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 "Item 6. Selected Financial Data," and our consolidated financial statements and the related notes contained elsewhere in this Annual 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 "Item 1A. Risk Factors" and "Introductory Note - Cautionary Note Regarding Forward-Looking Statements". Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our fiscal year endsMarch 31 and, unless otherwise noted, references to years or fiscal are for fiscal years endedMarch 31 . See "- Results of Operations." Overview We are a leading provider of management and technology consulting, analytics, engineering, digital solutions, mission operations, and cyber services toU.S. and international governments, major corporations, and not-for-profit organizations. Our ability to deliver value to our clients has always been, and continues to be, a product of the strong character, expertise and tremendous passion of our people. Our approximately 27,200 employees work to solve hard problems by making clients' missions their own, combining decades of consulting and domain expertise with functional expertise in areas such as analytics, digital solutions, engineering, and cyber, all fostered by a culture of innovation that extends to all reaches of the company. Through our dedication to our clients' missions, and a commitment to evolving our business to address their needs, we have longstanding relationships with our clients, some more than 75 years. We support critical missions for a diverse base of federal government clients, including nearly all of theU.S. government's cabinet-level departments, as well as increasingly for top-tier commercial and international clients. We support our federal government clients by helping them tackle their most complex and pressing challenges such as protecting soldiers in combat and supporting their families, advancing cyber capabilities, keeping our national infrastructure secure, enabling and enhancing digital services, transforming the healthcare system, and improving government efficiency to achieve better outcomes. We serve commercial clients across industries including aerospace, financial services, health and life sciences, energy, and transportation. Our international clients are primarily inEurope , theMiddle East andSoutheast Asia . 43 -------------------------------------------------------------------------------- Financial and Other Highlights EffectiveApril 1, 2019 , the Company adopted Accounting Standard Codification (ASC) No. 842 Leases (Topic 842), using the modified retrospective transition approach and, as a result, comparative information for the prior fiscal years have not been retrospectively adjusted. See Note 2 to our accompanying consolidated financial statements for more information on the impact of the adoption of this accounting standard. During fiscal 2020, the Company generated its highest annual revenue since its initial public offering and reported increases in headcount and backlog for the year. Revenue increased 11.3% from fiscal 2019 to fiscal 2020 primarily driven by sustained client demand and increased client staff headcount to meet that demand. Revenue also benefited from higher billable expenses as compared to the prior year. Operating income increased 11.1% to$669.2 million in fiscal 2020 from$602.4 million in fiscal 2019, while operating margin was 9.0% in both years. The increase in operating income was primarily driven by the same factors driving revenue growth as well as strong contract performance. These increases in operating income were partially offset by approximately$10.0 million in COVID-19 related expenses, including transitional costs, temporary reductions in billability during the month of March of fiscal 2020, and charges related to certain contracts involving a ready workforce that we believe we may not be able to recover. During fiscal 2019 the Company also benefited from an$11.2 million reduction in expense as a result of an amendment and associated revaluation of our long term disability plan liability. The Company also incurred incremental legal costs during fiscal 2019 and 2020 in response to theU.S. Department of Justice investigation and matters which purport to relate to the investigation, a portion of which was offset by the receipt of insurance reimbursements. We expect to incur additional costs in the future. Based on the information currently available, the Company is not able to reasonably estimate the expected long-term incremental legal costs or amounts that may be reimbursed associated with this investigation and these related matters. We are monitoring the evolving situation related to the COVID-19 outbreak and we continue to work with our stakeholders to assess further possible implications to our business and to take actions in an effort to mitigate adverse consequences. To protect employee health and safety while COVID-19 remains a threat, we plan to continue to deliver a majority of our services to clients via telework for the foreseeable future. In cases where telework options or effectiveness are limited, we are working closely with clients to achieve safe return plans guided by federal, state and local policies and advice from other experts. We are also working closely with our clients, where classified work is concentrated, to retain continuity of service and ensure a ready workforce. We expect to continue to be impacted by the inability of certain employees to perform their contract requirements at their designated work locations due to facility closures or restrictions as a result of COVID-19 and cannot perform such work remotely. While the CARES Act contains a provision that allows federal contractors to seek specified reimbursement for certain employees who are unable to perform their contract requirements due to government restrictions, such provision does not require the government to reimburse a contractor and reimbursements are also subject to limitations and do not extend pastSeptember 30, 2020 . As a result, we believe that some of our costs for certain employees who are unable to perform their contract requirements due to government restrictions will not be reimbursed and we expect that approximately$6 million per month for the fee on certain contracts involving a ready workforce may not be reimbursed or may exceed reimbursements in the near term. Although we cannot currently predict the overall impact of the COVID-19 outbreak, the longer the duration of the event, the more likely it is that it could have an adverse effect on our business, financial position, results of operations and/or cash flows. 44 -------------------------------------------------------------------------------- Non-GAAP Measures We publicly disclose certain non-GAAP financial measurements, including Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted Earnings Per Share, or Adjusted Diluted EPS, because management uses these measures for business planning purposes, including to manage our business against internal projected results of operations and measure our performance. We view Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS as measures of our core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP measures also provide another basis for comparing period to period results by excluding potential differences caused by non-operational and unusual or non-recurring items. In addition, we use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. We also utilize and discuss Free Cash Flow, because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business, and measuring liquidity generally. We present these supplemental measures because we believe that these measures provide investors and securities analysts with important supplemental information with which to evaluate our performance, long-term earnings potential, or liquidity, as applicable, and to enable them to assess our performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting principles generally accepted inthe United States , or GAAP, and when analyzing our performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of revenue to Revenue, Excluding Billable Expenses, operating income to Adjusted Operating Income, net income to Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income and Adjusted Diluted Earnings Per Share, and net cash provided by operating activities to Free Cash Flow, (ii) use Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP and (iii) use Free Cash Flow in addition to, and not as an alternative to, net cash provided by operating activities as a measure of liquidity, each as defined under GAAP. We have defined the aforementioned non-GAAP measures as follows: • "Revenue, Excluding Billable Expenses" represents revenue less billable expenses. We use Revenue, Excluding Billable Expenses because it provides management useful information about the Company's operating performance by excluding the impact of costs that are not indicative of the level of productivity of our consulting staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. • "Adjusted Operating Income" represents operating income before transaction costs, fees, losses, and expenses, including fees associated with debt prepayments and supplemental employee benefits due to the COVID-19 outbreak. We prepare Adjusted Operating Income to eliminate the impact of items we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. • "Adjusted EBITDA" represents net income before income taxes, net interest and other expense and depreciation and amortization and before certain other items, including transaction costs, fees, losses, and expenses, including fees associated with debt prepayments and supplemental employee benefits due to the COVID-19 outbreak. "Adjusted EBITDA Margin on Revenue" is calculated as Adjusted EBITDA divided by revenue. "Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses" is calculated as Adjusted EBITDA divided by Revenue, Excluding Billable Expenses. The Company prepares Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses to eliminate the impact of items it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature. • "Adjusted Net Income" represents net income before: (i)
transaction
costs, fees, losses, and expenses, including fees associated with debt prepayments, (ii) supplemental employee benefits due to the COVID-19 outbreak, (iii) tax credits, net of reserves for
uncertain
tax positions, (iv) amortization or write-off of debt issuance
costs
and write-off of original issue discount, (v) release of
income tax
reserves, and (vi) re- 45
-------------------------------------------------------------------------------- measurement of deferred tax assets and liabilities as a result of the 2017 Tax Act in each case net of the tax effect where appropriate calculated using an assumed effective tax rate. We prepare Adjusted Net Income to eliminate the impact of items, net of tax, we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. We view net income excluding the impact of the re-measurement of the Company's deferred tax assets and liabilities as a result of the 2017 Tax Act as an important indicator of performance consistent with the manner in which management measures and forecasts the Company's performance and the way in which management is incentivized to perform. • "Adjusted Diluted EPS" represents diluted EPS calculated using Adjusted Net Income as opposed to net income. Additionally, Adjusted Diluted EPS does not contemplate any adjustments to net income as required under the two-class method as disclosed in the
footnotes to
the consolidated financial statements. • "Free Cash Flow" represents the net cash generated from
operating
activities less the impact of purchases of property, equipment, and software. 46
--------------------------------------------------------------------------------
Below is a reconciliation of Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow to the most directly comparable financial measure calculated and presented in accordance with GAAP.
Fiscal Year Ended March 31, (Amounts in thousands, except share and per share data) 2020 2019
2018
(Unaudited) Revenue, Excluding Billable Expenses Revenue$ 7,463,841 $ 6,704,037 $ 6,167,600 Billable expenses 2,298,413 2,004,664
1,861,312
Revenue, Excluding Billable Expenses
$ 4,306,288 Adjusted Operating Income Operating Income$ 669,202 $ 602,394 $ 519,723 Transaction expenses (a) 1,069 3,660 - COVID-19 supplemental employee benefits (b) 2,722 - - Adjusted Operating Income$ 672,993 $ 606,054 $ 519,723 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income$ 482,603 $ 418,529 $ 301,692 Income tax (benefit) expense 96,831 96,874
128,344
Interest and other, net (c) 89,768 86,991
89,687
Depreciation and amortization 81,081 68,575 64,756 EBITDA 750,283 670,969 584,479 Transaction expenses (a) 1,069 3,660 - COVID-19 supplemental employee benefits (b) 2,722 - - Adjusted EBITDA$ 754,074 $ 674,629 $ 584,479 Adjusted EBITDA Margin on Revenue 10.1 % 10.1 % 9.5 % Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses 14.6 % 14.4 % 13.6 % Adjusted Net Income Net income$ 482,603 $ 418,529 $ 301,692 Transaction expenses (a) 1,069 3,660 - COVID-19 supplemental employee benefits (b) 2,722 - - Research and development tax credits (d) (38,395 ) - - Release of income tax reserves (e) (68 ) (462 ) - Re-measurement of deferred tax assets/liabilities (f) - (27,908 ) (9,107 ) Amortization or write-off of debt issuance costs and write-off of original issue discount 2,395 2,920 2,655 Adjustments for tax effect (g) (1,608 ) (1,711 ) (969 ) Adjusted Net Income$ 448,718 $ 395,028 $ 294,271 Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 141,238,135 143,156,176
147,750,022
Adjusted Net Income Per Diluted Share (h)
$ 1.99 Free Cash Flow Net cash provided by operating activities$ 551,428 $ 499,610 $ 369,143 Less: Purchases of property and equipment (128,079 ) (94,681 ) (78,437 ) Free Cash Flow$ 423,349 $ 404,929 $ 290,706 47
--------------------------------------------------------------------------------
(a) Fiscal 2020 and fiscal 2019 reflect debt refinancing costs incurred in connection with the refinancing transactions consummated onNovember 26, 2019 andJuly 23, 2018 , respectively.
(b) Represents the supplemental contribution to employees' dependent care FSA
accounts in response to the COVID-19 outbreak.
(c) Reflects the combination of Interest expense and Other income (expense),
net from the consolidated statement of operations. (d) Reflects tax credits, net of reserves for uncertain tax positions, recognized in fiscal 2020 related to an increase in research and development credits available for fiscal years 2016 to 2020.
(e) Release of pre-acquisition income tax reserves assumed by the Company in
connection with the Carlyle Acquisition. (f) Reflects the adjustments made to the provisional income tax benefit
associated with the re-measurement of the Company's deferred tax assets
and liabilities as a result of the 2017 Tax Act. (g) With the enactment of the 2017 Tax Act, the fiscal 2018 adjustment is reflected using assumed effective tax rate of 36.5%, whereas fiscal 2019 and 2020 adjustments are reflected using an effective tax rate of 26%.
These rates approximate the blended federal and state tax rates for fiscal
2018, 2019 and 2020, respectively, and consistently exclude the impact of
other tax credits and incentive benefits realized. (h) Excludes an adjustment of approximately$1.6 million ,$1.8 million , and$1.9 million of net earnings for fiscal 2020, 2019, and 2018,
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 theU.S. government services industry and our markets may influence our future results of operations: • uncertainty around the timing, extent, nature and effect of Congressional and otherU.S. government actions to approve
funding
of theU.S. government, address budgetary constraints,
including
caps on the discretionary budget for defense and non-defense departments and agencies, as established by the Bipartisan Budget Control Act of 2011 ("BCA") and subsequently adjusted by the American Tax Payer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget Act of 2019 and address the ability ofCongress to determine how to allocate the available budget authority and pass appropriations bills to fund bothU.S. government departments and agencies that are, and those that are not, subject to the caps; • budget deficits and the growingU.S. national debt
increasing
pressure on theU.S. government to reduce federal spending
across
all federal agencies together with associated uncertainty
about the
size and timing of those reductions; • cost-cutting and efficiency initiatives, current and future budget restrictions, continued implementation of Congressionally
mandated
automatic spending cuts and other efforts to reduceU.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 approve funding of theU.S. government and to craft a
long-term
agreement on theU.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 theU.S. government in the period before the end of theU.S. government's fiscal year onSeptember 30 , delay requests for new proposals and contract awards, rely on short-term
extensions and
funding of current contracts, or reduce staffing levels and hours of operation; • delays in the completion of futureU.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; 48
-------------------------------------------------------------------------------- • changes in the relative mix of overallU.S. government
spending and
areas of spending growth, with lower spending on homeland
security,
intelligence, defense-related programs as certain overseas operations end, and continued increased spending on
cybersecurity,
Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), advanced analytics, technology integration and healthcare; • the extent, nature and effect of the COVID-19 outbreak, including the impact on federal budgets, current and pending
procurements,
supply chains, demand for services, deployment and
productivity of
our employees and the economic and societal impact of a pandemic; • legislative and regulatory changes to limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of interim rules adopted by federal agencies pursuant to the Bipartisan Budget Act of 2013, which substantially further reduce the amount of allowable executive compensation under these contracts and extend these
limitations to a
larger segment of our executives and our entire contract base; • efforts by theU.S. government to address organizational conflicts of interest and related issues and the impact of those efforts on us and our competitors; • increased audit, review, investigation and general scrutiny byU.S. government agencies of government contractors' performance underU.S. government contracts and compliance with the terms of those contracts and applicable laws; • the federal focus on refining the definition of "inherently governmental" work, including proposals to limit contractor access to sensitive or classified information and work assignments, which will continue to drive pockets of insourcing in various agencies, particularly in the intelligence market; • negative publicity and increased scrutiny of government
contractors
in general, including us, relating toU.S. government
expenditures
for contractor services and incidents involving the
mishandling of
sensitive or classified information; •U.S. government agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts; • increased competition from other government contractors and market entrants seeking to take advantage of certain of the trends identified above, and industry trend towards consolidation, which may result in the emergence of companies that are better able to compete against us; • cost-cutting and efficiency and effectiveness efforts byU.S. civilian agencies with a focus on increased use of performance measurement, "program integrity" efforts to reduce waste, fraud and abuse in entitlement programs, and renewed focus on improving procurement practices for and interagency use of IT services, including through the use of cloud based options and data center consolidation; • restrictions by theU.S. government on the ability of federal agencies to use lead system integrators, in response to cost, schedule and performance problems with large defense
acquisition
programs where contractors were performing the lead system integrator role; • increasingly complex requirements of the Department of
Defense and
theU.S. intelligence community, including cybersecurity, managing federal health care cost growth and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare; and • increasing small business regulations across theDepartment of Defense and civilian agency clients continue to gain traction, agencies are required to meet high small business set aside targets, and large business prime contractors are required to
subcontract in
accordance with considerable small business participation goals necessary for contract award. Sources of Revenue Substantially all of our revenue is derived from services provided under contracts and task orders with theU.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 variousU.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 theU.S. government or any of our significantU.S. government clients could have a material adverse effect on our business and results of operations. In particular, theDepartment of Defense is one of our significant clients, and the BCA (as amended by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, 49 -------------------------------------------------------------------------------- the Bipartisan Budget Act of 2015, and the Bipartisan Act of 2018, and the Bipartisan Act of 2019), provides for automatic spending cuts (referred to as sequestration) totaling approximately$1.2 trillion between 2013 and 2021, including an estimated$500 billion in federal defense spending cuts over this time period. The Bipartisan Budget Act of 2019 raised BCA spending caps on defense spending by$90 billion for fiscal 2020, and$81 billion for fiscal 2021. For non-defense funding, the Bipartisan Budget Act of 2019 raised BCA spending caps by$78 billion for fiscal 2020 and$72 billion for government fiscal 2021. While the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget Act of 2019 all negated and raised budget limits put in place by the BCA for both defense and non-defense spending, there can be no assurance that any spending cuts implemented in the future would be similarly negated. This could result in a commensurate reduction in the amount of services that we are contracted to provide to theDepartment of Defense and could have a material adverse effect on our business and results of operations, and given the uncertainty of when and how these automatic reductions required by the BCA may return and/or be applied, we are unable to predict the nature or magnitude of the potential adverse effect. Contract Types We generate revenue under the following three basic types of contracts: • Cost-Reimbursable Contracts. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract, up to a ceiling based on the amount that has been funded, plus a fixed fee or award fee. As we increase or decrease our spending on allowable costs, our revenue generated on cost-reimbursable contracts will increase, up to the ceiling and funded amounts, or decrease, respectively. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-fixed-fee and cost-plus-award-fee, both of which reimburse allowable costs and provide for a fee. The fee under each type of cost-reimbursable contract is generally payable upon completion of services in accordance with the terms of the contract. Cost-plus-fixed-fee contracts offer no opportunity for payment beyond the fixed fee. Cost-plus-award-fee contracts also provide for an award fee that varies within specified limits based upon the client's assessment of our performance against a predetermined set of criteria, such as targets for factors like cost, quality, schedule, and performance. • Time-and-Materials Contracts. Under contracts in this category, we are paid a fixed hourly rate for each direct labor hour expended, and we are reimbursed for billable material costs and billable out-of-pocket expenses inclusive of allocable indirect costs. We assume the financial risk on time-and-materials contracts because our costs of performance may exceed negotiated hourly rates. To the extent our actual direct labor, including allocated indirect costs, and associated billable expenses decrease or increase in relation to the fixed hourly billing rates provided in the contract, we will generate more or less profit, respectively, or could incur a loss. • Fixed-Price Contracts. Under a fixed-price contract, we agree to perform the specified work for a predetermined price. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. Some fixed-price contracts have a performance-based component, pursuant to which we can earn incentive payments or incur financial penalties based on our performance. Fixed-price level of effort contracts require us to provide a specified level of effort (i.e., labor hours), over a stated period of time, for a fixed price. The amount of risk and potential reward varies under each type of contract. Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category. In addition, we are typically reimbursed for other contract direct costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-reimbursable contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a predetermined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings but generally involve greater financial risk because we bear the impact of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period's profitability. Changes in contract type as a result of re-competes and new business could influence the percentage/mix in unanticipated ways. 50 -------------------------------------------------------------------------------- The table below presents the percentage of total revenue for each type of contract: Fiscal Year Ended March 31, 2020 2019 2018 Cost-reimbursable 57% 53% 51% Time-and-materials 23% 24% 25% Fixed-price 20% 23% 24% Note: Upon the adoption of Topic 606 in fiscal 2019, the contract type descriptions noted above have been aligned to the Revenue by Contract Type descriptions found in Note 3 to our accompanying consolidated financial statements. Contract Diversity and Revenue Mix We provide services to our clients through a large number of single award contracts, contract vehicles, and multiple award contract vehicles. Most of our revenue is generated under indefinite delivery/indefinite quantity, or IDIQ, contract vehicles, which include multiple award government wide acquisition contract vehicles, or GWACs, and General Services Administration Multiple Award Schedule Contracts, or GSA schedules, and certain single award contracts. GWACs and GSA schedules are available to allU.S. government agencies. Any number of contractors typically competes under multiple award IDIQ contract vehicles for task orders to provide particular services, and we earn revenue under these contract vehicles only to the extent that we are successful in the bidding process for task orders. No single task order under any IDIQ contract represented more than 2.3% of our revenue in fiscal 2020. No single definite contract accounted for more than 2.9% of our revenue in fiscal 2020. 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. For fiscal 2020, 2019, and 2018, 92%, 92%, and 91%, respectively, of our revenue was generated by contracts and task orders for which we served as a prime contractor; 8%, 8%, and 9%, respectively, of our revenue was generated by contracts and task orders for which we served as a subcontractor; and approximately 24%, 24%, and 25%, respectively, of our revenue was generated by services provided by our subcontractors. 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 ofMarch 31, 2020 , 2019, and 2018, we employed approximately 27,200, 26,100, and 24,600 people, respectively, of which approximately 24,200, 23,400, and 22,100, respectively, were consulting staff. Contract Backlog We define backlog to include the following three components: • Funded Backlog. Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts. • Unfunded Backlog. Unfunded backlog represents the revenue
value of
orders (including optional orders) for services under existing contracts for which funding has not been appropriated or
otherwise
authorized. • Priced Options. Priced contract options represent 100% of the revenue value of all future contract option periods under
existing
contracts that may be exercised at our clients' option and for which funding has not been appropriated or otherwise authorized. Our backlog does not include contracts that have been awarded but are currently under protest and also does not include any task orders under IDIQ contracts, except to the extent that task orders have been awarded to us under those contracts. 51 --------------------------------------------------------------------------------
The following table summarizes the value of our contract backlog at the respective dates presented:
Fiscal Year Ended March 31, 2020 2019 2018 (In millions) Backlog: Funded$ 3,415 $ 3,436 $ 2,685 Unfunded 4,518 3,687 4,161 Priced options 12,796 12,198 9,174 Total backlog$ 20,729 $ 19,321 $ 16,020 Our total backlog consists of remaining performance obligations, certain orders under contracts for which the period of performance has expired, and unexercised option period and other unexercised optional orders. As ofMarch 31, 2020 andMarch 31, 2019 , the Company had$6.3 billion and$5.8 billion of remaining performance obligations, respectively and we expect to recognize more than half of the remaining performance obligations as ofMarch 31, 2020 as revenue over the next 12 months, and approximately three quarters over the next 24 months. The remainder is expected to be recognized thereafter. However, given the uncertainties discussed below, as well as the risks described in "Item 1A. Risk Factors", we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all. Our backlog includes orders under contracts that in some cases extend for several years.The U.S. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until theU.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract. We view growth in total backlog and consulting staff headcount as the two key measures of our potential business growth. Growing and deploying consulting staff is the primary means by which we are able to achieve profitable revenue growth. To the extent that we are able to hire additional consulting staff and deploy them against funded backlog, we generally recognize increased revenue. Total backlog increased by 7.3% fromMarch 31, 2019 toMarch 31, 2020 and increased by 20.6% fromMarch 31, 2018 toMarch 31, 2019 . Additions to funded backlog during fiscal 2020 and 2019 both totaled$7.4 billion . We report internally on our backlog on a monthly basis and review backlog upon occurrence of certain events to determine if any adjustments are necessary. We cannot predict with any certainty the portion of our backlog that we expect to recognize as revenue in any future period and we cannot guarantee that we will recognize any revenue from our backlog. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all are: program schedule changes, contract modifications, and our ability to assimilate and deploy new consulting staff against funded backlog; cost-cutting initiatives and other efforts to reduceU.S. government spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of theU.S. government's budgeting process and the use of continuing resolutions by theU.S. government to fund its operations. The amount of our funded backlog is also subject to change, due to, among other factors: changes in congressional appropriations that reflect changes inU.S. government policies or priorities resulting from various military, political, economic or international developments; changes in the use ofU.S. government contracting vehicles, and the provisions therein used to procure our services and adjustments to the scope of services, or cancellation of contracts, by theU.S. government at any time. In our recent experience, none of the following additional risks have had a material negative effect on our ability to realize revenue from our funded backlog: the unilateral right of theU.S. government to cancel multi-year contracts and related orders or to terminate existing contracts for convenience or default; in the case of unfunded backlog, the potential that funding will not be made available; and, in the case of priced options, the risk that our clients will not exercise their options. In addition, contract backlog includes orders under contracts for which the period of performance has expired, and we may not recognize revenue on the funded backlog that includes such orders due to, among other reasons, the tardy submission of invoices by our subcontractors and the expiration of the relevant appropriated funding in accordance with a predetermined expiration date such as the end of theU.S. government's fiscal year. The revenue value of orders included in contract backlog that has not been recognized as revenue due to period of performance expirations has not exceeded approximately 5.2% of total backlog as ofMarch 31, 2020 and any of the four preceding fiscal quarters. We expect to recognize revenue from a substantial portion of funded backlog as ofMarch 31, 2020 within the next twelve months. However, given the uncertainties discussed above, as well as the risks described in "Item 1A. Risk Factors", we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all. 52 -------------------------------------------------------------------------------- Operating Costs and Expenses Costs associated with compensation and related expenses for our people are the most significant component of our operating costs and expenses. The principal factors that affect our costs are additional people as we grow our business and are awarded new contracts, task orders, and additional work under our existing contracts, and the hiring of people with specific skill sets and security clearances as required by our additional work. Our most significant operating costs and expenses are described below. • Cost of Revenue. Cost of revenue includes direct labor, related employee benefits, and overhead. Overhead consists of indirect costs, including indirect labor relating to infrastructure, management and administration, and other expenses. • Billable Expenses. Billable expenses include direct
subcontractor
expenses, travel expenses, and other expenses incurred to perform on contracts. • General and Administrative Expenses. General and
administrative
expenses include indirect labor of executive management and corporate administrative functions, marketing and bid and proposal costs, and other discretionary spending. • Depreciation and Amortization. Depreciation and amortization includes the depreciation of computers, leasehold
improvements,
furniture and other equipment, and the amortization of internally developed software, as well as third-party software that we use internally, and of identifiable long-lived intangible assets over their estimated useful lives. Seasonality TheU.S. government's fiscal year ends onSeptember 30 of each year. While not certain, it is not uncommon forU.S. government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. In addition, we also have historically experienced higher bid and proposal costs in the months leading up to theU.S. government's fiscal year end as we pursue new contract opportunities being awarded shortly after theU.S. government fiscal year end as new opportunities are expected to have funding appropriated in theU.S. government's subsequent fiscal year. We may continue to experience this seasonality in future periods, and our future periods may be affected by it. While not certain, changes in the government's funding and spending patterns have altered historical seasonality trends, supporting our approach to managing the business on an annual basis. Seasonality is just one of a number of factors, many of which are outside of our control, which may affect our results in any period. See "Item 1A. Risk Factors." Critical Accounting Estimates and Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements as well as the reported amounts of revenue and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies, including the critical policies and practices listed below, are more fully described and discussed in the notes to the consolidated financial statements. We consider the following accounting policies to be critical to an understanding of our financial condition and results of operations because these policies require the most difficult, subjective or complex judgments on the part of our management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Revenue Recognition and Cost Estimation Our revenues from contracts with customers (clients) are derived from offerings that include consulting, analytics, digital solutions, engineering, and cyber services, substantially with theU.S. government and its agencies, and to a lesser extent, subcontractors. We also serve foreign governments, as well as domestic and international commercial clients. We perform under various types of contracts, which include cost-reimbursable-plus-fee contracts, time-and-material contracts, and fixed-price contracts. We consider a contract with a customer to exist under Topic 606 when there is approval and commitment from us and the customer, the rights of the parties and payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. We will also consider whether two or more contracts entered into with the same 53 -------------------------------------------------------------------------------- customer should be combined and accounted for as a single contract. Furthermore, in certain transactions with commercial clients and with theU.S. government, we may commence providing services prior to receiving a formal approval from the customer. In these situations, we will consider the factors noted above, the risks associated with commencing the work, and legal enforceability in determining whether a contract with the customer exists under Topic 606. Customer contracts are often modified to change the scope, price, specifications or other terms within the existing arrangement. Contract modifications are evaluated by management to determine whether the modification should be accounted for as part of the original performance obligation(s) or as a separate contract. If the modification adds distinct goods or services and increases the contract value proportionate to the stand-alone selling price of the additional goods or services, it will be accounted for as a separate contract. Generally, our contract modifications do not include goods or services which are distinct, and therefore are accounted for as part of the original performance obligation(s) with any impact on transaction price or estimated costs at completion being recorded as through a cumulative catch-up adjustment to revenue. We evaluate each service deliverable contracted with the customer to determine whether it represents promises to transfer distinct goods or services. Under Topic 606, these are referred to as performance obligations. One or more service deliverables often represent a single performance obligation. This evaluation requires significant judgment and the impact of combining or separating performance obligations may change the time over which revenue from the contract is recognized. Our contracts generally provide a set of integrated or highly interrelated tasks or services and are therefore accounted for as a single performance obligation. However, in cases where we provide more than one distinct good or service within a customer contract, the contract is separated into individual performance obligations which are accounted for discretely. Contracts with theU.S. government are subject to the FAR and are priced based on estimated or actual costs of providing the goods or services. We derive a majority of our revenue from contracts awarded through a competitive bidding process. Pricing for non-U.S. government agencies and commercial customers is based on discrete negotiations with each customer. Certain of our contracts contain award fees, incentive fees or other provisions that may increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and may be based upon customer discretion. Management estimates variable consideration as the most likely amount that we expect to achieve based on our assessment of the variable fee provisions within the contract, prior experience with similar contracts or clients, and management's evaluation of the performance on such contracts. We may perform work under a contract that has not been fully funded if the work has been authorized by the management and the customer to proceed. We evaluate unfunded amounts as variable consideration in estimating the transaction price. We include the estimated variable consideration in our transaction price to the extent that it is probable that a significant reversal of revenue will not occur upon the ultimate settlement of the variable fee provision. In the limited number of situations where our contracts with customers contain more than one performance obligation, we allocate the transaction price of a contract between the performance obligations in the proportion to their respective stand-alone selling prices. We generally estimate the stand-alone selling price of performance obligations based on an expected cost-plus margin approach as allowed under Topic 606. OurU.S. government contracts generally contain FAR provisions that enable the customer to terminate a contract for default or for the convenience of theU.S. government. We recognize revenue for each performance obligation identified within our customer contracts when, or as, the performance obligation is satisfied by transferring the promised goods or services. Revenue may either be recognized over time or at a point in time. We generally recognize revenue over time as our contracts typically involve a continuous transfer of control to the customer. A continuous transfer of control under contracts with theU.S. government and its agencies is evidenced by clauses which require us to be paid for costs incurred plus a reasonable margin in the event that the customer unilaterally terminates the contract for convenience. For contracts where we recognize revenue over time, a contract cost-based input method is generally used to measure progress towards satisfaction of the underlying performance obligation(s). Contract costs include direct costs such as materials, labor and subcontract costs, as well as indirect costs identifiable with, or allocable to, a specific contract that are expensed as incurred. We do not incur material incremental costs to acquire or fulfill contracts. Under a contract cost-based input method, revenue is recognized based on the proportion of contract costs incurred to the total estimated costs expected to be incurred upon completion of the underlying performance obligation. We generally include both funded and unfunded portions of customer contracts in this estimation process. For interim financial reporting periods, contract revenue attributable to indirect costs is recognized based upon agreed-upon annual forward-pricing rates established with theU.S. government at the start of each fiscal year. Forward pricing rates are estimated and agreed upon between us and theU.S. government and represent indirect contract costs required to execute and administer contract obligations. The impact of any agreed-upon changes, or changes in the estimated annual forward-pricing rates, will be recorded in the interim financial reporting period when such changes are identified. This change relates to the interim financial reporting period differences between the actual indirect costs incurred and allocated to customer contracts compared to the estimated amounts allocated to contracts using the estimated annual forward-pricing rates established with theU.S. government. 54 -------------------------------------------------------------------------------- On certain contracts, principally time-and-materials and cost-reimbursable-plus-fee contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred. However, we did not elect to use the practical expedient which would allow us to exclude contracts recognized using the right-to-invoice practical expedient from the remaining performance obligations disclosed below. Additionally, for stand-ready performance obligations to provide services under fixed-price contracts, revenue is recognized over time using a straight-line measure of progress as the control of the services is provided to the customer ratably over the term of the contract. If a contract does not meet the criteria for recognition of revenue over time, we recognize revenue at the point in time when control of the good or service is transferred to the customer. Determining a measure of progress towards the satisfaction of performance obligations requires management to make judgments that may affect the timing of revenue recognition. Many of our contracts recognize revenue under a contract cost-based input method and require an Estimate-at-Completion (EAC) process, which management uses to review and monitor the progress towards the completion of our performance obligations. Under this process, management considers various inputs and assumptions related to the EAC, including, but not limited to, progress towards completion, labor costs and productivity, material and subcontractor costs, and identified risks. Estimating the total cost at completion of performance obligations is subjective and requires management to make assumptions about future activity and cost drivers under the contract. Changes in these estimates can occur for a variety of reasons and, if significant, may impact the profitability of our contracts. Changes in estimates related to contracts accounted for under the EAC process are recognized in the period when such changes are made on a cumulative catch-up basis. If the estimate of contract profitability indicates an anticipated loss on a contract, we recognize the total loss at the time it is identified. For fiscal 2019, 2018 and 2017, the aggregate impact of adjustments in contract estimates was not material. Remaining performance obligations represent the transaction price of exercised contracts for which work has not yet been performed, irrespective of whether funding has or has not been authorized and appropriated as of the date of exercise. Remaining performance obligations do not include negotiated but unexercised options or the unfunded value of expired contracts. Business Combinations The accounting for the Company's business combinations consists of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed based on their fair values, with the excess recorded as goodwill. Certain fair value measurements include inputs that are unobservable, requiring management to make judgments and estimates that can be affected by contract performance and other factors that may cause final amounts to differ materially from original estimates. We have up to one year from the acquisition date to use additional information obtained to adjust the fair value of the acquired assets and liabilities which may result in changes to the recorded values with an offsetting adjustment to goodwill.Goodwill and Intangible Assets Impairment We test goodwill and trade name for impairment at least annually as ofJanuary 1 of each year and more frequently if interim indicators of impairment exist. We perform our impairment testing of goodwill at the reporting level. As our business is highly integrated and all of our components have similar economic characteristics, we conclude that we have one reporting unit at the consolidated entity level, which is the same as our single operating segment. We test goodwill for impairment using the quantitative method (primarily based on market capitalization). We test the trade name for impairment using the relief from royalty method that requires management to make significant amount of judgments and estimates in the valuation. We do not consider goodwill, trade name, or any other amortizable intangible assets at risk of impairment. Amortizable intangible assets are tested for impairment when an event occurs or circumstances change indicating that the carrying amount of the asset may not be recoverable. A significant amount of management judgment is required to determine if an event representing an impairment indicator has occurred during the year, including but not limited to: a decline in forecasted cash flows; a sustained, material decline in the stock price and market capitalization; a significant adverse change in the business climate or economy; or unanticipated competition. An adverse change in any of these factors could have a significant impact on the recoverability of other intangible assets. During the fiscal years endedMarch 31, 2020 ,March 31, 2019 , andMarch 31, 2018 , the Company did not record any impairment of goodwill and intangible assets. Accounting for Income Taxes Provisions for federal, state, and foreign income taxes are calculated from the income reported on our consolidated financial statements based on current tax law and also include the cumulative effect of any changes in tax rates from those previously used in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for purposes of preparing consolidated financial statements than for income tax purposes. 55 -------------------------------------------------------------------------------- Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for uncertain tax positions when, despite the belief that our tax positions are supportable, there remains uncertainty in a tax position taken in our previously filed income tax returns. For tax positions where it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of reserves, our effective tax rate in a given consolidated financial statement period may be materially impacted. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the value of these assets. If we are unable to generate sufficient future taxable income in these jurisdictions, a valuation allowance is recorded when it is more likely than not that the value of the deferred tax assets is not realizable. Recent Accounting Pronouncements See Note 2 to our accompanying audited consolidated financial statements for information related to our adoption of new accounting standards and for information on our anticipated adoption of recently issued accounting standards. Segment Reporting We report operating results and financial data in one operating and reportable segment. We manage our business as a single profit center in order to promote collaboration, provide comprehensive functional service offerings across our entire client base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding served markets and functional capabilities is discussed for purposes of promoting an understanding of our complex business, we manage our business and allocate resources at the consolidated level of a single operating segment. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with GAAP, and the rules and regulations of theU.S. Securities and Exchange Commission , orSEC . All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements and notes of the Company include its subsidiaries, and the joint ventures and partnerships over which the Company has a controlling financial interest. The Company uses the equity method to account for investments in entities that it does not control if it is otherwise able to exert significant influence over the entities' operating and financial policies. The Company's fiscal year ends onMarch 31 and unless otherwise noted, references to fiscal year or fiscal are for fiscal years endedMarch 31 . The accompanying consolidated financial statements present the financial position of the Company as ofMarch 31, 2020 and 2019 and the Company's results of operations for fiscal 2020, fiscal 2019, and fiscal 2018. EffectiveApril 1, 2019 , the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), using the modified retrospective transition approach and, as a result, comparative information for the prior fiscal years have not been retrospectively adjusted. Certain amounts reported in the Company's prior year consolidated financial statements have been reclassified to conform to the current year presentation. 56 --------------------------------------------------------------------------------
Results of Operations The following table sets forth items from our consolidated statements of operations for the periods indicated:
Fiscal Year Ended March 31, Fiscal 2020 Fiscal 2019 Versus Versus 2020 2019 2018 Fiscal 2019 Fiscal 2018 (In thousands) Revenue$ 7,463,841 $ 6,704,037 $ 6,167,600 11.3 % 8.7 % Operating costs and expenses: Cost of revenue 3,379,180 3,100,466 2,866,268 9.0 % 8.2 % Billable expenses 2,298,413 2,004,664 1,861,312 14.7 % 7.7 % General and administrative expenses 1,035,965 927,938 855,541 11.6 % 8.5 % Depreciation and amortization 81,081 68,575 64,756 18.2 % 5.9 % Total operating costs and expenses 6,794,639 6,101,643 5,647,877 11.4 % 8.0 % Operating income 669,202 602,394 519,723 11.1 % 15.9 % Interest expense (96,960 ) (89,517 ) (82,269 ) 8.3 % 8.8 % Other income (expense), net 7,192 2,526 (7,418 ) NM NM
Income before income taxes 579,434 515,403 430,036
12.4 % 19.9 % Income tax expense 96,831 96,874 128,344 - % (24.5 )% Net income$ 482,603 $ 418,529 $ 301,692 15.3 % 38.7 % NM - Not meaningful Fiscal 2020 Compared to Fiscal 2019 Revenue Revenue increased to$7,463.8 million from$6,704.0 million , or an 11.3% increase, primarily due to sustained client demand and increased client staff headcount to meet that demand. Revenue growth was also driven by an increase in billable expenses, including subcontractors and direct expenses on behalf of our clients. Cost of Revenue Cost of revenue increased to$3,379.2 million from$3,100.5 million , or a 9.0% increase. This increase was primarily due to an increase in salaries and salary-related benefits of$250.4 million , and an increase in employer retirement plan contributions of$12.7 million . The increase in salaries and salary-related benefits was driven by an increase in headcount growth and annual base salary increases. Cost of revenue as a percentage of revenue was 45.3% and 46.2% in fiscal 2020 and fiscal 2019, respectively. Billable Expenses Billable expenses increased to$2,298.4 million from$2,004.7 million , or a 14.7% increase. The overall increase was primarily attributable to an increase in use of subcontractors in fiscal 2020 driven by client demand. In addition, contracts which require the Company to incur direct expenses on behalf of clients increased over the prior year. Billable expenses as a percentage of revenue were 30.8% and 29.9% for fiscal 2020 and fiscal 2019, respectively. General and Administrative Expenses General and administrative expenses increased to$1,036.0 million from$927.9 million , or an 11.6% increase. The increase was primarily due to salaries and salary-related benefits of$52.0 million , driven by headcount growth as well as annual base salary increases. In addition, other business related expenses and professional fees increased$53.0 million . General and administrative expenses as a percentage of revenue were 13.9% and 13.8% for fiscal 2020 and fiscal 2019, respectively. Depreciation and Amortization Expense Depreciation and amortization expense increased to$81.1 million from$68.6 million , or an 18.2% increase, primarily due to increases in depreciation expense resulting from the effects of higher capital expenditures in fiscal 2019. 57 -------------------------------------------------------------------------------- Interest Expense Interest expense increased to$97.0 million from$89.5 million , or an 8.3% increase, primarily as a result of the incremental$400 million in debt the Company incurred inApril 2019 under the delayed draw facility (the "Delayed Draw Facility"). This was partially offset by a reduction in expense as a result of the repayment of the remaining Deferred Payment Obligation balance inDecember 2019 . Income Tax Expense Income tax expense decreased to$96.8 million from$96.9 million . The effective tax rate decreased to 16.7% in fiscal 2020 from 18.8% in fiscal 2019. The decrease was primarily due to an increase of$38.4 million in available research and development credits, net of reserves for uncertain tax positions, recognized in fiscal 2020, partially offset by the re-measurement of deferred income taxes of$27.9 million in fiscal 2019. We expect our effective tax rate to increase in relation to fiscal 2020 due to the research and development credits to be recognized being limited to a single tax year. For additional information concerning the research and development credit, see Note 14 to our consolidated financial statements. Fiscal 2019 Compared to Fiscal 2018 Revenue Revenue increased to$6,704.0 million from$6,167.6 million , or an 8.7% increase, primarily due to continued strength in client demand, which led to increased client staff headcount, and an increase in client staff labor, as well as improved contract performance. Revenue growth was also driven by an increase in billable expenses, including subcontractors and direct expenses on behalf of our clients. Cost of Revenue Cost of revenue increased to$3,100.5 million from$2,866.3 million , or an 8.2% increase. This increase was primarily due to an increase in salaries and salary-related benefits of$176.2 million , higher incentive compensation of$24.6 million , and an increase in employer retirement plan contributions of$7.2 million . The increase in salaries and salary-related benefits was driven by an increase in headcount growth and annual base salary increases. Cost of revenue as a percentage of revenue was 46.2% and 46.5% in fiscal 2019 and fiscal 2018, respectively. Billable Expenses Billable expenses increased to$2,004.7 million from$1,861.3 million , or a 7.7% increase. The overall increase was primarily attributable to an increase in use of subcontractors in fiscal 2019 driven by client demand. In addition, contracts which require the Company to incur direct and travel expenses on behalf of our clients increased over the prior year. Billable expenses as a percentage of revenue were 29.9% and 30.2% in fiscal 2019 and fiscal 2018, respectively. General and Administrative Expenses General and administrative expenses increased to$927.9 million from$855.5 million , or an 8.5% increase. The increase was primarily due to salaries and salary-related benefits of$32.0 million , driven by headcount growth as well as annual base salary increases. Incentive and stock compensation increased$14.6 million and other business expenses and professional fees increased$23.6 million . General and administrative expenses as a percentage of revenue were 13.8% and 13.9% for fiscal 2019 and fiscal 2018, respectively. Depreciation and Amortization Expense Depreciation and amortization expense increased to$68.6 million from$64.8 million , or a 5.9% increase, primarily due to increases in depreciation expense resulting from the effects of higher capital expenditures in fiscal 2018. Interest Expense Interest expense increased to$89.5 million from$82.3 million , or an 8.8% increase, primarily due to an increase in 1 Month LIBOR, the benchmark interest rate under our Secured Credit Facility, which rose approximately 60 basis points during fiscal 2019. Income Tax Expense Income tax expense decreased to$96.9 million from$128.3 million , or a 24.5% decrease. The effective tax rate decreased to 18.8% in fiscal 2019 from 29.8% in fiscal 2018, primarily due to the 2017 Tax Act's reduction of theU.S. federal corporate tax rate and the re-measurement of deferred income taxes. Liquidity and Capital Resources As ofMarch 31, 2020 , our total liquidity was$1.1 billion , consisting of$741.9 million of cash and cash equivalents and$399.1 million available under the Revolving Credit Facility. During the fourth quarter of fiscal 2020, we drew$100 million on 58 -------------------------------------------------------------------------------- our Revolving Credit Facility as a precautionary measure to test the availability of funds during this time of uncertainty caused by the outbreak of COVID-19. To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In the opinion of management, we will be able to meet our liquidity and cash needs through a combination of cash flows from operating activities, available cash balances, and available borrowing under the Revolving Credit Facility. If these resources need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities. The following table presents selected financial information for the periods presented: Fiscal Year Ended March 31, 2020 2019 2018 (In thousands) Cash and cash equivalents$ 741,901 $ 283,990 $ 286,958 Total debt$ 2,185,844 $ 1,759,761 $ 1,818,579
Net cash provided by operating activities
$ 369,143 Net cash used in investing activities (128,079 ) (89,212 ) (96,453 ) Net cash provided by (used in) financing activities 34,562 (413,366 ) (203,149 ) Total increase (decrease) in cash and cash equivalents$ 457,911 $ (2,968 )
From time to time we evaluate alternative uses for excess cash resources once our operating cash flow and required debt servicing needs have been met. Some of the possible uses of our remaining excess cash at any point in time may include funding strategic acquisitions, further investment in our business, and returning value to shareholders through share repurchases, quarterly dividends, and special dividends. While the timing and financial magnitude of these possible actions are currently indeterminable, the Company expects to be able to manage and adjust its capital structure in the future to meet its liquidity needs. Historically, we have been able to generate sufficient cash to fund our operations, mandatory debt and interest payments, capital expenditures, and discretionary funding needs. However, due to fluctuations in cash flows, including as a result of the trends and developments described above under "-Factors and Trends Affecting Our Results of Operations" relating toU.S. government shutdowns,U.S. government cost-cutting, reductions or delays in theU.S. government appropriations and spending process and other budgetary matters, it may be necessary from time-to-time in the future to borrow under our Secured Credit Facility to meet cash demands. While the timing and financial magnitude of these possible actions are currently indeterminable, we expect to be able to manage and adjust our capital structure to meet our liquidity needs. Our expected liquidity and capital structure may also be impacted by discretionary investments and acquisitions that we could pursue. We anticipate that cash 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; • the design, build-out, testing, and potential implementation and operation of new financial management systems;
• commitments and other discretionary investments;
• debt service requirements for borrowings under our Secured Credit Facility and interest payments for the Senior Notes; and
• cash taxes to be paid.
Our ability to fund our operating needs depends, in part, on our ability to continue to generate positive cash flows from operations or, if necessary, raise cash in the capital markets.
59 -------------------------------------------------------------------------------- Cash Flows Cash received from clients, either from the payment of invoices for work performed or for advances in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the client. Billing timetables and payment terms on our contracts vary based on a number of factors, including whether the contract type is cost-reimbursable, time-and-materials, or fixed-price. We generally bill and collect cash more frequently under cost-reimbursable and time-and-materials contracts, as we are authorized to bill as the costs are incurred or work is performed. In contrast, we may be limited to bill certain fixed-price contracts only when specified milestones, including deliveries, are achieved. In addition, a number of our contracts may provide for performance-based payments, which allow us to bill and collect cash prior to completing the work. Accounts receivable is the principal component of our working capital and is generally driven by revenue growth with other short-term fluctuations related to the payment practices of our clients. Our accounts receivable reflects amounts billed to our clients as of each balance sheet date. Our clients generally pay our invoices within 30 days of the invoice date, although we experience a longer billing and collection cycle with our global commercial customers. At any month-end, we also include in accounts receivable the revenue that was recognized in the preceding month, which is generally billed early in the following month. Finally, we include in accounts receivable amounts related to revenue accrued in excess of amounts billed, primarily on our fixed-price and cost-reimbursable-plus-award-fee contracts. The total amount of our accounts receivable can vary significantly over time, but is generally sensitive to revenue levels and customer mix. Operating Cash Flow Net cash provided by operations is primarily affected by the overall profitability of our contracts, our ability to invoice and collect cash from clients in a timely manner, our ability to manage our vendor payments, and the timing of cash paid for income taxes. Continued uncertainty in global economic conditions may also affect our business as customers and suppliers may decide to downsize, defer, or cancel contracts, which could negatively affect the operating cash flows. Net cash provided by operations was$551.4 million in fiscal 2020 compared to$499.6 million in fiscal 2019, or a 10.4% increase. The improvement in operating cash flow over the prior year was primarily due to the collection of our revenue and net income growth. This was partially offset by an increase in income taxes paid in fiscal 2020 as compared to the prior year. Investing Cash Flow Net cash used in investing activities was$128.1 million in fiscal 2020 compared to$89.2 million in the prior year, or a 43.6% increase. The increase in net cash used in investing activities was primarily due to an increase in capital expenditures over the prior year primarily related to investments in our facilities and infrastructure and information technology. Financing Cash Flow Net cash provided by financing activities was$34.6 million in fiscal 2020 compared to$413.4 million of net cash used in financing activities in the prior year. The increase in net cash provided by financing activities was primarily due to the following: • Total proceeds in fiscal 2020 of$500.0 million from the$400.0 million draw on our Delayed Draw Facility and a$100.0 million draw on our Revolving Credit Facility.
• A
to the prior year.
• The above was partially offset by the repayment of the remaining deferred
payment obligation balance of
in dividends paid compared to the prior year.
Dividends and Share Repurchases The Company paid$1.04 in dividends per share to shareholders of record in fiscal 2020. OnMay 26, 2020 , the Company announced a regular quarterly cash dividend in the amount of$0.31 per share. The quarterly dividend is payable onJune 30, 2020 to stockholders of record onJune 15, 2020 . The following table summarizes the cash distributions recognized in the consolidated statement of cash flows: Fiscal Year Ended March 31, 2020 2019 2018 (In thousands) Recurring dividends (1)$ 146,602 $ 114,234 $ 103,411 Dividend equivalents (2) - 280 951 Total distributions$ 146,602 $ 114,514 $ 104,362 60
-------------------------------------------------------------------------------- (1) Amounts represent recurring dividends that were declared and paid for during each quarter of fiscal 2020, 2019, and 2018, respectively. (2) Dividend equivalents are distributions made to option holders equal to the previously declared special dividends. OnDecember 12, 2011 , the Board approved a$30.0 million share repurchase program, which was further increased by the Board on (i)January 27, 2015 to$180.0 million , (ii)January 25, 2017 to$410.0 million , (iii)November 2, 2017 to$610.0 million , (iv)May 24, 2018 to$910.0 million , and (v)May 23, 2019 to$1,310.0 million . The Company may repurchase shares pursuant to the program by means of open market repurchases, directly negotiated repurchases or through agents acting pursuant to negotiated repurchase agreements. During fiscal 2020 and 2019, the Company purchased 2.5 million and 5.1 million shares of the Company's Class A Common Stock for an aggregate of$173.4 million and$239.8 million , respectively. As ofMarch 31, 2020 , the Company had approximately$484.8 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 the Board, and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts, and our Credit Agreement, as amended, and other factors deemed relevant by the Board. Indebtedness Our debt totaled$2,185.8 million and$1,759.8 million as ofMarch 31, 2020 and 2019, respectively. Our debt bears interest at specified rates (see Note 11 to our consolidated financial statements). OnNovember 26, 2019 (the "Amendment Effective Date"),Booz Allen Hamilton Inc. ("Booz Allen Hamilton") andBooz Allen Hamilton Investor Corporation ("Investor"), and certain wholly-owned subsidiaries ofBooz Allen Hamilton , entered into the Seventh Amendment (the "Seventh Amendment") to the Credit Agreement, dated as ofJuly 31, 2012 , as amended (the "Credit Agreement") with certain institutional lenders, andBank of America, N.A ., as Administrative and Collateral Agents. The Seventh Amendment reduced the applicable margin applicable to the Term Loan B ("Term Loan B" and, together with the Term Loan A, the "Term Loans") from 2.00% to 1.75% for LIBOR loans and from 1.00% to 0.75% for base rate loans and extended the maturity of the Term Loan B toNovember 26, 2026 . The applicable margin and maturity date applicable to the Term Loan A (the "Term Loan A") remained unchanged. Prior to the Seventh Amendment, approximately$389.0 million was outstanding under Term Loan B. Pursuant to the Seventh Amendment, certain lenders converted their existing Term Loan B loans into a new tranche of Term Loan B loans in an aggregate amount, along with Term Loan B loans advanced by certain new lenders, of approximately$389.0 million (the "New Refinancing Tranche B Term Loans"). The proceeds from the new lenders were used to prepay in full all of the existing Term Loan B loans that were not converted into the new Term Loan B tranche. Voluntary prepayments of the New Refinancing Tranche B Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first six months after the Seventh Amendment. The other terms of the New Refinancing Tranche B Term Loans are generally the same as the existing Term Loan B prior to the Seventh Amendment. As ofMarch 31, 2020 , the Credit Agreement providedBooz Allen Hamilton with a$1,363.7 million Term Loan A, a$388.1 million Term Loan B, and$500.0 million in New Revolving Commitments with a sub-limit for letters of credit of$100.0 million . As ofMarch 31, 2020 , the maturity date of Term Loan A and the termination date for the Revolving Credit Facility wasJune 23, 2023 and the maturity date of Term Loan B wasNovember 26, 2026 .Booz Allen Hamilton's obligations and the guarantors' guarantees under the Credit Agreement are secured by a first priority lien on substantially all of the assets (including capital stock of subsidiaries) ofBooz Allen Hamilton , Investor and the subsidiary guarantors, subject to certain exceptions set forth in the Credit Agreement and related documentation. Subject to specified conditions, without the consent of the then-existing lenders (but subject to the receipt of commitments), the Term Loans or Revolving Credit Facility may be expanded (or a new term loan facility or revolving credit facility added to the existing facilities) by up to (i) the greater of (x)$627 million and (y) 100% of consolidated EBITDA ofBooz Allen Hamilton , as of the end of the most recently ended four quarter period for which financial statements have been delivered pursuant to the Credit Agreement plus (ii) the aggregate principal amount under which pro forma consolidated net secured leverage remains less than or equal to 3.50:1.00. AtBooz Allen Hamilton's option, borrowings under the Secured Credit Facility bear interest based either on LIBOR (adjusted for maximum reserves, and subject to a floor of zero) for the applicable interest period or, a base rate equal to the highest of (x) the administrative agent's prime corporate rate, (y) the overnight federal funds rate plus 0.50% and (z) three-month LIBOR (adjusted for maximum reserves, and subject to a floor of zero) plus 1.00%), in each case plus an applicable margin, payable at the end of the applicable interest period and in any event at least quarterly. The applicable margin for Term Loan A and borrowings under the Revolving Credit Facility ranges from 1.25% to 2.00% for LIBOR loans and 0.25% to 1.00% for base rate loans, in each case based onBooz Allen Hamilton's consolidated total net leverage ratio. The applicable margin for Term Loan B is 1.75% for LIBOR loans and 0.75% for base rate loans. Unused commitments under the Revolving Credit 61 -------------------------------------------------------------------------------- Facility are subject to a quarterly fee ranging from 0.20% to 0.35% based onBooz Allen Hamilton's consolidated total net leverage ratio.Booz Allen Hamilton occasionally borrows under the Revolving Credit Facility in anticipation of cash demands. During fiscal 2020 and 2019,Booz Allen Hamilton accessed a total$100.0 million and$110.0 million of its$500.0 million Revolving Credit Facility. As ofMarch 31, 2020 , there was$100.0 million outstanding on the Revolving Credit Facility. As ofMarch 31, 2019 , there was no outstanding balance on the Revolving Credit Facility. The Credit Agreement requires quarterly principal payments of 1.25% of the stated principal amount of Term Loan A until maturity, and quarterly principal payments of 0.25% of the stated principal amount of Term Loan B until maturity.Booz Allen Hamilton also has agreed to pay customary letter of credit and agency fees. As ofMarch 31, 2020 and 2019,Booz Allen Hamilton was contingently liable under open standby letters of credit and bank guarantees issued by its banks in favor of third parties that totaled$9.7 million and$9.5 million , respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. AtMarch 31, 2020 and 2019, approximately$0.9 million and$1.0 million , respectively, of these instruments reduced our available borrowings under the Revolving Credit Facility. The remainder is guaranteed under a separate$15.0 million facility established in fiscal 2015, of which$6.2 million and$6.5 million , respectively, was available toBooz Allen Hamilton atMarch 31, 2020 and 2019. As ofMarch 31, 2020 , we had$399.1 million of capacity available for additional borrowings under the Revolving Credit Facility. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include limitations on the following, in each case subject to certain exceptions: (i) indebtedness and liens; (ii) mergers, consolidations or amalgamations, liquidations, wind-ups or dissolutions, and disposition of all or substantially all assets; (iii) dispositions of property; (iv) restricted payments; (v) investments; (vi) transactions with affiliates; (vii) change in fiscal periods; (viii) negative pledges; (ix) restrictive agreements; (x) line of business; and (xi) speculative hedging. The events of default include the following, in each case subject to certain exceptions: (a) failure to make required payments under the Secured Credit Facility; (b) material breaches of representations or warranties under the Secured Credit Facility; (c) failure to observe covenants or agreements under the Secured Credit Facility; (d) failure to pay or default under certain other material indebtedness; (e) bankruptcy or insolvency; (f) certain ERISA events; (g) certain material judgments; (h) actual or asserted invalidity of the Guarantee and Collateral Agreements or the other security documents or failure of the guarantees or perfected liens thereunder; and (i) a change of control. 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 ofMarch 31, 2020 , we were compliant with these covenants. During fiscal 2020, interest payments of$50.3 million and$15.9 million were made for the Term Loan A and Term Loan B facilities, respectively. During fiscal 2019, interest payments of$41.9 million and$16.8 million were made for the Term Loan A and Term Loan B facilities, respectively. The total outstanding debt balance is recorded in the accompanying consolidated balance sheets net of unamortized discount and debt issuance costs of$16.0 million and$19.0 million as ofMarch 31, 2020 and 2019, respectively. OnApril 25, 2017 ,Booz Allen Hamilton issued$350 million aggregate principal amount of its 5.125% Senior Notes due 2025 (the "Senior Notes") under an Indenture, datedApril 25, 2017 , amongBooz Allen Hamilton , certain subsidiaries ofBooz Allen Hamilton , as guarantors (the "Subsidiary Guarantors"), andWilmington Trust, National Association , as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture, dated as ofApril 25, 2017 , amongBooz Allen Hamilton , the Subsidiary Guarantors and the Trustee. A portion of the proceeds was used to repay all outstanding loans under the Revolving Credit Facility. For both fiscal 2020 and 2019, interest payments of$17.9 million were made for the Senior Notes. Borrowings under the Term Loans and, if used, the Revolving Credit Facility, incur interest at a variable rate. In accordance with our risk management strategy betweenApril 6, 2017 andApril 4, 2019 ,Booz Allen Hamilton executed a series of interest rate swaps. As ofMarch 31, 2020 , we had interest rate swaps with an aggregate notional amount of$1 billion . These instruments hedge the variability of cash outflows for interest payments on the floating portion of our debt. The Company's objectives in using cash flow hedges are to reduce volatility due to interest rate movements and to add stability to interest expense (see Note 12 in our consolidated financial statements). Capital Structure and Resources Our stockholders' equity amounted to$856.4 million as ofMarch 31, 2020 , an increase of$181.0 million compared to stockholders' equity of$675.4 million as ofMarch 31, 2019 . The increase was primarily due to net income of$482.6 million in fiscal 2020 and stock-based compensation expense of$43.3 million , partially offset by$186.6 million in treasury stock resulting from the repurchase of shares of our Class A Common Stock and$146.6 million in aggregate quarterly dividend payments in fiscal 2020. 62 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we did not have any material off-balance sheet arrangements. Contractual Obligations The following table summarizes our contractual obligations that require us to make future cash payments as ofMarch 31, 2020 . For contractual obligations, we included payments that we have an unconditional obligation to make. Payments Due by Fiscal Periods Less Than 1 to 3 3 to 5 More Than Total 1 Year Years Years 5 years (In thousands) Long-term debt (a)$ 2,101,841 $ 77,865 $ 155,730 $ 1,149,599 $ 718,647 Operating lease obligations 372,258 61,900 128,689 95,569 86,100 Interest on indebtedness 272,679 62,398 118,872 65,596 25,813 Revolver debt 100,000 100,000 - - - Tax liabilities for uncertain tax positions (b) 11,159 11,159 - - -
Total contractual obligations
(a) See Note 11 to our consolidated financial statements for additional
information regarding debt and related matters.
(b) The balance primarily includes an
uncertainties created with the acquisition of eGov
2017. Approximately,
excluded as we are not able to reasonably estimate the timing of future
cash flows to such unrecognized tax benefits. See Note 14 to our
consolidated financial statements for additional information regarding
gross unrecognized tax benefits.
In the normal course of business, we enter into agreements with subcontractors and vendors to provide products and services that we consume in our operations or that are delivered to our clients. These products and services are not considered unconditional obligations until the products and services are actually delivered, at which time we record a liability for our obligation. Capital Expenditures Since we do not own any of our facilities, our capital expenditure requirements primarily relate to the purchase of computers, management systems, furniture, and leasehold improvements to support our operations. Direct facility and equipment costs billed to clients are not treated as capital expenses. Our capital expenditures for fiscal 2020 and 2019 were$128.1 million and$94.7 million , respectively. The increase in capital expenditures over the prior year primarily relates to investments in our facilities and infrastructure, and information technology. We expect capital expenditures to decrease in the near term and overall in fiscal 2021 as compared to fiscal 2020. Given the uncertainty surrounding the COVID-19 outbreak, we may adjust our capital expenditures in fiscal 2021 to support our business operations as we further develop our long term strategy on a safe return to work. Commitments and Contingencies We are subject to a number of reviews, investigations, claims, lawsuits, and other uncertainties related to our business. For a discussion of these items, refer to Note 22 to our consolidated financial statements. 63
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