Good day, ladies and gentlemen, and welcome to the SAIC Fiscal Year 2019 Q3 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Shane Canestra, SAIC's Director of Investor Relations. Please go ahead, sir.

Good afternoon. My name is Shane Canestra, SAIC's Director of Investor Relations, and thank you for joining our third quarter fiscal year 2019 earnings call. Joining me today to discuss our business and financial results are Tony Moraco, SAIC's Chief Executive Officer; Nazzic Keene, our Chief Operating Officer; Charlie Mathis, our Chief Financial Officer, and the other members of our management team. This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you'll also find supplemental financial presentation slides to be utilized in conjunction with today's call. Both of these documents, in addition to our Form 10-Q, that will be filed this evening, 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, Tony Moraco.

Thank you, Shane, and good afternoon. As we prepare for the future, we continue to focus on delivering strong performance across our contract portfolio, as evidenced by our third quarter results. SAIC's third quarter performance of fiscal year 2019 continues to reflect sustained revenue growth and improved profitability. In alignment with our long-term strategy, Ingenuity 2025, our current performance and investments for the future are guided by a disciplined approach to address a favorable market environment. Areas of strategic importance and focus are IT modernization, cybersecurity, data analytics, readiness and training, space systems and mission application development. With the fifth consecutive quarter of year-over-year revenue growth, the third quarter delivered internal revenue growth of 3% as compared to the prior year quarter. Year-over-year growth was primarily attributable to sustaining our recompete contracts, combined with newly awarded contracts across the customer portfolio, including a fixed price IT modernization program in the state and local market, and an IT support contract to a new customer, the Department of Health and Human Services. Also providing growth in the quarter were increased orders in our supply chain portfolio supporting the military's increased focus on readiness and sustainment. Strong adjusted EBITDA margins of 8.3% for the third quarter, up 90 basis points from last year, resulted from improved program performance across the portfolio. Strong cash flow performance was improved from the second quarter and a year ago, in line with our expectations. Charlie will expand further on the financial results in a few minutes. We continue to be in a favorable market as we begin the new government fiscal year. A majority of our customers are operating with appropriate budgets, and continue their investment decisions with confidence from the end of government fiscal year 2018. Our customers that are operating under a continuing resolution are…

Thank you, Tony. Contract award activity in the third quarter led to bookings of approximately $1.2 billion, which translates to a book-to-bill of 1.0 for the quarter. I would also like to mention that SAIC has been successful in the aware of several single-award IDIQ vehicles that de-risk the revenue profile through recompete awards and provides increased confidence in our ability to accelerate growth through new task orders. During the third quarter, SAIC was awarded several single-award IDIQ vehicles with a ceiling value of $1.2 billion. An example is the recompete award of a single-award IDIQ with a total potential value of $861 million to continue support to our U.S. Navy SPAWAR customer. During the quarter, and contributing to bookings, SAIC was awarded a recompete, or Protect contract, valued at approximately $255 million over five years to continue space systems support for a sensitive government customer. Also in the Protect category was a three-year $98 million contract award from our AMCOM customer to continue providing aviation and unmanned systems technical support. Additionally, SAIC was awarded a new business or Expand category contract valued at $77 million over five years from Orange County California to provide information technology managed services and solutions. That concludes the most notable contributions to our third quarter bookings, with the balance comprised of other awards and contract modifications across our portfolio. Subsequent to the end of the third quarter, we were awarded a significant recompete single-award IDIQ contract in our supply chain business. The approximately $1.7 billion 10-year Global Tire's program, or more commonly known as TIRES, continues logistical and readiness support to our Defense Logistics Agency customer. Although the recompete award protected SAIC's legacy contract revenues, significant new work was consolidated into the vehicle from a competitor's contract. This great win de-risks an already low…

All right, thank you, Nazzic, and good afternoon. Our third quarter revenues of approximately $1.2 billion reflected internal revenue growth of 2.8%, as compared to the third quarter of last fiscal year. This was our fifth straight quarter of year-over-year revenue growth, and revenue growth on a year-to-date basis is 4.2%. Third quarter adjusted EBITDA was $98 million after excluding $14 million of acquisition and integration-related cost equating to a very strong 8.3% as a percentage of revenues. This quarter's adjusted EBITDA generation and margin percentage is the highest since our separation over five years ago. Third quarter profitability was strong, despite a large non-recurring negative adjustment as we realized a $25 million inventory provision partially offset by one-time positives of $19 million of VAC adjustments, mainly related to platform programs. While the third quarter had some large one-time adjustments, our normalized adjusted EBITDA margin for the quarter is in the low 8% range, reflecting very strong performance in the majority of the portfolio. Adjusted operating income of $87 million in the third quarter resulted in an adjusted operating margin of 7.4%, up significantly from the prior year quarter due to improved performance across the portfolio and lower indirect cost. Net income for the third quarter was $48 million, and adjusted diluted earnings per share was $1.35, after excluding the $14 million impact of the acquisition and integration costs I just mentioned. The effective tax rate for the quarter was approximately 18%, slightly below our previously communicated expected full-year rate of 20% to 22%. We continue to expect our full-year tax rate to be within this range. Third quarter operating cash flow and free cash flow were a source of $86 million and $80 million respectively. Third quarter cash flow was negatively impacted by $5 million of cash paid for…

As we approach the anticipated closing of the Engility acquisition in mid January, I encourage shareholders of SAIC and Engility to review the recently filed joint proxy. I also encourage you to vote in favor of the transaction in advance of the January 11th special shareholder meetings. Additionally, SAIC will be hosting an investor day on the afternoon of Monday, January 7th, in New York City. While the event will also be webcast, we encourage members of the investment community to attend in person, where we intend to discuss SAIC's long-term strategy in more detail, Engility's strategic fit within that framework, and the value-creating opportunity of the acquisition. Operator, we are now ready to take questions.

[Operator Instructions] And first, we have Greg Konrad with Jefferies.

Good evening. Just was hoping to start with cash. I mean, you've done $130 million in the first three quarters. You said $250 million for the year. Just if you could help us bridge the final quarter, and then just maybe the moving pieces to get to the $400 million?

Hey, Greg, this is Charlie. So, $138 million for the first three quarters, as I said, we're $20 million ahead of free cash flow from last year, operating cash flow $30 million. We expect the DSOs to be in the low to mid 50s at quarter end as compared to last year. And so, we're confident in being able to get to that $250 million due to the greater profitability of the company, the lower cash tax payments that we have and being able to achieve that DSO target number.

Thank you. And then you mentioned some consolidation in the Tires program. I mean, what's the incremental of that new contract versus the previous one you were operating under?

Hi, this is Nazzic. So yes, at this point we anticipate somewhere between 15% and 25% incremental revenue on our existing base business.

Thank you. And I might as well just sneak in…

Yes, it's about $15 million to $25 million incremental.

Perfect. And then just to sneak in one last one, is there any update on Mobile Protected Firepower, I thought that was going to be in November, but haven't seen anything as of late?

Yes, so we're still waiting. We expect that award to be somewhere in the December timeframe. That's what we understand. And we're just anxiously awaiting the award.

Thank you. Great quarter.

Thank you.

Thanks, Greg.

And moving on, from Cowen, we have Cai Von Rumohr.

Yes, thank you very much. So I guess the release talked about the strong profitability reflecting $22 million of performance, $14 million of EACs. And I think, Charlie, you mentioned $19 million, and then the $25 million inventory charge. So maybe walk us through all of those items, if you could. Thanks so much.

Yes, okay, Cai, let me walk you though this and explain better. So the third quarter EBITDA margin was a very strong 8.3%, and this did exclude the $14 million of acquisition and integration cost. There was a large negative non-recurring adjustment of $25 million related to inventory and purchase commitment provisions. And in the quarter, this was offset by one-time positives of $19 million of EAC adjustments mainly related to platform programs and other one-time items. These one-time adjustments essentially netted each other out. And aside from that, we had a very strong performance in our defense systems and Fed/Civ portfolios mainly due to product service mix, [indiscernible] short-term contracts. And this led to a normalized low 8% EBITDA margin as I stated, of which we're very pleased with that.

So what about the -- is it a misprint, the $14 million that's in the release?

The $14 million is the year-over-year comparison. That's --

Got it, okay.

Okay, and $19 million -- it is in the quarter.

Got it. That's very helpful. And you mentioned the tax rate, 22% to 23%. That's the fourth quarter or the year, because if it's the year you basically are going to have a huge step up in the fourth quarter?

Yes, for the full-year, 20% to 22% is where we think we'll be, somewhere in that range.

But if you were there, that's like 35% in the final quarter. Is that -- so you'll have 35% to 38%, is that essentially what we're talking about?

Yes, there were some discreet items in Q3 related to our tax filings and tax credits that made the Q3 number 17% favorable. So overall, you should be modeling for the full-year in that 20% to 22% range. Probably the lower end of that range would be advisable.

Got it, okay. And then -- so I think at one point you were talking about Engility 2020 -- well, excuse me, fiscal '21 cash flow of $450 million. And today you talked of $500 million. Maybe walk us through the differences between those two numbers.

Yes, so let me walk you through the cash flow. So year one, after the acquisition, free cash flow go from $250 million to $400 million. By year three, when we clear all the cost synergies and costs to achieve, we should be approaching $500 million in free cash flow. There's about $38 million to $40 million in the middle year there related to the cost synergies that we would take out? So it really goes $400 million, $450 million, $500 million would be the cash flow walk.

And so the $500 million is really fiscal year '22?

Yes.

That's correct. Okay, that's terrific. And then the interest in other, it looks like it was a negative of $15 million. Why was it that high, and what should we look for the year?

I'm sorry, was that -- you said the interest?

Interest expense and other expense looked like it was like a $15 million negative in the third quarter. Why was it so high, and what should we consider for the year?

Yes, so there was again because of the refinancing of the debt that occurred in the third quarter there was additional expense that went through there on the amortization and the interest expense. So you should really look to get back on the interest expense to a normalized amount that we had in the previous two quarter, which is around 10% or 11%, so that's -- okay.

Yes.

And moving on, we have Tobey Sommer with SunTrust.

Hey, guys, this is Joseph Thompson on the line for Tobey Sommer. Talking a little bit about MDF and platform business, are there any other platforms that SAIC is targeting that you could discuss? Thank you.

Joseph, this is Tony. We're looking at broad complex system integration across the portfolio. The Army does some modernization programs that we would consider. We don't want to talk about anything specific in the pipeline, but there are modernization type programs, probably smaller in scale than MPF that we would consider. That's kind of the high end of that, but we're looking at modernization components that fit our business model and that would be attractive to the customers as an alternative to the OEMs.

All right. And the moving on, could you talk a little bit about the single-award IDIQs that were not included in book-to-bill, what areas are they in, and are they categorized as Protect, or Expand, or Grow in year four.

Hi, this is Nazzic. So as we look back to Q3, the largest one is the one I referenced in my notes, and that is a single-award IDIQ with the recompete supporting our SPAWAR customer. And then there's various other smaller ones that go into the portfolio. We did do about, as I mentioned, $1.2 billion in single-award IDIQs in Q3. And of course that will de-risk the revenue profile going forward. The other one that I'll note, and again I mentioned this but I'll just reinforce it is, after the quarter closed we were awarded the Tires program that I mentioned. And that is a single-award IDIQ with additional revenue opportunities in the consolidation of two previous contracts.

Thank you. And then following up about the Tires program, what does the margin profile look like on that?

It's consistent with the overall margin of that portfolio, but we don't speak to specific margins at the program level.

Got you. And my final question is, how would you describe your business with federal agencies that the subject to continuing resolution? I know you mentioned earlier that you guys have seen more consistent or I guess more consistent budgets from a lot of the agencies you work with, but what about the ones on continuing resolution? Thanks.

Yes, we don't really see much of an impact on the continuing resolution. Looks like if we might get a two-week extension. But overall, with the bills that have been signed to start '19, which was -- I think everyone's excited about and then because we haven't seen it in a while, that the remaining bills, we don't have a significant exposure within those. It's still important to get those passed through, but since those same customers are operating at FY '18 levels, the [indiscernible] lines are pretty strong and robust, so really no impact on the CR for the remaining bills yet to be signed.

Thanks guys. That's all for me.

Thanks.

[Operator Instructions] Next, from Seaport Global, we have Josh Sullivan.

Hey, good evening.

Hi, Josh.

Just looking at some of the budget figures that are fermenting out there, are your long-term SAIC targets you've given still in place if we see a $700 billion budget next year?

Yes, I'd say that we're confident in the growth profiles that we've had. The budget environment, I think, is still fairly robust. The current rhetoric around declines, wouldn't be surprised if it comes off of the FY '18 FY '19 budget deal levels, but we don't expect it to be a dramatic drop off, just as we kind of incrementally moved up, we'll probably incrementally move down that scale. The market demand is still very significant, whether it be in the defense sector on mission system modernization or IT modernization across the entire government. So although we'll have operational impact perhaps within some of the government profiles I see will impact the opportunities that we have, our market position, and therefore would not shift off of our long-term revenue growth projections.

Okay. And I guess on that IT modernization comment, I think Pat Shanahan made some comments recently about wanting to migrate to the cloud a little faster, but the pace was a little frustrating. Are you able to capitalize on that with the AWS relationship or otherwise? And is there any way to kind of size that opportunity for us or what you're currently doing?

Well, it does give an advantage, our ability through the partnerships to continue to find innovative ways to accelerate the application migration from legacy systems, address the information assurance and security demands on the customers and yet still providing that innovation that allows them to serve mission capabilities differently. Hard to quantify, we got a fairly robust enterprise IT portfolio. So about 40% of our portfolio is in that IT domain, and a significant amount of that is in cloud migration activities and/or cyber security. So we do see those opportunities continuing. And our partnerships with companies like AWS and others allow us to get to market faster with some solid solutions.

Okay. And then just one last one, I think you made some comments about investing dollars in new opportunities. Any way to size that or what are the large opportunities you're going after in that?

So this is Nazzic. No, I mean, I really don't want to touch on specific large opportunities. We continue to pursue the market in the areas that Tony mentioned, our strategic focus areas. We do have, as we've noted before, a relatively low recompete year next year, and so that will allow us to have greater investments in the areas of expanding the business and expand our Grow categories serving our customers. So we see the opportunities to drive incremental investments in growing the business based on that profile of recompetes for next, but probably don't want to touch on specific opportunities.

Yes, this is Tony. I would just highlight that we think that we've got about 16% of our portfolio is in recompete next year, and that is inclusive of the Engility portfolio, so as an enterprise. Typically, given the contract terms, we run in the low 20s, 20% to 25%. So we're very excited about the opportunity to shift next year's dollars in part to not only cover our recompetes but also increase the joint bidding as we look to expand and grow with Engility compliment to the portfolio.

Okay, thank you.

You're welcome.

Next, we have Brian Ruttenbur with Drexel Hamilton.

Yes, my first question, just real quick, is trying to understand Cai's earlier question, and a clarification around that, because I did the similar math and then got confused on the answer. So I hate to repeat a question, but the tax rate in the fourth quarter is what? Can you fill in the blank for me?

Yes, the tax rate, between 35% and 40%.

Okay, good. So that's what I heard -- and -- yes.

Yes, I was focusing on the full-year tax rate of 20% to 22%.

Okay, perfect.

But fourth quarter --

Go ahead.

Okay.

No, and then second question -- I interrupted you too much, I apologize. The strategy for growth going forward, you talk about business development, I hear a lot about synergies. Do you expect, with Engility, that there's going to be an acceleration in growth? It sounds like a lot of your -- at least initial it's going to be all about saving money, but is there going to be an acceleration due to the combination, is that what you're anticipating, Tony?

Largely it's -- in year one, our opportunity to exploit the existing IDIQ contracts between the two companies to secure new task orders would be the means to work on a shorter sales cycle. The larger opportunities, multi-hundred million dollar opportunities to bid jointly, we will be working out through the pipeline next year, and given where we're still on that 12 to 24 month sales cycle, really we will see incremental revenue growth as a result of those bids until a year or two out in our FY '21 and '22. So I think it will be a gradual increase, and we will let you know as we go forward where the source of those revenue streams are coming from, but still confident in the alignment, the compatibility, the strategy, I would say the existing portfolios have very little overlap in conflicts. So we have to eliminate certain opportunities and we're still at record level amidst winning award that we think again support growth going forward, but we will have to wait and see on incrementals with the market, year or two, we will be very aggressive in filling that pipeline based on our collective capabilities.

And a little bit of color, I will add, so I touched on the fact that we've been doing the integration planning, but we are doing all the organizational design, all the integration planning in this phase, and so when we do close as we get towards the mid to late January timeframe, we absolutely plan on hitting the ground running from a sales perspective and from investment perspective. And so, I think that will allow us to accelerate the opportunities that Tony just touched on as we work through next year.

Great. Thank you very much.

Next we have Joe DeNardi with Stifel.

Hello. Yes, this is Jon Ladewig on for Joe DeNardi. My first question is around awards. Can you kind of give us some color on fourth quarter awards to-date that you've seen, and as it pertains to the extension for defense and other government, excuse me, other national security related contract awards from FY '18?

This is Nazzic. As far as this quarter, we're seeing pretty normative activity. So nothing -- certainly I touched on the TIRES program, and that's a big single event, but otherwise it's pretty normative. I'm not sure exactly what the other question was on -- as it relates to fiscal '18, I didn't quite follow that, I'm sorry.

Oh, no problem, Nazzic. For FY '18 allowed for additional dollars to be put on contract in fiscal first quarter '19, I was just seeing if that's been -- have you seen any impact from that so far this quarter?

No, I have not seen that. I will note that, and we touched on this on the single award IDIQs; we are seeing greater use of those and greater traction there. We have seen that over the course of the year. So that's probably the only thing that's probably out of the ordinary as we look at these last couple of quarters as well as into Q4, but otherwise, we're seeing pretty normative type activity.

Okay. Kind of along the same lines for the budget kind of outlook for FY '20, is the customer changing their order behavior in regards to the budget, or is it steady as she goes?

I'd say it's a bit more steady as she goes. We'll see just as we see some of the year-over-year money rolling through; again don't expect the large investments, the modernization programs to shift dramatically. I think the customers to-date have been both focused in their strategic priorities, that's established I think their award decisions. So I don't think there's too much on the fringe that would be eliminated. So I think it's just steady as she goes. We'll see down modest macro budgets as Congress and administration sort through those elements, but as far as addressable market, we really don't see a dramatic change in FY '20 profile. We do anticipate another two-year deal. Some sequestration doesn't get repealed, but again, we shouldn't expect to see an addressable market shift off of our segment as a result.

All right. Thank you very much.

Okay.

And ladies and gentlemen, that does conclude our question-and-answer session for today. I would like to turn the floor back to Shane Canestra for additional or closing remarks.

As Tony mentioned, we are excited to host an Investor Day on the afternoon of January the 7th. Communication will be coming out shortly regarding registration and details. If you wish to attend, please contact me to be added to the distribution list. Thank you very much for your participation in SAIC's third quarter fiscal year 2019 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.