sv1za
As filed with the Securities and Exchange
Commission on July 30, 2010
Registration No. 333-167645
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Booz Allen Hamilton Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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7373
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26-2634160
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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8283 Greensboro Drive
McLean, Virginia 22102
(703) 902-5000
(Address, including Zip Code,
and Telephone Number, including Area Code, of Registrants
Principal Executive Offices)
CG Appleby
Executive Vice President and
General Counsel
8283 Greensboro Drive
McLean, Virginia 22102
(703) 902-5000
(Name, Address, including Zip
Code, and Telephone Number, including Area Code, of Agent for
Service)
Copies to:
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Matthew E. Kaplan
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
(212) 909-6000
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Douglas S. Manya
Booz Allen Hamilton Inc.
8283 Greensboro Drive
McLean, Virginia 22102
(703) 902-5000
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Rachel W. Sheridan
Jason M. Licht
Latham & Watkins LLP
555 Eleventh Street, NW
Suite 1000
Washington, D.C. 20004
(202) 637-2200
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date hereof.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer x
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state or jurisdiction where the offer or sale
is not permitted.
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SUBJECT TO COMPLETION, DATED
JULY 30, 2010
Shares
Class A Common
Stock
This is an initial public offering of Class A common stock
of Booz Allen Hamilton Holding Corporation. We are
offering shares of Class A common
stock to be sold in this offering. No public market currently
exists for our Class A common stock. The initial public
offering price of our Class A common stock is expected to
be between $ and
$ per share.
We will apply to list our Class A common stock
on under the symbol BAH.
Investing in our Class A common stock involves risks.
See Risk Factors beginning on page 17 of this
prospectus.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters also may purchase up
to additional shares from us at the
initial offering price less the underwriting discounts and
commissions to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares to purchasers on
or about , 2010.
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Morgan
Stanley |
Barclays
Capital |
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BofA
Merrill Lynch |
Credit
Suisse |
Stifel Nicolaus
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BB&T
Capital Markets |
Lazard Capital Markets |
Raymond James |
, 2010.
TABLE OF
CONTENTS
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ii
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F-1
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You should rely only on the information contained in this
prospectus or any free writing prospectus prepared by or on
behalf of us or to which we have referred you. Neither we nor
the underwriters have authorized anyone to provide you with
additional or different information. Neither this prospectus nor
any free writing prospectus is an offer to sell anywhere or to
anyone where or to whom we are not permitted to offer or to sell
securities under applicable law. The information in this
prospectus or any free writing prospectus is accurate only as of
the date of this prospectus or such free writing prospectus, as
applicable.
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MARKET
AND INDUSTRY DATA
Information in this prospectus about each of the
U.S. government defense, intelligence and civil markets,
including our general expectations concerning those markets, our
position within those markets and the amount of spending by the
U.S. government on private contractors in any of those
markets, is based on estimates prepared using data from
independent industry publications, reports by market research
firms, other published independent sources, including the
U.S. government, and our good faith estimates and
assumptions, which are derived from such data and our knowledge
of and experience in these markets. Data provided by Bloomberg
Finance L.P. cited in this prospectus is based on data from the
Federal Procurement Data System, or FPDS. Although we believe
these sources are credible, we have not verified the data or
information obtained from these sources. By including such
market data and industry information, we do not undertake a duty
to provide such data in the future or to update such data if it
is updated. Our estimates, in particular as they relate to our
general expectations concerning the U.S. government
defense, intelligence and civil markets, have not been verified
by any independent source and involve risks and uncertainties
and are subject to change based on various factors, including
those discussed under the caption Risk Factors.
SUPPLEMENTAL
INFORMATION
Unless the context otherwise indicates or requires, as used
in this prospectus, references to: (i) we,
us, our or our company refer
to Booz Allen Hamilton Holding Corporation, its consolidated
subsidiaries and predecessors; (ii) Booz Allen
Holding or issuer refers to Booz Allen
Hamilton Holding Corporation exclusive of its subsidiaries;
(iii) Booz Allen Investor refers to Booz Allen
Hamilton Investor Corporation, a wholly-owned subsidiary of Booz
Allen Holding; (iv) Booz Allen Hamilton refers
to Booz Allen Hamilton Inc., our primary operating company and a
wholly-owned subsidiary of Booz Allen Holding;
(v) The Carlyle Group or Carlyle
refers to The Carlyle Group and its affiliated investment funds;
(vi) clients, when used in the context of the
U.S. government, refers to organizations at all levels of
the U.S. government, ranging from executive departments to
independent agencies and offices, with whom we contract for the
provision of services; (vii) fiscal, when used
in reference to any twelve-month period ended March 31,
refers to our fiscal years ended March 31; and
(viii) pro forma 2009 refers to our unaudited
pro forma results for the twelve months ended March 31,
2009, assuming the acquisition had been completed as of
April 1, 2008.
We are organized and operate as a corporation. Our use of the
term partnership in this prospectus reflects our
collaborative culture, and our use of the term
partner in this prospectus refers to our Chairman
and our Executive and Senior Vice Presidents. The use of the
terms partnership and partner is not
meant to create any implication that we operate our company as,
or have any intention to create a legal entity that is, a
partnership.
Booz Allen
Hamilton®,
Transformation Life
Cycletm,
the Booz Allen Hamilton logo, and other trademarks or service
marks of Booz Allen Hamilton Inc. appearing in this prospectus
are property of Booz Allen Hamilton Inc. Trade names, trademarks
and service marks of other companies appearing in this
prospectus are the property of their respective owners.
We have made rounding adjustments to reach some of the
figures included in this prospectus and, unless otherwise
indicated, percentages presented in this prospectus are
approximate.
ii
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that you should consider before investing in our
Class A common stock. You should read the entire prospectus
carefully, including the Risk Factors section and
our consolidated financial statements and the notes to those
statements, before making an investment decision. Some of the
statements in this summary constitute forward-looking
statements. See Special Note Regarding
Forward-Looking
Statements.
Overview
We are a leading provider of management and technology
consulting services to the U.S. government in the defense,
intelligence and civil markets. Founded in 1914 by Edwin Booz,
we have expanded beyond our management consulting foundation to
develop deep expertise in technology, engineering and analytics.
We began serving the U.S. government in 1940 by advising
the Secretary of the Navy in preparation for World War II.
Today, our approximately 23,300 people serve substantially all
of the cabinet-level departments of the U.S. government and
have strong and longstanding relationships with a diverse group
of other organizations at all levels of the
U.S. government. We support our clients in addressing
complex and pressing challenges such as combating global
terrorism, improving cyber capabilities, transforming the
healthcare system, improving efficiency and managing change
within the government and protecting the environment. We have
grown our revenue organically, without relying on acquisitions,
at an 18% compound annual growth rate, or CAGR, over the 15-year
period ended March 31, 2010, reaching $5.1 billion in
revenue in fiscal 2010.
We derived 98% of our revenue in fiscal 2010 from services
provided to over 1,300 clients across the U.S. government
under more than 4,900 contracts and task orders. We have served
our top ten clients, or their predecessor organizations, for an
average of over 20 years. We derived 86% of our revenue in
fiscal 2010 from engagements for which we acted as the prime
contractor. Also during fiscal 2010, we achieved an overall win
rate of 57% on new contracts and task orders for which we
competed and a win rate of more than 92% on re-competed
contracts and task orders for existing or related business. As
of March 31, 2010, our total backlog, including funded,
unfunded, and priced options, was $9.0 billion, an increase
of 24% over March 31, 2009.
We attribute the strength of our client relationships, the
commitment of our people, and our resulting growth to our
management consulting heritage and culture, which instills our
relentless focus on delivering value and enduring results to our
clients. We operate our business as a single profit center,
which drives our ability to collaborate internally and compete
externally. Our operating model is built on (1) our
dedication to client service, which focuses on leveraging our
experience and knowledge to provide differentiated insights,
(2) our
partnership-style
culture and compensation system, which fosters collaboration and
the efficient allocation of our people across markets, clients
and opportunities (3) our professional development and
360-degree
assessment system, which ensures that our people are aligned
with our collaborative culture, core values and ethics and
(4) our approach to the market, which leverages our matrix
of deep domain expertise in the defense, intelligence and civil
markets and our strong capabilities in strategy and organization
analytics, technology and operations.
1
Deployment
of Capabilities to Serve Clients
The diagram below illustrates the way we deploy our four
capability areas, including specified areas of expertise, to
serve our defense, intelligence and civil clients. Our dynamic
matrix of functional capabilities and domain expertise plays a
critical role in our efforts to deliver proven results to our
clients.
Market
Opportunity
Large
Addressable Markets
We believe that the U.S. government is the worlds largest
consumer of management and technology consulting services. Based
on data from Bloomberg Finance L.P., approximately
$513 billion of the U.S. government fiscal year 2009
discretionary outlays of $1 trillion were for
non-intelligence agency and non-ARRA (American Recovery and
Reinstatement Act) funding-related products and services
procured from private contractors. We estimate that
$93 billion of the spending directed towards private
contractors in U.S. government fiscal year 2009 was for
management and technology consulting services, with
$56 billion spent by the Department of Defense and
$37 billion spent by civil agencies. The agencies of the
U.S. Intelligence Community that we serve represent an
additional market.
Focus
on Efficiency and Transforming Procurement
Practices
There is pressure across the U.S. government to control
spending while also improving services for citizens and
aggressively pursuing numerous important policy initiatives.
This has led to an increased focus on accomplishing more with
fewer resources, streamlining information services and
processes, reducing fraud, waste and abuse, and improving
productivity. In order to efficiently implement these
initiatives, we believe that the U.S. government will
require support in the form of the services that we provide,
such as strategy and change management and organization and
process improvement. Economic pressure has also driven an
emphasis on greater accountability, transparency and spending
effectiveness in U.S. government procurement
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practices. Recent efforts to reform procurement practices have
focused on decreasing the use of lead system integrators, which
are contractors that have historically been hired to execute
large, complex and often defense-related acquisition programs,
the unbundling of outsourced projects and the mitigation of
specific organizational conflicts of interest issues, which
typically arise when a contractor has impaired objectivity,
unfair access to non-public information, or the ability to set
the ground rules for another procurement for which the
contractor competes.
Complex
Defense, Intelligence and Civil Agency
Requirements
The U.S. government continually reassesses and updates its
long-term priorities and develops new strategies to address the
rapidly evolving issues it faces. In order to deliver effective
advice in this environment, service providers must possess a
comprehensive knowledge of, and experience with, the
participants, systems and technology employed by the
U.S. government, and must also have an ability to
facilitate knowledge sharing while managing varying objectives.
For example, within the Department of Defense, the 2010
Quadrennial Defense Review, or the 2010 QDR, prioritizes support
for the war fighter and integrating intelligence, surveillance
and reconnaissance systems with weapons and ground operations.
Within the U.S. Intelligence Community and across the
U.S. government generally, the current priority is
enhancing cyber-capabilities. Within the civil agencies of the
U.S. government, there has been an increased focus on
financial regulation, energy and environmental issues,
healthcare reform and infrastructure-related challenges. We
believe that the initiatives resulting from these new priorities
will result in increased demand for management and technology
consulting services.
Major
Changes Create Demand
Major changes in the government, political and overall economic
landscape drive demand for objective management and technology
consulting services and advice. Certain of these changes, such
as the inauguration of a new presidential administration, are
recurring in nature. Other changes are more sudden and
unexpected, as was the case with the attacks of
September 11, 2001 and the recent financial crisis and
economic downturn. To effectively help clients develop and
implement new policies and respond to evolving priorities under
such circumstances, service providers must have the flexibility
to rapidly redeploy intellectual capital, resources and
capabilities.
Our Value
Proposition to Our Clients
As a leading provider of management and technology consulting
services to the U.S. government, we believe that we are
well positioned to grow across markets characterized by
increasing and rapid change.
Our
People
Our success as a management and technology consulting firm is
highly dependent upon the quality, integrity and dedication of
our people.
Superior Talent Base. We have a highly
educated talent base of approximately 23,300 people. Many
of the U.S. government contracts for which we compete
require contractors to have high-level security clearances, and
our large pool of cleared employees allows us to meet these
needs. Through our recruiting efforts, we are able to
successfully renew and grow our talent base, and we believe that
our ability to attract top level talent is significantly
enhanced by our commitment to professional development, our
position as a leader in our markets, the high quality of our
work and the appeal of our culture.
Focus on Talent Development. We develop our
talent base by providing our people with the opportunity to work
on important and complex problems, encouraging and acknowledging
contributions of our people at all levels of seniority, and
facilitating broad, inclusive and insightful leadership.
Assessment System that Promotes
Collaboration. We use our
360-degree
assessment process to help promote and enforce the consistency
of our collaborative culture, core values and ethics. Each of
our people receives an annual assessment and also participates
in the assessment of other company personnel.
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Core Values. Our core values, which are a key
component of our success, are: client service, diversity,
excellence, entrepreneurship, teamwork, professionalism,
fairness, integrity, respect and trust. All new hires receive
extensive training that emphasizes our core values, facilitates
their integration into our collaborative, client-oriented
culture and helps to ensure the delivery of consistent and
exceptional client service.
Our
Management Consulting Heritage
Our Approach to Client Service. Over the
70 years that we have been serving the
U.S. government, we have cultivated relationships of trust
with, and developed a comprehensive understanding of, our
clients. This insight regarding our clients, together with our
deep domain knowledge and capabilities, enable us to anticipate,
identify and address the specific needs of our clients.
Partnership-Style Culture and Compensation
System. A commitment to teamwork is deeply
ingrained in our company, and our partnership-style culture is
critical to maintaining this component of our operating model.
We manage our company as a single profit center with a
partner-style compensation system that focuses on the success of
the institution over the success of the individual.
Our
Client-Oriented Matrix Approach
We are able to address the complex and evolving needs of our
clients and grow our business through the application of our
matrix of deep domain knowledge and market-leading capabilities.
Through this approach, we deploy our four key capabilities,
strategy and organization, analytics, technology, and
operations, across our client base. This approach enables us to
quickly assemble and deploy client-focused teams comprised of
people with the expertise needed to address the challenges
facing our clients. We believe that our growth and significant
win rates on new and re-competed contracts demonstrate the
strength of our matrix approach as well as our industry-leading
reputation and our proven track record.
Our
Strategy for Continued Growth
To serve our clients and grow our business, we intend to execute
the following strategies:
Expand Our Business Base. We believe that
significant growth opportunities exist in our markets, and we
intend to:
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Deepen Our Existing Client Relationships. Our
approach to client service and our collaborative culture enable
us to effectively cross-sell and deploy multiple services to
existing clients. We plan to leverage our comprehensive
understanding of our clients needs and our track record of
successful performance to grow our client relationships and
expand the scope of the services we provide to our existing
clients.
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Help Clients Rapidly Respond to Change. We
will continue to help our clients formulate rapid and dynamic
responses to the frequent and sometimes sudden changes that they
face by leveraging: the scope and scale of our domain expertise,
our broad capabilities, and our one-firm culture.
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Broaden Our Client Base. We believe that
growing demand for the types of services we provide and our
ongoing business initiatives will enable us to leverage our
reputation as a trusted partner and industry leader to cultivate
new client relationships across all agencies and departments of
the U.S. government. We will also continue to build on our
current cyber-security related opportunities in the commercial
market.
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Capitalize on Our Strengths in Emerging
Areas. We will continue to leverage our deep
domain expertise and broad capabilities to help our clients
address emerging issues, including:
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Cyber. Network-enabled technology now forms
the backbone of our economy, infrastructure and national
security, and recent national policies and governmental
initiatives are creating new cyber-related opportunities. We are
currently involved in numerous cyber-related initiatives for our
defense, intelligence and civil clients and cyber-security
initiatives for commercial clients.
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Government Efficiency and Procurement. We are
focused on helping the U.S. government achieve operating
and budgetary efficiencies while simultaneously pursuing
numerous policy initiatives. In addition, recent
U.S. government reforms in the procurement area may allow
us to leverage our status as a large, objective service provider
with deep domain knowledge and technical expertise to win
additional assignments to the extent that we are able to address
organizational conflicts of interest and similar concerns more
easily than our competitors.
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Ongoing Healthcare Transformation. We expect
recent and ongoing developments in the healthcare market, such
as the passage of the Affordable Care Act of 2010 and the Health
Information Technology for Economic and Clinical Health Act of
2009, to increase demand for our healthcare consulting
capabilities. We have been serving healthcare-oriented clients
in the U.S. government since the late 1980s.
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Systems Engineering & Integration, or
SE&I. Our clients are increasingly utilizing
SE&I services to help them manage every phase of the
development and integration of increasingly sophisticated
information technology, communications and mission
systems ranging from satellite and space systems to
air traffic control and naval systems. Through the application
of our matrix, we have developed deep cross-market SE&I
capabilities combining engineering, acquisition, management and
prime contracting expertise. We plan to leverage this knowledge
and expertise to bid on large-scale SE&I contract awards.
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Continue to Innovate. We will continue to
invest significant resources in our efforts to identify
near-term
developments and long-term trends that may present significant
challenges or opportunities for our clients. Our single profit
center and one-firm culture provide the flexibility to devote
company-wide resources and key intellectual capital to
developing the functional capabilities and expertise needed to
address new and emerging challenges. We have regularly allocated
significant resources to these business development efforts and
have successfully transitioned several such initiatives into
meaningful contributors to our business. We continue to invest
in many initiatives at various stages of development, and are
currently focused on cloud computing, advanced analytics, and
the deployment of specialized services and capabilities in the
financial sector, among others.
5
Our
Corporate Structure
The following chart illustrates our corporate structure,
including Class A common stock ownership percentages, after
giving effect to this offering.
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(1) |
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Represents %, %
and % of the total voting power in
our company, respectively. |
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(2) |
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Guarantor of the senior credit facilities and mezzanine credit
facility. |
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(3) |
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Refers to our senior secured loan facilities providing for a
$125.0 million Tranche A term facility,
$585.0 million Tranche B term facility,
$350.0 million Tranche C term facility and
$245.0 million revolving credit facility. As of
March 31, 2010, we had $1.0 billion outstanding under
our senior credit facilities. |
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(4) |
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Refers to our $550.0 million mezzanine term loan facility.
As of March 31, 2010, on a pro forma basis after giving
effect to this offering and the use of the net proceeds
therefrom, which is based on the midpoint of the price range set
forth on the cover page of this prospectus, we would have had
$ million
of debt outstanding under our mezzanine credit facility. |
Our
Principal Stockholder
Our principal stockholder is Explorer Coinvest LLC, or Coinvest,
an entity controlled by Carlyle. Coinvest became our principal
stockholder in our July 2008 merger transaction, which, together
with the spin off of our commercial and international business
and the related transactions, is referred to in this prospectus
as the acquisition. See The Acquisition and
Recapitalization Transaction.
The Carlyle Group is a global alternative asset manager with
$90.5 billion under management committed to 67 funds as of
March 31, 2010. Carlyle invests in buyouts, growth capital,
real estate and leveraged finance in North America, Europe,
Asia, Australia, the Middle East and North Africa, and Latin
America focusing on aerospace and defense, automotive and
transportation, consumer and retail, energy and power, financial
services, healthcare, industrial, infrastructure, technology and
business services and telecommunications and media. Since 1987,
the firm has invested $60.6 billion of equity in 969
transactions for a total purchase price of $233.4 billion.
Carlyle employs 880 people in 27 offices throughout the
world.
6
As of March 31, 2010, Carlyle, through Coinvest, owned 79%
of our outstanding common stock, representing 81% of the total
voting power in our company. Following the completion of this
offering and assuming that the underwriters do not exercise
their option to purchase additional shares of Class A
common stock, Carlyle will continue to
own % of our outstanding common
stock, representing % of the total
voting power in our company. Because of certain voting and other
provisions of the current stockholders agreement, Carlyle may be
deemed to share beneficial ownership over shares of common stock
held by other stockholders. Of the seven members currently
serving on our board of directors, or the Board, four were
designated by Carlyle. Under the terms of an amended and
restated stockholders agreement to be entered into among Booz
Allen Holding and Coinvest in connection with this offering.
Carlyle will continue to have the right to designate a majority
of the Board nominees for election and the voting power to elect
such nominees following the completion of the offering. In
addition, the amended and restated stockholders agreement will
continue to provide rights and restrictions with respect to
certain transactions in our securities entered into by Coinvest
or certain other stockholders. See Certain Relationships
and Related Party Transactions Related Person
Transactions Stockholders Agreement.
Company
Information
We are incorporated under the laws of the state of Delaware. Our
principal executive office is located at 8283 Greensboro Drive,
McLean, Virginia 22102, and our telephone number is
(703) 902-5000.
Our website is www.boozallen.com and is included in this
prospectus as an inactive textual reference only. The
information contained on, or that may be accessed through, our
website is not part of, and is not incorporated into, this
prospectus.
7
The
Offering
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Class A common stock offered by us |
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shares |
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Class A common stock outstanding after the offering
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shares |
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Option to purchase additional shares of Class A common stock
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The underwriters have a
30-day
option to purchase an
additional
shares of Class A common stock from us. |
|
Proposed stock exchange symbol |
|
BAH |
|
Use of proceeds |
|
We estimate that our net proceeds from the offering, after
deducting underwriting discounts and commissions and estimated
offering expenses payable by us, will be approximately
$ million, based on the
midpoint of the price range set forth on the cover page of this
prospectus. We intend to use the net proceeds from this offering
to repay $ million of
indebtedness outstanding under our mezzanine credit facility and
pay an associated prepayment penalty of
$ million. See
Use of Proceeds. Certain of the underwriters of this
offering or their affiliates are lenders under our senior credit
facilities and mezzanine credit facility. Accordingly, certain
of the underwriters may receive net proceeds from this offering
in connection with the repayment of our mezzanine credit
facility. See Underwriting. |
|
Risk factors |
|
See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding whether to invest in shares of our
Class A common stock. |
|
Dividend policy |
|
We do not expect to pay dividends on our Class A common
stock for the foreseeable future. |
|
Conflicts of interest |
|
We intend to use certain of the net proceeds of this offering to
retire a portion of the mezzanine credit facility under which an
affiliate of Credit Suisse Securities (USA) LLC is a lender.
Since Credit Suisse Securities (USA) LLCs affiliate will
receive at least 5% of the net proceeds of this offering in
connection with this repayment, Credit Suisse Securities (USA)
LLC, a member of the Financial Industry Regulatory Authority, or
FINRA, may be deemed to have a conflict of interest
with us under FINRAs NASD Conduct Rule 2720.
Accordingly, this offering will be conducted in compliance with
the requirements of such rule. See
Underwriting Conflicts of Interest. |
Following this offering, we will have four classes of authorized
common stock: Class A common stock, Class B non-voting
common stock, Class C restricted common stock and
Class E special voting common stock. As
of ,
2010, ,
and shares of
our Class B non-voting common stock, Class C
restricted common stock and Class E special voting common
stock were outstanding. The rights of the holders of
Class A common stock, Class C restricted common stock
and Class E special voting common stock are identical,
except with respect to participation in dividends and other
distributions, vesting and conversion. Class A common
stock, Class C restricted common stock and Class E
special voting common stock are entitled to one vote per share
on all matters voted on by our stockholders. The Class B
common stock is non-voting common stock. When stock options
related to our Class E common stock are exercised, we will
8
repurchase the underlying share of Class E common stock and
issue a share of Class A common stock to the option holder.
See Description of Capital Stock.
The number of shares of our Class A common stock to be
outstanding immediately after the offering is based on the
number of shares of Class A common stock outstanding as
of , 2010. Such number excludes:
|
|
|
|
|
shares of Class A
common stock reserved for issuance under our Equity Incentive
Plan, including shares issuable upon the exercise of outstanding
stock options;
|
|
|
|
shares of Class A
common stock reserved for issuance under our Officers
Rollover Stock Plan upon the exercise of outstanding stock
options related to outstanding shares of our Class E
special voting common stock and our mandatory repurchase of
those shares in connection with such exercise; and
|
|
|
|
shares of Class A
common stock issuable upon transfer of outstanding Class B
non-voting common stock and Class C restricted common stock.
|
Unless we indicate otherwise, the information in this prospectus:
|
|
|
|
|
reflects a -for-1 split of our
outstanding common stock to be effected prior to the completion
of this offering. The stock split will be effected to reduce the
per share price of our Class A common stock to a more
customary level for an initial public offering and an initial
listing on a national securities exchange;
|
|
|
|
gives effect to amendments to our certificate of incorporation
and bylaws to be adopted prior to the completion of this
offering and the related elimination of our Class D merger
rolling common stock and Class F non-voting restricted
common stock prior to the completion of this offering;
|
|
|
|
assumes the issuance
of shares of Class A
common stock in this offering;
|
|
|
|
assumes that the initial public offering price of our
Class A common stock will be
$ per share, which is the
midpoint of the price range set forth on the cover page of this
prospectus;
|
|
|
|
assumes that the underwriters will not exercise their
over-allotment option; and
|
|
|
|
presents indebtedness outstanding under our senior credit
facilities and our mezzanine credit facility as of any
particular date net of unamortized discount.
|
9
SUMMARY
OF HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables provide a summary of our historical
consolidated financial and other data for the periods indicated.
The summary consolidated financial data for fiscal 2008 and
fiscal 2010 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. Our
historical results are not necessarily indicative of the results
that may be expected for any future period. The information
below should be read in conjunction with
Capitalization, Selected Historical
Consolidated Financial and Other Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the consolidated
financial statements and notes thereto included in this
prospectus.
As discussed in more detail under The Acquisition and
Recapitalization Transaction, Booz Allen Hamilton was
indirectly acquired by Carlyle on July 31, 2008.
Immediately prior to the acquisition, Booz Allen Hamilton
spun-off its commercial and international business and retained
its U.S. government business. The accompanying consolidated
financial statements included elsewhere in this prospectus are
presented for (1) the Predecessor, which are
the financial statements of Booz Allen Hamilton and its
consolidated subsidiaries for the period preceding the
acquisition, and (2) the Company, which are the
financial statements of Booz Allen Holding and its consolidated
subsidiaries for the period following the acquisition. Prior to
the acquisition, Booz Allen Hamiltons U.S. government
business is presented as the continuing operations of the
Predecessor. The Predecessors consolidated financial
statements have been presented for the twelve months ended
March 31, 2008 and the four months ended July 31,
2008. The operating results of the commercial and international
business that was spun off by Booz Allen Hamilton effective
July 31, 2008 have been presented as discontinued
operations in the Predecessor consolidated financial statements
and the related notes included in this prospectus. The
Companys consolidated financial statements for periods
subsequent to the acquisition have been presented from
August 1, 2008 through March 31, 2009 and for the
twelve months ended March 31, 2010. The Predecessors
financial statements may not necessarily be indicative of the
cost structure or results of operations that would have existed
if the U.S. government business operated as a stand-alone,
independent business. The acquisition was accounted for as a
business combination, which resulted in a new basis of
accounting. The Predecessors and the Companys
financial statements are not comparable as a result of applying
a new basis of accounting. See Notes 1, 4, and 24 to our
consolidated financial statements for additional information
regarding the accounting treatment of the acquisition and
discontinued operations.
The results of operations for fiscal 2008 are presented as
adjusted to reflect the change in accounting principle
related to our revenue recognition policies as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Estimates and Policies.
Included in the table below are unaudited pro forma results of
operations for the twelve months ended March 31, 2009, or
pro forma 2009, assuming the acquisition had been
completed as of April 1, 2008. The unaudited pro forma
condensed consolidated results of operations for fiscal 2009 are
based on our historical audited consolidated financial
statements included elsewhere in this prospectus, adjusted to
give pro forma effect to the acquisition. The unaudited pro
forma condensed consolidated results of operations for fiscal
2009 are presented because management believes it provides a
meaningful comparison of operating results enabling twelve
months of fiscal 2009, adjusted for the impact of the
acquisition, to be compared with fiscal 2010. The unaudited pro
forma condensed consolidated financial statements are for
informational purposes only and do not purport to represent what
our actual results of operations would have been if the
acquisition had been completed as of April 1, 2008 or that
may be achieved in the future. The unaudited pro forma condensed
consolidated financial information and the accompanying notes
should be read in conjunction with our historical audited
consolidated financial statements and related notes appearing
elsewhere in this prospectus and other financial information
contained in Risk Factors, The Acquisition and
Recapitalization Transaction, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations for a
description of the pro forma adjustments attributable to the
acquisition.
10
The pro forma as adjusted (i) earnings per share and
weighted average shares outstanding set forth in the table below
give effect to the net proceeds to us from the sale
of shares of our Class A
common stock in this offering at an assumed initial public
offering price of $ , the midpoint
of the range set forth on the cover page of this prospectus, and
the use of our net proceeds from this offering to repay
borrowings under our mezzanine credit facility and the
associated prepayment penalty as described in Use of
Proceeds, as if each had occurred on April 1, 2009,
and (ii) balance sheet data set forth in the table below
gives effect to the net proceeds to us from the sale
of shares of our Class A
common stock in this offering at an assumed initial public
offering price of $ per share, the
midpoint of the range set forth on the cover of this prospectus,
and the use of our net proceeds from this offering to repay
borrowings under our mezzanine credit facility and the
associated prepayment penalty as described in Use of
Proceeds, as if each had occurred on March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
March 31, 2009(1)
|
|
|
March 31, 2010
|
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,625,055
|
|
|
|
$
|
4,351,218
|
|
|
$
|
5,122,633
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and other costs
|
|
|
2,028,848
|
|
|
|
|
2,296,335
|
|
|
|
2,654,143
|
|
Billable expenses
|
|
|
935,459
|
|
|
|
|
1,158,320
|
|
|
|
1,361,229
|
|
General and administrative expenses
|
|
|
474,188
|
|
|
|
|
723,827
|
|
|
|
811,944
|
|
Depreciation and amortization
|
|
|
33,079
|
|
|
|
|
106,335
|
|
|
|
95,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,471,574
|
|
|
|
|
4,284,817
|
|
|
|
4,923,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
153,481
|
|
|
|
|
66,401
|
|
|
|
199,554
|
|
Interest income
|
|
|
2,442
|
|
|
|
|
5,312
|
|
|
|
1,466
|
|
Interest expense
|
|
|
(2,319
|
)
|
|
|
|
(146,803
|
)
|
|
|
(150,734
|
)
|
Other expense, net
|
|
|
(1,931
|
)
|
|
|
|
(182
|
)
|
|
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
151,673
|
|
|
|
|
(75,272
|
)
|
|
|
48,994
|
|
Income tax (benefit) expense from continuing operations
|
|
|
62,693
|
|
|
|
|
(25,831
|
)
|
|
|
23,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
88,980
|
|
|
|
$
|
(49,441
|
)
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(71,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,874
|
|
|
|
|
|
|
|
$
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding(2)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing
operations(2)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted weighted average shares outstanding(3)(4):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
Diluted
|
|
|
|
|
Pro forma as adjusted earnings per share from continuing
operations(3)(4):
|
|
|
|
|
Basic
|
|
$
|
|
|
Diluted
|
|
|
|
|
Dividends per share (unaudited)
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
(5)
|
Consolidated Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
$
|
270,484
|
|
Net cash used in investing activities of continuing operations
|
|
|
(10,991
|
)
|
Net cash used in financing activities of continuing operations
|
|
|
(372,560
|
)
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
March 31, 2009(1)
|
|
|
March 31, 2010
|
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
Other Financial Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(6)
|
|
$
|
226,874
|
|
|
|
$
|
277,344
|
|
|
$
|
368,323
|
|
Adjusted Net Income(6)
|
|
$
|
97,001
|
|
Free Cash Flow(6)
|
|
$
|
221,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
The Company
|
|
|
As of March 31,
|
|
|
As of March 31
|
|
|
2008
|
|
|
2009
|
|
2010
|
Other Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog (in thousands)(7)
|
|
|
N/A
|
(8)
|
|
|
$
|
7,278,782
|
|
|
$
|
9,012,923
|
|
Employees
|
|
|
18,822
|
|
|
|
|
21,614
|
|
|
|
23,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
As of March 31, 2010
|
|
|
|
|
Pro Forma as
|
|
|
Actual
|
|
Adjusted(9)
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
307,835
|
|
|
|
|
|
Working capital
|
|
|
584,248
|
|
|
|
|
|
Total assets
|
|
|
3,062,223
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
1,546,782
|
|
|
|
|
|
Stockholders equity
|
|
|
509,583
|
|
|
|
|
|
|
|
|
(1) |
|
See Selected Historical Consolidated Financial and Other
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operation
Results of Operations for further information regarding
our unaudited pro forma condensed consolidated results of
operations. |
|
(2) |
|
Basic earnings per share for the Company has been computed using
the weighted average number of shares of Class A common
stock, Class B non-voting common stock and Class C
restricted common stock outstanding during the period. The
Companys diluted earnings per share has been computed
using the weighted average number of shares of Class A
common stock, Class B non-voting common stock and
Class C restricted common stock including the dilutive
effect of outstanding common stock options and other stock-based
awards. The weighted average number of Class E special
voting common stock has not been included in the calculation of
either basic earnings per share or diluted earnings per share
due to the terms of such common stock. |
|
|
|
Basic earnings per share for the Predecessor has been computed
using the weighted average number of shares of Class A
common stock outstanding during the period. The
Predecessors diluted earnings per share has been computed
using the weighted average number of shares of Class A
common stock including the dilutive effect of outstanding
stock-based awards. |
|
(3) |
|
Reflects
a -
for-1 split of our outstanding common stock to be effected prior
to the completion of this offering. |
|
(4) |
|
Includes shares
of Class A common stock offered by us in this offering. Pro
forma as adjusted earnings per share data also gives effect to
the reduction in interest expense related to the use of the net
proceeds from this offering to repay a portion of our mezzanine
credit facility. |
|
(5) |
|
Reflects the payment of special dividends in the aggregate
amount of $114.9 million and $497.5 million to holders
of record of our Class A common stock, Class B
non-voting common stock, and Class C restricted common
stock as of July 29, 2009 and December 8, 2009,
respectively. |
12
|
|
|
(6) |
|
Adjusted EBITDA represents net income before
income taxes, net interest and other expense and depreciation
and amortization and before certain other items, including:
(i) certain stock option-based and other equity-based
compensation expenses, (ii) transaction costs, fees, losses
and expenses, (iii) the impact of the application of
purchase accounting and (iv) any extraordinary, unusual or
non-recurring items. We prepare Adjusted EBITDA to eliminate the
impact of items we do not consider indicative of ongoing
operating performance due to their inherent unusual,
extraordinary or non-recurring nature or because they result
from an event of a similar nature. |
|
|
|
We utilize and discuss Adjusted EBITDA because our management
uses this measure for business planning purposes, including to
manage the business against internal projected results of
operations and measure the performance of the business
generally. We view Adjusted EBITDA as a measure of our core
operating business because it excludes the impact of the items
described above on our results of operations as these items are
generally not operational in nature. Adjusted EBITDA also
provides another basis for comparing period to period results by
excluding potential differences caused by non-operational and
unusual, extraordinary or non-recurring items. We also present
Adjusted EBITDA in this prospectus as a supplemental performance
measure because we believe that this measure provides investors
and securities analysts with important supplemental information
with which to evaluate our performance and to enable them to
assess our performance on the same basis as management. |
|
|
|
Adjusted EBITDA as discussed in this prospectus may vary from
and may not be comparable to similarly titled measures presented
by other companies in our industry. Adjusted EBITDA is different
from the term EBITDA as it is commonly used, and
Adjusted EBITDA also varies from (i) the measure
Consolidated EBITDA discussed in this prospectus
under Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Indebtedness
and (ii) the measures EBITDA and Bonus
EBITDA discussed in this prospectus under Executive
Compensation. Adjusted EBITDA is not a recognized
measurement under U.S. Generally Accepted Accounting
Principles, or GAAP, and when analyzing our performance,
investors should (i) evaluate each adjustment in our
reconciliation of net income to Adjusted EBITDA and the
explanatory footnotes regarding those adjustments and
(ii) use Adjusted EBITDA in addition to, and not as an
alternative to, operating income or net income as a measure of
operating results, each as defined under GAAP. |
The following table reconciles net income to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2008
|
|
|
|
March 31, 2009
|
|
|
March 31, 2010
|
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Net income (loss)
|
|
$
|
17,874
|
|
|
|
$
|
(49,441
|
)(a)
|
|
$
|
25,419
|
|
Income tax (benefit) expense
|
|
|
62,693
|
|
|
|
|
(25,831
|
)
|
|
|
23,575
|
|
Interest and other expense, net
|
|
|
1,808
|
|
|
|
|
141,673
|
|
|
|
150,560
|
|
Depreciation and amortization(b)
|
|
|
33,079
|
|
|
|
|
106,335
|
|
|
|
95,763
|
|
Certain stock-based compensation expense(c)
|
|
|
35,013
|
|
|
|
|
82,019
|
|
|
|
68,517
|
|
Transaction expenses(d)
|
|
|
5,301
|
|
|
|
|
19,512
|
|
|
|
3,415
|
|
Purchase accounting adjustments(e)
|
|
|
|
|
|
|
|
3,077
|
|
|
|
1,074
|
|
Non-recurring items(f)
|
|
|
71,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
226,874
|
|
|
|
$
|
277,344
|
|
|
$
|
368,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents loss from continuing operations. |
|
(b) |
|
Includes $57.8 million and $40.6 million in pro forma
2009 and fiscal 2010, respectively, of amortization of
intangible assets resulting from the acquisition. |
13
|
|
|
(c) |
|
Reflects (i) $35.0 million of expense in fiscal 2008
for stock rights under the Predecessors Officer Stock
Rights Plan, which were accounted for as liability awards, and
(ii), $70.5 million and $49.3 million of stock-based
compensation expense for pro forma 2009 and fiscal 2010,
respectively, for new options for Class A common stock and
restricted shares, in each case, issued in connection with the
acquisition under the Officers Rollover Stock Plan
established in connection with the acquisition. Expense is based
on vesting schedules from three to five years, which is
dependent on whether officers were classified as retirement or
non-retirement eligible at the time of the acquisition. Also
reflects $11.5 million and $19.2 million for pro forma
2009 and fiscal 2010, respectively, of stock-based compensation
expense for Equity Incentive Plan Class A common stock
options issued in connection with the acquisition under the
Equity Incentive Plan established in connection with the
acquisition. |
|
(d) |
|
Fiscal 2008 and pro forma 2009 reflect charges related to the
acquisition, including legal, tax and accounting expenses.
Fiscal 2010 reflects costs related to the modification of our
credit facilities, the establishment of the Tranche C term
loan facility under our senior credit facilities and the
related payment of special dividends. See Acquisition and
Recapitalization Transaction. |
|
(e) |
|
Reflects adjustments resulting from the application of purchase
accounting in connection with the acquisition not otherwise
included in depreciation and amortization. |
|
(f) |
|
Reflects loss from discontinued operations. |
|
|
|
|
|
Adjusted Net Income represents net income
before: (i) certain stock option-based and other
equity-based compensation expenses, (ii) transaction costs,
fees, losses and expenses, (iii) the impact of the
application of purchase accounting, (iv) adjustments
related to the amortization of intangible assets,
(v) amortization or write-off of debt issuance costs and
write-off of original issue discount, or OID, and (vi) any
extraordinary, unusual or non-recurring items, in each case net
of the tax effect calculated using an assumed effective tax
rate. We prepare Adjusted Net Income to eliminate the impact of
items, net of tax, we do not consider indicative of ongoing
operating performance due to their inherent unusual,
extraordinary or non-recurring nature or because they result
from an event of a similar nature. |
|
|
|
We utilize and discuss Adjusted Net Income because our
management uses this measure for business planning purposes,
including to manage the business against internal projected
results of operations and measure the performance of the
business generally. We view Adjusted Net Income as a measure of
our core operating business because it excludes the items
described above, net of tax, which are generally not operational
in nature. We also present Adjusted Net Income in this
prospectus as a supplemental performance measure because we
believe that this measure provides investors and securities
analysts with important supplemental information with which to
evaluate our performance, long-term earnings potential and to
enable them to assess our performance on the same basis as
management. |
|
|
|
Adjusted Net Income as discussed in this prospectus may vary
from and may not be comparable to similarly titled measures
presented by other companies in our industry. Adjusted Net
Income is not a recognized measurement under GAAP and when
analyzing our performance, investors should (i) evaluate
each adjustment in our reconciliation of net income to Adjusted
Net Income and the explanatory footnotes regarding those
adjustments and (ii) use Adjusted Net Income in addition
to, and not as an alternative to, operating income or net income
as a measure of operating results, each as defined under GAAP. |
14
The following table reconciles net income to Adjusted Net Income:
|
|
|
|
|
|
|
The Company
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
25,419
|
|
Certain stock-based compensation expense(a)
|
|
|
68,517
|
|
Transaction expenses(b)
|
|
|
3,415
|
|
Purchase accounting adjustments(c)
|
|
|
1,074
|
|
Amortization of intangible assets(d)
|
|
|
40,597
|
|
Amortization or write-off of debt issuance costs and write-off
of OID
|
|
|
5,700
|
|
Adjustments for tax effect(e)
|
|
|
(47,721
|
)
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
97,001
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects $49.3 million of stock-based compensation expense
for new options for Class A common stock and restricted
shares, in each case issued in connection with the acquisition
under the Officers Rollover Stock Plan established in
connection with the acquisition. Expense is based on vesting
schedules from three to five years, which is dependent on
whether officers were classified as retirement or non-retirement
eligible at the time of the acquisition. Also reflects
$19.2 million of stock-based compensation expense for
Equity Incentive Plan Class A common stock options issued
in connection with the acquisition under the Equity Incentive
Plan established in connection with the acquisition. |
|
(b) |
|
Reflects costs related to the modification of our credit
facilities, the establishment of the Tranche C term loan
facility under our senior credit facilities and the related
payment of special dividends. See Acquisition and
Recapitalization Transaction. |
|
(c) |
|
Reflects adjustments resulting from the application of purchase
accounting in connection with the acquisition. |
|
(d) |
|
Reflects amortization of intangible assets resulting from the
acquisition. |
|
(e) |
|
Reflects taxes on adjustments at an assumed marginal effective
tax rate of 40%. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Factors and Trends Affecting Our Results
of Operations Income Taxes and our
consolidated financial statements and related footnotes included
in this prospectus. |
|
|
|
|
|
Free Cash Flow represents (i) net cash
provided by operating activities of continuing operations after
(ii) purchases of property and equipment, each as presented
in our consolidated statements of cash flows. We utilize and
discuss Free Cash Flow because our management uses this measure
for business planning purposes, to measure the cash generating
ability of our operating business after the impact of cash used
to purchase property and equipment, and to measure our liquidity
generally. We also present Free Cash Flow in this prospectus as
a supplemental liquidity measure because we believe that this
measure provides investors and securities analysts with
important supplemental information with which to evaluate our
liquidity and to enable them to assess our liquidity on the same
basis as management. |
|
|
|
Free Cash Flow as discussed in this prospectus may vary from and
may not be comparable to similarly titled measures presented by
other companies in our industry. Free Cash Flow is not a
recognized measurement under GAAP and when analyzing our
liquidity, investors should use Free Cash Flow in addition to,
and not as an alternative to, cash flows, as defined under GAAP,
as a measure of liquidity. |
15
|
|
|
|
|
The following table reconciles net cash provided by operating
activities of continuing operations to Free Cash Flow: |
|
|
|
|
|
|
|
The Company
|
|
|
|
Fiscal Year Ended
|
|
|
|
March 31, 2010
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
$
|
270,484
|
|
Purchases of property and equipment
|
|
|
(49,271
|
)
|
|
|
|
|
|
Free Cash Flow
|
|
$
|
221,213
|
|
|
|
|
|
|
|
|
|
(7) |
|
We define backlog to include funded backlog, unfunded backlog
and priced options. 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 those contracts. Unfunded backlog
represents the revenue value of orders for services under
existing contracts for which funding has not been appropriated
or otherwise authorized. 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. Backlog is given as of the end of each
period presented. See Risk Factors Risks
Relating to Our Business We may not realize the full
value of our backlog, which may result in lower than expected
revenue, Managements Discussion and Analysis
of Financial Condition and Results of Operations
Factors and Trends Affecting Our Results of
Operations Sources of Revenue Contract
Backlog and Business Backlog. |
|
(8) |
|
Not available because we began to separately track information
on priced options on April 1, 2008. |
|
(9) |
|
Each $1.00 increase (decrease) in the assumed public offering
price of $ per share would increase
(decrease) the pro forma as adjusted amount of each of cash and
cash equivalents, working capital, total assets, long-term debt,
net of current portion and stockholders equity by
approximately $ million, assuming that
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same, and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. We may also increase or
decrease the number of shares we are offering. Each increase of
1.0 million shares in the number of shares offered by us,
together with a concomitant $1.00 increase in the assumed
offering price of $ per share,
would increase the pro forma as adjusted amount of each of cash
and cash equivalents, working capital, total assets, long-term
debt, net of current portion, and stockholders equity by
approximately $ million.
Similarly, each decrease of 1.0 million shares in the
number of shares offered by us, together with a concomitant
$1.00 decrease in the assumed offering price of
$ per share, would decrease the
pro forma as adjusted amount of each of cash and cash
equivalents, working capital, total assets, long-term debt, net
of current portion, and stockholders equity by
approximately $ million. The
information discussed above is illustrative only and will adjust
based on the actual public offering price and other terms of
this offering determined at pricing. |
16
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should consider and read carefully all of the risks and
uncertainties described below, as well as other information
included in this prospectus, including our consolidated
financial statements and related notes appearing at the end of
this prospectus, before making an investment decision. The risks
described below are not the only ones facing us. The occurrence
of any of the following risks or additional risks and
uncertainties not presently known to us or that we currently
believe to be immaterial could materially and adversely affect
our business, financial condition or results of operations. In
such case, the trading price of our common stock could decline,
and you may lose all or part of your original investment. This
prospectus also contains forward-looking statements and
estimates that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the
forward-looking statements as a result of specific factors,
including the risks and uncertainties described below.
Risks
Related to Our Business
We
depend on contracts with U.S. government agencies for
substantially all of our revenue. If our relationships with such
agencies are harmed, our future revenue and operating profits
would decline.
The U.S. government is our primary client, with revenue
from contracts and task orders, either as a prime or a
subcontractor, with U.S. government agencies accounting for
98% of our revenue for fiscal 2010. Our belief is that the
successful future growth of our business will continue to depend
primarily on our ability to be awarded work under
U.S. government contracts, as we expect this will be the
primary source of all of our revenue in the foreseeable future.
For this reason, any issue that compromises our relationship
with the U.S. government generally or any
U.S. government agency that we serve would cause our
revenue to decline. Among the key factors in maintaining our
relationship with U.S. government agencies are our
performance on contracts and task orders, the strength of our
professional reputation, compliance with applicable laws and
regulations, and the strength of our relationships with client
personnel. In addition, the mishandling or the perception of
mishandling of sensitive information, such as our failure to
maintain the confidentiality of the existence of our business
relationships with certain of our clients, could harm our
relationship with U.S. government agencies. If a client is not
satisfied with the quality or type of work performed by us, a
subcontractor or other third parties who provide services or
products for a specific project, clients might seek to terminate
the contract prior to its scheduled expiration date, provide a
negative assessment of our performance to government-maintained
contractor past-performance data repositories, fail to award us
additional business under existing contracts or otherwise and
direct future business to our competitors. Furthermore, we may
incur additional costs to address any such situation and the
profitability of that work might be impaired. To the extent that
our performance does not meet client expectations, or our
reputation or relationships with any of our clients is impaired,
our revenue and operating profits could materially decline.
U.S.
government spending and mission priorities could change in a
manner that adversely affects our future revenue and limits our
growth prospects.
Our business depends upon continued U.S. government
expenditures on defense, intelligence and civil programs for
which we provide support. These expenditures have not remained
constant over time and have been reduced in certain periods. Our
business, prospects, financial condition or operating results
could be materially harmed among other causes by the following:
|
|
|
|
|
budgetary constraints affecting U.S. government spending
generally, or specific agencies in particular, and changes in
available funding;
|
|
|
|
a shift in expenditures away from agencies or programs that we
support;
|
|
|
|
reduced U.S. government outsourcing of functions that we
are currently contracted to provide, including as a result of
increased insourcing;
|
|
|
|
changes in U.S. government programs that we support or
related requirements;
|
17
|
|
|
|
|
U.S. government shutdowns (such as that which occurred
during government fiscal year 1996) or weather-related
closures in the Washington, DC area (such as that which occurred
in February 2010) and other potential delays in the
appropriations process;
|
|
|
|
U.S. government agencies awarding contracts on a
technically acceptable/lowest cost basis in order to reduce
expenditures;
|
|
|
|
delays in the payment of our invoices by government payment
offices; and
|
|
|
|
changes in the political climate and general economic
conditions, including a slowdown or unstable economic conditions
and responses to conditions, such as emergency spending, that
reduce funds available for other government priorities.
|
In particular, insourcing has become a major initiative for the
Department of Defense. The Department of Defense is one of our
significant clients and a reduction in the amount of services
that we are contracted to provide to the Department of Defense
as a result of this initiative or otherwise could have a
material adverse effect on our business and results of
operations.
These or other factors could cause U.S. government agencies
to decrease the number of new contracts awarded generally and
fail to award us new contracts, reduce their purchases under our
existing contracts, exercise their right to terminate our
contracts, or not exercise options to renew our contracts, any
of which could cause a material decline in our revenue.
We are
required to comply with numerous laws and regulations, some of
which are highly complex, and our failure to comply could result
in fines or civil or criminal penalties or suspension or
debarment by the U.S. government that could result in our
inability to receive U.S. government contracts, which could
materially and adversely affect our results of
operations.
As a U.S. government contractor, we must comply with laws
and regulations relating to the formation, administration and
performance of U.S. government contracts, which affect how
we do business with our clients. Such laws and regulations may
potentially impose added costs on our business and our failure
to comply with them may lead to civil or criminal penalties,
termination of our U.S. government contracts
and/or
suspension or debarment from contracting with federal agencies.
Some significant laws and regulations that affect us include:
|
|
|
|
|
the Federal Acquisition Regulation, or the FAR, and agency
regulations supplemental to the FAR, which regulate the
formation, administration and performance of
U.S. government contracts. Specifically, FAR 52.203-13
requires contractors to establish a Code of Business Ethics and
Conduct, implement a comprehensive internal control system, and
report to the government when the contractor has credible
evidence that a principal, employee, agent, or subcontractor, in
connection with a government contract, has violated certain
federal criminal law, violated the civil False Claims Act or has
received a significant overpayment;
|
|
|
|
the False Claims Act and False Statements Act, which impose
civil and criminal liability for presenting false or fraudulent
claims for payments or reimbursement, and making false
statements to the U.S. government, respectively;
|
|
|
|
the Truth in Negotiations Act, which requires certification and
disclosure of cost and pricing data in connection with the
negotiation of a contract, modification or task order;
|
|
|
|
laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the export of certain products, services and
technical data; and
|
|
|
|
the Cost Accounting Standards and Cost Principles, which impose
accounting requirements that govern our right to reimbursement
under certain cost-based U.S. government contracts and
require consistency of accounting practices over time.
|
In addition, the U.S. government adopts new laws, rules and
regulations from time to time that could have a material impact
on our results of operations.
18
Our performance under our U.S. government contracts and our
compliance with the terms of those contracts and applicable laws
and regulations are subject to periodic audit, review and
investigation by various agencies of the U.S. government.
If such an audit, review or investigation uncovers a violation
of a law or regulation, or improper or illegal activities
relating to our U.S. government contracts, we may be
subject to civil or criminal penalties or administrative
sanctions, including the termination of contracts, forfeiture of
profits, the triggering of price reduction clauses, suspension
of payments, fines and suspension or debarment from contracting
with U.S. government agencies. Such penalties and sanctions
are not uncommon in the industry and there is inherent
uncertainty as to the outcome of any particular audit, review or
investigation. If we incur a material penalty or administrative
sanction or otherwise suffer harm to our reputation, our
profitability, cash position and future prospects could be
materially and adversely affected. Further, if the
U.S. government were to initiate suspension or debarment
proceedings against us or if we are indicted for or convicted of
illegal activities relating to our U.S. government
contracts following an audit, review or investigation, we may
lose our ability to be awarded contracts in the future or
receive renewals of existing contracts for a period of time
which could materially and adversely affect our results of
operations or financial condition. We could also suffer harm to
our reputation if allegations of impropriety were made against
us, which would impair our ability to win awards of contracts in
the future or receive renewals of existing contracts.
We
derive a majority of our revenue from contracts awarded through
a competitive bidding process, and our revenue and profitability
may be adversely affected if we are unable to compete
effectively in the process or if there are delays caused by our
competitors protesting major contract awards received by
us.
We derive a majority of our revenue from U.S. government
contracts awarded though competitive bidding processes. We do
not expect this to change for the foreseeable future. Our
failure to compete effectively in this procurement environment
would have a material adverse effect on our revenue and
profitability.
The competitive bidding process involves risk and significant
costs to businesses operating in this environment, including:
|
|
|
|
|
the necessity to expend resources, make financial commitments
(such as procuring leased premises) and bid on engagements in
advance of the completion of their design, which may result in
unforeseen difficulties in execution, cost overruns and, in the
case of an unsuccessful competition, the loss of committed costs;
|
|
|
|
the substantial cost and managerial time and effort spent to
prepare bids and proposals for contracts that may not be awarded
to us;
|
|
|
|
the ability to accurately estimate the resources and costs that
will be required to service any contract we are awarded;
|
|
|
|
the expense and delay that may arise if our competitors protest
or challenge contract awards made to us pursuant to competitive
bidding, and the risk that any such protest or challenge could
result in the resubmission of bids on modified specifications,
or in termination, reduction, or modification of the awarded
contract; and
|
|
|
|
any opportunity cost of bidding and winning other contracts we
might otherwise pursue.
|
In circumstances where contracts are held by other companies and
are scheduled to expire, we still may not be provided the
opportunity to bid on those contracts if the
U.S. government determines to extend the existing contract.
If we are unable to win particular contracts that are awarded
through the competitive bidding process, we may not be able to
operate in the market for services that are provided under those
contracts for the duration of those contracts to the extent that
there is no additional demand for such services. An inability to
consistently win new contract awards over any extended period
would have a material adverse effect on our business and results
of operations.
It can take many months for the relevant U.S. government
agency to resolve protests by one or more of our competitors of
contract awards we receive. The resulting delay in the start up
and funding of the work under these contracts may cause our
actual results to differ materially and adversely from those
anticipated.
19
We may
lose GSA schedules or our position as a prime contractor on one
or more of our GWACs.
We believe that one of the key elements of our success is our
position as the holder of 11 General Services
Administration Multiple Award schedule contracts, or GSA
schedules, and as a prime contractor under
four government-wide acquisition contract vehicles, or
GWACs, as of March 31, 2010. GSA schedules are administered
by the General Services Administration and support a wide range
of products and services. GWACs are used to procure IT products
and services and are administered by the agency soliciting the
services or products. Our ability to maintain our existing
business and win new business depends on our ability to maintain
our position as a GSA schedule contractor and a prime contractor
on GWACs. The loss of any of our GSA schedules or our prime
contractor position on any of our contracts could have a
material adverse effect on our ability to win new business and
our operating results. In addition, if the U.S. government
elects to use a contract vehicle that we do not hold, we will
not be able to compete for work under that contract vehicle as a
prime contractor.
We may
earn less revenue than projected, or no revenue, under certain
of our contracts.
Many of our contracts with our clients are indefinite delivery,
indefinite quantity, or ID/IQ, contracts, including GSA
schedules and GWACs. ID/IQ contracts provide for the issuance by
the client of orders for services or products under the
contract, and often contain multi-year terms and unfunded
ceiling amounts, which allow but do not commit the
U.S. government to purchase products and services from
contractors. Our ability to generate revenue under each of these
types of contracts depends upon our ability to be awarded task
orders for specific services by the client. ID/IQ contracts may
be awarded to one contractor (single award) or several
contractors (multiple award). Multiple contractors must compete
under multiple award ID/IQ contracts for task orders to provide
particular services, and contractors earn revenue only to the
extent that they successfully compete for these task orders. In
fiscal 2008, pro forma 2009 and fiscal 2010, our revenue under
our GSA schedules and GWACs accounted for 29%, 27% and 23%,
respectively, of our total revenue. A failure to be awarded task
orders under such contracts would have a material adverse effect
on our results of operations and financial condition.
Our
earnings and profitability may vary based on the mix of our
contracts and may be adversely affected by our failure to
accurately estimate or otherwise recover the expenses, time and
resources for our contracts.
We enter into three general types of U.S. government
contracts for our services:
cost-reimbursable,
time-and-materials
and fixed-price. For fiscal 2010, we derived 50% of our revenue
from cost-reimbursable contracts, 38% from time-and-materials
contracts and 12% from fixed-price contracts.
Each of these types of contracts, to varying degrees, involves
the risk that we could underestimate our cost of fulfilling the
contract, which may reduce the profit we earn or lead to a
financial loss on the contract and adversely affect our
operating results.
Under cost-reimbursable contracts, we are reimbursed for
allowable costs up to a ceiling and paid a fee, which may be
fixed or performance-based. If our actual costs exceed the
contract ceiling or are not allowable under the terms of the
contract or applicable regulations, we may not be able to
recover those costs. In particular, there is increasing focus by
the U.S. government on the extent to which government
contractors, including us, are able to receive reimbursement for
employee compensation.
Under
time-and-materials
contracts, we are reimbursed for labor at negotiated hourly
billing rates and for certain allowable expenses. We assume
financial risk on
time-and-materials
contracts because our costs of performance may exceed these
negotiated hourly rates.
Under fixed-price contracts, we perform specific tasks for a
pre-determined price. Compared to
time-and-materials
and cost-reimbursable contracts, fixed-price contracts generally
offer higher margin opportunities because we receive the
benefits of any cost savings, but involve greater financial risk
because we bear the impact of any cost overruns. The
U.S. government has indicated that it intends to increase
its use of fixed price contract procurements. Because we assume
the risk for cost overruns and contingent losses on
20
fixed-price contracts, an increase in the percentage of
fixed-price contracts in our contract mix would increase our
risk of suffering losses.
Additionally, our profits could be adversely affected if our
costs under any of these contracts exceed the assumptions we
used in bidding for the contract. We have recorded provisions in
our consolidated financial statements for losses on our
contracts, as required under GAAP, but our contract loss
provisions may not be adequate to cover all actual losses that
we may incur in the future.
Our
professional reputation is critical to our business, and any
harm to our reputation could decrease the amount of business the
U.S. government does with us, which could have a material
adverse effect on our future revenue and growth
prospects.
We depend on our contracts with U.S. government agencies
for substantially all of our revenue and if our reputation or
relationships with these agencies were harmed, our future
revenue and growth prospects would be materially and adversely
affected. Our reputation and relationship with the
U.S. government is a key factor in maintaining and growing
revenue under contracts with the U.S. government. Negative
press reports regarding poor contract performance, employee
misconduct, information security breaches or other aspects of
our business, or regarding government contractors generally,
could harm our reputation. If our reputation with these agencies
is negatively affected, or if we are suspended or debarred from
contracting with government agencies for any reason, such
actions would decrease the amount of business that the
U.S. government does with us, which would have a material
adverse effect on our future revenue and growth prospects.
We use
estimates in recognizing revenue and if we make changes to
estimates used in recognizing revenue, our profitability may be
adversely affected.
Revenue from our fixed-price contracts is primarily recognized
using the
percentage-of-completion
method with progress toward completion of a particular contract
based on actual costs incurred relative to total estimated costs
to be incurred over the life of the contract. Revenue from our
cost-plus-award-fee contracts are based on our estimation of
award fees over the life of the contract. Estimating costs at
completion and award fees on our long-term contracts is complex
and involves significant judgment. Adjustments to original
estimates are often required as work progresses, experience is
gained and additional information becomes known, even though the
scope of the work required under the contract may not change.
Any adjustment as a result of a change in estimate is recognized
as events become known.
In the event updated estimates indicate that we will experience
a loss on the contract, we recognize the estimated loss at the
time it is determined. Additional information may subsequently
indicate that the loss is more or less than initially
recognized, which requires further adjustments in our
consolidated financial statements. Changes in the underlying
assumptions, circumstances or estimates could result in
adjustments that could have a material adverse effect on our
future results of operations.
We may
not realize the full value of our backlog, which may result in
lower than expected revenue.
As of March 31, 2010, our total backlog was
$9.0 billion, of which $2.5 billion was funded. We
define backlog to include the following three components:
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Funded Backlog. Funded backlog represents the
revenue value of orders for services under existing contracts
for which funding is appropriated or otherwise authorized less
revenue previously recognized on these contracts.
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Unfunded Backlog. Unfunded backlog represents
the revenue value of orders for services under existing
contracts for which funding has not been appropriated or
otherwise authorized.
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Priced Options. Priced contract options
represent 100% of the 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.
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Backlog does not include any task orders under ID/IQ contracts,
including GWACs and GSA schedules, except to the extent that
task orders have been awarded to us under those contracts.
We historically have not realized all of the revenue included in
our total backlog, and we may not realize all of the revenue
included in our total backlog in the future. There is a somewhat
higher degree of risk in this regard with respect to unfunded
backlog and priced options. In addition, there can be no
assurance that our backlog will result in actual revenue in any
particular period. This is because the actual receipt, timing
and amount of revenue under contracts included in backlog are
subject to various contingencies, including congressional
appropriations, many of which are beyond our control. For
example, the actual receipt of revenue from contracts included
in backlog may never occur or may be delayed because a program
schedule could change or the program could be canceled, or a
contract could be reduced, modified or terminated early,
including as a result of a lack of appropriated funds. In
addition, headcount growth is the primary means by which we are
able to recognize revenue growth. To the extent that we are able
to hire additional people and deploy them against funded
backlog, we recognize increased revenue. Any inability to hire
additional appropriately qualified personnel or failure to
effectively deploy such additional personnel against funded
backlog could negatively affect our ability to grow our revenue.
Furthermore, even if our backlog results in revenue, the
contracts may not be profitable.
We may
fail to attract, train and retain skilled and qualified
employees with appropriate security clearances, which may impair
our ability to generate revenue, effectively service our clients
and execute our growth strategy.
Our business depends in large part upon our ability to attract
and retain sufficient numbers of highly qualified individuals
who may have advanced degrees in areas such as information
technology as well as appropriate security clearances. We
compete for such qualified personnel with other
U.S. government contractors, the U.S. government and
private industry, and such competition is intense. Personnel
with the requisites skills, qualifications or security clearance
may be in short supply or generally unavailable. In addition,
our ability to recruit, hire and internally deploy former
employees of the U.S. government is subject to complex laws
and regulations, which may serve as an impediment to our ability
to attract such former employees, and failure to comply with
these laws and regulations may expose us and our employees to
civil or criminal penalties. If we are unable to recruit and
retain a sufficient number of qualified employees, our ability
to maintain and grow our business and to effectively service our
clients could be limited and our future revenue and results of
operations could be materially and adversely affected.
Furthermore, to the extent that we are unable to make necessary
permanent hires to appropriately service our clients, we could
be required to engage larger numbers of contracted personnel,
which could reduce our profit margins.
If we are able to attract sufficient numbers of qualified new
hires, training and retention costs may place significant
demands on our resources. In addition, to the extent that we
experience attrition in our employee ranks, we may realize only
a limited or no return on such invested resources, and we would
have to expend additional resources to hire and train
replacement employees. The loss of services of key personnel
could also impair our ability to perform required services under
some of our contracts and to retain such contracts, as well as
our ability to win new business.
We may
fail to obtain and maintain necessary security clearances which
may adversely affect our ability to perform on certain
contracts.
Many U.S. government programs require contractors to have
security clearances. Depending on the level of required
clearance, security clearances can be difficult and
time-consuming to obtain. If we or our employees are unable to
obtain or retain necessary security clearances, we may not be
able to win new business, and our existing clients could
terminate their contracts with us or decide not to renew them.
To the extent we are not able to obtain and maintain facility
security clearances or engage employees with the required
security clearances for a particular contract, we may not be
able to bid on or win new contracts, or effectively rebid on
expiring contracts, as well as lose existing contracts, which
may adversely affect our operating results and inhibit the
execution of our growth strategy.
22
Our
profitability could suffer if we are not able to effectively
utilize our professionals.
The cost of providing our services, including the utilization
rate of our professionals, affects our profitability. Our
utilization rate is affected by a number of factors, including:
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our ability to transition employees from completed projects to
new assignments and to hire and assimilate new employees;
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our ability to forecast demand for our services and thereby
maintain headcount that is aligned with demand;
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our ability to manage attrition; and
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our need to devote time and resources to training, business
development and other non-chargeable activities.
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If our utilization rate is too low, our profit margin and
profitability could suffer. Additionally, if our utilization
rate is too high, it could have a material adverse effect on
employee engagement and attrition, which would in turn have a
material adverse impact on our business.
We may
lose one or more members of our senior management team or fail
to develop new leaders which could cause the disruption of the
management of our business.
We believe that the future success of our business and our
ability to operate profitably depends on the continued
contributions of the members of our senior management and the
continued development of new members of senior management. We
rely on our senior management to generate business and execute
programs successfully. In addition, the relationships and
reputation that many members of our senior management team have
established and maintain with our clients are important to our
business and our ability to identify new business opportunities.
We do not have any employment agreements providing for a
specific term of employment with any member of our senior
management. The loss of any member of our senior management or
our failure to continue to develop new members could impair our
ability to identify and secure new contracts, to maintain good
client relations and to otherwise manage our business.
Our
employees or subcontractors may engage in misconduct or other
improper activities which could harm our ability to conduct
business with the U.S. government.
We are exposed to the risk that employee or subcontractor fraud
or other misconduct could occur. Misconduct by employees or
subcontractors could include intentional or unintentional
failures to comply with U.S. government procurement
regulations, engaging in unauthorized activities or falsifying
time records. Employee or subcontractor misconduct could also
involve the improper use of our clients sensitive or
classified information or the failure to comply with legislation
or regulations regarding the protection of sensitive or
classified information. It is not always possible to deter
employee or subcontractor misconduct, and the precautions we
take to prevent and detect this activity may not be effective in
controlling unknown or unmanaged risks or losses, which could
materially harm our business. As a result of such misconduct,
our employees could lose their security clearance and we could
face fines and civil or criminal penalties, loss of facility
clearance accreditation and suspension or debarment from
contracting with the U.S. government, as well as
reputational harm, which would materially and adversely affect
our results of operations and financial condition.
We
face intense competition from many competitors, which could
cause us to lose business, lower prices and suffer employee
departures.
Our business operates in a highly competitive industry and we
generally compete with a wide variety of U.S. government
contractors, including large defense contractors, diversified
service providers and small businesses. We also face competition
from entrants into our markets including companies divested by
large prime contractors in response to increasing scrutiny of
organizational conflicts of interest issues. Some of
23
these companies possess greater financial resources and larger
technical staffs, and others that have smaller and more
specialized staffs. These competitors could, among other things:
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divert sales from us by winning very large-scale government
contracts, a risk that is enhanced by the recent trend in
government procurement practices to bundle services into larger
contracts;
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force us to charge lower prices in order to win or maintain
contracts;
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seek to hire our employees; or
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adversely affect our relationships with current clients,
including our ability to continue to win competitively awarded
engagements where we are the incumbent.
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If we lose business to our competitors or are forced to lower
our prices or suffer employee departures, our revenue and our
operating profits could decline. In addition, we may face
competition from our subcontractors who, from time to time, seek
to obtain prime contractor status on contracts for which they
currently serve as a subcontractor to us. If one or more of our
current subcontractors are awarded prime contractor status on
such contracts in the future, it could divert sales from us and
could force us to charge lower prices, which could have a
material adverse effect on our revenue and profitability.
Our
failure to maintain strong relationships with other contractors,
or the failure of contractors with which we have entered into a
sub- or
prime contractor relationship to meet their obligations to us or
our clients, could have a material adverse effect on our
business and results of operations.
Maintaining strong relationships with other U.S. government
contractors, who may also be our competitors, is important to
our business and our failure to do so could have a material
adverse effect on our business, prospects, financial condition
and operating results. To the extent that we fail to maintain
good relations with our subcontractors or other prime
contractors due to either perceived or actual performance
failures or other conduct, they may refuse to hire us as a
subcontractor in the future or to work with us as our
subcontractor. In addition, other contractors may choose not to
use us as a subcontractor or choose not to perform work for us
as a subcontractor for any number of additional reasons,
including because they choose to establish relationships with
our competitors or because they choose to directly offer
services that compete with our business.
As a prime contractor, we often rely on other companies to
perform some of the work under a contract, and we expect to
continue to depend on relationships with other contractors for
portions of our delivery of services and revenue in the
foreseeable future. If our subcontractors fail to perform their
contractual obligations, our operating results and future growth
prospects could be impaired. There is a risk that we may have
disputes with our subcontractors arising from, among other
things, the quality and timeliness of work performed by the
subcontractor, client concerns about the subcontractor, our
failure to extend existing task orders or issue new task orders
under a subcontract, or our hiring of a subcontractors
personnel. In addition, if any of our subcontractors fail to
deliver the
agreed-upon
supplies or perform the
agreed-upon
services on a timely basis, our ability to fulfill our
obligations as a prime contractor may be jeopardized. Material
losses could arise in future periods and subcontractor
performance deficiencies could result in a client terminating a
contract for default. A termination for default could expose us
to liability and have an adverse effect on our ability to
compete for future contracts and orders.
We estimate that revenue derived from contracts in which we
acted as a subcontractor to other companies represented 13% of
our revenue for fiscal 2010. As a subcontractor, we often lack
control over fulfillment of a contract, and poor performance on
the contract could tarnish our reputation, even when we perform
as required, and could cause other contractors to choose not to
hire us as a subcontractor in the future. In addition, if the
U.S. government terminates or reduces other prime
contractors programs or does not award them new contracts,
subcontracting opportunities available to us could decrease,
which would have a material adverse effect on our financial
condition and results of operations.
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Adverse
judgments or settlements in legal disputes could result in
materially adverse monetary damages or injunctive relief and
damage our reputation.
We are subject to, and may become a party to, a variety of
litigation or other claims and suits that arise from time to
time in the ordinary course of our business. For example, over
time, we have had disputes with current and former employees
involving alleged violations of civil rights, wage and hour, and
workers compensation laws. Further, as more fully
described under Business Legal
Proceedings, six former officers and stockholders of the
Predecessor who had departed the firm prior to the acquisition
have filed suits against our company and certain of our current
and former directors and officers. Each of the suits arises out
of the acquisition and alleges that the former stockholders are
entitled to certain payments that they would have received if
they had held their stock at the time of acquisition. The
results of litigation and other legal proceedings are inherently
uncertain and adverse judgments or settlements in some or all of
these legal disputes may result in materially adverse monetary
damages or injunctive relief against us. Any claims or
litigation, even if fully indemnified or insured, could damage
our reputation and make it more difficult to compete effectively
or obtain adequate insurance in the future. The litigation and
other claims described in this prospectus under the caption
Business Legal Proceedings are subject
to future developments and managements view of these
matters may change in the future.
Systems
that we develop, integrate or maintain could experience security
breaches which may damage our reputation with our clients and
hinder future contract win rates.
Many of the systems we develop, integrate or maintain involve
managing and protecting information involved in intelligence,
national security and other sensitive or classified government
functions. A security breach in one of these systems could cause
serious harm to our business, damage our reputation and prevent
us from being eligible for further work on sensitive or
classified systems for U.S. government clients. Damage to
our reputation or limitations on our eligibility for additional
work or any liability resulting from a security breach in one of
the systems we develop, install or maintain could have a
material adverse effect on our results of operations.
Internal
system or service failures could disrupt our business and impair
our ability to effectively provide our services to our clients,
which could damage our reputation and have a material adverse
effect on our business and results of operations.
We create, implement and maintain information technology and
engineering systems, and provide services that are often
critical to our clients operations, some of which involve
classified or other sensitive information and may be conducted
in war zones or other hazardous environments. We are subject to
systems failures, including network, software or hardware
failures, whether caused by us, third-party service providers,
intruders or hackers, computer viruses, natural disasters, power
shortages or terrorist attacks. Any such failures could cause
loss of data and interruptions or delays in our or our
clients businesses and could damage our reputation. In
addition, the failure or disruption of our communications or
utilities could cause us to interrupt or suspend our operations,
which could have a material adverse effect on our business and
results of operations.
If our systems, services or other applications have significant
defects or errors, are subject to delivery delays or fail to
meet our clients expectations, we may:
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lose revenue due to adverse client reaction;
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be required to provide additional services to a client at no
charge;
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receive negative publicity, which could damage our reputation
and adversely affect our ability to attract or retain
clients; or
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suffer claims for substantial damages.
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In addition to any costs resulting from contract performance or
required corrective action, these failures may result in
increased costs or loss of revenue if they result in clients
postponing subsequently scheduled work or canceling or failing
to renew contracts.
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Our errors and omissions insurance coverage may not continue to
be available on reasonable terms or in sufficient amounts to
cover one or more large claims, or the insurer may disclaim
coverage as to some types of future claims. The successful
assertion of any large claim against us could seriously harm our
business. Even if not successful, these claims could result in
significant legal and other costs, may be a distraction to our
management and may harm our client relationships. In certain new
business areas, we may not be able to obtain sufficient
insurance and may decide not to accept or solicit business in
these areas.
The
growth of our business entails risks associated with new
relationships, clients, capabilities, service offerings and
maintaining our collaborative culture.
We are focused on growing our presence in our addressable
markets by: expanding our relationships with existing clients,
developing new clients by leveraging our core competencies,
creating new capabilities to address our clients emerging
needs and undertaking business development efforts focused on
identifying near-term developments and long-term trends that may
pose significant challenges for our clients. These efforts
entail inherent risks associated with innovation and competition
from other participants in those areas and potential failure to
help our clients respond to the challenges they face. As we
attempt to develop new relationships, clients, capabilities and
service offerings, these efforts could harm our results of
operations due to, among other things, a diversion of our focus
and resources, actual costs and opportunity costs of pursuing
these opportunities in lieu of others, and these efforts could
be unsuccessful. In addition, our ability to grow our business
by leveraging our operating model to efficiently and effectively
deploy our people across our client base is largely dependent on
our ability to maintain our collaborative culture. To the extent
that we are unable to maintain our culture for any reason, we
may be unable to grow our business. Any such failure could have
a material adverse effect on our business and results of
operations.
We and
our subsidiaries may incur debt in the future, which could
substantially reduce our profitability, limit our ability to
pursue certain business opportunities, and reduce the value of
your investment.
In connection with the acquisition and the recapitalization
transaction, which refers to the December 2009 payment of a
special dividend and repayment of a portion of the deferred
payment obligation and the related amendments to our credit
agreements, and as a result of our business activities, we have
incurred a substantial amount of debt. As of March 31,
2010, on a pro forma basis after giving effect to this offering
and the use of the net proceeds therefrom as described in
Use of Proceeds, we would have had approximately
$ million of debt
outstanding. The instruments governing our indebtedness may not
prevent us or our subsidiaries from incurring additional debt in
the future or other obligations that do not constitute
indebtedness, which could increase the risks described below and
lead to other risks. In addition, we may, at our option and
subject to certain closing conditions including pro forma
compliance with financial covenants, increase the borrowing
capacity under our senior credit facilities without the consent
of any person other than the institutions agreeing to provide
all or any portion of such increase, to an amount not to exceed
$100 million. The amount of our debt or such other
obligations could have important consequences for holders of our
Class A common stock, including, but not limited to:
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our ability to satisfy obligations to lenders may be impaired,
resulting in possible defaults on and acceleration of our
indebtedness;
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our ability to obtain additional financing for refinancing of
existing indebtedness, working capital, capital expenditures,
product and service development, acquisitions, general corporate
purposes, and other purposes may be impaired;
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a substantial portion of our cash flow from operations could be
dedicated to the payment of the principal and interest on our
debt;
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we may be increasingly vulnerable to economic downturns and
increases in interest rates;
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our flexibility in planning for and reacting to changes in our
business and the industry may be limited; and
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we may be placed at a competitive disadvantage relative to other
firms in our industry.
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Our
credit facilities contain financial and operating covenants that
limit our operations and could lead to adverse consequences if
we fail to comply with them.
Our senior credit facilities and our mezzanine credit facility,
which we refer to together as our credit facilities, contain
financial and operating covenants relating to, among other
things, interest coverage and leverage ratios, as well as
limitations on mergers, consolidations and dissolutions, sales
of assets, investments and acquisitions, indebtedness and liens,
dividends, repurchase of shares of capital stock and options to
purchase shares of capital stock, transactions with affiliates,
sale and leaseback transactions, and restricted payments.
Failure to meet these financial and operating covenants could
result from, among other things, changes in our results of
operations, the incurrence of debt, or changes in general
economic conditions, which may be beyond our control. These
covenants may restrict our ability to engage in transactions
that we believe would otherwise be in the best interests of our
stockholders, which could harm our business and operations.
Many
of our contracts with the U.S. government are classified or
subject to other security restrictions, which may limit investor
insight into portions of our business.
For fiscal 2010, we derived a substantial portion of our revenue
from contracts with the U.S. government that are classified
or subject to security restrictions which preclude the
dissemination of certain information. Because we are limited in
our ability to provide details about these contracts, their
risks or any dispute or claims relating to such contracts, you
will have less insight into certain portions of our business and
therefore may be less able to fully evaluate the risks related
to those portions of our business.
If we
cannot collect our receivables or if payment is delayed, our
business may be adversely affected by our inability to generate
cash flow, provide working capital, or continue our business
operations.
We depend on the timely collection of our receivables to
generate cash flow, provide working capital and continue our
business operations. If the U.S. government or any prime
contractor for whom we are a subcontractor fails to pay or
delays the payment of invoices for any reason, our business and
financial condition may be materially and adversely affected.
The U.S. government may delay or fail to pay invoices for a
number of reasons, including lack of appropriated funds, lack of
an approved budget, or as a result of audit findings by
government regulatory agencies. Some prime contractors for whom
we are a subcontractor have significantly fewer financial
resources than we do, which may increase the risk that we may
not be paid in full or that payment may be delayed.
Recent
efforts by the U.S. government to revise its organizational
conflict of interest rules could limit our ability to
successfully compete for new contracts or task orders, which
would adversely affect our results of operations.
Recent efforts by the U.S. government to reform its
procurement practices have focused, among other areas, on the
separation of certain types of work to facilitate objectivity
and avoid or mitigate organizational conflicts of interest and
strengthening regulations governing organizational conflicts of
interest. Organizational conflicts of interest may arise from
circumstances in which a contractor has:
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impaired objectivity;
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unfair access to non-public information; or
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the ability to set the ground rules for another
procurement for which the contractor competes.
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A focus on organizational conflicts of interest issues has
resulted in legislation and a proposed regulation aimed at
increasing organizational conflicts of interest requirements,
including, among other things, separating sellers of products
and providers of advisory services in major defense acquisition
programs. In addition, we expect the U.S. government to
adopt a FAR rule to address organizational conflicts of interest
issues that will apply to all government contractors, including
us, in Department of Defense and other procurements. A future
FAR rule may also increase the restrictions in current
organizational conflicts of interest regulations and rules. To
the extent that proposed and future organizational conflicts of
interest laws, regulations, and rules, limit our ability to
successfully compete for new contracts or task orders with the
U.S. government, either because of organizational conflicts
of interest issues arising from our business, or because
companies with which we are
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affiliated, including through Carlyle, or with which we
otherwise conduct business, create organizational conflicts of
interest issues for us, our results of operations could be
materially and adversely affected.
Acquisitions
could result in operating difficulties or other adverse
consequences to our business.
As part of our future operating strategy, we may choose to
selectively pursue acquisitions. This could pose many risks,
including:
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we may not be able to identify suitable acquisition candidates
at prices we consider attractive;
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we may not be able to compete successfully for identified
acquisition candidates, complete acquisitions or accurately
estimate the financial effect of acquisitions on our business;
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future acquisitions may require us to issue common stock or
spend significant cash, resulting in dilution of ownership or
additional debt leverage;
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we may have difficulty retaining an acquired companys key
employees or clients;
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we may have difficulty integrating acquired businesses,
resulting in unforeseen difficulties, such as incompatible
accounting, information management, or other control systems,
and greater expenses than expected;
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acquisitions may disrupt our business or distract our management
from other responsibilities;
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as a result of an acquisition, we may incur additional debt and
we may need to record write-downs from future impairments of
intangible assets, each of which could reduce our future
reported earnings; and
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we may have difficulty integrating personnel from the acquired
company with our people and our core values.
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In connection with any acquisition that we make, there may be
liabilities that we fail to discover or that we inadequately
assess, and we may fail to discover any failure of a target
company to have fulfilled its contractual obligations to the
U.S. government or other clients. Acquired entities may not
operate profitably or result in improved operating performance.
Additionally, we may not realize anticipated synergies, business
growth opportunities, cost savings and other benefits we
anticipate, which could have a material adverse effect on our
business and results of operations.
Risks
Related to Our Industry
Our
U.S. government contracts may be terminated by the government at
any time and may contain other provisions permitting the
government to discontinue contract performance, and if lost
contracts are not replaced, our operating results may differ
materially and adversely from those anticipated.
U.S. government contracts contain provisions and are
subject to laws and regulations that provide government clients
with rights and remedies not typically found in commercial
contracts. These rights and remedies allow government clients,
among other things, to:
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terminate existing contracts, with short notice, for convenience
as well as for default;
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reduce orders under or otherwise modify contracts;
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for contracts subject to the Truth in Negotiations Act, reduce
the contract price or cost where it was increased because a
contractor or subcontractor furnished cost or pricing data
during negotiations that was not complete, accurate and current;
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for some contracts, (i) demand a refund, make a forward
price adjustment or terminate a contract for default if a
contractor provided inaccurate or incomplete data during the
contract negotiation process and (ii) reduce the contract
price under certain triggering circumstances, including the
revision of price lists or other documents upon which the
contract award was predicated;
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terminate our facility security clearances and thereby prevent
us from receiving classified contracts;
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cancel multi-year contracts and related orders if funds for
contract performance for any subsequent year become unavailable;
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decline to exercise an option to renew a multi-year contract or
issue task orders in connection with ID/IQ contracts;
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claim rights in solutions, systems and technology produced by
us, appropriate such work-product for their continued use
without continuing to contract for our services and disclose
such work-product to third parties, including other
U.S. government agencies and our competitors, which could
harm our competitive position;
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prohibit future procurement awards with a particular agency due
to a finding of organizational conflicts of interest based upon
prior related work performed for the agency that would give a
contractor an unfair advantage over competing contractors, or
the existence of conflicting roles that might bias a
contractors judgment;
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subject the award of contracts to protest by competitors, which
may require the contracting federal agency or department to
suspend our performance pending the outcome of the protest and
may also result in a requirement to resubmit offers for the
contract or in the termination, reduction or modification of the
awarded contract; and
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suspend or debar us from doing business with the
U.S. government.
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If a U.S. government client were to unexpectedly terminate,
cancel or decline to exercise an option to renew with respect to
one or more of our significant contracts, or suspend or debar us
from doing business with the U.S. government, our revenue
and operating results would be materially harmed.
The
U.S. government may revise its procurement, contract or other
practices in a manner adverse to us.
The U.S. government may:
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revise its procurement practices or adopt new contract laws,
rules and regulations, such as cost accounting standards,
organizational conflicts of interest and other rules governing
inherently governmental functions at any time;
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reduce, delay or cancel procurement programs resulting from U.S.
government efforts to improve procurement practices and
efficiency;
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face restrictions or pressure from government employees and
their unions regarding the amount of services the
U.S. government may obtain from private contractors;
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award contracts on a technically acceptable/lowest cost basis in
order to reduce expenditures, and we may not be the lowest cost
provider of services;
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change the basis upon which it reimburses our compensation and
other expenses or otherwise limit such reimbursements; and
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at its option, terminate or decline to renew our contracts.
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In addition, any new contracting methods could be costly or
administratively difficult for us to implement and could
adversely affect our future revenue. Any such changes to the
U.S. governments procurement practices or the
adoption of new contracting rules or practices could impair our
ability to obtain new or re-compete contracts and any such
changes or increased associated costs could materially and
adversely affect our results of operations.
The
U.S. government may prefer minority-owned, small and small
disadvantaged businesses, therefore, we may not win contracts we
bid for.
As a result of the Small Business Administration, or SBA,
set-aside program, the U.S. government may decide to
restrict certain procurements only to bidders that qualify as
minority-owned, small or small disadvantaged businesses. As a
result, we would not be eligible to perform as a prime
contractor on those
29
programs and would be restricted to a maximum of 49% of the work
as a subcontractor on those programs. An increase in the amount
of procurements under the SBA set-aside program may impact our
ability to bid on new procurements as a prime contractor or
restrict our ability to recompete on incumbent work that is
placed in the set-aside program.
Our
contracts, performance and administrative processes and systems
are subject to audits, reviews, investigations and cost
adjustments by the U.S. government, which could reduce our
revenue, disrupt our business or otherwise materially adversely
affect our results of operations.
U.S. government agencies routinely audit, review and
investigate government contracts and government
contractors administrative processes and systems. These
agencies review our performance on contracts, pricing practices,
cost structure and compliance with applicable laws, regulations
and standards, including applicable government cost accounting
standards. They also review our compliance with government
regulations and policies and the Defense Contract Audit Agency,
or the DCAA, audits, among other areas, the adequacy of our
internal control systems and policies, including our purchasing,
property, estimating, compensation and management information
systems. In particular, over time the DCAA has increased and may
continue to increase the proportion of employee compensation
that it deems unallowable and the size of the employee
population whose compensation is disallowed, which will continue
to materially and adversely affect our results of operations or
financial condition. Any costs found to be unallowable under a
contract will not be reimbursed, and any such costs already
reimbursed must be refunded. Moreover, if any of the
administrative processes and systems are found not to comply
with government imposed requirements, we may be subjected to
increased government scrutiny and approval that could delay or
otherwise adversely affect our ability to compete for or perform
contracts. Unfavorable U.S. government audit, review or
investigation results could subject us to civil or criminal
penalties or administrative sanctions, and could harm our
reputation and relationships with our clients and impair our
ability to be awarded new contracts. For example, if our
invoicing system were found to be inadequate following an audit
by the DCAA, our ability to directly invoice
U.S. government payment offices could be eliminated. As a
result, we would be required to submit each invoice to the DCAA
for approval prior to payment, which could materially increase
our accounts receivable days sales outstanding and adversely
affect our cash flow. An unfavorable outcome to an audit, review
or investigation by any U.S. government agency could
materially and adversely affect our relationship with the
U.S. government. If a government investigation uncovers
improper or illegal activities, we may be subject to civil and
criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of
payments, fines and suspension or debarment from doing business
with the U.S. government. In addition, we could suffer
serious reputational harm if allegations of impropriety were
made against us. Provisions that we have recorded in our
financial statements as a compliance reserve may not cover
actual losses. Each of these results could materially and
adversely affect our results of operations or financial
condition.
A
delay in the completion of the U.S. governments budget
process could result in a reduction in our backlog and have a
material adverse effect on our revenue and operating
results.
On an annual basis, the U.S. Congress must approve budgets
that govern spending by each of the federal agencies we support.
When the U.S. Congress is unable to agree on budget
priorities, and thus is unable to pass the annual budget on a
timely basis, the U.S. Congress typically enacts a
continuing resolution. A continuing resolution allows government
agencies to operate at spending levels approved in the previous
budget cycle. When government agencies operate on the basis of a
continuing resolution, they may delay funding we expect to
receive on contracts we are already performing. Any such delays
would likely result in new business initiatives being delayed or
cancelled and a reduction in our backlog, and could have a
material adverse effect on our revenue and operating results.
Risks
Related to Our Common Stock and This Offering
Booz
Allen Holding is a holding company with no operations of its own
that depends on its subsidiaries for cash.
The operations of Booz Allen Holding are conducted almost
entirely through its subsidiaries and its ability to generate
cash to meet its debt service obligations or to pay dividends is
highly dependent on the
30
earnings and the receipt of funds from its subsidiaries via
dividends or intercompany loans. We do not currently expect to
declare or pay dividends on our Class A common stock for
the foreseeable future; however, to the extent that we determine
in the future to pay dividends on our Class A common stock,
none of our subsidiaries will be obligated to make funds
available to us for the payment of dividends. Further, our
credit facilities significantly restrict the ability of our
subsidiaries to pay dividends or otherwise transfer assets to
us. In addition, Delaware law may impose requirements that may
restrict our ability to pay dividends to holders of our common
stock.
Our
principal stockholder could exert significant influence over our
company.
As of March 31, 2010, Carlyle, through Coinvest, owned in
the aggregate shares representing 81% of our outstanding voting
power. After completion of this offering, Carlyle will own in
the aggregate shares representing %
of our outstanding voting power,
or % if the underwriters exercise
their over-allotment option in full. As a result, Carlyle will
have a controlling influence over all matters presented to our
stockholders for approval, including election and removal of our
directors and change of control transactions.
In addition, Coinvest is a party to the stockholders agreement
pursuant to which Carlyle currently has the ability to cause the
election of a majority of our Board. Under the terms of the
amended and restated stockholders agreement to be entered into
in connection with this offering, Carlyle will continue to have
the right to nominate a majority of the members of our Board and
to exercise control over matters requiring stockholder approval
and our policy and affairs, for example, by being able to direct
the use of proceeds received from this and future security
offerings. See Certain Relationships and Related Party
Transactions Stockholders Agreement. In
addition, following the consummation of this offering, we will
be a controlled company within the meaning of
applicable stock exchange rules and, as a result, currently
intend to rely on exemptions from certain corporate governance
requirements. The concentrated holdings of funds affiliated with
Carlyle, certain provisions of the amended and restated
stockholders agreement to be entered into prior to the
completion of this offering and the presence of Carlyles
nominees on our Board may result in a delay or the deterrence of
possible changes in control of our company, which may reduce the
market price of our common stock. The interests of Carlyle may
not always coincide with the interests of the other holders of
our common stock.
Carlyle is in the business of making investments in companies,
and may from time to time in the future acquire controlling
interests in businesses engaged in management and technology
consulting that complement or directly or indirectly compete
with certain portions of our business. If Carlyle pursues such
acquisitions in our industry, those acquisition opportunities
may not be available to us. In addition, to the extent that
Carlyle acquires a controlling interest in one or more companies
that provide services or products to the U.S. government,
our affiliation with any such company through Carlyle could
create organizational conflicts of interest and similar issues
for us under federal procurement laws and regulations. See
Risk Related to Our Business
Recent efforts by the U.S. government to revise its
organizational conflicts of interest rules could limit our
ability to successfully compete for new contracts or task
orders, which would adversely affect our results of
operations. We urge you to read the discussions under the
headings Certain Relationships and Related Party
Transactions and Security Ownership of Certain
Beneficial Owners and Management for further information
about the equity interests held by Carlyle and members of our
senior management.
Investors
in this offering will experience immediate dilution in net
tangible book value per share.
The initial public offering price per share will significantly
exceed the net tangible book value per share of our common
stock. As a result, investors in this offering will experience
immediate dilution of
$ in
net tangible book value per share based on an initial public
offering price of
$ ,
which is the midpoint of the price range set forth on the cover
page of this prospectus. This dilution occurs in large part
because our earlier investors paid substantially less than the
initial public offering price when they purchased their shares.
Investors in this offering may also experience additional
dilution as a result of shares of Class A common stock that
may be issued in connection with a future acquisition.
Accordingly, in the event that we are liquidated, investors may
not receive the full amount or any of their investment.
31
Our
financial results may vary significantly from period to period
as a result of a number of factors many of which are outside our
control, which could cause the market price of our Class A
common stock to decline.
Our financial results may vary significantly from period to
period in the future as a result of many external factors that
are outside of our control. Factors that may affect our
financial results include those listed in this Risk
Factors section and others such as:
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any cause of reduction or delay in U.S. government funding
(e.g., changes in presidential administrations that delay timing
of procurements);
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fluctuations in revenue earned on existing contracts;
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commencement, completion or termination of contracts during a
particular period;
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a potential decline in our overall profit margins if our other
direct costs and subcontract revenue grow at a faster rate than
labor-related revenue;
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strategic decisions by us or our competitors, such as changes to
business strategy, strategic investments, acquisitions,
divestitures, spin offs and joint ventures;
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a change in our contract mix to less profitable contracts;
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changes in policy or budgetary measures that adversely affect
U.S. government contracts in general;
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variable purchasing patterns under U.S. government GSA
schedules, blanket purchase agreements, which are agreements
that fulfill repetitive needs under GSA schedules, and ID/IQ
contracts;
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changes in demand for our services and solutions;
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fluctuations in our staff utilization rates;
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seasonality associated with the U.S. governments
fiscal year;
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an inability to utilize existing or future tax benefits,
including those related to our NOLs or stock-based compensation
expense, for any reason, including a change in law;
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alterations to contract requirements; and
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adverse judgments or settlements in legal disputes.
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A decline in the price of our Class A common stock due to
any one or more of these factors could cause the value of your
investment to decline.
A
majority of our outstanding indebtedness is secured by
substantially all of our consolidated assets. As a result of
these security interests, such assets would only be available to
satisfy claims of our general creditors or to holders of our
equity securities if we were to become insolvent to the extent
the value of such assets exceeded the amount of our indebtedness
and other obligations. In addition, the existence of these
security interests may adversely affect our financial
flexibility.
Indebtedness under our senior credit facilities is secured by a
lien on substantially all of our assets. Accordingly, if an
event of default were to occur under our senior credit
facilities, the senior secured lenders under such facilities
would have a prior right to our assets, to the exclusion of our
general creditors in the event of our bankruptcy, insolvency,
liquidation or reorganization. In that event, our assets would
first be used to repay in full all indebtedness and other
obligations secured by them (including all amounts outstanding
under our senior credit facilities), resulting in all or a
portion of our assets being unavailable to satisfy the claims of
our unsecured indebtedness. Only after satisfying the claims of
our unsecured creditors and our subsidiaries unsecured
creditors would any amount be available for our equity holders.
The pledge of these assets and other restrictions may limit our
flexibility in raising capital for other purposes. Because
substantially all of our assets are pledged under these
financing arrangements, our ability to incur additional secured
indebtedness or to sell or dispose of assets to raise capital
may be impaired, which could have an adverse effect on our
financial flexibility. As of March 31, 2010, we had
$1.0 billion of indebtedness
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outstanding under our senior credit facilities and had
$222.4 million of capacity available for additional
borrowings under the revolving portion of our senior credit
facilities (excluding the $21.3 million commitment by the
successor entity to Lehman Brothers Commercial Bank). In
addition, we may, at our option and subject to certain closing
conditions including pro forma compliance with financial
covenants, increase the senior credit facilities without the
consent of any person other than the institutions agreeing to
provide all or any portion of such increase, in an amount not to
exceed $100.0 million. See Description of Certain
Indebtedness Senior Credit Facilities
Guarantees; Security.
Our
Class A common stock has no prior public market, and our
stock price could be volatile and could decline after this
offering.
Before this offering, our Class A common stock had no
public market. We will negotiate the initial public offering
price per share with the representatives of the underwriters
and, therefore, that price may not be indicative of the market
price of our common stock after the offering. We cannot assure
you that an active public market for our Class A common
stock will develop after this offering or if it does develop, it
may not be sustained. In the absence of a public trading market,
you may not be able to liquidate your investment in our common
stock. In addition, the market price of our common stock could
be subject to significant fluctuations after this offering.
Among the factors that could affect our stock price are:
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quarterly variations in our operating results;
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changes in contract revenue and earnings estimates or
publication of research reports by analysts;
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speculation in the press or investment community;
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investor perception of us and our industry;
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strategic actions by us or our competitors, such as significant
contracts, acquisitions or restructurings;
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actions by institutional stockholders or other large
stockholders, including future sales;
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our relationship with U.S. government agencies;
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changes in U.S. government spending;
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changes in accounting principles; and
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general economic market conditions.
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In particular, we cannot assure you that you will be able to
resell your shares at or above the initial public offering
price. The stock markets have experienced extreme volatility in
recent years that has been unrelated to the operating
performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our
Class A common stock. In the past, following periods of
volatility in the market price of a companys securities,
class action litigation has often been instituted against the
company. Any litigation of this type brought against us could
result in substantial costs and a diversion of our
managements attention and resources, which would harm our
business, operating results and financial condition.
Fulfilling
our obligations incident to being a public company, including
with respect to the requirements of and related rules under the
Sarbanes Oxley Act of 2002, will be expensive and time consuming
and any delays or difficulty in satisfying these obligations
could have a material adverse effect on our future results of
operations and our stock price.
As a private company, we have not been subject to the
requirements of the Sarbanes-Oxley Act of 2002. As a public
company, the Sarbanes-Oxley Act of 2002 and the related rules
and regulations of the Securities and Exchange Commission, or
the SEC, as well as applicable stock exchange rules, will
require us to implement additional corporate governance
practices and adhere to a variety of reporting requirements and
complex accounting rules. Compliance with these public company
obligations will require us to devote significant management
time and will place significant additional demands on our
finance and accounting staff
33
and on our financial, accounting and information systems. We
expect to hire additional accounting and financial staff with
appropriate public company reporting experience and technical
accounting knowledge. Other expenses associated with being a
public company include increased auditing, accounting and legal
fees and expenses, investor relations expenses, increased
directors fees and director and officer liability
insurance costs, registrar and transfer agent fees, listing
fees, as well as other expenses.
In particular, upon completion of this offering, the
Sarbanes-Oxley Act of 2002 will require us to document and test
the effectiveness of our internal control over financial
reporting in accordance with an established internal control
framework, and to report on our conclusions as to the
effectiveness of our internal controls. It will also require an
independent registered public accounting firm to test our
internal control over financial reporting and report on the
effectiveness of such controls for fiscal 2012 and subsequent
years. In addition, upon completion of this offering, we will be
required under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, to maintain disclosure controls and
procedures and internal control over financial reporting. Any
failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting
obligations. If we are unable to conclude that we have effective
internal control over financial reporting, or if our independent
registered public accounting firm is unable to provide us with
an unqualified report regarding the effectiveness of our
internal control over financial reporting as of March 31,
2012 and in future periods, investors could lose confidence in
the reliability of our financial statements. This could result
in a decrease in the value of our common stock. Failure to
comply with the Sarbanes-Oxley Act of 2002 could potentially
subject us to sanctions or investigations by the SEC, the
exchange on which our Class A common stock is listed, or
other regulatory authorities.
Provisions
in our organizational documents and in the Delaware General
Corporation Law may prevent takeover attempts that could be
beneficial to our stockholders.
We have, and intend to include, effective as of the consummation
of the offering, a number of provisions in our certificate of
incorporation and bylaws that may have the effect of delaying,
deterring, preventing or rendering more difficult a change in
control of Booz Allen Holding that our stockholders might
consider in their best interests. These provisions include:
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establishment of a classified Board, with staggered terms;
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granting to the Board the sole power to set the number of
directors and to fill any vacancy on the Board;
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limitations on the ability of stockholders to remove directors
if a group, as defined under Section 13(d)(3)
of the Exchange Act, ceases to own more than 50% of our voting
common stock;
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granting to the Board the ability to designate and issue one or
more series of preferred stock without stockholder approval, the
terms of which may be determined at the sole discretion of the
Board;
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a prohibition on stockholders from calling special meetings of
stockholders;
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the establishment of advance notice requirements for stockholder
proposals and nominations for election to the Board at
stockholder meetings;
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requiring approval of two-thirds of stockholders to amend the
bylaws; and
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prohibiting our stockholders from acting by written consent if a
group ceases to own more than 50% of our voting
common stock.
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These provisions may prevent our stockholders from receiving the
benefit from any premium to the market price of our common stock
offered by a bidder in a takeover context. Even in the absence
of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock
if the provisions are viewed as discouraging takeover attempts
in the future. In addition, we expect to opt out of
Section 203 of the Delaware General Corporation Law, which
would have otherwise imposed additional requirements regarding
mergers and other business combinations, until Coinvest and its
34
affiliates no longer own more than % of our
Class A common stock. After such time, we will be governed
by Section 203.
Our amended and restated certificate of incorporation and
amended and restated by-laws may also make it difficult for
stockholders to replace or remove our management. These
provisions may facilitate management entrenchment that may
delay, deter, render more difficult or prevent a change in our
control, which may not be in the best interests of our
stockholders.
See Description of Capital Stock for additional
information on the anti-takeover measures applicable to us.
Sales
of outstanding shares of our common stock into the market in the
future could cause the market price of our common stock to drop
significantly.
Immediately following this offering, Carlyle will
own shares
of our Class A common stock,
or % of our outstanding
Class A common stock. If the underwriters exercise their
overallotment option in full, Carlyle will
own % of our outstanding
Class A common stock. If Carlyle sells, or the market
perceives that Carlyle intends to sell, a substantial portion of
its beneficial ownership interest in us in the public market,
the market price of our Class A common stock could decline
significantly. The sales also could make it more difficult for
us to sell equity or equity-related securities at a time and
price that we deem appropriate.
After this
offering, shares
of our Class A common stock will be outstanding. Of these
shares, shares
of our Class A common stock sold in this offering will be
freely tradable, without restriction, in the public market
unless purchased by our affiliates (as that term is
defined by Rule 144 under the Securities Act of 1933, or
Securities Act) and all of the remaining shares of Class A
common stock, as well as outstanding shares of our Class B
non-voting common stock, Class C restricted common stock
and Class E special voting common stock, subject to certain
exceptions, will be subject to a
180-day
lock-up by
virtue of either contractual lock-up agreements or pursuant to
the terms of the amended and restated stockholders agreement.
Morgan Stanley & Co. Incorporated and Barclays Capital
Inc. may, in their discretion, permit our directors, officers
and current stockholders who are subject to these
lock-ups to
sell shares prior to the expiration of the 180-day
lock-up
period. See Shares of Common Stock Eligible for Future
Sale
Lock-Up
Agreements. After the
lock-up
agreements pertaining to this offering expire, up to an
additional shares of
our Class A common stock will be eligible for sale in the
public market, all of which are held by directors, executive
officers and other affiliates and will be subject to volume and
holding period limitations under Rule 144 under the
Securities Act. The
remaining shares
of Class A common stock outstanding will be restricted
securities within the meaning of Rule 144 under the
Securities Act, but will be eligible for resale subject to
applicable volume, manner of sale, holding period and other
limitations of Rule 144 or pursuant to an exemption from
registration under Rule 701 under the Securities Act. After
the lock-up
agreements relating to this offering
expire, shares
of our Class A common stock will be issuable upon
(1) transfer of our Class B non-voting common stock
and Class C restricted common stock and (2) the
exercise of outstanding stock options relating to our
outstanding Class E special voting common stock. In
addition, the shares of our
Class A common stock underlying options that are either
subject to the terms of our equity compensation plans or
reserved for future issuance under our equity compensation plans
will become eligible for sale in the public market to the extent
permitted by the provisions of various option agreements, the
lock-up
agreements and Rules 144 and 701 under the Securities Act
to the extent such shares are not otherwise registered for sale
under the Securities Act. If these additional shares are sold,
or if it is perceived that they will be sold, in the public
market, the price of our common stock could decline
substantially. For additional information, see Shares of
Common Stock Eligible for Future Sale.
35
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains
forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as may,
will, could, should,
expects, intends, plans,
anticipates, believes,
estimates, predicts,
potential, continue, or the negative of
these terms or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking
statements are reasonable, we can give you no assurance these
expectations will prove to have been correct. These
forward-looking statements relate to future events or our future
financial performance and involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to
differ materially from any future results, levels of activity,
performance or achievements expressed or implied by these
forward-looking statements. These risks and other factors
include:
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any issue that compromises our relationships with the
U.S. government or damages our professional reputation;
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changes in U.S. government spending and mission priorities
that shift expenditures away from agencies or programs that we
support;
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the size of our addressable markets and the amount of
U.S. government spending on private contractors;
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failure to comply with numerous laws and regulations;
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our ability to compete effectively in the competitive bidding
process;
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the loss of GSA schedules or our position as prime contractor on
GWACs;
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changes in the mix of our contracts and our ability to
accurately estimate or otherwise recover expenses, time and
resources for our contracts;
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our ability to generate revenue under certain of our contracts
and our ability to realize the full value of our backlog;
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changes in estimates used in recognizing revenue;
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any inability to attract, train or retain employees with the
requisite skills, experience and security clearances;
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an inability to hire enough employees to service our clients
under existing contracts;
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an inability to effectively utilize our employees and
professionals;
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failure by us or our employees to obtain and maintain necessary
security clearances;
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the loss of members of senior management or failure to develop
new leaders;
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misconduct or other improper activities from our employees or
subcontractors;
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increased competition from other companies in our industry;
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failure to maintain strong relationships with other contractors;
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inherent uncertainties and potential adverse developments in
legal proceedings, including litigation, audits, reviews and
investigations, which may result in materially adverse
judgments, settlements or other unfavorable outcomes;
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internal system or service failures and security breaches;
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risks related to our indebtedness and credit facilities which
contain financial and operating covenants;
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the adoption by the U.S. government of new laws, rules and
regulations, such as those relating to organizational conflicts
of interest issues;
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an inability to utilize existing or future tax benefits,
including those related to our NOLs and stock-based compensation
expense, for any reason, including a change in law;
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variable purchasing patterns under U.S. government GSA
schedules, blanket purchase agreements and
ID/IQ
contracts; and
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other risks and factors listed under Risk Factors
and elsewhere in this prospectus.
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In light of these risks, uncertainties and other factors, the
forward-looking statements contained in this prospectus might
not prove to be accurate and you should not place undue reliance
upon them. All
forward-looking
statements speak only as of the date made and we undertake no
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.
37
USE OF
PROCEEDS
We estimate that the net proceeds from the sale
of shares of our Class A common
stock being offered by us pursuant to this prospectus at an
assumed initial offering price of $ per
share, the midpoint of the range set forth on the cover page of
this prospectus, will be approximately $
million, after deducting estimated underwriting discounts,
commissions and estimated offering expenses payable by us.
We intend to use the net proceeds we receive from the sale of
our Class A common stock to repay
$ million of our mezzanine credit
facility and pay a $ prepayment penalty
related to our repayment under our mezzanine credit facility.
Our mezzanine credit facility was entered into in connection
with the acquisition and amended in connection with the
recapitalization transaction. Our mezzanine credit facility
consists of a term loan facility in an aggregate principal
amount of up to $550.0 million that matures on
July 31, 2016. On July 31, 2008, we borrowed
$550.0 million under our mezzanine credit facility. As of
March 31, 2010, borrowings under our mezzanine credit
facility bore an interest rate at 13%. Certain of the
underwriters of this offering or their affiliates are lenders
under our mezzanine credit facility. Accordingly, certain of the
underwriters will receive net proceeds from this offering in
connection with the repayment of our mezzanine credit facility.
See Underwriting.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share would
increase (decrease) the net proceeds to us from this offering by
$ , assuming the number of shares offered
by us remains the same and after deducting estimated
underwriting discounts and commission and estimated offering
expenses payable by us. We may also increase or decrease the
number of shares we are offering. Each increase (decrease) of
1.0 million shares in the number of shares offered by us,
together with a concomitant $1.00 increase (decrease) in the
assumed offering price of $ per share,
would increase (decrease) net proceeds to us from this offering
by $ million, after deducting estimated
underwriting discounts and commission and estimated offering
expenses payable by us. The information discussed above is
illustrative only and will adjust based on the actual public
offering price and other terms of this offering determined at
pricing.
38
DIVIDEND
POLICY
We do not currently expect to declare or pay dividends on our
Class A common stock for the foreseeable future. Instead,
we anticipate that all of our earnings in the foreseeable future
will be used for the operation and growth of our business. Our
ability to pay dividends to holders of our Class A common
stock is limited by covenants in the credit agreements governing
our senior credit facilities and our mezzanine credit facility.
Any future determination to pay dividends on our Class A
common stock is subject to the discretion of our Board and will
depend upon various factors then existing, including our results
of operations, financial condition, liquidity requirements,
restrictions that may be imposed by applicable laws and our
contracts, as well as economic and other factors deemed relevant
by our Board. To the extent that the Board declares any future
dividends, holders of Class A common stock, Class B
non-voting common stock, and Class C restricted common
stock will share the dividend payment equally.
On July 27, 2009, we declared a special cash dividend on
all issued and outstanding shares of Class A common stock,
Class B non-voting common stock, and Class C
restricted common stock in the aggregate amount of
$114.9 million payable to holders of record as of
July 29, 2009. On December 7, 2009, we declared
another special cash dividend on all issued and outstanding
shares to the same equity classes described above in the
aggregate amount of $497.5 million payable to the holders
of record as of December 8, 2009. Of these amounts,
approximately $548.0 million was paid to Coinvest according
to its ownership of our Class A common stock. See The
Acquisition and Recapitalization Transaction. We do not
currently intend to declare or pay any similar special dividends
in the foreseeable future.
39
CAPITALIZATION
The following table sets forth our capitalization on a
consolidated basis as of March 31, 2010:
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on an actual basis; and
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on a pro forma as adjusted basis to give effect to the sale by
us of shares of our
Class A common stock in this offering at the initial public
offering price of $ per share (and
after deducting estimated underwriting discounts and commissions
and offering expenses payable by us) and the use of the net
proceeds therefrom as described in Use of Proceeds.
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The table below excludes the Class D merger rolling common
stock, par value $0.01, and the Class F non-voting
restricted common stock, par value $0.01, each of which had
600,000 authorized shares and no shares issued and outstanding
as of March 31, 2010. Our amended and restated certificate
of incorporation, which will become effective prior to the
completion of this offering, will eliminate the Class D
merger rolling common stock and the Class F non-voting
restricted common stock.
You should read this table in conjunction with the sections of
this prospectus entitled Selected Historical Consolidated
Financial and Other Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Description of Certain
Indebtedness and our financial statements and related
notes included elsewhere in this prospectus.
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As of March 31, 2010
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Pro Forma as
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Actual
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Adjusted
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(In thousands, except share and per share amounts)
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Cash and cash equivalents
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$
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307,835
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$
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Debt(1)
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$
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1,626,782
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$
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Stockholders equity:
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Class A common stock, par value $0.01 per share:
(i) Actual: 16,000,000 shares authorized and
10,292,290 shares issued and outstanding and (ii) Pro
forma as adjusted: shares
authorized and shares issued and
outstanding
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$
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103
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$
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Class B non-voting common stock, par value $0.01 per share:
(i) Actual: 16,000,000 shares authorized and
235,020 shares issued and outstanding and (ii) Pro
forma as adjusted: shares
authorized and shares issued and
outstanding
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2
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Class C restricted common stock, par value $0.01 per share:
(i) Actual: 600,000 shares authorized and
202,827 shares issued and outstanding and (ii) Pro
forma as adjusted: shares
authorized and shares issued and
outstanding
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2
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Class E special voting common stock, par value $0.03 per
share: (i) Actual: 2,500,000 shares authorized and
1,334,558 shares issued and outstanding and (ii) Pro
forma as adjusted: shares
authorized and shares issued and
outstanding
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40
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Preferred Stock, par value $0.01 per share: (i) Actual:
600,000 shares authorized and no shares issued and
outstanding and (ii) Pro forma as
adjusted: shares authorized and no
shares issued and outstanding
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Additional paid-in capital(2)
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526,618
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Accumulated deficit
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(13,364
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)
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Accumulated other comprehensive income (loss)
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(3,818
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)
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Total stockholders equity(2)
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$
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509,583
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$
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Total capitalization(2)
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$
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2,136,365
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$
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(1) |
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Debt reflects (i) long-term debt, net of current portion of
$21.9 million and (ii) the deferred payment obligation. |
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Long-term debt, net of current portion includes borrowings under
our senior credit facilities and our mezzanine credit facility.
For a description of these facilities, see Description of
Certain Indebtedness. Loans under our senior credit
facilities and our mezzanine credit facility were issued with
original issue discount and are presented net of unamortized
discount of $19.2 million as of March 31, 2010. |
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The $80.0 million deferred payment obligation is comprised
of a $17.6 million deferred payment obligation balance as
of March 31, 2010, and contingent tax claims in the amount
of $62.4 million related to the deferred payment
obligation, but does not include $2.4 million of accrued
interest related to the deferred payment obligation. See
The Acquisition and Recapitalization
Transaction The Acquisition The
Merger. |
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(2) |
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) each of additional paid-in capital,
total stockholders equity and total capitalization by
$ , assuming the number of shares
offered by us remains the same and after deducting estimated
underwriting discounts and commission and estimated offering
expenses payable by us. We may also increase or decrease the
number of shares we are offering. Each increase (decrease) of
1.0 million shares in the number of shares offered by us,
together with a concomitant $1.00 increase (decrease) in the
assumed offering price of $ per
share, would increase (decrease) the as adjusted amount of each
of additional paid-in capital, total stockholders equity
and total capitalization by approximately
$ million. The as adjusted
information discussed above is illustrative only and will adjust
based on the actual public offering price and other terms of
this offering determined at pricing. |
41
DILUTION
If you invest in our Class A common stock, your interest
will be diluted to the extent of the difference between the
initial public offering price per share of our Class A
common stock and the adjusted net tangible book value per share
of our Class A common stock, Class B non-voting common
stock and Class C restricted common stock immediately after
this offering.
Net tangible book value (deficit) per share represents the
amount of total book value of our total tangible assets less our
total liabilities divided by the number of shares of our
Class A common stock then outstanding. The net tangible
book value of our Class A common stock, Class B
non-voting common stock and Class C restricted common stock
as of March 31, 2010 was a deficit of
$ million, or approximately
$ per share.
After giving effect to the issuance and sale
of shares of our Class A
common stock offered by us at the initial public offering price
of $ , which is the midpoint of the
range set forth on the cover page of this prospectus, and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net
tangible book value of our Class A common stock,
Class B
non-voting
common stock and Class C restricted common stock after this
offering would have been approximately
$ million, or approximately
$ per share. This represents an
immediate increase in net tangible book value (deficit) of
approximately $ per share to
existing stockholders and an immediate dilution of approximately
$ per share to new investors
purchasing shares in this offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share, the
midpoint of the range set forth on the cover of this prospectus,
would increase (decrease) our adjusted net tangible book value
after this offering by $ and
increase (decrease) the dilution to new investors purchasing
shares in this offering by $ per
share, assuming the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated expenses payable by us. We may also increase or
decrease the number of shares we are offering. Each increase of
1.0 million shares in the number of shares offered by us,
together with a concomitant $1.00 increase in the assumed
offering price of $ per share,
would increase the dilution to new investors purchasing shares
in this offering by $ per share.
Similarly, each decrease of 1.0 million shares in the
number of shares offered by us, together with a concomitant
$1.00 decrease in the assumed offering price of
$ per share, would decrease the
dilution to new investors purchasing shares in this offering by
$ per share. The information
discussed above is illustrative only and will adjust based on
the actual public offering price and other terms of this
offering determined at pricing.
The following table illustrates this per share dilution:
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Per Share
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Initial public offering price
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Net tangible book value (deficit) as of March 31, 2010
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Increase attributable to this offering
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Pro forma net tangible book value (deficit), as adjusted to give
effect to this offering
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Dilution in pro forma net tangible book value to new investors
in this offering
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42
The following table summarizes, as of March 31, 2010, the
total number of shares of Class A common stock purchased
from us, the total consideration paid to us, and the weighted
average price per share paid to us, by our existing stockholders
and by the investors purchasing shares of Class A common
stock in this offering at our assumed initial public offering
price of $ per share,
which is the midpoint of the range set forth on the cover page
of this prospectus.
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Weighted
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Shares Purchased
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Total Consideration
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Average Price
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Number
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Percent
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Amount
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Percent
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per Share
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(In thousands, other than percentages)
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Existing stockholders
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%
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%
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New investors
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Total
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100
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%
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100
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%
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The foregoing discussion and tables give effect to the issuance
of our Class A common stock upon exercise of all
outstanding stock options held by directors and officers as
of , 2010 and the
conversion of our Class B non-voting common stock and
Class C restricted common stock into Class A common stock.
As of March 31, 2010, there were outstanding stock options
granted under our Officers Rollover Stock Plan and our
Equity Incentive Plan to purchase, subject to vesting, up
to shares
and
shares, respectively, of our Class A common stock at a
weighted average exercise price
of per
share
and
per share, respectively. As of March 31, 2010, there were
235,020 shares issued and outstanding and 202,827 shares issued
and outstanding of Class B non-voting common stock and
Class C restricted common stock, respectively.
In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance
of such securities could result in further dilution to our
stockholders.
43
THE
ACQUISITION AND RECAPITALIZATION TRANSACTION
The
Acquisition
On July 31, 2008, or the Closing Date, Booz Allen Hamilton
completed the separation of its U.S. government consulting
business from its commercial and international consulting
business, the spin off of the commercial and international
business, and the sale of 100% of its outstanding common stock
to Booz Allen Holding, which was majority owned by Carlyle. Our
company is a corporation that is the successor to the government
business of Booz Allen Hamilton following the separation.
The separation of the commercial and international business from
the government business was accomplished pursuant to a series of
transactions under the terms of a spin off agreement, dated as
of May 15, 2008, by and among Booz Allen Hamilton and
Booz & Company, or Spin Co., and certain of its
subsidiaries. As a result of the spin off and related
transactions, former stockholders of Booz Allen Hamilton that
had been engaged in the commercial and international business,
or the commercial partners, became the owners of Spin Co., which
held the commercial and international business. The spin off
agreement contains a three-year non-compete provision, ending
July 31, 2011, during which both Spin Co. and Booz Allen
Hamilton are prohibited, with certain exceptions, from engaging
in business in the other companys principal markets.
Following the spin off, Booz Allen Hamilton was indirectly
acquired by Carlyle pursuant to an Agreement and Plan of Merger,
dated as of May 15, 2008, and subsequently amended, by and
among Booz Allen Hamilton, Booz Allen Holding (formerly known as
Explorer Holding Corporation), which was majority owned by
Carlyle, Booz Allen Investor (formerly known as Explorer
Investor Corporation), a wholly owned subsidiary of Booz Allen
Holding, Explorer Merger Sub Corporation, a wholly-owned
subsidiary of Booz Allen Investor, and Spin Co. Under the terms
of the merger agreement, the acquisition of Booz Allen Hamilton
was achieved through the merger of Explorer Merger Sub
Corporation into Booz Allen Hamilton, with Booz Allen Hamilton
as the surviving corporation. As a result of the merger, Booz
Allen Hamilton became a direct subsidiary of Booz Allen Investor
and an indirect wholly-owned subsidiary of Booz Allen Holding.
The
Merger
Booz Allen Investor and its affiliates paid the purchase price
(subject to adjustments for transaction expenses, indebtedness,
fluctuations in working capital and other items) in
consideration for the government business through current and
deferred cash payments, stock and options in Booz Allen Holding
exchanged for Booz Allen Hamilton stock and options, and the
assumption or payment by Booz Allen Investor of certain
indebtedness.
The Booz Allen Hamilton partners working in the government
business, or the government partners, were required to exchange
a portion of their stock and options in Booz Allen Hamilton for
stock and options in Booz Allen Holding, and the commercial
partners were able to exchange a portion of their stock in Booz
Allen Hamilton for non-voting stock in Booz Allen Holding. These
exchanges were completed on July 30, 2008, and as a result,
the government partners and commercial partners held 19% and 2%,
respectively, of the common stock of Booz Allen Holding on the
Closing Date, with Carlyle, through Coinvest, beneficially
owning the remainder.
All of the remaining stock of Booz Allen Hamilton outstanding
immediately prior to the merger (other than the stock of Booz
Allen Hamilton held by Booz Allen Holding as a result of the
exchanges described above) was converted into the right to
receive the cash portion of the purchase price. Subject to the
escrows and the deferred payment described below, the cash
portion of the purchase price was distributed to the government
partners and the commercial partners shortly after the merger.
The purchase price consideration of $1,828.0 million was
comprised of the following significant components:
$1,625.9 million paid to shareholders in cash, transaction
costs of $24.0 million, fair value of stock options granted
under our Officers Rollover Stock Plan of
$79.7 million, and fair value of our deferred payment
obligation of $98.4 million.
44
The payment of $158.0 million of the cash consideration to
the government partners and the commercial partners was
structured as a deferred payment obligation of Booz Allen
Investor to such partners, or the deferred payment obligation,
and Booz Allen Investor is obligated to pay this amount (plus
interest at a rate of 5% per six months) to the partners, on a
pro rata basis,
81/2
years after the consummation of the merger or, in certain
circumstances, earlier. A total of $78.0 million of the
deferred payment obligation, plus $22.4 million of accrued
interest, was repaid on December 11, 2009. See
Recapitalization Transaction. Currently,
up to $80.0 million of the deferred payment obligation may
be reduced to offset any claims under the indemnification
provisions of the merger agreement described below.
On the Closing Date, $90.0 million of the cash
consideration was deposited into escrow to fund certain purchase
price adjustments, future indemnification claims under the
merger agreement and for certain other adjustments. As of
March 31, 2010 of the $90.0 million placed in escrow,
approximately $38.3 million, which includes accrued
interest, remains in escrow to cover indemnification claims
relating to losses that may be incurred from outstanding
litigation associated with the merger and certain outstanding
pre-closing tax claims and certain claims that may arise with
respect to certain pre-closing matters including taxes,
government contracts or the spin off and related transactions
and liabilities.
Financing
of the Merger
To fund the aggregate consideration for the acquisition, to
repay certain indebtedness in connection with the acquisition
and to provide working capital, Booz Allen Investor and Booz
Allen Hamilton entered into a series of financing transactions,
which included:
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entry into our senior credit facilities, and the incurrence of
$125.0 million of term loans under the Tranche A term
facility of the senior credit facilities and $585.0 million
under the Tranche B term facility under our senior credit
facilities;
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entry into our mezzanine credit facility, and the incurrence of
$550.0 million of term loans thereunder; and
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an equity contribution from Coinvest of approximately
$956.5 million.
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Indemnification
Under the Merger Agreement
From and after the Closing Date, Booz Allen Holding and its
subsidiaries (including Booz Allen Hamilton) are indemnified
under the merger agreement against losses arising from
(a) breach of certain representations and warranties
regarding Booz Allen Hamiltons capitalization, corporate
authorization, financial statements, internal accounting
controls, employee benefits, and DCAA audits and similar
government contracts investigations and claims, (b) the
failure of the sellers to perform certain covenants and
agreements in the merger agreement and the spin off agreement,
(c) the failure to assume and satisfy amounts owed under
the spin off agreement or certain ancillary agreements if and to
the extent that Spin Co. is insolvent or bankrupt, and
(d) any restructuring costs of Booz Allen Hamilton related
to the termination of transition services to Spin Co. after the
Closing Date. In addition, the merger agreement provides Booz
Allen Holding and its subsidiaries (including Booz Allen
Hamilton) with indemnification for (i) certain pre-closing
taxes and (ii) the amount of certain compensation
deductions resulting from any Booz Allen Hamilton options
exercised after the signing of the merger agreement and prior to
July 30, 2008. These indemnification rights are subject to
the various limitations, including time and dollar amounts, and
the sole recourse of Booz Allen Holding and its subsidiaries
with respect to any indemnification amounts owed to them under
the merger agreement are the escrow funds available for
indemnification and offset against Booz Allen Investors
obligation to pay a portion of the deferred payment obligation.
Spin
Off Agreement
In addition to governing the split of the commercial and
international business from the government business, the spin
off agreement sets forth certain restrictions and guidelines for
the interaction and operation of the government business and the
commercial and international business after the Closing Date,
including,
45
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for a period of three years following the Closing Date (subject
to certain exceptions), Spin Co. agreed that it and its
subsidiaries would not (i) provide, sell, or offer to sell
or advertise certain types of consulting services provided by
the government business, (ii) assist, advise, engage or
participate in providing such services to certain scheduled
competitors of Booz Allen Hamilton, (iii) have certain
interests in such competitors, (iv) knowingly permit its
names to be used by such competitors in connection with
providing any services other than permitted services or
(v) provide any services of any type to a scheduled list of
direct competitors or their subsidiaries or successors;
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for a period of three years following the Closing Date (subject
to certain exceptions), Booz Allen Hamilton agreed that it and
its subsidiaries would not (i) provide, sell, or offer to
sell or advertise any services other than certain types of
consulting services (including cyber-security services) provided
by the government business, (ii) assist or advise certain
scheduled competitors of Spin Co. in providing services other
than such consulting services provided by the government
business, (iii) have certain interests in such competitors,
or (iv) knowingly permit its names to be used by such
competitors in connection with providing any services other than
such consulting services provided by the government business;
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for a period of three years following the Closing Date, Booz
Allen Hamilton and Spin Co. agreed not to solicit or attempt to
solicit any client or business relation of the other party to
cease or adversely change their business relationship with the
other party or its subsidiaries;
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for a period of three years following the Closing Date, Booz
Allen Hamilton and Spin Co. agreed not to hire or attempt to
hire any person who was at Closing an officer, director,
employee, consultant or agent of the other party (subject to
certain exceptions);
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until the earlier of the fifth anniversary of the Closing Date
or a change in control of the other party, Booz Allen Hamilton
and Spin Co. agreed that they and their subsidiaries would not,
in the case of Spin Co., hire or attempt to hire any person who
was or is a stockholder of Booz Allen Hamilton (other than a
commercial partner); and in the case of Booz Allen Hamilton,
hire or attempt to hire any person who was, on or prior to the
Closing Date, a commercial partner, or is then, a stockholder of
Spin Co. (subject to certain exceptions); and
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for a period of three years following the Closing Date, Spin Co.
agreed that it and its subsidiaries would not directly or
indirectly acquire a competitor of Booz Allen Hamilton.
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Indemnification
under the Spin Off Agreement
Under the Spin Off Agreement, Booz Allen Hamilton has agreed to
indemnify Spin Co. from all losses arising out of breaches of
the Spin Off Agreement or certain related agreements, certain
employee benefit matters, and for liabilities and obligations
arising out of the government business, and Spin Co. has agreed
to indemnify Booz Allen Hamilton from all losses arising out of
breaches of the Spin Off Agreement or certain related
agreements, certain employee benefit matters, and for
liabilities and obligations arising out of the commercial and
international business. Spin Co. has also agreed to indemnify
Booz Allen Hamilton for increases in pre-closing taxes if a
majority of Spin Co.s shares or a majority of its assets
are sold to a third party within three years of the Closing Date
at a price in excess of the allocable portion of the
agreed-upon
fair market value of the Spin Co. shares and a taxing authority
successfully asserts that the fair market value of such shares
at the time of the spin off was in excess of the
agreed-upon
fair market value. Furthermore, each of Spin Co. and Booz Allen
Hamilton has generally agreed to indemnify the other from the
recapture of dual consolidated losses which result from an
action of the indemnifying party or its affiliates.
Recapitalization
Transaction
On December 11, 2009, in order to facilitate the payment of
a special dividend and the repayment of a portion of the
deferred payment obligation, Booz Allen Investor and Booz Allen
Hamilton entered into a series of amendments to the credit
agreements governing our senior credit facilities and mezzanine
credit facility. The credit agreement governing our senior
credit facilities was amended to, among other things, add
46
the Tranche C term facility under our senior credit
facilities, increase commitments under the revolving credit
facility under our senior credit facilities from
$100.0 million to $245.0 million, and add a specific
exception to the restricted payments covenant to permit the
payment of the special dividend. In addition to consenting to
such amendments, the lenders under the senior credit facilities
also consented to the amendment of the credit agreement
governing the mezzanine credit facility discussed below. In
exchange for such consents, each consenting lender received a
non-refundable cash fee equal to 0.1% of the sum of the
aggregate principal amount of such lenders Tranche A and B
term loans outstanding and such lenders existing revolving
commitment. In addition, each lender providing an increased
commitment under the revolving credit facility received a
non-refundable cash fee equal to 1.5% of such lenders
additional revolving commitment. The credit agreement governing
our mezzanine credit facility was amended to, among other things
add a specific exception to the restricted payments covenant to
permit the payment of the special dividend, to increase the
amount of senior credit facilities debt permitted under the debt
covenant to permit the incurrence of loans under the
Tranche C term facility and the increase in commitments
under the revolving credit facility. In addition, the premiums
payable upon the prepayment of the loans were increased, and a
1.0% premium was added with respect to payments of the loans at
maturity. In exchange for consenting to such amendments, each
consenting lender received a non-refundable cash fee equal to
1.0% of the aggregate principal amounts of such lenders
outstanding loans. Using cash on hand and $341.3 million in
net proceeds from the increased term loan facility, Booz Allen
Hamilton paid a special dividend of $650.0 million on its
common stock, all of which was paid to Booz Allen Investor, its
sole stockholder. Booz Allen Investor in turn used the proceeds
of the special dividend (i) to repay approximately
$100.4 million of the deferred payment obligation,
including $22.4 million in accrued interest, in accordance
with the terms of the merger agreement and (ii) to pay a
special dividend of approximately $549.6 million on its
common stock, all of which was paid to Booz Allen Holding, its
sole stockholder. Booz Allen Holding in turn declared a special
dividend of $497.5 million payable on its outstanding
Class A common stock, Class B non-voting common stock
and Class C restricted common stock, approximately
$444.1 million of which was paid to Coinvest and the
remainder of which was paid to the other stockholders of Booz
Allen Holding. The aforementioned transactions are referred to
in this prospectus as the recapitalization transaction.
As required by the Officers Rollover Stock Plan and the
Equity Incentive Plan, the exercise price per share of each
outstanding option was reduced in an amount equal to the
reduction in the value of the common stock as a result of the
dividend. Because the reduction in share value exceeded the
exercise price for certain of the options granted under the
Officers Rollover Stock Plan, the exercise price for those
options was reduced to the par value of the shares issuable on
exercise, and the holders became entitled to receive on the
options fixed exercise date a cash payment equal to the
excess of the reduction in share value as a result of the
dividend over the reduction in exercise price, subject to
vesting of the relation options. As of March 31, 2010, the
total obligations for these cash payments was $54.4 million.
47
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated statements of operations data for
fiscal 2008, the four months ended July 31, 2008, the eight
months ended March 31, 2009 and fiscal 2010, and the
selected consolidated balance sheet data as of March 31,
2009 and 2010 have been derived from our audited financial
statements included elsewhere in this prospectus. The
consolidated balance sheet data as of March 31, 2008 has
been derived from audited financial statements which are not
included in this prospectus. The selected consolidated
statements of operations data for fiscal 2006 and 2007 and the
selected consolidated balance sheet data as of March 31,
2006 and 2007 have been derived from our unaudited financial
statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements
and, in the opinion of our management, include all adjustments
necessary for a fair presentation of the information set forth
herein. Our historical results are not necessarily indicative of
the results that may be expected for any future period. The
selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
As discussed in more detail under The Acquisition and
Recapitalization Transaction, Booz Allen Hamilton was
indirectly acquired by Carlyle on July 31, 2008.
Immediately prior to the acquisition, Booz Allen Hamilton spun
off its commercial and international business and retained its
U.S. government business. The accompanying consolidated
financial statements are presented for (1) the
Predecessor, which are the financial statements of
Booz Allen Hamilton and its consolidated subsidiaries for the
period preceding the acquisition, and (2) the
Company, which are the financial statements of Booz
Allen Holding and its consolidated subsidiaries for the period
following the acquisition. Prior to the acquisition, Booz Allen
Hamiltons U.S. government business is presented as
the continuing operations of the Predecessor. The
Predecessors consolidated financial statements have been
presented for the twelve months ended March 31, 2008 and
the four months ended July 31, 2008. The operating results
of the commercial and international business that was spun off
by Booz Allen Hamilton effective July 31, 2008 have been
presented as discontinued operations in the Predecessor
consolidated financial statements and the related notes included
in this prospectus. The Companys consolidated financial
statements for periods subsequent to the acquisition have been
presented from August 1, 2008 through March 31, 2009
and for the twelve months ended March 31, 2010. The
Predecessors financial statements may not necessarily be
indicative of the cost structure or results of operations that
would have existed if the U.S. government business operated
as a stand-alone, independent business. The acquisition was
accounted for as a business combination, which resulted in a new
basis of accounting. The Predecessors and the
Companys financial statements are not comparable as a
result of applying a new basis of accounting. See Notes 1,
4, and 24 to our consolidated financial statements for
additional information regarding the accounting treatment of the
acquisition and discontinued operations.
Additionally, the results of operations and balance sheet data
for fiscal 2006, fiscal 2007, fiscal 2008, the four months ended
July 31, 2008, and the eight months ended March 31,
2009 and as of March 31, 2006, 2007 and 2008 are presented
as adjusted to reflect the change in accounting
principle related to our revenue recognition policies as
described in Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Estimates and Policies.
Included in the table below are unaudited pro forma results of
operations for the twelve months ended March 31, 2009, or
pro forma 2009, assuming the acquisition had been
completed as of April 1, 2008. The unaudited pro forma
condensed consolidated results of operations for fiscal 2009 are
based on our historical audited consolidated financial
statements included elsewhere in this prospectus, adjusted to
give pro forma effect to the acquisition. The unaudited pro
forma condensed consolidated results of operations for fiscal
2009 are presented because management believes it provides a
meaningful comparison of operating results enabling twelve
months of fiscal 2009, adjusted for the impact of the
acquisition, to be compared with fiscal 2010. The unaudited pro
forma condensed consolidated financial statements are for
informational purposes only and do not purport to represent what
our actual results of operations would have been if the
acquisition had been completed as of April 1, 2008 or that
may be achieved in the future. The unaudited pro forma condensed
consolidated financial information and the accompanying notes
should be read in conjunction with our historical audited
consolidated financial statements and related notes appearing
elsewhere in this prospectus
48
and other financial information contained in Risk
Factors, The Acquisition and Recapitalization
Transaction, and Managements Discussion and
Analysis of Financial Condition and Results of Operations
in this prospectus. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Results of Operations for a
description of the pro forma adjustments attributable to the
acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
|
Eight Months
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
July 31,
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
2009
|
|
|
2009(1)
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,902,513
|
|
|
$
|
3,209,211
|
|
|
$
|
3,625,055
|
|
|
$
|
1,409,943
|
|
|
|
$
|
2,941,275
|
|
|
$
|
4,351,218
|
|
|
$
|
5,122,633
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and other costs
|
|
|
1,572,817
|
|
|
|
1,813,295
|
|
|
|
2,028,848
|
|
|
|
722,986
|
|
|
|
|
1,566,763
|
|
|
|
2,296,335
|
|
|
|
2,654,143
|
|
Billable expenses
|
|
|
820,951
|
|
|
|
815,421
|
|
|
|
935,459
|
|
|
|
401,387
|
|
|
|
|
756,933
|
|
|
|
1,158,320
|
|
|
|
1,361,229
|
|
General and administrative expenses
|
|
|
409,576
|
|
|
|
421,921
|
|
|
|
474,188
|
|
|
|
726,929
|
|
|
|
|
505,226
|
|
|
|
723,827
|
|
|
|
811,944
|
|
Depreciation and amortization
|
|
|
22,284
|
|
|
|
27,879
|
|
|
|
33,079
|
|
|
|
11,930
|
|
|
|
|
79,665
|
|
|
|
106,335
|
|
|
|
95,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,825,628
|
|
|
|
3,078,516
|
|
|
|
3,471,574
|
|
|
|
1,863,232
|
|
|
|
|
2,908,587
|
|
|
|
4,284,817
|
|
|
|
4,923,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
76,885
|
|
|
|
130,695
|
|
|
|
153,481
|
|
|
|
(453,289
|
)
|
|
|
|
32,688
|
|
|
|
66,401
|
|
|
|
199,554
|
|
Interest income
|
|
|
1,995
|
|
|
|
2,955
|
|
|
|
2,442
|
|
|
|
734
|
|
|
|
|
4,578
|
|
|
|
5,312
|
|
|
|
1,466
|
|
Interest expense
|
|
|
(966
|
)
|
|
|
(1,481
|
)
|
|
|
(2,319
|
)
|
|
|
(1,044
|
)
|
|
|
|
(98,068
|
)
|
|
|
(146,803
|
)
|
|
|
(150,734
|
)
|
Other income (expense), net
|
|
|
392
|
|
|
|
146
|
|
|
|
(1,931
|
)
|
|
|
(54
|
)
|
|
|
|
(128
|
)
|
|
|
(182
|
)
|
|
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations and before income taxes
|
|
|
78,306
|
|
|
|
132,315
|
|
|
|
151,673
|
|
|
|
(453,653
|
)
|
|
|
|
(60,930
|
)
|
|
|
(75,272
|
)
|
|
|
48,994
|
|
Income tax (benefit) expense from continuing operations
|
|
|
39,399
|
|
|
|
55,921
|
|
|
|
62,693
|
|
|
|
(56,109
|
)
|
|
|
|
(22,147
|
)
|
|
|
(25,831
|
)
|
|
|
23,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
38,907
|
|
|
|
76,394
|
|
|
|
88,980
|
|
|
|
(397,544
|
)
|
|
|
$
|
(38,783
|
)
|
|
$
|
(49,441
|
)
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(30,409
|
)
|
|
|
(57,611
|
)
|
|
|
(71,106
|
)
|
|
|
(848,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,498
|
|
|
$
|
18,783
|
|
|
$
|
17,874
|
|
|
$
|
(1,245,915
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations(2)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share(2)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding(2)(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share (unaudited)(3)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
The Company
|
|
|
As of March 31,
|
|
|
As of March 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
2009
|
|
2010
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
|
(As adjusted)
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,233
|
|
|
$
|
3,272
|
|
|
$
|
7,123
|
|
|
|
$
|
420,902
|
|
|
$
|
307,835
|
|
Working capital
|
|
|
724,470
|
|
|
|
789,275
|
|
|
|
1,113,656
|
|
|
|
|
789,308
|
|
|
|
584,248
|
|
Total assets
|
|
|
1,422,983
|
|
|
|
1,482,453
|
|
|
|
1,891,375
|
|
|
|
|
3,182,249
|
|
|
|
3,062,223
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,220,502
|
|
|
|
1,546,782
|
|
Stockholders equity
|
|
|
271,090
|
|
|
|
272,068
|
|
|
|
313,065
|
|
|
|
|
1,060,343
|
|
|
|
509,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The table below presents the pro forma adjustments attributable
to the acquisition. The pro forma adjustments are described in
the accompanying footnotes and are based upon available
information and certain assumptions that we believe are
reasonable. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Months
|
|
|
Eight Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Pro Forma
|
|
|
|
July 31,
|
|
|
March 31,
|
|
|
Pro Forma
|
|
|
Fiscal Year Ended
|
|
|
|
2008
|
|
|
2009
|
|
|
Adjustments
|
|
|
March 31, 2009
|
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,409,943
|
|
|
$
|
2,941,275
|
|
|
|
|
|
|
$
|
4,351,218
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and other costs
|
|
|
722,986
|
|
|
|
1,566,763
|
|
|
$
|
6,586
|
(a)
|
|
|
2,296,335
|
|
Billable expenses
|
|
|
401,387
|
|
|
|
756,933
|
|
|
|
|
|
|
|
1,158,320
|
|
General and administrative expenses
|
|
|
726,929
|
|
|
|
505,226
|
|
|
|
(508,328
|
)(b)
|
|
|
723,827
|
|
Depreciation and amortization
|
|
|
11,930
|
|
|
|
79,665
|
|
|
|
14,740
|
(c)
|
|
|
106,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,863,232
|
|
|
|
2,908,587
|
|
|
|
|
|
|
|
4,284,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(453,289
|
)
|
|
|
32,688
|
|
|
|
|
|
|
|
66,401
|
|
Interest income
|
|
|
734
|
|
|
|
4,578
|
|
|
|
|
|
|
|
5,312
|
|
Interest expense
|
|
|
(1,044
|
)
|
|
|
(98,068
|
)
|
|
|
(47,691
|
)(d)
|
|
|
(146,803
|
)
|
Other (expense), net
|
|
|
(54
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(453,653
|
)
|
|
|
(60,930
|
)
|
|
|
|
|
|
|
(75,272
|
)
|
Income tax (benefit) expense from continuing operations
|
|
|
(56,109
|
)
|
|
|
(22,147
|
)
|
|
|
52,425
|
(e)
|
|
|
(25,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(397,544
|
)
|
|
|
(38,783
|
)
|
|
|
|
|
|
$
|
(49,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(848,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,245,915
|
)
|
|
$
|
(38,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects additional stock-based compensation expense associated
with options issued in exchange for stock rights under the stock
rights plan that existed prior to the closing of the acquisition
for $6.6 million (see Note 17 to our consolidated
financial statements for additional information on our
stock-based compensation). |
|
(b) |
|
Consists of the following adjustments: |
50
|
|
|
|
|
Increase to rent expense of $1.8 million due to
the elimination of the July 31, 2008 deferred rent
liability in accordance with the accounting treatment of leases
associated with the business combination;
|
|
|
|
Increase to management fees paid to Carlyle of
$0.3 million (see Note 19 to our consolidated
financial statements for additional information regarding the
management fees);
|
|
|
|
Additional stock-based compensation expense of
$13.4 million associated with options issued in exchange
for stock rights under the stock rights plan that existed prior
to the closing of the acquisition (see Note 17 to our
consolidated financial statements for additional information on
our stock-based compensation);
|
|
|
|
Reversal of $511.7 million for a one-time
acceleration of stock rights and the fair value
mark-up of
redeemable common shares immediately prior to the
acquisition; and
|
|
|
|
Reversal of certain related transaction costs of
$12.2 million.
|
|
(c) |
|
Reflects amortization expense of intangible assets established
as part of purchase accounting and depreciation expense
associated with the fair value of fixed assets associated with
the acquisition accounted for as a business combination for
$14.7 million. |
|
(d) |
|
Consists of the following adjustments: |
|
|
|
Reversal of interest expense of $1.0 million
recorded during the four months ended July 31, 2008 related
to the Predecessors previous debt outstanding prior to the
acquisition; and
|
|
|
|
Incurrence of additional interest expense of
$48.7 million associated with our new senior credit
facilities and mezzanine credit facility established in
conjunction with the acquisition.
|
|
(e) |
|
Reflects tax effect of the cumulative pro forma adjustments. |
|
|
|
(2) |
|
Basic earnings per share for the Company has been computed using
the weighted average number of shares of Class A common
stock, Class B non-voting common stock and Class C
restricted common stock outstanding during the period. The
Companys diluted earnings per share has been computed
using the weighted average number of shares of Class A
common stock, Class B non-voting common stock and
Class C restricted common stock including the dilutive
effect of outstanding common stock options and other stock-based
awards. The weighted average number of Class E special
voting common stock has not been included in the calculation of
either basic earnings per share or diluted earnings per share
due to the terms of such common stock. |
|
|
|
Basic earnings per share for the Predecessor has been computed
using the weighted average number of shares of Class A
common stock outstanding during the period. The
Predecessors diluted earnings per share has been computed
using the weighted average number of shares of Class A
common stock including the dilutive effect of outstanding
stock-based awards. |
|
(3) |
|
Reflects a -for-1 split of our common stock to be
effected prior to the completion of this offering. |
|
(4) |
|
Reflects the payment of special dividends in the aggregate
amount of $114.9 million and $497.5 million to holders
of record of our Class A common stock, Class B
non-voting common stock, and Class C restricted common
stock as of July 29, 2009 and December 8, 2009,
respectively. |
51
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the
reader understand our business, financial condition, results of
operations, liquidity and capital resources. You should read
this discussion in conjunction with Selected Historical
Consolidated Financial and Other Data, and our audited
consolidated financial statements and the related notes
beginning on
page F-1
of this prospectus.
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 Risk Factors and Special 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 ends March 31 and, unless otherwise noted,
references to years or fiscal are for fiscal years ended
March 31. References to pro forma 2009 in this
discussion and analysis are to unaudited pro forma results for
the twelve months ended March 31, 2009, assuming the
acquisition had been completed as of April 1, 2008. See
Results of Operations.
Overview
We are a leading provider of management and technology
consulting services to the U.S. government in the defense,
intelligence and civil markets. We are a well-known, trusted and
long-term partner to our clients, who seek our expertise and
objective advice to address their most important and complex
problems. Leveraging our
95-year
consulting heritage and a talent base of approximately
23,300 people, we deploy our deep domain knowledge,
functional expertise and experience to help our clients achieve
their objectives. We have a collaborative culture, supported by
our operating model, which helps our professionals identify and
respond to emerging trends across the markets we serve and
delivers enduring results for our clients. We have grown our
revenue organically, without relying on acquisitions, at an 18%
CAGR over the
15-year
period ended March 31, 2010, reaching $5.1 billion in
revenue in fiscal 2010.
We were founded in 1914 by Edwin Booz, one of the pioneers of
management consulting. In 1940, we began serving the
U.S. government by advising the Secretary of the Navy in
preparation for World War II. As the needs of our clients have
grown more complex, we have expanded beyond our management
consulting foundation to develop deep expertise in technology,
engineering, and analytics. Today, we serve substantially all of
the cabinet-level departments of the U.S. government. Our
major clients include the Department of Defense, all branches of
the U.S. military, the U.S. Intelligence Community,
and civil agencies such as the Department of Homeland Security,
the Department of Energy, the Department of Health and Human
Services, the Department of the Treasury and the Environmental
Protection Agency. We support these clients in addressing
complex and pressing challenges such as combating global
terrorism, improving cyber capabilities, transforming the
healthcare system, improving efficiency and managing change
within the government, and protecting the environment.
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.
52
Business
Environment and Key Trends in Our Markets
We believe that the following trends and developments in the
U.S. government services industry and our markets may
influence our future results of operations:
|
|
|
|
|
budgeting constraints increasing pressure on the
U.S. government to control spending while pursuing numerous
important policy initiatives, which may result in a slowdown in
the growth rate of U.S. government spending in certain areas;
|
|
|
|
changes in the level and mix of U.S. government spending,
such as the U.S. governments increased spending in
recent years on homeland security, cyber, advanced technology
analytics, intelligence and defense-related programs and
healthcare;
|
|
|
|
increased insourcing by the U.S. government of work that
was traditionally performed by outside contractors, including at
the Department of Defense;
|
|
|
|
specific efficiency initiatives by the U.S. government such
as the Base Realignment and Closure Program and efforts to
rebalance the U.S. defense forces in accordance with the
2010 QDR, as well as general efforts to improve procurement
practices and efficiencies, such as the actions recently
announced by the Office of Management and Budget regarding IT
procurement practices;
|
|
|
|
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;
|
|
|
|
restrictions by the U.S. government on the ability of
federal agencies to use lead system integrators, in response to
cost, schedule and performance problems with large defense
acquisition programs where contractors were performing the lead
system integrator role;
|
|
|
|
increasingly complex requirements of the Department of Defense
and the U.S. Intelligence Community, including
cyber-security, and focus on reforming existing government
regulation of various sectors of the economy, such as financial
regulation and healthcare;
|
|
|
|
increased competition from other government contractors and
market entrants seeking to take advantage of the trends
identified above; and
|
|
|
|
efforts by the U.S. government to address organizational
conflicts of interest and related issues and the impact of those
efforts on us and our competitors.
|
Sources
of Revenue
Substantially all of our revenue is derived from services
provided under contracts and task orders with the
U.S. government, primarily by our employees 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, which generally have been increasing among our key
markets and service offerings. 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.
Contract
Types
We generate revenue under the following three basic types of
contracts: cost-reimbursable,
time-and-materials,
and fixed-price.
|
|
|
|
|
Cost-reimbursable contracts. Cost-reimbursable
contracts provide for the payment of allowable costs incurred
during performance of the contract, up to a ceiling based on the
amount that has been funded, plus a fee. We generate revenue
under two general types of cost-reimbursable contracts:
cost-plus-fixed-fee and cost-plus-award-fee contracts, both of
which reimburse allowable costs and include a fixed contract
fee. The fixed fee under each type of cost-reimbursable contract
is generally payable upon completion of services in accordance
with the terms of the contract, and cost-plus-fixed-fee
contracts offer no opportunity for payment beyond the fixed fee.
Cost-plus-award-fee contracts also provide for
|
53
|
|
|
|
|
an award fee that varies within specified limits based upon the
clients assessment of our performance against a
predetermined set of criteria, such as targets for factors like
cost, quality, schedule, and performance.
|
|
|
|
|
|
Time-and-materials
contracts. Under a
time-and-materials
contract, we are paid a fixed hourly rate for each direct labor
hour expended, and we are reimbursed for allowable material
costs and allowable
out-of-pocket
expenses. To the extent our actual direct labor and associated
costs vary in relation to the fixed hourly billing rates
provided in the contract, we will generate more or less profit,
or could incur a loss.
|
|
|
|
Fixed-price contracts. Under a fixed-price
contract, we agree to perform the specified work for a
pre-determined
price. To the extent our actual costs vary from the estimates
upon which the price was negotiated, we will generate more or
less profit, 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, 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 tends to be higher than cost-reimbursable contracts as
long as we are able to staff those contracts with people who
have an appropriate skill set. Under fixed-price contracts, we
are required to deliver the objectives under the contract for a
pre-determined
price. Compared to
time-and-materials
and
cost-reimbursable
contracts, fixed-price contracts generally offer higher profit
margin opportunities because we receive the full benefit of any
cost savings but generally involve greater financial risk
because we bear the impact of any cost overruns. In the
aggregate, the contract type mix in our revenue for any given
period will affect that periods profitability. Over time
we have experienced a relatively stable contract mix although
the U.S. government has indicated an intent to increase its
use of fixed price contract procurements and reduce its use of
cost-plus-award-fee contract procurements.
The table below presents the percentage of total revenue for
each type of contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
The Company
|
|
|
Fiscal
|
|
|
Pro Forma
|
|
Fiscal
|
|
|
2008
|
|
|
2009
|
|
2010
|
Cost-reimbursable(1)
|
|
|
47
|
%
|
|
|
|
50
|
%
|
|
|
50
|
%
|
Time-and-materials
|
|
|
44
|
%
|
|
|
|
39
|
%
|
|
|
38
|
%
|
Fixed-price(2)
|
|
|
9
|
%
|
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
|
(1) |
|
Includes both cost-plus-fixed-fee and cost-plus-award fee
contracts. |
|
(2) |
|
Includes fixed-price level of effort contracts. |
Contract
Diversity and Revenue Mix
We provide our services to our clients through a large number of
single award contracts and contract vehicles and multiple award
contract vehicles. In fiscal 2010, the revenue from our top ten
single award contracts or contract vehicles based on revenue
represented 19% of our revenue. Most of our revenue is generated
under ID/IQ contract vehicles, which include multiple award
GWACs and GSA schedules and certain single award contracts.
GWACs and GSA schedules are available to all
U.S. government agencies. Any number of contractors
typically compete under multiple award ID/IQ contract vehicles
for task orders to provide particular services, and we earn
revenue under these contract vehicles only to the extent that we
are successful in the bidding process for task orders. In each
of fiscal 2008, pro forma 2009 and fiscal 2010, our revenue
under GWACs and GSA schedules collectively represented 29%, 27%
and 23% of our total revenue, respectively. No single task order
under any contract represented more than 1% of our revenue in
any of fiscal
54
2008, pro forma 2009 or fiscal 2010. No single contract
accounted for more than 9% of our revenue in any of fiscal 2008,
pro forma 2009 and fiscal 2010.
We generate revenue under our contracts and task orders through
our provision of services as both a prime contractor and
subcontractor, as well as from the provision of services by
subcontractors under contracts and task orders for which we act
as the prime contractor. The mix of these types of revenue
affect our contract margins. Our contract margins are generally
highest when we contract directly with the government without
the engagement of subcontractors. When we act as a prime
contractor or as a subcontractor, our contract margins are
generally higher on revenue earned for services we provide than
the margins we earn on services provided by our subcontractors.
For fiscal 2008, pro forma 2009 and fiscal 2010, 89%, 90% and
86%, respectively, of our revenue was generated by contracts and
task orders for which we serve as a prime contractor; 11%, 10%
and 13%, respectively, of our revenue was generated by contracts
and task orders for which we serve as a subcontractor; and 22%,
21% and 22%, respectively, of our revenue was generated by
services provided by our subcontractors.
Our
People
Revenue from our contracts is derived from services delivered by
our people and, as discussed above, to a lesser extent from our
subcontractors. Our ability to hire, retain and deploy talent is
critical to our ability to grow our revenue. As of
March 31, 2008, 2009, and 2010 we employed approximately
18,800, 21,600, and 23,300 people, respectively, of which
approximately 16,900, 19,600, and 21,000, respectively, were
consulting staff employees. Attrition for consulting staff was
15%, 15%, and 14% during fiscal 2008, 2009, and 2010,
respectively. We recently enhanced our firm-wide hiring program
to recruit and attract additional high quality and experienced
talent. We believe this program will allow us to better service
our clients under existing contracts and reduce our need to use
subcontractors.
Contract
Backlog
We define backlog to include the following three components:
|
|
|
|
|
Funded Backlog. Funded backlog represents the
revenue value of orders for services under existing contracts
for which funding is appropriated or otherwise authorized less
revenue previously recognized on these contracts.
|
|
|
|
Unfunded Backlog. Unfunded backlog represents
the revenue value of orders for services under existing
contracts for which funding has not been appropriated or
otherwise authorized.
|
|
|
|
Priced Options. Priced contract options
represent 100% of the revenue value of all future contract
option periods under existing contracts that may be exercised at
our clients option and for which funding has not been
appropriated or otherwise authorized.
|
Backlog does not include any task orders under ID/IQ contracts,
including GWACs and GSA schedules, except to the extent that
task orders have been awarded to us under those contracts.
The following table summarizes the value of our contract backlog
at the respective dates presented:
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
|
As of March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In millions)
|
|
|
Backlog:
|
|
|
|
|
|
|
|
|
Funded
|
|
$
|
2,392
|
|
|
$
|
2,528
|
|
Unfunded
|
|
|
1,968
|
|
|
|
2,453
|
|
Priced options
|
|
|
2,919
|
(1)
|
|
|
4,032
|
(1)
|
|
|
|
|
|
|
|
|
|
Total backlog
|
|
$
|
7,279
|
|
|
$
|
9,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown reflect 100% of the undiscounted revenue value of
all priced options. |
55
Our backlog includes orders under contracts that in some cases
extend for several years. The U.S. Congress generally
appropriates funds for our clients on a yearly basis, even
though their contracts with us may call for performance that is
expected to take a number of years. As a result, contracts
typically are only partially funded at any point during their
term and all or some of the work to be performed under the
contracts may remain unfunded unless and until the
U.S. Congress makes subsequent appropriations and the
procuring agency allocates funding to the contract.
We view growth in total backlog and headcount growth as the two
key measures of our business growth. Headcount growth is the
primary means by which we are able to recognize revenue growth.
To the extent that we are able to hire additional people, we
generally are able to deploy them against funded backlog and, as
a result, recognize increased revenue. Some portion of our
employee base is employed on less than a full time basis, and we
measure revenue growth based on the full time equivalency of our
people. Total backlog grew 24% from March 31, 2009 to
March 31, 2010. We cannot predict with any certainty the
portion of our backlog that we expect to recognize as revenue in
any future period. While we report internally on our backlog on
a monthly basis and review backlog upon the occurrence of
certain events to determine if any adjustments are necessary, we
cannot guarantee that we will recognize any revenue from our
backlog. The primary risks that could affect our ability to
recognize such revenue are program schedule changes and contract
modifications. In our recent experience, none of these or other
factors have had a material negative effect on our ability to
realize revenue from our funded backlog. Additional risks
include 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
available; and, in the case of priced options, the risk that our
clients will not exercise their options. See Risk
Factors Risks Related to Our Business We
may not realize the full value of our backlog, which may result
in lower than expected revenue.
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 a specific skill set 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.
Upon the completion of this offering, we will be required to
comply with new accounting, financial reporting and corporate
governance standards as a public company that we expect will
cause our general and administrative expenses to increase. Such
costs will include, among others, increased auditing and legal
fees, board of director fees, investor relations expenses, and
director and officer liability insurance costs.
56
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.
Income
Taxes
Our NOL carryforward, which as of March 31, 2010 was
$367.6 million, is subject to Section 382 of the
Internal Revenue Code. Section 382 of the Internal Revenue
Code limits the use of a corporations NOLs and certain
other tax benefits following a change in ownership of the
corporation. We believe that it is more likely than not that the
results of future operations will generate sufficient taxable
income over the next two to five years to realize the tax
benefits of our NOL carryforward.
We also expect that our future cash tax payments will be further
reduced by utilizing deductions created upon the exercise of
employee stock options. In general, under current law, an
exercise of a compensatory option to acquire our stock would
create an income tax deduction in an amount equal to the excess
of the fair market value of the stock subject to the option over
the option exercise price. In connection with the acquisition,
we issued options under the Officers Rollover Stock Plan,
referred to as Rollover options, of which options to purchase
1,334,584 shares were outstanding as of March 31,
2010, including options to purchase 97,139 shares that were
vested as of such date. The remaining Rollover options vest over
the period from June 30, 2010 to June 30, 2013 and,
once vested, are required to be exercised no later than
60 days (subject to extension by the Board) following
specified exercise commencement dates ranging from June 30,
2010 to June 30, 2015 or such options will be forfeited.
Assuming that all such options vest in accordance with their
terms and are exercised in accordance with the exercise
schedule, and that the fair market value of our Class A
common stock at the time of such exercises were equal to
$ ,
the midpoint of the range set forth on the cover page of this
prospectus, the expected reduction in our cash taxes over the
exercise period for such options would be approximately
$ in
excess of the tax benefit for such awards reflected in our
consolidated financial statements. There can be no assurance
that any such options will vest and be exercised or that the
value of our stock at the time of any exercise will not be less
than such midpoint or that any such tax deduction will be
realized. Any increase or decrease in the price of our
Class A common stock at the time of any such exercise
relative to such midpoint assumed above would likewise have the
effect of increasing (in the case of a decrease in stock price)
or decreasing (in the case of an increase in stock price) our
future cash tax payments.
In addition, we have issued options under the Equity Incentive
Plan, referred to as EIP options, of which options to purchase
1,306,497 shares were outstanding as of March 31,
2010, including options to purchase 236,889 shares that
were vested as of such date. These outstanding EIP options vest
over the period from fiscal 2011 to fiscal 2016 based on the
continued employment of the holder and the fulfillment of
certain performance targets. Options are exercisable any time
between vesting and ten years after grant date ranging from
June 30, 2019 to June 30, 2020. The exercise prices of
EIP options outstanding as of March 31, 2010 range from
$ to
$ per share and the weighted
average exercise price for such outstanding EIP options is
$ . Assuming that all such options
vest in accordance with their terms and are exercised, and that
the fair market value of our Class A common stock at the
time of such exercises were equal to
$ , the midpoint of the range set
forth on the cover page of this prospectus, and after giving
effect to the exercise of 35,181 options with an exercise price
of $
per share after the end of fiscal 2010, the expected reduction
in our cash taxes over the exercise period for such options
would be approximately
$ million
in excess of the tax benefit for such awards reflected in our
consolidated financial statements. There can be no assurance
that any such options will vest and be exercised, as to the
timing of any exercise or that the value of our stock at the
time of any such exercise will not be less than such midpoint or
that any such tax deduction will be realized. Any increase or
decrease in the price of our Class A common stock at the
time of any such exercise relative to such midpoint assumed
above would likewise have the effect of increasing (in the case
of a decrease in stock price) or decreasing (in the case of an
increase in stock price) our future cash tax expense.
57
For further information regarding our outstanding options,
including vesting and exercise terms, see Executive
Compensation Executive Compensation Plans and
Note 17 to our consolidated financial statements.
Effects
of Inflation
50% of our revenue is derived from cost-reimbursable contracts
as of March 31, 2010, which are generally completed within
one year of the contract start date. Bids for longer-term
fixed-price and
time-and-materials
contracts typically include sufficient provisions for labor and
other cost escalations to cover anticipated cost increases over
the period of performance. Consequently, revenue and costs have
generally both increased commensurate with overall economic
growth. As a result, net income as a percentage of total revenue
has not been significantly impacted by inflation.
Seasonality
The U.S. governments fiscal year ends on September 30
of each year. 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 generally experienced higher bid and proposal costs in the
months leading up to the U.S. governments fiscal
year-end as we pursue new contract opportunities being awarded
shortly after the U.S. government fiscal year-end as new
opportunities are expected to have funding appropriated in the
U.S. governments subsequent fiscal year. We may
continue to experience this seasonality in future periods, and
our future periods may be affected by it.
Seasonality is just one of a number of factors, many of which
are outside of our control, that may affect our results in any
period. See Risk Factors Risks Relating to Our
Common Stock and This Offering Our financial results
may vary significantly from period to period as a result of a
number of factors, many of which are outside our control, which
could cause the market value of our Class A common stock to
decline.
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 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, and are the most important to our
financial condition and operating results.
Revenue
Recognition and Cost Estimation
Substantially all of our revenue is derived from contracts to
provide professional services to the U.S. government and
its agencies. In most cases, we recognize revenue as work is
performed. For fixed-price contracts, we recognize revenue on
the
percentage-of-completion
basis with progress toward completion of a particular contract
based on actual costs incurred relative to total estimated costs
to be incurred over the life of the contract. Profits on
fixed-price contracts result from the difference between the
incurred costs and the revenue earned. This method is followed
where reasonably dependable estimates of revenue and costs under
the contract can be made. Estimates of total contract revenue
and costs are reviewed regularly and at least quarterly, and
recorded revenue and costs are subject to revision as the
contract progresses. Such revisions
58
may result in increases or decreases to revenue and income, and
are reflected in the financial statements in the periods in
which they are first identified. If our estimates indicate that
a contract loss will occur, a loss provision is recorded in the
period in which the loss first becomes probable and reasonably
estimable. Estimating costs under our long-term contracts is
complex and involves significant judgment. Factors that must be
considered in making estimates include labor productivity and
availability, the nature and technical complexity of the work to
be performed, potential performance delays, availability and
timing of funding from the client, progress toward completion,
and recoverability of claims. Adjustments to original estimates
are often required as work progresses and additional information
becomes known, even though the scope of the work required under
the contract may not change. Any adjustment as a result of a
change in estimates is made when facts develop, events become
known or an adjustment is otherwise warranted, such as in the
case of a contract modification. We have procedures and
processes in place to monitor the actual progress of a project
against estimates and our estimates are updated if circumstances
are warranted.
We recognize revenue for cost-plus-fixed-fee contracts with the
U.S. government as hours are worked based on reimbursable
and allowable costs, recoverable indirect costs and an accrual
for the fixed fee component of the contract. Many of our
U.S. government contracts include award fees, which are
earned based on the clients evaluation of our performance.
We have significant history with the client for the majority of
contracts on which we earn award fees. That history and
management monitoring of performance form the basis for our
ability to estimate such fees over the life of the contract.
Based on these estimates, we recognize award fees as work on the
contracts is performed.
Revenue earned under
time-and-materials
contracts is recognized as hours are worked based on
contractually billable rates to the client. Costs on
time-and-materials contracts are expensed as incurred.
Change
in Accounting Principle for Revenue Recognition
In 2010, we changed our methodology of recognizing revenue for
all of our U.S. government contracts to apply the
accounting guidance of Financial Accounting Standards Board, or
FASB, Accounting Standard Codification, or ASC, Subtopic
605-35, as
directed by ASC Topic 912, which permits revenue recognition on
a
percentage-of-completion
basis. Previously, we applied this guidance only to contracts
related to the construction or development of tangible assets.
For contracts not related to those activities, we had applied
the general revenue recognition guidance of Staff Accounting
Bulletin, or SAB, Topic 13, Revenue Recognition.
Upon contract completion, both methods yield the same results,
but we believe that the application of contract accounting under
ASC 605-35
to all U.S. government contracts is preferable to the
application of contract accounting under SAB Topic 13,
based on the fact that the percentage of completion model
utilized under
ASC 605-35
is a recognized accounting model that better reflects the
economics of a U.S. government contract during the contract
performance period.
The only material financial impact resulting from the accounting
change is the recognition of award fees based upon reliable
estimates. The guidance in
ASC 605-35
allows for award fees to be recorded over the life of a contract
based on managements estimates of those total fees, to the
extent we are able to make such estimates. We have concluded
that these estimates, in prior and current periods, can be made
based on our significant history with our portfolio of contracts
and managements monitoring of fees earned on such
contracts. Management concluded that accrual of award fees is
appropriate for all of our existing cost-plus-award-fee
contracts for which management is able to estimate the award
fees. This change has been reflected in all periods presented in
the audited consolidated financial statements and the unaudited
financial data presented elsewhere in this prospectus.
In accordance with ASC Subtopic
250-10,
Accounting Changes and Error Corrections, all prior
periods presented have been retrospectively adjusted to apply
the new method of accounting. Refer to Note 2 to our
consolidated financial statements for information on the effect
of the change in accounting principle on our consolidated
financial statements.
Goodwill
and Intangible Impairment
Goodwill represents the excess of the purchase price of an
acquired business over the fair value of its net tangible and
identifiable intangible assets. The fair value assessments
involved in the calculation of goodwill
59
require judgments and estimates that can be affected by contract
performance and other factors over time, which may cause the
amount of goodwill associated with a business to differ
materially from original estimates.
We have identified a single reporting unit for purposes of
testing goodwill. The goodwill of our reporting unit is tested
for impairment annually on January 1 and whenever an event
occurs or circumstances change such that it is reasonably
possible that an impairment condition may exist. Events or
circumstances that could trigger such an interim impairment test
include a decline in market capitalization below book value,
internal reports or reports by our competitors of a decrease in
revenue or operating income or bankruptcies, lower than expected
income during the current fiscal year or expected for the next
fiscal year, current period operating or cash flow loss, loss of
significant contracts, or projection of continuing income or
cash flow losses associated with the use of a long-lived asset
or group of assets.
Our goodwill impairment test is a two-step process performed at
the reporting unit level. The first step consists of estimating
the fair value of our reporting unit based on a discounted cash
flow model using revenue and profit forecasts and comparing its
estimated fair value with the carrying value, which includes the
allocated goodwill. If the fair value is less than the carrying
value, a second step is performed to compute the amount of the
impairment by determining an implied fair value of goodwill. The
implied fair value of goodwill is the residual fair value
derived by deducting the fair value of the reporting units
identifiable assets and liabilities from its estimated fair
value calculated in step one. The impairment charge represents
the excess of the carrying amount of the reporting units
goodwill over the implied fair value of goodwill. The revenue
and profit forecasts used in step one are based on
managements best estimate of future revenue and operating
costs. Changes in these forecasts could cause the reporting unit
to either pass or fail the first step in the impairment test,
which could significantly change the amount of the impairment
recorded from step two. In addition, the estimated future cash
flows are adjusted to present value by applying a discount rate.
Changes in the discount rate impact the impairment by affecting
the calculation of the fair value of the reporting unit in step
one.
Our goodwill impairment test performed for fiscal 2010 did not
result in any impairment of goodwill. For the year ended
March 31, 2010, there were no triggering events indicative
of goodwill or intangible impairment.
Stock-Based
Compensation
We use the Black-Scholes option-pricing model to determine the
estimated fair value for stock options. The fair value of our
stock on the date of the option grant is determined based on an
external valuation prepared contemporaneously and approved by
management and reviewed by the Board.
Critical inputs into the Black-Scholes option-pricing model
include: the option exercise price; the fair value of the stock
price; the expected life of the option in years; the annualized
volatility of the stock; the annual rate of quarterly dividends
on the stock; and the risk-free interest rate.
As we have no plans to issue regular dividends, a dividend yield
of zero is used in the Black-Scholes model. Expected volatility
is calculated as of each grant date based on reported data for a
peer group of publicly traded companies for which historical
information is available. We will continue to use peer group
volatility information until our historical volatility can be
regularly measured against an open market to measure expected
volatility for future option grants. Other than the expected
life of the option, volatility is the most sensitive input to
our option grants. To be consistent with all other implied
calculations, the same peer group used to calculate other
implied metrics is also used to calculate implied volatility.
While we are not aware of any news or disclosure by our peers
that may impact their respective volatility, there is a risk
that peer group volatility may increase, thereby increasing any
prospective future compensation expense that will result from
future option grants.
The risk-free interest rate used in the Black-Scholes
option-pricing model is determined by referencing the
U.S. Treasury yield curve rates with the remaining term
equal to the expected life assumed at the date of grant. Due to
the lack of historical exercise data, the average expected life
is estimated based on internal
60
qualitative and quantitative factors. As we obtain data
associated with future exercises, the useful life of future
grants will be adjusted accordingly.
Forfeitures are estimated based on our historical analysis of
attrition levels. Forfeiture estimates will be updated annually
for actual forfeitures. We do not expect this assumption to
change materially, as attrition levels have historically been
low.
As a privately held company, we obtained contemporaneous
valuations by an independent valuation specialist for our fair
value determinations. The valuations were based on several
generally accepted valuation techniques: a discounted cash flow
analysis, a comparable public company analysis, and for the most
recent valuation, a comparative transaction analysis. Estimates
used in connection with the discounted cash flow analysis were
consistent with the plans and estimates that we use to manage
the business although there is inherent uncertainty in these
estimates. The valuation analysis results in a range of derived
values with the final value selected and approved by our
Compensation Committee. The completion of the initial public
offering may add value to the shares due to, among other things,
increased liquidity and marketability; however, the extent (if
any) of such additional value cannot be measured with precision
or certainty and the shares could suffer a decrease in value.
Accounting
for Income Taxes
Provisions for federal and state income taxes are calculated
from the income reported on our financial statements based on
current tax law and also include, in the current period, 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 financial statements than for income tax purposes.
Significant judgment is required in determining income tax
provisions and evaluating tax positions. We establish reserves
for income tax when, despite the belief that our tax positions
are supportable, there remains uncertainty in a tax position 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 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
In October 2009, the FASB issued Accounting Standards Update, or
ASU,
No. 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements a consensus of the FASB
EITF 08-01,
to amend the revenue recognition guidance for arrangements with
multiple deliverables under ASC
605-25,
Revenue Recognition: Multiple-Element Arrangements. This
guidance modifies the requirements for determining whether a
deliverable can be treated as a separate unit of accounting by
removing the criteria that verifiable and objective evidence of
fair value exists for the undelivered elements.
In October 2009, the FASB issued ASU
No. 2009-14,
Software (Topic 985): Certain Revenue Arrangements That
Include Software Elements a consensus of the FASB
Emerging Issues Task Force, to amend the revenue recognition
guidance for certain arrangements that include software elements
under FASB
ASC 985-605,
Software: Revenue Recognition. The amendment to
ASC 985-605
focuses on determining which arrangements are within the scope
of the software revenue guidance.
61
The changes in ASU
No. 2009-13
and ASU
No. 2009-14
are effective on a prospective basis for transactions entered
into or materially modified for fiscal years beginning on or
after June 15, 2010, or on a retrospective basis for all
periods presented. Early adoption is permitted as of the
beginning of our fiscal year provided we have not previously
issued financial statements for any period within that year. We
have adopted the guidance on a prospective basis effective
April 1, 2010 and we believe that the guidance will not
have material impact on our consolidated financial statements
and disclosures. We are required to adopt both
ASU No. 2009-13
and ASU
No. 2009-14
in the same manner.
In March 2010, the FASB ratified Emerging Issues Task Force, or
EITF,
No. 08-9,
Milestone Method of Revenue Recognition, relating to
revenue recognition disclosures on research and development
deliverables. Under the new guidance, entities with research and
development arrangements, regardless of whether the arrangements
have single or multiple deliverables, must make certain
financial statement disclosures about the arrangements
milestones. These disclosures are now required to include a
description of the overall arrangement and its individual
milestones, a conclusion as to whether the milestones are
substantive, and the amount of consideration associated with the
milestone recognized during the current period. Additionally,
entities should disclose the list of factors they used in
determining whether the milestones are substantive and any
related contingent consideration. We are currently evaluating
the impact, if any, that the guidance will have on our
consolidated financial statements and disclosures. We would be
required to adopt EITF
No. 08-9
prospectively for all fiscal and interim periods after
June 15, 2010, in accordance with the new standard.
Other recent accounting pronouncements issued by the FASB
(including the EITF) and the American Institute of Certified
Public Accountants were not or are not believed by management to
have a material impact on our future consolidated financial
statements.
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.
The
Acquisition
On July 31, 2008, pursuant to the merger agreement, the
then-existing shareholders of Booz Allen Hamilton completed the
spin off and sale of the commercial and international business
to the commercial partners and the acquisition of Booz Allen
Hamilton by Carlyle, through the merger of Booz Allen Hamilton
with a wholly-owned indirect subsidiary of Booz Allen Holding.
Booz Allen Holding was formed for the purpose of Carlyle
indirectly acquiring Booz Allen Hamilton and was capitalized
through (1) the sale of $956.5 million of shares of
Class A common stock by Booz Allen Holding to Coinvest and
(2) $1,240.3 million of net proceeds from indebtedness
incurred under our senior credit facilities and our mezzanine
credit facility. Booz Allen Holding acquired Booz Allen Hamilton
for total consideration of $1,828.0 million. The
acquisition consideration was allocated to the acquired net
assets, identified intangibles of $353.8 million, and
goodwill of $1,163.1 million.
In connection with the acquisition, Booz Allen Holding exchanged
certain shares of its common stock for previously issued and
outstanding shares of Booz Allen Hamilton. Fully vested shares
of Booz Allen Hamilton were exchanged for vested shares of Booz
Allen Holding, with a fair value of $79.7 million. This
amount was included as a component of the total acquisition
consideration. Booz Allen Holding also issued restricted shares
and options in exchange for previously issued and outstanding
stock rights of Booz Allen Hamilton. Based on the vesting terms
of the newly issued Booz Allen Holding Class C restricted
common stock and the new options granted under the
Officers Rollover Stock Plan, the fair value of those
awards, $147.4 million, is recognized as compensation
expense by us subsequent to the acquisition as the restricted
common stock and stock options vest over a period of three to
five years. See The Acquisition and Recapitalization
Transaction.
62
The
Recapitalization Transaction
On December 11, 2009, we consummated the recapitalization
transaction, which included amendments of our senior credit
facilities and our mezzanine credit facility to, among other
things, add the $350.0 million Tranche C term facility
under our senior credit facilities and waive certain covenants
to permit the recapitalization transaction. Net proceeds from
the Tranche C term facility of $341.3 million, along
with cash on hand, were used to fund Booz Allen
Hamiltons dividend payment of $497.5 million, or
$46.42 per share, to all issued and outstanding shares of Booz
Allen Holdings Class A common stock, Class B
non-voting common stock and Class C restricted common
stock. We also repaid a portion of the deferred payment
obligation in the amount of $100.4 million, including
$22.4 million in accrued interest. As required by the
Officers Rollover Stock Plan and the Equity Incentive
Plan, the exercise price per share of each outstanding option
was reduced in an amount equal to the reduction in the value of
the common stock as a result of the dividend. Because the
reduction in share value exceeded the exercise price for certain
of the options granted under the Officers Rollover Stock
Plan, the exercise price for those options was reduced to the
par value of the shares issuable on exercise, and the holders
became entitled to receive on the options fixed exercise
date a cash payment equal to the excess of the reduction in
share value as a result of the dividend over the reduction in
exercise price, subject to vesting of the relation options. As
of March 31, 2010, the total obligations for these cash
payments was $54.4 million. See The Acquisition and
Recapitalization Transaction.
Basis of
Presentation
As discussed in more detail under The Acquisition and
Recapitalization Transaction, Booz Allen Hamilton was
indirectly acquired by Carlyle on July 31, 2008.
Immediately prior to the acquisition, Booz Allen Hamilton spun
off its commercial and international business and retained its
U.S. government business. The accompanying consolidated and
combined financial statements are presented for (1) the
Predecessor, which are the financial statements of
Booz Allen Hamilton for the period preceding the acquisition,
and (2) the Company, which are the financial
statements of Booz Allen Holding and its consolidated
subsidiaries for the period following the acquisition. Prior to
the acquisition, Booz Allen Hamiltons U.S. government
business is presented as the continuing operations of the
Predecessor. The Predecessors consolidated financial
statements have been presented for the twelve months ended
March 31, 2008 and the four months ended July 31,
2008. The operating results of the commercial and international
business that was spun off by Booz Allen Hamilton effective
July 31, 2008 have been presented as discontinued
operations in the Predecessor consolidated financial statements
and the related notes included in this prospectus. The
Companys consolidated financial statements for periods
subsequent to the acquisition have been presented from
August 1, 2008 through March 31, 2009 and for the
twelve months ended March 31, 2010. The Predecessors
financial statements may not necessarily be indicative of the
cost structure or results of operations that would have existed
if the U.S. government business operated as a stand-alone,
independent business. The acquisition was accounted for as a
business combination, which resulted in a new basis of
accounting. The Predecessors and the Companys
financial statements are not comparable as a result of applying
a new basis of accounting. See Notes 2, 4, and 24 to our
consolidated financial statements for additional information
regarding the accounting treatment of the acquisition and
discontinued operations.
The spin off of the commercial and international business, the
acquisition of a majority ownership by Carlyle, the related
application of the purchase accounting method and changes in our
outstanding debt resulted in significant changes in, among other
things, asset values, amortization expense, and interest
expense. Additionally, the Predecessors net loss for the
four months ended July 31, 2008 includes approximately
$1.5 billion of stock compensation expense related to the
accelerated vesting of a portion of existing rights to purchase
common stock of the Company and the
mark-up of
the Predecessors common stock to fair market value in
anticipation of the acquisition. The acquisition purchase price
was allocated to the Companys net tangible and
identifiable intangible assets based upon their fair values as
of August 1, 2008. The excess of the purchase price over
the fair value of the net tangible and identifiable assets was
recorded as goodwill.
The results of operations for fiscal 2008, the four months ended
July 31, 2008 and the eight months ended March 31,
2009 are presented as adjusted to reflect the change
in accounting principle related to our revenue recognition
policies, as described in Critical Accounting
Estimates and Policies.
63
Results of Operations
The following table sets forth items from our consolidated
statements of operations for the periods indicated (in
thousands). Included in the table below and set forth in the
following discussion are unaudited pro forma results of
operations for the twelve months ended March 31, 2009, or
pro forma 2009, assuming the acquisition had been
completed as of April 1, 2008. The unaudited pro forma
condensed consolidated results of operations for fiscal 2009 are
based on our historical audited consolidated financial
statements included elsewhere in this prospectus, adjusted to
give pro forma effect to the acquisition.
The unaudited pro forma condensed consolidated results of
operations for fiscal 2009 are presented because management
believes it provides a meaningful comparison of operating
results enabling twelve months of fiscal 2009 to be compared
with fiscal 2010 and fiscal 2008, adjusting for the impact of
the acquisition. The unaudited pro forma condensed consolidated
financial statements are for informational purposes only and do
not purport to represent what our actual results of operations
would have been if the acquisition had been completed as of
April 1, 2008 or that may be achieved in the future. The
unaudited pro forma condensed consolidated financial information
and the accompanying notes should be read in conjunction with
our historical audited consolidated financial statements and
related notes appearing elsewhere in this prospectus and other
financial information contained in Prospectus
Summary, Risk Factors and The
Acquisition and Recapitalization Transaction, in this
prospectus.
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|
|
|
Four
|
|
|
|
Eight
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Months
|
|
|
|
Months
|
|
|
|
|
|
Fiscal
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
July 31,
|
|
|
|
March 31,
|
|
|
Pro Forma
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
2009
|
|
|
Adjustments
|
|
|
2009
|
|
|
2010
|
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
(As adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
3,625,055
|
|
|
$
|
1,409,943
|
|
|
|
$
|
2,941,275
|
|
|
|
|
|
|
$
|
4,351,218
|
|
|
$
|
5,122,633
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
2,028,848
|
|
|
|
722,986
|
|
|
|
|
1,566,763
|
|
|
$
|
6,586
|
(a)
|
|
|
2,296,335
|
|
|
|
2,654,143
|
|
Billable expenses
|
|
|
935,459
|
|
|
|
401,387
|
|
|
|
|
756,933
|
|
|
|
|
|
|
|
1,158,320
|
|
|
|
1,361,229
|
|
General and administrative expenses
|
|
|
474,188
|
|
|
|
726,929
|
|
|
|
|
505,226
|
|
|
|
(508,328
|
)(b)
|
|
|
723,827
|
|
|
|
811,944
|
|
Depreciation and amortization
|
|
|
33,079
|
|
|
|
11,930
|
|
|
|
|
79,665
|
|
|
|
14,740
|
(c)
|
|
|
106,335
|
|
|
|
95,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,471,574
|
|
|
|
1,863,232
|
|
|
|
|
2,908,587
|
|
|
|
|
|
|
|
4,284,817
|
|
|
|
4,923,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
153,481
|
|
|
|
(453,289
|
)
|
|
|
|
32,688
|
|
|
|
|
|
|
|
66,401
|
|
|
|
199,554
|
|
Interest income
|
|
|
2,442
|
|
|
|
734
|
|
|
|
|
4,578
|
|
|
|
|
|
|
|
5,312
|
|
|
|
1,466
|
|
Interest (expense)
|
|
|
(2,319
|
)
|
|
|
(1,044
|
)
|
|
|
|
(98,068
|
)
|
|
|
(47,691
|
)(d)
|
|
|
(146,803
|
)
|
|
|
(150,734
|
)
|
Other expense, net
|
|
|
(1,931
|
)
|
|
|
(54
|
)
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(182
|
)
|
|
|
(1,292
|
)
|
Income (loss) from continuing operations before income taxes
|
|
|
151,673
|
|
|
|
(453,653
|
)
|
|
|
|
(60,930
|
)
|
|
|
|
|
|
|
(75,272
|
)
|
|
|
48,994
|
|
Income tax expense (benefit) from continuing operations
|
|
|
62,693
|
|
|
|
(56,109
|
)
|
|
|
|
(22,147
|
)
|
|
|
52,425
|
(e)
|
|
|
(25,831
|
)
|
|
|
23,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
88,980
|
|
|
|
(397,544
|
)
|
|
|
|
(38,783
|
)
|
|
|
|
|
|
$
|
(49,441
|
)
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(71,106
|
)
|
|
|
(848,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
17,874
|
|
|
$
|
(1,245,915
|
)
|
|
|
$
|
(38,783
|
)
|
|
|
|
|
|
|
|
|
|
$
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects additional stock-based compensation expense associated
with options issued in exchange for stock rights under the stock
rights plan that existed prior to the closing of the acquisition
for $6.6 million |
64
|
|
|
|
|
(see Note 17 to our consolidated financial statements for
additional information on our stock-based compensation). |
|
(b) |
|
Consists of the following adjustments: |
|
|
|
Increase to rent expense of $1.8 million due to
the elimination of the July 31, 2008 deferred rent
liability in accordance with the accounting treatment of leases
associated with the business combination;
|
|
|
|
Increase to management fees paid to Carlyle of
$0.3 million (see Note 19 to our consolidated
financial statements for additional information regarding the
management fees);
|
|
|
|
Additional stock-based compensation expense of
$13.4 million associated with options issued in exchange
for stock rights under the stock rights plan that existed prior
to the closing of the acquisition (see Note 17 to our
consolidated financial statements for additional information on
our stock-based compensation);
|
|
|
|
Reversal of $511.7 million for a one-time
acceleration of stock rights and the fair value
mark-up of
redeemable common shares immediately prior to the acquisition;
and
|
|
|
|
Reversal of certain related transaction costs of
$12.2 million.
|
|
(c) |
|
Reflects amortization expense of intangible assets established
as part of purchase accounting and depreciation expense
associated with the fair value of fixed assets associated with
the acquisition accounted for as a business combination for
$14.7 million. |
|
(d) |
|
Consists of the following adjustments: |
|
|
|
Reversal of interest expense of $1.0 million
recorded during the four months ended July 31, 2008 related
to the Predecessors previous debt outstanding prior to the
acquisition; and
|
|
|
|
Incurrence of additional interest expense of
$48.7 million associated with our new senior credit
facilities and mezzanine credit facility established in
conjunction with the acquisition.
|
|
(e) |
|
Reflects tax effect of the cumulative pro forma adjustments. |
Financial
and Other Highlights Fiscal 2010
We have a broad and diverse contract and client base and no
single contract or task order accounted for more than a 10%
impact on our revenue growth from pro forma 2009 to fiscal 2010.
Key financial highlights during fiscal 2010 include:
|
|
|
|
|
Revenue increased 17.7% over pro forma 2009 driven primarily by
the deployment of approximately 1,500 net additional
consulting staff during fiscal 2010 against funded backlog. Net
additional consulting staff reflects newly hired consulting
staff net of consulting staff attrition.
|
|
|
|
Operating income for fiscal 2010 as a percentage of revenue
increased to 3.9% in fiscal 2010 from 1.5% in pro forma 2009.
The increase in operating margin reflects a reduction in the
cost of revenue as a percentage of revenue driven by a decrease
in acquisition-related expenses and cost efficiencies across our
overhead base primarily related to lower indirect labor costs.
Operating income reflects a $3.1 million reduction in
reserves for costs in excess of funding appropriated under
existing contracts, (ii) recognition of $3.6 million
of profits earned but unrecorded under existing contracts
following a comprehensive contract review and
(iii) recognition of $2.1 million of profits earned
under a contract that was terminated at the request of our
counterparty and with our consent.
|
|
|
|
Income from continuing operations before taxes for fiscal 2010
was $49.0 million compared to a loss of $75.3 million
for pro forma 2009 due to an increase in operating income of
$133.2 million partially offset by a decrease in interest
income and an increase in interest expense.
|
65
Fiscal
2010 Compared to Pro Forma 2009
Revenue
Revenue increased to $5,122.6 million in fiscal 2010 from
$4,351.2 million in pro forma 2009, or a 17.7% increase.
This revenue increase was primarily driven by the deployment of
approximately 1,500 net additional consulting staff during
fiscal 2010 against funded backlog. Consulting staff increased
during the period due to ongoing recruiting efforts, resulting
in additions to consulting staff in excess of attrition.
Additions to funded backlog during fiscal 2010 totaled
$5.3 billion 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.
Cost of
Revenue
Cost of revenue increased to $2,654.1 million in fiscal
2010 from $2,296.3 million in pro forma 2009, or a 15.6%
increase, primarily due to increases in salaries and
salary-related benefits of $347.4 million and employer
retirement plan contributions of $27.8 million. The
increase in salaries and salary-related benefits was driven by
headcount growth of approximately 1,500 net additional
consulting staff during fiscal 2010. The increase in employer
retirement plan contributions was due to an increase in the
number of employees who completed one year of service and became
eligible to participate in our Employees Capital
Accumulation Plan. The cost of revenue increase was partially
offset by decreases in incentive compensation of
$13.9 million and $4.5 million in stock-based
compensation expense for new Rollover and EIP options for
Class A common stock and restricted shares, in each case
issued in connection with the acquisition (stock-based
compensation expense related to Rollover options and restricted
shares issued in connection with the acquisition and the initial
grant of EIP options, collectively referred to as
acquisition-related compensation expense). The decrease in
incentive compensation was primarily due to a decrease in the
number of senior personnel eligible for incentive compensation
engaged in
day-to-day
client management roles, and the decrease in acquisition-related
compensation expense was primarily due to a decrease in expense
recognition compared to the prior year period due to the
application of the accounting method for recognizing stock-based
compensation, which requires higher expenses initially and
declining expenses in subsequent years. Cost of revenue was
51.8% and 52.8% of revenue for fiscal 2010 and pro forma 2009,
respectively.
Billable
Expenses
Billable expenses increased to $1,361.2 million in fiscal
2010 from $1,158.3 million in pro forma 2009, or a 17.5%
increase, primarily due to increased direct subcontractor
expenses and, to a lesser extent, increases for travel and
material expenses incurred to support delivery of additional
services to our clients under new and existing contracts. The
increase in direct subcontractor expenses was primarily
attributable to increased use of subcontractors due to increased
funded backlog. Billable expenses as a percentage of revenue
were 26.6% for each of fiscal 2010 and pro forma 2009.
General
and Administrative Expenses
General and administrative expenses increased to
$811.9 million in fiscal 2010 from $723.8 million in
pro forma 2009, or a 12.2% increase, primarily due to increases
in salaries and salary-related benefits of $51.7 million,
incentive compensation of $32.0 million, primarily due to
an increase in the number of senior personnel that became
eligible for incentive compensation and increased compensation
under our annual performance bonus program, as well as an
increase in the number of generally senior personnel eligible
for incentive compensation engaged in internal management,
development and strategic planning, and other expenses
associated with increased headcount across our general corporate
functions, including finance, accounting, legal, and human
resources, to prepare us for operating as a public company and
support the increased scale of our business. The general and
administrative expenses increase was partially offset by a
decrease of $9.0 million in acquisition-related
compensation expense, which was principally due to the
accounting method for recognizing stock-based compensation
expense. The increase in general and administrative expenses was
also impacted by a decrease of $16.1 million in fiscal 2010
compared to pro forma 2009 of transaction expenses. Transaction
expenses in fiscal 2010 related to the payment of special
66
dividends to holders of record of our Class A common stock,
Class B non-voting common stock and Class C restricted
stock as of July 29, 2009 and December 8, 2009, and
transaction expenses in pro forma 2009 related to the
acquisition, including legal, tax and accounting expenses.
General and administrative expenses as a percentage of revenue
were 15.9% and 16.6% for fiscal 2010 and pro forma 2009,
respectively.
Depreciation
and Amortization
Depreciation and amortization decreased to $95.8 million in
fiscal 2010 from $106.3 million in pro forma 2009, or a
9.9% decrease, primarily due to a decrease of $17.2 million
in the amortization of our intangible assets, including below
market rate leases and contract backlog, that were recorded in
connection with the acquisition and amortized based on
contractual lease terms and projected future cash flows,
respectively, thereby reflecting higher amortization expense
initially, and declining expense in subsequent periods.
Intangible asset amortization expense decreased to
$3.4 million per month in fiscal 2010 compared to
$4.8 million per month in pro forma 2009.
Interest
Income, Interest (Expense) and Other Expense
Interest income is primarily related to interest on late client
payments, as well as interest earned on our cash balances.
Interest income decreased to $1.5 million in fiscal 2010
from $5.3 million in pro forma 2009, or a 72.4% decrease,
due to declining interest rates in the marketplace as well as
lower cash balances resulting from the recapitalization
transaction.
Interest expense increased to $150.7 million in fiscal 2010
from $146.8 million in pro forma 2009, or a 2.7% increase,
primarily due to debt incurred in connection with the
recapitalization transaction in December 2009. In connection
with the recapitalization transaction in December 2009, we
amended and restated our senior credit facilities to add the
Tranche C term facility. This increase also reflects an
increase of $2.6 million in amortization of debt issuance
costs. Interest accrued on our approximately $1.6 billion
of debt as of March 31, 2010 at contractually specified
rates ranging from 4.0% to 13.0%, and is generally required to
be paid to our syndicate of lenders each quarter. This increase
was partially offset by a decrease in interest expense related
to the deferred payment obligation. In December 2009, we repaid
$78.0 million of the original deferred payment obligation
plus interest accrued on the deferred payment obligation of
$22.4 million. Interest continues to be accrued subsequent
to December 2009 on the remaining $80.0 million of the
deferred payment obligation.
Other expense increased to $1.3 million in fiscal 2010 from
$0.2 million in pro forma 2009.
Income
(Loss) from Continuing Operations before Income Taxes
Pre-tax income (loss) was an income of $49.0 million in
fiscal 2010 compared to a loss of $75.3 million in pro
forma 2009. This increase was primarily due to revenue growth,
cost efficiencies across our overhead base, lower indirect cost
spending and lower acquisition-related compensation expense.
Income
Tax Expense (Benefit) from Continuing Operations
Income tax expense (benefit) was an expense of
$23.6 million in fiscal 2010 compared to a benefit of
$25.8 million in pro forma 2009, primarily due to pre-tax
income in fiscal 2010 compared to a pre-tax loss in pro forma
2009. The effective tax rate in pro forma 2009 of 34.3% reflects
the impact of state taxes and the limitations on the
deductibility of meals and entertainment expenses. This
effective tax rate does not equate to future cash expenses for
tax, as our NOLs are expected to be used to satisfy a portion of
our future tax obligations.
Pro
Forma 2009 Compared to Fiscal 2008
Revenue
Revenue increased to $4,351.2 million in pro forma 2009
from $3,625.1 million in fiscal 2008, or a 20.0% increase.
This revenue increase was primarily driven by the deployment of
approximately 2,700 net additional consulting staff during
pro forma 2009 against funded backlog. Additions to funded
backlog during pro forma 2009 totaled $4.8 billion as a
result of the conversion of unfunded backlog to funded backlog,
the
67
award of new contracts and task orders under which funding was
appropriated and the exercise and subsequent funding of priced
options.
Cost of
Revenue
Cost of revenue increased to $2,296.3 million in pro forma
2009 from $2,028.8 million in fiscal 2008, or a 13.2%
increase, primarily due to increased salaries and salary-related
benefits of $330.9 million, employer retirement plan
contributions of $16.3 million and incentive compensation
of $4.4 million, partially offset by a decrease in
stock-based compensation expense of $7.9 million from
fiscal 2008 to pro forma 2009. The increase in salaries and
salary-related benefits was driven by headcount growth of
approximately 2,700 net additional consulting staff during
pro forma 2009. Cost of revenue was 52.8% and 56.0% of revenue
for pro forma 2009 and fiscal 2008, respectively.
Billable
Expenses
Billable expenses increased to $1,158.3 million in pro
forma 2009 from $935.5 million in fiscal 2008, or a 23.8%
increase, primarily due to an increase in direct subcontractor
expenses of $89.9 million to support delivery of additional
services to our clients under new and existing contracts.
Billable expenses as a percentage of revenue were 26.6% and
25.8% for pro forma 2009 and fiscal 2008, respectively.
General
and Administrative Expenses
General and administrative expenses increased to
$723.8 million in pro forma 2009 from $474.2 million
in fiscal 2008, or a 52.6% increase, primarily due to increases
in salaries and salary-related benefits of $33.0 million,
incentive compensation of $28.3 million and related
compensation associated with our increased headcount.
Additionally, pro forma 2009 included the impact of
acquisition-related
compensation expense of $55.0 million. The increase also
reflects an increase of $14.2 million of transaction
expenses related to the acquisition, including legal, tax and
accounting expenses. General and administrative expenses as a
percentage of revenue were 16.6% and 13.1% for pro forma 2009
and fiscal 2008, respectively.
Depreciation
and Amortization
Depreciation and amortization expenses increased to
$106.3 million in pro forma 2009 from $33.1 million in
fiscal 2008, primarily due to the amortization of our intangible
assets of $57.8 million, including below market rate leases
and contract backlog, that were recorded in connection with the
acquisition and amortized based on contractual lease terms and
projected future cash flows, respectively, thereby reflecting
higher amortization expense initially, and declining expense in
subsequent periods.
Interest
Income, Interest (Expense) and Other Income (Expense)
Interest income increased to $5.3 million in pro forma 2009
from $2.4 million in fiscal 2008, primarily due to interest
earned on the additional cash maintained during the twelve
months of operations of pro forma 2009.
Interest expense increased to $146.8 million in pro forma
2009 from $2.3 million in fiscal 2008, primarily due to the
interest expense incurred associated with our new senior credit
facilities, mezzanine credit facility and deferred payment
obligation. The increase also reflects amortization of
$3.1 million of debt issuance costs.
Other expense decreased to $0.2 million in pro forma 2009
from $1.9 million in fiscal 2008.
Income
(Loss) from Continuing Operations before Income Taxes
Pre-tax income (loss) was a loss of $75.3 million in pro
forma 2009 compared to an income of $151.7 million in
fiscal 2008, primarily due to interest expense incurred in
connection with our new senior credit facilities and mezzanine
credit facility and the deferred payment obligation.
68
Income
Taxes Expense (Benefit) from Continuing Operations
Income tax expense (benefit) was a benefit of $25.8 million
in pro forma 2009 compared to an expense of $62.7 million
in fiscal 2008, primarily due to a pre-tax loss in pro forma
2009, compared to a pre-tax income in fiscal 2008.
Fiscal
2010 Compared to Eight Months Ended March 31,
2009
Revenue
Revenue increased to $5,122.6 million in fiscal 2010 from
$2,941.3 million in the eight months ended March 31,
2009, or a 74.2% increase, primarily due to twelve months of
operations included in fiscal 2010 compared to eight months of
operations included in the comparison period. This revenue
increase was primarily driven by the deployment of approximately
1,500 net additional consulting staff during fiscal 2010
against funded backlog. Additions to funded backlog during
fiscal 2010 totaled $5.3 billion 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.
Cost of
Revenue
Cost of revenue increased to $2,654.1 million in fiscal
2010 from $1,566.8 million in the eight months ended
March 31, 2009, or a 69.4% increase, primarily due to
twelve months of operations included in fiscal 2010 compared to
eight months of operations included in the comparison period.
Increased salaries and
salary-related
benefits of $987.5 million, employer retirement plan
contributions of $76.3 million, incentive compensation of
$24.5 million, and acquisition-related compensation expense
of $2.1 million also contributed to the increase. The
increase in salaries and salary-related benefits was driven by
headcount growth of approximately 1,500 net additional
consulting staff during fiscal 2010. Cost of revenue was 51.8%
and 53.3% of revenue for fiscal 2010 and the eight months ended
March 31, 2009, respectively.
Billable
Expenses
Billable expenses increased to $1,361.2 million in fiscal
2010 from $756.9 million in the eight months ended
March 31, 2009, or a 79.8% increase, primarily due to
twelve months of operations included in fiscal 2010 compared to
eight months of operations included in the comparison period. An
increase in direct subcontractor expenses of $569.7 million
and travel expenses of $32.5 million, incurred to support
delivery of additional services to our clients under new and
existing contracts, also contributed to the increase. Billable
expenses as a percentage of revenue were 26.6% and 25.7% for
fiscal 2010 and the eight months ended March 31, 2009,
respectively.
General
and Administrative Expenses
General and administrative expenses increased to
$811.9 million in fiscal 2010 from $505.2 million in
the eight months ended March 31, 2009, or a 60.7% increase,
primarily due to twelve months of operations included in fiscal
2010 compared to eight months of operations included in the
comparison period. This increase also reflects increased
salaries and salary-related benefits of $124.1 million,
incentive compensation of $37.4 million, employer
retirement plan contributions of $14.6 million,
acquisition-related compensation expense of $4.3 million,
and other expenses associated with increased headcount across
our general corporate functions, including finance, accounting,
legal, and human resources, to prepare us for operating as a
public company and to support the increased scale of our
business. General and administrative expenses as a percentage of
revenue were 15.9% and 17.2% for fiscal 2010 and the eight
months ended March 31, 2009, respectively. General and
administrative expenses as a percentage of revenue declined in
fiscal 2010 as compared to the eight months ended March 31,
2009 as we continued to leverage our corporate infrastructure
over a larger revenue base.
69
Depreciation
and Amortization
Depreciation and amortization increased to $95.8 million in
fiscal 2010 from $79.7 million in the eight months ended
March 31, 2009, or a 20.2% increase, primarily due to
twelve months of operations included in fiscal 2010 compared to
eight months of operations included in the comparison period.
This increase also reflects the amortization of certain of our
intangible assets, including below-market rate leases and
contract backlog, that were recorded in connection with the
acquisition and amortized based on contractual lease terms and
projected future cash flows, respectively.
Interest
Income and Interest (Expense)
Our interest income decreased to $1.5 million in fiscal
2010 from $4.6 million in the eight months ended
March 31, 2009, or a decrease of 68.0%, due to declining
interest rates in the marketplace, as well as lower cash
balances resulting from the recapitalization transaction.
Interest expense increased to $150.7 million in fiscal 2010
from $98.1 million in the eight months ended March 31,
2009, or a 53.7% increase, primarily due to twelve months of
operations included in fiscal 2010 compared to eight months of
operations included in the comparison period. Debt incurred in
connection with the recapitalization transaction in December
2009 also contributed to the increase. In connection with the
recapitalization transaction in December 2009, we amended and
restated our senior credit facilities to add the Tranche C
term facility. Interest accrued on our approximately
$1.6 billion of debt as of March 31, 2010 at
contractually specified rates ranging from 4.0% to 13.0%, and is
generally required to be paid to our syndicate of lenders each
quarter. In December 2009, we also repaid $78.0 million of
the original deferred payment obligation plus interest accrued
on the deferred payment obligation of $22.4 million.
Interest continues to be accrued subsequent to December 2009 on
the remaining $80.0 million of the deferred payment
obligation.
Income
(Loss) from Continuing Operations before Income Taxes
Pre-tax income (loss) was an income of $49.0 million in
fiscal 2010 compared to a loss of $60.9 million in the
eight months ended March 31, 2009. This increase was
primarily due to stronger revenue growth, cost efficiency across
our overhead base and lower indirect costs.
Income
Tax Expense (Benefit) from Continuing Operations
Income tax expense (benefit) was an expense of
$23.6 million in fiscal 2010 compared to a benefit of
$22.1 million in the eight months ended March 31,
2009, primarily due to a pre-tax income in fiscal 2010 as
opposed to a pre-tax loss in the eight months ended
March 31, 2009.
Our effective tax rate increased from 36.3% as of March 31,
2009 to an annual rate of 48.1% as of March 31, 2010. This
effective rate is higher than the statutory rate of 35%
primarily due to state taxes and the limitations on the
deductibility of meal and entertainment expenses. This effective
tax rate does not equate to future cash expenses for tax, as our
NOLs are expected to be used to satisfy a portion of our future
tax obligations.
Eight
Months Ended March 31, 2009 Compared to Four Months Ended
July 31, 2008
Revenue
Revenue increased to $2,941.3 million in the eight months
ended March 31, 2009 from $1,409.9 million in the four
months ended July 31, 2008, or a 108.6% increase, primarily
due to eight months of operations included in the eight months
ended March 31, 2009 compared to four months of operations
included in the comparison period.
Cost of
Revenue
Cost of revenue increased to $1,566.8 million in the eight
months ended March 31, 2009 from $723.0 million in the
four months ended July 31, 2008, or a 116.7% increase,
primarily due to eight months of
70
operations included in the eight months ended March 31,
2009 compared to four months of operations included in the
comparison period. In the eight months ended March 31,
2009, we experienced increased salaries and salary-related
benefits of $692.1 million, employer retirement plan
contributions of $56.1 million, acquisition-related
compensation expense of $20.5 million, and incentive
compensation of $45.3 million. The increase in salary and
salary-related benefits resulted from our need to staff new
contract and task order awards as well as additional work under
existing contracts. Cost of revenue was 53.3% and 51.3% of
revenue for the eight months ended March 31, 2009 and the
four months ended July 31, 2008, respectively.
Billable
Expenses
Billable expenses increased to $756.9 million in the eight
months ended March 31, 2009 from $401.4 million in the
four months ended July 31, 2008, or a 88.6% increase,
primarily due to eight months of operations included in the
eight months ended March 31, 2009 compared to four months
of operations included in the comparison period. Billable
expenses as a percentage of revenue were 25.7% and 28.5% in the
eight months ended March 31, 2009 and the four months ended
July 31, 2008, respectively. The decrease in billable
expenses as a percentage of revenue in the eight months ended
March 31, 2009 was due to a higher proportion of
subcontractor and material spending in the four months ended
July 31, 2008.
General
and Administrative Expenses
General and administrative expenses decreased to
$505.2 million in the eight months ended March 31,
2009 from $726.9 million in the four months ended
July 31, 2008, or a 30.5% decrease, primarily related to
stock-based compensation expense of $511.7 million
associated with a one-time acceleration of stock rights and the
fair value
mark-up of
redeemable common shares immediately prior to the acquisition in
July 2008 compared to $41.6 million of acquisition-related
compensation expense in the eight months ended March 31,
2009. The decrease was partially offset by an increase in
salaries and salary-related expenses of $69.4 million,
incentive compensation of $28.9 million, and other expenses
during the eight months ended March 31, 2009 as we
increased headcount across our general corporate functions
following the acquisition. General and administrative expenses
as a percentage of revenue were 17.2% and 51.6% in the eight
months ended March 31, 2009 and the four months ended
July 31, 2008, respectively.
Depreciation
and Amortization
Depreciation and amortization increased to $79.7 million in
the eight months ended March 31, 2009 from
$11.9 million in the four months ended July 31, 2008
primarily due to the amortization of certain of our intangible
assets recorded in connection with the acquisition. The increase
also reflects eight months of operations included in the eight
months ended March 31, 2009 compared to four months of
operations included in the comparison period.
Interest
Income and Interest (Expense)
Interest income increased to $4.6 million in the eight
months ended March 31, 2009 from $0.7 million in the
four months ended July 31, 2008 primarily due to eight
months of operations included in the eight months ended
March 31, 2009 compared to four months of operations
included in the comparison period. Interest earned on the
additional cash maintained during the eight months ended
March 31, 2009 also contributed to this increase.
Interest expense increased to $98.1 million in the eight
months ended March 31, 2009 from $1.0 million in the
four months ended July 31, 2008 primarily due to debt
incurred in connection with the acquisition. Prior to the
acquisition, our debt consisted of an unsecured line of credit
in the amount of $245.0 million, which accrued interest at
an interest rate of 3.05% for the four months ended
July 31, 2008. In connection with the acquisition in July
2008, we incurred significant interest-bearing debt with a
syndicate of lenders which held two term loans under our senior
credit facilities (Tranche A and Tranche B) and a
mezzanine loan under our mezzanine credit facility. During the
eight months ended March 31, 2009, interest accrued on our
debt at contractually specified rates ranging from 4.0% to
13.0%, and was generally paid to our syndicate of lenders each
quarter. Additionally, in
71
connection with the acquisition, we incurred a
$158.0 million deferred payment obligation, which accrues
interest at a rate of 5.0% per six-month period.
Income
(Loss) from Continuing Operations before Income Taxes
Pre-tax loss decreased to a loss of $60.9 million in the
eight months ended March 31, 2009 from a loss of
$453.7 million in the four months ended July 31, 2008,
or a 86.6% decrease, primarily due to stock-based compensation
expense related to a one-time acceleration of stock rights and
the fair value
mark-up of
redeemable common stock in connection with the acquisition and
significant transaction related costs in the four months ended
July 31, 2008, partially offset by increased interest
expense associated with the debt incurred as part of the
acquisition and the recognition of stock compensation expense
related to new stock option plans following the acquisition.
Income
Tax Expense (Benefit) from Continuing Operations
Income tax benefit decreased to a benefit of $22.1 million
in the eight months ended March 31, 2009 from a benefit of
$56.1 million in the four months ended July 31, 2008,
or a 60.5% decrease, primarily due to a decrease in the pre-tax
loss in the eight months ended March 31, 2009 compared to
the four months ended July 31, 2008, and the tax treatment
of certain costs related to the acquisition. Our effective tax
rate of 12.4% for the four months ended July 31, 2008 was
reflective of non-deductible acquisition-related costs incurred
during the period, primarily equity compensation, for which
there was no corresponding tax benefit. The effective tax rate
of 36.3% for the eight months ended March 31, 2009 was
higher than the statutory rate of 35% primarily due to state
taxes.
Four
Months Ended July 31, 2008 Compared to Fiscal
2008
Revenue
Revenue decreased to $1,409.9 million in the four months
ended July 31, 2008 from $3,625.1 million in fiscal
2008, or a 61.1% decrease, primarily due to four months of
operations included in the four months ended July 31, 2008
compared to twelve months of operations included in fiscal 2008.
Cost of
Revenue
Cost of revenue decreased to $723.0 million in the four
months ended July 31, 2008 from $2,028.8 million in
fiscal 2008, or a 64.4% decrease, primarily due to four months
of operations included in the four months ended July 31,
2008 compared to twelve months of operations included in fiscal
2008. Cost of revenue was 51.3% and 56.0% of revenue for the
four months ended July 31, 2008 and fiscal 2008,
respectively.
Billable
Expenses
Billable expenses decreased to $401.4 million in the four
months ended July 31, 2008 from $935.5 million in
fiscal 2008, or a 57.1% decrease, primarily due to four months
of operations included in the four months ended July 31,
2008 compared to twelve months of operations included in fiscal
2008. Billable expenses as a percentage of revenue were 28.5%
and 25.8% for the four months ended July 31, 2008 and
fiscal 2008, respectively.
General
and Administrative Expenses
General and administrative expenses increased to
$726.9 million in the four months ended July 31, 2008
from $474.2 million in fiscal 2008, or a 53.3% increase,
primarily due to stock-based compensation expense of
$511.7 million associated with a one-time acceleration of
stock rights and the fair value
mark-up of
redeemable common shares immediately prior to the acquisition.
General and administrative expenses as a percentage of revenue
were 51.6% and 13.1% for the four months ended July 31,
2008 and fiscal 2008, respectively. General and administrative
expenses as a percentage of revenue for the four months ended
July 31, 2008 were significantly higher due to the
stock-based compensation expense recorded in connection with the
acquisition.
72
Depreciation
and Amortization
Depreciation and amortization expenses decreased to
$11.9 million in the four months ended July 31, 2008
from $33.1 million in fiscal 2008, or a 63.9% decrease,
primarily due to four months of operations included in the four
months ended July 31, 2008 compared to twelve months of
operations included in fiscal 2008.
Interest
Income and Interest (Expense)
Interest income decreased to $0.7 million in the four
months ended July 31, 2008 from $2.4 million in fiscal
2008, or a 69.9% decrease, primarily due to four months of
operations included in the four months ended July 31, 2008
compared to twelve months of operations included in fiscal 2008.
Interest expense decreased to $1.0 million in the four
months ended July 31, 2008 from $2.3 million in fiscal
2008, or a 55.0% decrease, primarily due to four months of
operations included in the four months ended July 31, 2008
compared to twelve months of operations included in fiscal 2008.
Income
(Loss) from Continuing Operations before Income Taxes
Pre-tax income (loss) was a loss of $453.7 million in the
four months ended July 31, 2008 compared to an income of
$151.7 million in fiscal 2008, primarily due to the
increased stock compensation expense related to a one-time
acceleration of stock rights and the fair value
mark-up of
redeemable common stock in anticipation of the acquisition.
Income
Taxes Expense (Benefit) from Continuing Operations
Income tax expense (benefit) was a benefit of $56.1 million
in the four months ended July 31, 2008 compared to an
expense of $62.7 million in fiscal 2008, primarily due to a
pre-tax loss for the four months ended July 31, 2008
compared to a pre-tax income in fiscal 2008. Our effective tax
rate of 41.3% for fiscal 2008 was higher than the statutory rate
of 35%, primarily due to state taxes and equity compensation.
Our effective tax rate of 12.4% for the four months ended
July 31, 2008 reflected a reduction to the calculated tax
benefit at the U.S. statutory and state income tax rate due
to non-deductible acquisition-related costs incurred during the
period, primarily equity compensation, for which there was no
corresponding tax benefit.
Liquidity
and Capital Resources
We have historically funded our operations, debt payments,
capital expenditures, and discretionary funding needs from our
cash from operations. We had $420.9 million and
$307.8 million in cash and cash equivalents at
March 31, 2009 and March 31, 2010, respectively. We
expect to use all of the net proceeds of this offering to repay
$ million of the term loan
under our mezzanine credit facility, which was
$545.2 million as of March 31, 2010, and pay a related
prepayment penalty of $ . As of
March 31, 2010, on a pro forma basis after giving effect to
this offering and the use of the net proceeds therefrom, we
would have had outstanding approximately
$ million in total
indebtedness. Following the completion of this offering and the
use of the net proceeds therefrom, our primary sources of
liquidity will be cash flow from operations, either from the
payment of invoices for work performed or for advances in excess
of costs incurred, and available borrowings under our senior
credit facilities.
Our primary uses of cash following this offering will be for:
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operating expenses, including salaries;
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working capital requirements to fund the growth of our business;
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capital expenditures which primarily relate to the purchase of
computers, business systems, furniture and leasehold
improvements to support our operations; and
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debt service requirements for borrowings under our senior credit
facilities and mezzanine credit facility.
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73
We do not currently intend to declare or pay dividends,
including special dividends on our Class A common stock,
for the foreseeable future. Our ability to pay dividends to our
shareholders is limited as a practical matter by restrictions in
the credit agreements governing our senior credit facilities and
mezzanine credit facility. Any future determination to pay a
dividend is subject to the discretion of our Board, and will
depend upon various factors, including our results of
operations, financial condition, liquidity requirements,
restrictions that may be imposed by applicable law and our
contracts, our ability to negotiate amendments to the credit
agreements governing our senior credit facilities and mezzanine
credit facility, and other factors deemed relevant by our Board
and our creditors.
By selling shares of our Class A common stock to the public
in this offering, we will be able to expand ownership in the
firm, gain access to the public capital markets, and pay off a
portion of the indebtedness that we incurred in connection with
the recapitalization transaction. We do not expect our
transition to or existence as a public company to affect our
client focus or day-to-day operations.
Generally, cash provided by operating activities has been
adequate to fund our operations. Due to fluctuations in our cash
flows and the growth in our operations, it may be necessary from
time to time in the future to borrow under our credit facilities
to meet cash demands. We anticipate that cash provided by
operating activities, 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.
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. A number of our
contracts may provide for performance-based payments, which
allow us to bill and collect cash prior to completing the work.
Accounts receivable is the principal component of our working
capital and is generally driven by revenue growth with other
short-term fluctuations related to the payment practices of our
clients. Our accounts receivable reflect amounts billed to our
clients as of each balance sheet date. Our clients generally pay
our invoices within 30 days of the invoice date. At 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 contracts and
cost-plus-award-fee contracts. The total amount of our accounts
receivable can vary significantly over time, but is generally
sensitive to revenue levels. Total accounts receivable (billed
and unbilled combined, net of allowance for doubtful accounts)
days sales outstanding, or DSO, was 91, 73, and 69 as of
March 31, 2008, March 31, 2009, and March 31,
2010, respectively.
74
The table below sets forth our net cash flows for continuing
operations for the periods presented.
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Predecessor
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The Company
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Twelve Months
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Four Months
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Eight Months
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Twelve Months
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Ended
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Ended
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Ended
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Ended
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March 31,
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July 31,
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March 31,
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March 31,
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2008
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2008
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2009
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2010
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(In thousands)
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Net cash provided by (used in) operating activities
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$
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43,791
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$
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(26,548
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)
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$
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180,709
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$
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270,484
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Net cash used in investing activities
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(38,527
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)
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(162,976
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)
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(1,660,518
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)
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(10,991
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)
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Net cash (used in) provided by financing activities
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(1,413
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)
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211,112
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1,900,711
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(372,560
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)
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Total increase (decrease) in cash and cash equivalents
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$
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3,851
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$
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21,588
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$
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420,902
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$
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(113,067
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)
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Net Cash
from Operating Activities
Net cash from operations is primarily affected by the overall
profitability of our contracts, our ability to invoice and
collect from our clients in a timely manner, and our ability to
manage our vendor payments. During fiscal 2010, our net cash
provided by operations was $270.5 million, compared to
$180.7 million in the eight months ended March 31,
2009 and net cash used in operations of $26.5 million in
the four months ended July 31, 2008. The increase in net
cash provided by operations in fiscal 2010 compared to the eight
months ended March 31, 2009 was primarily due to the twelve
months of operations included in fiscal 2010 compared to eight
months included in the eight months ended March 31, 2009.
This increase was also due to improved management of vendor
payments and improved cash collection in fiscal 2010, partially
offset by accrued compensation and benefits, which included
payment of employee bonuses and annual funding of the
Employees Capital Accumulation Plan, our defined
contribution plan.
The increase in net cash provided by operations in the eight
months ended March 31, 2009 compared to the four months
ended July 31, 2008 was primarily due to the eight months
of operations included in the eight months ended March 31,
2009 compared to four months included in the four months ended
July 31, 2008. This increase was also due to a loss from
discontinued operations in the four months ended July 31,
2008 and transaction costs related to the acquisition in the
four months ended July 31, 2008.
Net cash used in operations of the Predecessor was
$26.5 million in the four months ended July 31, 2008
compared to net cash provided by operations of
$43.8 million in fiscal 2008, primarily due to a loss from
discontinued operations in the four months ended July 31,
2008, as well as transaction costs related to the acquisition
during that period.
Net Cash
from Investing Activities
Net cash used in investing activities was $11.0 million for
fiscal 2010 compared to $1,660.5 million in the eight
months ended March 31, 2009 and $163.0 million in the
four months ended July 31, 2008. The decrease in fiscal
2010 compared to the eight months ended March 31, 2009 and
the increase in the eight months ended March 31, 2009
compared to the four months ended July 31, 2008, were
primarily due to $1.6 billion of cash paid in connection
with the acquisition, net of cash acquired of
$28.7 million, which was recorded in the eight months ended
March 31, 2009. In fiscal 2010, this was partially offset
by an increase in capital expenditures and expenditures for
internally developed software.
Net cash used in investing activities of the Predecessor was
$163.0 million in the four months ended July 31, 2008
compared to $38.5 million in fiscal 2008, primarily due to
the Predecessors investments of $153.7 million in its
discontinued operations during the four months ended
July 31, 2008.
75
Net Cash
from Financing Activities
Net cash from financing activities are primarily associated with
proceeds from debt and the repayment thereof. Net cash used in
financing activities was $372.6 million in fiscal 2010,
compared to net cash provided by financing activities of
$1,900.7 million in the eight months ended March 31,
2009 and net cash provided by financing activities of
$211.1 million in the four months ended July 31, 2008.
The increase in net cash used in financing activities in fiscal
2010 compared to the eight months ended March 31, 2009 was
primarily due to the payment of $612.4 million in special
dividends and repayment of $100.4 million of the deferred
payment obligation and related accrued interest, partially
offset by net proceeds of $341.3 million from loans under
Tranche C of our senior credit facilities. The increase in
net cash used in financing activities in the eight months ended
March 31, 2009 compared to the four months ended
July 31, 2008 was primarily due to several factors relating
to the acquisition, including proceeds of $1.2 billion
related to our senior credit facilities and our mezzanine credit
facility (offset by debt issuance costs of $45.0 million)
and proceeds from the issuance of common stock in connection
with the acquisition of $956.5 million, partially offset by
repayment of $251.1 million of outstanding debt, which were
recorded in the eight months ended March 31, 2008.
Net cash provided by financing activities of the Predecessor was
$211.1 million in the four months ended July 31, 2008
compared to net cash used in financing activities of
$1.4 million in fiscal 2008, primarily due to proceeds from
debt of $227.5 million during the four months ended
July 31, 2008.
Indebtedness
In connection with the acquisition, we entered into a series of
financing transactions. See The Acquisition and
Recapitalization Transaction and Description of
Certain Indebtedness.
In connection with the acquisition, Booz Allen Hamilton, as
borrower, and Booz Allen Investor, as guarantor, entered into
our senior credit facilities. Our senior credit facilities
consist of a $125.0 million Tranche A term facility, a
$585.0 million Tranche B term facility, a
$350.0 million Tranche C term facility and a
$245.0 million revolving credit facility. As of
March 31, 2010, we had $110.8 million outstanding
under the Tranche A term facility, $566.8 million
outstanding under the Tranche B term facility, and
$345.8 million outstanding under the Tranche C term
facility. As of March 31, 2010, no amounts had been drawn
under the revolving credit facility. As of March 31, 2010,
we were contingently liable under open standby letters of credit
and bank guarantees issued by our banks in favor of third
parties that total $1.4 million. These letters of credit
and bank guarantees primarily relate to leases and support of
insurance obligations. These instruments reduce our available
borrowings under the revolving credit facility. As of
March 31, 2010, we had $222.4 million of capacity
available for additional borrowings under the revolving credit
facility (excluding the $21.3 million commitment by the
successor entity to Lehman Brothers Commercial Bank).
In connection with the acquisition, Booz Allen Hamilton, as
borrower, and Booz Allen Investor, as guarantor, entered into
our mezzanine credit facility, which consists of a
$550.0 million term loan. As of March 31, 2010, we had
$545.2 million of term loans outstanding under our
mezzanine credit facility.
The loans under our senior credit facilities are secured by
substantially all of our assets and none of such assets will be
available to satisfy the claims of our general creditors. The
credit agreement governing our senior credit facilities requires
the maintenance of certain financial and non-financial
covenants. The loans under our mezzanine credit facility are
unsecured, and likewise the credit agreement governing our
mezzanine credit facility requires the maintenance of certain
financial and non-financial covenants, including limitations on
indebtedness and liens; mergers, consolidations and
dissolutions; dispositions of property; restricted payments;
investments and acquisitions; sale and leaseback transactions;
transactions with affiliates; and limitations on activities.
In addition, we are required to meet the following financial
maintenance covenants at each quarter-end:
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Consolidated Total Leverage Ratio the ratio
of total leverage as of the last day of the quarter (defined as
the aggregate principal amount of all funded debt, less cash,
cash equivalents and permitted liquid investments) to the
preceding four quarters Consolidated EBITDA
(as defined in the credit agreements governing the credit
facilities). For the period ending March 31, 2010, this
ratio must be
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less than or equal to 5.75 to 1.0 to comply with our senior
credit facilities, and less than 6.9 to 1.0 to comply with our
mezzanine credit facility. Effective June 30, 2010, these
required ratios will decrease to 5.5 to 1.0 for our senior
credit facilities, and 6.6 to 1.0 for our mezzanine credit
facility. As of March 31, 2010, we were in compliance with
our consolidated total leverage ratio.
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Consolidated Net Interest Coverage Ratio the
ratio of the preceding four quarters Consolidated
EBITDA (as defined in our senior credit facilities) to net
interest expense for the preceding four quarters (defined as
cash interest expense, less the sum of cash interest income and
one-time financing fees (to the extent included in consolidated
interest expense)). For the period ending March 31, 2010,
this ratio must be greater than or equal to 1.7 to 1.0 to comply
with our senior credit facilities. Effective June 30, 2010,
this ratio will increase to 1.8 to 1.0. As of March 31,
2010, we were in compliance with our consolidated net interest
coverage ratio.
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Capital
Structure and Resources
At March 31, 2009 and March 31, 2010, we held cash and
cash equivalents of approximately $420.9 million and
$307.8 million, respectively. Our long-term debt amounted
to $1.2 billion and $1.5 billion at March 31,
2009 and 2010, respectively. As of March 31, 2009 and 2010,
our long-term debt bears interest at specified rates and is held
by a syndicate of lenders (see Note 11 in our consolidated
financial statements).
Our stockholders equity amounted to $509.6 million at
March 31, 2010, a decrease of $550.8 million compared
to stockholders equity of $1,060.3 million at
March 31, 2009, due to the special dividend paid in July
2009 and the special dividend paid in December 2009 in
connection with the recapitalization transaction described
above, as well as the reclassification of $33.6 million
from additional paid-in capital to other long-term liabilities
related to the reduction to one cent of the strike price of
options vested and not yet exercised that would have had an
exercise price below zero as a result of the December 2009
dividend. This difference between one cent and the reduced value
for shares vested and not yet exercised is reflected in other
long-term liabilities on the March 31, 2010 balance sheet,
and is to be paid in cash upon exercise of the options. This
decrease was partially offset by net income of
$25.4 million for fiscal 2010.
Quantitative
and Qualitative Disclosures of Market Risk
Our exposure to market risk for changes in interest rates
relates primarily to our outstanding debt, and cash and cash
equivalents consisting primarily of funds invested in
U.S. government insured money-market accounts. At
March 31, 2009 and March 31, 2010, we had
$420.9 million and $307.8 million, respectively, in
cash and cash equivalents and Treasury bills. The interest
expense associated with our term loans and any loans under our
revolving credit facility will vary with market rates.
Our exposure to market risk for changes in interest rates
related to our outstanding debt is somewhat mitigated as the
term loans under the Tranche B term facility and
Tranche C term facility have LIBOR floors of 3% and 2%,
respectively. A significant rise above current interest rate
levels would be required to increase our interest expense
related to Tranche B and Tranche C. An increase in
market interest rates could result in increased interest expense
associated with Tranche A, which accounted for 7.1% of our
outstanding debt as of March 31, 2010 and which does not
have a LIBOR floor. A hypothetical 1% increase in interest rates
would increase interest expense related to the term facilities
under our senior credit facilities by approximately
$1.2 million on an annual basis, and likewise decrease our
income and cash flows. A hypothetical increase of LIBOR to 4%
would increase interest expense related to all term facilities
under our senior credit facilities by approximately
$16.9 million on an annual basis, and likewise decrease our
income and cash flows. As of June 10, 2010, one-month LIBOR
was 0.35%. The interest rate on our term loans under our
mezzanine credit facility is fixed at 13.0%.
The return on our cash and cash equivalents balance as of
March 31, 2010 was less than 1%. Therefore, although
investment interest rates may continue to decrease in the
future, the corresponding impact to our interest income, and
likewise to our income and cash flow, would not be material.
77
We do not use derivative financial instruments in our investment
portfolio and have not entered into any hedging transactions.
Off-Balance
Sheet Arrangements
As of March 31, 2009 and 2010, we did not have any
off-balance sheet arrangements.
Contractual
Obligations
The following tables summarize our contractual obligations that
require us to make future cash payments as of March 31,
2010 on a historical basis and on an as adjusted basis. For
contractual obligations, we included payments that we have an
unconditional obligation to make. The as adjusted contractual
obligations presented below give effect to this offering and the
use of the net proceeds therefrom as if these transactions
occurred on March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More Than
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt(a)
|
|
$
|
1,587,850
|
|
|
$
|
21,850
|
|
|
$
|
56,200
|
|
|
$
|
81,200
|
|
|
$
|
1,428,600
|
|
Operating lease obligations
|
|
|
287,676
|
|
|
|
74,447
|
|
|
|
106,777
|
|
|
|
69,886
|
|
|
|
36,566
|
|
Interest on indebtedness
|
|
|
812,118
|
|
|
|
141,677
|
|
|
|
279,989
|
|
|
|
272,898
|
|
|
|
117,554
|
|
Deferred payment obligation(b)
|
|
|
63,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,435
|
|
Liability to Rollover option holders(c)
|
|
|
54,351
|
|
|
|
6,976
|
|
|
|
29,422
|
|
|
|
17,953
|
|
|
|
|
|
Tax liabilities for uncertain tax positions
FIN 48(d)
|
|
|
100,178
|
|
|
|
18,573
|
|
|
|
40,154
|
|
|
|
41,451
|
|
|
|
|
|
Other
|
|
|
13,319
|
|
|
|
|
|
|
|
|
|
|
|
13,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
2,918,927
|
|
|
$
|
263,523
|
|
|
$
|
512,542
|
|
|
$
|
496,707
|
|
|
$
|
1,646,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More Than
|
|
As Adjusted Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
287,676
|
|
|
|
74,447
|
|
|
|
106,777
|
|
|
|
69,886
|
|
|
|
36,566
|
|
Interest on indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred payment obligation(b)
|
|
|
63,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,435
|
|
Liability to Rollover option holders(c)
|
|
|
54,351
|
|
|
|
6,976
|
|
|
|
29,422
|
|
|
|
17,953
|
|
|
|
|
|
Tax liabilities for uncertain tax positions
FIN 48(d)
|
|
|
100,178
|
|
|
|
18,573
|
|
|
|
40,154
|
|
|
|
41,451
|
|
|
|
|
|
Other
|
|
|
13,319
|
|
|
|
|
|
|
|
|
|
|
|
13,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 11 to our consolidated financial statements for
additional information regarding debt and related matters. |
|
(b) |
|
Includes $17.6 million deferred payment obligation balance,
plus current and future interest accruals. |
|
(c) |
|
Reflects liabilities to holders of stock options issued under
our Officers Rollover Stock Plan related to the reduction
in the exercise price of such options as a result of the July
2009 dividend and the December 2009 dividend. |
|
(d) |
|
Includes $62.4 million of tax liabilities offset by amounts
owed under the deferred payment obligation. The remainder is
related to other tax liabilities. |
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
78
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 own facilities, our capital
expenditure requirements primarily relate to the purchase of
computers, business systems, furniture and leasehold
improvements to support our operations. Direct costs billed to
clients are not treated as capital expenses. Our capital
expenditures for fiscal 2010 were $49.3 million and the
majority of such capital expenditures related to facilities
infrastructure, equipment, and information technology.
Expenditures for facilities infrastructure and equipment are
generally incurred to support new and existing programs across
our business. We also incur capital expenditures for IT to
support programs and general enterprise information technology
infrastructure.
Commitments
and Contingencies
We are subject to a number of reviews, investigations, claims,
lawsuits, and other uncertainties related to our business. For a
discussion of these items, refer to Note 19 to our
consolidated financial statements.
79
BUSINESS
Overview
We are a leading provider of management and technology
consulting services to the U.S. government in the defense,
intelligence and civil markets. We are a well-known, trusted and
long-term partner to our clients, who seek our expertise and
objective advice to address their most important and complex
problems. Leveraging our
95-year
consulting heritage and a talent base of approximately
23,300 people, we deploy our deep domain knowledge,
functional expertise and experience to help our clients achieve
their objectives. We have a collaborative culture, supported by
our operating model, which helps our professionals identify and
respond to emerging trends across the markets we serve and
delivers enduring results for our clients. We have grown our
revenue organically, without relying on acquisitions, at an 18%
CAGR over the
15-year
period ended March 31, 2010, reaching $5.1 billion in
revenue in fiscal 2010. We calculated our CAGR as our annualized
revenue growth over the period taking into account the effects
of annual compounding. We believe that a
15-year CAGR
is an appropriate measurement of our growth because it
demonstrates the rate at which we have grown our business over a
meaningful period of time.
We were founded in 1914 by Edwin Booz, one of the pioneers of
management consulting. In 1940, we began serving the
U.S. government by advising the Secretary of the Navy in
preparation for World War II. As the needs of our clients have
grown more complex, we have expanded beyond our management
consulting foundation to develop deep expertise in technology,
engineering, and analytics. Today, we serve substantially all of
the cabinet-level departments of the U.S. government. Our
major clients include the Department of Defense, all branches of
the U.S. military, the U.S. Intelligence Community,
and civil agencies such as the Department of Homeland Security,
the Department of Energy, the Department of Health and Human
Services, the Department of the Treasury and the Environmental
Protection Agency. We support these clients in addressing
complex and pressing challenges such as combating global
terrorism, improving cyber capabilities, transforming the
healthcare system, improving efficiency and managing change
within the government and protecting the environment.
We have strong and longstanding relationships with a diverse
group of clients at all levels of the U.S. government. We
derived 98% of our revenue in fiscal 2010 from services provided
to over 1,300 client organizations across the
U.S. government under more than 4,900 contracts and task
orders. The single largest entity that we served in fiscal 2010
was the U.S. Army which represented 15% of our revenue in
that period. Further, we have served our top ten clients, or
their predecessor organizations, for an average of over
20 years. We derived 86% of our revenue in fiscal 2010 from
engagements for which we acted as the prime contractor. Also
during fiscal 2010, we achieved an overall win rate of 57% on
new contracts and task orders for which we competed and a win
rate of more than 92% on re-competed contracts and task orders
for existing or related business. As of March 31, 2010, our
total backlog, including funded, unfunded, and priced options,
was $9.0 billion, an increase of 24% over March 31,
2009.
We attribute the strength of our client relationships, the
commitment of our people, and our resulting growth to our
management consulting heritage and culture, which instills our
relentless focus on delivering value and enduring results to our
clients. We operate our business as a single profit center,
which drives our ability to collaborate internally and compete
externally. Our operating model is built on (1) our
dedication to client service, which focuses on leveraging our
experience and knowledge to provide differentiated insights,
(2) our partnership-style culture and compensation system,
which fosters collaboration and the efficient allocation of our
people across markets, clients and opportunities, (3) our
professional development and
360-degree
assessment system, which ensures that our people are aligned
with our collaborative culture, core values and ethics and
(4) our approach to the market, which leverages our matrix
of deep domain expertise in the defense, intelligence and civil
markets and our strong capabilities in strategy and
organization, analytics, technology and operations.
We are organized and operate as a corporation. Our use of the
term partnership reflects our collaborative culture,
and our use of the term partner refers to our
Chairman and our Senior and Executive
80
Vice Presidents. The use of the terms partnership
and partner is not meant to create any implication
that we operate our company as, or have any intention to create
a legal entity that is, a partnership.
Market
Opportunity
We believe that the U.S. government is the worlds
largest consumer of management and technology consulting
services and its demand for such services remains strong, driven
by the need to manage dynamic and complex issues such as the
improvement and effectiveness of national security and homeland
security programs, the establishment of new
intelligence-gathering processes and infrastructure, protecting
against cyber-security threats, and several civil agency reform
initiatives. At the same time, the U.S. government is
seeking to increase efficiency and improve existing procurement
practices. Major changes and crises driven by shifting domestic
priorities and external events produce shifts in government
policies and priorities that create additional sources of demand
for management and technology consulting services.
Large
Addressable Markets
The U.S. governments budget for U.S. government
fiscal year ended September 30, 2009 was $3 trillion,
excluding authorizations from the ARRA, Overseas Contingency
Operations, and supplemental funding for the Department of
Defense. Of this amount, $1 trillion was for discretionary
budget authority, including $502 billion for the Department
of Defense and U.S. Intelligence Community and $526 billion
for civil agencies. Based on data from Bloomberg Finance L.P.,
approximately $513 billion of the U.S. government
fiscal year 2009 discretionary outlays were for non-intelligence
agency and non-ARRA funding-related products and services
procured from private contractors. We estimate that
$93 billion of the spending directed towards private
contractors in U.S. government fiscal year 2009 was for
management and technology consulting services, with
$56 billion spent by the Department of Defense and
$37 billion spent by civil agencies. The agencies of the
U.S. Intelligence Community that we serve represent an
additional market.
Focus
on Efficiency and Transforming Procurement
Practices
Focus on Efficiency. There is pressure across
the U.S. government to control spending while also
improving services for citizens and aggressively pursuing
numerous important policy initiatives. This has led to an
increased focus on accomplishing more with fewer resources,
streamlining information services and processes, improving
productivity and reducing fraud, waste and abuse. We believe
that the U.S. government will require support in the form
of the services that we provide, such as strategy and change
management and organization and process improvement to implement
these initiatives. Two efficiency initiatives currently being
undertaken by the U.S. government are the most recent Base
Realignment and Closure Program, pursuant to which military
bases and installations are shut down or reorganized to more
efficiently support U.S. military forces, and a rebalancing
of defense forces and strategy in accordance with the 2010 QDR
to more effectively meet the demands of current threats in a
constrained fiscal environment. To streamline information
services and processes and improve productivity,
U.S. government agencies are making increased use of
information technology, improving the deployment of human
capital, and deploying better decision support systems. To
reduce fraud, waste and abuse, both the Obama Administration and
Congress have recently taken action to reduce improper payments
made by the U.S. government to individuals, organizations
and contractors that, according to the White House, amounted to
$98 billion in 2009. President Obama signed an Executive
Order aimed at reducing improper payments in November 2009 and
issued a memorandum ordering the expansion of payment recapture
audits in March 2010, and the House of Representatives passed
the Improper Payments Elimination and Recovery Bill in April
2010.
Transforming Procurement Practices. Economic
pressure has also driven an emphasis on greater accountability,
transparency and spending effectiveness in U.S. government
procurement practices. Recent efforts to reform procurement
practices have focused on (1) decreasing the use of lead
system integrators, (2) the unbundling of outsourced
projects to link contract payments to specific milestones and
project benchmarks in order to ensure timely delivery and
adherence to required budgets and outlays and (3) the
separation of certain types of work to facilitate objectivity
and avoid or mitigate specific organizational conflicts of
interest issues, which issues typically arise when providers of
products to the U.S. government
81
also provide systems engineering and technical assistance work,
acquisition support and other consulting services related to the
products being sold. A focus on organizational conflicts of
interest issues has resulted in legislation and a proposed
regulation aimed at increasing organizational conflicts of
interest requirements, including, among other things, separating
sellers of products and providers of advisory services in major
defense acquisition programs. We believe that the
U.S. governments continued efforts to improve
procurement processes will generate increased demand for
objective management and technology consulting services.
Complex
Defense, Intelligence and Civil Agency
Requirements
The U.S. government continually reassesses and updates its
long-term priorities and develops new strategies to address the
rapidly evolving issues it faces. In order to deliver effective
advice in this environment, service providers must possess a
comprehensive knowledge of, and experience with, the
participants, systems and technology employed by the
U.S. government, and must also have an ability to
facilitate knowledge sharing while managing varying objectives.
For example, within the Department of Defense, the 2010 QDR
prioritizes support for the war fighter and integrating
intelligence, surveillance and reconnaissance systems with
weapons and ground operations.
Within the U.S. Intelligence Community and across the
U.S. government generally, the current priority is
enhancing cyber-capabilities, including cyber-security, in the
face of the continually evolving threat of terrorism and the
increasing reliance of both the U.S. government and the
private sector on critical information technology systems. In
U.S. government fiscal year 2009, the U.S. government
established CNCI to support and coordinate U.S. cyber
initiatives. At the time of CNCIs establishment, the
Washington Post reported that the U.S. government would
spend approximately $17 billion over seven years in
connection with CNCI.
Within the civil agencies of the U.S. government, there has
been an increased focus on financial regulation, energy and
environmental issues, healthcare reform and
infrastructure-related challenges. The transformation of the
nations healthcare system alone will require significant
effort and investment to
re-design
processes and policies and communicate changes effectively to
citizens and healthcare providers. Modernizing healthcare
information technology systems is an essential element of this
transformation as highlighted by President Obamas Budget
Request for U.S. government fiscal year 2011, which
includes an allocation of $6.2 billion for the Department
of Health and Human Services to improve and strengthen
healthcare information technology and systems. We believe the
U.S. government will rely on management and technology
consulting service providers to provide research, consulting,
implementation and improvement services to develop and manage
programs across its various civil agencies and departments.
We believe that the initiatives resulting from these new
priorities will result in increased demand for management and
technology consulting services.
Major
Changes Create Demand
Major changes in the government, political and overall economic
landscape drive demand for objective management and technology
consulting services and advice. These changes, which can be
recurring in nature or more sudden and unexpected, create
significant opportunities for us, as clients seek out service
providers with the flexibility to rapidly deploy intellectual
capital, resources and capabilities.
The inauguration of a new presidential administration is a
recurring change that drives the need for objective analysis and
advice to help develop and implement new policies and respond to
evolving priorities. For example, one of the primary focuses of
the Reagan administration was a
build-up of
U.S. defense forces, while the Clinton administration
ushered in the era of
e-Government
by harnessing the power of the Internet for the first time.
Similarly, the Obama administration has been focused on a range
of domestic and foreign policy initiatives, including those
related to the transformation of the healthcare system.
The attacks of September 11, 2001 and the recent financial
crisis and economic downturn are examples of sudden and
unexpected changes. These developments created urgent needs for
changes to policy and the regulatory environment. In response to
the September 11 attacks, the U.S. government created the
Department of Homeland Security, fully integrating 22 previously
distinct agencies to improve oversight and protection of
82
the U.S. homeland. In response to the recent financial
crisis, the U.S. government has pursued several programs to
stabilize the U.S. and global economies, including the
institution of the Troubled Assets Recovery Program, the
Financial Recovery Act of 2009, and ARRA.
Our Value
Proposition to Our Clients
As a leading provider of management and technology consulting
services to the U.S. government, we believe that we are
well positioned to grow across markets characterized by
increasing and rapid change. We believe that our dedication to
client service, the quality of our people, our management
consulting heritage and our client-oriented matrix approach
provide the strong foundation necessary for our continued growth.
Our
People
Our success as a management and technology consulting firm is
highly dependent upon the quality, integrity and dedication of
our people.
Superior Talent Base. We have a highly
educated talent base of approximately 23,300 people: as of
March 31, 2010, 82% held bachelor degrees, 44% held masters
degrees and 4% held doctoral degrees. In addition, many of the
U.S. government contracts for which we compete require
contractors to have high-level security clearances, and our
large pool of cleared employees allows us to meet these needs.
As of March 31, 2010, 75% of our people held government
security clearances: 26% at Secret and 49% at Top Secret (54% of
the latter were Top Secret/Sensitive Compartmented Information).
High-level security clearances generally afford a person access
to data that affects national security, counterterrorism or
counterintelligence, or other highly sensitive data. Persons
with the highest security clearance, Top Secret, have access to
information that would cause exceptionally grave
damage to national security if disclosed to the public.
Persons with access to the most sensitive and carefully
controlled intelligence information hold a Top-Secret/Sensitive
Compartmented Information clearance. Persons with the
second-highest clearance classification, Secret, have access to
information that would cause serious damage to
national security if disclosed to the public. Through internal
referrals and external recruiting efforts, we are able to
successfully renew and grow our talent base, and we believe that
our ability to attract top level talent is significantly
enhanced by our commitment to professional development, our
position as a leader in our markets, the high quality of our
work and the appeal of our culture. Each year, we typically
receive more than 200,000 applications, conduct more than 15,000
interviews and hire approximately 5,000 new people,
approximately half of which are hired as a result of referrals
from our own people.
Focus on Talent Development. We develop our
talent base by providing our people with the opportunity to work
on important and complex problems, encouraging and acknowledging
contributions of our people at all levels of seniority, and
facilitating broad, inclusive and insightful leadership. We also
encourage our people to continue developing their substantive
skills through continuing education. In fiscal 2010, 75% of our
people participated in one or more internal training courses,
and 42% of our people took advantage of external training
opportunities. Our learning programs, which have consistently
been recognized as
best-in-class
in the industry, include partnerships with universities, vendors
and online content providers. These programs offer convenient,
cost-effective, quality educational opportunities that are
aligned with our core capabilities.
Assessment System that Promotes
Collaboration. We use our
360-degree
assessment process, an employee assessment tool based on
multiple sources, to help promote and enforce the consistency of
our collaborative culture, core values and ethics. Each of our
approximately 23,300 people receives an annual assessment
and also participates in the assessment of other company
personnel. Assessments combine this internal feedback from
supervisors, peers and subordinates with market input, and each
assessment is led by a Booz Allen person outside of the
employees area. Our assessment process is focused on
facilitating the continued development of skills and career
paths and ensuring the exchange of support and knowledge among
our people.
Core Values. We believe that one of the key
components of our success is our focus on core values. Our core
values are: client service, diversity, excellence,
entrepreneurship, teamwork, professionalism, fairness,
integrity, respect and trust. All new hires receive extensive
training that emphasizes our core values, facilitates
83
their integration into our collaborative, client-oriented
culture and helps to ensure the delivery of consistent and
exceptional client service.
The emphasis that we place on our people yields recognized
results. External awards and recognition include being named for
several consecutive years as one of Fortune Magazines
100 Best Companies to Work For, one of
Consulting Magazines Best Firms to Work For
and one of Business Weeks Best Places to Launch a
Career.
Our
Management Consulting Heritage
Our Approach to Client Service. Over the
70 years that we have been serving the
U.S. government, we have cultivated relationships of trust
with, and developed a comprehensive understanding of, our
clients. This insight regarding our clients, together with our
deep domain knowledge and capabilities, enable us to anticipate,
identify and address the specific needs of our clients. While
working on contract engagements, our people work to develop a
holistic understanding of the issues and challenges facing the
client to ensure that our advice helps them achieve enduring
results.
Partnership-Style Culture and Compensation
System. A commitment to teamwork is deeply
ingrained in our company, and our partnership-style culture is
critical to maintaining this component of our operating model.
We manage our company as a single profit center with a
partner-style compensation system that focuses on the success of
the institution over the success of the individual. This
distinctive system fosters internal collaboration that allows us
to compete externally by motivating our partners to act in the
best interest of the institution. As a result, we are able to
emphasize overall client service, and encourage the rapid and
efficient allocation of our people across markets, clients and
opportunities.
Our
Client-Oriented Matrix Approach
We are able to address the complex and evolving needs of our
clients and grow our business through the application of our
matrix of deep domain knowledge and market-leading capabilities.
Through this approach, we deploy our four key capabilities,
strategy and organization, analytics, technology, and
operations, across our client base. This approach enables us to
quickly assemble and deploy, and redeploy when necessary,
client-focused teams comprised of people with the skills and
expertise needed to address the challenges facing our clients.
We believe that our significant win rates on new and re-competed
contracts demonstrate the strength of our matrix approach as
well as our industry-leading reputation and our proven track
record.
Our
Strategy for Continued Growth
We serve our clients by identifying, analyzing and solving their
most complex problems and anticipating developments that will
have near- and long-term impacts on their operations. To serve
our clients and grow our business, we intend to execute the
following strategies:
Expand
Our Business Base
We are focused on growing our presence in our addressable
markets primarily by expanding our relationships with, and the
capabilities we deliver to, our existing clients. We will
continue to help our clients recognize more efficient and
effective mission execution by deploying our objective insight
and market expertise across current and future contract
engagements. We believe that significant growth opportunities
exist in our markets, and we intend to:
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Deepen Our Existing Client Relationships. The
complex and evolving nature of the challenges our clients face
requires the application of different core competencies and
capabilities. Our approach to client service and collaborative
culture enables us to effectively cross-sell and deploy multiple
services to existing clients. We plan to leverage our
comprehensive understanding of our clients needs and our
track record of successful performance to grow our client
relationships and expand the scope of the services we provide to
our existing clients.
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Help Clients Rapidly Respond to Change. We
will continue to help our clients formulate rapid and dynamic
responses to the frequent and sometimes sudden changes that they
face by leveraging: the scope and scale of our domain expertise,
our broad capabilities and our one-firm culture, which allow us
to effectively and efficiently allocate our resources and deploy
our intellectual capital.
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Broaden Our Client Base. We intend to
capitalize on our scale, the scope of our domain expertise and
core capabilities, and our reputation as a trusted long-term
partner to grow our client base. We believe that growing demand
for the types of services we provide and our ongoing business
initiatives will enable us to leverage our reputation as a
trusted partner and industry leader to cultivate new client
relationships across all agencies and departments of the
U.S. government. We will also continue to build on our
current cyber-security related work in the commercial market as
permitted under the terms of our non-competition agreement with
Spin Co. We will explore new opportunities as those
opportunities become available in the commercial market upon
termination of those contractual restrictions on July 31,
2011, particularly to the extent that we are able to leverage
our core competencies, such as our domain expertise in energy,
transportation, health and finance, and our functional
capabilities, such as cyber and analytics.
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Capitalize
on Our Strengths in Emerging Areas
We will continue to leverage our deep domain expertise and broad
capabilities to help our clients address emerging issues.
Through the early identification of clients emerging needs
and the development of adaptive capabilities to help address
those needs, we have established strong competencies and
functional capabilities in numerous areas of potential growth,
including:
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Cyber. Network-enabled technology now forms
the backbone of our economy, infrastructure and national
security, and recent national policies and initiatives in this
area, including CNCI, are creating new cyber-related
opportunities. We have been focused on cyber and predecessor
areas, such as information assurance, since 1999. We are
currently involved in cyber-related initiatives for our defense,
intelligence and civil clients and cyber-security initiatives
for commercial clients. We are focused on further developing our
cyber capabilities to position our company as a leader across
the broad and growing range of areas requiring cyber-related
services.
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Government Efficiency and Procurement. We are
focused on helping the U.S. government achieve operating
and budgetary efficiencies driven by the need to control
spending while simultaneously pursuing numerous policy
initiatives. In addition, recent U.S. government reforms in
the procurement area may allow us to leverage our status as a
large, objective service provider to win additional assignments
to the extent that we are able to address organizational
conflicts of interest and similar concerns more easily than our
competitors.
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Ongoing Healthcare Transformation. We expect
recent and ongoing developments in the healthcare market, such
as the passage of the Affordable Care Act of 2010 and the Health
Information Technology for Economic and Clinical Health Act of
2009, to increase demand for our healthcare consulting
capabilities. We have been serving healthcare-oriented clients
in the U.S. government since the late 1980s. In 2002,
we began a focused expansion of our healthcare consulting
business, and the current scale of that business, together with
our technology-related capabilities, provide us with a strong
platform from which to address our clients increased focus
on the interoperability of healthcare IT platforms, healthcare
policy, and payment and caregiver reforms.
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Systems Engineering &
Integration. Our clients are increasingly
utilizing SE&I services to help them manage every phase of
the development and integration of increasingly sophisticated
information technology, communications and mission
systems ranging from satellite and space systems to
air traffic control and naval systems. Many SE&I
engagements require the application of requisite competencies
across the entire range of agencies or departments involved in a
particular program. Through the application of our matrix, we
have developed deep cross-market knowledge and a combination of
engineering, acquisition, management and leadership expertise.
We plan to leverage this knowledge and expertise to bid on
large-scale SE&I contracts.
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Continue
to Innovate
We will continue to invest significant resources in our efforts
to identify near-term developments and long-term trends that may
present significant challenges or opportunities for our clients.
Our single profit
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center and one-firm culture afford us the flexibility to devote
company-wide resources and key intellectual capital to
developing the functional capabilities and expertise needed to
address those issues. We have regularly allocated significant
resources to these business development efforts and have
successfully transitioned several such initiatives into
meaningful contributors to our business, including:
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our assurance and resilience services area, which generated
approximately $450 million of revenue in fiscal 2010 and
which began in 1999 with our efforts to anticipate the
challenges posed to federal agencies by IT
proliferation; and
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our healthcare consulting services area, which generated
approximately $280 million of revenue in fiscal 2010 and
began in the late 1980s with IT work for the Department of
Health and Human Services, and expanded rapidly in 2002 as the
result of an internal analysis of potential long-term trends
which could affect federal health agencies.
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We continue to invest in many initiatives at various stages of
development. Three such initiatives are:
Cloud Computing. Cloud computing is
Internet-based computing whereby shared resources, software and
information are provided to computers and other devices
on-demand without requiring new user infrastructure. The
U.S. government has adopted cloud computing as its
preferred information technology environment. Several pilot
programs related to the U.S. governments transition
to cloud computing are already in progress across its agencies,
and cyber-initiatives designed to help ensure the integrity and
security of cloud computing environments will be essential to
the success of this transition.
Advanced Analytics. Through our advanced
analytics capability, we utilize advanced mathematical and other
analytical tools to examine the way in which specific issues
relate to data on past, present and projected future actions.
Advanced Analytics are critical to our clients efforts to
translate the enormous volumes of data flowing from our
nations investments in information, communications and
technology into insight, foresight and decision-making capacity.
Financial Sector. Specialized services are
needed to help modernize payment processes, implement new
technology to assist financial regulators, and reform and
redefine the role and organization of agencies such as the
Department of the Treasury, the SEC, the Federal Reserve and the
Commodity Futures Trading Commission. In addition, financial
services companies in the commercial market have extensive
electronic networks and electronic payment processing that
require the application of sophisticated cyber-security to deter
and defend against cyber-criminals and other actors intent on
compromising those systems.
Our
Clients and Capabilities
The diagram below illustrates the way we deploy our four
capability areas, including specified areas of expertise, to
serve our defense, intelligence and civil clients. Our dynamic
matrix of functional capabilities and domain expertise plays a
critical role in our efforts to deliver results to our clients.
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Deployment
of Capabilities to Serve Clients
Our
Clients
We have strong and longstanding relationships with a diverse
group of clients at all levels of the U.S. government.
Selected
Long-Term Client Relationships
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Relationship
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Length
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Client(1)
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(Years)
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U.S. Navy
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U.S. Army
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60
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National Security Agency
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25+
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Department of Homeland Security
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20+
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U.S. Air Force
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20+
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National Reconnaissance Office
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15+
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A U.S. intelligence agency
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15+
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Department of Energy
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15+
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Federal Bureau of Investigation
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15+
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Internal Revenue Service
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10+
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Defense
Clients
Our reputation and track record in serving the
U.S. military and defense agencies spans 70 years. Our
defense business revenue represented 55% of our business based
on revenue for fiscal 2010. Our revenue in this area for fiscal
2010 was approximately $2.8 billion. Our key defense
clients are set forth below.
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U.S. Army. For 60 years, we have
addressed challenges for the U.S. Army at the strategic,
operational and tactical levels by bringing experienced people,
high quality processes and advanced technologies together. We
work with our U.S. Army clients to help sustain their land
combat capabilities while responding to current demands and
preparing for future needs. Recent examples of the services that
we have provided include enhancing field intelligence systems,
delivering rapid response solutions to counter improvised
explosive devices, infusing lifecycle sustainment capabilities
to improve distribution and delivery of material, and employing
systems and consulting methods to help expand care and support
for soldiers and their families. Our clients include Army
Headquarters, Army Material Command (AMC), Forces Command
(FORSCOM), Training and Doctrine Command (TRADOC), and many
Program Executive Offices, Direct Reporting Units and Army
Service Component Commands.
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U.S. Navy/Marine Corps. We have supported
the U.S. Navy for 70 years. We employ a
multidimensional approach that analyzes and balances people,
processes, technology, and infrastructure to meet their missions
of equipping global forces for greater flexibility, mobility and
efficiency, sustaining results while reducing costs and
integrating new technology. Our clients include the Office of
the Secretary of the Navy, Chief of Naval Operations, the
Commandant of the Marine Corps to the Office of Naval
Intelligence and U.S. Navy/Marine Corps operating commands
and systems commands, as well as the Joint Program Executive
Offices (PEO) and individual PEOs such as Naval Air Systems
Command (NAVAIR), Naval Seas Systems Command (NAVSEA),
U.S. Marine Corps Systems Command, and Space and Naval
Warfare (SPAWAR).
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U.S. Air Force/NASA/Aerospace. We provide
integrated strategy and technical services to the U.S. Air
Force. Our skilled strategists and technology experts bring
diverse capabilities to assignments that include weapons
analysis, capability-based planning and aircraft systems
engineering. We also support the space industry in applying new
technologies, integrating space operations, and using strategies
to address the technical issues, cost, schedule and risk of
space systems. Our clients include Air Combat Command, Air Force
Space Command, Air Force Materiel Command, Air Mobility Command,
Air Force Cyber Command, Air Force Pacific Command, NASA, the
Defense Information Systems Agency (DISA), the National
Reconnaissance Office (NRO) and the National
Geospatial-Intelligence Agency (NGA).
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Joint Staff and Combatant Commands. We provide
mission-critical support to the Office of the Secretary of
Defense, the Joint Staff, the Combatant Commands (COCOMs), and
other U.S. government departments and agencies during the
planning and mission execution phases to meet global mission
requirements ranging from integrated intelligence, surveillance
and reconnaissance (ISR) to space and global strike operations.
Our clients include most major organizations within the Office
of the Secretary of Defense and the Department of Defenses
agencies, as well as Joint Forces Command, Pacific Command,
Northern Command, Central Command, Southern Command, European
Command, Strategic Command, Special Operations Command, and
Transportation Command.
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Intelligence
Clients
We have provided the primary group of government agencies and
organizations that carry out intelligence activities for the
U.S. government, or the U.S. Intelligence Community,
with
forward-thinking,
success-oriented consulting and mission support services in
analysis, systems engineering, program management, operations,
organization and change management, budget and resource
management, studies and wargaming. This critical business area
has strong barriers to entry for competitors because of the
specialized expertise and high-level security clearances
required. Our intelligence business represented 21% of our
business based on
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revenue for fiscal 2010. Revenue in this area for fiscal 2010
was approximately $1.0 billion. Our major intelligence
clients include:
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U.S. Intelligence Agencies. We provide
critical support in strategic planning, policy development,
program development and execution, information sharing,
architecture, and program management for research and
development projects as well as support to reform initiatives
flowing from the Intelligence Reform and Terrorism Protection
Act. We help clients improve the processes and substance of
intelligence information provided to the executive and
legislative branches of the U.S. government for policy
development and operational decision making.
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Joint Staff and Unified Combatant Commands. We
deliver comprehensive intelligence analysis, including providing
all-source intelligence analysis and open-source intelligence
analysis conducted in high intensity environments. We also
provide data collection management and analytical systems
intelligence training services, and provide intellectual capital
and best practices for intelligence activities.
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Military Intelligence. We provide consulting
services, integrated intelligence and information operations
mission support, and a range of counterintelligence services to
the U.S. Army, U.S. Air Force, U.S. Navy, Marine
Corps, and Defense Intelligence Agency.
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Civil
Clients
Support to civil government agencies of the U.S. government
and
U.S.-funded
international development work has grown significantly as a
percentage of our overall business. The FPDS ranks us
16th on its overall list of top 100 federal contractors for
federal fiscal year 2009 based on overall prime contracting
dollars. For that same period and using data provided by
Bloomberg Finance L.P., we estimate that we ranked
24th based on overall prime contracting dollars in the
civil clients. Our civil business represented 24% of our
business based on revenue for fiscal 2010. Revenue in this area
for fiscal 2010 was approximately $1.2 billion. Our civil
government clients include:
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Financial Services. We provide support to all
major U.S. government finance and treasury organizations
charged with the collection, management and protection of the
U.S. financial system, including the Department of the
Treasury, Internal Revenue Service and other agencies of the
Department of the Treasury, Office of the Comptroller of the
Currency, Federal Deposit Insurance Corporation, Federal Reserve
Board and Banks, the SEC, and Pension Benefit Guaranty
Corporation. We create innovative approaches to some of their
most challenging problems, including bank receivership, payment
channel modernization, cyber initiatives and fraud detection.
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Health. We support government clients on
innovative projects that help achieve public health missions,
including entitlement reform, developing a national health
information network, mitigating risk to populations, improving
government infrastructure, and facilitating an international
public-private sector dialogue on international health issues.
Our clients include the Department of Health and Human Services
and its agencies, including the U.S. Food and Drug
Administration, National Institutes of Health, Centers for
Disease Control and Prevention (CDC), the Centers for Medicare
and Medicaid Services, the Department of Defense Military Health
System and Department of Veterans Affairs.
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Energy, Transportation and Environment. We
support clients in the transportation, energy and environment
sectors which have control over our national infrastructure. We
support our clients efforts to maintain and build
infrastructure that is efficient, effective and sustainable. Our
services include strategy, operations, technology and
engineering. Our clients include the Departments of Energy,
Transportation, and Interior and their component agencies, and
the Environmental Protection Agency. We also support the
Department of Defense in major environmental and infrastructure
programs in the United States and Europe.
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Justice and Homeland Security. We support the
U.S. governments homeland security mission and
operations in the areas of intelligence (analysis, information
sharing, and risk assessment), operations (coordination,
contingency planning, and decision support), strategy,
technology and management
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(program management and information technology tools), emergency
management and response planning, and border, cargo and
transportation security. We support law enforcement missions and
operations in counterterrorism, intelligence and
counterintelligence, and traditional criminal areas (narcotics,
white collar crime, organized crime, and violent crime).
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Business of Government. We help agencies
effectively and efficiently manage the business processes that
support government in its provision of services to its citizens,
spanning management, personnel, budget operations, information
technology and telecommunications. Our clients include the
General Services Administration, Office of Management and
Budget, Office of Personnel Management, the Congress, and
Courts. We also support public sector grant-making agencies,
from health and education, to labor and homeland and economic
security, serving clients such as the Departments of
Agriculture, Homeland Security, Commerce, Education, Labor, and
Housing and Urban Development, as well as the National Science
Foundation. In addition, we serve our U.S. government
clients abroad in helping them resolve systemic global
development needs. Our clients include the U.S. Agency for
International Development, the Department of State, Millennium
Challenge Corporation, and the World Bank.
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Our
Capabilities
Strategy
and Organization
Our strategy and organization capability focuses on helping
clients define and achieve their strategic objectives. We
provide transformational programs to improve organizational
effectiveness, manage change, and enable client organizations to
improve their performance. Our Transformation Life
Cycletm
framework and Change Management Advanced Practitioner program
provide a proven methodology and credentialed experts to help
clients succeed. Our areas of expertise include:
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Strategy and change management, helping clients formulate
business strategies to meet their mission, and transforming key
elements within organizations such as people, processes,
technology and physical infrastructure;
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Organization and process improvement, redesigning an
organizations structure to fit its mission and strategy,
aligning its business purpose, and improving operations and
performance through business process reengineering, knowledge
management, strategic sourcing, shared services and lean six
sigma methodologies; and
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Human capital, learning and communications, helping
clients build new capabilities and increasing workforce
performance through competency identification and development of
learning programs, designing programs to better manage the
workforce for high performance, and building stakeholder
understanding and buy-in.
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Analytics
Our analytics capability includes advanced analysis, modeling,
simulation of conflicts (also known as war-gaming) and other
simulations, and accountability tools to help our clients make
informed decisions about threats and opportunities, and the
practical realities of turning decisions into action, such as
resource availability. Our areas of expertise include:
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Business analytics, enabling our clients to optimize
decisions regarding resources through financial and economic
analysis, financial stewardship and accountability and
disciplined contract strategy and program controls;
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Intelligence and operations analytics, providing a full
spectrum of intelligence analysis, innovative all-source
analysis, analytic training and counter-intelligence services to
meet persistent challenges and guard against new threats;
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Mission and performance analytics, enhancing our
clients ability to weigh alternative futures and make
sound decisions that are supported by rigorous methods,
including capabilities based assessments, modeling and
simulation, policy analysis, threat, vulnerability and risk
analysis and war-games; and
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Advanced analytics, developing capabilities to exploit
very large amounts of information through the use of advanced
mathematical techniques to gain insights, create foresight and
make predictions to support fact-based decision making for our
clients.
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Technology
Our technology capability focuses on helping clients solve their
mission-critical objectives through the deployment of advanced
technology. We have more than 7,600 highly skilled
technology experts and engineers who maintain deep knowledge of
the latest leading technologies. Our experts combine their
specialized skills with our problem-solving approach to ensure
that we understand a clients mission and objectives and,
based on that understanding, design, develop and implement the
optimum technology solution. Our areas of expertise include:
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Cyber technologies, enabling clients to execute their
missions in cyberspace with trusted and secure networks,
systems, and information and delivering solutions for full life
cycle support, information exchange, collaboration,
transportation, and information storage;
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SE&I, developing, acquiring, testing and integrating
complex systems, integrated acquisition management, program and
technical integration, and program and organizational leadership
design;
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Systems development, designing and deploying information
technology solutions, including software development to automate
business processes, improve client service, solve mission
requirements, and share information effectively and
securely; and
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Strategic technology and innovation, identifying and
incubating advanced technologies, innovation processes, and
innovation management critical to the achievement of our
clients goals.
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Operations
Our operations capability is focused on the full spectrum of
mission execution and delivery from
front-end
acquisition and program management to infrastructure design and
end-to-end
supply chain management. Our operations capability helps our
clients formulate and implement a strategy to achieve tangible
results. Our areas of expertise include:
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Acquisition and program management, enabling clients to
originate, plan, and execute programs of all types and
complexity across the entire program or product lifecycle,
including program and project management, acquisition and life
cycle services and program integration;
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Infrastructure, developing sustainable strategies and
executing plans to solve complex challenges across the many
natural and man-made infrastructure environments to facilitate a
safe, efficient, effective and sustainable project;
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Mission and industry expertise, supporting clients across
planning and policy development, capability development and
management, conceptual and operational requirements, and mission
readiness and operational support; and
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Supply chain and logistics, formulating and executing
supply chain strategies and mission-specific logistics solutions
to optimize material, data and human capital flows designed to
achieve our clients targets for cost, readiness and
operational performance.
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Client
Case Examples
Our projects require a comprehensive understanding of our
clients and their needs, and we have developed a
multi-dimensional and adaptable skill set that allows us to
provide services under each of our capability areas across our
client base. The case examples below illustrate how we have
deployed our skill-sets in the strategy and organization,
analytics, technology and operations capability areas to provide
services to our clients.
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We developed a methodology that dramatically improves the
design, cost and management of major weapons programs that we
refer to as Design for Affordability, and worked
closely with the U.S. Navy to achieve significant cost
reductions. Launched in 2004, the first Virginia-class submarine
cost more than $3.2 billion to build, which exceeded
estimates provided to U.S. Navy officials for this class of
over 30 boats. The Chief of Naval Operations subsequently
set a target cost of $2 billion per submarine as a
condition for increasing production from one to two boats per
year starting in 2012. Electric Boat, the prime contractor,
engaged us as a subcontractor to develop a comprehensive
strategy for permanently reducing costs to $2 billion per
boat. Our Design for Affordability methodology achieved positive
results, which led to the U.S. Navy directly hiring us to
extend our methodology across other parts of the submarine value
chain in the areas of operations and sustainability. The Design
for Affordability methodology utilizes our operations, strategy
and organization and analytics capabilities, and we can apply
this methodology to help the U.S. government achieve
cost-savings in other large acquisition programs such as those
for aircraft and combat vehicles.
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We are working with a major client in the U.S. Intelligence
Community on cloud computing. We are employing cloud
technologies to store, manage, and perform advanced analytics on
massive volumes of data to identify patterns that reveal larger
trends, yield new insights, and ultimately capture cyber
actors behavior. In support of our client, we utilize our
technology and analytics capabilities to analyze huge stores of
historical data in the cloud and build statistical models to
understand the behavior, intent, and potential future targets of
adversaries attempting to conduct attacks or crimes in
cyberspace. Improved cyber analysis using cloud technologies is
highly useful for government agencies striving to better share
information and integrate intelligence.
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We worked with the CDC to improve its process for ordering,
distributing and managing the U.S.s supply of
publicly-funded childhood vaccines through the Vaccines for
Children program, a $3 billion-dollar-a-year initiative
that reaches half of all American children. The CDC mission was
to respond more effectively to public health crises such as
disease outbreaks, vaccine shortages, natural disasters and
disruptions of the vaccine supply. We utilized our strategy and
organization, operations and technology capabilities and
leveraged our expertise in supply chain management, information
management and change management to redesign the CDCs
procurement and storage process to allow them to ship inventory
in hours instead of weeks. We helped the CDC integrate 64
grantees with formerly separate supply and distribution systems
into a single, centrally managed supply chain that has shipped
millions of doses of vaccines and realized $496 million in
overall one-time savings with the potential for recurring annual
savings.
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Contracts
Our portfolio of contracts is highly diversified with no single
contract accounting for more than 9% of our revenue in any of
fiscal 2008, pro forma 2009 or fiscal 2010, and no single task
order under any contract accounting for more than 1% of our
revenue in any of fiscal 2008, pro forma 2009 and fiscal 2010.
In fiscal 2010, we derived 30% of our revenue from our top 10
contracts and contract vehicles, and over 50% of our revenue was
derived from individually awarded task orders under a large
number of ID/IQ contract vehicles.
There are two predominant contracting methods by which the
U.S. government procures services: definite contracts and
indefinite contract vehicles. Each of these is described below:
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Definite contracts call for the performance of specified
services or the delivery of specified products. The
U.S. government procures services and solutions through
single award, definite contracts that specify the scope of
services that will be delivered and identify the contractor that
will provide the specified services. When an agency recognizes a
need for services or products, it develops an acquisition plan,
which details the means by which it will procure those services
or products. During the acquisition process, the agency may
release a request for information to determine if qualified
bidders exist, a draft request for a proposal to allow industry
to comment on the scope of work and acquisition strategy, and
finally a formal request for a proposal. Following the
evaluation of submitted proposals, the agency will award the
contract to the winning bidder.
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Indefinite contract vehicles provide for the issuance by the
client of orders for services or products under the terms of the
contract. Indefinite contracts are formally known as indefinite
delivery, indefinite quantity or ID/IQ contracts, and are often
referred to as contract vehicles or ordering contracts. ID/IQ
contracts may be awarded to one contractor (single award) or
several contractors (multiple award). Under a multiple award
ID/IQ contract, there is no guarantee of work as contract
holders must compete for individual work orders. ID/IQ contracts
will often include pre-established labor categories and rates,
and the ordering process is streamlined (usually taking less
than a month from recognition of a need to an established order
with a contractor). ID/IQ contracts often have
multi-year
terms and unfunded ceiling amounts, thereby enabling but not
committing the U.S. government to purchase substantial
amounts of products and services from one or more contractors in
a streamlined procurement process.
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GWACs and GSA schedules are ID/IQ contracts that are open to all
U.S. government agencies. Contract holders compete for
individual task orders under both types of ID/IQ contract
vehicles. Prices (labor rates) are pre-established under GSA
schedules, while prices under GWACs may be pre-established or
determined by task order proposal. Agencies may solicit
companies directly under GSA schedules and, under GWACs, must
work through the agency that operates the GWAC or receive a
delegation of authority to use the GWAC. GSA schedules are
administered by the General Services Administration and support
a wide range of products and services. GWACs are used to procure
IT products and services and are administered by the agency
soliciting the services or products, with permission from the
Office of Management and Budget.
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As of September 30, 2009, the end of the
U.S. governments fiscal year, there were a total of
39 GSA schedules with over 17,000 schedule holders that
generated more than $37.4 billion in annual sales in U.S.
government fiscal year 2009. We were the number three provider
under the GSA federal supply schedule program based on revenue
with a total of $899.0 million in revenue during U.S.
government fiscal 2009. Based on revenue from our top three GSA
schedules, we were the number five contractor on the Information
Technology (IT) Schedule 70, the number two contractor on
the Mission Oriented Business Integrated Services (MOBIS)
Schedule, and the number two contractor on the Professional
Engineering Services (PES) Schedule in U.S. government
fiscal year 2009.
Listed below are our top three GSA schedules and GWACs based on
revenue for each of fiscal 2008, pro forma 2009 and fiscal 2010,
the number of active task orders as of March 31, 2010 under
each of our top three GSA schedules and GWACs and an aggregation
of all other GSA schedules and GWACs. These contract vehicles
are available to all U.S. government agencies and the
revenue stated is the result of individually competed task
orders.
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Number of
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% of
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Pro
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% of
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% of
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Task Orders
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Fiscal
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Total
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Forma
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Total
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Fiscal
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Total
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as of
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Expiration
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Contract
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2008
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Revenue
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2009
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Revenue
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2010
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Revenue
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March 31, 2010
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Date
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(Revenue in millions)
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Mission Oriented Business Integrated Services
(MOBIS) #874
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$
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187.8
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5
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%
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$
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245.6
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6
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%
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$
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351.7
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7
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%
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494
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9/30/12
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Information Technology (IT) #70
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$
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330.2
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9
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%
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$
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334.5
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8
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%
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$
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257.7
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5
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%
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326
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7/30/10
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Professional Engineering Services (PES) #871
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$
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242.8
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7
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%
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$
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243.8
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6
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%
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$
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216.5
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4
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%
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287
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10/28/14
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All Others
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$
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279.4
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8
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%
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$
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339.1
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7
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%
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$
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368.2
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7
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%
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Total
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$
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1,040.2
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29
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%
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$
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1,163.0
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27
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%
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$
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1,194.1
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23
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%
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Listed below are our top single award contract, our top five
single award contracts and our top ten single award contracts,
each based on revenue and the number of active task orders as of
March 31, 2010 under these contracts. Eight of our top ten
single award contracts and all of our top five single award
contracts are
93
ID/IQ contracts. The number of task orders for our top ten
contracts does not include task orders under classified
contracts due to the fact that information associated with those
contracts is classified.
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Number of
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% of
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Task Orders
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Fiscal
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Total
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as of
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Expiration
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Contract
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2010
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Revenue
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March 31, 2010
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Date
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(Revenue in millions)
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Top Contract
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$
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376.0
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7
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%
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335
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1/8/2013
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Top Five Contracts
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$
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817.1
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16
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%
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907
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Top Ten Contracts
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$
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957.8
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19
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%
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961
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Backlog
We define backlog to include the following three components:
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Funded Backlog. Funded backlog represents the
revenue value of orders for services under existing contracts
for which funding is appropriated or otherwise authorized less
revenue previously recognized on these contracts.
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Unfunded Backlog. Unfunded backlog represents
the revenue value of orders for services under existing
contracts for which funding has not been appropriated or
otherwise authorized.
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Priced Options. Priced contract options
represent 100% of the revenue value of all future contract
option periods that may be exercised at our clients option
and for which funding has not been appropriated or otherwise
authorized.
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Backlog does not include any task orders under ID/IQ contracts,
including GWACs and GSA schedules, except to the extent that
task orders have been awarded to us under those contracts.
The following table summarizes the value of our contract backlog
at the respective dates presented:
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The Company
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As of March 31,
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2009
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2010
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(In millions)
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Backlog:
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Funded
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$
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2,392
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$
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2,528
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Unfunded
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1,968
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2,453
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Priced options
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2,919
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(1)
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4,032
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(1)
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Total backlog
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$
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7,279
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$
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9,013
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(1) |
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Amounts shown reflect 100% of the undiscounted revenue value of
all priced options. |
We may never realize all of the revenue that is included in our
total backlog, and there is a higher degree of risk in this
regard with respect to unfunded backlog and priced options.
Our backlog includes orders under contracts that in some cases
extend for several years. The U.S. Congress generally
appropriates funds for our clients on a yearly basis, even
though their contracts with us may call for performance that is
expected to take a number of years. As a result, contracts
typically are only partially funded at any point during their
term and all or some of the work to be performed under the
contracts may remain unfunded unless and until the
U.S. Congress makes subsequent appropriations and the
procuring agency allocates funding to the contract.
Total backlog grew 24% from March 31, 2009 to
March 31, 2010. We cannot predict with any certainty the
portion of our backlog that we expect to recognize as revenue in
any future period. While we report internally on our backlog on
a monthly basis and review backlog upon the occurrence of
certain events to determine if any adjustments are necessary, we
cannot guarantee that we will recognize any revenue from our
backlog. The primary risks that could affect our ability to
recognize such revenue are program schedule changes and contract
94
modifications. In our recent experience, none of these or other
factors have had a material negative effect on our ability to
realize revenue from our funded backlog. Additional risks
include 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, and, in the case
of unfunded backlog, the potential that funding will not be
available and in the case of priced options, the risk that our
clients will not exercise these options. See Risk
Factors Risks Related to Our Business We
may not realize the full value of our backlog, which may result
in lower than expected revenue.
Competition
Due to its size, the government consulting market is highly
fragmented. As certain commercial sectors of the consulting
market have declined over the past few years, competition within
the government professional services industry has intensified.
In addition to professional service companies like our own that
focus principally on the provision of services to the
U.S. government, other companies active in our markets
include large defense contractors, diversified service providers
and small businesses. Changing government polices are also
helping to reshape the competitive landscape. Some large prime
contractors are beginning to divest their professional services
business units due to the U.S. governments increased
sensitivity to organizational conflicts of interest and these
divested companies will be free to compete with us without their
former organizational conflicts of interest constraints. The
formal adoption of FAR organizational conflicts of interest
rules or additional more restrictive rules by
U.S. government agencies could cause further such
divestitures which could further increase competition in our
markets. At the other end of the spectrum are small businesses.
Small business are growing in the government services industry
due in large part to a push by both the Obama and Bush
administrations to bolster the economy by helping small business
owners.
In the course of doing business, we compete and collaborate with
companies of all types. We strive to maintain positive and
productive relationships with these organizations. Some of them
hire us as a subcontractor, and we hire some of these other
contractors to work with us as our subcontractors. Our major
competitors include: (i) contractors focused principally on
the provision of services to the U.S. government, such as
CACI International, Inc., L-3 Communications Holdings, Inc.,
ManTech International Corp., SRA International, Inc., and TASC
Inc.; (ii) large defense contractors which provide both
products and services to the U.S. government, such as The
Boeing Company, General Dynamics Corp., Lockheed Martin Corp.,
Northrop Grumman Corp., and Raytheon Co.; and
(iii) diversified service providers, such as Accenture,
Computer Sciences Corp., Deloitte Consulting LLP and SAIC, Inc.
We compete on the basis of our technical expertise and client
knowledge, our ability to successfully recruit appropriately
skilled and experienced talent, our ability to deliver
cost-effective multi-faceted services in a timely manner, our
reputation and relationship with our clients, past performance,
security clearances, and the size and scale of our company.
Patents
and Proprietary Information
Our management and technology consulting services and related
products are not generally dependent upon patent protection. We
claim a proprietary interest in certain of our service offerings
and related products, methodologies and know-how. We have
several patents but we do not consider our business to be
materially dependent on the protection of such patents.
Additionally, we have a number of trade secrets that contribute
to our success and competitive position, and we endeavor to
protect this proprietary information. While protecting trade
secrets and proprietary information is important, we are not
materially dependent on any specific trade secret or group of
trade secrets. Other than licenses to commercially available
third-party software, we have no licenses to intellectual
property that are significant to our business.
We rely upon a combination of nondisclosure agreements and other
contractual arrangements, as well as copyright, trademark,
patent and trade secret laws to protect our proprietary
information. We also enter into proprietary information and
intellectual property agreements with employees, which require
them to disclose any inventions created during employment, to
convey such rights to inventions to us, and to restrict any
disclosure of proprietary information.
95
Our most important trademark is the Booz Allen
Hamilton mark, registered in the United States and certain
foreign countries. Generally, registered trademarks have
perpetual life, provided that they are renewed on a timely basis
and continue to be used properly as trademarks. We have three
registered trademarks related to our name and logo with the
earliest renewal in February 2011. Under a branding agreement
entered in connection with the acquisition, Spin Co. was
granted a perpetual, exclusive, worldwide, royalty-free license
to use Booz as a name and mark other than with
Allen or Hamilton and certain other
words associated with our business in connection with certain
activities. We agreed not to use Booz unless it is
accompanied by Allen or Hamilton or both
and we are restricted in our use of certain other words
associated with Spin Co.s business. Under certain
circumstances, including if certain Spin Co. competitors
obtain ownership of Booz Allen Hamilton, the licensed marks will
be assigned to Spin Co.
For our work under U.S. government funded contracts and
subcontracts, the U.S. government obtains certain rights to
data, software and related information developed under such
contracts or subcontracts. These rights generally allow the
U.S. government to disclose such data, software and related
information to third parties, which third parties may include
our competitors in some instances. In the case of our work as a
subcontractor, our prime contractor may also have certain rights
to data, information and products we develop under the
subcontract.
Facilities
We do not own any facilities or real estate. Our corporate
headquarters are located at 8283 Greensboro Drive, McLean,
Virginia 22102. We lease other operating offices and facilities
throughout North America, and a limited number of overseas
locations. Our principal offices outside of McLean, Virginia
include: Annapolis Junction, MD; Rockville, MD; San Diego,
CA; and Herndon, VA. Additionally, nationwide we have
approximately 30 Department of Defense approved locations that
support classified U.S. government operations. We also have
a number of Sensitive Compartmented Information Facilities,
which are enclosed areas within buildings that are used to
perform classified work for the U.S. Intelligence
Community. Many of our employees are located in facilities
provided by the U.S. government. The total square footage
of our leased offices and facilities is approximately
2.9 million square feet. We believe our facilities meet our
current needs, and that additional facilities will be required
and available as we expand in the future.
Regulation
As a contractor to the U.S. government, as well as state
and local governments, we are heavily regulated in most fields
in which we operate. We deal with numerous U.S. government
agencies and entities, and when working with these and other
entities, we must comply with and are affected by unique laws
and regulations relating to the formation, administration and
performance of U.S. government contracts. Some significant
laws and regulations that affect us include:
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FAR, and agency regulations supplemental thereto, which regulate
the formation, administration and performance of
U.S. government contracts;
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the Truth in Negotiations Act, which requires certification and
disclosure of cost and pricing data in connection with the
negotiation of a contract, modification or task order;
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the Procurement Integrity Act, which regulates access to
competitor bid and proposal information and certain internal
government procurement sensitive information, and our ability to
provide compensation to certain former government procurement
officials;
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post government employment laws and regulations, which restrict
the ability of a contractor to recruit, hire, and deploy former
employees of the U.S. government;
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laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the export of certain products, services and
technical data; and
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96
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the Cost Accounting Standards and FAR Cost Principles, which
impose accounting requirements that govern our right to
reimbursement under certain cost-based U.S. government
contracts and require consistency of accounting practices over
time.
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Given the magnitude of our revenue derived from contracts with
the Department of Defense, the DCAA is our cognizant government
audit agency. The DCAA audits the adequacy of our internal
control systems and policies including, among other areas,
compensation. As a result of its audits, the DCAA may determine
that a portion of our employee compensation is unallowable. See
Risk Factors Risk Related to Our
Industry Our contracts, performance and
administrative processes and systems are subject to audits,
reviews, investigations and cost adjustments by the U.S.
government, which could reduce our revenue, disrupt our business
or otherwise materially adversely affect our results of
operations.
The U.S. government may revise its procurement practices or
adopt new contract rules and regulations at any time. In order
to help ensure compliance with these laws and regulations, all
of our employees are required to attend ethics training at least
annually, as well as other compliance training relevant to their
position. Internationally, we are subject to special
U.S. government laws and regulations (such as the Foreign
Corrupt Practices Act), local government regulations and
procurement policies and practices, including regulations
relating to import-export control, investments, exchange
controls and repatriation of earnings, as well as varying
currency, political and economic risks.
U.S. government contracts are, by their terms, subject to
termination by the U.S. government either for its
convenience or default by the contractor. In addition,
U.S. government contracts are conditioned upon the
continuing availability of Congressional appropriations.
Congress usually appropriates funds for a given program on a
September 30 fiscal year basis, even though contract performance
may take many years. As is common in the industry, our company
is subject to business risks, including changes in governmental
appropriations, national defense policies, service modernization
plans, and availability of funds. Any of these factors could
materially adversely affect our companys business with the
U.S. government in the future.
See Risk Factors Risks Related to Our
Business We are required to comply with numerous
laws and regulations, some of which are highly complex, and