BOOZ ALLEN HAMILTON HOLDING CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, and liquidity and capital resources. You should read this discussion in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report.

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements.

These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 filed with the Securities and Exchange Commission on May 30, 2012, or Annual Report, and under Part II, "Item 1A. Risk Factors," and "- Special Note Regarding Forward Looking Statements" of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our fiscal year ends March 31 and, unless otherwise noted, references to years or fiscal are for fiscal years ended March 31. See "-Results of Operations." Overview We are a leading provider of management and technology consulting services to the U.S. government in the defense, intelligence, and civil markets.

Additionally, we provide management and technology consulting services to major corporations, institutions, and not for profit organizations. As the needs of our clients have grown more complex, we have developed deep expertise in strategy and organization, analytics, technology, engineering, and operations.

Our acquisition of the Defense Systems Engineering and Support, or DSES, division of ARINC Incorporated, effective November 30, 2012, will further enhance our existing engineering capabilities and defense market position.

Leveraging our 99-year consulting heritage and a talent base of approximately 24,800 people, we deploy our deep domain knowledge, functional expertise, and experience to help our clients achieve their objectives. 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 a collaborative culture, supported by our operating model, which helps our professionals identify and respond to emerging trends across the markets we serve and deliver enduring results for our clients.

Financial and Other Highlights Revenue decreased 3.5% from the three months ended December 31, 2011 to the three months ended December 31, 2012 and decreased 2.5% from the nine months ended December 31, 2011 to the nine months ended December 31, 2012. We continue to focus on cost reduction efforts and efficiency initiatives which includes effective management of our capacity and efficient management of our costs.

Capacity management and other cost reduction activities continued throughout the current period, and may influence future periods, due to the continuing trends of fiscal uncertainty and cost cutting in our principal markets. The outcome of these efforts in the three and nine months ended December 31, 2012 have resulted in a net decline in our headcount, which has led to declines in billable hours and therefore a decline in our direct labor. Each of these factors directly results in revenue declines. In this environment, we have also continued to focus on the effective deployment of our consulting staff to minimize the amount of time our staff spend on non-revenue producing activities. This reduction in unbillable time along with efficient use of our indirect costs, contributes to lower indirect costs, and most importantly a lower ratio of indirect costs to direct labor. Reductions in indirect costs have a direct correlation to a reduction of revenue recognized on our large portfolio of cost-reimbursable contracts. Substantially all of our revenue and backlog continues to be derived from services and solutions provided to client organizations across the U.S.

government, primarily by our consulting staff and, to a lesser extent, our subcontractors. The mix of revenue generated by our consulting staff and subcontractors affects our operating margin, as the portion of our operating income derived from fees we earn on services provided by our subcontractors is significantly less than the operating income derived from direct consulting staff labor. The decline in our revenue described above was partially offset by revenue from our acquisition of DSES that closed on November 30, 2012.

Operating income grew 18.7% to $116.6 million in the three months ended December 31, 2012 from $98.2 million in the three months ended December 31, 2011, which reflects a 160 basis point increase in operating margin to 8.4% from 6.8% in the comparable periods. Operating income grew 15.0% to $333.4 million in the nine months ended December 31, 2012 from $290.0 million in the nine months ended December 31, 2011, which reflects a 120 basis point increase in operating margin to 7.9% from 6.7% in the comparable period. The improvement in operating margin was due to increased contract profitability 17 -------------------------------------------------------------------------------- due to disciplined cost management of indirect spending, as described above, as well as decreases in incentive compensation costs. Our effective management of other indirect costs and lower ratio of indirect costs to direct labor produces higher margins on our time-and-material contracts and ultimately produces higher margins on our fixed-price contracts. The factors contributing to the increased operating margin were partially offset by increases in depreciation expense due to facility expansion in previous years, causing a higher increase in depreciation for fiscal 2013, and transaction costs incurred in connection with the acquisition of DSES.

Cash provided by operations increased $146.9 million to $398.9 million for the nine months ended December 31, 2012 from $252.0 million for the nine months ended December 31, 2011. The increase in cash provided by operations was a result of overall profitability of our contracts, our ability to invoice and collect from clients in a timely manner, and our effective management of vendor payments.

Non-GAAP Measures We publicly disclose certain non-GAAP financial measurements, including Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted Earnings Per Share, or EPS, because management uses these measures for business planning purposes, including to manage our business against internal projected results of operations and measure our performance. We view Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS as measures of our core operating business, which exclude the impact of the items detailed below, as these items are generally not operational in nature. These non-GAAP measures also provide another basis for comparing period to period results by excluding potential differences caused by non-operational and unusual or non-recurring items. We also utilize and discuss Free Cash Flow, because management uses this measure for business planning purposes, measuring the cash generating ability of the operating business, and measuring liquidity generally.

We present these supplemental measures because we believe that these measures provide investors with important supplemental information with which to evaluate our performance, long term earnings potential, or liquidity, as applicable, and to enable them to assess our performance on the same basis as management. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance or liquidity, as applicable, investors should (i) evaluate each adjustment in our reconciliation of operating and net income to Adjusted Operating Income, Adjusted EBITDA and Adjusted Net Income, and net cash provided by operating activities to Free Cash Flows, and the explanatory footnotes regarding those adjustments, each as defined under GAAP, (ii) use Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS in addition to, and not as an alternative to, operating income, net income or diluted EPS, as a measure of operating results, and (iii) use Free Cash Flows in addition to, and not as an alternative to, net cash provided by operating activities as a measure of liquidity, each as defined under GAAP. We have defined the aforementioned non-GAAP measures as follows: • "Adjusted Operating Income" represents operating income before (i) certain stock option-based and other equity-basedcompensation expenses, (ii) adjustments related to the amortization of intangible assets, and (iii) any extraordinary, unusual, or non-recurring items. We prepare Adjusted Operating Income to eliminate the impact of items we do not consider indicative of ongoing operating performance due to their inherent unusual, extraordinary, or non-recurring nature or because they result from an event of a similar nature.

• "Adjusted EBITDA" represents net income before income taxes, net interest and other expense, and depreciation and amortization and before certain other items, including: (i) certain stock option-based and other equity-based compensation expenses, (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, and (iii) 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.

• "Adjusted Net Income" represents net income before: (i) certain stock option-based and other equity-based compensation expenses, (ii) transaction costs, fees, losses, and expenses, including fees associated with debt prepayments, (iii) adjustments related to the amortization of intangible assets, (iv) amortization orwrite-off of debt issuance costs and write-off of original issue discount, and (v) any extraordinary, unusual, or non-recurring items, in each case net of the tax effect calculated using an assumed effective tax rate. We prepare Adjusted Net Income to eliminate the impact of items, net of tax, we do not consider indicative of ongoing operating performance due to their inherent unusual,extraordinary, or non-recurring nature or because they result from an event of a similar nature.

18-------------------------------------------------------------------------------- • "Adjusted Diluted EPS" represents diluted EPS calculated using Adjusted Net Income as opposed to net income. Additionally, Adjusted Diluted EPS does not contemplate any adjustments to net income as required under the two-class method as disclosed in thefootnotes to the financial statements.

• "Free Cash Flow" represents the net cash generated from operating activities less the impact of purchases of property andequipment.

Below is a reconciliation of Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Three Months Ended Nine Months Ended December 31, December 31, (Amounts in thousands, except share and per share data) 2012 2011 2012 2011 (Unaudited) (Unaudited) Adjusted Operating Income Operating Income $ 116,596 $ 98,188 $ 333,361 $ 289,975 Certain stock-based compensation expense (a) 1,086 2,418 4,944 11,589 Amortization of intangible assets (b) 3,125 4,091 9,384 12,273 Transaction expenses (c) - - 2,725 - Adjusted Operating Income $ 120,807 $ 104,697 $ 350,414 $ 313,837 EBITDA & Adjusted EBITDA Net income $ 56,184 $ 62,860 $ 164,245 $ 189,328 Income tax expense 38,815 23,531 110,636 67,971 Interest and other, net 21,597 11,797 58,480 32,676 Depreciation and amortization 18,127 19,530 54,243 55,924 EBITDA 134,723 117,718 387,604 345,899 Certain stock-based compensation expense (a) 1,086 2,418 4,944 11,589 Transaction expenses (c) - - 2,725 - Adjusted EBITDA $ 135,809 $ 120,136 $ 395,273 $ 357,488 Adjusted Net Income Net income $ 56,184 $ 62,860 $ 164,245 $ 189,328 Certain stock-based compensation expense (a) 1,086 2,418 4,944 11,589 Transaction expenses (c) - - 2,725 - Amortization of intangible assets (b) 3,125 4,091 9,384 12,273 Amortization or write-off of debt issuance costs and write-off of original issue discount 1,667 1,202 11,493 3,602 Net gain on sale of state and local transportation business (d) - - - (5,681 ) Release of income tax reserves (e) - (11,085 ) - (35,133 ) Adjustments for tax effect (f) (2,351 ) (3,084 ) (11,419 ) (10,985 ) Adjusted Net Income $ 59,711 $ 56,402 $ 181,372 $ 164,993 Adjusted Diluted Earnings Per Share Weighted-average number of diluted shares outstanding 145,063,515 141,799,725 144,116,057 140,996,611 Adjusted Net Income Per Diluted Share (g) $ 0.41 $ 0.40 $ 1.26 $ 1.17 Free Cash Flow Net cash provided by operating activities $ 9,186 $ 74,902 $ 398,934 $ 252,019 Less: Purchases of property and equipment (6,282 ) (21,918 ) (20,657 ) (65,558 ) Free Cash Flow $ 2,904 $ 52,984 $ 378,277 $ 186,461 19--------------------------------------------------------------------------------(a) Reflects stock-based compensation expense for options for Class A Common Stock and restricted shares, in each case, issued in connection with the Acquisition of our Company by The Carlyle Group (the Acquisition) under the Officers' Rollover Stock Plan. Also reflects stock-based compensation expense for Equity Incentive Plan Class A Common Stock options issued in connection with the Acquisition under the Equity Incentive Plan.

(b) Reflects amortization of intangible assets resulting from the Acquisition.

(c) Reflects debt refinancing costs incurred in connection with the Recapitalization Transaction consummated on July 31, 2012.

(d) Nine months ended December 31, 2011 reflects the gain on sale of our state and local transportation business, net of the associated tax benefit of $1.6 million.

(e) Reflects the release of income tax reserves.

(f) Reflects tax effect of adjustments at an assumed marginal tax rate of 40%.

(g) Excludes an adjustment of approximately $475,000 and $9.0 million of net earnings for the three and nine months ended December 31, 2012, respectively, associated with the application of the two-class method for computing diluted earnings per share.

Recent Developments The following recent developments occurred after December 31, 2012, which may cause our future results of operations to differ from our historical results of operations discussed under "- Results of Operations." On January 29, 2013, our Board of Directors authorized and declared a regular quarterly cash dividend in the amount of $0.09 per share. The quarterly dividend is payable on February 28, 2013 to shareholders of record on February 11, 2013.

Factors and Trends Affecting Our Results of Operations Our results of operations have been, and we expect them to continue to be, affected by the following factors, which may cause our future results of operations to differ from our historical results of operations discussed under "- Results of Operations." Business Environment and Key Trends in Our Markets We believe that the following trends and developments in the U.S. government services industry and our markets may influence our future results of operations: • budget deficits and the growing U.S. national debt increasing pressure on the U.S. government to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions; • changes in the relative mix of overall U.S. government spending and areas of spending growth, with lower spending on homeland security, intelligence and defense-related programs as overseas operations end, and continued increased spending on cyber-security, advanced analytics, technology integration and healthcare; • cost cutting and efficiency initiatives and other efforts to streamline the U.S. defense and intelligence infrastructure, including the initiatives implemented by the Secretary of Defense or reductions in defense budgets resulting from Congressional action; • Continued uncertainty around the timing, extent and nature of Congressional and other U.S. government action to address budgeting constraints and the U.S. government's ability to incurindebtedness in excess of its current limit and the U.S. deficit, including, in the absence of Congressional action to the contrary, material reductions in defense budgets resulting from the commencement on March 2, 2013 of automatic sequestration as required under the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012); • delays in the completion of the U.S. government's budget process, which has in the past and could in the future delayprocurement of the products, services, and solutions we provide; • existing and proposed fiscal constraints by the U.S. government and uncertainty about the size of future budget reductions may cause clients to invest appropriated funds on a less consistent or rapid basis, or not at all, particularly when considering long-term initiatives, not issue task orders in sufficient volume to reach current contract ceilings, and delay requests for newproposals and contract awards, relying on short-term extensions of current contracts instead; • the federal focus on refining the definition of "inherently governmental" work will continue to drive pockets ofinsourcing in various agencies, particularly in the intelligence market; 20-------------------------------------------------------------------------------- • cost cutting and efficiency and effectiveness efforts by U.S.

civilian agencies with a focus on increased use of performance measurement, "program integrity" efforts to reduce waste, fraud and abuse in entitlement programs, and renewed focus on improving procurement practices for and interagency use of IT services, including through the use of cloud based options and data center consolidation; • 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, managing federal health care cost growth and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare; • 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 consulting staff and, to a lesser extent, our subcontractors. Funding for our contracts and task orders is generally linked to trends in budgets and spending across various U.S. government agencies and departments. We provide services under a large portfolio of contracts and contract vehicles to a broad client base, and we believe that our diversified contract and client base lessens potential volatility in our business; however, a reduction in the amount of services that we are contracted to provide to the U.S. government or any of our significant U.S. government clients could have a material adverse effect on our business and results of operations. In particular, the Department of Defense is one of our significant clients, and the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012) could impose an estimated $500 billion to $600 billion in automatic federal defense spending cuts between 2013 and 2021 to the extent that automatic sequestration required by the act commences on March 2, 2013. A reduction in the amount of services that we are contracted to provide to the Department of Defense could have a material adverse effect on our business and results of operations, and given the uncertainty of how these automatic reductions may be applied, we are unable to predict the nature or magnitude of the potential adverse effect.

Contract Types We generate revenue under the following three basic types of contracts: • Cost-Reimbursable Contracts. Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract, up to a ceiling based on the amount that has been funded, plus a fee. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-fixed-fee and cost-plus-award-fee, both of which reimburse allowable costs and provide for a fee. The fee under each type of cost-reimbursable contract is generally payable upon completion of services in accordance with the terms of the contract. Cost-plus-fixed-fee contracts offer no opportunity for payment beyond the fixed fee.

Cost-plus-award-fee contracts also provide for an award fee that varies within specified limits based upon the client's assessment of our performance against a predetermined set of criteria, such as targets for factors like cost, quality, schedule, and performance.

• Time-and-Materials Contracts. Under atime-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 21--------------------------------------------------------------------------------contracts have a performance-based component, pursuant to which we can earn incentive payments or incur financial penalties based on our performance.

Fixed-price level of effort contracts require us to provide a specified level of effort (i.e., labor hours), over a stated period of time, for a fixed price.

The amount of risk and potential reward varies under each type of contract.

Under cost-reimbursable contracts, there is limited financial risk, because we are reimbursed for all allowable costs up to a ceiling. However, profit margins on this type of contract tend to be lower than on time-and-materials and fixed-price contracts. Under time-and-materials contracts, we are reimbursed for the hours worked using the predetermined hourly rates for each labor category.

In addition, we are typically reimbursed for other contract direct costs and expenses at cost. We assume financial risk on time-and-materials contracts because our labor costs may exceed the negotiated billing rates. Profit margins on well-managed time-and-materials contracts tend to be higher than profit margins on cost-reimbursable contracts as long as we are able to staff those contracts with people who have an appropriate skill set. Under fixed-price contracts, we are required to deliver the objectives under the contract for a pre-determined price. Compared to time-and-materials and cost-reimbursable contracts, fixed-price contracts generally offer higher profit margin opportunities because we receive the full benefit of any cost savings but generally involve greater financial risk because we bear the impact of any cost overruns. In the aggregate, the contract type mix in our revenue for any given period will affect that period's profitability. Over time we have experienced a relatively stable contract mix. However, over the last twelve months we have experienced a shift from time-and-materials contracts to cost-reimbursable contracts.

The table below presents the percentage of total revenue for each type of contract: Three Months Ended Nine Months Ended December 31, December 31, 2012 2011 2012 2011 Cost-reimbursable (1) 58 % 54 % 57 % 54 % Time-and-materials 27 % 31 % 28 % 31 % Fixed-price (2) 15 % 15 % 15 % 15 % (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 services to our clients through a large number of single award contracts and contract vehicles and multiple award contract vehicles. Most of our revenue is generated under indefinite delivery/indefinite quantity, or ID/IQ, contract vehicles, which include multiple award government wide acquisition contract vehicles, or GWACs, and General Services Administration Multiple Award Schedule Contracts, or GSA schedules, and certain single award contracts. GWACs and GSA schedules are available to all U.S. government agencies. Any number of contractors typically compete under multiple award ID/IQ contract vehicles for task orders to provide particular services, and we earn revenue under these contract vehicles only to the extent that we are successful in the bidding process for task orders.

We generate revenue under our contracts and task orders through our provision of services as both a prime contractor and subcontractor, as well as from the provision of services by subcontractors under contracts and task orders for which we act as the prime contractor. The mix of these types of revenue affects our operating margin. Substantially all of our operating margin is derived from direct consulting staff labor, as the portion of our operating margin derived from fees we earn on services provided by our subcontractors is not significant.

We view growth in direct consulting staff labor as the primary driver of earnings growth. Direct consulting staff labor growth is driven by consulting staff headcount growth, after attrition, and total backlog growth.

Our People Revenue from our contracts is derived from services delivered by consulting staff and, to a lesser extent, from our subcontractors. Our ability to hire, retain, and deploy talent with skills appropriately aligned with client needs is critical to our ability to grow our revenue. We continuously evaluate whether our talent base is properly sized and appropriately compensated, and contains an optimal mix of skills to be cost competitive and meet the rapidly evolving needs of our clients.We seek to achieve that result through recruitment and management of capacity and compensation. As of December 31, 2012 and 2011, we employed approximately 24,800 and 25,800 people, respectively, of which approximately 22,400 and 23,300, respectively, were consulting staff. Our headcount as of December 31, 2012 is inclusive of the approximately 900 employees that joined us as a result of the DSES acquisition.

22 -------------------------------------------------------------------------------- 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, which includes acquired backlog from the Company's acquisition of DSES made during the three months ended December 31, 2012: As of December 31 2012 2011 (In millions) Backlog: Funded $ 3,152 $ 2,971 Unfunded (1) 3,614 3,717 Priced options 6,156 5,527 Total backlog $ 12,922 $ 12,215 (1) Reflects a reduction by management to the revenue value of orders for services under two existing single award ID/IQ contracts the Company has had for several years, based on an established pattern of funding under these contracts by the U.S. government.

Our backlog includes orders under contracts that in some cases extend for several years. The U.S. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

We view growth in total backlog and consulting staff headcount as the two key measures of our potential business growth. Growing and deploying consulting staff is the primary means by which we are able to recognize profitable revenue growth. To the extent that we are able to hire additional consulting staff and deploy them against funded backlog, we generally recognize increased revenue.

Total backlog, including backlog from the DSES acquisition of $1.53 billion, increased by 5.8% from December 31, 2011 to December 31, 2012. Funded backlog of $3.15 billion, including funded backlog from the DSES acquisition of $247.3 million, increased by 6.1% from December 31, 2011 to December 31, 2012.

Conversions to funded backlog during the twelve months ended December 31, 2012, excluding the impact of funded backlog from acquisitions, totaled $5.7 billion in comparison to $6.0 billion for the comparable period, with the decrease due to a lower conversion of unfunded backlog to funded backlog, the award of new contracts and task orders under which funding was appropriated, and 23 -------------------------------------------------------------------------------- the exercise and subsequent funding of priced options. We report internally on our backlog on a monthly basis and review backlog upon occurrence of certain events to determine if any adjustments are necessary.

We cannot predict with any certainty the portion of our backlog that we expect to recognize as revenue in any future period and we cannot guarantee that we will recognize any revenue from our backlog. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all are: program schedule changes, contract modifications, and our ability to assimilate and deploy new consulting staff against funded backlog; cost cutting initiatives and other efforts to reduce U.S. government spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of the U.S. government's budgeting process and the use of continuing resolutions by the U.S. government to fund its operations. Funded backlog includes orders under contracts for which the period of performance has expired, and we may not recognize revenue on the funded backlog that includes such orders due to, among other reasons, the tardy submission of invoices by our subcontractors and the expiration of the relevant appropriated funding in accordance with a pre-determined expiration date such as the end of the U.S.

government's fiscal year. The revenue value of orders included in funded backlog that has not been recognized as revenue due to period of performance expirations has not exceeded approximately 5.8% of funded backlog as of the end of any of the eight fiscal quarters preceding the fiscal quarter ended December 31, 2012.

In our recent experience, none of the following additional risks have had a material negative effect on our ability to realize revenue from our funded backlog: the unilateral right of the U.S. government to cancel multi-year contracts and related orders or to terminate existing contracts for convenience or default; in the case of unfunded backlog, the potential that funding will not be made available; and, in the case of priced options, the risk that our clients will not exercise their options.

Operating Costs and Expenses Costs associated with compensation and related expenses for our people are the most significant component of our operating costs and expenses. The principal factors that affect our costs are additional people as we grow our business and are awarded new contracts, task orders, and additional work under our existing contracts, and the hiring of people with specific skill sets and security clearances as required by our additional work. In conjunction with our initial public offering, our Board of Directors adopted a new equity compensation plan.

The equity compensation component of the new plan has reduced officer-related compensation expense included in cost of revenue and general and administrative expenses over the near term with such expense reduction to reverse over time.

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 directsubcontractor expenses, travel expenses, and other expenses incurred to perform on contracts.

• General and Administrative Expenses. General andadministrative expenses include indirect labor of executive management and corporate administrative functions, marketing and bid and proposal costs, and other discretionary spending.

• Depreciation and Amortization. Depreciation and amortization includes the depreciation of computers, leaseholdimprovements, furniture and other equipment, and the amortization of internally developed software, as well as third-party software that we use internally, and of identifiable long-lived intangible assets over their estimated useful lives.

Seasonality The U.S. government's fiscal year ends on September 30 of each year. 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. government's fiscal year end as we pursue new contract opportunities being awarded shortly after the U.S. government fiscal year end as new opportunities are expected to have funding appropriated in the U.S. government's subsequent fiscal year. We may continue to experience this seasonality in future periods, and our future periods may be affected by it.

24 -------------------------------------------------------------------------------- Critical Accounting Estimates and Policies The Company has engaged in business acquisition activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition, as goodwill presents the excess of the purchase price of an acquired business over the fair value of its net tangible and identifiable intangible assets.

Except for the above, there have been no material changes during the period covered by this Quarterly Report to the information disclosed in the Critical Accounting Estimates and Policies section in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report.

Results of Operations We completed our acquisition of DSES on November 30, 2012. The operating results of DSES were included in our condensed consolidated statements of operations from the date of closing through December 31, 2012. The following table sets forth items from our condensed consolidated statements of operations for the periods indicated: Three Months Ended Nine Months Ended December 31, Percent December 31, Percent 2012 2011 Change 2012 2011 Change (Unaudited) (Unaudited) (Unaudited) (Unaudited) (In thousands) (In thousands) Revenue $ 1,392,695 $ 1,442,718 (3.5 )% $ 4,212,769 $ 4,318,598 (2.5 )% Operating costs and expenses: Cost of revenue 692,920 729,977 (5.1 )% 2,122,356 2,172,450 (2.3 )% Billable expenses 382,520 370,540 3.2 % 1,114,424 1,143,641 (2.6 )% General and administrative expenses 182,532 224,483 (18.7 )% 588,385 656,608 (10.4 )% Depreciation and amortization 18,127 19,530 (7.2 )% 54,243 55,924 (3.0 )% Total operating costs and expenses 1,276,099 1,344,530 (5.1 )% 3,879,408 4,028,623 (3.7 )% Operating income 116,596 98,188 18.7 % 333,361 289,975 15.0 % Interest expense (21,731 ) (12,035 ) 80.6 % (50,788 ) (36,523 ) 39.1 % Other, net 134 238 (43.7 )% (7,692 ) 3,847 (299.9 )% Income before income taxes 94,999 86,391 10.0 % 274,881 257,299 6.8 % Income tax expense 38,815 23,531 65.0 % 110,636 67,971 62.8 % Net income $ 56,184 $ 62,860 (10.6 )% $ 164,245 $ 189,328 (13.2 )% Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011 Revenue Revenue decreased to $1,392.7 million from $1,442.7 million, or a 3.5% decrease.

The decrease was primarily driven by a lower rate of indirect expenses which had a direct correlation to the reduction of revenue on our large portfolio of cost-reimbursable contracts. The lower rate of indirect expenses is primarily attributable to the cost reduction actions the Company implemented in late fiscal 2012 and continued focus on effective capacity and cost management, partially offset by revenue from the acquisition of DSES. Conversions to funded backlog during the twelve months ended December 31, 2012, excluding the impact of any funded backlog from acquisitions, totaled $5.7 billion in comparison to $6.0 billion for the comparable 25 -------------------------------------------------------------------------------- period, with the decrease due to challenging and uncertain market conditions which is contributing to a lower conversion of unfunded backlog to funded backlog, the award of new contracts and task orders under which funding was appropriated, and the exercise and subsequent funding of priced options.

Cost of Revenue Cost of revenue decreased to $692.9 million from $730.0 million, or a 5.1% decrease. This decrease was primarily due to a decrease in salaries and salary related benefits of $32.6 million, a decrease in incentive compensation costs of $13.8 million, and a decrease in employer retirement plan contributions of $3.9 million. The decreases were offset by increases in other direct consulting staff expenses of $13.4 million. The decrease in incentive compensation costs was due to reduced headcount in the senior ranks associated with the cost restructuring plan that was implemented during fiscal 2012, and a decrease in the incentive compensation accrual rates in fiscal 2013 as compared to fiscal 2012 largely in response to lower revenue growth due to the challenging and uncertain market conditions for government contractors, which has had an impact on our achievement of our annual incentive plan targets. The decrease in employer retirement plan contributions was due to a decrease in the number of employees who completed one year of service and became eligible to participate in our defined contribution plan, the Employees' Capital Accumulation Plan, or ECAP.

Cost of revenue as a percentage of revenue was 49.8% and 50.6% in the three months ended December 31, 2012 and 2011, respectively.

Billable Expenses Billable expenses increased to $382.5 million from $370.5 million, or a 3.2% increase. This increase was primarily due to increases in subcontractor-related expenses of $25.2 million offset by decreases in other billable expenses of $13.2 million incurred to perform on contracts. The increase in direct subcontractor-related expenses was in support of growth on existing and new contracts and task orders during the three months ended December 31, 2012.

Billable expenses as a percentage of revenue were 27.5% and 25.7% in the three months ended December 31, 2012 and 2011, respectively.

General and Administrative Expenses General and administrative expenses decreased to $182.5 million from $224.5 million, or an 18.7% decrease. This decrease was primarily due to a decrease of $36.0 million in other business-related expenses and professional fees attributable to the Company's disciplined management of corporate-related expenditures, a decrease in salaries and salary-related benefits of $3.7 million, and a decrease in incentive compensation costs of $2.3 million. The decrease in incentive compensation costs was due to reduced headcount in the senior ranks associated with the cost restructuring plan that was implemented during fiscal 2012, and a decrease in the incentive compensation accrual rates in fiscal 2013 as compared to fiscal 2012 for the same reasons described above under Cost of Revenue. General and administrative expenses as a percentage of revenue were 13.1% and 15.6% for the three months ended December 31, 2012 and 2011, respectively.

Depreciation and Amortization Depreciation and amortization decreased to $18.1 million from $19.5 million, or a 7.2% decrease. This decrease was primarily due to decreased capital expenditures due to the additional facility expansion to support the increase in headcount in fiscal 2012.

Interest Expense Interest expense increased to $21.7 million from $12.0 million, or an 80.6% increase, primarily due to debt incurred in connection with the Recapitalization Transaction consummated on July 31, 2012, offset slightly by a decrease in the interest expense related to the deferred payment obligation due to payments made by the Company.

Income Tax Expense Income tax expense increased to $38.8 million from $23.5 million or a 65.0% increase. The effective tax rate increased from 27.2% to 40.9% primarily due to the release of uncertain tax position reserves in the prior year.

Nine Months Ended December 31, 2012 Compared to Nine Months Ended December 31, 2011 Revenue Revenue decreased to $4,212.8 million from $4,318.6 million, or a 2.5% decrease.

The decrease was primarily driven by a decrease in revenue attributable to billable expenses and a lower rate of indirect expenses which has a direct correlation to the reduction of revenue on our large portfolio of cost reimbursable contracts. The lower rate of indirect expenses is primarily attributable to the cost reduction actions the Company implemented in late fiscal 2012 and continued focus on effective capacity and cost management, partially offset by revenue from the acquisition of DSES. Conversions to funded backlog during the twelve months ended December 31, 2012, excluding the impact of any funded backlog from acquisitions, totaled $5.7 billion in comparison to $6.0 billion for the comparable period, with the decrease due to challenging and uncertain market 26 -------------------------------------------------------------------------------- conditions which is contributing to a lower conversion of unfunded backlog to funded backlog, the award of new contracts and task orders under which funding was appropriated, and the exercise and subsequent funding of priced options.

Cost of Revenue Cost of revenue decreased to $2,122.4 million from $2,172.5 million, or a 2.3% decrease. This decrease was primarily due to a decrease in salaries and salary related benefits of $54.4 million and a decrease of $13.8 million in incentive compensation costs, offset by an increase in other direct consulting staff expenses of $21.2 million. The decrease in incentive compensation costs was due to reduced headcount in the senior ranks associated with the cost restructuring plan that was implemented during fiscal 2012, and a decrease in the incentive compensation accrual rates in fiscal 2013 as compared to fiscal 2012 largely in response to lower revenue growth due to the challenging and uncertain market conditions for government contractors, which has had an impact on our achievement of our annual incentive plan targets. Cost of revenue as a percentage of revenue was 50.4% and 50.3% in the nine months ended December 31, 2012 and 2011, respectively.

Billable Expenses Billable expenses decreased to $1,114.4 million from $1,143.6 million, or a 2.6% decrease. This decrease was primarily due to decreases in other billable expenses of $30.4 million incurred to perform on contracts offset by increases in subcontractor-related expenses of $1.2 million. The increase in direct subcontractor-related expenses was in support of growth on existing and new contracts and task orders during the nine months ended December 31, 2012.

Billable expenses as a percentage of revenue were 26.5% in the nine months ended December 31, 2012 and 2011.

General and Administrative Expenses General and administrative expenses decreased to $588.4 million from $656.6 million, or a 10.4% decrease. This decrease was primarily due to a decrease of $58.1 million in other business-related expenses and professional fees attributable to the Company's disciplined management of corporate-related expenditures, a decrease of $8.8 million in salaries and salary-related benefits, a decrease in stock-based compensation of $3.3 million, and a decrease of $0.6 million in incentive compensation costs. The decrease in incentive compensation costs was due to reduced headcount in the senior ranks associated with the cost restructuring plan that was implemented during fiscal 2012, and a decrease in the incentive compensation accrual rates in fiscal 2013 as compared to fiscal 2012 for the same reasons described above under Cost of Revenue. These decreases were offset by an increase of $2.5 million in employer retirement plan contributions due to an increase in the number of employees who completed one year of service and became eligible to participate in our defined contribution plan, the ECAP. General and administrative expenses as a percentage of revenue were 14.0% and 15.2% for the nine months ended December 31, 2012 and 2011, respectively.

Depreciation and Amortization Depreciation and amortization decreased to $54.2 million from $55.9 million, or a 3.0% decrease. This decrease in depreciation and amortization expense was primarily due to a decrease of $2.3 million in the amortization of our intangible assets, which includes below market rate leases and contract backlog that were recorded in connection with the Acquisition, as described in our Annual Report, and are 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 $9.9 million for the nine months ended December 31, 2012 compared to $12.3 million for the nine months ended December 31, 2011.

Interest Expense Interest expense increased to $50.8 million from $36.5 million, or a 39.1% increase, primarily due to debt incurred in connection with the Recapitalization Transaction consummated on July 31, 2012, offset slightly by a decrease in the interest expense related to the Deferred Payment Obligation, or DPO, due to payments made by the Company.

Income Tax Expense Income tax expense increased to $110.6 million from $68.0 million or a 62.8% increase. The effective tax rate increased from 26.4% to 40.2% primarily due to the release of uncertain tax position reserves in the prior year.

Liquidity and Capital Resources We have historically been able to generate sufficient cash to fund our operations, debt payments, capital expenditures, and discretionary funding needs. We had $317.6 million and $484.4 million in cash and cash equivalents as of December 31, 2012 and March 31, 2012 respectively, and our debt totaled $1,726.4 million and $965.4 million as of December 31, 2012 and March 31, 2012 respectively. Due to fluctuations in cash flows and the growth in operations, it may be necessary from time to 27 -------------------------------------------------------------------------------- time in the future to borrow under our senior secured loan 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, which primarily include: • operating expenses, including salaries; • working capital requirements to fund the growth of our business; • capital expenditures which primarily relate to the purchase of computers, business systems, furniture, and leaseholdimprovements to support our operations; • debt service requirements for borrowings under our senior secured loan facilities; and • cash taxes to be paid.

From time to time we evaluate alternative uses for excess cash resources including debt prepayments, payment of dividends, share repurchases or funding acquisitions. Any determination to pursue one or more of the above alternative uses for excess cash is subject to the discretion of our Board of Directors, and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions that may be imposed by applicable law, our contracts, and our senior secured credit agreement, as amended, and other factors deemed relevant by our Board of Directors.

On November 30, 2012 the Company acquired DSES for approximately $155.1 million in cash. Additionally, on December 31, 2012 the Company acquired an engineering services company for an immaterial amount.

Effective July 31, 2012, the Company consummated the Recapitalization Transaction whereby our debt under the new senior credit facilities total $1.75 billion ($725 million Tranche A and $1,025 million Tranche B) and includes a $500 million revolving credit facility. See "-- Indebtedness." On December 12, 2011, the Board of Directors approved a $30.0 million share repurchase program, to be funded from cash on hand. As of December 31, 2012, no shares have been repurchased under the program.

During the three and nine months ended December 31, 2012, we declared recurring cash dividends totaling $12.2 million ($0.09 per share) and $36.3 million ($0.27 per share). Additionally, during the nine months ended December 31, 2012, we declared special cash dividends totaling $1,112.1 million ($8.00 per share). No cash dividends were declared for the three and nine months ended December 31, 2011.

For each special dividend declared, the Compensation Committee, as Administrator of the Officers' Rollover Stock Plan and the Equity Incentive Plan, as amended, is required to make a determination under the respective plan's antidilution provision to adjust the outstanding options. For both the $1.50 and $6.50 special dividends, holders of the Rollover Options received a cash payment equal to the amount of the special dividend on the options' mandatory exercise date.

For the $1.50 special dividend, holders of EIP options were granted a dividend equivalent equal to the special dividend payable on June 29, 2012 or the vesting of the EIP option, whichever is later. For the $6.50 special dividend, holders of EIP options with a pre-dividend exercise price less than $11.00 per share received a dividend equivalent equal to the amount of the special dividend payable on August 31, 2012 or the vesting of the EIP option, whichever is later.

All other EIP options were adjusted by reducing the exercise price by $6.36 which is equal to the difference between the pre-dividend closing fair market value of our Class A Common Stock and the post-dividend opening fair market value of our Class A Common Stock as noted on the New York Stock Exchange.

Associated with the payment of the dividends, and in connection with the authorization of the special dividends, the Company paid accrued interest on the DPO of $4.0 million for the nine months ended December 31, 2012. No such payments were made for the same periods in fiscal 2012.

On January 29, 2013, our Board of Directors authorized and declared a regular quarterly cash dividend in the amount of $0.09 per share. The quarterly dividend is payable on February 28, 2013 to shareholders of record on February 11, 2013.

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 28 -------------------------------------------------------------------------------- and time-and-materials contracts, as we are authorized to bill as the costs are incurred or work is performed. In contrast, we may be limited to bill certain fixed-price contracts only when specified milestones, including deliveries, are achieved. In addition, a number of our contracts may provide for performance-based payments, which allow us to bill and collect cash prior to completing the work.

Accounts receivable is the principal component of our working capital and is generally driven by revenue growth with other short-term fluctuations related to the payment practices of our clients. Our accounts receivable reflect amounts billed to our clients as of each balance sheet date. Our clients generally pay our invoices within 30 days of the invoice date. At any month-end, we also include in accounts receivable the revenue that was recognized in the preceding month, which is generally billed early in the following month. Finally, we include in accounts receivable amounts related to revenue accrued in excess of amounts billed, primarily on our fixed-price and cost-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, which we calculate by dividing total accounts receivable by revenue per day during the relevant fiscal quarter, was 63 as of December 31, 2012 and 65 as of March 31, 2012.

The table below sets forth our net cash flows for the periods presented: Nine Months Ended December 31, 2012 2011 (Unaudited) (Unaudited) (In thousands)Net cash provided by operating activities $ 398,934 $ 252,019 Net cash used in investing activities (178,027 ) (42,226 ) Net cash (used in) / provided by financing activities (387,697 ) 2,603 Total (decrease) / increase in cash and cash equivalents $ (166,790 ) $ 212,396 Net Cash from Operating Activities Net cash from operations is primarily affected by the overall profitability of our contracts, our ability to invoice and collect from clients in a timely manner, and our ability to manage our vendor payments. Net cash provided by operations was $398.9 million in the nine months ended December 31, 2012 compared to $252.0 million in the same prior year period, or a 58.3% increase.

The increase in net cash provided by operations was primarily due to a higher volume in cash collections during the U.S. government's fiscal year end, which resulted in a decrease in accounts receivable. Our higher cash collections were due to more timely payments by our customers than in the same prior year period, due in part to the U.S. Government's Office of Management and Budget's July 2012 temporary requirement to pay Department of Defense prime contractors within 15 days, which allows small business contractors and subcontractors to receive payments earlier. As a result, we experienced earlier receipt of monies than in the same prior year period.

Net Cash from Investing Activities Net cash used in investing activities was $178.0 million in the nine months ended December 31, 2012 compared to $42.2 million in the same prior year period, or a 321.6% increase. The increase in net cash used in investing activities was primarily due to the $155.1 million in cash paid to ARINC for the acquisition of DSES on November 30, 2012.

Net Cash from Financing Activities Net cash used in financing activities was $387.7 million in the nine months ended December 31, 2012 compared to net cash provided by financing activities of $2.6 million in the same prior year period. The increase in net cash used in financing activities was primarily due to the payment of regular and special dividends and associated dividend equivalents, partially offset by the net proceeds of the Recapitalization Transaction.

Indebtedness Our debt totaled $1,726.4 million and $965.4 million as of December 31, 2012 and March 31, 2012, respectively. The interest rate in effect for Tranche A was 2.96% and for Tranche B was 4.50% as of December 31, 2012. The interest rate in effect under our prior credit facility was 2.49% and 3.75% for loans under Tranche A and Tranche B, respectively, as of March 31, 2012. As of December 31, 2012 and March 31, 2012, there were no amounts outstanding under our revolving credit facilities of $500 million and $275 million respectively. As of December 31, 2012 the Company was in compliance with all of its financial covenants under its credit facilities.

29 -------------------------------------------------------------------------------- On July 31, 2012, the Company consummated the Recapitalization Transaction, which included the refinancing and termination of the Company's existing senior secured credit agreement with the proceeds of the borrowings under the Company's new senior secured credit agreement. Additionally the net proceeds of the recapitalization were used to pay the special dividend on August 31, 2012, as described above under Liquidity and Capital Resources. The new senior secured credit agreement, or the Credit Agreement, provided the Company with a $725.0 million Term Loan A tranche and a $1,025.0 million Term Loan B tranche, and a $500.0 million revolving credit facility with a $100.0 million sublimit for letters of credit.

Absent any prepayment accelerations of Debt Issuance Costs, or DIC, or the effect of changes in interest rates, the following table summarizes the estimated annual amortization expense of DIC using the effective interest rate method: DIC Amortization Expense Total 2013 2014 2015 2016 2017 Thereafter (in thousands) Tranche A Loans $ 12,033 $ 749 $ 2,988 $ 2,839 $ 2,604 $ 2,178 $ 675 Tranche B Loans 11,522 383 1,589 1,643 1,715 1,775 4,417 Revolver 9,790 483 1,957 1,957 1,962 1,957 1,474 Total $ 33,345 $ 1,615 $ 6,534 $ 6,439 $ 6,281 $ 5,910 $ 6,566 The Credit Agreement requires quarterly principal payments of 1.25% of the stated principal amount of Tranche A Loans, with annual incremental increases to 1.875%, 2.50%, 3.125%, and 13%, prior to the Tranche A Loans maturity date of December 31, 2017, and 0.25% of the stated principal amount of Tranche B Loans, with the remaining balance payable on the Tranche B Loans maturity date of July 31, 2019. The revolving credit facility matures on December 31, 2017, at which time any outstanding principal balance is due in full.

The interest rate on borrowings under Tranche A is LIBOR plus 2.75%, and will range from 2.00% to 2.75% based on the Company's total leverage ratio. The interest rate on borrowings under Tranche B is LIBOR plus 3.5% with a 1% floor.

The revolving credit facility margin and commitment fee are subject to the leveraged based pricing grid, as set forth in the Credit Agreement.

The loans under the Credit Agreement 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 contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following, in each case subject to certain exceptions: a maximum net total leverage ratio; a minimum net interest coverage ratio; limitations on indebtedness and liens; mergers, consolidations or amalgamations, or liquidations, wind-ups or dissolutions; dispositions of property; restricted payments; investments; transactions with affiliates; sale and lease back transactions; change in fiscal periods; negative pledges; restrictive agreements; limitations on line of business; limitations on speculative hedging and limitations on changes of names and jurisdictions. In addition, we are required to meet certain financial covenants at each quarter end, namely Consolidated Net Total Leverage and Consolidated Net Interest Coverage Ratios. As of December 31, 2012 we were compliant with these covenants.

Capital Structure and Resources Our stockholders' equity amounted to $184.5 million as of December 31, 2012, a decrease of $1,000.7 million compared to stockholders' equity of $1,185.2 million as of March 31, 2012, primarily due to the payment of special dividends on June 29, 2012 and August 31, 2012, offset by the net increase for the nine month period from common stock issuances, stock option exercises, net income of $164.2 million in the nine months ended December 31, 2012, and stock-based compensation expense of $19.9 million.

Off-Balance Sheet Arrangements As of December 31, 2012, we did not have any off-balance sheet arrangements.

30 -------------------------------------------------------------------------------- Capital Expenditures Since we do not own any of our facilities, our capital expenditure requirements primarily relate to the purchase of computers, business systems, furniture, and leasehold improvements to support our operations. Direct facility and equipment costs billed to clients are not treated as capital expenses. Our capital expenditures for the nine months ended December 31, 2012 and 2011 were $20.7 million and $65.6 million, respectively, and the majority of such capital expenditures related to facilities infrastructure, equipment, and information technology. Expenditures for facilities infrastructure and equipment are generally incurred to support new and existing programs across our business. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure.

Commitments and Contingencies We are subject to a number of reviews, investigations, claims, lawsuits, and other uncertainties related to our business. For a discussion of these items, refer to Note 15 to our condensed consolidated financial statements.

Special Note Regarding Forward Looking Statements This Quarterly Report on Form 10-Q, or Quarterly Report, including information incorporated by reference into this Quarterly Report, contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "should," "forecasts," "expects," "intends," "plans," "anticipates," "projects," "outlook," "believes," "estimates," "predicts," "potential," "continue," "preliminary," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give you no assurance these expectations will prove to have been correct. These forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

These risks and other factors include: cost cutting and efficiency initiatives and other efforts to reduce U.S. government spending, including automatic sequestration required by the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012), which could reduce or delay funding for orders for services especially in the current political environment; delayed funding of our contracts due to delays in the completion of the U.S.

government's budgeting process and the use of continuing resolutions by the U.S.

government to fund its operations or related changes in the pattern or timing of government funding and spending; continued uncertainty around the timing, extent and nature of Congressional and other U.S. government action to address budgeting constraints and the U.S. government's ability to incur indebtedness in excess of its current limit and the U.S. deficit; any issue that compromises our relationships with the U.S. government or damages our professional reputation; changes in U.S. government spending and mission priorities that shift expenditures away from agencies or programs that we support; the size of our addressable markets and the amount of U.S. government spending on private contractors; failure to comply with numerous laws and regulations; our ability to compete effectively in the competitive bidding process and delays caused by competitors' protests of major contract awards received by us; the loss of General Services Administration Multiple Award schedule contracts, or GSA schedules, or our position as prime contractor on government-wide acquisition contract vehicles, or GWACs; changes in the mix of our contracts and our ability to accurately estimate or otherwise recover expenses, time, and resources for our contracts; our ability to generate revenue under certain of our contracts; our ability to realize the full value of our backlog and the timing of our receipt of revenue under contracts included in backlog; changes in estimates used in recognizing revenue; an inability to attract, train, or retain employees with the requisite skills, experience, and security clearances; an inability to hire, assimilate, and deploy enough employees to serve our clients under existing contracts; an inability to timely and effectively utilize our employees; failure by us or our employees to obtain and maintain necessary security clearances; the loss of members of senior management or failure to develop new leaders; misconduct or other improper activities from our employees or subcontractors; increased competition from other companies in our industry; failure to maintain strong relationships with other contractors; inherent uncertainties and potential adverse developments in legal or regulatory proceedings, including litigation, audits, reviews, and investigations, which may result in materially adverse judgments, settlements, withheld payments, penalties, or other unfavorable outcomes including debarment, as well as disputes over the availability of insurance or indemnification; internal system or service failures and security breaches, including, but not limited to, those resulting from external cyber attacks on our network and internal systems; risks related to changes to our operating structure, capabilities, or strategy intended to address client needs, grow our business or respond to market developments; risks associated with new relationships, clients, capabilities, and service offerings in our U.S. and international businesses; failure to comply with special U.S. government laws and regulations relating to our international 31-------------------------------------------------------------------------------- operations; risks related to our indebtedness and credit facilities which contain financial and operating covenants; the adoption by the U.S. government of new laws, rules, and regulations, such as those relating to organizational conflicts of interest issues; our ability to realize the expected benefits from our acquisition of the DSES division of ARINC Incorporated; risks related to future acquisitions; an inability to utilize existing or future tax benefits, including those related to our stock-based compensation expense, for any reason, including a change in law; variable purchasing patterns under U.S. government GSA schedules, blanket purchase agreements and indefinite delivery, indefinite quantity, or ID/IQ, contracts; and other risks and factors described in Part II, "Item 1A. Risk Factors" and elsewhere in this Quarterly Report.

In light of these risks, uncertainties and other factors, the forward-looking statements contained in this Quarterly Report might not prove to be accurate and you should not place undue reliance upon them. All forward-looking statements speak only as of the date made and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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