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Booz Allen Hamilton (NYSE:BAH)
Q4 2018 Earnings Conference Call
May. 29, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. At this time all lines are in a listen-only mode, later there will be an opportunity for questions. I'd now like to turn the call over to Mr. Curt Riggle.

Curt Riggle -- Vice President, Investor Relations

Thank you, Chelsea. Good morning and thank you for joining 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 included 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.

Horacio Rozanski -- President and Chief Executive Officer

Thank you, Curt. And good morning everyone. Thanks for joining us. Lloyd and I are really excited about the full-year results for the 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 of 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 the thank you and 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 changed 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 the fiscal year 2018, we met all of our financial objectives and delivered on our commitment to create 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 the record earnings with our highest adjusted EBITDA since the firm went public.

We had our largest headcount growth in seven years. We hit a record for year and 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 six 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've 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, planned relationships, contract base, scale and agility to continue growing and evolving our market position. Our confidence is well-placed.

For three consecutive years, we have increased our headcount and backlogs which will fuel additional revenue growth in coming years.In addition, the recent two-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.This includes data science and machine intelligence and per price scale agile developments, resilience, 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.

Lloyd Howell -- Chief Financial Officer

Thanks, Horacio. I want to echo your comments on the 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 continue 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 the 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-billable line, where most of our profitability is generated and we delivered on that promise. By comparison in the fiscal year 2017, growth and revenue excluding billable expenses was 4.1%. Our revenue performance is 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 increased headcount helped push us across the $6 billion mark in the fiscal year 2018. It also positions us for continued growth in the years ahead at the top and bottom lines. Total backlog at fiscal year-end was $16 billion, 18% larger than a year ago. Our full-year book-to-bill was 1.39 times, the second highest full-year mark since our IPO.

In the fourth quarter, book-to-bill was 0.6 times, 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 the full fiscal year 2018, the total value of proposals, a 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 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 delivered since the 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 [Technical difficulty] 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 three tax-related items that had a meaningful impact on the 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 liabilities using the new 21% federal tax rate.

This discrete non-cash benefit was recognized in the fourth quarter. We are excluding the impact from our non-GAAP adjusted net income ADEPS. Lastly, we also realized an income tax benefit of $14.5 million total for the 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 the 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 focused 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 the fiscal year 2018, our record revenues and profitability drove strong net income 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 a $1.67 in the prior year and adjusted diluted earnings per share increased to $2.01 from a $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 the fiscal year 2017 due to higher cash tax payment as compared to the prior year due to the timing of payments and an increase in working capital needs, including an increase in accounts receivables 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 were also a condition of the new tax law.In the 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 selection strategy intended to mitigate the higher DSO levels that we are experiencing. Capital expenditures in the fiscal year 2018 were $78 million, up from the previous year primarily due to facilities improvements 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 the fiscal year 2019 at approximately $100 million. We have for some time emphasized that Booz Allen's value to investors is grounded in two things, industry-leading organic revenue growth and our effective use of the balance sheet and capital-deployment strategy.

In the fiscal year 2018, we well exceeded our goal of returning at least a 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 share repurchases over the course of the year. In the fourth quarter, we repurchased 2.1 million shares of stock, bringing the total for the year to 7.6 million shares purchased at an average price of $35.62.

We also paid out just over a $103 million in dividends in the 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 investment in our people and innovation and in building capabilities that our client needs most.Our objective for the fiscal year 2018 was to continue the momentum we started two years earlier driving top-line growth with relatively stable margins which we have done. Looking to the 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 remained committed to deploying significant amounts 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 the 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 the fiscal year 2019 than in the past due to these accounting changes. When we release our first-quarter results, we'll provide restated the fiscal year 2018 results for comparative purposes. Horacio and I look forward to speaking with you more at investor day about our outlook for the 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.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 will bring a wealth of knowledge 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 eight years. With that, Horacio, back to you.

Horacio Rozanski -- President and Chief Executive Officer

Thank you, Lloyd. Curt, I will 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.

Curt Riggle -- Vice President, Investor Relations

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

Questions and Answers:

Operator

Certainly. [Operator instructions]. Thank you. And our first question will come from Edward Caso with Wells Fargo.

Your line is open.

Edward Caso -- Wells Fargo Securities -- Analyst

Great. Thank you and 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 and getting them maybe some thoughts on special efforts you're making to sort of attract and retain.

Thanks.

Horacio Rozanski -- President and Chief Executive Officer

Hey good morning. Thanks for the question. As you saw, we have the largest headcount growth in seven 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 two, you will remember that we talked about the fact the bulk of our growth is in fact, the growth of the staff that is more technical in nature outpaces the overall headcount growth in the firm. So, I think those are the proof points that are indeed doing very well. We're gearing up for our summer games program, which is a great attraction to the kinds of the 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 hirers across the board. And in general, I think our value proposition, our own purpose statement attracts the right kind of people, the people that both have the technical skills but 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.

Edward Caso -- Wells Fargo Securities -- Analyst

My other question is on margins. If we did our numbers right it looks like you are maybe 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? Thanks.

Lloyd Howell -- Chief Financial Officer

Sure. We expect our margins in '19 to still be in the mid-9. 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 mid-9s and we kept that promise. And if you can repeat the second question? Never mind, I remember.

In terms of the DOJ cost and the impact on the margins, in the third quarter, we did share some information with everyone. We baked that into our FY'19 guidance. And beyond that, we don't have any other comments on legal costs for the foreseeable future.

Edward Caso -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Carter Copeland with Melius. Your line is open.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning, gentlemen.

Horacio Rozanski -- President and Chief Executive Officer

Good morning.

Carter Copeland -- Melius Research -- Analyst

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 two months, almost two months go by. It sounds, Horacio, like your comments imply 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 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 tacked 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? Is it a wait and see? Just help us get some of the mindset around that. Thanks, guys.

Horacio Rozanski -- President and Chief Executive Officer

I'll take on the first question and Lloyd will take on the second one. 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 five years and we're excited about the acceleration of revenue, its billable 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 and based on what's in front of them we expect a robust summer selling season like we always do. Its 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 the markets as they see to maximize overall growth and overall profitability for the year and not for a given quarter.

Lloyd Howell -- Chief Financial Officer

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 a 100% of free cash flow. We've got a healthy balance sheet with $287 million on hand and undrawn revolver and we feel that the 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, they have 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 of additional $300 million just taking us under 500.

And we're going to pull that lever depending upon market conditions, so with $373 million returned to shareholders and the opportunities to continue to invest in our people and our businesses, we couldn't be happier with our capital-deployment strategy.

Carter Copeland -- Melius Research -- Analyst

OK, thanks for the color guys.

Operator

Thank you. Our next question comes from Tim McHugh with William Blair. Your line is open.

Tim McHugh -- William Blair & Company -- Analyst

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

Lloyd Howell -- Chief Financial Officer

Thanks, Tim. I think we all saw that we had a 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 that, those colleagues to utilize and essentially our guidance indicates another year of strong growth. In terms of cost management, we've always managed our business, we feel effective and we manage for the year.

And so, we expect that to continue and making sure that we get our hires utilized and we're always looking for capabilities that Horacio mentioned in his comments.

Tim McHugh -- William Blair & Company -- Analyst

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 it 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 that sets the expectations, right? Any sense of the magnitude of that move?

Lloyd Howell -- Chief Financial Officer

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

Tim McHugh -- William Blair & Company -- Analyst

OK.

Horacio Rozanski -- President and Chief Executive Officer

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

Operator

Our next question comes from Tobey Sommer with SunTrust. Your line is open.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

I was wondering, if you could talk to us about your plans for the kind of, on a percentage basis headcount growth, you just gave 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 to, I think you described this fiscal year as kind of the peak?

Horacio Rozanski -- President and Chief Executive Officer

Well, I'll get started on headcount. The reality of the business is that there are things that we manage against like college hires tend to come in, for example in the fall many of them prefer to take summer off. So, there is natural seasonality to that and we usually start the year, our teams might be building a bit of a cushion on availability, the start of the year with high availability and then take advantage of the selling season and a growing 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 brand in our 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 both 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.

Lloyd Howell -- Chief Financial Officer

When it comes to capex, historically we have been around 1% of our revenues and a net '18 primary driver was facility improvements which we talked about for several quarters. In '19, what's contributing to getting out of a peak of $100 million is a continuation of improvement in our facilities but also our infrastructure systems and technology. Several years ago, we in conjunction with Vision 2020 we developed an IT roadmap. 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 but also allows us to attract and retain the talent that we need and want.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

And 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?

Horacio Rozanski -- President and Chief Executive Officer

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 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 employment 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.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Operator

Thank you. And our next question comes from Cai von Rumohr with Cowen & Company. Your line is open.

Cai von Rumohr -- Cowen & Company -- Analyst

Thank you, good job. And again Curt, terrific job over the years. So, you talked about 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?

Horacio Rozanski -- President and Chief Executive Officer

Let me try. I think the truth of the matter is, we're seeing strength across the board. I'm not sure how to engage the overall market as much as much as the market in which Booz Allen plays in. Maybe that's my little caveat is over the last five to six 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 show growth. As I said before, commercial international grew at 30% combined or close to 30% which is an acceleration from the prior couple of years. And we expect more double-digit growth into FY'19 and beyond.

On the other ones, I guess that the general color is, we are seeing a great deal of strength. And it's proven by two drivers. One is obviously the budget situation is good but also many of our largest clients are very focused on the 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 a flag officer in a faraway command, they all talk about the same three priorities: increasing the war-fighting capability, improving security cooperation with other countries, and modernizing. And the money is flowing toward 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 that there are leadership changes and perhaps the focus is still coming together but those tend not to be our largest clients and against our largest clients who we are overseeing is focused and budget against strategic priorities that we can support.

Cai von Rumohr -- Cowen & Company -- Analyst

Terrific. And one quick follow up. So, margins, you said adjusted EBITDA margins basically still in the mid-9s relatively flat. And yet with the more normalized hiring, you won't have the $5 million hit you have 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? Thanks.

Lloyd Howell -- Chief Financial Officer

Sure. Look, we've included the legal cost 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 want to see our thunder on this call with that but in '19 we can expect that we'll be around mid-9.

Cai von Rumohr -- Cowen & Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Brian Ruttenbur with Drexel Hamilton. Your line is open.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Yeah, thank you very much. The first question I have is on capital deployment. You have been primarily buying back stock. And I want to understand what the breakpoint is.

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.

Lloyd Howell -- Chief Financial Officer

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 it's 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 debt does with the interest rate. At the moment, we're happy with our debt structure, I think 43% of it is fixed but again, we're always looking at that but, we don't believe that we are close to our breakpoint at this point.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

OK. So as a follow-up No. 1, what is the breakpoint, is it 6% is, give me a number, please, if you could. And then No.

2, if you could talk give an update on the status of the criminal and civil investigation, is it expected to ramp up this fiscal year. Your opinion and what status, if any that you could give us on that?

Horacio Rozanski -- President and Chief Executive Officer

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.

Lloyd Howell -- Chief Financial Officer

And on the breakpoint. We feel again Brain, 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-end. Again, as we get into the fiscal year we're going to look and do what's been the best interest of our debt and equity investments.

Operator

And our next question comes from Greg Konrad with Jefferies. Your line is open.

Greg Konrad -- Jefferies -- Analyst

To comment on 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 parse growth from upsized of existing contracts versus new contract wins? I guess, what I'm trying to get at when we 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 we'll take some time for those new contracts to come through maybe in your fiscal year '20?

Lloyd Howell -- Chief Financial Officer

We see the continuation of our growth really for four reasons. One is clients, two, the backlog. In '18, we had a near record backlog, the highest book-to-bill since the IPO. Our pipeline, we're seeing a period of performance on some of the proposals we are lengthening and the bid process, up.

And as you can appreciate, we've got a very diverse portfolio. There is no one contract that's individually significant. We're seeing experience and we're seeing growth across all of our markets going forward. And with our backlog of 18% in '18, we feel that we're looking at definitely being within the range that we provided.

That's it.

Greg Konrad -- Jefferies -- Analyst

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

Lloyd Howell -- Chief Financial Officer

No. I mean, it really reflects the seasonality and likely as we've said in our prepared comments the timing of appropriations. Historically our funded backlog increases in a month or two after final appropriations are enacted. Our second quarter, which aligns the government fiscal year is the high point and it drops down the third quarter, and then we start rebuilding again for the next year's second quarter.

So we don't see this anything more than just the seasonality we experience year over year.

Greg Konrad -- Jefferies -- Analyst

Thank you.

Operator

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

Horacio Rozanski -- President and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 50 minutes

Call Participants:

Curt Riggle -- Vice President, Investor Relations

Horacio Rozanski -- President and Chief Executive Officer

Lloyd Howell -- Chief Financial Officer

Edward Caso -- Wells Fargo Securities -- Analyst

Carter Copeland -- Melius Research -- Analyst

Tim McHugh -- William Blair & Company -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Cai von Rumohr -- Cowen & Company -- Analyst

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Greg Konrad -- Jefferies -- Analyst

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