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Edited Transcript of SAIC earnings conference call or presentation 26-Mar-20 9:00pm GMT

Q4 2020 Science Applications International Corp Earnings Call

MCLEAN Apr 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Science Applications International Corp earnings conference call or presentation Thursday, March 26, 2020 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 - VP 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 & Analyst

* Joseph William DeNardi

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

* Joshua Ward Sullivan

The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst

* Matthew Carl Akers

Barclays Bank PLC, Research Division - Research Analyst

* Matthew Higgins Sharpe

Morgan Stanley, Research Division - Equity Analyst

* Seth Michael Seifman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to SAIC's Fourth Quarter and Full Fiscal Year 2020 Earnings Call.

At this time, I would like to turn the conference call 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 - VP 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 fourth quarter and full fiscal year 2020 earnings call. Joining me today to discuss our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; and Charlie Mathis, our Chief Financial Officer.

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-K 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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Good afternoon, and thank you for joining us to discuss SAIC's fourth quarter and full fiscal year 2020 results, our outlook for fiscal year 2021 and the execution of our strategy to continue providing value to all of our stakeholders. SAIC's full year results reflect strong operational and financial performance as we successfully implemented many strategic initiatives to position the company for sustained profitable growth and long-term value creation.

Charlie will provide details on the business development and financial results, but I would like to highlight a few areas of our strong performance in fiscal year 2020. SAIC delivered strong profitability and cash generation that met or exceeded the expectations that were set at the beginning of the year. Compared to fiscal year 2019, SAIC improved adjusted EBITDA margins by 80 basis points and increased our free cash flow by $281 million to $437 million, representing a 180% increase in the fiscal year. Additionally, we are on track to generate over $0.5 billion in free cash flow in fiscal year '22. We also had a very successful business development year with a book-to-bill of 1.2x with strong third and fourth quarters of 1.4 and 1.5, respectively.

Our work in the space and intelligence community has seen impressive recompete and new business contract wins, accelerated by the Engility acquisition and integration. It's a great example of our team's ability to embrace the exciting expanding opportunities that are available to SAIC as well as our steadfast focus to bring mission-critical technologies and specialized expertise to our customers.

Last year's business development results position the company well for growth in fiscal year 2021 while increasing our pipeline of opportunities in our strategic markets. This performance was accomplished while also integrating the Engility acquisition and now further accelerating our strategy through the acquisition of Unisys Federal. It was a busy year on many fronts, and I'm very proud of SAIC's continued strong performance.

Turning to the market environment. The past few weeks have been challenging for our global community. The spread of the COVID-19 virus has altered many aspects of our collective and individual lives. I'm confident that as a nation, we will remain resilient and will overcome this challenge. Our thoughts and sympathy is with all of those affected either directly or indirectly.

Now specific to SAIC, due to the nature of our business, we have seen minimal impact to our operations to date and have proactively developed readiness plans should disruptions increase. We already maintain an infrastructure that accommodates remote work for a significant number of employees when needed, frequently allowing employees to support customer programs remotely.

Specific to our business, the government services market is very resilient to challenges. Our federal government customer is largely less economically sensitive with a significant portion of the work we perform considered mission-critical. This frequently minimizes the impact of these types of disruptions. We have honed our operational muscles from events like government shutdowns and weather-related disruptions. As the effects of COVID-19 continue to unfold, we are likely to see some impact to our business, but we expect the impact to be very manageable. The government services market has long-term contracts, a flexible operating model and cost structure and customers with stable funding levels.

As our team consistently meets and exceeds our customers' expectations, another key element of our continued success is our ability to execute on our strategy. We continue to focus on 3 strategic items that we have previously mentioned. First, with the successful integration of Engility largely completed, we have now pivoted to the successful integration of Unisys Federal. Second, we look to accelerate sustained profitable growth by focusing investments in key strategic areas as well as leveraging new market access and capabilities from the Engility and Unisys Federal acquisitions. And third, every level of the organization is working diligently to win the war for talent. We have made improvements and investments in areas that directly enhance our employees' work lives and provide attractive benefits to attract and retain high-demand technology talent.

While the government works on fiscal year 2021 budgets, SAIC's balanced and diversified portfolio provides great stability in the event there are shifts in individual agency funding. The acquisition of Unisys Federal further balances and strengthens our customer base with increased federal civilian customer access. All indications point to the U.S. federal government continuing to allocate budget increases to areas where SAIC is a leader and is strongly positioned for future growth, such as space, mission engineering and integration and IT modernization. As we have mentioned before, these are the focus areas of our long-term strategy.

We are excited to have closed the acquisition of Unisys Federal on March 13. We welcome the talented and mission-driven Unisys Federal employees to SAIC. We are very excited to have you join the company and work with you to leverage a commercial-style delivery model across our broad portfolio.

SAIC is now a leading government services technology integrator in digital transformation with increased value creation through 4 dimensions: first, enhanced capabilities in government priority areas, including IT modernization, cloud migration, managed services and DevSecOps; second, an expanded portfolio of intellectual property and technology-driven offerings enabling government-tailored commercial-based solutions; third, increased access to current and new customers with a strong pipeline of new business opportunities; and finally, an acquisition that is highly accretive across key financial metrics.

We are very proud of our success in the Engility integration and have tremendous confidence in the successful integration of Unisys Federal. Just like the Engility acquisition, we've spent considerable effort planning for the integration of Unisys Federal, leveraging our experience and processes to ensure a smooth transition for employees and customers. Compared with the Engility integration, there are not as many milestones to communicate as it is a less complicated integration than Engility, but we will communicate notable activities as they are accomplished.

We're off to a very strong start, and we are very excited about the opportunities that are before us. I'd like to ask Charlie to share our business development and financial results before taking your questions.

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

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Thank you, Nazzic, and good afternoon, everyone. SAIC's fourth quarter and full fiscal year 2020 results reflect strong profitability and cash flow generation, while business development activity and the acquisition of Unisys Federal point to organic revenue and profit growth in fiscal 2021.

Let me start with our business development results. Contract award activity in the fourth quarter led to net bookings of $2.4 billion, translating to a book-to-bill of 1.5 for the quarter and 1.2 for the full year. In our December call, we communicated our confidence in a strong fourth quarter book-to-bill and how this quarter would be the strongest quarter of the year, and we have delivered on that expectation.

Fourth quarter net bookings was comprised of a wide variety of contract awards and modifications, including $1.1 billion of space and national security awards, including the new business win of U.S. Air Force Common Computing Environment or Cloud One contract valued at $727 million. We were also successful at retaining a classified space contract valued at approximately $265 million, demonstrating our leadership in the space domain and our emphasis in this market. U.S. Army awarded SAIC a new business contract award valued at $98 million for IT support and C4I services in the Pacific region.

SAIC was also successful in retaining a multiple-award IDIQ contract with the Pension Benefit Guaranty Corporation to provide IT operations support services and have been awarded the first 2 task orders worth approximately $115 million. The remaining award activity in the fourth quarter was across many smaller contracts and contract modifications but did include about $193 million of increased value in SAIC's existing AMCOM portfolio, demonstrating our continued performance and customer satisfaction.

Subsequent to the end of the quarter, SAIC resecured 2 notable new business contracts that have been in protest resolution. Protests were resolved in our favor on the U.S. Air Force's $655 million EDIS contract and the $950 million FSG-80 contract to support the Defense Logistics Agency. I'm also very pleased to announce that we were successful in the recompete of our Department of Justice asset forfeiture contract. As a reminder, this is a significant recompete of a contract performed through a joint venture structure where SAIC consolidates the financials. The contract award is still in a potential protest period. After a prolonged award cycle, we are very excited to begin support to these customers.

At the end of the fourth quarter, SAIC's total contract backlog stood at approximately $15 billion with funded contract backlog of $3 billion. The estimated value of SAIC's submitted proposals awaiting award at the end of the fourth quarter was approximately $14.5 billion, down from the third quarter and representative of a strong fourth quarter of awards. Our pipeline is strong and robust. And as we continue to focus on sustained profitable growth, as Nazzic mentioned, with about half of the value of the submitted proposals relating to new business opportunities, our refreshed strategy is better than ever aligned to service offerings focused on an organic growth strategy.

Let me turn to our financial results, and I will primarily focus on SAIC's fourth quarter performance with references to full year results in specific areas. Our fourth quarter revenues of approximately $1.5 billion reflect growth of 29% as compared to the fourth quarter of last fiscal year due to revenues associated with the Engility acquisition. Excluding the impact of the Engility acquisition, fourth quarter revenues contracted year-over-year by 1% driven by the revenue dyssynergies that have affected us all year and will not reoccur in fiscal year 2021. Full fiscal year 2020 revenue, excluding acquisition revenues, contracted approximately 1% but included an approximate 2% headwind from the revenue dyssynergy, which again is a headwind we do not have in fiscal year 2021.

Fourth quarter adjusted EBITDA was $134 million, a $39 million increase from the prior year. Adjusted EBITDA margin equated to 8.7% after adjusting for $18 million of acquisition and integration costs mostly related to the Engility integration. Fourth quarter margin performance was strong as we continued to see exceptional program performance and the continued benefit of the net cost synergies.

For the full fiscal year, adjusted EBITDA margin was 8.4%, 80 basis points above our prior fiscal year and at the top of our guided range for the year. Again, this was due to the same drivers I mentioned, strong program performance and the benefit of cost synergies.

Acquisition and integration costs were $18 million and $48 million for the quarter and fiscal year, respectively. The vast majority of the fourth quarter amount was related to the Engility integration activities with approximately $2 million related to the Unisys Federal acquisition cost.

Net income for the fourth quarter was $60 million, and diluted earnings per share was $1.01 for the quarter, inclusive of the fourth quarter acquisition and integration costs of $18 million. Excluding acquisition and integration costs as well as amortization of intangibles, our adjusted diluted earnings per share was $1.58. Onetime favorable tax treatment as a result of a research and development tax credit contributed about $0.16 to diluted EPS. Our full year effective tax rate was approximately 20%, lower than our previous expectation of 22% to 24% due to the mentioned research and development tax credit.

Turning to free cash flow generation. I am pleased to report that SAIC generated $437 million of free cash flow, exceeding our previously communicated expectation of $425 million and $281 million above our FY '19 free cash flow number. We finished the year with cash on hand of $188 million, and we continue to have tremendous confidence in our ability to generate cash. To this point, included in our release is the announcement that our Board of Directors has approved a quarterly dividend of $0.37 a share payable on April 24 to the shareholders of record on April 9.

We operate a very capital-light business model that contains mostly variable costs, and we receive almost all of our payments from the federal government. Once past the uncertainty of COVID-19, our top priority with excess cash generation will be to make voluntary debt repayments. However, for now, we will maintain excess cash on the balance sheet for our ongoing operations.

Now turning to our forward outlook for fiscal year 2021. Prior to the COVID-19 virus emerging, we intended to provide formal fiscal year 2021 guidance. Although we have seen minimal impact to date, we feel it is prudent to postpone issuing fiscal '21 guidance due to the uncertainty surrounding COVID-19. That being said, we would like to provide the investment community with the framework for how we viewed fiscal '21 before the COVID-19 issue emerged and some context on the resilience of SAIC's business model in this environment.

As you know, this is a rapidly evolving issue. So these are our thoughts as of today for the consolidated business to include Unisys Federal for the 10.5 months we will own them in fiscal '21. Prior to the emergence of COVID-19, we believe we would grow revenues organically by 3% to 6%, adjusted EBITDA margins in the high 8% to 9% range, a significant improvement over prior year adjusted EBITDA margins. This excludes approximately $60 million of acquisition and integration costs primarily as a result of Unisys Federal and trailing Engility integration costs. Free cash flow to be at least $450 million, which includes the tax-adjusted impact of transaction-related cash outflows.

Looking out farther and having cleared the COVID-19 crisis, we expect to achieve $550 million of free cash flow in fiscal year '22, as I communicated on the call to announce the acquisition of Unisys Federal. Nothing has changed in the basic fundamentals of our company or the demand from our customers to alter that view. We continue to have confidence in that outlook and reaffirm it today. With this in mind, we expect to meet our targeted net leverage ratio of 3.0x by the end of fiscal year 2022. Again, I'm providing this framework to demonstrate that fundamentals of our business remain strong. We have a very flexible cost structure and have levers to mitigate impacts of our profitability and cash flow.

While the vast majority of our employees continue to work as normal or remotely, a small number of employees in sensitive work environments are working modified work schedules, and we fully expect to recover cost of disruption. With customers increasingly being flexible to remote work and the mission-critical nature of our IT services, it is helpful to lessen the COVID-19 impact.

I would like to reiterate a few of the financial benefits of acquiring Unisys Federal and the strength of our capital structure. The acquisition is immediately accretive to organic growth, immediately accretive to adjusted EBITDA margins, immediately accretive to adjusted earnings per share, immediately accretive to cash generation excluding transaction costs. Unisys Federal, similar to SAIC, has a very capital-light business model, a flexible cost structure and the ability for approximately 80% of their employees to work remotely, and their primary customer is the U.S. government.

Currently, we are able to manage the impacts of the COVID-19 crisis. As of yesterday, our consolidated weekly billings and cash collections have been normal, and our cash on hand remains well above our targeted level of $150 million. In addition, we have full access to our $400 million committed revolving credit facility. And finally, we amended our accounts receivable purchase facility to allow us to raise another $100 million through the sale of receivables in the event we need to.

As noted in our press release today, SAIC is a well-capitalized company that primarily serves the U.S. federal government, providing business stability through long-term contracts, a flexible cost structure and a customer whose obligations to pay invoices are backed by the full faith in credit of U.S. government. SAIC has ample liquidity and a strong capital structure to more than adequately service our debt obligations in the context of potential business impacts from the COVID-19 virus.

Nazzic, back to you for concluding remarks.

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

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Thanks, Charlie. As we concluded fiscal year '20, we spent some time reflecting on how SAIC has transformed over the past few years. Through the acquisitions of Scitor, Engility and Unisys Federal as well as significant organic transformational activities, the company is markedly different than it was. Our business portfolio has been strengthened and diversified, our capabilities have advanced and broadened, and we have made significant progress in all key financial metrics. But as we all know, it's about what we'll be doing moving forward. The steps we have taken these past few years have laid a solid foundation for a successful future, and we are very excited for what lies ahead for SAIC.

In closing, I want to express my sincere welcome to all of our new colleagues joining us as part of the Unisys Federal acquisition. We are thrilled to have you as part of Team SAIC. And to all my SAIC colleagues, I look forward to the time when we could all walk the halls together again and enjoy an in-person conversation. But until then, I wish you and your families good health. I appreciate all you do each and every day for your company, your colleagues and your nation.

Operator, we're now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from 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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Congrats here. Can you talk a little bit more about how the contracting officers are being flexible or not flexible in the current environment as far as setting up remote activity, willingness -- you suggested willingness to get refunded for the payback for the Blue Gold issues and so forth. Anyway, give us some color on that front.

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

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Absolutely, Ed. Thanks for the question. This is Nazzic. So we have seen great cooperation and collaboration from our customers and as well as the contracting officers that are part of this -- every conversation that we have. And to date, they've been very collaborative, very supportive. There's everything from letting folks work from home, work remote, to looking for opportunities to do social distancing inside the facilities that support them today. And so I've just been very pleased by all the interactions we've had.

In some cases, as you mentioned, the Blue Gold in the -- in some parts of the intelligence community, the effort to go to shift work to give some -- a little more distancing and to be able to serve the mission is something we're navigating real time. As we sit here today, there are certainly more conversations to be had there. It is -- the nature of that contract is a cost plus -- for the most part, the nature of those contracts are cost plus that provides the protections as well.

So at this point, as Charlie mentioned, we've had minimal impact. But again, we know we're early in the cycle. We would expect over time to potentially see a bit more, but the nature of the work that we do and the flexibility that we have seen with our customers has just

(technical difficulty)

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

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Can you talk a little bit about the military here? Obviously, they're stop travel. They're sort of holding people on bases. Is that impacting your business as well?

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

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So we -- not really. We've actually had very little impact from our DoD portfolio. And so again, just working hand in hand with the customer, looking for the opportunity to do work either at home, remote locations or working with them on opportunities to provide more distancing has all gone exceptionally well. So we've seen very, very small impact from our DoD customers to date.

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Operator [6]

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Your next question comes from Sheila Kahyaoglu from Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [7]

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Thank you for the pictures on the slide deck. I can't remember what other people look like now, so appreciate it. Nazzic, I guess for you, book-to-bill has been above 1 for the last 3 quarters. What gives you confidence in the organic revenue growth return? And how do you think about the recompete pipeline from here?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [8]

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Great question. Thanks, Sheila. So certainly, the book-to-bill, as you mentioned, being above 1 in the last 2 quarters have been very strong. And then -- so that gives us some confidence. And then we've been talking about a handful of wins that are new business wins. So we've referenced Cloud One. We've referenced EDIS, FSG-80, just to give you the -- some near-term significant wins over the last quarter or so. And so those are new business wins that will go into this year. So as Charlie mentioned, as we did -- this is our cycle for putting together our annual plan. And in doing so, we do have confidence in our ability to drive organic growth as we go into this year, again ignoring whatever potential impact COVID-19 could have. But as we look at the business from a core perspective, going into the year, we had that confidence.

As we think about the recompete pipeline, we've been talking about a couple of significant ones going into this year. One was the FSA recompete. And again, as we noted, that is one that has been awarded, recognizing we're still in the protest period, so we'll continue to navigate that. But that derisks certainly some top line as we go into this year. The other significant one that we have been highlighting and talking to is the various recompetes in the broader AMCOM portfolio. And so those -- they'll be recompeted over a course of several contracts over the next several months, year plus. And so that certainly is something we're paying close attention to. Again, we feel confident for our ability to retain our work there based on our history, based on the excellent job that we do with that customer and based on past performance. But again, we take every recompete very seriously, and so we'll continue to navigate that and report out on that. And those 2, the broad AMCOM portfolio, not one particular contract, as well as the FSA were the biggest ones that would -- that we've been tracking going into this year.

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [9]

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Sheila, if I could just add a couple -- if I can add just a couple of bullet points on the revenue topic as well. Just as a reminder, we do not have the revenue dyssynergies that we had last year. That was about a 2% headwind. And with the Unisys Federal acquisition and with our expectation of them growing more than 10%, that will be accretive to our organic growth in FY '21 as well although we've owned them only 10.5 months.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [10]

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Understood. And then, Charlie, maybe just -- sorry about the echo, guys. You talked about margin expansion, Charlie. Should we still think about the Unisys business as an 11.5% margin business in fiscal '21 for you guys? And just the pro forma profitability, are there any nuances we should be aware of?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [11]

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Yes. So the framework we gave on the margins was in the high 8s to 9% pre-COVID-19 crisis. That's from the 8.4% that we just reported. The Unisys Federal will contribute 20 to 30 basis points. Remember, we've only owned them only 10.5 months. And then the SAIC portfolio, given the additional cost synergies from Engility, should contribute another 20 to 30 basis points. So that's really the walk as far as how you get to the higher margins in FY '21.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [12]

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Sheila, are you able to hear us okay?

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Operator [13]

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Your next question comes from the line of Matt Sharpe with Morgan Stanley.

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

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I just wanted to get a sense of how you guys are thinking about the cadence of business throughout the year just given the recent Cloud One, the FSG-80 and EDIS wins. I know you're not providing formal guidance. But if you could just give us some sense because those recent wins obviously imply a very heavily weighted back end. But what does the ramp maybe look like?

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

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Yes, Matt. This is Nazzic. Can you hear us okay? Let me do a quick check.

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

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Yes, I can. Yes.

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

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Okay, great. Thank you. So yes, as you would expect, having won significant contracts late in the year or early in this year, for the most part, they do frequently take time to ramp up. And so we would see in general, as you outlined, the ability to drive growth higher in the back half of the year than in the front half of the year just by the nature and the size of the contract, the ramp-up period and those -- and the way those will come on to the overall portfolio. So I think that's a fair representation on how to look at it.

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

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And then what does Q1 book-to-bill look like thus far? Are you seeing any slowing of awards from the government? Obviously, you've had a flurry of big wins post-quarter end. But maybe you could just sort of box in the level of activity as well as what you expect in terms of B2B.

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

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Great question. So it is early in the quarter obviously. As we have in years past, Q1 can be a bit softer book-to-bill just from our business cycle. And so it wouldn't be extraordinary if we had a bit more softness in our first quarter. We haven't seen any significant delays as of yet regarding the COVID situation. But one might expect, as we get further in our quarter, we might see some slowdown there. So it's something we're paying great attention to. We're tracking it on a regular basis. But I think as a result of one historical performance in Q1 as well as this particular nuance, I wouldn't be shocked to see some softness. But it's not something we're overly concerned about as we sit here today because I believe that even if we do, which again it's too early to tell, but even if we do, I have confidence it'll pick up over the course of the year, assuming again that this crisis get behind us.

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Matthew Higgins Sharpe, Morgan Stanley, Research Division - Equity Analyst [20]

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Got it. And then, Charlie, just real quick on cash. With the DoD moving from 80% to 90% progress payments, how should we think about the impact here in Q1? Are we going to see a surge level? Or what's the implication there?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [21]

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There's not a lot of implication on our business that -- it's a couple of contracts, but it's really not a material impact for us.

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Operator [22]

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Your next question comes from Cai von Rumohr with Cowen and Company.

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

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Yes. So I've read somewhere that Unisys is a member of Leidos' team on NGEN. Could you give us some color in terms of how big that is and what sort of a ramp do you expect?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [24]

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Yes. Thanks, Cai. So yes, that's true that it was a -- they were part of the team kind of pre-SAIC engagement. And obviously, that's got to go through now is protest cycle. But they were part of the team, are part of the team. It is a relatively small position. So we would need to view it as a material impact. And certainly as it will get halted and slowed due to the slowdown specific to the protest cycle, but that is the fact of the case.

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

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Got it. And then I was kind of intrigued by the comments you made that debt was $2.9 billion, and cash was $155 million. Because I assume we paid $1.2 billion for Unisys, and those numbers kind of imply free cash flow in the first quarter of like $160 million, a very strong first quarter free cash flow. Am I misreading that?

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

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Yes, you are misreading that, Cai, so I'll go through a little bit. $1.2 billion was the purchase price. We raised $600 million from Term Loan Bs and $400 million on senior unsecured notes. We also sold $200 million of our accounts receivable. That's how we financed the transaction. Our free cash flow is really expected to be around $30 million to $40 million per month on average, is what we'd expect.

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

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The receivables explains it. That's great. And so do you -- does your guide on cash flow for the year assume that you -- we continue to use $200 million for the receivables?

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

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Yes, yes. We anticipate to continue to use $200 million of our accounts receivable. We also amended our agreement, so we can sell an additional $100 million if we needed to. We don't anticipate that we will need to, but it's there with the amended agreement, and that's part of the 8-K filing that you'll see today as well.

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Operator [29]

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Your next question comes from Seth Seifman with JPMorgan.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [30]

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Just -- I apologize if you guys brought this up, but on the Unisys Federal contribution for fiscal '21, thinking for the 10.5 months something in the range of $600 million?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [31]

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So let me help you with that. As you know, they reported $725 million ending December calendar year '19. We expect them to grow 10%, and we are going to report 10.5 months of that number. So that's how you should calculate the contribution.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [32]

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Right. Okay, okay. And then I guess when you think about maybe bridging a little bit from the cash flow that you're looking for in fiscal '21 to fiscal '22, if we started at $450 million and then we think about the onetime costs associated with Unisys Federal after tax, probably takes you up to $480 million or something like that. And then we think about bridging from that $480 million to $550 million, can you take us through some of the big chunks there in terms of how you get there?

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

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Yes, so I'd be happy to bridge it. So again, we'll start at the $450 million, the SAIC. For those 10.5 months, Unisys Federal net of the interest expense and cash tax benefits adds about $50 million to that number. So that's your baseline. But for the onetime tax-adjusted impacts of the transaction costs and some other onetime working capital adjustments, that gets you back to the $450 million. So the baseline to get to the $550 million in FY '22 really going to start at $500 million. And then due to the higher growth, the higher-margin portfolio of Unisys Federal, the fact we have them for a full year, not 10.5 months, and then the additional tax benefits that they bring, that's how you get to the $550 million in FY '22.

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Operator [34]

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Your next question comes from Matt Akers with Barclays.

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Matthew Carl Akers, Barclays Bank PLC, Research Division - Research Analyst [35]

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I was wondering if you could talk about the hiring environment right now given that a lot of people sort of can't come out. Are you still hiring? Or is that any kind of a risk as you guys look at returning to growth this year?

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

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Yes, good question. So we haven't seen any big swings in hiring at this juncture. We still have contracts where we need to add people. And we've talked about some of the ramp-ups. So at this particular moment, certainly, our hiring remains on track. It is a competitive labor market, and so we've done several things inside the company to set ourselves apart, and we'll continue to work on that. So at this moment, again, we're only a month or so into this crisis. We haven't seen any big change in our ability to hire.

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Matthew Carl Akers, Barclays Bank PLC, Research Division - Research Analyst [37]

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Okay. Great. And then I guess just an update on the Engility synergies relative to the targets that you guys laid out, are those all behind us? And how much would you say you're able to achieve relative to the initial target?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [38]

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Yes. So as we communicated, and Charlie can add some color, but as we communicated last quarter, we have the vast majority of those behind us. We do have some trailing synergies that will come into this year in the form of real estate consolidations that we had planned that just took time to navigate and do some of the negotiations and a few small IT consolidations that will take place this year. But the vast majority of those cost synergies are behind us.

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Matthew Carl Akers, Barclays Bank PLC, Research Division - Research Analyst [39]

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Okay. And then I guess one more just on interest expense. I think you talked about $135 million, I think, for the year, now that you're holding on to some cash a little bit longer. What's sort of the updated number we should expect for this year?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [40]

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Yes. So we're looking at around $125 million of interest expense for the year. There's also $75 million of mandatory debt payments in the year as well. So yes, we are looking to not make additional voluntary payments. That number I gave you was based on the mandatory payments. So if we start making voluntary payments, that number would come down. But we just think it's prudent to, in this environment, keep the additional cash on the balance sheet as for now.

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Operator [41]

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Your next question comes from Jon Raviv with Citi.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP & Analyst [42]

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So Nazzic and just maybe a question for the total SAIC leadership team, paradigm shifts don't come along too often in the federal government environment. And I don't want to overstate anything, it's still "early," but there are a lot of changes going on. You've also identified public health as something you're interested in historically. I'm not sure you have too much of it sitting here today. So what is your long-term strategy to address what could be a restacking of priorities for the federal government given the huge disruptions being caused by pandemic today?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [43]

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Yes. It's Nazzic. So a great question. I think a couple of things that I would just emphasize. One is that we have a great ability to be agile and pivot when we need to be, and the diversified portfolio allows for that flexibility. Now with that being said, we still fundamentally believe the areas that we have been focused on, that we believe will drive growth, will, in fact, continue to drive growth. So certainly, space is one example of that. The IT modernization and the digital transformation strategy that SAIC has been on and now even further accelerated with the recent acquisition, I think, is one that absolutely can create a marketable difference for our federal customer.

Our federal customers are also looking for the opportunity to work remotely, to find different mechanisms to do the work they need to do, and IT is a tremendous enabler of that capability. And so that's just one example where it might be a little different than we were thinking 30 days ago or 60 days ago, but it creates great opportunities. So I do believe that we're on the right track, but we will pivot if we need to. Our diversified portfolio, access to a broad range of customers and the combination of our IT skills and our engineering skills as well as our DLA portfolio give us a strong position.

As you referenced in the health space, you're absolutely right. We do not have a significant presence in the health -- the federal health market. But again, the leverage of IT, the modernization that's required in the broad health care IT realm is certainly top of mind and the solutions we bring to bear can absolutely work in that domain as well. So we still believe we're very well positioned. We will pivot, and we'll be agile. We want to do everything in our power to help our nation and help the federal government through this crisis. And our relationship with our customers and the solutions we bring to bear, I am confident will be an accelerant and provide that opportunity.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP & Analyst [44]

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It's typically said in this environment -- sorry, not this environment, in this industry that relationships are key. And it's sometimes easier to acquire relationships in past performance especially with certain clients rather than build it organically. If there is a bigger push into public health, federal health, does something like Unisys enable you to kind of go there organically and say, "Hey, we have this commercial model. You should utilize this"? Or do you see yourselves perhaps looking to more of a buy versus a make or more of an inorganic opportunity in the public health space going forward?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [45]

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Well, so I think it -- certainly, the recent acquisition of Unisys Federal, coupled with the work that SAIC was already doing in this broad IT modernization, the migration to the cloud, the digital transformation, being able to do work from different venues, is something that's absolutely critical for the broad health care market as well. And so I do believe that the solutions we bring to bear there can and will make a difference in the broad health care market. Now with that being said, we have said before that the access to the customers, having more domain and mission experience in health care would be advantageous to SAIC. But we don't believe we need to do that at this minute. We're well positioned with the recent acquisition. And so our priority is to drive organic growth through the assets we have today for the foreseeable future, and I think we're positioned to do that.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP & Analyst [46]

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And then just a quick question on the current book of business. You mentioned that AMCOM, seemed like you upsized AMCOM in the quarter by a little bit. Can you just give a little more perspective on what that was, and I know it's a big focus for the rest of the year, and kind of how you're seeing the customer make the decisions there?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [47]

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Well, we had a bridge contract on one of our AMCOM contracts. I think it was $130 million roughly, $180 million, roughly in that range. Just demonstrating that the customer relations that we have with that customer, we will know on the AMCOM recompete sometime likely early summertime, I would think. But we highlighted that one just again to let you know there's activity going on. We're continuing to get awards. We're still in -- have great relationships there, and we still are very positive about that recompete.

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Operator [48]

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Your next question comes from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [49]

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I was wondering if you could compare and contrast your experience in various government shutdowns to the current environment with respect to maybe a few vectors: contract awards, collections and kind of what you're experiencing in DSO. So there's not just your own ability to work remotely but also, in many cases, your customers. How would that play out for you?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [50]

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Yes. So Tobey, this is Nazzic. So in general, when we go -- when we work through a shutdown, the dynamics are very different actually. The shutdown is because a particular part of the government doesn't have funding. And so we have to navigate it in that manner. And so that means, in some cases, the government can't work. They can't let contracts. They can't pay. And so it does really halt business in a different way than what we're seeing with this particular dynamic. This is not an economic issue. This is not an issue where the -- our customers don't have the money. And so there is differences to the way it's being managed, navigated on our side as well as our customer side. And so today, as Charlie mentioned, we have not seen a slowdown in being able to get paid. We've not seen a slowdown in being able to do the work that we need to do. Again, it's early days, but we've not seen those dynamics as we would compare it to a shutdown.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [51]

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And how would you characterize any differences in your kind of broad customer set, DoD versus intelligence versus civil customers? Are there differences worth noting when you look at the business across those dimensions?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [52]

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Yes. So I think one of the easiest ways to look at it and -- is in the intelligence community, as an example, frequently, not always but frequently, the work has to be done in secure areas. And so to the extent that those secure areas provide a challenge, whether they've been infected as an example that could happen or you're looking for social distancing, that has a different nuance than being able to do work from home on a type of work that doesn't have that same security requirement. So that's just one example. There is nuances. There is differences. But again, we've been very fortunate to date to be able to navigate those in partnership with our customer so that we can continue to support the mission but also ensure that we do everything in our power to protect our employees as well as the customer employees.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [53]

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Last question for me. Are you currently able to fully hire and onboard a new employee remotely? And if not, is that something you're looking to be able to do in the near future?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [54]

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No, we can certainly do that today. It is something that we have done. Even before this, we frequently will hire people in areas where we don't have -- we either don't have an office or we've got a very small office. So it is something that we have done in the past and we continue to do as a normal course of business. Obviously, it takes on a different flavor today, but it's something we're very comfortable doing.

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Operator [55]

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Your next question comes from Joseph DeNardi with Stifel.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [56]

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Charlie, you're looking at about, I guess, $1 billion in free cash flow over the next 2 years in the context of the $4 billion market cap for you all. It's pretty unusual for a business with your type of durability and visibility. So can you talk about maybe a little bit how you think that is best deployed? How much needs to go to debt paydown? And what does that leave in terms of dividend? And then what's your preference for M&A and the buyback?

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

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Thanks, Joe. So our top priority is to pay down our debt. We have a leverage target of 3x by FY '22. So that is the top priority. Obviously, preserving the dividend is something that we will do, first and foremost. There's no risk in the dividend. And the additional cash, we will have to evaluate this next year, and we're in that position of excess capacity and get within our leverage optimal capital structure. We always look to maximize, I think, for the shareholders, look strategically to add to certain assets and this type of thing. So I think we'll evaluate it. But again, top priority is to delever rapidly in FY '21, excess capacity in FY '22.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [58]

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And so Charlie, how much do you need to pay down or how much -- what are your mandatory debt repayments? I think you said it was $75 million this year. Do you have that number for next year?

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Charles A. Mathis, Science Applications International Corporation - Executive VP & CFO [59]

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$100 million next year, about $110 million of interest expense, but the mandatory debt, $100 million. We would look to pay down voluntary debt payments this year. I think it's about $250 million. Again, whether we do that 3 months, 6 months, at the end of the year all depends on when we get through this crisis. But that's what we're looking to do to get to that leverage ratio.

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Joseph William DeNardi, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Airline Analyst [60]

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Got it. That's helpful. And then, Nazzic, just on the decision to not provide guidance, I mean a lot of companies aren't providing it, so it's not really unique in that sense. But you're also saying that your business isn't being impacted currently. So how much of this is just kind of out of an abundance of caution versus real concern or uncertainty that based on what you're hearing from customers, that eventually, there could be some disruption? Maybe just try and put that into context a little bit.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [61]

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Yes. No, a fair question. So I think a couple of thoughts. So as Charlie outlined, we did intend to provide some general guidance. That was our goal going into this particular call, and we've been communicating that over the course of the last few months. And so that was our starting position. And certainly, as we look at the impact of this crisis, we've been -- we are fortunate. We have not seen significant impact to date. We're very -- we remain optimistic that we can navigate this. Certainly, the indications are that we can, but there's so much uncertainty.

And so the way that -- as Charlie and I thought about it, we just think it's the responsible position to just be very transparent. And that's to give you guys a sense for what we -- what it looks like going into the year but also to recognize that we are just a few weeks into something that can be a few more weeks or a few more months. And so we just believe this was the right balance of how to communicate what we know today as well as what we don't know today.

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Operator [62]

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Your next question comes from Gavin Parsons with Goldman Sachs.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [63]

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Thinking about some of these bigger awards that you've won over that or are about to hit the backlog, obviously, you have a bit of a shorter portfolio duration than some of the peers, so I think you've got a 4- to 5-year leverage duration. You're going to have 20% to 25% recompete a year. So I mean some of these bigger contracts with longer durations, are you continuing to mix that way over the next few years? And what do you think your duration looks like a few years from now?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [64]

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Yes. We -- in general, Gavin, we see it relatively unchanged. If we think about the average duration for us is, give or take, 5 years, some are 3, some are 7, we're seeing some at 10. So it's -- but I would just assume that -- the general average of 5 years as we look at contracts that we would be bidding on and winning.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [65]

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Got it. And are you seeing the industry consolidating the bigger contracts? And are you seeing any benefits of scale on your ability to bid on bigger work?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [66]

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So yes. So certainly, in some areas of the business, we are seeing that opportunity. And so being able to compete with the exceptional past performance that we have and to be able to pursue those sizable contracts is something that SAIC has historically done. So we've certainly had the scale and past performance. Adding on the Unisys Federal portfolio certainly gives us greater strength and capacity in the IT modernization, digital transformation. So we feel very good about our position as it relates to the broad market.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [67]

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Appreciate that. And then maybe just on book-to-bill I think the good momentum throughout the year, right, sequential improvement kind of every quarter since acquiring Engility. I know you said you put a lot of work in ahead of acquiring Engility to make sure it didn't disrupt the bookings process. But maybe if you could do a look back and talk about kind of the success you've had accelerating book-to-bill and whether or not Engility was and is more disruptive than you thought and if you think this momentum can continue.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [68]

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There was a couple of places where I couldn't quite get the question, and I apologize for that. But can you restate for me, please? I'd like to be able to address it.

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Gavin Eric Parsons, Goldman Sachs Group Inc., Research Division - Associate [69]

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Yes. Just to look back on bookings and how that's improved and accelerated throughout the year.

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [70]

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Okay. So yes, so we did see -- to your point, we did see incremental each quarter in general got better on the bookings side. So I think a couple of things contributed to that. One is we did a lot of work with the Engility acquisition to strengthen our go-to-market position in the key markets that we talked about, in particular the intel market and the space market. So as you would expect, that takes time to get through the pulling together of a go-to-market team, the building of the pipeline and then being able to solidify that.

So I think the early work was very positive, and we're applying that same approach to the recent acquisition. And again, we're only a little less than 2 weeks in, but we've already gone through -- we're working through the pipeline and ensuring that we've got the right focus. We've worked through the organizational dynamics of ensuring we have the right go-to-market teams. So we try to do as much as humanly possible, right out of the gate, really focused on business development, go-to-market and pipeline development and adjudication. So that is something that we learned. We did it well with Engility. We'll do it even better with Unisys Federal as we continue to learn as an organization. But that is a priority of ours right out of the chute when we do an acquisition.

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Operator [71]

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Your next question comes from Josh Sullivan with The Benchmark Company.

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [72]

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Just in the prepared remarks, you talked a little bit about potential shifts in funding. Can you just expand on that, where that might happen first? Are you seeing those shifts accelerate in any way in any particular vertical at this point?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [73]

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No, there's nothing in particular aside from what may or may not happen with regard to the COVID-19 situation. Yes, the remarks were really around the fact that we have a very diversified portfolio. Certainly, we are -- we have the potential of having an administration change later this year. And sometimes that does -- it does create an opportunity to drive more money one direction or the other. But again, we believe that, that really is a strength of SAIC because of the diversification. And so it was really just a statement to say that either navigating through this particular crisis, which obviously is going to have some short-term budget flows with regard to some of the stimulus bills, or long term as the priorities of the nation may change, we believe we're exceptionally well positioned because of diversification, not in our -- not just in the customer base, in what we do and what we deliver in support of our customers' missions.

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [74]

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Got it. Appreciate that. And then just as far as exposure to the Afghanistan theater at this point, as the drawdown accelerates there, is there still material exposure there? Can you just highlight that?

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Nazzic S. Keene, Science Applications International Corporation - CEO & Director [75]

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No, we do not have any material exposure there.

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Operator [76]

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There are no further questions at this time. I'll turn the call back to Shane Canestra for closing remarks.

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Shane P. Canestra, Science Applications International Corporation - VP of IR [77]

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Thank you. As we conclude, I would like to announce that our Annual Shareholder Meeting will take place on June 3. Similar to last year, we will be conducting a virtual shareholder meeting whereby shareholders will participate online. Instructions on how to participate virtually will be included with the proxy voting ballot as well as our investor website.

Thank you very much for your participation in SAIC's Fourth Quarter and Full Fiscal Year 2020 Earnings Call. This concludes the call, and we thank you for your continued interest in SAIC.

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Operator [78]

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This concludes today's conference call. You may now disconnect.