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Edited Transcript of SAIC earnings conference call or presentation 5-Sep-19 9:00pm GMT

Q2 2020 Science Applications International Corp Earnings Call

MCLEAN Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Science Applications International Corp earnings conference call or presentation Thursday, September 5, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles A. Mathis

Science Applications International Corporation - Executive VP & CFO

* Nazzic S. Keene

Science Applications International Corporation - CEO & Director

* Shane P. Canestra

Science Applications International Corporation - Director of IR

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Conference Call Participants

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* Cai von Rumohr

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Gavin Eric Parsons

Goldman Sachs Group Inc., Research Division - Associate

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP

* Joseph William DeNardi

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst

* Joshua Ward Sullivan

Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst

* Matthew Higgins Sharpe

Morgan Stanley, Research Division - Equity Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day and welcome to the SAIC Fiscal Year 2020 Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice President of Investor Relations. Please go ahead, sir.

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Shane P. Canestra, Science Applications International Corporation - Director of IR [2]

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Good afternoon. My name is Shane Canestra, SAIC's Vice President of Investor Relations, and thank you for joining our second quarter fiscal year 2020 earnings call. Joining me today to discuss our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; Charlie Mathis, our Chief Financial Officer; and other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you'll also find supplemental financial presentation slides to be utilized in conjunction with today's call. Both of these documents, in addition to our Form 10-Q to be filed soon, should be utilized in evaluating our results and outlook, along with information provided on today's call.

Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.

It is now my pleasure to introduce our CEO, Nazzic Keene.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [3]

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Thank you, Shane, and good afternoon. SAIC took another positive step forward in the second quarter of fiscal 2020, keeping our attention on operational performance, progressing on the integration of the Engility acquisition and delivering strong financial and business development results. While Charlie will discuss the financial results in greater detail, our second quarter reflects strength in a contract portfolio that is aligned to key areas of our market with strong profitability and free cash flow generation.

The second quarter delivered revenues of $1.6 billion, in line with our expectations and equating to a 43% total revenue growth from the prior year quarter. Strong adjusted EBITDA margins were 8.4% for the second quarter, up 90 basis points from last year. The cash generation profile of the company continues to be compelling, with second quarter and first half cash flow providing continued confidence in our full year target and enabling capital deployment for shareholder value creation.

Net bookings for the quarter were approximately $1.9 billion, excluding about $400 million of single award IDIQ vehicles, translating to a quarterly book-to-bill of 1.2. On a pro forma basis, SAIC's trailing 12-month book-to-bill is 1.1.

During the quarter, SAIC was awarded contracts and task orders valued at over $1 billion of recompete and new business from U.S. national security and intelligence customers. These awards also demonstrate the intersection of 2 areas of significant opportunities for growth: space and IT modernization.

It is very exciting to see the continuing buildup momentum as a stronger SAIC goes to market with these important customers. Additionally, SAIC was awarded a recompete contract valued at $117 million from NASA to continue providing a variety of IT services to support the National Center for Critical Information Processing and Storage. Also in the recompete category was a $93 million contract award from the U.S. Navy to support electronic warfare activities.

Awarded during the quarter, but not immediately contributing to bookings, was a new business award of $106 million single award IDIQ contract with the Defense Intelligence Agency to provide media management and analysis efforts across the science and technology directorate.

SAIC continues to operate in a favorable market environment in the closing month of government fiscal year '19 and looking forward into fiscal '20. As appropriations are enacted, we do not expect significant shifts in budget priorities and SAIC is well aligned in areas of national importance and funding such as space-related missions, IT modernization and readiness, among others.

Although a few customers have expressed concerns around facing a potential continuing resolution to start the government fiscal year, for now, proposal activity remains strong, as demonstrated in the momentum we see in our business development activities. Customer demand in our pipeline of qualified pursuits is expanding, although we have also seen delays in some contract awards due to protests or new business that has not materialized.

At the end of the second quarter, SAIC's total contract backlog sit at approximately $13.9 billion, up about 3% from the first quarter. Funded backlog was approximately $2.6 billion. The estimated value of SAIC's submitted proposals awaiting award is $13.4 billion, up from the end of the first quarter. Approximately 75% of submitted proposals are for new business, an indicator of a favorable market environment, our low-level of recompete this fiscal year and the potential for SAIC to accelerate growth over time.

Before turning the call over to Charlie, I'd like to provide you an update on the integration of Engility. As I mentioned in our June call, we have successfully achieved all of the year 1 cost synergies and are on track to realize year 2 synergy targets next year. In fact, we recently achieved another critical milestone, the successful integration of many business systems which is key to achieving our year 2 cost synergies. This is a significant achievement in the integration process and, I believe, one of the earliest acquisition-related systems integrations in our space. I want to personally thank the team for their tremendous effort and success in achieving this important milestone.

Through the end of the year, we will focus on 2 additional integration milestones: harmonizing employee benefits and rationalizing our facility footprint. We have more work ahead of us, but I'm very proud of the newly combined team and what we've accomplished so far.

Charlie, over to you for our financial results.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [4]

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Thank you, Nazzic. Our second quarter revenues of approximately $1.6 billion reflect total revenue growth of 43%, which were due to revenues associated with the Engility acquisition. Organic revenue therefore was flat year-over-year, although adjusting for about $30 million of revenue dis-synergies in the quarter, organic revenue growth increased approximately 2%. As a reminder, we have previously communicated an approximate $100 million of revenue dis-synergies for the full fiscal year due to elimination of prime sub-revenue; lower revenue on cost-plus contracts due to cost synergy achievement and other factors.

Second quarter adjusted EBITDA margins were again strong at 8.4% as a percentage of revenues, up 90 basis points from the prior year. Second quarter adjusted EBITDA was $134 million, a $50 million increase from the prior year. Adjusted EBITDA excludes $6 million of integration-related cost in the quarter. Second quarter margins, similar to our first quarter, was due to strong program performance and the favorable effect of accelerating our net cost synergies.

Net income for the second quarter was $57 million, and excluding $6 million of integration cost as well as amortization of intangibles, our adjusted diluted earnings per share was $1.35 for the second quarter, an increase of 11% from the prior year quarter. In addition, the year-to-date adjusted EPS accretion is also 11%. Diluted earnings per share was $0.96, inclusive of the $6 million of integration cost I just mentioned. The effective tax rate for the quarter was approximately 23%, consistent with our previously communicated and reaffirmed today expected full year rate of 22% to 24%, with a cash tax rate also unchanged at 13% to 15%, benefited by the tax assets acquired from Engility.

Second quarter operating cash flow and free cash flow were a very strong $95 million and $90 million, respectively, due to excellent cash collections and reduced working capital. Historically, our second quarter cash flow is the seasonally lowest cash generation quarter of the year due to an additional payroll cycle as compared to the other 3 quarters and 2 income tax payments. I'm very pleased with the free cash flow generation we have achieved since the close of the acquisition.

Free cash flow for the quarter is $114 million increase from last year, and on a year-to-date basis has increased approximately $200 million over the first half of last year. In addition, we have achieved approximately 60% of our full year target to date.

Days sales outstanding at the end of the quarter were 59 days. During the second quarter, we deployed $156 million of capital consisting of $133 million to repurchase approximately 1.6 million shares, $21 million in dividends and $2 million in mandatory debt repayment. With regards to share repurchases, we announced in early July $100 million negotiated buy back from one of our private equity shareholders, KKR, that repurchased approximately 1.2 million shares from them directly at a discount to the previous day's closing price.

We believe this acceleration of our capital deployment plan in fiscal year 2020 is in the best interest of long-term shareholders. We will continue to be thoughtful and disciplined with regards to the deployment of capital for shareholder value creation.

I should note that our Board of Directors will meet in mid-September and will consider capital deployment opportunities going forward, including our next quarterly dividend that is typically payable to shareholders in October.

Now turning to our forward outlook. We exceeded our expectation for revenue in the first half of the year, but we are cautious about a revenue increase in our second half. As Nazzic mentioned, our outlook is impacted by the potential for a continuing resolution, new business that has been protested or has not materialized and higher revenue dis-synergies, partially due to accelerated cost synergy achievement. We expect second half revenues to be consistent with our first half revenues of $3.2 billion. This revenue outlook for the year does not impact our longer-term outlook as contract award opportunities and business momentum is building.

I'm very pleased with the strong margin and cash flow performance in the first half of the year, which gives us confidence in our full year outlook. As far as margins, our full year adjusted EBITDA margin is expected to increase about 80 basis points from the prior year's stand-alone SAIC adjusted EBITDA margin of 7.5%, which is at the middle to upper end of our previously communicated expectations. Our more favorable outlook on margins is due to our first half performance, better-than-expected cost synergy achievement and continued focus on operational and program performance.

Our free cash flow target remains at $425 million for the fiscal year. With our strong first half collections, working capital improvements and continued focus on achieving additional balance sheet synergies, we are confident we can meet or exceed this goal for the year.

Nazzic, back to you for concluding comments.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [5]

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Thanks, Charlie. I am very excited to have officially become the Chief Executive Officer at the beginning of August. With our new scale and reach, SAIC has the opportunity to be a stronger partner for our customers with an expansive portfolio of solutions. We also have a deeper bench of talent and expertise in our company, which allows us to create a differentiated experience for our employees, with broader career development options.

With these new opportunities, the leadership team and I are taking a fresh look at our long-term business strategy, the initiatives to execute on that plan and the key performance indicators to gauge success. As we refresh our long-term strategy to shape our priorities, there are 3 areas that have my immediate attention: the successful integration of Engility; driving profitable revenue growth; and winning our war for talent. As you know, these 3 items are not mutually exclusive in the government services space. Our success will be enabled by our talented employees who are inspired by purpose and are driven to grow our company by bringing innovative solutions to solve our customers' toughest mission challenges.

We have recently announced some leadership changes that reflect this intensified focus on our employees. We welcome 2 new Board members to SAIC, Carol Goode and Yvette Kanouff. Both Carol and Yvette are proven strategic leaders who have established their careers in high-tech companies in Silicon Valley and the San Francisco Bay Area. They bring diverse perspectives and fresh ideas, and we are excited to get their counsel as we shape our talent and solution strategies. I look forward to working with these 2 strong leaders, and I am confident they will have an immediate impact on our organization and our ability to deliver business results.

As a newly integrated organization led by a strong leadership team, SAIC aims to leverage our new market opportunities and employ the best talent in the industry. With a strong foundation of passionate and skilled team members, we are in a position to change our growth trajectory. SAIC is focused on 3 tenets for success: inspire employees; accomplish customer missions; and reward shareholders.

Operator, we're now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Edward Caso with Wells Fargo.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [2]

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Hoping that you have a positive answer to this question. Just curious how your operations are doing down in Charleston, South Carolina, given the Dorian hurricane?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [3]

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Yes. So at this point -- Ed, it's Nazzic. At this point, we've closed the facilities and certainly wanted to support, help the employees being able to get to a safer place. I have not heard of any catastrophic issues at this point, but it's something we pay tremendous attention to up and down the East Coast over the course of these last few days. But we appreciate you asking; it is very important to us.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [4]

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Great. And one -- and different question, what bookings do you have? Or what awards do you have that are still in protest? Or how big is that number? That you've won that's still in protest.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [5]

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We have a couple and about $1 billion still in protest.

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Operator [6]

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And we'll go next to Jon Raviv with Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [7]

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On the sales outlook for the year, can you just give us a little more detail around essentially what's going on? You mentioned a few things driving that revised outlook for the year. Kind of what new business is not materializing? Is that SAIC stuff? Is it Engility stuff? Is it integrated opportunity stuff? Is it mostly timing where it flips? Is it things that you expected to win that you lost? Like just give us some more sense of why it looks like you're going to finish the year below the sales target you identified on the last call.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [8]

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Thanks, Jon. So let me just clarify and give some additional color on that. So we expect revenues to be consistent with the first half of $3.2 billion. We're cautious in increasing the revenue outlook for the second half and the factors are 3. The first of which is we're anticipating higher revenue dis-synergies for the full year, partially related to our success in accelerating the cost synergies. We're expecting revenue dis-synergies of $120 million now, up 20% from our previous expectations. As you know reducing cost lowers revenue in our cost-plus contracts and we're approximately 60%. However, this is a onetime impact of our FY '20 growth. It's about a 2% headwind to the revenue growth, the $120 million.

With the acceleration of the cost synergies, it's strengthened our margin outlook for the year. And as I mentioned previously, we expect an 80 basis point increase from last year stand-alone SAIC, and this is to the middle or upper end of the margin range that we previously communicated.

Now the other 2 factors that are impacting the revenue outlook are items that Nazzic mentioned, which are the protest in new business not materializing, and think here of a particular Air Force contract that was awarded back in the spring. It's gone through a protest cycle and more and continues to go through that. And also a few, and I'll emphasize the word few, customer concerns around our continuing resolution to start a fiscal year. We do see this as a timing issue. We do not see this impacting the long-term revenue outlook. The pipeline of proposals is very strong. We're encouraged by the strength of the company or profitability that have $13.5 billion of proposals awaiting to be awarded, of which 75% of these are new business. So we feel confident with the long-term outlook there.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [9]

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I'm sorry, did I miss the third factor?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [10]

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The third factor was the few, and again, emphasize on few, customer concerns around the CR to start the fiscal year.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [11]

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Just on free cash flow, you mentioned that first half performance thus far has been quite strong. Is there any timing helping that, the performance in first half '20? And then also thinking more towards the approaching $522 million, what are some of the drivers of sustainability thereafter? We know that the tax boost in there but what about things like working capital?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [12]

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Yes, so thanks for that. And I can tell you, I'm extremely pleased with the outstanding job that our operations and finance teams did to achieve this. They've been really focused, and continued to make progress on the process improvements and with the 2 companies combined. We're getting paid timely. We're looking to incorporate some of the best practices from the combination of the companies, and so I'm very pleased. I know those people are probably listening to this call, so I can tell them again I'm very pleased with our achievement in the first half of the year. We achieved 60% of the goal and we're sticking with the $425 million right now. We do have a systems conversion that just was completed this month. And although it went incredibly well, we'll wait another quarter to see how the cash collections look before increasing our outlook. Our longer-term outlook remains intact, as we said. And so yes, we believe we will get to the $500 million by year 3 that we outlined earlier in the year.

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Operator [13]

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And we'll go next to Matthew Sharpe with Morgan Stanley.

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [14]

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I was just wondering if you guys could give us a sense of how the current quarter bookings are shaping up being that it tends to be a higher volume period with the end of the government fiscal year at the end of this month?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [15]

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Yes. This is Nazzic. So yes, historically, Q3 for us tends to be a higher bookings quarter. And we're seeing proof points of that as we go into the quarter with the activity over the last couple of quarters and getting things into submit stage. So we feel very confident with our third quarter bookings. Again, one of the nuances that we navigate is looking at this contract awards as well as the single award IDIQs. We still have many customers that tend to use single award IDIQs as their contract vehicle of choice. So yes, we do believe we're going into the quarter with a strong position from a sales perspective and anticipate having a strong quarter.

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [16]

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And then on the Air Force EDIS contract, which you just alluded to a few moments ago, and then the Department of Justice asset forfeiture program. Do you guys have any color around those programs in terms of when they might be resolved or awarded? I know that they're probably expected last month or so, and they've dragged out a little bit longer than expected.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [17]

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Yes. So the short answer is we don't exactly know when those things are going to transpire. We -- certainly on the DOJ one, it could happen any time, and so we'll continue to look at that. As it relates to EDIS, they are going through their process. And so that will probably take another weeks or months at this point. But it's hard to tell.

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [18]

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Got it. And then just one last one if I could. On the integration of Engility, it seems as though you guys are, at this point in time, well ahead of schedule on cost takeout or cost synergies. Are you seeing any opportunity at this point in time to beat your financial targets or upside to where you thought you might be?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [19]

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Yes. So totally agree with your statement on where we sit today. So we're very pleased. I'm very pleased with where we are with just the systems conversion we've done, the organization is fully integrated, as I shared with you before, and a lot of the decisions were made very, very early on in our acquisition cycle. So extremely pleased with how the companies have come together and we're seeing great proof points in going to market together as well, as we look to leverage the capabilities across the entire portfolio to drive a stronger proposal activity and drive incremental growth opportunities.

As it relates to the cost synergies, yes, we are ahead of plan. We're very, very happy about that, and we continue to look at every opportunity we can to drive additional cost out of the equation. That's certainly top of mind for us. But as we do that, we also want to balance the need to invest in growth. And so we're looking at the trade space that exists to drive the profitability that we inspire to drive and that we've communicated as a result of this acquisition, but also look to invest in growth to drive the long-term value creation.

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Operator [20]

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We'll go next to Cai von Rumohr with Cowen and Company.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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Great quarter. So could you give us a little more color on the revenue guidance? Normally, your third quarter is stronger than your fourth, is that kind of a pattern? Or is there going to be something different? And how much of the shortfall would you say is at Engility as opposed to heritage SAIC?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [22]

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Cai, this is Charlie. I would just say that we're not really giving any guidance for quarterly revenues. They're fairly consistent expectations, third and fourth quarter, and we don't break out the Engility right now. It's fully integrated into the company. And so we're looking at 1 company, and declines or revenue that goes down is SAIC.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23]

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When you say revenues consistent third and fourth quarter, you mean third quarter should be close to the fourth? Or consistent with prior patterns where the third was better than the fourth?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [24]

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I would just say that they're consistent quarter-to-quarter.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25]

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Okay. And then margins in the first quarter, you had $8 million of favorable EACs, and you said this is kind of above average, normal. Normal is $4 million. How much was it in the second quarter? And what's your outlook now for the year for EACs?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [26]

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It was $4 million EAC favorable adjustments in Q2, and that's the kind of normal run rate that we've seen and we would continue to expect that in the second half of the year.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27]

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Terrific. And last one on cash flow. I'm a little confused. I mean you talked of strong collections and yet the DSOs were 59 days in the first quarter and you talked of the seasonal pressure of accounts payable but it doesn't look like -- excuse me, of payroll. It doesn't look like you kind of made any large payroll and it doesn't look like there were 2 tax payments. So maybe you can kind of explain those items, if you would.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [28]

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Yes. So the collections that we had were actually favorable from the combined company. When you look at combining Engility and SAIC, the DSOs, we're actually pleased with the 59 days there. There was also a reduction in working capital for the quarter of managing different aspects of working capital and inventory that also attributed to what was just an exceptional quarter, an exceptional first half and our free cash flow generation.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29]

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And so are we going to have the extra payroll? Because it doesn't look like it hit this quarter when it normally does. And did you have the 2 tax payments in this quarter?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [30]

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Yes. Yes, we did. Yes. And the additional payroll, yes, I believe that, that did also hit for the quarter. So the good news on the tax payment side is that because our cash tax rate being so low due to the Engility tax assets that we acquired, there's less impact to an additional tax payment in the quarter.

So it's -- I can just say, Cai, that there is tremendous focus on collecting timely, ensuring that we have billings outstanding and we get the billings out on time, and that they're accurate, so that the customer pays without disputes, and so that we're collections are extremely good and there's continued focus on that. And continuing to look at the process improvements that we have. So we're very, very pleased with the results so far.

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Operator [31]

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And we'll go next to Sheila Kahyaoglu with Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [32]

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Just, Charlie, thank you for sizing the items that are hitting the $150 million impact for revenues this year. I guess when you think about the protests and the delays in the contract, does that -- how do you think about that changing, if at all, your 3% revenue growth CAGR through 2022? And how should we think about growth accelerating next year?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [33]

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Yes. So we have confidence in our longer-term revenue outlook that we laid out. As I mentioned, we have items that are impacting FY '20 specifically, namely, the $120 million of revenue dis-synergies. So again, as we look forward, we're encouraged by the strength in company, more profitable company, the $13.5 billion in proposals awaiting awards, which is up the amount of 75% related to new business. So we're confident that we can hit this long-term revenue outlook. That has not changed. And a lot of this protest, contract delays being awarded is a timing issue. So that's not impacting our longer-term views.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [34]

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The other thing I would add, just to give some color, and Charlie has done this, but if we look at -- as I look at what's happening in the company around the development of the pipeline, the execution of the pipeline, the opportunity to leverage the best of both companies to drive revenue synergies and revenue opportunities, we are seeing those. We are seeing those come to fruition to the pipeline. And certainly, at this juncture, many of them are in the early stages of submit. So we are seeing some good momentum there. And as Charlie mentioned, the majority, the vast majority of what we have in the submit state, even today, is for new business. So as we continue to win our fair share of opportunities that are really in sweet spots for SAIC, we have confidence in growth over the course of the next couple of years.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [35]

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And I guess just to touch on that, you said $13 billion of bids and 75% are new business, can you give us an idea of where you're bidding? And just to tie it into margins, first half margins are 8.4% EBITDA, your target is 8.1% to 8.4%, so you're already at that high end. You previously stated second half would be better. I guess does anything prohibit you from continuing to expand margins?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [36]

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No. So certainly, the different programs have different margin profiles. And as we have a significant portion of our portfolio at a cost-plus structure, that in and of itself provides some guardrails, I would say. So -- but as we look at key areas, an example would be the IT modernization that is top of mind for us, something that SAIC excels at. In some cases, those proposals are submitted on a fixed price basis, gives us higher confidence in being able to generate greater profitability over the months and years to come. But we continue to drive sales across the entire portfolio but are very, very focused on some key areas that has -- where we are stronger because of the Engility acquisition, and we've touched on those areas like space. The space domain, we're seeing good traction. And that's across from the DOD, across the intel community, across the civilian part of the portfolio where we see great opportunities based on what we know to be the government and certainly this administration's priorities and we believe those are enduring. So we've got some great opportunities to drive growth as we look forward to kind of coming out of this year.

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Operator [37]

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And we'll go next to Gavin Parsons with Goldman Sachs.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [38]

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Just on the customer CR concerns, some of your peers have sounded a little bit more optimistic about a 2-year budget deal. I know we got a little bit of a sense of your exposure to shutdown and specific agencies at the beginning of this year, but would you say that's a most recent development, like in the last few weeks or so? Or is it just that you're inherently more -- the work that you do is kind of more exposed to or sensitive to a shutdown or a CR?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [39]

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It's a great question. And again, I think as Charlie mentioned, we're not seeing this concern across the entire portfolio by any means. We've just heard from a couple of customers that have some interesting work to start that they don't believe they can start until this particular item is resolved. So it is -- for us, it is isolated, but it is in a couple of areas that have caused some headwinds as we go into the back half of the year. But I'm not hearing anything systemic. My sense is it's customer by customer, depending on what needs to get done.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [40]

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Okay. Great. And then on book-to-bill, I appreciate there's somewhat of a different definition versus some of your peers and this may be an oversimplification, but if I strip out the revenue headwinds, organic has kind of been 0% or so for the last 12 months, and the trailing 12-month, both funded and total book-to-bill, has been about 1. So what kind of book-to-bill do we need to see for you to kind of accelerate growth to hit that 3% target or surpass it? I mean what do we need on a funded or a total book-to-bill to see growth accelerate on a reported basis, rather -- not stripping out all those onetime pieces?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [41]

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Gavin, this is Charlie. I think a book-to-bill or the way we currently report it of 1.2, in that range, gets us into that low-single-digit revenue growth. I would also emphasize that we don't include in the book-to-bill the single award IDIQs, of which there have been over $3 billion in the last 12 months. So we think that the pipeline for business is there in order to hit the longer-term outlook that we've given.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [42]

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And the only precaution I would give, and I know we've talked about this before, book-to-bill is an indicator, but certainly isn't the indicator. And so we have to look at what's in submit status, how much of the submits are new business versus recompete, and obviously take into consideration, as Charlie mentioned, the differences between single award IDIQs and contract vehicles and the way that we categorize those. So it's obviously something we pay a tremendous amount of attention to. It's important. But I think looking at book-to-bill in isolation doesn't necessarily tell the story either way, quite candidly.

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Operator [43]

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We'll go next to Joseph DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [44]

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Charlie, sorry to beat this horse to death, but just on the $150 million, how much of that should we just kind of write off? And how much should we move into FY '21?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [45]

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So I would -- look, most of this is a timing issue that we've laid out here on these points, the one on the additional cost synergies is headwinds for this particular year that won't carry forward next year. And the remaining of those are really delays of awards that are in protest. So I would think that these would obviously flow into next year as revenue stream.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [46]

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So do you think $50 million goes away and $100 million shows up next year?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [47]

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Well, this is Nazzic, so certainly, some of it absolutely goes away. So if you think about the prime sub relationships that existed prior to closing the transactions, those get pushed through the system and those are gone forever. Same with, to some extent, same with the impact of the cost takeout. You take the cost out, the cost flow construct, it also has an impact on revenue. So I would consider those to be more isolated events that as we go into next year, certainly, much of that will be behind us. So that's how I would think about it as you look at the kind of mapping.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [48]

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Okay. And then just on the customer feedback on concerns around a CR, could you talk about which customer specifically that you're hearing it from? Is it kind of intel, defense, Fed/Civ? Any color there?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [49]

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No, I prefer not to do that. I will tell you that it's not isolated. Again, it's not a vast majority. It's just a few customers that are hesitant to start anything until the final budget cycle kind of gets through the system. So -- but again, it's not widespread. We're not hearing across the board. But I'd probably prefer not to attribute it to any particular customer.

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Operator [50]

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We'll go next to Tobey Sommer with SunTrust.

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Unidentified Analyst, [51]

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This is Josh [Rabib] on for Tobey today. We're hoping you could share how you view the logistics and supply chain business as part of the overall portfolio? And if you could provide some color on the outlook for that segment, that would be great.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [52]

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Yes. So this is Charlie. The logistics and supply chain business has actually been performing very well for this year and it's consistent. It generates a ton of cash. It's a very stable business, very well run, although the margins there are lower and it creates about a 40 to 50 basis points headwind to our overall portfolio on the margin side. But the economics of the supply chain businesses is quite well and it's been performing well.

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Operator [53]

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We'll go next to Josh Sullivan with Seaport Global.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [54]

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So I understand here you had some customers preparing for the CR, but what are your expectations for the CR? If it comes in a full quarter, is that encompassed in guidance here?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [55]

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Yes, so obviously, I probably know everything you know about if it was CR or not, so we all hope that this process goes through and the budget -- the 2-year budget cycle comes to a conclusion. If it doesn't, I would expect a relatively short CR. Again, we'll navigate as we need to. And we don't see it as a significant impact to our business. Again, I touched on the fact that we probably had a couple of contracts and we do have a couple that are new work and they're hesitant to start until this is resolved. But we've navigated a CR many, many times over the course of the last several years, and so we don't see it as a high risk or high impact to business.

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Joshua Ward Sullivan, Seaport Global Securities LLC, Research Division - Director & Senior Industrials Analyst [56]

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Okay. Great. And then could you just comment on the Polaris JV, and if that will be a -- if you're successful, a product-like kind of margin profile.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [57]

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Yes. So that's the vehicle program that we are doing with Polaris, the joint venture. And this is one in which -- this is very different from what we've done in the past with our vehicle platforms. First, I would just want to clarify that aspect of it. This is one of which we are providing similar type of work that we did with the MRAP upgrades, the C4ISR type of work, things that we've done very, very well over a number of years, and we're looking to do similar work there on this vehicle platform. We think they have a very good competitive vehicle, very excited about it. The margins would be similar to what we've done work previously, and I think we're going to have a couple of those on display at AUSA.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [58]

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I do want to just put a stop what Charlie said and that is it is a different type of program. So we did make a pivot after -- as we closed out last year and we kind of rethought about what made the most sense for us in these major programs of record and manufacturing of vehicles. And so we've elected to take a very different posture and position, and this is a great example of that work. The proven vehicle, it is -- and our role is really to help engineer it, to strengthen the C4ISR and work with our partner in delivering a strong vehicle versus us owning the manufacturing of something along those lines. So it is very different type of work for us as it relates to the previous vehicle platform. But very consistent, as Charlie mentioned, with the core capabilities inside of SAIC if we think about engineering and C4ISR, and I think it plays very well to those strengths.

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Operator [59]

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We'll go next to Jon Raviv with Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [60]

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On the $500 million target in FY '22, just following up on that topic, how sustainable is that? We know there's a tax boost that rolls off at some point, but what other things are getting to that point beyond just profit growth? Is it working capital that rolls off? Just again, trying to get an idea of how sustainable the $500 million is.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [61]

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No. It's a very sustainable number. There's nothing in there. There are tax assets that roll off in year 7, I think this is year 3, where they start rolling off or coming down. So we see it as sustainable. And also, I would like to mention on here the fact that we do have the $300 million optionality when you exclude the dividends and exclude the mandatory debt payments over that 3-year period of optionality for capital deployment over that 3-year period as well. So we see the $500 million continuing to grow as our profits will grow beyond year 3.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [62]

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And on deployment, with the acceleration of the FY '20 repo plan with the ASR a couple months ago, should we expect minimal activity through the rest of the second half, or is that something you're still going to evaluate in a couple of weeks with the Board meeting?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [63]

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With a strong free cash flow, we expect additional deployments in the second half, but we don't communicate our detailed future capital deployment plans. We'll be discussing that with our Board of Directors in the near future and get back to you on that.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [64]

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Great. And if I could just squeeze one more in, just on, Nazzic, you talked about revisiting or putting your stand on a long-term business strategy today to include looking at some of the KPIs. Can you just add context for us, so what do you foresee? What's the starting point? What do you perceive to be the long-term business strategy now? What are the KPIs right now? And what has that conversation started, so to speak?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [65]

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Sure. Great question. So really, the driving factor for stepping back and refreshing our strategy was the acquisition of Engility gives us a very different position in the market. And from here is that we believe will drive more than average growth. And so the objective was to step back and take a look at our existing strategy. Engility closed many of the gaps, if you think about greater access to the intel community, greater access to the space missions. And so what we're doing now is just taking a fresh look and with the intent of getting better clarity and visibility on where the growth is going to come for the next 1, 2, 5 years. And also then aligning our resources or investments to facilitate and drive that growth.

And so that's how we're thinking about it right now. Again, I don't -- it's not going to be a radical right turn. I think SAIC is exceptionally well positioned in a terrific market. And the type of work that we do and the solutions that we bring to bear are very consistent with the national priorities. And so we just want to take a fresh look, step back and ensure that we absolutely are focused in the right areas now that we are a bit different company with Engility joining the SAIC family. And that really is what's driving that. Does that help?

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [66]

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Yes.

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Operator [67]

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And we'll go next to Joseph DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [68]

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Nazzic, can you just talk about kind of how pleased you are thus far with talent retention at Engility? And then just more broadly from an M&A appetite standpoint, are you in a position, do you have the capacity to do more acquisitions now? Do you want to wait? What's your feeling there?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [69]

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You bet. So on the people side and the attrition side, I'm very pleased with where we sit today. And we've monitored this, as you could probably imagine, our assets are our people and so we monitor this on a very regular basis and has been and we've been doing that since we closed the transaction. But the decisions we made early on, the blending of the leadership teams, the full integration from an organizational standpoint of the companies happening on day 1 really contributed to -- I believe, contributed to our ability to retain the talent that we need and especially as we think about declared resources that are so critical to our business. So I'm extremely pleased with where we are. And -- but with that being said, we're not -- I'm not considering it done or considering it finished until we get through this year, get to the next couple milestones and really begin to see the revenue opportunity that I know we'll be able to see as we go into next year.

So that's that on the people side. On the M&A side, so the -- from a capacity standpoint, we absolutely have the capacity. The strengths of SAIC now as a result of the Engility acquisition, Charlie touched on the cash profile, and so we certainly have the capacity. My first and foremost priority is to continue the successful integration of Engility, and so that comes first. But with that being said, you can't always control what comes to market when, and we'll continue to look at M&A opportunities that would facilitate growth in either in capability sets or in customer access. And so we keep our eyes open. We continue to engage in conversations when something comes across the desk to make sure that it's something that you either want to take a look at or not. But I will tell you, it's not our highest priority as we sit here today.

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Operator [70]

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At this time, I would like to hand the call back over to our speakers for any additional or closing remarks.

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Shane P. Canestra, Science Applications International Corporation - Director of IR [71]

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Thank you very much for your participation in SAIC's second quarter fiscal year 2020 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.

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Operator [72]

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That does conclude today's conference. We thank you for your participation.