interest cost | 1,126 |
| | 892 |
|
Net actuarial loss | 884 |
| | 144 |
|
Total postretirement medical expense | $ | 3,436 |
| | $ | 2,057 |
|
As of June 30, 2015 and March 31, 2015, the unfunded status of the post-retirement medical plan was $109.1 million and $107.3 million, respectively, which is included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
11. 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 June 30, |
| 2015 | | 2014 |
Beginning of period | $ | (22,159 | ) | | $ | (6,636 | ) |
Amounts reclassified from accumulated other comprehensive loss | 524 |
| | 85 |
|
Net current-period other comprehensive loss | 524 |
| | 85 |
|
End of period | $ | (21,635 | ) | | $ | (6,551 | ) |
The following table presents the reclassifications out of accumulated other comprehensive loss to net income:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
Amortization of net actuarial loss included in net periodic benefit cost (See Note 10) | | | |
Total before tax | $ | 884 |
| | $ | 144 |
|
Tax benefit | (360 | ) | | (59 | ) |
Net of tax | $ | 524 |
| | $ | 85 |
|
12. 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 |
| | 0 |
| | 0 |
| | 1,851,589 |
| | 2,999,393 |
|
Issuance of common stock | 212,078 |
| | — |
| | — |
| | — |
| | — |
|
Stock options exercised | 162,431 |
| | — |
| | — |
| | (7,085 | ) | | — |
|
Repurchase of common stock (3) | — |
| | — |
| | — |
| | — |
| | 1,360,563 |
|
Balance at June 30, 2015 | 150,612,184 |
| | — |
| | — |
| | 1,844,504 |
| | 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 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) | 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. In addition, the repurchase of common stock above reflects shares repurchased 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 shares repurchased to cover the minimum statutory withholding taxes on accelerated restricted stock vesting for departing officers.
For the quarterly offering period that closed on June 30, 2015, 57,476 Class A Common Stock shares were purchased by employees under the Company's Employee Stock Purchase Plan, or ESPP. Since the program's inception, 1,566,433 shares have been purchased by employees.
13. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense recognized in the condensed consolidated statements of operations:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
Cost of revenue | $ | 1,145 |
| | $ | 2,037 |
|
General and administrative expenses | 5,120 |
| | 4,025 |
|
Total | $ | 6,265 |
| | $ | 6,062 |
|
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 June 30, |
| 2015 | | 2014 |
Equity Incentive Plan Options | $ | 1,057 |
| | $ | 1,194 |
|
Class A Restricted Common Stock | 5,208 |
| | 4,868 |
|
Total | $ | 6,265 |
| | $ | 6,062 |
|
As of June 30, 2015, there was $25.0 million of total unrecognized compensation cost related to unvested stock-based compensation agreements. The unrecognized compensation cost as of June 30, 2015 is expected to be fully amortized over the next 4.75 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.
|
| | | | | | |
| | June 30, 2015 |
| | Unrecognized Compensation Cost | | Weighted Average Remaining Period to be Recognized (in years) |
Equity Incentive Plan Options | | $ | 6,080 |
| | 3.73 |
Class A Restricted Common Stock | | 18,954 |
| | 2.55 |
Total | | $ | 25,034 |
| | |
Equity Incentive Plan
On April 1, 2015, 457,320 options were granted under the Second Amended and Restated Equity Incentive Plan, or EIP. The estimated fair value of the per-option grant was $6.71, resulting in a total fair value of $3.1 million. The fair value of our Class A Common Stock on April 1, 2015 at the time of the option grant was $29.08.
As of June 30, 2015, there were 6,497,085 EIP options outstanding, of which 1,741,851 were unvested.
Grants of Class A Restricted Common Stock and Restricted Stock Units
On April 1, 2015, the Board of Directors granted 23,719 Restricted Stock Units to certain newly hired officers. The aggregate value was estimated at $0.7 million based on the stock price of $29.08 on the grant date.
On May 19, 2015, the Board of Directors granted 2,094 Restricted Stock Units to certain newly hired officers. The aggregate value was estimated at $60,000 based on the stock price of $28.65 on the grant date.
As permitted under the terms of the EIP, the Compensation Committee as Administrator of the Plan, authorized the withholding of taxes not to exceed the minimum statutory withholding amount, through the surrender of shares of Class A Common Stock issuable upon the vesting or accelerated vesting of Restricted Stock. For those holders who elected to
participate, the Company repurchased a total of 160,563 shares and recorded them as treasury shares at a cost of $4.1 million during the three months ended June 30, 2015.
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 is fully recorded on the condensed consolidated balance sheet. The 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 includes all special dividends declared.
Total compensation expense recorded in conjunction with the payment of the dividend equivalents to EIP option holders for the three months ended June 30, 2015 was $0.1 million. Future compensation expense related to the payment of the dividend equivalents to EIP option holders not yet recognized in the statement of operations is $0.4 million and is expected to be recognized over two years.
As of June 30, 2015 and March 31, 2015, the Company calculated a total recorded and unrecorded stock-based compensation liability of $32.0 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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2015 | | March 31, 2015 |
| EIP Options | | Rollover Options | | Total | | EIP Options | | Rollover Options | | Total |
Current liability (1) | $ | 2,315 |
| | $ | 28,035 |
| | $ | 30,350 |
| | $ | 3,697 |
| | $ | 28,035 |
| | $ | 31,732 |
|
(1) Included in accrued compensation and benefits (Note 6).
As of June 30, 2015, $1.6 million related to EIP options will be recorded as liabilities as the options vest over the next 3.75 years. As of March 31, 2015, there was an unrecorded liability of $4.1 million related to EIP options. There is no unrecorded liability related to Rollover options as of June 30, 2015 or March 31, 2015, as the Rollover options are fully vested.
14. 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).
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 June 30, 2015 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents: | | | | | | | |
Cash and cash equivalents | $ | 24,309 |
| | $ | — |
| | $ | — |
| | $ | 24,309 |
|
Money market funds (1) | — |
| | 127,167 |
| | — |
| | 127,167 |
|
Total cash and cash equivalents | $ | 24,309 |
| | $ | 127,167 |
| | $ | — |
| | $ | 151,476 |
|
Liabilities: | | | | | | | |
Contingent earnout liability (2) | — |
| | — |
| | 4,500 |
| | 4,500 |
|
Total liabilities | $ | — |
| | $ | — |
| | $ | 4,500 |
| | $ | 4,500 |
|
The following table set forth by levels represents the fair value of the Company's cash and cash equivalents 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 June 30, 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 June 30, 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 June 30, 2015:
|
| | | |
| Contingent Earnout Liability |
Balance at March 31, 2015 | 4,500 |
|
Issuances | — |
|
Balance at June 30, 2015 | $ | 4,500 |
|
15. 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 June 30, 2015 were $64,000 and $49,000, respectively. Revenue and cost associated with these related parties for the three months ended June 30, 2014 were $212,000 and $163,000, 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 $47.0 million at June 30, 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 June 30, 2015 and 2014, the Company incurred $250,000 in advisory fees in each period.
16. COMMITMENTS AND CONTINGENCIES
Leases
As a result of the July 2008 acquisition, as described in the Company’s Annual Report, the Company assigned a total of nine leases to Booz & Co, which has subsequently changed its name to Strategy&. The Company remains liable for two leases for facilities located in Chicago and London under the terms of the original leases should Strategy& default on its obligations. The Chicago lease expires in November 2015 and the London lease expires in March 2017. All other leases assigned to Strategy& have expired. There were no events of default under these leases as of June 30, 2015 or March 31, 2015. The maximum potential amount of undiscounted future payments is $9.3 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 June 30, 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 $4.1 million and $5.3 million, respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. At June 30, 2015 and March 31, 2015, approximately $3.0 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 $3.9 million and $4.9 million, respectively, was available to the Company at June 30, 2015 and March 31, 2015.
Government Contracting Matters
For the three months ended June 30, 2015 and 2014, approximately 98% 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. During the three months ended June 30, 2015 the Company negotiated final fiscal 2008 indirect cost rates with the government and as a result, adjusted a portion of its provision for the recovery of allowable expenses based on the outcome of the negotiations. The Company also revised its provision for emerging exposures that may result in future cost disallowances. 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 June 30, 2015 and March 31, 2015, the Company has recorded a liability of approximately $206.6 million and $205.3 million, respectively, for its current best estimate of amounts to 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 June 30, 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, but are still subject to appeal by the plaintiffs. As of June 30, 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.”
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 22,500 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 first 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 and to facilitate the transition of work under our expiring largest ID/IQ contract. Total headcount also grew by over 400 employees as compared to the prior year period.
Revenue increased 2.2% from the three months ended June 30, 2014 to the three months ended June 30, 2015. During the quarter there was an increase in billable expenses of $27.7 million due to an increase in our use of subcontractors and other direct expenses incurred to perform on contracts. Confidence in the government contracting environment led the Company to increase indirect spending over the prior year period which had the effect of increasing revenue on cost reimbursable contracts.
In addition, with the ending of our largest ID/IQ contract in July 2015 there was increased activity to position our work on other contracts. Total headcount also increased over the prior year as the Company hired to meet existing demand for qualified staff as well as implemented efforts to build a bench of staff for anticipated near term opportunities.
Operating income decreased 9.3% to $126.1 million in the three months ended June 30, 2015 from $139.0 million in the three months ended June 30, 2014, which reflects a 120 basis point decrease in operating margin to 9.3% from 10.5% in the comparable period. The decrease in operating income was primarily attributable to the increase in indirect costs as discussed. 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. In addition, operating income was impacted by a net decrease in the Company's provision for the potential recovery of allowable expenses recorded during the three months ended June 30, 2014 without a similar net change for the three months ended June 30, 2015.
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 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) certain stock option-based and other equity-based compensation expenses, (ii) adjustments related to the amortization of intangible assets, and (iii) 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: (i) certain stock option-based and other equity-based compensation expenses, and (ii) 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) certain stock option-based and other equity-based compensation expenses, (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, (iii) adjustments related to the amortization of intangible assets, (iv) amortization or write-off of debt issuance costs and write-off of original issue discount, and (v) 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. |
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 June 30, |
(Amounts in thousands, except share and per share data) | 2015 | | 2014 |
| (Unaudited) |
Adjusted Operating Income |
Operating Income | $ | 126,144 |
| | $ | 139,023 |
|
Amortization of intangible assets (a) | 1,056 |
| | 1,056 |
|
Transaction expenses (b) | — |
| | 2,039 |
|
Adjusted Operating Income | $ | 127,200 |
| | $ | 142,118 |
|
EBITDA & Adjusted EBITDA | | | |
Net income | $ | 64,306 |
| | $ | 71,115 |
|
Income tax expense | 44,280 |
| | 47,934 |
|
Interest and other, net | 17,558 |
| | 19,974 |
|
Depreciation and amortization | 15,117 |
| | 16,232 |
|
EBITDA | 141,261 |
| | 155,255 |
|
Transaction expenses (b) | — |
| | 2,039 |
|
Adjusted EBITDA | $ | 141,261 |
| | $ | 157,294 |
|
Adjusted Net Income | | | |
Net income | $ | 64,306 |
| | $ | 71,115 |
|
Amortization of intangible assets (a) | 1,056 |
| | 1,056 |
|
Transaction expenses (b) | — |
| | 2,039 |
|
Amortization or write-off of debt issuance costs and write-off of original issue discount | 1,294 |
| | 2,660 |
|
Adjustments for tax effect (c) | (940 | ) | | (2,302 | ) |
Adjusted Net Income | $ | 65,716 |
| | $ | 74,568 |
|
Adjusted Diluted Earnings Per Share | | | |
Weighted-average number of diluted shares outstanding | 149,271,321 |
| | 149,627,168 |
|
Adjusted Net Income Per Diluted Share (d) | $ | 0.44 |
| | $ | 0.50 |
|
Free Cash Flow | | | |
Net cash provided by operating activities | $ | 19,096 |
| | $ | 91,726 |
|
Less: Purchases of property and equipment | (13,140 | ) | | (2,652 | ) |
Free Cash Flow | $ | 5,956 |
| | $ | 89,074 |
|
| |
(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. |
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(c) | Reflects tax effect of adjustments at an assumed marginal tax rate of 40%. |
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(d) | Excludes an adjustment of approximately $698,000 and $823,000 of net earnings for the three months ended June 30, 2015 and 2014 respectively, associated with the application of the two-class method for computing diluted earnings per share. |
Factors and Trends Affecting Our Results of Operations
Our results of operations have been, and we expect them to continue to be, affected by the following factors, which may cause our future results of operations to differ from our historical results of operations discussed under “— Results of Operations.”
Business Environment and Key Trends in Our Markets
We believe that the following trends and developments in the U.S. government services industry and our markets may influence our future results of operations:
| |
• | current and continued uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints. The discretionary budget is still constrained by the budget caps defined by the Bipartisan Budget Control Act 2011 and subsequently adjusted by the American Tax Payer Relief Act of 2012. While those caps allow very modest annual growth in the discretionary budget for defense and non-defense departments and agencies, the uncertainty arises in the ability to determine how to allocate the available budget authority and for Congress to pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. It is unclear whether the U.S. government’s fiscal year 2016, which begins on October 1, 2015, will begin with a complete set of appropriations bills to fund the U.S. government or if the fiscal year will begin under a continuing resolution (CR); |
| |
• | 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; |
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• | 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; |
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• | delays in the completion of future U.S. government’s budget processes, which have in the past and could in the future delay procurement of the products, services, and solutions we provide; |
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• | changes in the relative mix of overall U.S. government spending and areas of spending growth, with lower spending on homeland security, intelligence 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; |
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• | 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; |
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• | 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; |
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• | increased audit, review, investigation and general scrutiny by U.S. government agencies of government contractors' performance under U.S. government contracts and compliance with the terms of those contracts and applicable laws; |
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• | the federal focus on refining the definition of “inherently governmental” work, including proposals to limit contractor access to sensitive or classified information and work assignments, which will continue to drive pockets of insourcing in various agencies, particularly in the intelligence market; |
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• | 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; |
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• | 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; |
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• | increased competition from other government contractors and market entrants seeking to take advantage of certain of the trends identified above; |
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• | 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; |
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• | 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 |
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• | 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 Consolidated Appropriations Act, 2014), 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. Under the Budget Control Act, as amended, approximately $90 billion in spending cuts are mandated for government fiscal 2015, and the Department of Defense has estimated its share of these cuts at $45 billion. 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. |
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• | 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. |
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• | 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 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 June 30, |
| 2015 | | 2014 |
Cost-reimbursable (1) | 55% | | 56% |
Time-and-materials | 24% | | 26% |
Fixed-price (2) | 21% | | 18% |
| |
(1) | Includes both cost-plus-fixed-fee and cost-plus-award-fee contracts. |
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(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.
Our largest ID/IQ contract expired on July 8, 2015 with several task orders that extend beyond that date, the latest ending in September 2016. The contract has ended and we are in the process of attempting to transition work from the expired contract to new contracts and task orders under a number of existing multiple award ID/IQ vehicles. The loss, without replacement, of certain of these contract vehicles could have a material adverse effect on our ability to win new business and our operating results.
We generate revenue under our contracts and task orders through our provision of services as both a prime contractor and subcontractor, as well as from the provision of services by subcontractors under contracts and task orders for which we act as the prime contractor. The mix of these types of revenue affects our operating margin. Substantially all of our operating margin is derived from direct consulting staff labor, as the portion of our operating margin derived from fees we earn on services provided by our subcontractors is not significant. We view growth in direct consulting staff labor as the primary driver of earnings growth. Direct consulting staff labor growth is driven by consulting staff headcount growth, after attrition, and total backlog growth.
Our People
Revenue from our contracts is derived from services delivered by consulting staff and, to a lesser extent, from our subcontractors. Our ability to hire, retain, and deploy talent with skills appropriately aligned with client needs is critical to our ability to grow our revenue. We continuously evaluate whether our talent base is properly sized and appropriately compensated, and contains an optimal mix of skills to be cost competitive and meet the rapidly evolving needs of our clients.We seek to achieve that result through recruitment and management of capacity and compensation. As of June 30, 2015 and 2014, we employed approximately 22,500 and 22,100 people, respectively, of which approximately 20,300 and 20,100, respectively, were consulting staff.
Contract Backlog
We define backlog to include the following three components:
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• | 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. |
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• | 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. |
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• | 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 June 30, |
| 2015 | | 2014 |
| (In millions) |
Backlog: | | | |
Funded | $ | 2,388 |
| | $ | 2,347 |
|
Unfunded (1) | 2,493 |
| | 2,569 |
|
Priced options | 4,377 |
| | 4,766 |
|
Total backlog | $ | 9,258 |
| | $ | 9,682 |
|
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(1) | Reflects a reduction by management to the revenue value of orders for services under one 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 decreased by 4.4% from June 30, 2014 to June 30, 2015. Additions to funded backlog during the twelve months ended June 30, 2015 totaled $5.4 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 4.8% of funded backlog as of the end of any of the four fiscal quarters preceding the fiscal quarter ended June 30, 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.
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• | 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. |
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• | Billable Expenses. Billable expenses include direct subcontractor expenses, travel expenses, and other expenses incurred to perform on contracts. |
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• | 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. |
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• | 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. A final accounting standards update is pending. 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 three months ended June 30, 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.
Results of Operations
The following table sets forth items from our condensed consolidated statements of operations for the periods indicated: |
| | | | | | | | | | |
| Three Months Ended June 30, | | Percent |
| 2015 | | 2014 | | Change |
| (Unaudited) | | (Unaudited) | | |
| (In thousands) | | |
Revenue | $ | 1,351,604 |
| | $ | 1,322,297 |
| | 2.2 | % |
Operating costs and expenses: | | | | | |
Cost of revenue | 643,032 |
| | 645,001 |
| | (0.3 | )% |
Billable expenses | 378,650 |
| | 350,972 |
| | 7.9 | % |
General and administrative expenses | 188,661 |
| | 171,069 |
| | 10.3 | % |
Depreciation and amortization | 15,117 |
| | 16,232 |
| | (6.9 | )% |
Total operating costs and expenses | 1,225,460 |
| | 1,183,274 |
| | 3.6 | % |
Operating income | 126,144 |
| | 139,023 |
| | (9.3 | )% |
Interest expense | (17,490 | ) | | (18,864 | ) | | (7.3 | )% |
Other, net | (68 | ) | | (1,110 | ) | | (93.9 | )% |
Income before income taxes | 108,586 |
| | 119,049 |
| | (8.8 | )% |
Income tax expense | 44,280 |
| | 47,934 |
| | (7.6 | )% |
Net income | $ | 64,306 |
| | $ | 71,115 |
| | (9.6 | )% |
Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014
Revenue
Revenue increased to $1,351.6 million from $1,322.3 million, or a 2.2% increase. During the quarter there was an increase in billable expenses of $27.7 million due to an increase in our use of subcontractors and other direct expenses incurred to perform on contracts. Confidence in the government contracting environment led the Company to increase indirect spending over the prior year period which had the effect of increasing revenue on cost reimbursable contracts. Total headcount also increased over the prior year as the Company hired to meet existing demand for qualified staff as well as implemented efforts to build a bench of staff for anticipated near term opportunities. Conversions to funded backlog during the twelve months ended June 30, 2015 totaled $5.4 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 $643.0 million from $645.0 million, or a 0.3% decrease. While total headcount increased by approximately 1.9% there was a decrease in medical insurance expense that more than offset the increase in salary expense, resulting in a decrease in salaries and salary-related benefits of $2.5 million partially offset by an increase in incentive compensation of $1.5 million. The decrease in salaries and salary-related benefits was primarily due to a decrease in medical insurance expense. Cost of revenue as a percentage of revenue was 47.6% and 48.8% for the three months ended June 30, 2015 and 2014, respectively.
Billable Expenses
Billable expenses increased to $378.7 million from $351.0 million, or a 7.9% increase. The overall increase was primarily due to increases in subcontractor-related expenses and other direct expenses of $25.0 million incurred to perform on
contracts. Billable expenses as a percentage of revenue were 28.0% and 26.5% for the three months ended June 30, 2015 and 2014, respectively.
General and Administrative Expenses
General and administrative expenses increased to $188.7 million from $171.1 million, or a 10.3% increase. This increase was primarily due to an increase in salaries and salary-related benefits of $11.4 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 $4.9 million. General and administrative expenses as a percentage of revenue were 14.0% and 12.9% for the three months ended June 30, 2015 and 2014, respectively.
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
Depreciation and Amortization
Depreciation and amortization decreased to $15.1 million from $16.2 million, or a 6.9% decrease, primarily due to a reduction in amortization of intangible assets, as well as a decrease in depreciation expense resulting from the effect of lower capital expenditures in prior years.
Interest Expense
Interest expense decreased to $17.5 million from $18.9 million, or an 7.3% 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 $44.3 million from $47.9 million, or a 7.6% decrease, primarily due to a decrease in pre-tax income, partially offset by an increase in the effective tax rate.
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 $151.5 million and $207.2 million in cash and cash equivalents as of June 30, 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; |
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• | debt service requirements for borrowings under our senior secured loan facilities; and |
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.
The following table summarizes the cash distributions recognized in the condensed consolidated statement of cash flows:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
Recurring dividends (1) | $ | 19,052 |
| | $ | 16,048 |
|
Dividend equivalents (2) | 3,593 |
| | 4,472 |
|
Total distributions | $ | 22,645 |
| | $ | 20,520 |
|
(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) Dividend equivalents are distributions made to option holders equal to the special dividends declared and paid.
On July 29, 2015, the Company announced a regular quarterly cash dividend in the amount of $0.13 per share, payable on August 31, 2015 to stockholders of record on August 10, 2015.
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 June 30, 2015 includes all special dividends declared through June 30, 2015. As of June 30, 2015 and March 31, 2015, the Company calculated a total recorded and unrecorded stock-based compensation liability of $32.0 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 61 as of June 30, 2015 and 59 as of March 31, 2015.
The table below sets forth our net cash flows for the periods presented:
|
| | | | | | | |
| Three Months Ended June 30, |
| 2015 | | 2014 |
| (Unaudited) | | (Unaudited) |
| (In thousands) |
Net cash provided by operating activities | $ | 19,096 |
| | $ | 91,726 |
|
Net cash used in investing activities | (13,140 | ) | | (2,652 | ) |
Net cash used in financing activities | (61,697 | ) | | (29,620 | ) |
Total (decrease) increase in cash and cash equivalents | $ | (55,741 | ) | | $ | 59,454 |
|
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 $19.1 million in the three months ended June 30, 2015 compared to $91.7 million in the prior year period, or a 79.2% decrease. The decrease was primarily due to increased payments in vendor payables and accrued expenses incurred in support of an increase in indirect spending and other costs.
Net Cash from Investing Activities
Net cash used in investing activities was $13.1 million in the three months ended June 30, 2015 compared to $2.7 million in the prior year period, or a 395.5% increase. The increase in net cash used in investing activities was due to increased capital expenditures over the prior year primarily due to leasehold improvements.
Net Cash from Financing Activities
Net cash used in financing activities was $61.7 million in the three months ended June 30, 2015 compared to $29.6 million in the prior year period, or a 108.3% increase. The increase in net cash used in financing activities was primarily due to an increase in repurchases of common stock in the first quarter of fiscal 2016 as compared to the prior year due to a repurchase of 1.2 million shares of our Class A Common Stock for $30.5 million on the open market. The increase in net cash used in financing activities was also due to increased principal payments of approximately $10 million on our debt in accordance with the quarterly principal payment terms of our credit facility.
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). As of June 30, 2015, the Credit Agreement provided 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 $1,616.7 million and $1,626.3 million as of June 30, 2015 and March 31, 2015, respectively. The interest rate in effect for Term Loan A was 2.69% and for Term Loan B was 3.75% as of June 30, 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 June 30, 2015 and March 31, 2015, there were no amounts outstanding under our revolving credit facility of $500.0 million. As of June 30, 2015 and March 31, 2015, the Company was in compliance with all of the Credit Agreement's debt covenants.
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 | $ | 5,574 |
| $ | 1,294 |
| $ | 1,622 |
| $ | 1,463 |
| $ | 1,108 |
| $ | 87 |
| $ | — |
|
Term Loan B | 7,107 |
| 1,217 |
| 1,678 |
| 1,752 |
| 1,830 |
| 630 |
| — |
|
Revolver | 7,265 |
| 1,396 |
| 1,853 |
| 1,853 |
| 1,853 |
| 310 |
| — |
|
Total | $ | 19,946 |
| $ | 3,907 |
| $ | 5,153 |
| $ | 5,068 |
| $ | 4,791 |
| $ | 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 June 30, 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 $4.1 million and $5.3 million, respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. At June 30, 2015 and March 31, 2015, approximately $3.0 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 $3.9 million and $4.9 million, respectively, was available to the Company at June 30, 2015 and March 31, 2015. As of June 30, 2015 and March 31, 2015, we had $497.0 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 June 30, 2015, we were compliant with these covenants.
Capital Structure and Resources
Our stockholders’ equity amounted to $207.7 million as of June 30, 2015, an increase of $21.2 million compared to stockholders’ equity of $186.5 million as of March 31, 2015. The increase is primarily due to net income of $64.3 million in the three months ended June 30, 2015, and stock-based compensation expense of $6.3 million, partially offset by $19.1 million in recurring and special dividend payments and a $34.6 million increase in treasury stock resulting from the re-purchase of 1.2 million shares during the three months ended June 30, 2015.
Off-Balance Sheet Arrangements
As of June 30, 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 three months ended June 30, 2015 and 2014 were $13.1 million and $2.7 million, respectively, and the majority of such capital expenditures related to facilities infrastructure, equipment, and information technology. Expenditures for facilities infrastructure and equipment are 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 16 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 Consolidated Appropriations Act, 2014), 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 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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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the information disclosed in the Quantitative and Qualitative Disclosures about Market Risk section in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 filed with the Securities and Exchange Commission on May 21, 2015.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, or Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Our performance under U.S. government contracts and compliance with the terms of those contracts and applicable laws and regulations are subject to continuous audit, review, and investigation by the U.S. government which may include such investigative techniques as subpoenas or civil investigative demands. Given the nature of our business, these audits, reviews, and investigations may focus, among other areas, on various aspects of procurement integrity, labor time reporting, sensitive and/or classified information access and control, executive compensation, and post government employment restrictions. We are not always aware of our status in such matters, but we are currently aware of certain pending audits and investigations involving labor time reporting, procurement integrity, and classified information access. In addition, from time to time, we are also 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, we do not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on our financial condition and results of operations. As of June 30, 2015 and March 31, 2015, there were 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 The Carlyle Group 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 us and certain of our 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, but are still subject to appeal by the plaintiffs. The aggregate alleged damages sought in these four remaining suits is 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, we do not expect them to have a material adverse effect on our financial condition and results of operations.
There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of 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.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The following table shows the share repurchase activity for each of the three months in the quarter ended June 30, 2015:
|
| | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
April 2015 | | — | | — | | — | | $ 126,540,000 |
May 2015 | | — | | — | | — | | $ 126,540,000 |
June 2015 | | 1,200,000 | | $ 25.41 | | 1,200,000 | | $ 96,023,452 |
Total | | 1,200,000 | | | | 1,200,000 | | |
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(1) | On December 12, 2011, the Board of Directors approved a $30.0 million share repurchase program. On January 27, 2015, the Board of Directors approved an increase to our share repurchase authorization from $30.0 million to up to $180.0 million. A special committee of the Board of Directors was appointed to evaluate market conditions and other relevant factors and initiate repurchases under the program from time to time. The share repurchase program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. |
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Item 3. | Defaults Upon Senior Securities |
None.
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Item 4. | Mine Safety Disclosures |
Not applicable.
None.
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Exhibit Number | | Description |
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2.1 | | Agreement and Plan of Merger, dated as of May 15, 2008, by and among Booz Allen Hamilton Inc., Booz Allen Hamilton Holding Corporation (formerly known as Explorer Holding Corporation), Booz Allen Hamilton Investor Corporation (formerly known as Explorer Investor Corporation), Explorer Merger Sub Corporation and Booz & Company Inc. (Incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1 (File No. 333- 167645)) |
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2.2 | | Spin Off Agreement, dated as of May 15, 2008, by and among Booz Allen Hamilton Inc., Booz & Company Holdings, LLC, Booz & Company Inc., Booz & Company Intermediate I Inc. and Booz & Company Intermediate II Inc. (Incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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2.3 | | Amendment to the Agreement and Plan of Merger and the Spin Off Agreement, dated as of July 30, 2008, by and among Booz Allen Hamilton Inc., Booz Allen Hamilton Investor Corporation (formerly known as Explorer Investor Corporation), Explorer Merger Sub Corporation, Booz & Company Holdings, LLC, Booz & Company Inc., Booz & Company Intermediate I Inc. and Booz & Company Intermediate II Inc. (Incorporated by reference to Exhibit 2.3 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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3.1 | | Third Amended and Restated Certificate of Incorporation of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report for the period ended September 30, 2014 on Form 10-Q (File No. 001-34972)) |
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3.2 | | Second Amended and Restated Bylaws of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report for the period ended December 31, 2010 on Form 10-Q (File No. 001-34972)) |
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4.1 | | Amended and Restated Stockholders Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Periodic Report on Form 8-K filed on January 30, 2015) (File No. 001-34972)) |
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4.2 | | Form of Stock Certificate (Incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.1 | | Management Agreement, by and among Booz Allen Hamilton Holding Corporation (formerly known as Explorer Holding Corporation), Booz Allen Hamilton Inc., and TC Group V US, LLC, dated as of July 31, 2008 (Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.2† | | Second Amended and Restated Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report for the period ended September 30, 2014 on Form 10-Q (File No. 001-34972)) |
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10.3† | | Booz Allen Hamilton Holding Corporation Officers’ Rollover Stock Plan (Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.4† | | Form of Booz Allen Hamilton Holding Corporation Rollover Stock Option Agreement (Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.5† | | Form of Stock Option Agreement under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.6† | | Form of Stock Option Agreement under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.7† | | Form of Subscription Agreement (Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.8† | | Form of Restricted Stock Agreement for Directors under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.9† | | Form of Restricted Stock Agreement for Employees under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.10† | | Amended and Restated Booz Allen Hamilton Holding Corporation Annual Incentive Plan (Incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report for the period ended September 30, 2014 on Form 10-Q (File No. 001-34972)) |
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10.11† | | Booz Allen Hamilton Holding Corporation Officers’ Retirement Plan (Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.12† | | Officer’s Comprehensive Medical and Dental Choice Plans (Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.13† | | Retired Officer’s Comprehensive Medical and Dental Choice Plans (Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.14† | | Group Variable Universal Life Insurance (Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report for the year ended March 31, 2015 on Form 10-K (File No. 001-34972)) |
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10.15† | | Group Personal Excess Liability Insurance (Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.16† | | Annual Performance Bonus Program (Incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.17† | | Form of Booz Allen Hamilton Holding Corporation Director and Officer Indemnification Agreement (Incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-167645)) |
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10.18† | | Form of Stock Option Agreement under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report for the year ended March 31, 2011 on Form 10-K (File No. 001-34972)) |
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10.19† | | Officer Transition Policy (Incorporated by reference to Exhibit 10.24 to the Company’s Annual Report for the year ended March 31, 2011 on Form 10-K (File No. 001-34972)) |
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10.20† | | Form of Stock Option Agreement under the Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report for the period ended December 31, 2011 on Form 10-Q (File No. 001-34972)) |
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10.21 | | Amendment No. 1 to the Amended and Restated Stockholders Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Periodic Report on Form 8-K filed on June 14, 2012 (File No. 001-34972)) |
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10.22 | | Credit Agreement, by and among Booz Allen Hamilton Inc., as the Borrower, the several lenders from time to time parties thereto, Bank of America, N.A., as Administrative Agent, Collateral Agent and Issuing Lender, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse Securities (USA) LLC, Barclays Bank PLC, Citigroup Global Markets Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Morgan Stanley Senior Funding, Inc. and Sumimoto Mitsui Banking Corporation, as Joint Bookrunners, Credit Suisse Securities (USA) LLC, as Syndication Agent, Barclays Bank PLC, Citigroup Global Markets Inc., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Morgan Stanley Senior Funding, Inc., Sumimoto Mitsui Banking Corporation and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Documentation Agents, dated as of July 31, 2012 (Incorporated by reference to Exhibit 10.1 to the Company’s Periodic Report on Form 8-K filed on August 1, 2012 (File No. 001-34972)) |
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10.23 | | Guarantee and Collateral Agreement, among Booz Allen Hamilton Investor Corporation, Booz Allen Hamilton Inc., and the Subsidiary Guarantors party thereto, in favor of Bank of America, N.A., as Collateral Agent, dated as of July 31, 2012 (Incorporated by reference to Exhibit 10.2 to the Company’s Periodic Report on Form 8-K filed on August 1, 2012 (File No. 001-34972)) |
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10.24 | | First Amendment to Credit Agreement, dated as of August 16, 2013, by and among Booz Allen Hamilton Inc., as Borrower, Booz Allen Hamilton Investor Corporation, Booz Allen Hamilton Engineering Holding Co., LLC, Booz Allen Hamilton Engineering Services, LLC, SDI Technology Corporation, ASE, Inc. and , Booz Allen Hamilton International, Inc., as Guarantors, Bank of America, N.A., as Administrative Agent, Collateral Agent and New Refinancing Tranche B Term Lender, and the other Lenders and financial institutions from time to time party thereto (Incorporated by reference to Exhibit 10.1 to the Company’s Periodic Report on Form 8-K filed on August 20, 2013 (File No. 001-34972)) |
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10.25† | | Form of Employment Agreement (Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report for the year ended March 31, 2014 on Form 10-K (File No. 001-34972))
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10.26† | | Form of Restricted Stock Agreement under the Amended and Restated Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report for the year ended March 31, 2014 on Form 10-K (File No. 001-34972)) |
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10.27† | | Form of Restricted Stock Unit Agreement under the Amended and Restated Equity Incentive Plan of Booz Allen Hamilton Holding Corporation (Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report for the year ended March 31, 2014 on Form 10-K (File No. 001-34972)) |
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10.28 | | Second Amendment to Credit Agreement, dated as of May 7, 2014, among Booz Allen Hamilton Inc., as Borrower, Booz Allen Hamilton Investor Corporation, Booz Allen Hamilton Engineering Holding Co., LLC, Booz Allen Hamilton Engineering Services, LLC, SDI Technology Corporation, ASE, Inc. and Booz Allen Hamilton International, Inc., as Guarantors, Bank of America, N.A., as Administrative Agent, Collateral Agent and Issuing Lender, and the other Lenders and financial institutions from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Periodic Report on Form 8-K filed on May 13, 2014 (File No. 001-34972)) |
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10.29† | | Form of Restricted Stock Unit Agreement under the Second Amended and Restated Equity Incentive Plan of Booz Allen Hamilton Holding Corporation* |
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31.1 | | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer* |
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31.2 | | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer* |
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32.1 | | Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)* |
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32.2 | | Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)* |
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101 | | The following materials from Booz Allen Hamilton Holding Corporation’s Quarterly Report on Form 10-Q for the three months ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2015 and March 31, 2015; (ii) Condensed Consolidated Statements of Operations for the three months ended June 30, 2015 and 2014; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2015 and 2014; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2015 and 2014; and (v) Notes to Condensed Consolidated Financial Statements. |
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* | Filed electronically herewith. |
† Management contract or compensatory arrangement.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | Booz Allen Hamilton Holding Corporation |
| | Registrant |
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Date: July 29, 2015 | By: | /s/ Kevin L. Cook |
| | Kevin L. Cook Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
Exhibit1029_FormofRSUAgreement
Restricted Stock Unit Agreement
EQUITY INCENTIVE PLAN OF
BOOZ ALLEN HAMILTON HOLDING CORPORATION
RESTRICTED STOCK UNIT AGREEMENT
GRANT NOTICE
Unless otherwise defined herein, the terms defined in the Second Amended and Restated Equity Incentive Plan of Booz Allen Holding Corporation (the “Plan”) shall have the same defined meanings in this Restricted Stock Unit Agreement, which includes the terms in this Grant Notice (the “Grant Notice”) and Appendix A attached hereto (collectively, the “Agreement”).
You have been granted restricted stock units, subject to the terms and conditions of the Plan and this Agreement in an amount and vesting schedule set forth on the Morgan Stanley Smith Barney Benefit Access system at www.benefitaccess.com.
Your acceptance of this grant indicates your agreement and understanding that the Restricted Stock Units granted herein are subject to all of the terms and conditions contained in the Agreement and the Plan. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF THE PLAN AND APPENDIX A, WHICH CONTAIN THE SPECIFIC TERMS AND CONDITIONS OF THE RESTRICTED STOCK UNITS.
In order to accept this grant, please go to the Morgan Stanley Smith Barney Benefit Access system at www.benefitaccess.com and follow the instructions regarding this grant.
APPENDIX A TO RESTRICTED STOCK UNIT AGREEMENT
1.Grant of Restricted Stock Units. Subject to the terms, conditions, and restrictions set forth in this Agreement (including the Grant Notice and the Morgan Stanley Smith Barney Benefit Access System at www.benefitaccess.com) and in the Plan, the Company hereby evidences and confirms its grant to the Participant, effective as of the Grant Date, of the number of restricted stock units specified in the Grant Notice set forth on the Morgan Stanley Smith Barney Benefit Access System (the “Restricted Stock Units”). This Agreement is subordinate to, and the terms and conditions of the Restricted Stock Units granted hereunder are subject to, the terms and conditions of the Plan, which are incorporated by reference herein. If there is any inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall govern.
2.Vesting of Restricted Stock Units.
a.Vesting. Except as otherwise provided in this Section 2, the Restricted Stock Units shall become vested, in the amount(s), and on the vesting date(s) set forth on the Morgan Stanley Smith Barney Benefit Access System (each, a “Vesting Date”), subject to the continued employment of the Participant by the Company or any Subsidiary thereof through such date.
b.Termination of Employment.
(i)Termination Due to Death. If a Participant’s employment or service terminates due to the Participant’s death, all unvested Restricted Stock Units shall immediately vest.
(ii)Termination Due to Disability. If a Participant’s employment or service terminates due to Disability, all unvested Restricted Stock Units shall not be forfeited upon such termination and shall continue to vest in accordance with the schedule provided in Section 2(a) and (b).
(iii)Termination by Reason of a Company Approved Departure; Termination by the Company Other than for Cause. If a Participant’s employment or service (i) terminates in a Company Approved Departure (as defined below) or (ii) is terminated by the Company for a reason other than for Cause, then, in each case, all unvested Restricted Stock Units shall not be forfeited upon such termination and shall continue to vest in accordance with the schedule as provided on the Morgan Stanley Smith Barney Benefit Access System. “Company Approved Departure” shall mean a termination of employment that the Company (through the members of its senior management), in its sole discretion, determines to be in the best interest of the
Company and the Company’s approval of such termination as a Company Approved Departure is approved or ratified by the Board or the Administrator.
(iv)Termination for Cause. If a Participant’s employment or service terminates for Cause, all unvested Restricted Stock Units shall be immediately forfeited and canceled, effective as of the date of the Participant’s termination of service. In addition, any Restricted Stock Units that vested during the twelve months prior to or any time after the Participant engaged in the conduct that gave rise to the termination for Cause (and any stock or cash issued in settlement of such Restricted Stock Units) shall upon demand by the Administrator be immediately forfeited and disgorged or paid to the Company together with all gains earned or accrued due to the sale of Stock issued in settlement of any Restricted Stock Units.
(v)Termination for Any Other Reason. If a Participant’s employment is terminated for any reason other than death, Disability, Company Approved Departure, Cause or by the Company without Cause, all unvested Restricted Stock Units shall immediately be forfeited.
c.Change in Control. In the event of a Change in Control, then the Restricted Stock Units shall vest or continue and shall have such treatment, as set forth in the Plan.
d.Other Forfeiture Provisions. The Restricted Stock Units shall also be forfeited and subject to disgorgement and/or repayment to the Company in the event the Participant (i) engages in financial or other misconduct (including but not limited to engaging in Competitive Activity) or as required by Applicable Law, as provided in the Plan or (ii) materially violates any restrictive covenant agreement (or any other agreement containing restrictive covenants) that the Participant has entered into with the Company.
e.Committee Discretion. Notwithstanding anything contained in this Agreement to the contrary, subject to Article XIII of the Plan, the Committee, in its sole discretion, may waive forfeiture provisions or accelerate the vesting with respect to any Restricted Stock Units under this Agreement, at such times and upon such terms and conditions as the Committee shall determine; provided, however, that such waiver or acceleration of vesting shall not change the settlement date of the Restricted Stock Units provided in Section 3 of this Agreement.
3.Settlement of Restricted Stock Units. Subject to Section 8(d), the Company shall deliver to the Participant one share of Stock (or the value thereof) in settlement of each outstanding Restricted Stock Unit that has vested as provided in Section 2(a) on the first to occur of (i) the Vesting Date (or within 30 days thereafter) or (ii) a Change in Control in which the Restricted Stock Units do not continue, in each case (A) in Stock by either, (x) issuing one or more certificates evidencing the Stock to the Participant or (y) registering the issuance of the Stock in the name of the Participant through a book entry credit in the records of the Company’s transfer
agent, or (B) in the event of settlement upon a Change in Control, a cash payment equal to the Change in Control Price, multiplied by the number of vested Restricted Stock Units). No fractional shares of Stock shall be issued in settlement of Restricted Stock Units. Fractional Restricted Stock Units shall be settled through a cash payment equal to the Fair Market Value of the Stock on the settlement date.
4.Securities Law Compliance. Notwithstanding any other provision of this Agreement, the Participant may not sell the shares of Stock acquired upon vesting of the Restricted Stock Units unless such shares are registered under the Securities Act of 1933, as amended (the “Securities Act”), or, if such shares are not then so registered, such sale would be exempt from the registration requirements of the Securities Act. The sale of such shares must also comply with other applicable laws and regulations governing the shares and Participant may not sell the shares of Stock if the Company determines that such sale would not be in material compliance with such laws and regulations.
5.Participant’s Rights with Respect to the Restricted Stock Units.
a. Restrictions on Transferability. The Restricted Stock Units granted hereby are not assignable or transferable, in whole or in part, and may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by will or by the laws of descent and distribution to the estate of the Participant upon the Participant’s death; provided that the deceased Participant’s beneficiary or representative of the Participant’s estate shall acknowledge and agree in writing, in a form reasonably acceptable to the Company, to be bound by the provisions of this Agreement and the Plan as if such beneficiary or the estate were the Participant.
b. No Rights as Stockholder. The Participant shall not have any rights as a stockholder including any voting, dividend or other rights or privileges as a stockholder of the Company with respect to any Stock corresponding to the Restricted Stock Units granted hereby unless and until shares of Stock are issued to the Participant in respect thereof.
c. Dividend Equivalents. The Participant shall be credited with Dividend Equivalents in the form of a right to a cash payment when cash dividends are paid on the Stock. Such cash payment shall equal the amount obtained by multiplying the amount of the dividend declared and paid for each share of Stock by the number of Restricted Stock Units held by the Participant on the record date. Any cash amounts credited to the Participant’s account shall be paid to the Participant on the applicable Payment Date for the related cash dividends.
6.Participant’s Representations, Warranties and Covenants.
a. No Conflicts; No Consents. The execution and delivery by Participant of this Agreement, the consummation of the transactions contemplated hereby and the performance of Participant’s obligations hereunder do not and will not (i) materially conflict with or result in a material violation or breach of any term or provision of any Law applicable to either Participant or the Restricted Stock Units or (ii) violate in any material respect, conflict with in any material respect or result in any material breach of, or constitute (with or without notice or lapse of time or both) a material default under, or require either Participant to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, any contract, agreement, instrument, commitment, arrangement or understanding to which Participant is a party.
b. Compliance with Rule 144. If any shares of Stock issued in respect of the Restricted Stock Units are to be disposed of in accordance with Rule 144, the Participant shall transmit to the Company an executed copy of Form 144 (if required by Rule 144) no later than the time such form is required to be transmitted to the Commission for filing and such other documentation as the Company may reasonably require to assure compliance with Rule 144 in connection with such disposition.
c. Participant Status. The Participant represents and warrants that, as of the date hereof, the Participant is an officer, employee, director or Consultant of the Company or a Subsidiary.
7.Adjustment in Capitalization. The number, class or other terms of any outstanding Restricted Stock Units shall be adjusted by the Committee to reflect any stock dividend, stock split or share combination or any recapitalization, business combination, merger, consolidation, spin-off, exchange of shares, liquidation or dissolution of the Company or other similar transaction affecting the Stock in such manner as it determines in its sole discretion.
8.Miscellaneous.
a. Binding Effect; Benefits. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.
b. No Right to Continued Employment. Nothing in the Plan or this Agreement shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate the Participant’s employment at any time, or confer upon the Participant any right to continue in the employ of the Company or any of its Subsidiaries.
c. Interpretation. This Agreement is subject to the terms and conditions of the Plan. In the event of any inconsistency between the provisions of this Agreement and the Plan, the Plan shall govern. The Administrator, acting pursuant to the Plan, as constituted from time to time, shall, except as expressly provided otherwise herein, have the right to determine reasonably and in good faith any questions that arise in connection with this Agreement, and any such determination shall be final, binding and conclusive on all Participants and other individuals claiming any right under the Plan. The failure of the Company or the Participant to insist upon strict performance of any provision hereunder, irrespective of the length of time for which such failure continues, shall not be deemed a waiver of such party’s right to demand strict performance at any time in the future. No consent or waiver, express or implied, to or of any breach or default in the performance of any obligation or provision hereunder shall constitute a consent or waiver to or of any other breach or default in the performance of the same or any other obligation hereunder.
d. Tax Withholding. Whenever any cash or other payment is to be made hereunder or with respect to the Restricted Stock Units, the Company or any Subsidiary shall have the power to withhold an amount (in cash, Restricted Stock Units or in Stock issuable upon settlement of Restricted Stock Units or from other amounts paid to the Participant in cash (whether under the Plan or otherwise)) sufficient to satisfy federal, state, and local withholding tax requirements relating to such transaction; provided, however, that in the event that the Company withholds shares issuable to the Participant (or any portion thereof) to satisfy any applicable withholding taxes, the Company shall only withhold a number of whole shares having a Fair Market Value, determined as of the date of vesting, not in excess of the minimum of tax required to be withheld by law (or such lower amount as may be necessary to avoid liability award accounting). The Company may require the recipient of shares of Stock to remit to the Company an amount in cash sufficient to satisfy the amount of taxes required to be withheld as a condition to the issuance of shares in settlement of the Restricted Stock Units. The Committee may, in its discretion, require the Participant, or permit the Participant to elect, subject to such conditions as the Committee shall impose, to meet such obligations by having the Company withhold or sell the least number of whole shares of Stock having a Fair Market Value sufficient to satisfy all or part of the amount required to be withheld. The Company or such Subsidiary may defer the settlement of Restricted Stock Units until such withholding or other tax requirements are satisfied and if the Participant has not satisfied such withholding or other tax requirements as of the last day of the calendar year in which the Vesting Date occurs, the Restricted Stock Units shall be forfeited. The Participant shall be responsible for all withholding taxes and other tax consequences of this award of Restricted Stock Units.
e. Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without reference to principles of conflict of laws which would give rise to the application of the substantive law of another jurisdiction.
f. Amendment. This Agreement may not be amended, modified or supplemented orally, but only by a written instrument executed by the Participant and the Company.
g. Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by the Company or the Participant without the prior written consent of the other party, provided that the Company may assign all or any portion of its rights or obligations under this Agreement to one or more persons or other entities designated by it.
h. Severability; Blue Pencil. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.
i. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By entering into this Agreement and accepting the Restricted Stock Units evidenced hereby, the Participant acknowledges: (a) that the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (b) that the Award does not create any contractual or other right to receive future grants of Awards; (c) that participation in the Plan is voluntary; (d) that the value of the Restricted Stock Units is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; and (e) that the future value of the Stock is unknown and cannot be predicted with certainty.
j. Employee Data Privacy. By accepting the grant evidenced hereby, the Participant: (a) authorizes the Company and the Participant’s employer, if different, any agent of the Company administering the Plan or providing Plan recordkeeping services, to disclose to the Company or any of its affiliates any information and data the Company requests in order to facilitate the grant of the Award and the administration of the Plan; (b) waives any data privacy rights the Participant may have with respect to such information; and (c) authorizes the Company and its agents to store and transmit such information in electronic form.
k. Consent to Electronic Delivery. By entering into this Agreement and accepting the Restricted Stock Units evidenced hereby, Participant hereby consents to the delivery of information (including, without limitation, information required to be delivered to the Participant pursuant to applicable securities laws) regarding the Company and the Subsidiaries, the Plan, this Agreement and the Restricted Stock Units via Company website, the Morgan Stanley Smith Barney Benefit Access System, email or other electronic delivery.
l. Specified Employee Delay. If the Participant is deemed a "specified employee" within the meaning of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”), as determined by the Committee, at a time when the Participant becomes
eligible for settlement of the Restricted Stock Units upon his or her “separation from service” within the meaning of Section 409A, then to the extent necessary to prevent any accelerated or additional tax under Section 409A, such settlement will be delayed until the earlier of: (a) the date that is six months following the Participant’s termination of service and (b) the Participant's death. Notwithstanding anything to the contrary in this Agreement, if settlement is to occur upon a termination of service other than due to death or Disability and the Participant is a specified employee, to the extent necessary to comply with, and avoid imposition on the Participant of any additional tax or interest imposed under, Section 409A, settlement shall instead occur on the first business day following the six-month anniversary of the Participant’s termination of service (or, if earlier, upon the Participant’s death), or as soon thereafter as practicable (but no later than 90 days thereafter).
m. Section 409A of the Code. This Agreement is intended to be administered in a manner consistent with the requirements, where applicable, of Section 409A. Where reasonably practicable, the Agreement shall be administered in a manner to avoid the imposition on the Participant of immediate tax recognition and additional taxes pursuant to Section 409A. In addition, to the extent permissible under Section 409A, any series of installment payments under this Agreement shall be treated as a right to a series of separate payments. Notwithstanding the foregoing, the Company shall not have any liability to any Person in the event Section 409A applies to any payment hereunder in a manner that results in adverse tax consequences to the Participant or any of the Participant’s beneficiaries.
n. Headings and Captions. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
o. Notices. All notices under this Agreement shall be (i) delivered by hand, (ii) sent by commercial overnight courier service, (iii) sent by registered or certified mail, return receipt requested, and first-class postage prepaid, (iv) sent by e-mail or any other form of electronic transfer or delivery approved by the Administrator, or (v) faxed, in each case to the parties at their respective addresses and facsimile numbers set forth in the records of the Company or at such other address or facsimile number as may be designated in a notice by either party to the other.
p. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.
BAH-2015.06.30-EX31.1
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Horacio Rozanski, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Booz Allen Hamilton Holding Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: July 29, 2015 | By: | /s/ Horacio Rozanski |
| | Horacio Rozanski President and Chief Executive Officer (Principal Executive Officer) |
BAH-2015.06.30-EX31.2
Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Kevin L. Cook, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Booz Allen Hamilton Holding Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: July 29, 2015 | By: | /s/ Kevin L. Cook |
| | Kevin L. Cook Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
BAH-2015.06.30-EX32.1
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the report on Form 10-Q of Booz Allen Hamilton Holding Corporation (the “Company”) for the fiscal quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned President and Chief Executive Officer of the Company certifies, to the best of his knowledge and belief pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: July 29, 2015 | By: | /s/ Horacio Rozanski |
| | Horacio Rozanski President and Chief Executive Officer (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Booz Allen Hamilton Holding Corporation and will be retained by Booz Allen Hamilton Holding Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
BAH-2015.06.30-EX32.2
Exhibit 32.2
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the report on Form 10-Q of Booz Allen Hamilton Holding Corporation (the “Company”) for the fiscal quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Executive Vice President, Chief Financial Officer and Treasurer of the Company certifies, to the best of his knowledge and belief pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Date: July 29, 2015 | By: | /s/ Kevin L. Cook |
| | Kevin L. Cook Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Booz Allen Hamilton Holding Corporation and will be retained by Booz Allen Hamilton Holding Corporation and furnished to the Securities and Exchange Commission or its staff upon request.