Booz Allen Hamilton Holding Corp (BAH) 2018 Q4 法說會逐字稿

Good morning. Thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call covering Fourth Quarter and Full Year Results for Fiscal 2018. (Operator Instructions)

I'd now like to turn the call over to Mr. Curt Riggle.

Thank you, Chelsea. Good morning, and thank you for all for joining us for Booz Allen's Fourth Quarter and Full Fiscal Year 2018 Earnings Announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 1. I'm Curt Riggle, Vice President of Investor Relations. And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President and Chief Financial Officer.

As shown on the disclaimer on Slide 2, please keep in mind that some of the items we will discuss this morning will include statements that may be considered forward-looking and therefore are subject to known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company services and other factors discussed in today's earnings release and set forth under the forward-looking statements disclaimer included in our fourth quarter fiscal 2018 earnings release and in our SEC filings.

We caution you not to place undue reliance on any forward-looking statements that we may make today and remind you that we assume no obligation to update or revise the information discussed on this call. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our fourth quarter fiscal 2018 slides.

It's now my pleasure to turn the call over to our CEO, Horacio Rozanski. We are now on Slide 3.

Thank you, Curt, and good morning, everyone. Thanks for joining us.

Lloyd and I are really excited about the full year results for fiscal year 2018 we are sharing with you today, particularly because we are reporting record profitability underpinned by a third consecutive year of industry-leading organic revenue growth. The results give us a great deal of confidence about the future. They show that the fundamentals of our business are strong; the continuing strategic transformation of our firm, successful. And we are now positioned in the market precisely where client demand is greatest and growing, at the intersection of technology and mission.

All credit for these achievements goes to the people of Booz Allen. So I will start this morning with a thank you and a big congratulations to our more than 24,000 colleagues across the globe. You are living up to the proud legacy of this firm, serving clients with passion and ingenuity and advancing missions in ways that truly change the world. That's the heart or purpose that motivates our people. And at Booz Allen, we believe there is a straight line connection between our purpose, our strategy, our operational and financial success and our value to clients and investors.

In fiscal year 2018, we met all of our financial objectives and delivered on our commitment to create value for investors. Today, Lloyd and I will focus on the FY '18 results and our outlook for this fiscal year. Next week, we have our Investor Day schedule. There, we will introduce a multi-year view into Booz Allen's financial goals and engage in a deeper conversation with investors. And as we do with these quarterly calls, we will make Investor Day available live via audio webcast.

Let me summarize the headlines for fiscal 2018. For the first time, we exceeded $6 billion in revenue and $2 in earnings per share. We maintained our industry-leading organic revenue growth and significantly accelerated growth in revenue, excluding billable expenses. We delivered record earnings with our highest adjusted EBITDA since the firm went public. We had our largest headcount growth in 7 years. We hit a record for year-end backlog. We made a small acquisition that bolsters our commercial cyber capabilities. And we returned $373 million to shareholders through dividends and share repurchases.

These accomplishments demonstrate that the new path we set for Booz Allen 6 years ago was exactly the right path. By successfully anticipating where the federal market was headed, we were able to position Booz Allen to capitalize on the change, expand into new markets and ensure that our firm continues to thrive.

Under our Vision 2020 growth strategy, we developed the advanced capabilities we knew would be in high demand, in part by staying true to our roots as an innovator and reaching out to partner with other innovators. We focused on winning work that is not only high priority for our clients, but also mission-essential and therefore less sensitive to budget shifts. We diversified and strengthened our workforce into one that offers end-to-end solutions that integrate mission knowledge, consulting and technology. And we expanded into the global commercial market to take advantage of our leading edge capabilities while adding dimensions of value to our federal business.

Implementation of this strategy has created quality growth that we believe is sustainable over the long term. Our firm has the right culture, client relationships, contract base, scale and agility to continue growing and evolving our market position. Our confidence is well placed. For 3 consecutive years, we have increased our headcount and backlog, which will fuel additional revenue growth in coming years.

In addition, the recent 2-year budget deal and omnibus appropriations bill significantly increased discretionary funding. With greater budget certainty, our clients are more inclined to undertake the visionary work associated with upgrading and modernizing their own capabilities. And Booz Allen will be there to support them every step of the way, fusing consulting and mission knowledge with innovative technologies. These include: data science and machine intelligence, enterprise-scale Agile development, resilient positioning navigation and timing, adaptive cyber defense and immersive technologies.

With government funding now beginning to flow, we are seeing lots of opportunity across our contract and client base from defense to intelligence to civil agencies. Our global commercial business also continues to do very well, reaching nearly 30% revenue growth last fiscal year. We believe our momentum will continue into FY '19 and beyond, and that is reflected in our guidance, which Lloyd will take you through after a deeper look at our fiscal '18 numbers.

Lloyd, over to you.

Thanks, Horacio. I want to echo your comments on fiscal year 2018. It was an excellent year strategically, operationally and financially with record profitability driven by strong organic revenue growth. We finished the year ahead of where we thought we would be at the bottom line, and on revenue, we were in line with our growth forecast. These results demonstrate that the business is on track, well managed and continues to create value for investors.

Today, in addition to discussing our full year performance in some detail, I'll provide an update on the impact of the new tax law on our business. I will also discuss our fiscal year 2019 guidance, which speaks to the continued confidence we have in our business and financial performance.

Please turn to Slide 4 for a summary of our results. Starting at the top line. In fiscal year 2018, revenue and revenue excluding billable expenses each grew 6.3%. At the beginning of the year, we committed to accelerating growth at the revenue ex billables line where most of our profitability is generated, and we delivered on that promise. By comparison, in fiscal year 2017, growth in revenue, excluding billable expenses was 4.1%. Our revenue performance was driven by continued strong demand for Booz Allen services and solutions and a significant increase in headcount to meet that demand. As of March 31, our headcount was up by more than 1,300 over the prior year buoyed by very strong hiring in the second and third quarters. This increase in headcount helped push us across the $6 billion mark in fiscal year 2018. It also positions us for continued growth in the years ahead at the top and bottom lines.

Total backlog at the fiscal year end was $16 billion, 18% larger than a year ago.

Our full year book-to-bill was 1.39x, the second highest full year mark since our IPO. In the fourth quarter, book-to-bill was 0.6x. This reflects the typical seasonality in our awards as well as, we believe, the late passage of the omnibus spending bill in March. As Horacio mentioned, government funding is now beginning to flow.

Looking forward, our proposal pipeline is robust. And for full fiscal year 2018, the total value of proposals, period of performance and bid profit margin all increased.

In sum, in our portion of the market where the focus is high-end differentiated solutions, demand is strong and the market is healthy. We are capturing a lot of work, and we see a great deal of opportunity ahead.

Moving to earnings. You'll see the success we've had translating top line growth to the bottom line. Our record adjusted EBITDA at $585 million represents a 6.9% increase. That builds on the earnings growth we've delivered since fiscal year 2016 and demonstrates once again our solid core operating performance.

Adjusted EBITDA margin for the full year was 9.5%, exceeding the top end of our expected range due to a modest improvement in contract profitability, a focus on billability and cost management in the fourth quarter and a slightly lower-than-anticipated billable expenses in the fourth quarter.

As referenced in our last call, there are 3 tax-related items that had a meaningful impact on fiscal year 2018 performance: enactment of the Tax Cuts and Jobs Act, remeasurement of our deferred taxes and the new accounting standard adopted early this fiscal year for treatment of stock-based compensation. For details on income tax drivers, please turn to Slide 5.

First, due to the new tax law, we realized an additional income tax benefit of $14.2 million in the fiscal year 2018 driven by a lower federal statutory tax rate. A majority of this benefit was realized in the third quarter. Second, we recognized provisional tax effects of the new law in the year ended March 31 and recorded a $9.1 million income tax benefit that relates entirely to the remeasurement of deferred tax assets and liability using the new 21% federal tax rate. This discrete noncash benefit was recognized in the fourth quarter. We are excluding the impact from our non-GAAP adjusted net income and ADEPS. Lastly, we also realized an income tax benefit of $14.5 million total for fiscal year 2018 due to the adoption of the new accounting standard on stock-based compensation. At year-end, our adjusted effective tax rate for fiscal year 2018 came in at just over 32%. Going forward, we expect our annual effective tax rate to be 25% to 27%.

As you know, we focus a lot on our industry-leading organic revenue growth because we believe it's the best way to drive sustainable bottom line growth, which enables us to continue delivering returns for our shareholders.

In fiscal year 2018, our record revenues and profitability drove strong net income and ADEPS performance. Net income for the full fiscal year grew nearly 21% to $305 million. Adjusted net income was $298 million, up 13.5% year-over-year. Diluted earnings per share increased to $2.05 from $1.67 in the prior year, and adjusted diluted earnings per share increased to $2.01 from $1.75 in the prior year. These increases were primarily driven by revenue growth, profitability improvement, the impact of the new tax law and a lower share count in fiscal 2018 due to the share repurchases made during the year.

Moving on to cash. We ended the fiscal year in a strong position with $287 million in cash on hand. This is an increase of $70 million over the prior year. We generated a free cash flow-to-adjusted net income ratio of 98%, slightly below our target of 100% due to the positive impact of tax reform on adjusted net income. Going forward, we believe that operating cash flow is a better metric for underlying cash generation.

Net cash from operating activities for the full fiscal year was down $13 million compared to fiscal year 2017 due to higher cash tax payments as compared to the prior year due to the timing of payments and an increase in working capital needs, including an increase in accounts receivable consistent with our growth. This fiscal year and forward, we expect bottom line benefits from our lower effective tax rate. However, the tax rate benefits will not translate one-to-one into lower cash taxes paid over the next several years due to the accelerated amortization of our deferred tax liability relating to unbilled receivables that was also a condition of the new tax law.

In fiscal year 2019, we expect to generate $380 million to $420 million in operating cash flows, an increase that will be driven primarily by underlying profitability and management of working capital spend. This includes a cash collection strategy intended to mitigate the higher DSO levels that we are experiencing.

Capital expenditures in fiscal year 2018 were $78 million, up from the previous year primarily due to facilities improvement that increased the efficiency of our space and support future growth. We expect CapEx to remain elevated as we continue to invest in facilities, infrastructure, systems and technology to support the Vision 2020 road map we laid out years ago. Our forecast for capital spending peaks in fiscal year 2019 at approximately $100 million.

We have, for some time, emphasized that Booz Allen's value to investors is grounded in 2 things: industry-leading organic revenue growth and our effective use of the balance sheet and capital deployment strategy. In fiscal year 2018, we well exceeded our goal of returning at least 100% of free cash flow to investors, all while keeping our leverage roughly flat.

Please turn to Slide 6 for details. As Horacio mentioned, we returned a total of $373 million to shareholders through dividends and as share repurchases over the course of the year. In the fourth quarter, we repurchased 2.1 million shares of stock bringing the total to 7.6 million shares purchased at an average price of $35.62. We also paid out just over $103 million in dividends in fiscal year 2018.

Given our continued strong financial performance and confidence in the future, the company today announced it has authorized a regular dividend of $0.19 per share, payable on June 29 to stockholders of record on June 14.

We are also pleased to announce that our Board of Directors last week approved a $300 million increase in the company's share repurchase authorization, which brings our total current authorization up to $495 million. This is another indication of our commitment to using our cash generation and balance sheet strength to drive value for shareholders.

Finally, I want to talk about our outlook for the year. Horacio outlined the many reasons we have confidence going into 2019: healthy demand for our services and solutions, the strength of our pipeline and the fruits of our continued investments in our people and innovation and in building capabilities that our clients need most.

Our objective for fiscal year 2018 was to continue the momentum we started 2 years earlier driving top line growth with relatively stable margins, which we have done.

Looking to fiscal year 2019. We expect our momentum to continue with revenue growing between 6% and 8%. Growth in revenue, excluding billable expenses, is expected to be in the same range for the full year. With continued strong organic revenue growth and a full year of benefits from tax reform, we are poised again to deliver meaningful earnings growth. At the bottom line, we expect adjusted diluted earnings per share to be $2.35 to $2.50.

We remain committed to deploying significant amount of capital to create near- and long-term value for our shareholders in the form of tuck-in strategic acquisitions as available, share repurchases and dividends. In fiscal year 2019, we anticipate returning at least $350 million to shareholders. We will also continue to invest in our business and our people to drive future growth.

I'd like to note that our guidance for both the top and bottom line considers the adoption of the new revenue recognition standard, ASC 606, which we do not believe will have a material impact on our full year financial results. Our business will continue to follow seasonal patterns, but we expect our margins to be much more consistent quarter-to-quarter in fiscal year 2019 than in the past due to these accounting changes. When we release our first quarter results, we will provide restated fiscal year 2018 results for comparative purposes. Horacio and I look forward to speaking with you more at Investor Day about our outlook for fiscal year 2019 and beyond. We're excited about our performance in the year that just ended and believe it sets us up very well for continued success.

Before concluding, I want to recognize Curt Riggle for his many years of service as Booz Allen's Head of Investor Relations. His knowledge and experience have been a huge help to me over the past 2 years. As you may have seen, we announced earlier this month that Nick Veasey will become Director of Investor Relations as of June 30 and Curt will be here to assist with the transition before taking on a new role at the firm. I've worked with Nick for several years now as he has led our M&A and capital allocation strategy. He'll bring a wealth of management about financial markets and our business to the IR role and I'm sure he'll build on the strong foundation and relationships that Curt has established over the past 8 years.

With that, Horacio, back to you.

Thank you, Lloyd. Curt, I want to add my personal thanks for all you've done as Head of IR. It's been my privilege to watch you grow in this role all the way back to our IPO. We're grateful you'll be here to help Nick transition into this crucial role, and I look forward to having you contribute in a new way by leading our internal financial education program.

As I said in my opening remarks, fiscal year 2018 was a year of financial milestones for Booz Allen, record revenue, earnings, backlog and so on. Yet there is another recent milestone I want to mention before moving to Q&A. Last month, we announced the creation of the Booz Allen Foundation, an independent public charity. The foundation is an extension of our firm's century-long commitment to community service. The most important and exciting thing about this milestone for us is that the foundation will share Booz Allen's purpose: to empower people to change the world. Its areas of focus include those that we care deeply about: veterans and military families, global health, youth and education and community resilience. This is all part of scaling our capacity for social good. The foundation's efforts will complement those our firm pursues in our community partnerships program, a vibrant program of volunteering and community service that is critically important to attracting and retaining the best talent in today's competitive environment. Our people want to give back. Our firm wants to give back. That's the motivation behind the foundation and we could not be more pleased to see it now up and running.

And with that, Curt, let's open the lines for Q&A please.

Great. Thank you, Horacio. Chelsea, if you could go ahead and give instructions and open the lines for Q&A, that'd be great.

(Operator Instructions) And our first question will come from Edward Caso with Wells Fargo.

Congrats to Curt as well. My question is around access to the people that map up with your positioning of mission and new technology. How are you doing in getting them? Maybe some thoughts on special efforts you're making to sort of attract and retain.

Thanks for the question. As you saw, we have the largest headcount growth in 7 years last year at 1,300 net new staff and so we feel really good about our overall capacity to attract and retain the right kind of talent. And if you go back a call or 2, you'll remember that we talked about the fact that the bulk of our growth is, in fact, the growth of the staff that are more technical in nature outpaces the overall headcount growth in the firm. So I think those are the proof points that we're indeed doing very well. We're gearing up for our Summer Games program, which is a great attraction to the kinds of people that we need to hire. We typically get many times more applicants than we can actually bring into the program. We are seeing good numbers of hires across-the-board. And in general, I think our value proposition, our own value, our purpose statement attract the right kind of people, the people that both have the technical skills, frankly have the passion for the mission that makes this firm special. So we feel good about our overall ability to drive headcount into this year and beyond.

My other question is on margins. If we did our numbers right, it looks like you may be guiding EBITDA margin down a little bit this year? And can you also talk about the impact of the legal fees around DOJ, the impact on Q4 and the forward outlook?

Sure. We are actually saying expect our margins in '19 to still be in the mid-9s. As we've discussed in the past, we're looking for margin stability throughout the year with the adoption of the new standard, but we promised that we would finish the year in mid-9s, and we kept that promise. And if you could repeat the second -- oh, never mind, I remember. In terms of the DOJ caused an impact on the margin, in the third quarter we did share some information with everyone. We've baked that into our FY '19 guidance, and beyond that, we don't have any other comments on legal costs for the foreseeable future.

Our next question comes from Carter Copeland with Melius.

Two questions. One, I realize you're reporting Q4 here, but I'm just trying to tease out the statements you made around the market. We've now had 2 months -- almost 2 months go by. It sounds, Horacio, like your comments implied that April and May have been notably different from what you saw last quarter with the passage of the budget, just wanted to confirm that. And then, secondly, on capital deployment, I noted the minimum $350 million capital return, but I think if you look at the -- at least one end of the range on share repo implies around $400 million of share repo, which would be clearly an acceleration once you tack on the dividend to that. So just maybe should we take anything from the levels of capital deployment as a signal of a different level? Are you -- is it a wait-and-see? Just help us get some of the mindset around that.

Carter, I'll take on the first question and Lloyd will take on the second one. I'm not sure -- we run the business for the year and we manage the business on an annual basis. We feel really good about where we are in this year. We feel good about the market, the strength of the market. It's frankly, for my money, one of the best markets we've seen at least in the last 5 years and we're excited about the acceleration of revenue, ex billables, that we're guiding to. We're excited about the level of profitability that we can drive from that, which you see in the ADEPS guidance. And as the month-to-month discussion, quite frankly our teams run the business as they see it, and based on what's in front of them, we expect to have a very robust summer selling season like we always do. It's late passage of the budget, but there is a budget and we're going to take full advantage of those opportunities. And that's sort of what we're seeing, and we're going to let the teams really run each of their markets as they seek to maximize overall growth and overall profitability for the year, not for a given quarter.

Carter, when it comes to capital deployment, we're always looking for ways to create value for our shareholders and we're very pleased that we were able to return $373 million in FY '18. And as your question indicates, we do expect to deploy $350 million, again greater than 100% of free cash flow. We've got a healthy balance sheet with $287 million on hand, an undrawn revolver and we feel that flexibility with our capital deployment strategy creates shareholder value. We're also going to look at pursuing acquisitions, maintaining our capability with tuck-ins. But frankly, as they have presented themselves, we've got evaluated multiples right now and we really haven't seen assets that meet our standards. Right now, share repurchases is certainly a lever that we've been pulling and we're pleased with the repurchase authorization, the additional $300 million, just taking us under $500 million. And we're going to pull that lever depending upon market conditions. So with $373 million returned to shareholders and the opportunity to continue to invest in our people, in our businesses, we couldn't be happier with our capital deployment strategy.

Our next got question comes from Tim McHugh with William Blair & Company.

Given you're aggressively hiring, I guess, can you talk about there was also mention of a kind of cost management initiative and seems like headcount was down, consultant headcount down sequentially at least. So I guess, what parts of the business is that focused on? Why now when you're trying to add so many heads, I guess, to that?

Thanks, Tim. I think we all saw that we had surge in hiring in Q2 and Q3 and we really expect a similar pattern in FY '19. That being said, in our fourth quarter, we were focused on getting those colleagues utilized and essentially our guidance indicates another year of strong growth. In terms of cost management, we've always managed our business, we feel, effectively and we manage for the year. And so we expect that to continue in making sure that we get our hires utilized, and we're always looking for capabilities that Horacio mentioned in his upfront comments.

Okay. And then Q1 or I guess the comment about more even margins throughout 2019, I guess, just so we set expectations right before you report your next quarter, I guess. The implication being that negatively impacts the new accounting rules, this negatively impacts the Q1 margin versus the prior comparison and so the earnings will be a little bit more spread out through the other quarters, just trying to make sure we set expectations right. Any sense of the magnitude of that move?

Not really. We're going to disclose as we get through the quarters. On Q1, we'll disclose at that point, but you got it right.

One of the things [upheld], just to build on that, is as we're going through the quarters, we are -- the statements will adjust the prior year quarters. So you'll be able to get an apples-to-apples comparison as we go on.

Our next question comes from Tobey Sommer with SunTrust.

I was wondering if you could talk to us about your plans for kind of, on a percentage basis, headcount growth. You just gave us some color about the seasonality and expect 2Q, 3Q to be stronger quarters, but if you could speak to that. And then also just give us a little more color on the CapEx taper because I think you described this fiscal year as kind of the peak.

So I'll get started on headcount. The reality of the business is that there are things that we manage against like we -- college hires tend to come in, for example, in the fall, many of them after they take summer off. So there's natural seasonality to that. And we usually start the year, our teams like building a bit of a cushion on availability, start of the year with high availability and then take advantage of a selling season and a great hiring season in Q2 and Q3 and so that's the kind of seasonality that Lloyd was talking about before. Having said that, we're looking at 5%-or-so headcount growth at the net level year-over-year and we feel that we have both the pipeline, the capacity to accomplish that. And it's not just the headcount because hiring people is easy. Hiring the right people is what we're all about, and we feel like our brand in the market and the programs that we've been running and the type of outreach that we're doing give us access to the right kind of people that will have a passion for our purpose and the mission of our clients and have the right technical skills, especially at the leading edge of technology where we're playing more and more.

And when it comes to CapEx, historically we've been around 1% of our revenues. And in '18, the primary driver was facility improvements, which we talked about for several quarters. In '19, what's contributing to getting at a peak of $100 million is continuation of improvement in our facilities, but also our infrastructures, systems and technology. Several years ago, we, in conjunction with Vision 2020, we developed an IT road map. We've already moved our email to the cloud, adopted a new HR information system and the continuation of other improvements are really to ensure we've got the infrastructure to support our sustainable quality growth. So the business is strong, our performance puts us in a position to commit to this investment, and to Horacio's previous response, it also allows us to attract and retain the talents that we need and want.

Just one follow-up, if I could. With respect to the roughly 5% targeted headcount growth, is that distributed in the D.C. metro area and nationally kind of evenly? Or are you hiring in other perhaps lower-cost and higher-unemployment markets?

We're hiring across-the-board and we're going to hire -- largely, a lot of it is demand driven. And where our clients are and where our clients are generating demand, we see, for example, in our defense business significant demand outside of the Washington metro area and our headcount will match that. In our civil and intelligence business, we see a lot more demand here in the Wash metro area. And each part of these markets, frankly, has opportunities in terms of employment levels, but also challenges because in the larger areas perhaps it's a little bit more challenging from an overall unemployment standpoint, but at the same time because we have mass and capacity, we can reach deeper into those markets. So I'm not going to minimize the importance of recruiting because it's obviously critical to our growth, but we feel really good about being able to bring in the kinds of people that we need.

And our next question comes from Cai Von Rumohr with Cowen and Company.

And again, Curt, terrific job over the years. So you talked of a very strong market. You mentioned the commercial international, some specifics. Could you give us some color on the relative strength of each of those markets, defense, intel, civil, commercial international?

Let me try. I think -- the truth of the matter is we're seeing strength across-the-board. I'm not sure how to gauge the overall market as much as the market in which Booz Allen plays in. Maybe that's my little caveat is over the last 5, 6 years of Vision 2020, I feel like we have positioned the firm into a very strong, unique position in the market really where technology meets mission where our consulting heritage plays the strongest. And so we're seeing great demand. And if you look at FY '18, all of our markets actually showed growth. As I said before, commercial international grew at 30% combined or close to 30%, which is acceleration from the prior couple years, and we expect more double-digit growth into FY '19 and beyond. On the other ones, I guess, the general color is we are seeing a great deal of strength and it's driven by 2 drivers. One is obviously the budget situation is good, but also many of our largest clients are very focused on mission and are very focused on particular strategies. I'll give you the DoD example perhaps. DoD has, in my view, the clearest strategic focus that it's had in at least the last few years. Whether you listen to Secretary Mattis or whether you listen to an SES working in a research lab or whether -- or a flag officer in a faraway command, they all talk about the same 3 priorities: increasing the war-fighting capability, improving security cooperation with other countries and modernizing. And the money is flowing towards those types of priorities and we have positioned ourselves to be an essential partner to many of those clients in driving there and that's why we're seeing strength. There are some civilian agencies where there's leadership changes and perhaps the focus is still coming together, but those tend to be not our largest clients. And against our largest clients, again what we're seeing is focus and budget against the strategic priorities that we can support.

Terrific. And one quick follow-up. So margins, you've said adjusted EBITDA margins basically still in the mid-9s, relative flat. And yet, with a more normalized hiring you won't have the $5 million hit you had last year. Your mix is going toward higher-margin commercial international, your billables ratio is not up and you're moving toward more higher-tech applications. All of those factors would suggest higher margins in fiscal '19. Are they flat? Is that either a conservative number or should we be concerned that maybe the legal expenses are increased -- are creeping up as a percent of the total?

Sure. No, Cai. We've included the legal costs in our forecast for '19. As you know, we do manage the business conservatively and we feel that maintaining the growth that we're seeing at the bottom line with mid-9s allows us to do that. At our Investor Day we're actually going to talk beyond '19 and what we expect to achieve going forward, but I won't steal our thunder on this call with that. But in '19, we can expect that we'll be around mid-9s.

Our next question comes from Brian Ruttenbur with Drexel Hamilton.

The first question I have is on capital deployment. You have been primarily buying back stock and I want to understand what is the breakpoint, maybe this is to Lloyd, on when you start paying down debt aggressively? Where do interest rates need to go in order for you to switch your capital deployment strategy? And then I have a follow-up.

Sure. We are reacting to what we feel is the best in the interest of our shareholders, and frankly, share repurchases has been the lever that we felt was the best to pull in '18. With the increase in authorization, I think this is definitely a lever that we're going to continue to do. We're not close to the breakpoint at this point when it comes to our debt, but we are actively looking at that as you would expect over the course of every year and watching what the Fed does with interest rate. At the moment, we're happy with our debt structure. I think 43% of it is fixed. But again, we are always looking at that, but we do not believe that we are close to our breakpoint at this point.

Okay. So as a follow-up, number one, what is the breakpoint? Is it 6%, is it -- give me a number please, if you could. And then, number two, if you could talk just an update on the status of the criminal and civil investigation. Is it expected to wrap up this fiscal year, in your opinion? And what status, if any, that you could give us on that?

Let me start with the back question first. We don't have anything new to report on the investigation on this call. We continue to cooperate with the government in their process and that's pretty much where we are.

And on the breakpoint, we feel, again, Brian, that we're in a good position, we're in a good place. We don't really see a breakpoint at this point in our year. And again, as we get into the fiscal year, we're going to look and do what's in the best interest of our debt and equity investors.

And our next question comes from Greg Konrad with Jefferies.

Just to come at some of these questions a bit of a different way. I mean, when you look at the 2019 outlook of 6% to 8% revenue growth, is there any way to parse growth from upsize of existing contracts versus new contract wins? I guess, what I'm trying to get at, when you think about the fiscal year '18 budget coming through, you mentioned kind of the busy selling season. Do we see some of those new opportunities in 2019? Or will it take some time for those new contracts to come through maybe in your fiscal year '20?

We see the continuation of our growth really on 4 reasons: one, our clients; two, the backlog. In '18, we had a new record backlog, the highest book-to-bill since the IPO. Our pipeline, we're seeing the period of performance on submitted proposals were lengthening and the bid profits up, and as you can appreciate, we've got a very diverse portfolio. There's no one contract that's individually significant. We're seeing -- we've experienced and we're seeing growth across all of our markets going forward. And with our backlog up 18% in '18, we feel that we're looking at definitely being within the range that we provided. That's it.

And then just one follow-up on backlog. I mean, funded was down year-over-year. Has there maybe been a change in structure of contract? Or how should we [read] that versus the unfunded and priced options?

No. I mean, it really reflects the seasonality, and likely, as we said in our prepared comments, the timing of appropriations. Historically, our funded backlog increases in a month or 2 after final appropriations are enacted. Our second quarter, which aligns with the government fiscal year is at the high point then it drops down the third quarter and then we start rebuilding again for the next year's second quarter. So we don't see there's anything more than just the seasonality we experience year-over-year.

And this ends the Q&A session. And I'd now like to turn the call back to Horacio Rozanski for closing remarks.

Thank you very much. Thanks again, everyone, for joining us and thank you for your questions. Lloyd and I look forward to continuing this conversation and to seeing many of you at our Investor Day next week. As you can probably tell, both from our upfront remarks and from our answers, we're very optimistic about the future and we are very eager to share the longer-term story with you next Wednesday. And until then, have a great week.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.