The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read this discussion in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report, and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the fiscal year ended
March 31, 2021, which provides additional information on comparisons of fiscal 2021 and 2020 . 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 is ending
We are a leading provider of management and technology consulting, analytics, engineering, digital solutions, mission operations, and cyber services to
U.S.and international governments, major corporations, and not-for-profit organizations. Our ability to deliver value to our clients has always been, and continues to be, a product of the strong character, expertise and tremendous passion of our people. Our approximately 29,300 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, the longest of which is more than 80 years. We support critical missions for a diverse base of federal government clients, including nearly all of the U.S.government's cabinet-level departments, as well as for commercial clients, both domestically and internationally. We support our federal government clients by helping them tackle their most complex and pressing challenges such as protecting soldiers in combat and supporting their families, advancing cyber capabilities, keeping our national infrastructure secure, enabling and enhancing digital services, transforming the healthcare system, and improving government efficiency to achieve better outcomes. We serve commercial clients across industries including financial services, health and life sciences, energy, and technology.
Financial and Other Highlights
In fiscal 2022, the Company delivered year-over-year revenue growth and increased the headcount of client staff for the year. Revenue increased 6.4% from fiscal 2021 to fiscal 2022, primarily due to the impact of acquisitions and strong demand, partially offset by lower staff utilization.
Operating income decreased 9.2% to
$685.2 millionin fiscal 2022 from $754.4 millionin fiscal 2021, which reflects a decrease in operating margin to 8.2% from 9.6% in the comparable year. The decrease in operating income and operating margin were impacted by acquisition and divestiture costs of $97.5 millionprimarily related to our acquisitions during fiscal 2022. Increases in depreciation and amortization (primarily due to the recent acquisitions) year over year also contributed to the decline in operating income. These decreases were partially offset by profitable contract level performance and mix, which includes inorganic contributions, as well as prudent cost management. In addition, fiscal 2021 operating income was impacted by approximately $24.0 millionby the inability to recognize revenue on, or bill for, fee on certain contracts involving a ready workforce. The Company also incurred incremental legal costs during fiscal 2022 and 2021 in response to the U.S. Department of Justiceinvestigation 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 COVID-19, and we continue to work with our stakeholders to assess further possible implications to our business. We could be impacted by the implementation of our Company policy requiring full COVID-19 vaccinations of all employees, except for employees who qualify for medical or religious exemptions. Although we cannot currently predict the overall impact of COVID-19, the longer the duration the more likely it is that it could have an adverse effect on our business, financial position, results of operations, billable expenses, and/or cash flows. 46 --------------------------------------------------------------------------------
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 client staff headcount and our overall direct labor, which management believes provides useful information to our investors about our core operations. We also utilize and discuss Free Cash Flow, because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business, and measuring liquidity generally. We present these supplemental measures because we believe that these measures provide investors and securities analysts with important supplemental information with which to evaluate our performance, long-term earnings potential, or liquidity, as applicable, and to enable them to assess our performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Revenue, Excluding Billable Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting principles generally accepted in
the United States, or GAAP, and when analyzing our performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of revenue to Revenue, Excluding Billable Expenses, operating income to Adjusted Operating Income, net income to Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses, Adjusted Net Income and Adjusted Diluted 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 client 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 acquisition and divestiture costs, financing transaction costs, supplemental employee benefits due to COVID-19, significant acquisition amortization, and restructuring costs. 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 acquisition and divestiture costs, financing transaction costs, supplemental employee benefits due to COVID-19, and restructuring costs. "Adjusted EBITDA Margin on Revenue" is calculated as Adjusted EBITDA divided by revenue. "Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses" is calculated as Adjusted EBITDA divided by Revenue, Excluding Billable Expenses. The Company prepares Adjusted EBITDA, Adjusted EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses to eliminate the impact of items it does not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary or non-recurring nature or because they result from an event of a similar nature. •"Adjusted Net Income" represents net income before: (i) acquisition and divestiture costs, (ii) financing transaction costs, (iii) supplemental employee benefits due to COVID-19, (iv) significant acquisition amortization, (v) restructuring costs, (vi) gain associated with equity method investment activity, (vii) research and development tax credits, (viii) release of income tax reserves, (ix) loss on debt extinguishment, (x) remeasurement of deferred tax assets/liabilities, and (xi) amortization or write-off of debt issuance costs 47 -------------------------------------------------------------------------------- and debt discount, in each case net of the tax effect where appropriate calculated using an assumed effective tax rate. We prepare Adjusted Net Income to eliminate the impact of items, net of tax, we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature. We view net income excluding the impact of the re-measurement of the Company's deferred tax assets and liabilities 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.
•The “Free Cash Flow” represents the net cash generated by operating activities less the impact of purchases of property, plant and equipment and software.
Below is a reconciliation of revenue excluding billable expenses, adjusted operating income, adjusted EBITDA, adjusted EBITDA margin to revenue, adjusted EBITDA margin to revenue excluding billable expenses, adjusted net income, adjusted diluted EPS and free cash flow most directly comparable financial measure calculated and presented in accordance with GAAP.
March 31, (Amounts in thousands, except share and per share data) 2022 2021 2020 (Unaudited) Revenue, Excluding Billable Expenses Revenue $ 8,363,700
$ 7,858,938 $ 7,463,841Less: Billable expenses 2,474,163 2,325,888 2,298,413 Revenue, Excluding Billable Expenses $ 5,889,537 $ 5,533,050 $ 5,165,428Adjusted Operating Income Operating Income $ 685,181 $ 754,371 $ 669,202Acquisition and divestiture costs (a) 97,485 411 - Financing transaction costs (b) 2,348 - 1,069 COVID-19 supplemental employee benefits (c) - 577 2,722 Significant acquisition amortization (d) 38,295 - - Restructuring costs (e) 4,164 - - Adjusted Operating Income $ 827,473 $ 755,359 $ 672,993EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin on Revenue & Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses Net income $ 466,577 $ 608,958 $ 482,603Income tax expense 137,466 53,481 96,831 Interest and other, net (f) 81,138 91,932 89,768 Depreciation and amortization 145,747 84,315 81,081 EBITDA 830,928 838,686 750,283 Acquisition and divestiture costs (a) 97,485 411 - Financing transaction costs (b) 2,348 - 1,069 COVID-19 supplemental employee benefits (c) - 577 2,722 Restructuring costs (e) 4,164 - - Adjusted EBITDA $ 934,925 $ 839,674 $ 754,074Adjusted EBITDA Margin on Revenue 11.2% 10.7 % 10.1 % Adjusted EBITDA Margin on Revenue, Excluding Billable Expenses 15.9% 15.2 % 14.6 % Adjusted Net Income Net income $ 466,577 $ 608,958 $ 482,603Acquisition and divestiture costs (a) 97,485 411 - Financing transaction costs (b) 2,348 - 1,069 COVID-19 supplemental employee benefits (c) - 577 2,722 Significant acquisition amortization (d) 38,295 - - Restructuring costs (e) 4,164 - - Gain associated with equity method investment activities (g) (12,761) - - Research and development tax credits (h) - (2,928) (38,395) Release of income tax reserves (i) - (29) (68) Loss on debt extinguishment (j) - 13,239 - Remeasurement of deferred tax assets/liabilities (k) - (76,767) - Amortization or write-off of debt issuance costs and debt discount 3,340 2,402 2,395 49
-------------------------------------------------------------------------------- Adjustments for tax effect (l) (31,399) (4,324) (1,608) Adjusted Net Income $ 568,049
$ 541,539 $ 448,718Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 134,850,808 138,703,220 141,238,135 Adjusted Net Income Per Diluted Share (m) $ 4.21 $ 3.90 $ 3.18Free Cash Flow Net cash provided by operating activities $
Less: Purchases of goods, equipment and software
(79,964) (87,210) (128,079) Free Cash Flow $ 656,562
$ 631,474 $ 423,349(a)Represents costs associated with the acquisition and divestiture efforts of the Company related to transactions for which the Company has entered into a letter of intent to either acquire a controlling financial interest in the target entity or divest a portion of our business. Acquisition and divestiture costs primarily include costs associated with (i) buy-side and sell-side due diligence activities, (ii) compensation expenses associated with employee retention, and (iii) legal and advisory fees, primarily associated with the acquisitions of Liberty IT Solutions, LLC("Liberty"), Tracepoint Holdings, LLC("Tracepoint") and EverWatch Corp.("EverWatch"), as well as the planned divestiture of our management consulting business serving the Middle Eastand North Africa(the "MENA Divestiture"), as disclosed in Note 5.
(b) Reflects expenses associated with debt financing activities incurred during the first quarter of fiscal 2022.
(c) Represents additional contribution to employee FSA accounts for dependents in response to COVID-19.
(d)Amortization expense associated with acquired intangibles from significant acquisitions. Significant acquisitions include acquisitions which the Company considers to be beyond the scope of our normal operations. Significant acquisition amortization includes amortization expense associated with the acquisition of Liberty in the first quarter of fiscal 2022. (e)Represents restructuring charges of
$8.3 millionincurred during the fourth quarter of fiscal 2022, net of approximately $4.2 millionof revenue recognized on recoverable expenses, associated with severance costs of a restructuring plan to reduce certain executive administrative personnel costs.
(f) Reflects the combination of interest expense and other income (expense), net of the Consolidated Statement of Income.
(g)Represents (i) a gain in the second quarter of fiscal 2022 associated with the Company's previously held equity method investment in Tracepoint and (ii) a gain in the third quarter of fiscal 2022 associated with the divestiture of a controlling financial interest of a certain product offering. (h)Reflects tax credits, net of reserves for uncertain tax positions, recognized in fiscal 2021 and 2020 related to an increase in research and development credits available for fiscal years 2016 to 2019 and fiscal years 2016 to 2020, respectively.
(i) Release of pre-acquisition income tax reserves assumed by the Company in connection with the Carlyle Acquisition.
(j)Reflects the loss on debt extinguishment resulting from the redemption of
Booz Allen Hamilton Inc.'s5.125% Senior Notes due 2025 (the "2025 Senior Notes"), including $9.0 millionof the premium paid at redemption, and write-off of the unamortized debt issuance cost. (k)Reflects the income tax benefit associated with tax losses generated during fiscal 2021 as a result of a change in certain tax methods of accounting. The Company intends to carry these losses back to fiscal 2016 and subsequent periods under the Coronavirus Aid Relief and Economic Security Act and has re-measured the fiscal 2021 loss accordingly. (l)Reflects the tax effect of adjustments at an assumed effective tax rate of 26%, which approximates the blended federal and state tax rates, and consistently excludes the impact of other tax credits and incentive benefits realized. (m)Excludes an adjustment of approximately $3.1 million, $3.5 million, and $1.6 millionof net earnings for fiscal 2022, 2021, and 2020, respectively, associated with the application of the two-class method for computing diluted earnings per share.
Factors and Trends Affecting Our Results of Operations
Our operating results have been, and we expect to continue to be, affected by the following factors, which could cause our future operating results to differ from our historical operating results described in the “-Operating results” section.
Business environment and main trends in our markets
We believe that the following trends and developments in the
•uncertainty around the timing, extent, nature and effect of Congressional and other
U.S.government actions to approve funding of the U.S.government, address budgetary constraints, including caps on the discretionary budget for defense and non-defense departments and agencies, as established by the Bipartisan Budget Control Act of 2011 ("BCA") and subsequently adjusted by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, and the Bipartisan Budget Act of 2019, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and the Consolidated Appropriations Act of 2021, and address the ability of Congressto determine how to allocate the available budget authority and pass appropriations bills to fund both U.S.government departments and agencies that are, and those that are not, subject to the caps; •budget deficits and the growing U.S.national debt increasing pressure on the U.S.government to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions; •cost-cutting and efficiency initiatives, current and future budget restrictions, continued implementation of Congressionally mandated automatic spending cuts, and other efforts to reduce U.S.government spending could cause clients to reduce or delay funding for orders for services or invest appropriated funds on a less consistent or rapid basis or not at all, particularly when considering long-term initiatives and in light of current uncertainty around Congressional efforts to craft a long-term agreement on the U.S.government's ability to incur indebtedness in excess of its current limits, and generally in the current political environment, there is a risk that clients will not issue task orders in sufficient volume to reach current contract ceilings, alter historical patterns of contract awards, including the typical increase in the award of task orders or completion of other contract actions by the U.S.government in the period before the end of the U.S.government's fiscal year on September 30, delay requests for new proposals and contract awards, rely on short-term extensions and funding of current contracts, or reduce staffing levels and hours of operation;
• delays in the completion of future
•changes in the relative mix of overall
U.S.government spending and areas of spending growth, with lower spending on homeland security, intelligence, defense-related programs as certain overseas operations end, and continued increased spending on cybersecurity, Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), advanced analytics, technology integration, and healthcare, including as a result of the presidential and administration transition; •the extent, nature and effect of COVID-19, including the impact on federal budgets, current and pending procurements, supply chains, demand for services, deployment and productivity of our employees and the economic and societal impact of a pandemic, and the expected continued volatility in billable expenses, as well as the impact of our Company policy requiring full COVID-19 vaccinations of all employees, except for employees who qualify for medical or religious exemptions;
•increased inflationary pressure which could have an impact on the cost of the activity and/or reduce the purchasing power of customers;
•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;
• the efforts of the
•increased audit, review, investigation, and general scrutiny by
U.S.government agencies of government contractors' performance under U.S.government contracts and compliance with the terms of those contracts and applicable laws;
• the federal government’s emphasis on refining the definition of “inherently governmental” work, including proposals to limit contractors’ access to sensitive or classified information and work assignments, which continue to create pockets of internalization in various agencies, particularly in the intelligence market;
51 -------------------------------------------------------------------------------- •negative publicity and increased scrutiny of government contractors in general, including us, relating to
U.S.government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information; •U.S. government agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts;
•increased competition from other government contractors and market entrants seeking to take advantage of some of the trends identified above, and an industry trend towards consolidation, which may result in the emergence of better-equipped companies to compete with us;
•cost cutting and efficiency and effectiveness efforts by
U.S.civilian agencies with a focus on increased use of performance measurement, "program integrity" efforts to reduce waste, fraud and abuse in entitlement programs, and renewed focus on improving procurement practices for and interagency use of IT services, including through the use of cloud based options and data center consolidation; •restrictions by the U.S.government on the ability of federal agencies to use lead system integrators, in response to cost, schedule, and performance problems with large defense acquisition programs where contractors were performing the lead system integrator role; •increasingly complex requirements and enforcement and reporting landscapes of the Department of Defenseand the U.S.intelligence community, including cybersecurity, managing federal health care cost growth, competition, and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare; and •increasing small business regulations across the Department of Defenseand 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 income
Substantially all of our revenue is derived from services provided under contracts and task orders with the
U.S.government, primarily by our client staff and, to a lesser extent, our subcontractors. Funding for our contracts and task orders is generally linked to trends in budgets and spending across various U.S.government agencies and departments. We provide services under a large portfolio of contracts and contract vehicles to a broad client base, and we believe that our diversified contract and client base lessens potential volatility in our business; however, a reduction in the amount of services that we are contracted to provide to the U.S.government or any of our significant U.S.government clients could have a material adverse effect on our business and results of operations. In particular, the Department of Defenseis one of our significant clients, and the BCA originally required nine automatic spending cuts (referred to as "sequestration") of $109 billionannually from 2013 to 2021, half of which was intended to come from defense programs, though less than $1 billionhas been cut for defense programs per year under the BCA. Mandatory sequestrations under the BCA were subsequently extended by the Bipartisan Budget Act of 2013, the Bipartisan Budget Act of 2015, the Bipartisan Budget Act of 2018, the Bipartisan Budget Act of 2019, the CARES Act and the Consolidated Appropriations Act of 2021, which did not specify an amount of savings required to be achieved through sequestration after 2021 but apply an 8.3% reduction in defense spending in each year from 2021 to 2030. This could result in a commensurate reduction in the amount of services that we are contracted to provide to the Department of Defenseand 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.
Types of contract
We generate revenue under the following three basic contract types:
•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 52 --------------------------------------------------------------------------------
evaluation of our performance against a predetermined set of criteria, such as targets for factors such as cost, quality, schedule and performance.
•Time-and-Materials Contracts. Under contracts in this category, we are paid a fixed hourly rate for each direct labor hour expended, and we are reimbursed for billable material costs and billable out-of-pocket expenses inclusive of allocable indirect costs. We assume the financial risk on time-and-materials contracts because our costs of performance may exceed negotiated hourly rates. To the extent our actual direct labor, including allocated indirect costs, and associated billable expenses decrease or increase in relation to the fixed hourly billing rates provided in the contract, we will generate more or less profit, respectively, or could incur a loss. •Fixed-Price Contracts. Under a fixed-price contract, we agree to perform the specified work for a predetermined price. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. Some fixed-price contracts have a performance-based component, pursuant to which we can earn incentive payments or incur financial penalties based on our performance. Fixed-price level of effort contracts require us to provide a specified level of effort (i.e., labor hours), over a stated period of time, for a fixed price. The amount of risk and potential reward varies under each type of contract. Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category. In addition, we are typically reimbursed for other contract direct costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-reimbursable contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a predetermined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings but generally involve greater financial risk because we bear the impact of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period's profitability. Changes in contract type as a result of re-competes and new business could influence the percentage/mix in unanticipated ways. The table below presents the percentage of total revenue for each type of contract: Fiscal Year Ended March 31, 2022 2021 2020 Cost-reimbursable 54% 56% 57% Time-and-materials 24% 25% 23% Fixed-price 22% 19% 20%
Diversity of contracts and revenue composition
We provide services to our clients through a large number of single award contracts, contract vehicles, and multiple award contract vehicles. Most of our revenue is generated under indefinite delivery/indefinite quantity, or IDIQ, contract vehicles, which include multiple award government wide acquisition contract vehicles, or GWACs, and General Services Administration Multiple Award Schedule Contracts, or GSA schedules, and certain single award contracts. GWACs and GSA schedules are available to all
U.S.government agencies. Any number of contractors typically competes under multiple award IDIQ contract vehicles for task orders to provide particular services, and we earn revenue under these contract vehicles only to the extent that we are successful in the bidding process for task orders. No single task order under any IDIQ contract represented more than 3.6% of our revenue in fiscal 2022. No single definite contract accounted for more than 3.0% of our revenue in fiscal 2022. 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 2022, 2021, and 2020, 94%, 93%, and 92%, respectively, of our revenue was generated by contracts and task orders for which we served as a prime contractor; 6%, 7%, and 8%, respectively, of our revenue was generated by contracts and task orders for which we served as a subcontractor; and 24%, 25%, and 24%, 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 client 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 client staff 53 -------------------------------------------------------------------------------- labor as the primary driver of earnings growth. Direct client staff labor growth is driven by client staff headcount growth, after attrition, and total backlog growth. Our People Revenue from our contracts is derived from services delivered by client staff and, to a lesser extent, from our subcontractors. Our ability to hire, retain, and deploy talent with skills appropriately aligned with client needs is critical to our ability to grow our revenue. We continuously evaluate whether our talent base is properly sized and appropriately compensated, and contains an optimal mix of skills to be cost competitive and meet the rapidly evolving needs of our clients. We seek to achieve that result through recruitment and management of capacity and compensation. As of March 31, 2022, 2021, and 2020, we employed approximately 29,300, 27,700, and 27,200 people, respectively, of which approximately 26,300, 24,800, and 24,200, respectively, were client staff.
We define the 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 value of order revenue (including optional orders) for services under existing contracts for which funding has not been earmarked or otherwise authorized.
•Priced Options. Priced contract options represent 100% of the revenue value of all future contract option periods under existing contracts that may be exercised at our clients' option and for which funding has not been appropriated or otherwise authorized. Our backlog does not include contracts that have been awarded but are currently under protest and also does not include any task orders under IDIQ contracts, except to the extent that task orders have been awarded to us under those contracts. The following table summarizes the value of our contract backlog at the respective dates presented: Fiscal Year Ended March 31, 2022 2021 2020 (In millions) Backlog: Funded
$ 3,710 $ 3,510 $ 3,415Unfunded 9,925 6,086 4,518 Priced options 15,612 14,436 12,796 Total backlog $ 29,247 $ 24,032 $ 20,729(1) Backlog presented as of March 31, 2022includes backlog acquired from the Company's acquisitions made during the twelve months ended March 31, 2022. Total backlog acquired was approximately $2.6 billionas of March 31, 2022Our total backlog consists of remaining performance obligations, certain orders under contracts for which the period of performance has expired, and unexercised option period and other unexercised optional orders. As of March 31, 2022and March 31, 2021, the Company had $7.4 billionand $6.7 billionof remaining performance obligations, respectively, and we expect to recognize approximately 70% of the remaining performance obligations as of March 31, 2022as revenue over the next 12 months, and approximately 85% over the next 24 months. The remainder is expected to be recognized thereafter. However, given the uncertainties discussed below, as well as the risks described in "Item 1A. Risk Factors", 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. Congressgenerally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congressmakes subsequent appropriations and the procuring agency allocates funding to the contract. We view growth in total backlog and client staff headcount as the two key measures of our potential business growth. Growing and deploying client 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 client staff and deploy them against funded backlog, we generally recognize increased revenue. Total backlog increased by 21.7% from March 31, 2021to March 31, 2022and increased by 15.9% from March 31, 54 -------------------------------------------------------------------------------- 2020 to March 31, 2021. Additions to funded backlog during fiscal 2022 and 2021 totaled $8.6 billionand $8.0 billionrespectively, as a result of the conversion of unfunded backlog to funded backlog, the award of new contracts and task orders under which funding was appropriated, and the exercise and subsequent funding of priced options. We report internally on our backlog on a monthly basis and review backlog upon occurrence of certain events to determine if any adjustments are necessary. We cannot predict with any certainty the portion of our backlog that we expect to recognize as revenue in any future period and we cannot guarantee that we will recognize any revenue from our backlog. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all are: program schedule changes, contract modifications, and our ability to assimilate and deploy new client staff against funded backlog; cost-cutting initiatives and other efforts to reduce U.S.government spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of the U.S.government's budgeting process and the use of continuing resolutions by the U.S.government to fund its operations. The amount of our funded backlog is also subject to change, due to, among other factors: changes in congressional appropriations that reflect changes in U.S.government policies or priorities resulting from various military, political, economic, or international developments; changes in the use of U.S.government contracting vehicles, and the provisions therein used to procure our services and adjustments to the scope of services, or cancellation of contracts, by the U.S.government at any time. In our recent experience, none of the following additional risks have had a material negative effect on our ability to realize revenue from our funded backlog: the unilateral right of the U.S.government to cancel multi-year contracts and related orders or to terminate existing contracts for convenience or default; in the case of unfunded backlog, the potential that funding will not be made available; and, in the case of priced options, the risk that our clients will not exercise their options. In addition, contract backlog includes orders under contracts for which the period of performance has expired, and we may not recognize revenue on the funded backlog that includes such orders due to, among other reasons, the tardy submission of invoices by our subcontractors and the expiration of the relevant appropriated funding in accordance with a predetermined expiration date such as the end of the U.S.government's fiscal year. The revenue value of orders included in contract backlog that has not been recognized as revenue due to period of performance expirations has not exceeded approximately 5.1% of total backlog as of March 31, 2022and any of the four preceding fiscal quarters. We expect to recognize revenue from a substantial portion of funded backlog as of March 31, 2022within 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.
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. Revenue cost includes direct labor, related benefits and overhead. Overhead costs include indirect costs, including indirect labor related to infrastructure, management and administration, and other expenses.
• Billable expenses. Billable expenses include direct expenses of subcontractors, travel expenses and other expenses incurred to perform the contracts.
•General and administrative expenses. General and administrative expenses include the indirect labor of general management and corporate administrative functions, marketing, tendering and proposal costs, and other discretionary expenses.
•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.
U.S.government's fiscal year ends on September 30of each year. While not certain, it is not uncommon for U.S.government agencies to award extra tasks or complete other contract actions in the weeks before the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds. In addition, we also have historically experienced higher bid and proposal costs in the months leading up to the U.S.government's fiscal year end as we pursue new contract opportunities being awarded shortly after the U.S.government fiscal year end as new opportunities are expected to have funding appropriated in the 55 -------------------------------------------------------------------------------- U.S.government's subsequent fiscal year. We may continue to experience this seasonality in future periods, and our future periods may be affected by it. While not certain, changes in the government's funding and spending patterns have altered historical seasonality trends, supporting our approach to managing the business on an annual basis.
Seasonality is just one of many factors, many of which are beyond our control, and which can 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 the
U.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-materials 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 customer should be combined and accounted for as a single contract. Furthermore, in certain transactions with commercial clients and with the U.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 the U.S.government are generally 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 56 -------------------------------------------------------------------------------- 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. Our U.S.government contracts generally contain FAR provisions that enable the customer to terminate a contract for default or for the convenience of the U.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 the U.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 the U.S.government at the start of each fiscal year. Forward pricing rates are estimated and agreed upon between us and the U.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, are recorded in the interim financial reporting period when such changes are identified. These changes relate 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 the U.S.government. 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 2022, 2021, and 2020, 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. 57 --------------------------------------------------------------------------------
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.
We test goodwill and trade name for impairment at least annually as of
January 1of 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. A 10% change in our enterprise value would not result in a goodwill or trade name 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 ended
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. 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 relating to our adoption of new accounting standards and for information on our planned adoption of recently issued accounting standards.
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. 58 --------------------------------------------------------------------------------
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 the
U.S. Securities and Exchange Commission, or SEC. 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 on March 31and unless otherwise noted, references to fiscal year or fiscal are for fiscal years ended March 31. The accompanying consolidated financial statements present the financial position of the Company as of March 31, 2022and 2021 and the Company's results of operations for fiscal 2022, fiscal 2021, and fiscal 2020.
Certain amounts presented in the Company’s prior year consolidated financial statements have been reclassified to conform to the current year’s presentation.
The following table sets forth the items in our Consolidated Statements of Income for the periods indicated:
Fiscal Year Ended March 31, Fiscal 2022 Fiscal 2021 Versus Versus 2022 2021 2020 Fiscal 2021 Fiscal 2020 (In thousands) Revenue
$ 8,363,700 $ 7,858,938 $ 7,463,8416.4 % 5.3 % Operating costs and expenses: Cost of revenue 3,899,622 3,657,530 3,379,180 6.6 % 8.2 % Billable expenses 2,474,163 2,325,888 2,298,413 6.4 % 1.2 % General and administrative expenses 1,158,987 1,036,834 1,035,965 11.8 % 0.1 % Depreciation and amortization 145,747 84,315 81,081 72.9 % 4.0 % Total operating costs and expenses 7,678,519 7,104,567 6,794,639 8.1 % 4.6 % Operating income 685,181 754,371 669,202 (9.2) % 12.7 % Interest expense (92,352) (81,270) (96,960) 13.6 % (16.2) % Other income (expense), net 11,214 (10,662) 7,192 NM
Income before income taxes 604,043 662,439 579,434 (8.8) % 14.3 % Income tax expense 137,466 53,481 96,831 157.0 % (44.8) % Net income
$ 466,577 $ 608,958 $ 482,603(23.4) % 26.2 % Net loss attributable to non-controlling interest $ (163)$ - $ - NM
Net income attributable to common stockholders
$ 466,740 $ 608,958 $ 482,603(23.4) % 26.2 % NM - Not meaningful
Fiscal 2022 vs. Fiscal 2021
Revenue went to
Cost of revenue increased to
$3,899.6 millionfrom $3,657.5 million, or a 6.6% increase, and remained relatively flat as a percentage of revenue at 46.6% and 46.5% for fiscal 2022 and 2021, respectively. This increase was primarily due to an increase in salaries and salary-related benefits of $251.8 million, driven by an increase in headcount (including the impact of acquisitions) and annual base salary increases, as well as increases in other direct costs of $29.3 million.
Billable expenses increased to
$2,474.2 millionfrom $2,325.9 million, or a 6.4% increase, and remained flat as a percentage of revenue at 29.6%. This increase was primarily attributable to an increase in the use of subcontractors driven by 59 -------------------------------------------------------------------------------- client demand and timing of client needs as well as increases in expenses from contracts that require the Company to incur other direct expenses and travel on behalf of clients as compared to the prior year.
General and administrative expenses
General and administrative expenses increased to
$1,159.0 millionfrom $1,036.8 million, or an 11.8% increase and increased as a percentage of revenue to 13.9% from 13.2%. General and administrative expenses were impacted by approximately $95.5 millionof acquisition costs primarily associated with our acquisitions of Liberty and Tracepoint incurred during fiscal 2022. In addition, salaries and salary related benefits increased $34.7 million, driven by an increase in headcount and annual base salary increases.
Depreciation and amortization
Depreciation and amortization increased to
Interest expense increased to
Other (Income) Expense, net
Other (income) net expenses increased to
•A net gain of
$7.1 millionrecognized from a transaction in the third quarter of fiscal 2022 in which the Company transferred all assets related to SnapAttack™ to a new cyber threat hunting and detection company and disposed of the controlling interest to an unrelated third party and retained an equity method investment;
income tax expense
Income tax expense increased to
$137.5 millionfrom $53.5 million. The effective tax rate increased to 22.8% in fiscal 2022 from 8.1% in fiscal 2021. The increase was primarily due to a $76.8 millionincome tax benefit recognized in the fourth quarter of fiscal 2021 related to the re-measurement of net operating losses that were carried back to fiscal 2016 and subsequent years.
Cash and capital resources
March 31, 2022, our total liquidity was $1.7 billion, consisting of $695.9 millionof cash and cash equivalents and $999.0 millionavailable under the Revolving Credit Facility. To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, 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. 60 -------------------------------------------------------------------------------- The following table presents selected financial information for the periods presented: Fiscal Year Ended March 31, 2022 2021 2020 (In thousands) Cash and cash equivalents $ 695,910 $ 990,955 $ 741,901Total debt $ 2,800,072
Net cash provided by operating activities
$ 736,526 $ 718,684 $ 551,428Net cash (used in) investing activities (867,725) (158,284) (128,079)
Net cash (used in) provided by financing activities (163,846)
Total (decrease) increase in cash and cash equivalents
From time to time we evaluate alternative uses for excess cash resources once our operating cash flow and required debt servicing needs have been met. Some of the possible uses of our remaining excess cash at any point in time may include funding strategic acquisitions, further investment in our business, and returning value to shareholders through share repurchases, quarterly dividends, and special dividends. While the timing and financial magnitude of these possible actions are currently indeterminable, the Company expects to be able to manage and adjust its capital structure in the future to meet its liquidity needs. Historically, we have been able to generate sufficient cash to fund our operations, mandatory debt and interest payments, capital expenditures, and discretionary funding needs. However, due to fluctuations in cash flows, including as a result of the trends and developments described above under "-Factors and Trends Affecting Our Results of Operations" relating to
U.S.government shutdowns, U.S.government cost-cutting, reductions or delays in the U.S.government appropriations and spending process and other budgetary matters, it may be necessary from time-to-time in the future to borrow under our Secured Credit Facility to meet cash demands. While the timing and financial magnitude of these possible actions are currently indeterminable, we expect to be able to manage and adjust our capital structure to meet our liquidity needs. Our expected liquidity and capital structure may also be impacted by discretionary investments and acquisitions that we could pursue. We anticipate that cash provided by operating activities, existing cash and cash equivalents, and borrowing capacity under 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 finance the organic and inorganic growth of our business;
•capital expenditures which relate primarily to the purchase of computers, business systems, furniture and leasehold improvements to support our operations;
•continuous maintenance around all financial management systems;
•commitments and other discretionary investments;
•debt service requirements for borrowings under our secured credit facility and interest payments for senior notes; and
• cash taxes to be paid.
Our ability to fund our operating requirements depends, in part, on our ability to continue to generate positive cash flow from operations or, if necessary, to raise funds in the capital markets. In addition, from time to time, we evaluate conditions for opportunistic access to funding markets to obtain additional debt capital resources and to improve the terms of our indebtedness.
In the fourth quarter of fiscal 2022, the Company announced that it had entered into a definitive agreement to acquire
EverWatch Corp., a leading provider of advanced solutions to the defense and intelligence communities for approximately $440.0 million, subject to customary adjustments. The Company expects to fund the acquisition with cash on hand. The transaction is expected to close in fiscal 2023. 61 --------------------------------------------------------------------------------
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
$736.5 millionin fiscal 2022 compared to $718.7 millionin fiscal 2021, or a 2.5% increase. The increase in operating cash flow over the prior year was primarily driven by strong working capital management, partially offset by approximately $97.5 millionof acquisition costs incurred and paid during fiscal 2022, primarily associated with our acquisitions of Liberty and Tracepoint. Effective fiscal 2023, the Tax Cuts and Jobs Act of 2017 requires the capitalization of research and development costs for tax purposes, which can then be amortized over five years and 15 years for domestic and foreign costs, respectively. Congresshas proposed tax legislation to delay the effective date of this change to 2026, but it is uncertain whether the proposed delay will ultimately be enacted into law. Based upon the analysis performed to date and our interpretation of the legislation, the Company estimates that we will incur approximately $150.0 millionin cash taxes in fiscal 2023 if the current effective date remains in place, but our deferred tax liability would be offset by a corresponding amount. Investing Cash Flow Net cash used in investing activities was $867.7 millionin fiscal 2022 compared to $158.3 millionin the prior year. The increase in net cash used in investing activities was primarily due to the Company's acquisitions of Liberty and Tracepoint, partially offset by the initial 40% minority investment in Tracepoint of $74.2 millionin the prior year.
Net cash used in financing activities was
$163.8 millionin fiscal 2022 compared to $311.3 millionin the prior year, or a 47.4% decrease. The decrease in net cash used in financing activities was primarily due to the following: •An increase of $152.2 millionin net proceeds from the issuance of bonds in fiscal 2022 (Senior Notes due 2029) as compared to fiscal 2021 (Senior Notes due 2028);
•A decrease of
•The above was partially offset by an increase in share repurchases of
$105.5 millionand an increase in dividends paid of $28.0 millionas compared to the prior year.
Dividends and share buybacks
The Company paid
$1.54in dividends per share to shareholders of record in fiscal 2022. On May 20, 2022, the Company announced a regular quarterly cash dividend in the amount of $0.43per share. The quarterly dividend is payable on June 30, 2022to stockholders of record on June 15, 2022. 62 --------------------------------------------------------------------------------
The following table summarizes the cash distributions recognized in the consolidated statement of cash flows:
Fiscal Year Ended March 31, 2022 2021 2020 (In thousands) Recurring dividends (1)
$ 209,057 $ 181,066 $ 146,602
(1) Amounts represent recurring dividends that were declared and paid during each quarter of fiscal years 2022, 2021 and 2020, respectively.
December 12, 2011, the Board of Directors approved a share repurchase program, which was most recently increased to $2,160.0 millionin January 26, 2022. 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 2022 and 2021, the Company purchased 4.7 million and 3.8 million shares of the Company's Class A Common Stock, respectively, for an aggregate of $389.9 millionand $293.4 million, respectively. As of March 31, 2022, the Company had approximately $651.6 millionremaining under the repurchase program. Any determination to pursue one or more of the above alternative uses for excess cash is subject to the discretion of our Board of Directors, and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts, and our Credit Agreement, as amended, and other factors deemed relevant by our Board of Directors.
Our debt totaled
$2.8 billionand $2.4 billionas of March 31, 2022and 2021, respectively. Our debt bears interest at specified rates (see Note 10 to our consolidated financial statements). On June 24, 2021, Booz Allen Hamilton Inc.("Booz Allen Hamilton"), Booz Allen Hamilton Investor Corporation("Investor"), and certain wholly-owned subsidiaries of Booz Allen Hamilton, entered into the eighth amendment (the "Eighth Amendment") to the Credit Agreement dated as of July 31, 2012, as amended (the "Existing Credit Agreement" and, as amended, the "Credit Agreement"), with certain institutional lenders and Bank of America, N.A., as Administrative Agent and Collateral Agent. The Eighth Amendment added an additional tier in the pricing grid and extended the maturity applicable to both the Term Loan A ("Term Loan A") and revolving credit facility (the "Revolving Credit Facility") to June 24, 2026, increased the aggregate principal amount of the Revolving Credit Facility and the letter of credit sublimit thereunder, and made certain other amendments to the financial covenants and other terms under the Existing Credit Agreement. The interest rate and maturity date applicable to Term Loan B ("Term Loan B" and, together with Term Loan A, the "Term Loans") remained unchanged. Prior to the Eighth Amendment, approximately $1,289.8 millionwas outstanding under Term Loan A (the "Existing Tranche A Term Loans"). Pursuant to the Eighth Amendment, certain lenders under the Existing Credit Agreement converted their Existing Tranche A Term Loans into a new tranche of tranche A term loans (the "New Refinancing Tranche A Term Loans") in an aggregate amount, along with the New Refinancing Tranche A Term Loans advanced by certain new lenders, of approximately $1,289.8 million. The proceeds from the new lenders were used to prepay in full all of the Existing Tranche A Term Loans that were not converted into the New Refinancing Tranche A Term Loans. Voluntary prepayments of the New Refinancing Tranche A Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty. The other terms of the New Refinancing Tranche A Term Loans are generally the same as the Existing Tranche A Term Loans prior to the Eighth Amendment. Prior to the Eighth Amendment, approximately $500.0 millionof revolving commitments (the "Existing Revolving Commitments") were available under the Existing Credit Agreement, with a sublimit for letters of credit of $100.0 million. Pursuant to the Eighth Amendment, certain lenders under the Existing Credit Agreement converted their Existing Revolving Commitments into a new tranche of revolving commitments (the "New Revolving Commitments" and the revolving credit loans made thereunder, the "New Revolving Loans") in an aggregate amount, along with the New Revolving Commitments of certain new lenders, of $1,000 million, with a sublimit for letters of credit of $200.0 million. As of March 31, 2022, the Credit Agreement provided Booz Allen Hamiltonwith a $1,241.4 millionTerm Loan A, a $380.3 millionTerm Loan B, and $1,000 millionRevolving Credit Facility with a sub-limit for letters of credit of $200.0 million(collectively, the "Secured Credit Facility"). As of March 31, 2022, the maturity date of Term Loan A and the termination date for the Revolving Credit Facility was June 24, 2026and the maturity date of Term Loan B was November 26, 2026. Booz Allen Hamilton'sobligations and the guarantors' guarantees under the Credit Agreement are secured by a first priority lien on substantially all of the assets (including capital stock of subsidiaries) of Booz Allen Hamilton, Investor and the subsidiary guarantors, subject to certain exceptions set forth in the Credit Agreement and related documentation. Subject to specified conditions, without the consent of the then-existing lenders (but subject to the receipt of commitments), the Term 63 -------------------------------------------------------------------------------- Loans or the Revolving Credit Facility may be expanded (or a new term loan facility or revolving credit facility added to the existing facilities) by up to (i) the greater of (x) $909 millionand (y) 100% of consolidated EBITDA of Booz Allen Hamilton, as of the end of the most recently ended four quarter period for which financial statements have been delivered pursuant to the Credit Agreement plus (ii) the aggregate principal amount under which pro forma consolidated net secured leverage remains less than or equal to 3.50:1.00. At Booz Allen Hamilton'soption, 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 1.13% to 2.00% for LIBOR loans and 0.13% to 1.00% for base rate loans, in each case based on Booz Allen Hamilton'sconsolidated total net leverage ratio. The applicable margin for Term Loan B is 1.75% for LIBOR loans and 0.75% for base rate loans. Unused commitments under the Revolving Credit Facility are subject to a quarterly fee ranging from 0.18% to 0.35% based on Booz Allen Hamilton'sconsolidated total net leverage ratio. Booz Allen Hamiltonoccasionally borrows under the Revolving Credit Facility in anticipation of cash demands. During fiscal 2022, Booz Allen Hamiltonaccessed no amounts of its $500.0 millionRevolving Credit Facility. During fiscal 2021, Booz Allen Hamiltonaccessed a total of $100.0 millionof its $500.0 millionRevolving Credit Facility. As of March 31, 2022, there was no outstanding balance on the Revolving Credit Facility. As of March 31, 2021, $100.0 millionwas outstanding on the Revolving Credit Facility, which was repaid in June 2021.
The credit agreement requires quarterly principal repayments of 1.25% of the stated principal amount of Term Loan A until maturity, and quarterly principal repayments of 0.25% of the stated principal amount of the loan term B until maturity.
Booz Allen Hamiltonalso has agreed to pay customary letter of credit and agency fees. As of March 31, 2022and 2021, Booz Allen Hamiltonwas contingently liable under open standby letters of credit and bank guarantees issued by its banks in favor of third parties that totaled $8.4 millionand $9.8 million, respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. For both March 31, 2022and 2021, approximately $1.0 million, of these instruments reduced our available borrowings under the Revolving Credit Facility. The remainder is guaranteed under a separate $20.0 millionfacility, of which $12.6 millionand $11.1 million, respectively, was available to Booz Allen Hamiltonat March 31, 2022and 2021. As of March 31, 2022, we had $999.0 millionof capacity available for additional borrowings under the Revolving Credit Facility. The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include limitations on the following, in each case subject to certain exceptions: (i) indebtedness and liens; (ii) mergers, consolidations or amalgamations, liquidations, wind-ups or dissolutions, and disposition of all or substantially all assets; (iii) dispositions of property; (iv) restricted payments; (v) investments; (vi) transactions with affiliates; (vii) change in fiscal periods; (viii) negative pledges; (ix) restrictive agreements; (x) line of business; and (xi) speculative hedging. The events of default include the following, in each case subject to certain exceptions: (a) failure to make required payments under the Secured Credit Facility; (b) material breaches of representations or warranties under the Secured Credit Facility; (c) failure to observe covenants or agreements under the Secured Credit Facility; (d) failure to pay or default under certain other material indebtedness; (e) bankruptcy or insolvency; (f) certain Employee Retirement Income Security Act, or ERISA, events; (g) certain material judgments; (h) actual or asserted invalidity of the Guarantee and Collateral Agreements or the other security documents or failure of the guarantees or perfected liens thereunder; and (i) a change of control. In addition, we are required to meet certain financial covenants at each quarter end, namely Consolidated Net Total Leverage and Consolidated Net Interest Coverage Ratios. As of March 31, 2022, we were compliant with these covenants. During fiscal 2022, interest payments of $19.6 millionand $7.2 millionwere made for the Term Loan A and Term Loan B facilities, respectively. During fiscal 2021, interest payments of $23.6 millionand $7.8 millionwere made for the Term Loan A and Term Loan B facilities, respectively.
The total amount of debt outstanding is recorded in the accompanying consolidated balance sheets, net of the unamortized discount and debt issue costs of
August 24, 2020, Booz Allen Hamiltonissued $700 millionaggregate principal amount of its Senior Notes under an Indenture, dated as of August 24, 2020, among Booz Allen Hamilton, certain subsidiaries of Booz Allen Hamilton, as guarantors (the "Subsidiary Guarantors"), and Wilmington Trust, National Associationas trustee (the "Trustee"), as supplemented by the First Supplemental Indenture, dated as of August 24, 2020, among Booz Allen Hamilton, the Subsidiary Guarantors and the Trustee. A portion of the net proceeds from the sale of the Senior Notes was used to redeem in full $350 millionaggregate principal amount of the outstanding 2017 Senior Notes at a redemption price of 102.56% of the principal amount thereof, plus accrued and unpaid interest thereon to (but excluding) the redemption date, and to pay all fees 64 -------------------------------------------------------------------------------- and expenses related to the foregoing. Booz Allen Hamiltonintends to use the remaining net proceeds from the sale of the Senior Notes for working capital and other general corporate purposes (see Note 10 in our consolidated financial statements). For fiscal 2022 and 2021, total interest payments of $37.9 millionand $28.7 millionwere made for the Senior Notes, respectively. 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 between April 6, 2017and April 4, 2019, Booz Allen Hamiltonexecuted a series of interest rate swaps. As of March 31, 2022, we had interest rate swaps with an aggregate notional amount of $700.0 million. These instruments hedge the variability of cash outflows for interest payments on the 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 11 in our consolidated financial statements).
Capital structure and resources
Our stockholders' equity amounted to
$1,046.7 millionas of March 31, 2022, a decrease of $25.1 millioncompared to stockholders' equity of $1,071.2 millionas of March 31, 2021. The decrease was primarily due to $419.3 millionin treasury stock resulting from the repurchase of shares of our Class A Common Stock and $209.2 millionin aggregate quarterly dividend payments in fiscal 2022, partially offset by net income of $466.6 millionin fiscal 2022 and stock-based compensation expense of $69.8 million.
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 2022 and 2021 were
$80.0 millionand $87.2 million, respectively. The decrease in capital expenditures was primarily driven by lower spend related to the implementation of our new financial management system on April 1, 2021as compared to the prior year period, as well as lower facilities expenses reflecting the investment in technology and tools needed to support the virtual work environment.
Commitments and contingencies
We are subject to a number of reviews, investigations, claims, lawsuits, and other uncertainties related to our business. For a discussion of these items, refer to Note 20 to our consolidated financial statements. 65
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