Booz Allen Hamilton Holding Corp (BAH) Q4 2019 Earnings Call Transcript

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Booz Allen Hamilton Holding Corp (NYSE: BAH)
Q4 2019 Earnings Call
May 28, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by, and welcome to Booz Allen Hamilton's Earnings Call, covering Fourth Quarter and Full Year Results for Fiscal Year 2019. At this time, all participants 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. Nick Veasey.

Nicholas Veasey -- Director of Investor Relations

Thank you. Good morning, and thank you for joining us for Booz Allen's fourth quarter and full fiscal year 2019 earnings announcement. We hope you've had an opportunity to read the press release that we issued earlier this morning. We've also provided presentation slides on our website and are now on Slide 2.

I'm Nick Veasey, Director 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 3, 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 our forecasted results. Those risks and uncertainties include, among other things, general economic conditions, the availability of government funding for our company's 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 2019 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 2019 slides.

It is now my pleasure to turn the call over to our CEO, Horacio Rozanski. And we are now on Slide 5.

Horacio Rozanski -- Chief Executive Officer, President and Director

Thank you, Nick and good morning everyone. Lloyd and I are pleased to report today outstanding results for fiscal year 2019. The people of Booz Allen excelled on all fronts, serving clients with talent and dedication, leading our firm in exciting new directions and delivering financial performance that exceeded even our own expectations. As a result, we enter fiscal year 2020 on April 1st, with a great deal of momentum and optimism about the future.

This morning, I'll summarize our performance against the investment thesis we've presented last June. I'll also talk about the medium-term strategic outlook and highlights for fiscal year 2019. Then Lloyd will take you through the numbers in detail, including our guidance for this fiscal year.

The headline as we close the books of fiscal year 2019 is that Booz Allen in essence jump a year ahead on the three-year horizon as we saw it last June. We said at the time that our investment thesis has three parts. It begins with our differentiated market position, operating right where our clients need us the most at the intersection of consulting, mission and technology. We said we believe this unique positioning would drive 50% ADEPS growth to about $3 per share by fiscal year 2021 and that we aim to achieve this through a combination of organic revenue growth, margin expansion and efficient capital deployment. We also pointed to the potential for additional growth or option value from the new capabilities and business lines we've been investing in. Against that backdrop in year one of our three year period, we delivered 39% ADEPS growth to $2.76, for fiscal year 2019.

If you look across all the key metrics our performance improved against what we're already very strong results in fiscal year 2018. This allows us to update today our three year goal for ADEPS growth is now expected to be 66% from about $2 per share in fiscal year 2018 to about $3.30 per share in fiscal year 2021. The key to enduring success for an institution like Booz Allen is always keeping one foot in the presence and one foot in the future. What I would like to emphasize today is that we feel secure in our market position for the long term. Why because we are seeing a fundamental shift in how government leaders, think about the role of technology in their missions.

Technology adoption in Government is accelerating for reasons that are here to stay. Namely, the return of great power competition, and the digital revolution. As stated in the national defense strategy there is concern that the United States advantage over its nation state rivals it's not what it once was. And there is broad agreement that to secure our edge we must use advanced technologies, including those that have only now begun to come of age.

The senior most leaders I talked to in both government and the private sector are looking for innovation, speed and agility. The truth is the United States is contending with an attack surface that is nothing like it was as recently as 20 years ago. Space and cyber our war fighting domains as much as land, sea and air. On the software, hardware mix for both weapons platforms and defensive capabilities is steeping rapidly toward software. Years into defense and intelligence communities see this new reality and they are committed to forging a new path to protect our country and its interest. But it's why we see, for example a focus at the highest levels of DoD on securing the supply chain from industrial espionage and cyber attacks.

And urgency in the military services about moving directed energy capabilities from the lab to the field. Initial use cases for AI being pushed to the tactical edge and the establishment of Army features commanding Austin, Texas a city, known for innovation. Those are about a few of the examples I see and hear about as I travel the country and meet with defense clients and senior officials.

Turning now to the civilian agencies, our clients also feel an urgency to modernize systems, protect them and find efficiencies. The digital revolution has transformed our economy and society. This is elevating what citizens expect from their government. We see it in how federal agencies are detecting and fighting fraud, speeding the delivery of services and fundamentally transforming the user experience for digital citizens. At the same time, technology is more democratized and interconnected than ever before, this opens both great opportunities to serve citizens better and significant threats to critical infrastructure. Civil agency leaders, know that the best and most cost-effective solutions are no longer exclusively people based. They require a combination of people and technology.

And finally in the commercial sector, we see a similar dynamic with heavy focus on applying technology to the biggest problems clients face. Such as the theft of intellectual property or cyber vulnerabilities in the supply chain. The private sector in many ways is ahead of government in terms of adoption and demand for cyber security solutions continues to grow. The bottom line for Booz Allen, is that the market for our (Technical Difficulty). We believe that demand for complex, high-end technology solutions will keep growing. The investments we have made and will continue to make in talent, capabilities, solutions and new business lines, have been essential to creating our first mover advantage. They have bolstered our differentiation and we believe, have allowed us to separate from the path and maintain our industry-leading position.

Booz Allen outperformed in fiscal year 2019 because we operated at the top of our game in a very good market. Clarity about the federal budget allowed our core government clients to move forward on technology adoption that has long been needed. They turn to us and we delivered, as we approach the end of the two year budget agreement we are encouraged by recent developments. But remain concerned about the pathway is available for Congress and the White House to reach a new agreement. Therefore as we opened this fiscal year, we have planned for a relatively more aggressive first half and expect to execute a more conservative plan in the second half. We are capturing all the opportunity we can. Executing against contracts, managing costs and accelerating our hiring, so that we can get ahead of any possible disruption up after September 30. In short, we are monitoring the political dynamics, but we remain focused on the things that we can control.

Before turning the call over to Lloyd I want to return for a moment to how proud I am of our firm's performance in fiscal year 2019, particularly in light of January's government shutdown. We delivered another year of industry-leading organic revenue growth, exceeding our guidance. This was driven in part by another strong year of hiring in a very tight labor market. EBITDA margins and ADEPS both increased significantly and continued strong cash generation supported our capital allocation goals. Book-to-bill came in late in the fourth quarter. But we believe this is largely due to timing and reflects the quarter-to-quarter volatility inherent in pursuing larger awards. We feel confident that our backlog and headcount along with our opportunity pipeline and hiring expectations will continue to drive revenue and earnings growth into the future.

Global commercial had another very successful year, with 32% revenue growth despite some challenges in our business in the Middle East. The leaders of our commercial business deserve huge credit for operationalizing against its cyber first strategy. Our talent and capabilities are unmatched due to our long history of supporting cyber missions in the government. As a result, we are winning more and more work with Fortune 500 companies.

Finally, I'll mention that in fiscal year 2019, we continued to push forward an option value capabilities as I've highlighted in previous calls. The launch of District Defend and Recreation.gov were important milestones and we introduced AI capabilities to more clients over the course of the past year. While these are still nascent businesses for us. We think they hold significant potential to drive incremental growth in the long term. We will continue to update you periodically on the progress we're making.

On the strength of our differentiation, the global strategic environment and our outstanding performance in FY '19, we're issuing guidance for fiscal year 2020, that again forecast meaningful growth even in what could be a more challenging budget environment. We expect another year of industry-leading organic revenue growth historically, high margin performance and value creation for shareholders through ADEPS growth and smart capital deployment. The financial outlook underscores precisely what I said at the start of my remarks. As we opened fiscal year 2020 Booz Allen is a year ahead of the expectations we set just a year ago. Together our team of over 26,000 is forging ahead, eager to again demonstrate the strength of this institution, our dedication to declines missions and our desire to create value for shareholders.

With that, Lloyd over to you.

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks Horacio, and good morning everyone. I have the pleasure today of presenting another exceptional quarter of performance to round off a year that again produced industry-leading organic revenue and record earnings. When we presented our investment thesis almost a year ago we set ourselves ambitious three year financial goals 50% ADEPS growth driven by a combination of annual revenue growth of 6% to 9% and 10 to 30 basis points of margin expansion over the three year period and a cumulative $1.4 billion of capital deployment including dividends over the same timeframe.

Thanks to the unique market position we occupy a favorable market environment and the hard work of our people. We are further along in our three-year journey and we thought we would be at this point.

For the full year, as Horacio noted, we outpaced our guidance for both the top and bottom line. Growth and revenue excluding billable expenses of just over 9%, and adjusted EBITDA margin performance well ahead of our expectations enabled us to deliver adjusted diluted earnings per share of $2.76 for the fiscal year 2019. Just $0.24 shy of our $3 ADEPS goal for fiscal year 2021. These results show that our strategy and operational execution position the business to take maximum advantage of a favorable market environment in fiscal year 2019. Our outperformance in year one that the new foundation for the remaining two years of our investment thesis horizon and we anticipate will enable us to end fiscal year 2021 further along on our growth trajectory than we initially thought.

As Horacio noted, this means that we are in a position today to update our three-year ADEPS goal to 66% ADEPS growth from fiscal year 2018 through fiscal year 2021. Our continued confidence in the business and the strength of our unique market position are reflected in both the updated investment thesis goals and our guidance for fiscal year at 2020, which I'll walk through this morning.

Let me start though with a summary of our results for fiscal year 2019. Please turn to Slide 6. At the top line, revenue and revenue excluding billable expenses grew 8.7% and 9.1% respectively for the full year. As we said repeatedly, our strategy centers on delivering sustainable quality organic growth by serving our clients in ways that would be difficult for others in the industry to match. Our performance this year building on our 6.2% revenue growth in fiscal year 2018 demonstrates that our strategy is working. We managed well through a partial government shutdown in January and kept going.

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, total headcount was 26,069, up by 1,430 year-over-year or 5.8%. Hiring and retention during the fourth quarter were strong, allowing the firm to surpass our targeted 5% growth in headcount for the full year.

In the quarter, we grew our headcount by 266 compared to a net decline of 108 in the fourth quarter of fiscal year 2018. New retention and training programs aimed at minimizing attrition and upscaling our talented workforce that helped fuel this growth in headcount and give us added confidence that we'll have another healthy headcount increase in fiscal year 2020.

Turning to Slide 7. Our fourth quarter book-to-bill was 0.36 times lower than what is typical for Q4. Quarter-to-quarter, there was some volatility in our book-to-bill number last year and the unevenness may continue. You'll recall that our second quarter book-to-bill was a record for the firm, a period when we won several large recompete as well as both new work and work taken from our competitors.

The last two quarters we have seen a few opportunities protested or pushed to the right. And quite frankly, they're not win to Recompete that we had anticipated winning. We do not view this as a trend and are confident that we have ample backlog in proposal volume to support growth over the long term. I'll also note that one large contract that had been protested was awarded to our firm this month. If that $1 billion award had been resolved before the end of March, book-to-bill for the fourth quarter would have been 0.93 times. Even with that award excluded, our book-to-bill for the fiscal year was 1.49 times, the best full year mark since our IPO. And more importantly, total backlog at fiscal year-end was $19.3 billion, 21% larger than a year ago. Funded backlog as of March 31st, was up 28% to $3.4 billion. Unfunded backlog was down 11.4% at $3.7 billion and priced options increased 33% to $12.2 billion.

Demand signals remains strong, particularly in portions of the market where mission and technology intersect, and the focus is high-end differentiated solution. And as our hiring trends and guidance suggests, we are very much in a growth posture for the foreseeable future.

Moving to the bottom line. As I said earlier, we once again achieved record earnings. Full year adjusted EBITDA was $675 million, up 15.4% from the previous year. This increase was driven primarily by our top line growth, strong contract level performance and solid operational management. Our people deserve lots of credit for how well they serve clients and manage this complex business over the course of the year.

As a result, our adjusted EBITDA margin for the full year was 10.1% well above the 9.5% delivered in fiscal year 2018 and well ahead of the 10 to 30 basis point improvement over the three years that we articulated in our investment thesis. Our excellent margin performance during the first three quarters gave us room in the fourth quarter to accelerate various initiatives aimed at attracting and retaining talent and developing our capabilities and solutions.

While this had an impact on the final quarters margin, we manage the business for the long-term, and we are pleased to be able to make decisions like this. Decisions that strengthen our position going into fiscal year 2020. Full year net income DEPS and ADEPS grew significantly. These increases were primarily driven by revenue growth, profitability improvement and lower effective tax rate and a lower share count in fiscal year 2019 due to our share repurchase efforts.

Net income grew 39% year-over-year to $419 million. Adjusted net income was $395 million, up 34% from fiscal year 2018. Diluted earnings per share rose to $2.91 from $2.03 in the prior year and adjusted diluted earnings per share increased to $2.76 from $1.99 in the prior year. During the fourth quarter, our bottom line also benefited from the divestiture of a small asset called riskCanvas which is a financial compliance service offering. While relatively small this transaction demonstrates our willingness and ability to monetize our intellectual property when it's in the best interest of the firm, our people and our shareholders. Pivoting to the balance sheet, we ended the fiscal year in a strong position with $284 million in cash on hand. Our cash position was fortified by the $500 million in operating cash generated during the fiscal year, which put us at the very top of our forecasted range. This represents 35% growth over fiscal year 2018.

Several factors led to the improvement in our cash position. We refocused our invoice prioritization and collection efforts, working closely with government agency counterparts to prioritize invoices and work through any issues. We also work collaboratively with payment offices to quickly return to normal operations after the government shutdown. Also for the full year, we benefited from an approximately $76 million decrease in cash taxes paid, primarily due to a one-time tax methodology change. Capital expenditures in fiscal year 2019 were $95 million in line with our expectation.

Finally, I'll note that we executed and drew down the $400 million delayed-draw portion of our Term Loan A as planned on April 23. This additional capital of attractive financing rates both improves our capital structure and supports our commitment to deliver shareholder value through disciplined capital deployment.

Please turn to Slide 8. During the fourth quarter, we continue to execute on our capital allocation strategy that is designed to deliver both near and long-term shareholder value. For the full fiscal year, we returned $364 million to shareholders through dividends and share repurchases, surpassing our goal of $350 million. Share repurchases amounting to $250 million were executed at an average price of approximately $47 per share.

I'm pleased to announce that our Board of Directors last week approved a $400 million increase in the company's share repurchase authorization, which takes our total remaining capacity to $658 million. This increased authorization will provide us additional capacity to opportunistically take advantage of business and market condition to opportunistically take advantage of business and market conditions. Today, we are also announcing that the company has authorized a regular dividend of $0.23 per share, payable on June 28 to stockholders of record on June 14.

Turning to our outlook for the year. Please move to slide 9. Booz Allen is carrying momentum into the new fiscal year and as Horacio said we intend to come out of the gate fast and build on what was an exceptional fiscal year. Given the uncertainty around government funding patterns beyond September 30, we believe that planning for a relatively more aggressive first half and conservative second half is prudent.

At the top line we expect to continue our industry leading performance with organic revenue again growing between 6% to 9% in fiscal year 2020. Growth in revenue excluding billable expenses is expected to be in the same range, to support this growth, we are targeting another year of 5% headcount growth even as the labor market remains tight. We expect to sustain full-year adjusted EBITDA margin in the low 10 on par with fiscal year 2019 which was our best margin performance since our IPO. At the bottom line, we again expect a significant increase with full year adjusted diluted earnings per share between $2.90 and $3.05. This guidance is based on an assumed a 137 million to 141 million weighted average shares outstanding, and a tax rate in the range of 23% to 25%.

We expect to generate $400 million to $450 million in operating cash, which is in line with last year, if you exclude the non-recurring tax-related items I mentioned previously. And finally, for fiscal year 2020 we are forecasting CapEx of $120 million, as we continued to invest in facilities, infrastructure and technology. This includes new, secure and retrofitted space and technology to support new business line, continued growth outside the Washington Metro area and an increasingly technical workforce.

Turning to the goals, our investment thesis here are our expectations through fiscal year 2021. We anticipate continued ADEPS growth beyond this fiscal year to $3.30 per share by the end of fiscal year 2021. This would represent ADEPS growth of 66% over the three year period. As we said a year ago, we have several levers, we can pull to achieve this bottom line result, including revenue growth, margin expansion and capital deployment. Our goal of 6% to 9% annual revenue growth remains unchanged. We will continue to invest in our business and believe that EBITDA margins in the low '10s are sustainable. And on capital deployment, we are reaffirming our intent to return at least $1.4 billion in capital over the three year period which represents a major component of our value proposition to shareholders.

Further I'll note that we continue to believe that quarterly dividends equating to approximately 2% yield provide meaningful value to shareholders. In closing, we are extremely pleased with our fiscal year 2019 performance. Booz Allen is on the right path, we are delivering exceptional financial results. We have built up sustainable momentum in the business and our people are more engaged and focused on our clients missions than ever before. The entire management team is excited about the year to come and we continue on our path of achieving the goals of our investment thesis.

With that, Nick let's open the lines for questions.

Horacio Rozanski -- Chief Executive Officer, President and Director

Great, Bryan. Please open the line.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) And our first question will come from the line of Carter Copeland with Melius Research. Your line is now open.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning gentlemen. I hope you had a good holiday.

Horacio Rozanski -- Chief Executive Officer, President and Director

Good morning, you too.

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Hey, Carter.

Carter Copeland -- Melius Research -- Analyst

Horacio, I wondered if I could just sort of ask you a high-level question about sort of comments you alluded to in your opening remarks, and it's just around the evolution of the firms growth posture. I mean back when you kicked off Vision 2020, you were in a sort of investing and growth when growth wasn't there. But now, a lot of your comments and what you're seeing in the market, shows you that the customer is embracing growth and kind of a new way. So when you think about what it is you're investing in, whether it's verticals or dollars or, whatever. Can you give us some color on where you may be shifting focus to or from or if there are places that you can accelerate your efforts. So I just, it seems to be a bit different than where we were a few years ago and I wondered if you could kind of give us some color on how that's evolving?

Horacio Rozanski -- Chief Executive Officer, President and Director

Thanks, Carter for that question. I guess the way I would answer is, when we launched Vision 2020 we're clearly investing way ahead of demand, and that was challenging, because it's hard to sustain that if you will, the desire to continue to do that, we are now in the payoff period of Vision 2020 where the demand is there, where we are well positioned to capture what we have prepared for. If you think about everything from AI to open architecture to digital, we're there; directed energy, we're there integrating all these multi-domain warfare technologies and tactics, we're there, that's what we have been preparing to do.

And as a result, we're looking at industry leading revenue growth for at least the next couple of years, we're looking at being able to take that with strong margins through to the bottom line and to deliver for our shareholders. What we had hoped and we intend as we do that, we continue to double down on these technologies and on being the technology translator for our clients as they seek more of these to counter threats and to improve our missions.

Carter Copeland -- Melius Research -- Analyst

Do you see more areas like the ones you mentioned to -- that are -- that are significant that three years from now we'll be talking about in the same way?

Horacio Rozanski -- Chief Executive Officer, President and Director

You know, a lot of, I think what we're going to be evolving to with the conversation we've begun to have a year ago in June at Investor Day, along we call option value, the idea that we can monetize for intellectual capital in different ways and take these new technologies in new ways creating platform for AI not just AI services creating new value at higher margins on directed energy. I think these are the kinds of things we're going to be talking about over the next couple of years. But at the same time I don't want to minimize that -- the value that we are creating already in our core business at historically high margins at industry leading revenue rates. We expect an intend to see that continue, and we're, as we build the option value portfolio we're doubling down in all the things that are working.

Carter Copeland -- Melius Research -- Analyst

Okay. Great. Thanks. I'll go with the follow-up and let somebody else ask. Thanks, guys.

Horacio Rozanski -- Chief Executive Officer, President and Director

Thank you.

Operator

Thank you. And our next question will come from Jon Raviv with Citi. Your line is now open.

Jon Raviv -- Citi -- Analyst

Hey good morning, everyone. So you raised your FY 21 numbers, but you're sticking with $1.4 billion of deployment. So I mean, there is some excess cash somewhere. Can you talk about your plans for that related to your huge (ph) CapEx and certainly consuming some. So can you help us think about that strategy and the payback periods for that sort of spending?

Horacio Rozanski -- Chief Executive Officer, President and Director

Sure, we're very happy with what we've been able to do in terms of cash generation and when it comes to our capital deployment, we've got a strong position that's driven by combination of our performance, operating performance as well as our balance sheet growth. We also feel that our deployment strategy is disciplined and provides as we said in our prepared remarks, value for our shareholders both the near and long term. We're going to continue to be focused on the levers that we've long talked about, share repurchases, regulatory dividends, capabilities tuck-ins and possibility of a special. That has really allowed us to leverage our balance sheet strength, where we've got ample capacity to meet our investment thesis going forward.

So from cash generation, the capital deployment, we feel that our strategy is working and we are very pleased with the results to date. When it comes to CapEx, we said that we expect to be around 100 million for the next couple of years again focused on investing in our infrastructure, our facilities as well as long overdue, IT monetization efforts. We feel this is a smart investment as we continue to grow and provided the financial performance, the returns that we've given and we feel that from a CapEx standpoint, the return is going to continue to fuel that growth.

Jon Raviv -- Citi -- Analyst

And just to confirm Lloyd, on the call you said $120 million for FY 20?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct.

Jon Raviv -- Citi -- Analyst

Okay. And then just a quick follow-up, just thinking about FY '20. Can you just help us bridge to the bottom line number, the EPS number, just given the elements you've given us. I know that the margin outlook isn't precise and then though that the FY '19 had some one-time is flowing through margins. Have you sort of level set us on which numbers we should be starting from, as you think about margin going into an FY 20?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Sure. As we said in our investment thesis, we're very focused on growing aid apps and given the performance that we've had in FY '19, we feel that we are well on track with our investment thesis. Starting at the top line, the 6% to 9% growth range again is consistent with what we see occurring in the market, given Horacio's comments about the entire year. We feel that demonstrating above market growth and then allows us to provide the ADEPS performance at the bottom line. On the margin, we're well ahead from the mid-9, we're very pleased with 10.1% that we produced in FY '19 and we expect to hold that going forward. That then with smart tax improvements that we've been able to achieve will allow us to reach the ADEPS range of $2.90 to $3.05.

Jon Raviv -- Citi -- Analyst

Thank you very much.

Operator

Thank you. And our next question will come from Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good morning, guys and thank you. Just to Carter's question, Horacio, maybe we could follow-up. How do we think about as your focus changes on how does hiring change? How does that change through your targeting as employees and what does that have in terms of wage implications and maybe it changes your overall contract structure?

Horacio Rozanski -- Chief Executive Officer, President and Director

Hey Sheila, great question. I -- we've been on this path of hiring and increasingly more technical workforce now for several years. I talked a year ago about the statistics and they show that the growth in our technical workforce is faster than the overall growth rate. As you heard from lower, this year we added over 1,400 net new employees again the predominant characteristic is people who can integrate technology, especially the leading-edge technologies with all of our mission knowledge and all of our consulting expertise to drive real results or clients.

That is shaping -- our work and is being shaped by what we're selling. If you look into our pipeline, a lot of our pipeline is around taking new technology and integrating it into clients missions in different ways, because we've been added longer because we have now scale in all of these things. We feel that that's a differentiated position in the market. It allows us even to attract a new set of partners and collaborators from industry, especially from the commercial sector that wouldn't have a pathway into the Federal sector you know, we talk about our partnership with NVIDIA, we've talked about many of the Silicon Valley companies that we work with. All of that together creates a unique position. Our clients have been willing to cover the reality that these folks operate at higher salaries. The fact that a lot of our contracts are cost-plus in the sense is actually very positive and we feel good about our ability to both maintain pricing, as Lloyd talked about the same historically high margins while at the same time continuing to grow rapidly this direction.

Sheila Kahyaoglu -- Jefferies -- Analyst

Great. Thank you. And then Lloyd, one for you. Cash flow guidance is relatively weak relative to higher EPS growth. How do we think about maybe cash flow growth from here and closer in line to what your net income is growing?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, Sheila, we're pleased with our ability to improve upon our cash generation, the improvements that we've made over the course of FY '19, we feel really kicked in, especially over the fourth quarter. We are expecting to be up to 450 million in FY 20 and that excludes the tax benefit that we received in FY '19. That being said, we think we're on pace to be at the same levels, if not slightly above in FY 20.

Sheila Kahyaoglu -- Jefferies -- Analyst

Great. Thank you.

Operator

Thank you. And our next question will come from line of Cai von Rumohr with Cowen & Company. Your line is now open.

Cai von Rumohr -- Cowen & Company -- Analyst

Yes, thank you very much. So your G&A as a percent of sales spiked up to 15.3% that's considerably higher than it's been in past quarters. Was that investment growth, why was that too high? And what should we be looking for going forward into fiscal '20? Thanks.

Horacio Rozanski -- Chief Executive Officer, President and Director

Cai, we manage on an annual basis, the increase that you make reference is really related to salary and related benefits for our workforce.

Cai von Rumohr -- Cowen & Company -- Analyst

Well, is it therefore going to continue in fiscal '20, what sort of G&A to sales ratio should we look for? You've been going around 13.8 something like that. Are we going to be in that area?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I mean it's really related to the increase in headcount that we've been able to achieve with over 1,400 folks added, that's what we believe is contributed to the slight increase, but as Horacio mentioned, we're going to continue to focus on an overall workforce increase around 5%, and I think the resulting ratio be reflective of that.

Cai von Rumohr -- Cowen & Company -- Analyst

Great. And last one is, if we take the midpoint of your guidance, the individual items of your guidance for fiscal '20, it looks like you should do about 3.10 not $2.90 to $3.05, am I missing something there?

Horacio Rozanski -- Chief Executive Officer, President and Director

No, we're very happy with our guidance at this point really feel that it reflects the confidence in our market position and with an ADEPS growth of 8% year-over-year at the midpoint. We believe that we're certainly on track with our investment thesis.

Cai von Rumohr -- Cowen & Company -- Analyst

Okay. Great. Thank you.

Operator

Thank you. And our next question will come from the line of Edward Caso with Wells Fargo. Your line is now open.

Edward Caso -- Wells Fargo -- Analyst

Hi, sir, following up on Cai's question here. Can you level (ph) set us on the net interest expense for assumption in F '19, obviously, you've raised 400 million not deployed yet. So, you've got active share repurchase maybe at a more aggressive pace this year as well embedded in the guide. So if you could get a level set us on interest? Thanks.

Horacio Rozanski -- Chief Executive Officer, President and Director

Sure. We feel that we're going to maintain the interest given today were at 52% (ph) fixed rate given versus two years ago we were at zero. So, we're focused on maintaining that given where rates are today.

Edward Caso -- Wells Fargo -- Analyst

Can you offer the dollar number or dollar range for that's implied in your guidance?

Horacio Rozanski -- Chief Executive Officer, President and Director

No.

Edward Caso -- Wells Fargo -- Analyst

Okay. My other question is, the clients are begging you for innovation and you talked a lot about innovation, but the contracting process still seems to fight that what are you -- what are you doing or your clients changing behavior or what are you doing to sort of facilitate the adoption of innovation?

Horacio Rozanski -- Chief Executive Officer, President and Director

We are seeing a shift in some places, I think -- as you know, the client community is not monolithic and some contracting shops lean forward into new contracting approaches into being able and willing to apply that flexibility that's available through them, we're seeing OTA as one example of how that manifests itself, but that's not the only way which are doing, and we're seeing clients do bake-offs around prototypes and choose best of breed, and we're leaning into the types of clients that are really valuing innovation and looking for them inside each agency, inside each department, and finding them. And that's what's fueling both the growth, but also the differentiation that allows us to sustain by margins, to sustain unit growth rates and to attract the right people that then allows us to start that virtuous circle, if you will all over again. I can't say every client is there, I don't think that would be the right characterization, but there are certainly enough clients there and enough clients under way there to paying for us a very bright picture about the future.

Edward Caso -- Wells Fargo -- Analyst

Great. Thank you.

Operator

Thank you. And our next question will come from Joseph DeNardi with Stifel. Your line is now open.

Joseph DeNardi -- Stifel -- Analyst

Yeah, thanks, good morning. Horacio or Lloyd, can you just talk about the -- kind of the degree of competition that you typically see for business, maybe if you want to talk about the pipeline or the backlog? How much of the business is maybe you and -- one to two competitors three to four and then, more than five ballpark. Thank you.

Horacio Rozanski -- Chief Executive Officer, President and Director

I'll be honest, we don't look at the business that way and because a lot of these procurements are complex and teams get form sometimes our teaming with somebody want procurement and nearer than competing head on another one. The environment remains very competitive. And our clients benefit from that and they benefit the pricing and the benefit in the quality of the work that they end up getting. I feel very confident that we have carved for ourselves a unique place in this market around all of the things that we've been talking about this morning, so while we will go into procurements oftentimes with several competing themes, we tend to prevail on the strength of the uniqueness of our solution. On the strength of having done something like that before as opposed to this being our first time and ultimately on the quality of the delivery that either will add to that or will come from that, that then doesn't just like you win the job, but also win the Recompete. So again, I mean it all goes back to this notion of not how many competitors that how differentiated are you, when you go we send your answer to the client.

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

I would just add, we remain focused on our backlog in 19, it was up around 20% and front it was up 28%. So from our perspective, we are not demand constrained, it really goes back to competing in a tight labor market, which we've been able to do with over 1,400 books added to the team in '19.

Joseph DeNardi -- Stifel -- Analyst

Okay. And sorry if you addressed this earlier, but can you just quantify maybe the cadence through the year in terms of what the upside could be. If you get a budget passed maybe sooner than you're expecting? Thanks for the question.

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

So let me do a qualitative view on that because we don't do quarter-by-quarter guidance, but what we have said is, we are planning to be relatively more aggressive in the first half, if you look us typically we come out of the blocks in the first quarter conservative, we typically come out flattish on hiring and we've built up throughout the year. This year we're trying to come out of the blogs harder, with a stronger hiring in the first quarter and the first half. And if we have a budget and everything is straight in the second half we will continue in that trend. And if things are a little bump year than that we will hopefully have built enough momentum to deliver on all the commitments for the year in spite of that.

Operator

Thank you. And our next question will come from the line of Gavin Parsons with Goldman Sachs. Your line is open.

Gavin Parsons -- Goldman Sachs -- Analyst

Hey, good morning, everyone.

Horacio Rozanski -- Chief Executive Officer, President and Director

Good morning.

Gavin Parsons -- Goldman Sachs -- Analyst

Lloyd a second ago, you mentioned that the funded backlog is up almost 30% year-over-year. You look back at the last couple of years, the unfunded and priced options have pretty significantly outgrow and funded and this is the first year where you really saw funded kind of gain traction. Is that a direct result of price dropping through to unfunded dropping through to funded. So should we look back at the historical total book to bill and think of that as translating through to funded and giving you more visibility and growth going forward, is that the wrong way to think about it?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

No the right way to think about is looking at the drilling 12 month when it comes to book to bill that's what we're focused on -- typically, the quarter-to-quarter just track the seasonality, the government procurement cycle is under. I think it's great that fund is up 28% and as I said in previous calls, we looked at price option is really as a leading indicator in terms of our client demand not only for conducting the work, but also the demand for Booz Allen to support it. So book to bill of around 1.5 is great the backlog being up, as I mentioned a minute ago going into '19 the pipeline value wise is up 20%. So again we're not constrained by demand from our perspective, it's really competing in the tight labor market.

Gavin Parsons -- Goldman Sachs -- Analyst

So in essence you could grow 6% to 9% without maintaining a 1.5 book-to-bill?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

No, I mean -- again if we're bringing in headcount around 5% that provides us with a conversion that will put us in that 6% to 9% range, the 1.5 because as we look at it really just over the course of the year. Do we have the demand there to do that conversion, but for our model we really remain focused on our people invest in our people development and training programs and so that really fuel the top line growth from our perspective.

Gavin Parsons -- Goldman Sachs -- Analyst

Makes sense. So then maybe can you just help with how much of -- kind of the investment in both headcount and CapEx? How much of those going toward future wins B&P versus kind of scaling and ramping up that what you've already won?

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I mean we don't break it down that way basically our investment, which you saw in Q4 is really aimed that our people, our people program, the recruitment of the talent in the tight labor market. And that has given us momentum we believe going into FY 20. On the investment that we had around our infrastructure, IT and facility is really hand in hand with that people focus. On today's job market our workforce is looking for an environment where they could be highly collaborative, our facility upgrades facilitate that. And then we want to work with the latest and greatest technology in order to support our client and monetization efforts are into that.

Horacio Rozanski -- Chief Executive Officer, President and Director

Let me just add our proposal pipeline is also up over last year this time. So we're not trading all, growing our backlog, growing our client portfolio we're growing our people we're actually doing both.

Gavin Parsons -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Thank you. And our next question will come from line of Tobey Sommer with SunTrust. Your line is now open.

Tobey Sommer -- SunTrust -- Analyst

Thanks. Are there new areas that you're investing in thematically if I think back to the areas of investment that you focused on for Vision 2020, wondering if there are new ones on the horizon that you're investing in today and maybe winning contracts in two, three years? Thanks.

Horacio Rozanski -- Chief Executive Officer, President and Director

Sure. I think it's -- let me put it into two buckets, one bucket, as I mentioned before, is the option value portfolio where we're investing in taking intellectual capital that we have, but we think have high growth potential into the future and building a business model around that, that would potentially deliver it's completely different economics. So I'll use artificial intelligence, as one example, inside our core business, we are seeing tremendous pipeline and a lot of growth in the traditional services model where we're taking our intellectual capital to our clients in the form of labor hours. People working on some of the major projects that you see mentioned in the press building the algorithm, building the models that actually allow AI do better intelligence that do better defense of our troops to do fraud detection and so forth.

At the same time, we are investing on -- trying to figure out if we can create software, software as a service AI as a service type environment that would actually have different economics and that could actually be sold as part of the complete solution to the client together with the labor hours. And then that's the kind of thing that has been very excited about the future, we have amazing intellectual capital that needs to get monetized in different way so that we can continue to invest and advanced new technologies. At the same time, we're looking at Quantum, we're looking at 5G, which is not tomorrow it's today on a number of other things. So we're always looking at what's next in the horizon and pulling those things forward into clients as soon as we can.

Tobey Sommer -- SunTrust -- Analyst

Thanks. And when I think about the business model and growing organically 6% to 9% the topline and headcount, a little bit lower than that. Could you just talk about margins and where they can go because your initial three year look at an annual margin expansion target and you kind of shifted to talking about the low 10s. Thanks.

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Sure, I mean, we're very pleased with our ability to be in the low 10s and from our perspective, we're ahead where we thought we would be somewhere is around -- about 60 basis points. We're always going to be focused on strong operating performance and cost management, we were able to do that very well in FY '19 and that produce the results that we saw finishing up at 10.1%. In the long run we believe margins are going to be driven by our growth in our commercial business as well as the option value investments that Horacio spoke to. So we think it's sustainable in the low 10s and that's our goal for FY 20 through '21?

Operator

Thank you. And our next question will come from the line of Tim McHugh with William Blair. Your line is now open.

Tim McHugh -- William Blair -- Analyst

Hey, gusy, thanks. Just first I guess maybe on the two Recompete you said you actually didn't win that you thought you would win if there any trend there are similarity or anything you learned? I guess, as you think back to why you didn't win them as we think forward? Thanks.

Horacio Rozanski -- Chief Executive Officer, President and Director

No, I mean, these things go driven by several factors in today's environment, contracts are getting bundled we lose some things as we're chasing different types of new work consistent with our strategy and we are always actively shaping the portfolio. Bottom line is, our pipeline is up by 20%, we remain very confident going forward.

Tim McHugh -- William Blair -- Analyst

Okay. And then can -- I guess on the Middle East, it was mentioned briefly some disruption I guess within the global commercial piece. I assume, I guess maybe elaborate, but I assume that's just related to some of the headlines we're seeing about stripening out (ph) of Saudi Arabia, but can you elaborate and how meaningful is that to what the commercial as we think forward?

Horacio Rozanski -- Chief Executive Officer, President and Director

So -- sure. A couple of issues. One -- this are industry issues are not just Booz Allen issues. The pattern of cash collections in that part of the world tends to lead to higher DSOs and we're both aware of that and managing that closely. The geopolitical implications that we talked about in terms of the headlines, it has some secondary effect, so for example, it takes longer to get export licenses now than it used to and we need to look at that very carefully, because a lot of our work is under export licenses. And we and all companies are being judicious in terms of the work that we take on to make sure that it aligns with our values and that is long-term sustainable.

Having said that, global commercial and its totality is only 4% of our portfolio and our work in the Middle East is well less than half of that and when you look at the totality of our global commercial business, it has been growing upwards of 25% now for several years. Our work, especially in the U.S., continues to grow very robustly. We're very excited about it and we see great potential for continued growth and continued margins into the future.

Tim McHugh -- William Blair -- Analyst

Thank you.

Operator

Thank you. And I'm showing no further questions in the queue. So, now it is my pleasure to turn the conference back over to Mr. Horacio Rozanski, President and Chief Executive Officer for any closing comments or remarks.

Horacio Rozanski -- Chief Executive Officer, President and Director

Thank you very much and thanks everyone for your questions. I hope Lloyd and I have conveyed our pride in the firms performance, our confidence about our market position and our optimism about the future. The great team of professionals we have the privilege to lead is serving clients exceptionally well and expanding our business into exciting new areas. It's on the strength of their talent, their focus and values that this institution continues to thrive. So we look forward to continued growth and success in fiscal year 2020. Thank you again for joining us today and enjoy the rest of the day.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day.

Duration: 58 minutes

Call participants:

Nicholas Veasey -- Director of Investor Relations

Horacio Rozanski -- Chief Executive Officer, President and Director

Lloyd Howell -- Executive Vice President, Chief Financial Officer and Treasurer

Carter Copeland -- Melius Research -- Analyst

Jon Raviv -- Citi -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Cai von Rumohr -- Cowen & Company -- Analyst

Edward Caso -- Wells Fargo -- Analyst

Joseph DeNardi -- Stifel -- Analyst

Gavin Parsons -- Goldman Sachs -- Analyst

Tobey Sommer -- SunTrust -- Analyst

Tim McHugh -- William Blair -- Analyst

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