Published: 2023-01-27 00:00:00 ET

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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, or SEC, and should be read in conjunction with the information contained in the Company's Annual Report on Form 10-K for the year ended March 31, 2022. The interim period unaudited condensed consolidated financial statements are presented as described below. Certain information and disclosures normally required for annual financial statements have been condensed or omitted pursuant to GAAP and SEC rules and regulations. In the opinion of management, all adjustments considered necessary for fair presentation of the results of the interim periods presented have been included. The Company’s fiscal year ends on March 31 and unless otherwise noted, references to fiscal year or fiscal are for fiscal years ended March 31. The results of operations for the nine months ended December 31, 2022 are not necessarily indicative of results to be expected for the full fiscal year.

The condensed consolidated financial statements and notes of the Company include its subsidiaries, and other entities over which the Company has a controlling financial interest or where the Company is a primary beneficiary. The Company uses the equity method to account for investments in entities that it does not control if it is otherwise able to exert significant influence over the entities' operating and financial policies. Equity investments in entities over which the Company does not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-temporary impairments.

Certain amounts reported in the Company's prior fiscal year condensed consolidated financial statements have been reclassified to conform to the current fiscal year presentation.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include the provision for claimed indirect costs, valuation and lives of tangible and intangible assets, impairment of long-lived assets, accrued liabilities, revenue recognition, including the accrual of indirect costs, bonus and other incentive compensation, stock-based compensation, reserves for uncertain tax positions and valuation allowances on deferred tax assets, provisions for income taxes, postretirement obligations, collectability of receivables, and loss accruals for litigation. Actual results experienced by the Company may differ materially from management's estimates.

Recently Adopted Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance is intended to provide relief for entities impacted by reference rate reform. Topic 848 contains provisions and optional accounting expedients designed to simplify requirements around the designation of hedging relationships, probability assessments of hedged forecasted transactions, and accounting for modifications of contracts that refer to LIBOR or other rates affected by reference rate reform. The guidance is elective and is effective on the date of issuance. Topic 848 is applied prospectively to contract modifications and as of the effective date for existing and new eligible hedging relationships. The Company has elected to apply the hedge accounting practical expedient related to the probability of hedged future LIBOR indexed cash flows and continues its quantitative method of assessing subsequent hedge effectiveness in the fourth quarter of fiscal 2020. Further, during the second quarter of fiscal year 2023, the Company transitioned its term loans from LIBOR-indexed interest payments to Term SOFR-indexed interest payments in connection with the Ninth Amendment of the Credit Agreement. For its interest rate swaps designated as cash flow hedges, the Company elected to apply certain of the accounting expedients to assume that the reference rates upon which hedged forecasted transactions will be based on match the LIBOR-indexed rates used in the Company's interest rate swaps consistent with past presentation. The Company continues to evaluate the impact of Topic 848 and may apply other elections, as applicable. The adoption of this guidance did not have a material impact on the consolidated financial statements and disclosures.

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Recent Accounting Pronouncements Not Yet Adopted

Accounting and reporting pronouncements effective after December 31, 2022 and issued through the filing date are not expected to have a material impact on the Company's condensed consolidated financial statements.

The Company's revenues from contracts with customers (clients) are derived from offerings that include consulting, analytics, digital solutions, engineering, mission, and cyber services, substantially with the U.S. government and its agencies and, to a lesser extent, subcontractors. The Company also serves foreign governments, as well as domestic and international commercial clients. The Company performs under various types of contracts, which include cost-reimbursable contracts, time-and-materials contracts, and fixed-price contracts.

Contract Estimates

We recognize revenue for many of our contracts under a contract cost-based input method and require an Estimate-at-Completion (“EAC”) process, which management uses to review and monitor the progress towards the completion of our performance obligations. Under this process, management considers various inputs and assumptions related to the EAC, including, but not limited to, progress towards completion, labor costs and productivity, material and subcontractor costs, and identified risks. Estimating the total cost at the completion of our performance obligations is subjective and requires management to make assumptions about future activity and cost drivers under the contract. Changes in these estimates can occur for a variety of reasons and, if significant, may impact the revenue and profitability of the Company’s contracts. Changes in estimates related to contracts accounted for under the EAC process are recognized on a cumulative catch-up basis in the period when such changes are determinable and reasonably estimable. If the estimate of contract profitability indicates an anticipated loss on a contract, the Company recognizes the total loss at the time it is identified. For each of the three and nine months ended December 31, 2022 and 2021, the aggregate impact of adjustments in contract estimates was not material.

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by contract type, customer, as well as whether the Company acts as prime contractor or subcontractor, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following series of tables presents our revenue disaggregated by these categories.

Revenue by Contract Type:

We generate revenue under the following three basic types of contracts:

•Cost-Reimbursable Contracts: Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract, up to a ceiling based on the amount that has been funded, plus a fixed fee or award fee.

•Time-and-Materials Contracts: Under contracts in this category, we are paid a fixed hourly rate for each direct labor hour expended, and we are reimbursed for billable material costs and billable out-of-pocket expenses inclusive of allocable indirect costs. We assume the financial risk on time-and-materials contracts because our costs of performance may exceed negotiated hourly rates.

•Fixed-Price Contracts: Under a fixed-price contract, we agree to perform the specified work for a predetermined price. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss.

The table below presents the total revenue for each type of contract:

			Three Months Ended December 31,																		Nine Months Ended December 31,
			2022									2021									2022									2021
Cost-reimbursable			$	1,211,589		53		%				$	1,079,893		53		%				$	3,603,824		53		%				$	3,322,507		54		%
Time-and-materials			572,491			25		%				484,718			24		%				1,682,831			25		%				1,482,431			24		%
Fixed-price			492,994			22		%				465,909			23		%				1,538,995			22		%				1,320,686			22		%
Total Revenue			$	2,277,074		100		%				$	2,030,520		100		%				$	6,825,650		100		%				$	6,125,624		100		%

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Revenue by Customer Type:

			Three Months Ended December 31,																		Nine Months Ended December 31,
			2022									2021									2022									2021
U.S. government(1):
Defense Clients			$	1,043,535		46		%				$	946,141		47		%				$	3,082,634		45		%				$	2,916,210		48		%
Intelligence Clients			419,227			18		%				369,345			18		%				1,260,653			18		%				1,144,933			18		%
Civil Clients			758,473			33		%				651,050			32		%				2,299,969			34		%				1,905,984			31		%
Total U.S. government			2,221,235			97		%				1,966,536			97		%				6,643,256			97		%				5,967,127			97		%
Global Commercial Clients			55,839			3		%				63,984			3		%				182,394			3		%				158,497			3		%
Total Revenue			$	2,277,074		100		%				$	2,030,520		100		%				$	6,825,650		100		%				$	6,125,624		100		%

(1) Certain contracts were reassigned between the various verticals of our U.S. government business shown in the table above to better align our operations to the customers we serve within each market. Prior year revenue by customer type has been recast to reflect the changes.

Revenue by Whether the Company Acts as a Prime Contractor or a Subcontractor:

			Three Months Ended December 31,																		Nine Months Ended December 31,
			2022									2021									2022									2021
Prime Contractor			$	2,151,265		94		%				$	1,913,657		94		%				$	6,461,935		95		%				$	5,753,596		94		%
Subcontractor			125,809			6		%				116,863			6		%				363,715			5		%				372,028			6		%
Total Revenue			$	2,277,074		100		%				$	2,030,520		100		%				$	6,825,650		100		%				$	6,125,624		100		%

Performance Obligations

Remaining performance obligations represent the transaction price of exercised contracts for which work has not yet been performed, irrespective of whether funding has or has not been authorized and appropriated as of the date of exercise. Remaining performance obligations exclude negotiated but unexercised options, the unfunded value of expired contracts, and certain variable consideration which the Company does not expect to recognize as revenue.

As of December 31, 2022 and March 31, 2022, the Company had $8.1 billion and $7.4 billion of remaining performance obligations, respectively. We expect to recognize approximately 70% of the remaining performance obligations at December 31, 2022 as revenue over the next 12 months, and approximately 85% over the next 24 months. The remainder is expected to be recognized thereafter.

Contract Balances

The Company's performance obligations are typically satisfied over time and revenue is generally recognized using a cost-based input method. Fixed-price contracts are typically billed to the customer using milestone or fixed monthly payments, while cost-reimbursable-plus-fee and time-and-material contracts are typically billed to the customer at periodic intervals (e.g., monthly or weekly) as indicated by the terms of the contract. Disparities between the timing of revenue recognition and customer billings and cash collections result in net contract assets or liabilities being recognized at the end of each reporting period.

Contract assets primarily consist of unbilled receivables typically resulting from revenue recognized exceeding the amount billed to the customer and right to payment is not just subject to the passage of time. Unbilled amounts represent revenues for which billings have not been presented to customers. These amounts are generally billed and collected within one year subject to various conditions including, without limitation, appropriated and available funding. Long-term unbilled receivables not anticipated to be billed and collected within one year, which are primarily related to retainage, holdbacks, and long-term rate settlements to be billed at contract closeout, are included in other long-term assets in the accompanying condensed consolidated balance sheets. Contract liabilities primarily consist of advance payments, billings in excess of costs incurred and deferred revenue. Contract assets and liabilities are reported on a net contract basis at the end of each reporting period. The Company maintains an allowance for credit losses to provide for an estimate of uncollectible receivables. Provision for credit losses recognized was not material for the three and nine months ended December 31, 2022 and 2021.

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The following table summarizes the contract assets and liabilities, and accounts receivable, net of allowance recognized on the Company’s condensed consolidated balance sheets:

						December 31, 2022						March 31, 2022
Current assets
Accounts receivable–billed						$	624,317					$	465,322
Accounts receivable–unbilled (contract assets)						1,183,522						1,157,667
Allowance for credit losses						(63)						—
Accounts receivable, net						1,807,776						1,622,989
Other long-term assets
Accounts receivable–unbilled (contract assets)						58,945						64,339
Total accounts receivable, net						$	1,866,721					$	1,687,328
Other current liabilities
Advance payments, billings in excess of costs incurred and deferred revenue (contract liabilities)						$	21,619					$	26,747

The Company computes basic and diluted earnings per share amounts based on net income attributable to common stockholders for the periods presented. The Company uses the weighted-average number of common shares outstanding during the period to calculate basic earnings per share, or EPS. Diluted EPS adjusts the weighted average number of shares outstanding to include the dilutive effect of outstanding common stock options and other stock-based awards.

The Company currently has outstanding shares of Class A Common Stock. Unvested Class A Restricted Common Stock holders are entitled to participate in non-forfeitable dividends or other distributions. These unvested restricted shares participated in the Company's dividends declared and were paid in the first, second, and third quarters of fiscal 2023 and 2022. As such, EPS is calculated using the two-class method whereby earnings are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of unvested restricted shares. A reconciliation of the income used to compute basic and diluted EPS for the periods presented are as follows:

			Three Months Ended December 31,												Nine Months Ended December 31,
			2022						2021						2022			2021
Earnings for basic computations (1)			$	30,526					$	127,992					$	337,607		$	373,413
Weighted-average common shares outstanding for basic computations			132,224,802						133,587,858						132,286,243			134,629,367
Earnings for diluted computations (1)			$	30,526					$	127,995					$	337,612		$	373,421
Dilutive stock options and restricted stock			535,075						674,392						545,326			684,859
Weighted-average common shares outstanding for diluted computations			132,759,877						134,262,250						132,831,569			135,314,226
Earnings per common share
Basic			$	0.23					$	0.96					$	2.55		$	2.77
Diluted			$	0.23					$	0.95					$	2.54		$	2.76

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Acquisition

On October 14, 2022, the Company completed the acquisition of EverWatch Corp. (“EverWatch”), a leading provider of advanced solutions to the defense and intelligence communities for approximately $444.8 million, net of post-closing adjustments and transaction costs incurred as part of the acquisition. The acquisition was funded with cash on hand. As a result of the transaction, EverWatch became a wholly owned subsidiary of Booz Allen Hamilton Inc.

Under the terms of the purchase agreement, the Company has 120 days after closing to provide proposed post-closing working capital adjustments to the sellers which are subject to dispute. The final purchase price allocations will be completed after the underlying information has been finalized and agreed upon by the sellers and the Company.

The following table summarizes the consideration and the preliminary allocation of the purchase price paid for EverWatch:

Cash consideration (gross of cash acquired)			$	444,847
Purchase price allocation:
Cash			4,779
Current assets			27,305
Operating lease right-of-use asset			7,894
Other long-term assets			4,119
Intangible assets			125,100
Deferred tax liabilities			(29,525)
Current liabilities			(11,625)
Operating lease liabilities - short-term			(1,362)
Operating lease liabilities - long-term			(6,532)
Total fair value of identifiable net assets acquired			$	120,153
Goodwill			$	324,694

The acquisition is accounted for under the acquisition method of accounting, which requires the total acquisition consideration to be allocated to the assets acquired and liabilities assumed based on an estimate of the acquisition date fair value, with the difference reflected in goodwill. The preliminary goodwill of $324.7 million is primarily attributable to EverWatch's specialized workforce and the expected synergies between the Company and EverWatch.

The Company preliminarily recognized $125.1 million of intangible assets which consists of contract assets and backlog, and will be valued using the excess earnings method discounted cash flow approach, incorporating Level 3 inputs as described under the fair value hierarchy of Topic 820. These unobservable inputs will reflect the Company's own judgment about which assumptions market participants would use in pricing an asset on a non-recurring basis. The intangible assets are expected to be amortized over the estimated useful life of 17 years.

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The valuation of assets acquired and liabilities assumed are preliminary and based on valuation estimates and assumptions. The accounting for business combinations requires estimates and judgments regarding expectations of

future cash flows of the acquired business, and the allocations of those cash flows to identifiable tangible and intangible assets. The estimates, assumptions and discount rate underlying the preliminary valuations are subject to collection of information necessary to complete the valuations (specifically related to projected financial information) within the measurement period, which is up to one year from the acquisition date. Although the Company does not currently expect material changes to the initial value of net assets acquired, the Company continues to evaluate assumptions related to the valuation of the assets acquired and liabilities assumed. Any adjustments to our estimates of purchase price allocation will be made in the periods in which the adjustments are determined, and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates.

Pro forma results of operations for this acquisition are not presented because the acquisition is not material to the Company's consolidated results of operations.

Divestitures

Middle East and North Africa Management Consulting Business

On September 1, 2022, the Company completed the divestiture of its management consulting business serving the Middle East and North Africa (“MENA”) region to Oliver Wyman, a global management consulting firm and a business of Marsh McLennan. The divestiture was substantially comprised of the contracts associated with the MENA business, the assets and liabilities associated with those contracts, and the workforce that provides services under those contracts.

As a result of this transaction, during the second quarter the Company de-recognized the assets and liabilities associated with the MENA business and recognized a pre-tax gain of $31.2 million, which is reflected in other income, net, on the condensed consolidated statement of operations. The consideration for the sale of the business is subject to customary working capital adjustments, which may impact the amount of gain recognized.

Managed Threat Services Business

On December 5, 2022, the Company completed the divestiture of its commercial Managed Threat Services (“MTS”) business to Security On-Demand. The divestiture was substantially comprised of the contracts associated with the MTS business, the assets and liabilities associated with those contracts, and the workforce that provides services under those contracts.

As a result of this transaction, during the third quarter the Company de-recognized the assets and liabilities associated with the MTS business and recognized a pre-tax gain of $4.6 million which is reflected in other income, net, on the condensed consolidated statement of operations. The consideration for the sale of the business is subject to customary working capital adjustments and contingent consideration, which may impact the amount of gain recognized.

Business Deconsolidation

In December 2022, the Company forfeited certain participating rights of a consolidated artificial intelligence software platform business which has unrelated third-party interest holders and is classified as a variable interest entity (VIE). As a result of this transaction, the Company determined that it is not the primary beneficiary of the VIE and thus de-recognized the assets, liabilities and non-controlling interest of this business. The Company recorded the fair value of our retained equity investment of $7.6 million which is accounted for under the measurement alternative. The resulting pre-tax gain, calculated as the investment value less the net de-recognized balances, was $8.9 million and is reflected in other income, net, on the condensed consolidated statement of operations.

Goodwill

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Accounts payable and other accrued expenses consisted of the following: 

			December 31, 2022						March 31, 2022
Vendor payables			$	482,245					$	539,524
Accrued expenses			504,335						363,092
Total accounts payable and other accrued expenses			$	986,580					$	902,616

Accrued expenses consisted primarily of the Company’s provision for claimed indirect costs (approximately $311.6 million and $290.4 million as of December 31, 2022 and March 31, 2022, respectively), and the reserve associated with the U.S. Department of Justice's investigation of the Company ($124.0 million as of December 31, 2022). See Note 15, “Commitments and Contingencies,” to the condensed consolidated financial statements for further discussion of this provision.

Accrued compensation and benefits consisted of the following: 

			December 31, 2022						March 31, 2022
Bonus			$	97,923					$	96,040
Retirement			109,251						48,169
Vacation			172,346						206,199
Other			50,615						88,226
Total accrued compensation and benefits			$	430,135					$	438,634

Debt consisted of the following: 

			December 31, 2022												March 31, 2022
			Interest Rate						Outstanding Balance						Interest Rate						Outstanding Balance
New Term Loan A			5.67		%				$	1,639,688					—		%				$	—
Existing Term Loan A Loans			—		%				—						1.71		%				1,241,398
Existing Term Loan B Loans			—		%				—						2.21		%				380,321
Senior Notes due 2028			3.88		%				700,000						3.88		%				700,000
Senior Notes due 2029			4.00		%				500,000						4.00		%				500,000
Less: Unamortized debt issuance costs and discount on debt									(17,977)												(21,647)
Total									2,821,711												2,800,072
Less: Current portion of long-term debt									(41,250)												(68,379)
Long-term debt, net of current portion									$	2,780,461											$	2,731,693

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Credit Agreement

On September 7, 2022 (the “Ninth Amendment Effective Date”), Booz Allen Hamilton Inc. (“Booz Allen Hamilton”), Booz Allen Hamilton Investor Corporation (“Investor”), and certain wholly owned subsidiaries of Booz Allen Hamilton, entered into the Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement dated as of July 31, 2012, as amended (the “Existing Credit Agreement” and, as amended, the “Credit Agreement”), with certain institutional lenders and Bank of America, N.A., as Administrative Agent, Collateral Agent, Issuing Lender, Refinancing Revolver Lender, New Refinancing Tranche A Term Lender and 2022 Supplemental Tranche A Lender. As of December 31, 2022, the Credit Agreement provided Booz Allen Hamilton with a $1,639.7 million Term Loan A (“New Term Loan A”) and a $1,000.0 million revolving credit facility (the “Revolving Credit Facility”), with a sub-limit for letters of credit of $200.0 million (collectively, the “Secured Credit Facility”). Booz Allen Hamilton’s obligations and the guarantors’ guarantees under the Credit Agreement are secured by a first priority lien on substantially all of the assets (including capital stock of subsidiaries) of Booz Allen Hamilton, Investor and the subsidiary guarantors, subject to certain exceptions set forth in the Credit Agreement and related documentation; such security is expected to be released in connection with Booz Allen Hamilton obtaining investment grade ratings from both Moody's and S&P.

Pursuant to the Ninth Amendment, (i) $1,000.0 million of revolving commitments outstanding under the Existing Credit Agreement were refinanced by a new tranche of revolving commitments (the “New Revolving Commitments” and the revolving credit loans made thereunder, the “New Revolving Loans”) in an aggregate amount of $1,000.0 million, with a sublimit for letters of credit of $200.0 million and (ii) approximately $1,225.3 million of Term Loan A loans (the “Existing Term Loan A Loans”) and $379.3 million of Term Loan B loans (the “Existing Term Loan B Loans”) outstanding under the Existing Credit Agreement were refinanced by a new tranche of Term Loan A loans in an aggregate amount, along with additional new tranche A term loans advanced by certain lenders, totaling $1,650.0 million. The majority of the proceeds of the New Term Loan A were used to prepay in full all of the Existing Term Loan A Loans and Existing Term Loan B Loans.

The Ninth Amendment extended the maturity of the New Term Loan A and the New Revolving Commitments to September 7, 2027. Voluntary prepayments of the New Term Loan A and the New Revolving Loans are permitted at any time, in minimum principal amounts, without premium or penalty.

The New Term Loan A will amortize in consecutive quarterly installments in an amount equal to (i) on the last business day of each full fiscal quarter that begins after the Ninth Amendment Effective Date but on or before the two year anniversary of the Ninth Amendment Effective Date, 0.625% of the stated principal amount of the New Term Loan A and (ii) on the last business day of each full fiscal quarter that begins after the two year anniversary of the Ninth Amendment Effective Date but before the five year anniversary of the Ninth Amendment Effective Date, 1.25% of the stated principal amount of the New Term Loan A. The remaining balance of the New Term Loan A will be payable upon maturity.

The rate at which the New Term Loan A and the New Revolving Loans bear interest will be based either on Term SOFR (subject to a 0.10% adjustment and a floor of zero) for the applicable interest period or a base rate (equal to the highest of (i) the administrative agent’s prime corporate rate, (ii) the overnight federal funds rate plus 0.50% and (iii) three-month Term SOFR (subject to a 0.10% adjustment and a floor of zero) plus 1.00%), in each case plus an applicable margin, payable at the end of the applicable interest period and in any event at least quarterly. The applicable margin for the New Term Loan A and the New Revolving Loans ranges from 1.00% to 2.00% for Term SOFR loans and zero to 1.00% for base rate loans, in each case based on the lower of (i) the applicable rate per annum determined pursuant to a consolidated total net leverage ratio grid and (ii) the applicable rate per annum determined pursuant to a ratings grid. Unused New Revolving Commitments are subject to a quarterly fee ranging from 0.10% to 0.35% based on the lower of (i) the applicable fee rate per annum determined pursuant to a consolidated total net leverage ratio grid and (ii) the applicable fee rate per annum determined pursuant to a ratings grid. Booz Allen Hamilton has also agreed to pay customary letter of credit and agency fees.

In connection with the Ninth Amendment, the Company accelerated the amortization of ratable portions of the Debt Issuance Costs, or DIC, and Original Issue Discount, or OID associated with the prior senior secured loan facilities of $3.4 million.These expenses are reflected in other expense, net in the condensed consolidated statement of operations for the three and nine months ended December 31, 2022. Additionally, the Company expensed third party debt issuance costs of $6.9 million that did not qualify for deferral, which are reflected in general and administrative costs in the condensed consolidated statement of operations for the three and nine months ended December 31, 2022.

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The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. In addition, Booz Allen Hamilton is required to meet a financial covenant at each quarter end based on a consolidated net total leverage ratio. As of December 31, 2022 and March 31, 2022, Booz Allen Hamilton was in compliance with all financial covenants associated with its debt and debt-like instruments. In connection with Booz Allen Hamilton obtaining investment grade ratings from both Moody's and S&P, activities restricted by certain negative covenants are expected to be permitted subject to pro forma compliance with the financial covenants and no events of default having occurred and continuing.

The following table summarizes interest payments made on the Company’s term loans:

			Three Months Ended December 31,												Nine Months Ended December 31,
			2022						2021						2022						2021
New Term Loan A			$	24,845					$	—					$	24,845					$	—
Existing Term Loan A			—						4,733						14,165						15,197
Existing Term Loan B			—						1,795						5,209						5,401
Total			$	24,845					$	6,528					$	44,219					$	20,598

Borrowings under the New Term Loan A, and if used, the Revolving Credit Facility, incur interest at a variable rate. As of December 31, 2022, Booz Allen Hamilton had interest rate swaps with an aggregate notional amount of $550.0 million. These instruments hedge the variability of cash outflows for interest payments on the Term Loans and Revolving Credit Facility. The Company's objectives in using cash flow hedges are to reduce volatility due to interest rate movements and to add stability to interest expense (See Note 9, “Derivatives,” to our condensed consolidated financial statements).

Senior Notes

For information on the terms, conditions, and restrictions of the Company's 4.000% Senior Notes due July 1, 2029 (the “Senior Notes due 2029”) and 3.875% Senior Notes due 2028 (the “Senior Notes due 2028”, and, together with the Senior Notes due 2029, the “Senior Notes”), see Note 10, “Debt,” of the Company’s consolidated financial statements included in the fiscal 2022 Form 10-K.

In connection with Booz Allen Hamilton obtaining investment grade ratings from both Moody's and S&P, certain negative covenants in the indentures governing the Senior Notes were suspended, and guarantees of the Senior Notes were released.

Interest Expense

Interest on debt and debt-like instruments consisted of the following:

			Three Months Ended December 31,												Nine Months Ended December 31,
			2022						2021						2022						2021
			(In thousands)												(In thousands)
New Term Loan A Interest Expense			$	20,733					$	—					$	39,210					$	—
Existing Term Loan A Loans Interest Expense			—						4,724						—						15,187
Existing Term Loan B Loans Interest Expense			—						1,795						5,186						5,401
Interest on Revolving Credit Facility			—						—						—						25
Senior Notes Interest Expense			11,781						11,781						35,344						31,121
Amortization of Debt Issuance Cost (DIC) and Original Issue Discount (OID) (1)			1,042						1,168						3,329						3,462
Interest Swap Expense			(1,648)						4,097						1,571						13,627
Other			123						112						388						378
Total Interest Expense			$	32,031					$	23,677					$	85,028					$	69,201

(1) DIC and OID on the Term Loans and senior notes are recorded as a reduction of long-term debt in the condensed consolidated balance sheet and are amortized ratably over the life of the related debt using the effective rate method. DIC on the Revolving Credit Facility is recorded as a long-term asset on the condensed consolidated balance sheet and amortized ratably over the term of the Revolving Credit Facility.

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The Company utilizes derivative financial instruments to manage interest rate risk related to its variable rate debt. The Company’s objectives in using these interest rate derivatives, which were designated as cash flow hedges, are to manage its exposure to interest rate movements and reduce volatility of interest expense. The aggregate notional amount of all interest rate swap agreements was $550.0 million as of December 31, 2022. The swaps have staggered maturities, ranging from June 30, 2023 to June 30, 2025.

The floating-to-fixed interest rate swaps involve the exchange of variable interest amounts from a counterparty for the Company making fixed-rate interest payments over the life of the agreements without exchange of the underlying notional amount and effectively convert a portion of the variable rate debt into fixed interest rate debt.

Derivative instruments are recorded in the condensed consolidated balance sheet on a gross basis at estimated fair value. As of December 31, 2022, $11.5 million and $6.5 million, were classified as other current assets and other long-term assets, respectively, on the condensed consolidated balance sheet. As of March 31, 2022, $4.1 million, $4.3 million and $39 thousand were classified as other long-term assets, other current liabilities, and other long-term liabilities, respectively, on the condensed consolidated balance sheet.

For interest rate swaps designated as cash flow hedges, the changes in the fair value of derivatives are recorded in Accumulated Other Comprehensive Income (Loss), or AOCI, net of taxes, and is subsequently reclassified into interest expense, net in the period that the hedged forecasted interest payments are made on the Company's variable-rate debt. The effect of derivative instruments on the accompanying condensed consolidated financial statements for the three and nine months ended December 31, 2022 and 2021 is as follows:

						Three Months Ended December 31,
Derivatives in Cash Flow Hedging Relationships			Location of Gain or Loss Recognized in Income on Derivatives			Amount of Pre-Tax Gain or (Loss) Recognized in AOCI on Derivatives						Amount of Pre-Tax Gain or (Loss) Reclassified from AOCI into Income (1)
						2022			2021			2022			2021
Interest rate swaps			Interest income (expense)			$	1,565		$	5,271		$	1,648		$	(4,097)

(1) The reclassifications from accumulated other comprehensive income (loss) to net income were reduced by tax benefit (expense) of ($0.4 million) and $1.1 million for the three months ended December 31, 2022 and 2021, respectively.

						Nine Months Ended December 31,
Derivatives in Cash Flow Hedging Relationships			Location of Gain or Loss Recognized in Income on Derivatives			Amount of Pre-Tax Gain or (Loss) Recognized in AOCI on Derivatives						Amount of Pre-Tax Gain or (Loss) Reclassified from AOCI into Income (2)
						2022			2021			2022			2021
Interest rate swaps			Interest income (expense)			$	16,704		$	3,496		$	(1,571)		$	(13,627)

(2) The reclassifications from accumulated other comprehensive loss to net income was reduced by taxes of $0.4 million and $3.6 million for the nine months ended December 31, 2022 and 2021, respectively.

Over the next 12 months, the Company estimates that $11.6 million will be reclassified as a decrease to interest expense. Cash flows associated with periodic settlements of interest rate swaps will be classified as operating activities in the condensed consolidated statement of cash flows.

The Company is subject to counterparty risk in connection with its interest rate swap derivative contracts. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The Company mitigates this credit risk by entering into agreements with credit-worthy counterparties and regularly reviews its credit exposure and the creditworthiness of the counterparties.

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The Company’s effective income tax rates were 25.6% and 18.9% for the three months ended December 31, 2022 and 2021, respectively, and 23.3% and 21.6% for the nine months ended December 31, 2022 and 2021, respectively. Our effective tax rates for these periods differ from the federal statutory rate of 21.0% primarily due to the inclusion of state and foreign income taxes and permanent rate differences, which are predominantly related to certain executive compensation and the accrual of reserves for uncertain tax positions, offset by research and development tax credits, excess tax benefits for employee share-based compensation, and the Foreign Derived Intangible Income deduction.

The Company is currently contesting tax assessments from the District of Columbia Office of Tax and Revenue (“DC OTR”) for fiscal years 2013 through 2015. The assessment relates to $11.7 million of taxes, net of federal tax benefits, as of December 31, 2022.

During fiscal 2022, the Company received notification that the District of Columbia Office of Administrative Hearings ruled in favor of the DC OTR. The Company is currently appealing the decision with the District of Columbia Court of Appeals. The Company intends to continue to vigorously defend this matter. Oral arguments will occur in calendar year 2023.

The Company has taken similar tax positions with respect to subsequent fiscal years. As of December 31, 2022, the Company does not maintain reserves for any uncertain tax positions related to the contested tax benefits related to 2013 through 2015, nor does it maintain reserves for the similar tax positions taken in the subsequent fiscal years. Management continues to evaluate this position quarterly to determine if a change in estimate is needed. If an adverse final resolution were to occur with respect to uncertain tax positions related to the contested tax benefits or the similar tax positions taken for fiscal years 2013 through 2020, the total potential future tax expense that would arise would be approximately $40.2 million to $58.8 million, net of federal benefits.

For the fiscal 2021 tax year, the Company generated a tax loss for U.S. Federal and state tax purposes resulting from the treatment of costs associated with property, plant, and equipment. As a result of a provision in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), the Company was allowed to carry this loss back to the five prior tax years (fiscal years 2016 to 2020). Accordingly, the Company recorded a long-term income tax receivable in fiscal 2021 (due to the uncertainty around expectations for the timing of refund receipt) which was largely offset by a corresponding deferred tax liability reflected within the property and equipment deferred tax liability in the Company's significant components of deferred income tax assets and liabilities. In October 2022, the Company received a partial federal tax refund of approximately $174.0 million plus interest for its carryback claim related to the above, which reduced the long-term income tax receivable on our Condensed Consolidated Balance Sheet as of December 31, 2022.

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All amounts recorded in other comprehensive income (loss) are related to the Company's post-retirement plans and interest rate swaps designated as cash flow hedges. The following table shows the changes in accumulated other comprehensive loss, net of tax:

			Three Months Ended December 31, 2022									Nine Months Ended December 31, 2022
			Post-retirement plans			Derivatives designated as cash flow hedges			Totals			Post-retirement plans			Derivatives designated as cash flow hedges			Totals
Beginning of period			$	8,807		$	13,334		$	22,141		$	8,811		$	(226)		$	8,585
Other comprehensive income before reclassifications(1)			2			1,155			1,157			—			12,337			12,337
Amounts reclassified from accumulated other comprehensive income (loss)			(2)			(1,217)			(1,219)			(4)			1,161			1,157
Net current-period other comprehensive income (loss)			—			(62)			(62)			(4)			13,498			13,494
End of period			$	8,807		$	13,272		$	22,079		$	8,807		$	13,272		$	22,079

(1) Changes in other comprehensive income before reclassification for derivatives designated as cash flow hedges are recorded net of tax expense of $0.4 million and $4.4 million for the three and nine months ended December 31, 2022, respectively.

			Three Months Ended December 31, 2021									Nine Months Ended December 31, 2021
			Post-retirement plans			Derivatives designated as cash flow hedges			Totals			Post-retirement plans			Derivatives designated as cash flow hedges			Totals
Beginning of period			$	(1,523)		$	(22,476)		$	(23,999)		$	(1,562)		$	(28,209)		$	(29,771)
Other comprehensive loss before reclassifications(2)			—			3,896			3,896			—			2,585			2,585
Amounts reclassified from accumulated other comprehensive loss			20			3,029			3,049			59			10,073			10,132
Net current-period other comprehensive income			20			6,925			6,945			59			12,658			12,717
End of period			$	(1,503)		$	(15,551)		$	(17,054)		$	(1,503)		$	(15,551)		$	(17,054)

(2) Changes in other comprehensive loss before reclassification for derivatives designated as cash flow hedges are recorded net of tax expense of $1.4 million and $0.9 million for the three and nine months ended December 31, 2021, respectively.

The following table summarizes stock-based compensation expense recognized in the condensed consolidated statements of operations: 

			Three Months Ended December 31,												Nine Months Ended December 31,
			2022						2021						2022						2021
Cost of revenue			$	9,091					$	7,235					$	26,227					$	19,832
General and administrative expenses			9,679						9,524						24,765						25,355
Total			$	18,770					$	16,759					$	50,992					$	45,187

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The following table summarizes the total stock-based compensation expense recognized in the condensed consolidated statements of operations by the following types of equity awards, including stock options, time-based and performance-based restricted stock awards. Compensation expense for performance-based awards is estimated at each reporting date using management's expectation of the probable achievement of the specified performance criteria of each tranche during the respective performance periods:

			Three Months Ended December 31,												Nine Months Ended December 31,
			2022						2021						2022						2021
Equity Incentive Plan Options			$	772					$	252					$	2,005					$	1,477
Restricted Stock and other awards			$	17,998					16,507						48,987						43,710
Total			$	18,770					$	16,759					$	50,992					$	45,187

As of December 31, 2022, there was $66.4 million of total unrecognized compensation cost related to unvested stock-based compensation agreements. The unrecognized compensation cost as of December 31, 2022 is expected to be fully amortized over the next 4.84 years. Absent the effect of accelerating stock compensation cost for any departures of employees who may continue to vest in their equity awards, the following table summarizes the unrecognized compensation cost and the weighted-average period the cost is expected to be amortized.

						December 31, 2022
						Unrecognized Compensation Cost						Weighted Average Remaining Period to be Recognized (in years)
Equity Incentive Plan Options						$	4,539					3.83
Restricted Stock Awards						61,897						1.81
Total						$	66,436

Equity Incentive Plan

As of December 31, 2022, there were 1.2 million EIP options outstanding, of which 0.6 million were unvested.

During the three months ended December 31, 2022, the Board of Directors granted 0.1 million restricted stock units to certain employees of the Company. The aggregate value of these awards was $15.0 million based on the grant date stock price.

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

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The financial instruments measured at fair value in the accompanying condensed consolidated balance sheets consist of the following:

			Recurring Fair Value Measurements as of December 31, 2022
			Level 1						Level 2						Level 3						Total
Assets:
Current derivative instruments (2)			$	—					$	11,483					$	—					$	11,483
Long-term deferred compensation plan asset (1)			19,392						—						—						19,392
Long term derivative instruments (2)			—						6,518						—						6,518
Total Assets			$	19,392					$	18,001					$	—					$	37,393
Liabilities:
Long-term deferred compensation plan liability (1)			19,392						—						—						19,392
Total Liabilities			$	19,392					$	—					$	—					$	19,392

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			Recurring Fair Value Measurements as of March 31, 2022
			Level 1						Level 2						Level 3						Total
Assets:
Long-term deferred compensation plan asset (1)			$	16,512					$	—					$	—					$	16,512
Long term derivative instruments (2)			—						4,088						—						4,088
Total Assets			$	16,512					$	4,088					$	—					$	20,600
Liabilities:
Current derivative instruments (2)			$	—					$	4,324					$	—					$	4,324
Long-term derivative instruments (2)			—						39						—						39
Long-term deferred compensation plan liability (1)			16,512						—						—						16,512
Total Liabilities			$	16,512					$	4,363					$	—					$	20,875

(1) Investments in this category consist primarily of mutual funds whose fair values are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. These assets and liabilities represent investments held in a consolidated trust to fund the Company's non-qualified deferred compensation plan and are recorded in other long-term assets and other long-term liabilities on our condensed consolidated balance sheets.

(2) The Company’s interest rate swaps are considered over-the-counter derivatives and fair value is estimated based on the present value of future cash flows using a model-derived valuation that uses Level 2 observable inputs such as interest rate yield curves. See Note 9, “Derivatives,” to the condensed consolidated financial statements for further discussion on the Company’s derivative instruments designated as cash flow hedges.

The fair value of the Company's cash and cash equivalents, which are Level 1 inputs, approximated its carrying values at December 31, 2022 and March 31, 2022.

The Company's debt is carried at amortized cost and is measured at fair value quarterly for disclosure purposes. The estimated fair values of debt are determined using quoted prices or other market information obtained from recent trading activity of the debt in markets that are not active (Level 2 inputs). The fair value is corroborated by prices derived from the interest rate spreads of recently completed leveraged loan transactions of a similar credit profile, industry, and terms to that of the Company. The fair value of the Senior Notes due 2029 and the Senior Notes due 2028 are determined using quoted prices or other market information obtained from recent trading activity in the high-yield bond market (Level 2 inputs). The carrying amount and estimated fair value of debt consists of the following:

			December 31, 2022												March 31, 2022
			Carrying Amount						Estimated Fair Value						Carrying Amount						Estimated Fair Value
New Term Loan A			$	1,639,688					$	1,602,795					$	—					$	—
Existing Term Loan A Loans			—						—						1,241,398						1,218,122
Existing Term Loan B Loans			—						—						380,321						379,461
3.88% Senior Notes due 2028			700,000						624,092						700,000						676,228
4.00% Senior Notes due 2029			500,000						443,125						500,000						488,335

Letters of Credit and Third-Party Guarantees

As of December 31, 2022 and March 31, 2022, the Company was contingently liable under open standby letters of credit and bank guarantees issued by our banks in favor of third parties that totaled $6.1 million and $8.4 million, respectively. These letters of credit and bank guarantees primarily support insurance and bid and performance obligations. At both December 31, 2022 and March 31, 2022, approximately $1.0 million of these instruments reduced the available borrowings under the Revolving Credit Facility. The remainder is guaranteed under a separate $20.0 million facility of which $14.9 million and $12.6 million were available to the Company at December 31, 2022 and March 31, 2022, respectively.

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Government Contracting Matters - Provision for Claimed Indirect Costs

For both the three months ended December 31, 2022 and 2021, approximately 97% of the Company's revenue was generated from contracts where the end user was an agency or department of the U.S. government, including contracts where the Company performed either as a prime contractor or subcontractor, and regardless of the geographic location in which the work was performed. For both the nine months ended December 31, 2022 and 2021, approximately 97% of the Company's revenue was generated from such contracts. As noted in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022, in the ordinary course of business, agencies of the U.S. government, including the Defense Contract Audit Agency (DCAA), audit the Company’s claimed indirect costs and conduct inquiries and investigations of our business practices with respect to government contracts to determine whether the Company's operations are conducted in accordance with these requirements and the terms of the relevant contracts. Management believes it has recorded the appropriate provision for claimed indirect costs for any audit, inquiry, or investigation of which it is aware that may be subject to any reductions and/or penalties. As of December 31, 2022 and March 31, 2022, the Company had recorded liabilities of approximately $311.6 million and $290.4 million, respectively, for estimated adjustments to claimed indirect costs based on its historical DCAA audit results, including the final resolution of such audits with the Defense Contract Management Agency, for claimed indirect costs incurred subsequent to fiscal 2011, and for contracts not yet closed that are subject to audit and final resolution.

Litigation

Our performance under U.S. government contracts and compliance with the terms of those contracts and applicable laws and regulations are subject to continuous audit, review, and investigation by the U.S. government, which may include such investigative techniques as subpoenas or civil investigative demands. Given the nature of our business, these audits, reviews, and investigations may focus, among other areas, on various aspects of procurement integrity, labor time reporting, sensitive and/or classified information access and control, executive compensation, and post government employment restrictions. We are not always aware of our status in such matters, but we are currently aware of certain pending audits and investigations involving labor time reporting, procurement integrity, and classified information access. In addition, from time to time, we are also involved in legal proceedings and investigations arising in the ordinary course of business, including those relating to employment matters, relationships with clients and contractors, intellectual property disputes, and other business matters. These legal proceedings seek various remedies, including claims for monetary damages in varying amounts, none of which are considered material, or are unspecified as to amount. Although the outcome of any such matter is inherently uncertain and may be materially adverse, based on current information, we do not expect any of the currently ongoing audits, reviews, investigations, or litigation to have a material adverse effect on our financial condition and results of operations. As of December 31, 2022 and March 31, 2022, there were no material amounts accrued in the condensed consolidated financial statements related to these proceedings. As previously disclosed in Note 20, “Commitments and Contingencies,” to the consolidated financial statements of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with these matters.

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