Booz Allen Hamilton Holding Corporation (BAH) Earnings Call Transcript & Summary

Thanks so much, everyone, for joining us for the Jefferies Virtual IT Services Summit. Today, we have the Booz team with us. I'm going to hand it over to Rubun Dey, who's Head of Investor Relations, for a second, and then we'll talk to Lloyd and Kristine. Booz -- Rubun, sorry.

Thanks. Sure. Before we get started, please note that we may discuss forward-looking statements here that are subject to known and unknown risks and uncertainties as well as certain non-GAAP metrics we believe are useful in understanding our business. More information regarding our forward-looking statements and reconciliations of non-GAAP to GAAP are included in our SEC filings. So back to you, Sheila.

Thanks, Rubun. So we have Lloyd Howell, a proper introduction, who's CFO and Treasurer; and Kristine Martin Anderson, who's Executive VP of the Civilian Services Group. Just a quick disclaimer. Jefferies is restricted on Booz, so we won't be asking certain questions for that reason. But I'll kick it off, Lloyd, with bigger picture items. And just a housekeeping item for those on the webcast, feel free to ask a question into the webcast, and I'll read it out. So Lloyd, just to start it out. You've talked about strong demand for services and solutions in this, but headwinds around election, budgets and COVID remain. How do you think about these areas normalizing?

First of all, Sheila, it's great to see you. Thank you to you and Jefferies for hosting today's conference. Kristine, Rubun and I are happy to be here. As you recall, in our third quarter, there were several dynamics that we began to feel following a very strong first half to our FY '21. And those included election uncertainty, some programmatic shifts, a snapback and our workforce productivity levels. What we said in the third quarter is that we saw those as temporary. And that in the future, things would start to climb back to a new normal but certainly wouldn't be overnight. What we saw toward the end of our fiscal year was certainly a return to very strong demand signals with our highest book-to-bill for our fourth quarter than we've ever had before. So coming in at 1.38x, that was very encouraging. And with an overall growth in our backlog to $24 billion, we felt that, okay, the demand signals are there. Let's continue to win work. So we've maintained strong win rates. But when it came to the headwind around programmatic shifts, we were expecting a $51 million to $100 million range. They actually came in at $94 million. But again, we had very strong bookings. On the second matter, which was a snapback to staff utilization or productivity, we had estimated that to be about a $50 million headwind. That came in at $40 million. But what we also saw was a continued normalization of billability, PTO usage. And our team is managing that as well as we can, while, at the same time, being sensitive to our workforce welfare, encouraging them to take time off because it's been a very stressful year. And then lastly, with the billable expenses coming in lighter due to less business travel, we expected that to also be in the range of $50 million to $100 million. That actually came in at $60 million. And going forward, we expect that to turn around a bit. We've described the year as in the first half a building and then a stronger second half. And we think billable expenses will correspond to that type of path or trajectory. So not everything has come back. We didn't expect it to at this point. But certainly, on the demand side, we're very encouraged by what we've seen. And the operational priority for us is really on the recruiting side. So our business leaders are motivated. They're on it. We saw a slight pickup in the fourth quarter. We're encouraged by that. But we know our work is not done. We expect that to create some choppiness over the next couple of quarters.

And maybe I think Horacio and yourself have been very good at positioning Booz and aligning it to the right budget areas. We don't have -- we won't have a fed up this time around, but what are your expectations around the future budgets? And how does that change within your defense, intel and civil businesses?

Yes. It's interesting. Prior to the pandemic, the thinking was that we would see a flattening to the budget, in particular, defense. And Booz Allen would have subscribed to that. With a number of years of growing budgets, sort of was going to hit that next sort of cycle. But we were encouraged by the fact that much of our portfolio is aimed at what we see as critical missions, top priorities for all of the federal market. Specifically, IT modernization efforts, artificial intelligence, cybersecurity, including data analytics. These are all topics that have been consistently growing in demand over a long period of time. So even in a constrained or a flattening budget, we still remain optimistic and confident that we're positioned well. With the new administration coming in, certainly, their agenda has been on health, infrastructure, environment, education. And Kristine actually manages the part of our portfolio that would include those areas. And I think what you'll hear from her is that we are working with our clients. We're positioned well. And should we see any pivot or a new sort of initiative underway, historically, we've been very aggressive with getting in front of that and competing for that work. So Kristine, I don't know if you want to add any comments to what you're seeing on the civilian side.

Sure. Well, first of all, it's a really exciting time to be working on the civilian side because of the focus on both modernization and transformation in many of the civil missions. And so we do tend to focus on a set of core missions. And those core missions have been exactly aligned with where the Biden administration has been going. So just even taking like the American Rescue Plan, the focus on the pandemic, on IT modernization, on cyber, are all areas that we have already been positioned to do work. And then, of course, the new builds, which I think are still shuffling, and we'll see soon what will come out of those, are also strongly aligned to the work that we do. So there's 2 natural delays that are happening right now. One delay is the change in administration, where you're seeing the senior officials just getting into their roles over some of these programs. And the second natural delay is after the -- after any act is passed, there's a period of time before the money is released. So for example, just starting in early June, the money around the IT transformation really starts to come out of the federal CIO. So that gap from the time the act is passed till the time the money is released, it's just a natural gap. So we're very excited about what's coming forward for us but being patient.

And Kristine, just to frame up for us, how big is the civil business and the -- how do you divide it up in terms of end markets?

Yes. Just over $2 billion and the -- and Lloyd didn't give me the exact number as of today. And health is about half of that.

Okay. Perfect. Lloyd, turning to the labor market, we've talked about how tight it is. I remember your last Analyst Day, which you had Ariana Grande playing in the background somewhere, and I was like, I want to work here. So what are you guys doing to recruit? How tight is the market? What are your headcount expectations for 2022, and just the seasonality of that as we think about the quarters?

Sure. As I've always said, we're in a very competitive labor market, particularly for the types of skills and talents that we're looking for. Everyone else is looking for the same talent. And so we have relied over the years on both sourcing and recruiting activities, but at the same time, retention. So retaining our talent once they're here is equally important to bringing in new talent. What we always target going into every fiscal year is mid-single digits. Last year was unique in that because productivity was running at such a high level, quite frankly recruiting wasn't a top priority. We were pulling from our bench, which was people we already knew, easily deployed. And at the same time, we had a run rate in the first half of about 3%. That tailed off in the second half of the year, and we exited around 2% for the year. Now we know that we need to be more aggressive on the recruiting front. And so there are a couple of levers that we historically have pulled, that we've revisited and emphasized going forward. The first is that we get about 30% of our candidates from employee referrals. So we revisited that program to really encourage our folks to refer colleagues, friends, family, you name it, who have the right skill sets, and we're seeing a nice pickup in that part of the funnel. Number two is we get a number of our candidates who will exit the government, particularly in DOD, the 5-, 10-, 15- and 20-year mark. They still want to support the programs and the missions that they know, albeit from private sector and they have familiarity with Booz Allen. So we are being aggressive with making sure that they know we're hiring and that we want them and their backgrounds and their experience, and so they're great candidates as well. The third is that we do get from competitors or folks who are looking to leave the private sector and maybe support the public sector. And so we're engaged in forums to make sure that folks know that who they can contact and direct them as soon as possible to the right people. And then fourthly, we make a number of contingent offers, largely dependent upon opportunities that have high probability of wins. I mean, I have come in the door yet. We're revisiting that and making sure that if we really do think that it's likely that we'll get the work, we're turning them on and bringing them on board maybe sooner than we did historically. So we've seen some improvement. We still expect this to be a bit of a slow climb over the course of next fiscal year, not the least of which is though vaccines are rolling out and people are feeling more open to travel and considering different opportunities career-wise, that's going to be gradual. And so we're just making sure that we're doing and being as aggressive as we can to bring on those people. One last point. Our guidance for FY '22 on the organic side is in a range of 4% to 7%. And where we end up in that range is largely, from our perspective, timing as to when and how quickly we can bring on the new talent. So that's really the limiting factor to that range, and we're doing all we can do to make sure we're at the upper end of that one.

I'm going to sneak 2 in because you brought up 2 good points I want to follow up on. What was attrition last year as people stayed at home? And what do you factor in for this year? And then you mentioned a point about hiring from the services 5-, 10-, 20-year mark. Is it any different at Booz versus your competitors on who you target?

So on the attrition side, Sheila, we've never disclosed the exact percent. In FY '21, it was an all-time low. I've been in the business now 33 years, and I don't think I've ever seen attrition as low as it was. I think academia would tell you that, hey, mid-teens is a healthy attrition rate. We run a little bit north of that, just given the technical talent base of our workforce. But we have offsetting, we think, good mitigation strategies around training, development, incentives that keep it at a very manageable rate. Going forward, we expect it to rise as, inevitably as things open up, people are more open to making job changes. But we think we've got a good plan for on the attrition side. In terms of the services, I would point you to our culture and our emphasis on people. During the pandemic, I think our very first leadership team objective was to take care of our people. So we stood up $100 million resilience program to really extend PTO usage, dependent care, other, what we think are good corporate communities mainly in the DoD environment. And that resonates with the folks that are leaving the government. They want to join a company that puts people first. It's value-based. We've got a very strong teamwork environment. With one P&L, we can provide different opportunities across the portfolio. So we don't have the segmentation and the silo barriers that you typically see somewhere else. So I think folks are attracted to us once they get a better understanding of our culture. The compensation reward system is also attractive, so they don't miss a beat in that regard. But I think that's how we compete against others that are looking for the same talent.

No. That makes sense. And then maybe just turning to the intel business, everybody's pointed to a little bit of delays here. When are you seeing that market return to normal? Are procurement offices opening up their bids? And what do you see in your bid pipeline?

Yes. For us, our intelligence business has been in transformation over the past several years. We've had performance that was lighter than we expected. We made senior management changes. We've also revisited the nature of the services and the capabilities we were providing. We have 3 sub accounts that make up our intel business, national agencies, cyber and defense military. National agencies, doing very well. Cyber, also doing very well, a little bit impacted by programmatic delays that I spoke about earlier this morning, but we expect that to turn around. And then our defense military intelligence account, it really had slipped into staff augmentation, program management type of work, subject to real, low cost, technically acceptable sort of bid environments, and we have been pivoting that toward the higher solution work. So that's been a work in progress, and we're pleased with where that's come along. We expect to -- our intel business to return to growth in the near term. In terms of impacts, what's interesting is when COVID hit, we collectively moved to a shift work arrangement. And due to the CARES Act, we're unable to sort of bill for fee. So we expect those headwinds to subside. We're having good conversations with the clients, and so we expect the RFP issuance to pick up. And so we feel we're positioned well to compete for that work. And as I said, with the transformation we have underway, it's on track. And we expect the business to return to growth in the near term.

I'm doing another sneaky follow-up in here, but I remember the intel management change you made last April. You mentioned national agency is good. Cyber is good. The defense military account, is that a structural change where it's shifting to staff augmentation work? Or was it just a little strategy shift that you want to shift back?

I'd say more the latter. We had sort of grown accustomed to some incumbency work that year-over-year was shifting more and more into program management staff augmentation and subject to competitive dynamics that, quite frankly, we lost our differentiation. So we were able to deploy leadership. They've got a different approach with a different capability set that we see it resonating with the newer clients. And we've had some, albeit smaller successes, we expect to build upon that going forward. So these things happen in a large company like ourselves. And as Kristine will tell you, we constantly are tinkering with emphasis and programs and taking shots at new opportunities. And so that's what we're doing with DMI. But it had slipped probably more than we would have liked. And so now we're -- the team is on it, and we're expecting to see some improvement.

Yes. You say near-term return to growth. So that can mean anything. But what do you think about the growth profile of intel versus defense and maybe civil?

We're seeing defense having another strong year. I mean if you look back at the past couple of years, it's been doing very well. Similarly with civil. I think civil, as Kristine will tell you, was impacted in ways that were hard to predict following the election. And I think the Biden administration is getting their feet on the ground and things are starting to improve. And Intel is a meaningful part of our portfolio. There's so much that is cyber-related that we're able to cross-pollinate across the broader portfolio, not the least of which includes AI and data analytics. So even though the overall account or market was performing lower than we wanted, we still had nice contributions in civil and defense that I'm sure Kristine would tell you are invaluable, particularly around larger cyber programs.

Yes. Brings me to my next question. I think Booz is the largest provider of AI services to the federal government, with volumes up 60% off a very low base last quarter. How do you think about the competitive advantages there? And are there, for AI specifically, how much of the work is pure AI versus intersecting other areas within cyber or Intel?

From a competitive standpoint, we're very pleased that we won some of the initial large programs, particularly in defense. I think that established us as having the insight. Having the capability certainly helped on to your question about candidates helped in the labor market as well. But this is a pretty competitive environment across the board. So the team doesn't take anything for granted. We're still aggressively looking for newer opportunities, shaping newer opportunities as well as the talent that will underpin that. So AI, off to a good start. I'd argue that's still kind of in the early stages. I think defense and Intel certainly have been tinkering and exploring. And now they've got programs of record involving AI. I think there are plenty of agencies and departments in the civilian market that I think there's huge application as well. Kristine can talk about that. But what's interesting about AI is it's not just pure AI. I mean it includes a little bit of everything, from cybersecurity, data analytics, system software development, change management. And so because of our, I think, structure and how we approach opportunities, we've always done it from an integrated perspective. And so I think partly why we were successful in some of the earlier opportunities is because that's what we brought to bear. And that really resonated with the client. It's like, gee, we're still trying to figure this out ourselves and the fact that you're coming to the table with all these different perspectives and you understand our mission, that gave us the edge. But it keeps evolving. You've got 5G on the horizon. You've got just things that will continue to shape the market. But the one common thing we see is that everything is increasingly integrated.

Well, another buzzword. So 5G is what you mentioned. Can you elaborate on some of your partnerships with 5G technology companies?

Yes. What's interesting with 5G, again, I think, very much in the early stages. We have a track record of working with our clients in the early stage of development. And in the case of DoD, really with the research labs. And they have been really at the forefront of trying to determine how does this technology apply to DoD, broadly speaking, and what are the sensitivities. And so we've been fortunate to support the labs with some of their pilots that are expected to run for the next couple of years. And I'm going to greatly oversimplify it, but the services, who are also involved then would pick it up as a program of record at some point in the future. And that has yet to occur. But when that does occur, that certainly puts us in a strong competitive position to compete to support that work. So early stages. And where the partnerships come into play is that as we are supporting the labs, we're certainly also partnering with corporate players that bring more of a commercial perspective. And then we work with our clients to figure out what's the federal application or the defense application. We are not typically in any sort of exclusive arrangement. So that gives us and our clients great flexibility. But once it gets to a program of record opportunity or RFP, we feel that those relationships really are valuable and competing to support that work. So more to come. Early stages, as I mentioned. But we're excited about what that may bring.

That certainly sounds awesome. And then we've ended Kristine on, we've referred to her a few times, but I think most investors are of the view that civil businesses don't really grow, and you guys grew 8% last year. So what's driving some of that good growth and the trajectory of that beyond that?

Yes. Thanks for that question. Yes, we grew 8.4% last year. We're really proud of that, and that's with the slowdown in the second half of the year with the administration change. I would say that the 2 main drivers for us are areas where we really understand the mission, and that has definitely driven our health growth and also driven our growth in treasury and in some parts of cyber within our justice and Homeland Security and transportation business. So health is definitely the main driver of our civil growth. But then also digital modernization is still huge for us. And that can span from just replatforming, which is probably the least exciting, where you might just move to the cloud and have some cyber fortification, to streamlining and updating, and that's where you see some of the low-code, no-code applications come in, some AI get introduced as well where current processes are being updated and made much more efficient. And then there's the really exciting stuff for us, it's where the whole mission is reimagined. And then you really get to build the technology from the ground up. And it's happening all across the civil government. It will be accelerated with new funding, and it will continue to drive our growth into the new year.

I mean what budget items are you looking at, Kristine, in terms of -- what budgets are you looking at in terms of projecting your growth profile?

Yes. So we'll look at health, right, all the way across the board. We work across the entire health business. Cyber, obviously, is a driver for us. We'll be looking at economic workforce efforts around Department of Labor. We're looking at climate, the new introduction of ARPA-H, if that survives in the bill. Transformation in the DOJ. So we've got pretty broad -- post office transformation, which I think has been a big focus lately on the hill. So across the board, I think we've got opportunity in all of our core missions.

And then in civil, you guys called out a pause on a large cyber program. Where are you in getting that restarted? Any way to think about the impact and how we think the program will get back on track? And then additionally, overall, what's your visibility within the cyber portfolio?

Yes. I think in cyber, at least in civil, a lot of the issues centered around funding, right? The budgets were being burned faster than they were being renewed. And you've seen a lot of effort in the past couple of months to correct that, right, new funding coming into cyber through the American Rescue Plan and then additional funds going forward, the executive order on cyber, et cetera. So now the next step is really to get those funds on to programs. And that's what will push it forward. So we don't have to do new recompetes or anything. We just have to get the funds allocated to the specific lines in the programs and start to go forward. And we see that happening over the next couple of months.

Got it. And what's your visibility overall within the civil cyber portfolio?

I don't actually have a number for just cyber.

Okay. No problem. And then as we think about, how much of that, the civil and the commercial cyber business, how much of you guys work together? We hear about opportunities like Solar Winds, the Colonial pipeline, and I would think that's a gold mine for a company like Booz. So what are those opportunities like?

Well, across our business, because we have 1 P&L, we can shift workforce, right? So whether it's in national security for cyber or in civil for cyber and in commercial for cyber, we have a set of cyber leaders that are very connected to one another. And one helps the other in terms of both customer insight, et cetera, and where the priorities are. So we do work tightly together. And I think as Lloyd has already mentioned, part of the challenge is all 3 of them have really high demand for new talent.

Sheila, I would just add, since we sit at the nexus of commercial and the government, when we see things like Solar Winds and Colonial, the issue is really how to engage law enforcement to address the adversaries and what may have been compromised, especially if it's a critical infrastructure company or sector. And so because of our relationships on the federal side with law enforcement, we're able to connect the dots and then also share insights that we may have about particular motivations, incentives of these adversaries. And to Kristine's commentary, that happens pretty frequently. We also try to leverage our intelligence community to the extent that we're allowed to or that we can. So because they are externally focused outside of the U.S. borders and Homeland Security's focused inside, there's a great deal of sensitivity there. But we will connect people, and they can have their own private discussions with the government as they see fit. And so that is really a differentiator, we think, and why on the commercial side, folks are attracted to Booz Allen because we have this sort of federal presence that can be of assistance should they find themselves in a compromising situation.

Yes. No, that makes a lot of sense. And you guys have talked about the health business being about $1 billion. How does that tie into the administration's push? What are the areas of opportunity?

Yes. There's a lot happening in health. I think in the last administration, we saw more focus in the VA and a bit of a slowdown in Medicare, for example, and up until the pandemic in CDC as well, standard programs going forward, but not a lot of new investment. With the new administration, it is a very broad agenda. Public health infrastructure is a priority, going back to building on the ACA and dealing with coverage gaps. And we've seen even with the special enrollment period, already 1 million new people have gotten coverage through the ACA, and then 2 million came back to relook at their plans for some of the advantages from the past Act. A focus still on drug pricing, that was definitely discussed in the last administration. There isn't really a formal path forward, but it's still a priority. Modernizing the VA continues to be a priority across both administrations and then also continuing the electronic health record modernization efforts in the VA and at defense health. Improving health equity. Affordable technology solutions, looking at telehealth virtual care, closing the digital divide, mental health access, opioid crisis. I mean, it is a very, very broad agenda in health.

Sure. And then just thinking about broader digital transformation as it relates to the civil government business. You've talked about citizen service businesses. How do you think about the market opportunity? And maybe where are you in terms of the evolution for digitalizing the government? You talked about post office as an example. Where are we kind of in that? And what are the bigger potential revenue drivers for those?

Yes. There are the whole array across civil, right, some that are just still in the re-platforming to others like the post office that are reimagining. And we are seeing a lot of effort in treasury right now in the IRS, certainly continuing in health. We've seen work in labor, Department of Labor, Justice, et cetera, Transportation. So we are seeing a lot of continued effort. And with our recent acquisition of Liberty IT Solutions, we're leaning further into some of the low code, no-code solutions as another piece of that portfolio, which will start in health and then move across all of civil. So we're really excited about that acquisition. The -- there's no shortage of RFPs. We have a strong win rate, and we are focused on our core missions. And we are expecting in June, as the agencies go after the new $1 billion on the technology management fund, that will again fuel some new growth.

Sure. And then maybe, Lloyd or Kristine, for either of you, any way to think about the overall life cycle development and how we should be thinking about getting more of the pie given ability to implement digital solutions? This is for health or the overall business, AI, machine learning and cyber, in terms of just Booz market share.

Yes. It's difficult for us to itemize share. I would just point you back to what our historical growth rates have been, and that has been a function of both winning recompetes as well as new work. And so we've been pleased with that performance. And so in terms of an addressable market that's well in excess of $120 billion, $150 billion, we're only at $8 billion. So I think there's plenty of upside for us to continue to grow. On the digital front, I'd point you back to where we were about 7 or 8 years ago. When we looked at our portfolio, I would offer that probably 1/3 of that was really in this digital high-tech realm. Today, our estimate is that 50% to 60% of our business is now more technical, with plenty of upside potential as well. So we're pleased with the progress we've made. We feel there's plenty more headroom. And year-over-year, when you look at our new work competitions, it's certainly in the spaces that we want to compete in. And it also has led to wins, such as, to your earlier question, AI, cybersecurity. And so we're going to continue to lean forward, and we're pretty confident we'll be able to get there.

And you mentioned -- I'm throwing a new one out there for you, Lloyd, but you mentioned technical expertise. A lot of your competitors are also talking about that. Where do you find that you're seeing your most competition? Who are your competition? Are lower-tier guys advancing, in your view?

Yes. If you look at our portfolio, I'll start with Intel, because of the clearance requirement, certainly who we compete against that sort of on the other side of the table in a prime position are folks that are in our peer group. They have their own relationships. They have their own cleared folks with the right citizenship, insights into similar programs. And so that's typically who we'll see prime. The subcontractors or the teammates in that market are also well known, some of which may be graduates from the intelligence community themselves that start smaller businesses and may have insight into a particular program. But that's largely the landscape. The difference would be with some of the cloud migration opportunities, we're going to team with Microsoft, the Google and AWS. And we have done so in that market. But by and large, it is what it has traditionally been. Defense, it opens up a little bit, still in the prime competitor role or folks in our peer group. The teammates vary, depending upon what the opportunity is. Again, the -- if it's a cloud opportunity, it's still partnering with those larger vendors. But if it's sort of programs that AI that we've done in the past, it tends to be folks that are in the sector, with occasionally a new market entrant but not really at scale. It's very episodic. Kristine's market is the Wild, Wild West. There we have everyone. We have people in our peer group, Deloitte federal, Accenture, the strategic management consulting firms, boutiques of any variety. And so I'll let Kristine speak to it specifically, but there, the dynamics really hinge on how well do you know that particular client, their mission, the requirements, your tenure, your relationships, and we've done a very good job focusing in that regard. Kristine, what did I miss?

No. I think you said it exactly right. It is a bit of a Wild, Wild West, but it's by agency, there are a set of core competitors. And so we do see, say, Deloitt federal and Accenture federal in many, many places. But then there are other places that you'll see more of IBM, or you'll see more of the traditional defense contractors have come into civil just in certain areas. So it does vary quite a bit. It tends to be pretty dynamic, a lot of new entrants that come in and come out, a lot of small business spinoffs and then acquisitions by larger businesses. So it is kind of wild. But in the end of the day, it comes down to having the right technical expertise combined with the right mission understanding. And that's really what the formula is for winning in civil.

And we'll get to that in a second, Kristine, but I guess in -- within health, who do you think about -- you said on an agency by agency, it's a competition -- the competition is focused that way. What are your top 3 agencies in health? And then in terms of the government priorities, what are the top 3 areas of priorities for the government?

Yes. We're really strong at the VA, I think everyone knows that, in both the Veterans benefit side and the Veterans health side. Medicare and Medicaid has traditionally been a growing business for us. The FDA is a huge business for us. NIH has been growing. And the CDC, we've been with the CDC for a good long time as well. So I would say that those are kind of the places that we have the majority of our effort, which I understand is -- defense health as well, but I think we're a little smaller in defense health than in other places. Definitely, when you look at digital modernization, that is going to drive the continued growth across health as well. We also are -- I would look for Booz Allen when there's new programs announced. We are traditionally someone the government leans on when it has to go from the ideas and the act into an implementable program. That's an area that we tend to come in, sometimes on the pure consulting side at first and then move over to IT, sometimes straight into IT. So I would look for us there. And then I think the next part is any place that you're looking for the government to be changing their relationship with the citizen, right? That's an area that we specialize in and trying to help the government streamline those interactions.

And then Lloyd, maybe 2 questions for you on profitability. Your margins were -- adjusted EBITDA margins were 10.7% last year. Your guidance this year is mid 10%. Maybe parse that in terms of the COVID impact, hiring costs, anything on why margins are going down year-over-year.

Sure. I'll open up by saying we're very pleased to be where we are today, particularly if you go back in time being sort of in the mid-9s. I think the team and all the business leaders have really done a great job focusing not just on top line, but profitability. I think that plays out in our margin performance. We ask our leaders to focus on EBIT dollars, not necessarily margin. So we see it as a means to an end, not the ultimate objective. That being said, we guided to mid-10s this year, in large part because we expect some of the dynamics that existed with COVID to begin to reverse. So business travel being essentially nonexistent will come back, albeit slower. Billable expenses will come back, albeit slower. But we're going to maintain strong cost management. So management of our unallowables will contribute to us getting to the mid-5s. And we're going to focus with some of our work being fixed price, making sure those jobs also contribute in a way that we expect. So you're right. The winds are going to start to shift. It will be gradual by our expectations. It's hard for me to give you the exact inflection point. But that's why our commentary on the call was we expect the first half to be building and with a stronger second half. And margins will correspond with that. But for the year, we're guiding to 10.5%.

And then how do we think about structural margins from here? You guys don't have long-term targets. So maybe Rubun should be putting an Investor Day together with a target out there. But I'm always amazed that there is a more operating leverage in the business given the high quality of it.

Yes. It's interesting. The 3 contract types kind of bound a bit where we can be. And we've been able to be a little bit north than what the ranges would indicate. But if you're looking at a cost reimbursable, which is about 56% of our portfolio, that's a mid to high single-digit range. And we've been able to operate at the upper end of that range across those contract types. Similarly with time and materials, similar sort of fee range. We've done well there. And then fixed price, you can be well in excess, get into double digits. But you really, from our perspective, have to be smart about what's the nature of the work, how well do you know the client, how well you understand the user requirements. And so to manage that, we typically only do fixed price work for existing clients, particularly if it's a software or systems development effort. Studies, which we do all the time, has not really represent a huge risk. And most of our fixed price work occurs in Kristine's market. Defense and Intel largely prefer cost reimbursible and time and materials. But Kristine's market, which is analogous to what you would see in a commercial context, is much more comfortable with fixed price support, largely because they're smaller in nature, shorter in duration. And so the government maybe subconsciously has kind of bounded the risk even from their perspective. But that's where we typically stay. And for us, it's about 19 -- it's in the high teens now. I think about 19% of our overall portfolio is fixed price. So I don't know, Kristine, if you have anything else to add to that.

Yes. We're seeing even more shift toward more fixed price, which we welcome. So I think that's definitely true in our business, T&M and fixed price more than cost plus.

Okay. No, that's super helpful. And then maybe just to close it up in terms of capital deployment, what do we think about from here? How does M&A play into it?

Sure. So we -- I've always maintained that we have the right capital deployment strategy based on the strength of our balance sheet. We generate a tremendous amount of cash year-over-year, and the deployment of that has been share repurchases, dividend and, most recently, a pick-up in M&A. Horacio and I have signaled, probably the beginning of FY '21, if not the end of '20, that we wanted to be in a position to do more capability tuck-ins if it met our strategic requirements, our cultural requirements in terms of integration, as well as our financial targets. And our most recent acquisition of Liberty fit all of that. And I would argue that we spent more time with them really on the cultural value integration aspects to really make sure that combination was going to be successful. And the numbers are great, too, from an accretive standpoint. So we expect to continue to do acquisitions, but holding a pretty high standard. We have been patient and disciplined. We're going to continue to do that. The queue of opportunities is growing. We're sourcing more of these than just responding to a bank's book. And our business leaders like Kristine have been really at the forefront of shaping, pursuing and then ultimately integrating these acquisitions.

Great. With that, I'd actually wrap it up. And thank you, Lloyd and Kristine, for being here and Rubun for answering all of our questions. Thank you, everyone, for joining.

Thank you.