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Edited Transcript of SAIC earnings conference call or presentation 30-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Science Applications International Corp Earnings Call

MCLEAN Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Science Applications International Corp earnings conference call or presentation Thursday, March 30, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Moraco

Science Applications International Corporation - CEO and Director

* Charles A. Mathis

Science Applications International Corporation - CFO and EVP

* Shane Canestra

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Conference Call Participants

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* Brian William Ruttenbur

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Cai Von Rumohr

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

* Jonathan Phaff Raviv

Citigroup Inc, Research Division - VP

* Krishna Sinha

Vertical Research Partners, LLC - Analyst

* Richard Eskelsen

Wells Fargo Securities, LLC, Research Division - Associate 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 day, and welcome to the SAIC's Fiscal Year 2017 Fourth Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Shane Canestra, Investor Relations. Please go ahead.

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Shane Canestra, [2]

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Good morning, and thank you for joining SAIC's Fourth Quarter and Full Fiscal Year 2017 Earnings Call. My name is Shane Canestra, Director of Investor Relations, and joining me today to discuss our business and financial results are Tony Moraco, our Chief Executive Officer; Charlie Mathis, our Chief Financial Officer; and other members of our management team.

This morning, 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 the 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 Factor section of our Annual Report on Form 10-K and quarterly reports on Form 10-Q.

In addition, these 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 informational for investors, and both our press release and the supplemental financial presentation slides include the reconciliations to the most comparable GAAP measures.

It is now my pleasure to introduce our CEO, Tony Moraco.

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [3]

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Thank you, Shane, and good morning. SAIC's fourth quarter and full fiscal year 2017 results demonstrate continued execution of our business strategy and delivery on our shareholder value proposition.

Charlie will discuss the financial results in detail, but I would like to summarize the fourth quarter and provide highlights from fiscal year 2017.

Fourth quarter revenues of approximately $1 billion demonstrate contraction of 4% as compared to the prior year quarter as bookings and conversion of revenue only partially offset isolated contract reductions. Adjusted EBITDA margin of 7.1% demonstrate SAIC's ability to effectively manage our investments, costs and profitability.

For full fiscal year 2017, revenue of approximate $4.5 billion reflects 3% total growth and 2% internal revenue contraction over the prior year. While below our long-term target of annual low single-digit internal revenue growth, SAIC's diversified contract portfolio was resilient against several market challenges and remains a stable portfolio well aligned to market demands.

Full fiscal year adjusted EBITDA margin was 7.4%, excluding acquisition- and integration-related costs. This represents a 20 basis point increase from the prior year in alignment with our long-term margin improvement target. Fiscal year '17 adjusted diluted earnings per share was $3.35, and full year free cash flow of $258 million was significantly above our communicated target and at the heart of our shareholder value proposition. Underpinning these results is the solid foundation of contract performance and continued execution of our business strategies.

We continue to be confident in our alignment of SAIC's capabilities to market needs and stand ready to assist customers as they execute their mission objectives. Regardless of the speculation about changes in federal government budget priorities, our overall market remains large, attractive and recurring with the potential of an improved outlook. With support for increased military readiness, SAIC is well aligned to respond with offerings in such areas as training and simulation and platform integration as the armed services modernize their systems and expand the force structure.

SAIC is also well positioned in enterprise IT and information assurance as our customers take advantage of efficient cloud architectures that address the increase in cybersecurity threats. These are just a few areas to which SAIC can meet requirements being driven by the new administration. The federal government is operating under a continuing resolution, which unless acted upon earlier, will expire on April 28. While there are several plausible scenarios and budget outcomes for the remainder of this government fiscal year, we believe that there will be minimal impact to our fiscal year '18 due to the length of time to get additional funds on contracts.

Any potential increase to our customers' budgets will likely have a positive impact on our fiscal year '19. Despite an improving defense market, we continue to face headwinds in our fiscal year 2018 from the carryover of a recompete loss in the fourth quarter, uncertainty in the budgets of key federal civilian agencies and continued award delays due to ongoing administration transitions.

SAIC's strategy and continued investments enable us to react quickly to changing priorities. While federal government macro-level priorities are likely to shift somewhat, our long-term outlook remains the same with expected modest growth in our markets for the next few years consistent with our long-term financial targets.

Contract award activity in the fourth quarter led to bookings of approximately $800 million, which translates to a book-to-bill of 0.8 for the quarter. Fourth quarter bookings included $254 million of work with our AMCOM customer, a $73 million award of a bridge contract to continue full life cycle information technology support to the U.S. Army - Human Resources Command and various awards and contract modifications across the portfolio.

Although not immediately contributing to bookings, we were recently awarded several IDIQ vehicles that provide opportunities to protect the existing work with the U.S. Navy and expand IT support efforts to the Defense Logistics Agency, as well as grow business with the Army Space and Missile command.

SAIC's full fiscal year 2017 book-to-bill of 1.2, our strongest annual book-to-bill to date, was achieved as a result of executing against our expanding pipeline of contract opportunities. Our Protect, Expand and Grow strategy continues to build a quality pipeline and produced an overall competitive win rate for the year of over 65%.

At the end of the fiscal year, SAIC's total contract backlog was approximately $8 billion and funded contract backlog was $1.8 billion. The estimated value of SAIC's submitted proposals awaiting award is approximately $15.5 billion, up from $14 billion in the third quarter, primarily due to the submittal of several large expand-and-grow contract opportunities.

As communicated previously, our largest contract, AMCOM EXPRESS is being recompeted by the customer and transitioning individual task orders to the GSA OASIS vehicle. We are competing over the course of fiscal year 2018 for several large task orders that, in aggregate, comprise a significant portion of our support to the AMCOM customer.

In the first quarter, we were awarded the first task order, known as virtual systems, with a total value in excess of $400 million. Subsequently, however, the order was protested, and as the incumbent, we will continue to support the customer through our current AMCOM EXPRESS vehicle. We expect protest resolution in the early June time frame.

Let me provide you with a brief update on our platform integration programs, the Marine Corps AAV and ACV contracts. As I mentioned on our December call, we completed the first phase of the AAV program with delivery of 10 prototype refurbished amphibious vehicles and we are supporting Marine Corps efforts as they perform testing for approximately 9 months. After completion of the testing phase, we anticipate to enter Low-Rate Initial Production, or LRIP, in the fall of 2017.

Moving to ACV, we have delivered 2 of 16 ACV prototypes of a completely new Amphibious Combat Vehicle to the Marine Corps. We expect to complete delivery of the remaining prototype vehicles by the end of the second quarter, at which time we will then support approximately a 9-month test and evaluation phase. At the completion of testing, the Marine Corps will down-select to one company to enter ACV LRIP in mid-2018.

These programs, coupled with an expanding business development pipeline and strong bookings in fiscal year 2017, positions SAIC well for continued delivery of shareholder value creation in fiscal '18 and beyond.

Charlie, over to you to provide more details on our financial results.

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [4]

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Thank you, Tony and good morning, everyone. During my remarks, 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 billion reflect contraction of 4% as compared to the fourth quarter of last fiscal year. Revenue performance was impacted primarily due to one less productive day, reduced volume from our AMCOM customer contracts, the recompete loss of an IT integration program for the Department of Homeland Security and delays on the Marine Corps IT services program.

These decreases were, partially offset by revenues on previously awarded programs such as ACV and GSA GEO.

Operating income of $61 million in the fourth quarter resulted in an operating margin of 5.9%, up from 5% in the prior year quarter primarily due to lower acquisition and integration expenses, lower intangible amortization and additional cost savings initiatives. These impacts were partially offset by higher bid-and-proposal investments to support our strong pipeline of contract opportunities.

Fourth quarter EBITDA as a percentage of revenues was 7.1% and is typically our lowest margin quarter of the year due to holidays and associated employee vacation time. This resulted in full fiscal year adjusted EBITDA margin of 7.4%, a 20 basis points increase from the prior year and meets our long-term target of 10 to 20 basis points of annual margin improvement. This improvement was accomplished while increasing our investments in business development activities.

Net income for the fourth quarter was $36 million, and diluted earnings per share was $0.79 for the quarter, up 7% from adjusted diluted earnings per share in the prior year quarter.

The effective tax rate for the quarter was approximately 30%, which includes the finalization of research and development tax credits reported last quarter. With regard to our effective tax rate, we estimate our fiscal year 2018 tax rate to be approximately 26%. Our effective tax rate in the first quarter will be impacted by the adoption of the new accounting standard for excess tax benefits on stock-based compensation at the beginning of our fiscal year '18. We estimate this will cause our effective tax rate to be 10% to 15% in the first quarter due to the vesting of employee stock grants that generally occur in our first quarter and based on our stock price at that time. Our fiscal year 2018 full year tax rate would be approximately 36% excluding the adoption of this accounting standard. Fluctuations in our stock price would cause our effective tax rate estimates to change.

SAIC continues to deliver strong cash flow generation. Our strong quarter of collections and cash management resulted in fourth quarter operating cash flows of $62 million and free cash flow of $58 million. This performance resulted in $258 million of free cash flow for the year, significantly above the $215 million that we expected after consideration of the extra payroll week in fiscal '17.

Day’s sales outstanding of 48 days is primarily related to the accelerated receivable collections of $20 million in the fourth quarter. We expect our DSOs to return to the low 50s due to the timing of accelerated payments received in the fourth quarter.

The fourth quarter ended with cash balance of $210 million, above our average operating cash balance target of $150 million. Our total debt is just over $1 billion, equating to a leverage ratio of approximately 3x debt-to-adjusted EBITDA at the end of the fourth quarter.

During the fourth quarter, we deployed $51 million of capital, consisting of $13 million in cash dividends and $38 million of planned share repurchases, representing about 457,000 shares.

For the full fiscal year '17, we deployed $203 million to our shareholders, consisting of $54 million of dividends and $149 million of planned share repurchases.

We are committed to our long-term financial targets and they remain unchanged.

On average, and over time, we expect low single-digit internal revenue growth and remain confident in our long-term profitability improvement target of 10 to 20 basis points annually.

Due to the timing of accelerated receivable payments in fiscal year '17, we expect generation of approximately $220 million of annual free cash flow. This significant cash flow generation, along with the excess cash we carried at the end of fiscal '17, allows us to execute our capital deployment strategy.

We expect to pay dividends of about $55 million, make total debt repayments of approximately $25 million with the remainder of cash in excess of $150 million available to further share repurchases and strategic M&A should it arise.

As announced in our press release today, our Board of Directors has approved a quarterly cash dividend of $0.31 a share payable to shareholders on April 28.

Tony, back to you for concluding remarks.

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [5]

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Thanks, Charlie. I would like to announce that our Annual Shareholder Meeting will take place on June 7. In a change from historical practice, we will be conducting a virtual shareholder meeting whereby we will no longer conduct an in-person shareholder meeting at our corporate headquarters, but rather encourage all shareholders to participate online.

Instructions on how to participate virtually will be included with the proxy voting ballot as well as on our investor website.

In conclusion. SAIC is well positioned as a result of the accomplishments in fiscal year 2017 and continues to be a market leader in the federal government services market. The talented women and men of SAIC provide our customers with the essential skills to meet our customers' most difficult challenges, and I thank them for their dedication to SAIC and our country.

Operator, we are 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 we'll take our first question from Jon Raviv.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [2]

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Charlie, could you clarify just some of the cash flow dynamics this year and next, specifically how much of the FY '17 onetime items reversed in FY '18. Sounds like you had a $20 million working capital benefit, I think you had a $25 million payroll negative. If those reversed, it seems like free cash flow should be flat year-on-year, but I think I just heard you say $220 million. How did that compare to what the target was for this year, which was $240 million underlying? Sorry for the long question, but can you just sort of bridge all of those moving pieces for us, please?

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [3]

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Yes, I would be happy to. So let me start with the $240 million, that is the $240 million free cash flow target that we give. We had an extra week of payroll of roughly $25 million. So the fiscal year '17 target was $250 million. It came in at roughly $260 million for '17. $20 million of that excess in '17 will reverse in '18, so the $240 million free cash flow target in '18 is now $220 million due to reversal of the cash we received early, it's really timing related. Does that help?

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [4]

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Yes, that's helpful. And then just on growth visibility, I know you reiterated your long-term targets. Can you just give us a sense for what sales are doing in FY '18? I know you don't give specific guidance, but it sounds like you have a few headwinds. Could you quantify that lost IT recompete? And then also give us a sense for the full year GAAP headwind from the extra week, also that's another 200 basis points. So I guess the question is can GAAP sales grow or GAAP sales will probably be negative in FY '18?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [5]

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Yes, this is Tony, Jon. Right now, the answer to one of your questions, the recompete is in the $40 million, $50 million range year-over-year, so that will create a bit of a headwind going into this year. Our expectation is the FY '18 revenue run rate is going to be comparable to '17 results. There is upside in Q3, Q4, in particular, based on pending decisions, the timing of future awards off of the submitted proposals that are about $15 billion. A third of those are in actual contract award and/or task orders. So confident that, that pipeline is in place subject to some of the customer decision points. The long-term outlook still remains the same with low single-digit growth is unchanged overall. The variability that we experience year-over-year tends to still be around the supply chain and materials within the supply chain as well as materials on some of the IT programs that was a component of the variability year-over-year as well. So we'll track that. But overall, I'd say with the strength of the portfolio, where we sit today, even with the headwinds from the carryover, that we should see FY '18 results in line with '17 and we'll still probably see that plus or minus 1% or 2% of variability based on the materials in the contract award activity.

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Operator [6]

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And we'll take our next question from Cai Von Rumohr.

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Cai Von Rumohr, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [7]

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So maybe getting back to Jon's question on the cash flow. I mean, if your DSOs go up to the low 50s, it looks like that's a negative swing, approximately $100 million. Is there something else that's kind of getting you to this cash flow number because it looks like that would be a pretty significant headwind.

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [8]

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Cai, this is Charlie. The DSOs are going from 48 to low 50s, call it 50. That's the -- roughly the $20 million swing, not $100 million. So that's really the impact that we're talking about, is $20 million.

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Cai Von Rumohr, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [9]

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Okay. And then could you give us some color on your bookings outlook for the first quarter? I mean, we're transitioning to a new administration. What are we seeing there in terms of the first quarter? Tone looks good, and what do you expect later on in the year?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [10]

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Cai, it's Tony. I think that we'll see, as we've talked about with the transition, the larger deals there -- I think there's still going to be a modest delay to probably mid-year, so late Q2, because of the large programs, so again submitted proposals in large part. Those that require senior-level support and award decision, are really those will be caught up until the undersecretary's administration show up and realign and reaffirm what their spending strategies are. So I think we'll still see a general flow of task orders. The ongoing activities will be supported and funded. To try and quantify that, we've seen 0.8, 0.9 tends to be something that's sustainable, given the short duration of some of those contracts. We tend to get those higher book-to-bills when the large multi-hundred million dollar contracts are awarded. We have a number of those in the pipeline. But again, I think those are the ones that are subject most to some delay at this point, about a quarter or so. There are still some awards coming out. I think the outlook is consistent as we come out of a soft Q4 historically. Q1 may modestly improve from that, but very much in line with I would suggest probably below 1.0 for a quarter or so until you get some of those multi-hundred million dollar programs awarded and moving through the system. But overall, pretty much in line with general activities.

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Cai Von Rumohr, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [11]

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And the last one would be there's been talk of some cuts to state Health & Human Services, et cetera. Could you talk about any exposure your Fed/Civil business might have to proposed cuts?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [12]

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Sure. Well, we've talked a lot about the Department of State programs, the large enterprise IT program, Vanguard. That, we don't think is subject to the budget cuts in the context of day-to-day mission operations enterprise IT across the globe. So there's -- that's the largest contract, but I wouldn't say it is subject to the budget cuts overall. We're not highly concentrated in any one agency. So as we hear the various budget debate, we're tracking that, but we are seeing our customers continue to execute in their mission activities. The enterprise IT is very stable as operations and maintenance type of monies. I think the -- any budget cuts will likely come in new programs or potential strategic shifts up through those agencies, but I'd say our exposure is low, it's across the various agencies and our alignment on what is more of on O&M, mission operation-related work and was pretty high and would offset any potential budget changes that would occur in, say, over the course of the next year or so. But a lot of that still have to unwind on how the budget really takes shape and so there's a lot of variances within that. But I think overall, given the portfolio, I don't see any material swing one way or the other given what we're hearing today.

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Operator [13]

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(Operator Instructions) We'll take our next question from Ed Caso.

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Richard Eskelsen, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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It's actually Rick Eskelsen on for Ed. My first question is just thinking about this current government fiscal year, if you get a near-term omnibus or even the full year CR, do you think that there could be a surge in spending, sort of a catch-up of stuff up being delayed? Or do you see it as kind of continuing at the current pace?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [15]

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I'd say probability-wise, I'd probably lean towards the current pace than a big swing in one flow or another. The CR itself has some constraints. We've collectively managed through that each year, so I don't see it's going to be a fundamental problem in this year. The potential catch-up, if you will, will likely occur in our FY '19. We may see some uptick as this government year ends. A lot of that is, again, is subject to perhaps the defense bill, if that goes through and we're clear of CR, that does probably free up more monies than a full year CR. We're hearing perhaps that there is some momentum to try and get the defense bill through, given the administration's priorities. But overall, I think we've got -- through an omnibus or a CR, at least the impact to us will be relatively modest in this current fiscal year. We may see some activities of the new government fiscal year starts our Q4 and then most of the activities will probably ramp up on awards that we've already -- are submitted with the awards in FY '19 where I think you'll see any catch-up or increase in spending aligned with administration priorities.

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Richard Eskelsen, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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On the AMCOM EXPRESS, can you just give a little bit more details on the expectations and timing for the other two pieces, the big pieces that are moving to OASIS, I think the SSES and the BSCS pieces?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [17]

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Sure. The AMCOM contract under the current blanket purchase agreement, the collective task orders that we have, represent a few hundred million dollars a year in activities. Those are -- the larger ones are going through a restructure. We've messaged on those going through the GSA OASIS contract vehicle. The customer's executing their procurement strategies and we've been amidst submitting proposals. We did, in fact, win the first large virtual systems task order that was a part of that -- the construction of the contract, however that was protested. We expect that protest to be resolved in the June time frame. But we continue to operate under the BPA with continued support to the customer. We expect those large task order proposals and decisions to occur between now and into the summer months. And we'll keep you posted, probably next quarter we'll have more color on the results of those task order recompetes.

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Richard Eskelsen, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]

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Just last one on the -- going back on the free cash flow side. Can you just remind us is there any working capital dynamic this year for the AAV and ACV? I think that there was a build, one was ramping down and the other was building last year. So what's the dynamics look like for this year? And how is that tacked into the $220 million you talked about?

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [19]

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So there's the expectation of the AAV LRIP award in the fall of which there will be some use of working capital for the full year. On the platform integration, there's probably $10 million for the full year basis.

The other thing I would like to say on the cash flow is our cash flow expectations do not change our capital deployment strategy at all. The amount of capital deployment for fiscal '18 will be very similar to '17 with dividend and the remainder to be considered for -- to share repurchase.

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Operator [20]

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And we'll take our next question from Brian Ruttenbur.

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Brian William Ruttenbur, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [21]

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A couple of questions. First of all, let me summarize what you've told me and please tell me if I'm incorrect. Revenue in '18 is going to be flattish. The tax rate we should be assuming is 26% on the year, obviously a little lower than that in the first quarter, 10% to 15%. Share count will probably go down depending if you use the cash to make acquisitions or repurchase shares. Your debt is going to go down by $25 million. I didn't hear anything about operating margins in there. Any kind of guidance? Did you to talk about margins being up, down, flat?

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [22]

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Yes, we continue to have confidence in the margin expansion in the 10 to 20 basis points, which is in line with our long-range target.

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [23]

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And your other assumptions are pretty close to what we described. It's pretty close to your assumption base. Thanks.

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Brian William Ruttenbur, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [24]

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Okay. So in terms of, just switching gears now that I understand that, bolting on to some other questions. On the CR and Trump's delays, you're anticipating delays kind of through the first half of your fiscal year and then the second half things picking up. Is that primarily due to the CR, due to Trump, due to just breaking loose of some contracts? What is the primary driver of the second half of the fiscal year?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [25]

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It's going to be tied to contract awards that have -- for proposals that have been submitted. It'll be tied to the administration priorities making their way in budget proposals that move forward that will provide confidence both for near-term spend and long-term spend for the larger programs. That will be aligned with the arrival of, let's say, mid- to senior tier administration officials, so those billets are being filled real-time. So it fluctuates a bit by agency. They're all running at slightly different pace. And for those reasons, we feel that Q1, Q2 for us is relatively steady and that we're positioned to take advantage of the award activities in Q3, Q4. That's when we would expect possible revenue growth in those two quarters compared to the first two.

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Brian William Ruttenbur, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [26]

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Okay. And then last question on interest expense. Have you assumed anything in your -- that you will have higher interest expense going forward? Or should we be using kind of where you shook out in the fourth quarter as kind of a going-forward level? I assume by paying down some debt, you're assuming maybe some creep in interest rates?

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Charles A. Mathis, Science Applications International Corporation - CFO and EVP [27]

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No, I would use the fourth quarter going-forward rate, roughly $40 million interest expense for the year.

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Operator [28]

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And we'll take our next question from Krishna Sinha.

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Krishna Sinha, Vertical Research Partners, LLC - Analyst [29]

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Can you just elaborate -- I'm sorry to beat a dead horse on this, but on the top line, are you -- so it sounds like a flattish guide for next year. How does the prospect of a full year CR affect that? Are you kind of gunning for that outcome and therefore you're saying that things could ramp up if you win more on the top line on your projects -- or I'm sorry, the $15 billion in bids outstanding that you have?

And then can you talk about your trailing 12-month book-to-bill has been 1.2, which is pretty solid. Over the next 12 months, are the programs that you're winning longer-ramping programs? I guess, why aren't we seeing that translate into the top line over the next 12 months based on your flat guide? Can you just elaborate on that?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [30]

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Sure. We've got strong book-to-bills. There are some longer-term programs. The AAV/ACV program's a good example of platform integration work, the Mark 48 we announced last year. All those programs in the technology integration domain and these engineering phases, as they precede low rate and full rate production, it is not a straight line as some of the traditional services work where you can spread that contract value over the full period of performance in a consistent way. So there are slower ramps on some of those larger programs. So the conversion of a large book-to-bill is delayed slightly. The good news in that story, though, is that we have long-term backlog and well positioned, a lot of those contracts are also fixed price and that gives us confidence and a line of sight on margin improvement going forward. So overall, the long-term programs do stretch that book-to-bill to revenue, but does provide higher confidence for execution in the long run. From that we can then, with the additional award activities, kind of getting your first part of your question on the impact of CRs and budgets, that as we are operating in, say, a relatively consistent task order flow under a CR, our expectation is as the budgets materialize, they're approved, that will tend to release decision authorities and customers will begin award some of those larger contracts or add new scope of work to our current contracts. So that's another dynamic that does pick up with some budget certainty. So we see that, again, slight delays in the near term, but we do see the upside going forward, and then so that's why we still believe that we can align towards our long-term top line targets of low single-digit growth and also have the opportunity to continue the margin expansion that we've done for the last 3 years.

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Operator [31]

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And we'll take our next question from Tobey Sommer.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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In your prepared remarks, you talked about the investments you made to bid and proposal. I was wondering if you, in evaluating the level of production there, you're seeing opportunity to increase it to kind of propel a higher book-to-bill and better organic growth.

And then I wanted to ask you again if you could talk about the sort of product and solutions business, the low rate production stuff that you're on now. Are you seeing more opportunities for that with your business approach? And kind of how do you think about reaching out to try and to gather more of that business?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [33]

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Sure. The first part of question on the bid and proposal spend, very comfortable with our investment portfolio, the balance between bid and proposal that the entire life cycle is captured. So I think we are well positioned to have very high quality business development pipeline. We expect that to continue. We have aligned those bids against strategic filters in what we think are higher growth markets, those that are best aligned for our probability to win. I think our competitive win rate in a couple of markets represents the quality of what we bid aligned to our probabilities to win across-the-board. We've also got a bit of line of sight as a leading indicator that those bids also are higher fees, so that, again, give us some additional confidence on the margin expansion as well. So I don't see at this point that -- and we came out and refine the bid and proposal investments in a pretty effective way, so I don't believe we need to make a significant shift in that. We do make modest shifts now and then.

We try also to fund, to kind of transition to your second question, to actually spend R&D money to make sure that we can, in fact, develop repeatable solutions that are part of this outcome -- more outcome-based service delivery. So we're honoring the services business model. We can increase the repeatability of our solutions through R&D. That, in turn, allows us to sell fixed price on a more regular basis, also contributes to our win rates in that we can be, I think, aggressive in our past performance in our solution set and then, in turn, bid and expect higher margins on that portfolio. So that's working together. We are focused on expanding that product and solution, that we've had a consistent approach to a broad, high-end services complemented by products and solutions that we sell. And I think that's fundamental to our market brand as a technology integrator than just a service provider or a system engineering organization. So the product and solutions we would expect to continue to explore both on mission areas like the platforms we talked about with AAV and ACV and modernization of programs. That's well aligned, we think, to the readiness initiative from the administration on the defense side, and we continue to see repeatable solutions, opportunities in enterprise IT in the form of cloud migration and cybersecurity solutions. So I think we've got a good balance. So if we're shifting in investments, I'd say it's more on the solutions side with consistent quality alignment on the business development side.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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If I could sneak in one more. Could you comment on what growth has been like and what the outlook is here in this fiscal year for cyber and the Scitor business?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [35]

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Sure. On the cyber side, we're seeing continued demand in the context of our enterprise IT work. Cybersecurity solutions tend to be bundled with some of those larger IT programs. Recent contract activities and awards in -- related to cyber, CYBERCOM and market access, as those cybersecurity programs also, I think, are maturing and customer demand is very high. Cyber's inherent in everything that we sell at this point with IT as well as on the mission side as everything is pretty well connected overall. Transition on the intelligence community side, as you know, the foundation through the market access and the Scitor acquisition, we'll continue to expand that business development pipeline. We've expanded some scope on some particular contracts. We continue to do a sell-through strategy of legacy SAIC capabilities through those same Scitor channels, and in turn, leverage the legacy Scitor experiences in some of our other programs, principally around state systems in a broad sense from system engineering to states operations.

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Operator [36]

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(Operator Instructions) We'll take our next question from Jon Raviv.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [37]

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Just -- Tony, can you just, forgive the question, but I'd just run maybe a postmortem on the lost DHS IT recompete? What did you see happening there? And what changes might have to be made either to the business or is it a function of just the market and competitiveness? What do you think happened there?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [38]

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It's still a very competitive marketplace. Companies are continuing to position. We're up against competitive bids each and every day, probably thousand-plus each year, so there's a broad portfolio. I think it's fairly balanced. We don't win every contract. We have a very high recompete win rate, but it's not 100% and so we do our best to stay aligned and past performance is still fundamental. Always disappointing when you lose a recompete, but, in turn, I think we're very strong in working towards aligning further with those customers. But restructuring of contracts, just in the market dynamic. We still see some larger contracts being fragmented and competed differently. We still see various contracts coming together and consolidating. So those dynamics still occur and sometimes your positions overall change. In this case, it was fairly steady and it wasn't a major restructure shift, but I would say it's just competitive dynamics that we're, unfortunately, not a successful awardee. But no real changes to the business overall or the portfolio as a result of that particular action.

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Jonathan Phaff Raviv, Citigroup Inc, Research Division - VP [39]

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Understood. And then just if I could get you for one more. From your perspective, philosophically almost, how do you see like companies like SAIC or industries fit in the new D.C. environment? You have a business-friendly the administration, what would could that mean for policy changes that could impact your business? At the same time, there are cost cuts, which could impact programs? But on the flip side, how does SAIC help agencies save money?

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Anthony J. Moraco, Science Applications International Corporation - CEO and Director [40]

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Well, I think philosophically, the policy side, I think, the sense of a pro-business environment, whether it be on tax, or let's say, deregulation, the slowdown on added regulation in the context of compliance or the pullback of some compliance in the -- within the government contracting domain, we've seen a significant uptick in supply chain compliance management, which does affect us as a technology integrator. As you know, 1/3 or so of our portfolio moves through that procurement side of the house, so that puts cross-demand on us. It's a modest amount, but it's tangible dollars that we would potentially be able to reinvest in areas like R&D that I mentioned earlier. So I think pro-business helps us. Tax will affect everyone, so will be a net neutral to our peers, but I think the compliance side we'll take advantage of that if that, in fact, does improve. With the budget challenges and some cost cuts, who's a bill payer, who's not, we still believe that we're well positioned in the portfolio to be very responsive to the changing requirements. I don't think we're as dependent upon areas where those cuts may go, given the diversity of our portfolio. So overall, I think there is, from a private sector perspective, I think there is optimism that through these next few years, that the administration is in a support of the capacity. And as we know and we see the overall budgets, that 1% to 2% overall federal budget trend should continue. And so we expect that through Congress and their bills, we'll track that day-to-day, quarter-to-quarter, but overall, the trend is slightly positive consistent with hopefully post-sequestration, slightly more favorable business environment for the private sector. And the government's dependency on private sector technology innovation to help them run their businesses each day, to gain efficiencies in their IT systems and modernize the mission systems and capabilities that they need, I think the sector is in a very strong position going forward with a modest upside or growth, if you will, for the macroeconomics. We'll just have to manage the portfolio account to account as we do every day.

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Operator [41]

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And that concludes today's question-and-answer session. Mr. Canestra, at this time, I will turn the conference back to you for any additional or closing remarks.

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Shane Canestra, [42]

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Thank you, Mariah. I would like to thank you very much for your participation in SAIC's Fiscal Year 2017 Fourth Quarter and Year-end Earnings Call. This concludes the call, and we thank you very much for your continued interest in SAIC.

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Operator [43]

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And this concludes today's call. Thank you for your participation. You may now disconnect.