Science Applications International Corp (SAIC) 2016 Q4 法說會逐字稿

Good day, and welcome to the SAIC FY16 quarter-four and year-end conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Levi, Investor Relations. Please go ahead.

Good morning. And thank you for joining us for SAIC's fourth-quarter and fiscal year-end 2016 earnings call. This morning we issued our earnings release. And joining me today to discuss our business and financial results are Tony Moraco, our CEO, and John Hartley, our CFO.

Today's call is being webcast at investors.SAIC.com, where you'll also find the earnings release and 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 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 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.

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

Thank you Paul, and good morning. SAIC's fourth-quarter and full FY16 results demonstrate a growing momentum in the execution of our strategy and delivering on our shareholder value proposition. Fourth-quarter revenue of approximately $1.1 billion reflects 13% total growth and 1% internal revenue contraction as compared to the prior-year quarter. Full FY16 revenue of approximately $4.3 billion reflects 12% total growth, and internal revenue was essentially flat over the prior year.

John will discuss the fourth-quarter financials in more detail, but fourth-quarter adjusted EBITDA margin was 7.5% and full fiscal year adjusted EBITDA margin was 7.2%, excluding acquisition and integration-related costs. This represents a 40 basis points increase from the prior year, consistent with our long-term profitability improvement targets. Adjusted diluted earnings per share was $0.74 for the quarter and $2.85 for the year.

A particularly strong fourth-quarter operating cash flow of $108 million due to strong year-end collections resulted in full-year operating cash flow of $226 million. This demonstrates our continued ability to generate cash flow for shareholder value creation. These financial results enabled by strong contract performance and execution of our business strategy reflect the building momentum that SAIC is carrying into FY17.

Our primary customer, the US Federal Government, is operating in a relatively stable environment, and recent federal budget clarity provides opportunity for modest growth of government spending in IT and mission-critical areas where SAIC has proven capabilities. The demand for the services and solutions SAIC provides continues to be strong, as demonstrated by our significant amount of submitted proposals which further supports our long-term revenue growth outlook. Our confidence in revenue growth is further bolstered by significant new business awards in FY16, such as NASA Lights, GSA GEO, FAA controller training, and successes in our vehicle integration business.

Award activity of $855 million in the fourth quarter translates to a book-to-bill of 0.8, in line with our seasonal bookings profile and historical fourth quarters. The quarter included many small awards as well as contract modifications and extensions, and a significant program award of the United States Marine Corps Amphibious Combat Vehicle, or ACV program. This program contributed to our bookings in the fourth quarter, following GAO's recent protest decision upholding the ACV contract award to SAIC.

As a reminder, this is a new program for the Marine Corps and by bringing to bear a market disrupting business model, SAIC was successful in winning the ACV award against traditional platform manufacturers. This $122 million fixed price award to produce 13 prototype amphibious vehicles is expected to be completed by September of 2017. If [down] selected in the second phase for additional vehicle production, the full value of this contract could be over $1 billion.

Additionally, our vehicle integration business recently achieved a significant milestone with the delivery of the first of 10 amphibious assault vehicles survivability upgrades, or AV, ahead of schedule to the Marine Corps. These two programs are a continuance of our proud history of vehicle integration in support of our war fighters, and amplify the success of our innovations in this business area. During the quarter we were also successful with a $485 million award on our NASA East program recompete, but it was protested shortly after award and we expect resolution in the second quarter as we continue serving NASA on the current contract.

SAIC continued to be successful with the award of IDIQ contracts in the fourth quarter that provide valuable market access and opportunities for business expansion. In a protect win we were awarded a position on the US Army Chemical and Biological Defense IDIQ contract where we will compete for task orders to assist the Joint Program Executive Office for Chemical and Biological Defense. After the end of the quarter we were awarded a $93 million task order under the GSA Oasis IDIQ contract by the US Army Aviation and Missile Research Development Engineering Center to provide human performance training services to special operation soldiers, federal agencies and civilian employees. This protect award will allow us continue support of our current AMCOM EXPRESS customer.

At the end of the fourth quarter SAIC's total contract backlog was over $7 billion, of which about $2 billion was funded. The estimated value of SAIC's submitted proposals awaiting award is $13.4 billion, or about 3 times our annual revenues. Our submitted proposals are split roughly in half, with about $6.5 billion in standard contracts and task orders and the balance in estimated SAIC value of IDIQ contracts. As previously communicated our opportunity for revenue growth is enabled by our continued investment in the development of our pipeline, as demonstrated by two-thirds of the submitted standard contracts in the expand-and-grow categories.

Before asking John to discuss the financial results, let me provide a quick update on the Scitor integration. I'm very pleased that we have completed the final phase of the Scitor integration with the transition of Scitor to SAIC's enterprise systems. This is a tremendous accomplishment and I thank the team for a job well done.

We continue our focus on business execution and expanding our business development pipeline by leveraging all the people and our capabilities to expand our presence in the intelligence community and Air Force markets. Our collaboration across the enterprise will help us realize revenue synergies and sustain our ability to provide high-value services with above average margins.

John, over to you to discuss our financial results.

Thank you Tony, and good morning everyone. I will primarily focus on SAIC's performance for the fourth quarter, with references to the full-year results where it makes sense. Our fourth-quarter revenues of approximately $1.1 billion represent 13% total growth and 1% internal revenue contraction as compared to the fourth quarter of last fiscal year. The full FY16 internal revenue was basically flat, consistent with our previous communications.

The internal revenue contraction for the quarter is primarily due to reduced materials in our supply chain operations of approximately $30 million, the completion of a Navy technical program of $11 million, and $6 million of Scitor revenue from their prior fourth quarter. These revenue contractions were partially offset by increased subcontractor activity on our AMCOM EXPRESS program and the ramp-up of the FAA controller training program. Operating income of $54 million in the fourth quarter resulted in an operating margin of 5.1%, which was impacted by $10 million of acquisition and integration costs that, if excluded, results in an adjusted operating margin of 6%.

Looking forward, and consistent with the amounts that I discussed in our December call, we expect additional acquisition and integration costs related to facility consolidation of approximately $5 million in the first half of FY17, with most coming in the first quarter. This will complete the Scitor integration cost one year following acquisition.

Back to fourth-quarter margin performance. For the fourth quarter, EBITDA as a percentage of revenues was 6.8%, and after adjusting for integration-related costs, adjusted EBITDA was 7.5%, up 70 basis points from the fourth quarter of last year. These results reflect strong program performance across the portfolio and our focus on disciplined indirect spending.

Adjusted EBITDA for the full year FY16 was 7.2%, up 40 basis points from full year FY15, reflecting the addition of Scitor's higher margin business to the SAIC portfolio and our ongoing margin improvement initiatives. Going forward, 7.2% adjusted EBITDA is our new baseline for margin improvement, in line with our long-term financial targets of 10 to 20 basis points annually on average and over time.

Net income for the fourth quarter was $28 million and diluted earnings per share was $0.60 for the quarter. Earnings per share were impacted by $0.14 as a result of integration costs. If these costs were excluded it results in adjusted diluted earnings per share of $0.74 for the quarter.

In addition to the strong operating performance, fourth-quarter EPS was favorably impacted by a lower effective tax rate of about 31%, increasing earnings per share by about $0.03. This reduction in tax expense for the quarter was primarily the result of the retroactive passage of the Federal Research Tax Credit, which is now permanent. Accordingly, we expect our normative tax rate going forward to be in the range of 37% to 37.5%.

Robust cash flow continues to be a catalyst for our shareholder value proposition. We believe our fourth-quarter days sales outstanding of 54 days is sustainable and reflects our focus on cash flow.

SAIC generated operating cash flow of $108 million and free cash flow of $99 million in the fourth quarter, resulting in full-year operating cash flow of $226 million. These results include our previously discussed internal investment of working capital of about $30 million in support of the Marine Corps AAV contract. We still expect this to normalize in the first half of FY17, but should generally be replaced by a similar working capital investment on the ACV contract.

We ended the fourth quarter with cash balance of $195 million, which is above our targeted average operating cash balance of $150 million. Our total debt is now just under $1.1 billion, equating to a leverage ratio just over 3 times debt to pro forma adjusted bank EBITDA. I will remind you that we have a credit agreement restriction on share repurchases of $50 million per fiscal year until we are below the leverage ratio of 3 times.

As a result of the strong FY16 performance and through scheduled debt repayments in our first quarter, we expect to be free from this share repurchase restriction after the first quarter as opposed to our previously anticipated second quarter. As I have stated several times, we do not plan on accumulating cash above our $150 million average target, but rather deploy it to maximize shareholder value.

During the fourth quarter we deployed $46 million of capital consisting of $14 million in cash dividends and $32 million of share repurchases, representing about 700,000 shares. During the last two quarters of FY16 when we resumed our share repurchase program following the acquisition of Scitor we repurchased $50 million of our shares representing about 3% of our total shares outstanding and the maximum amount under our current debt covenant restriction. We also made fourth-quarter debt repayments of $43 million on our term loan debt.

Looking to FY17 we expect to pay dividends of about $55 million, make scheduled debt repayments of $54 million, with the remainder of our cash in excess of $150 million available for other deployments such as share repurchases among other alternatives. To that end as announced in our press release today, our Board of Directors has approved a quarterly dividend of $0.31 a share payable to shareholders on April 29.

That concludes my remarks on the fourth quarter. And I would like to provide commentary regarding the expectations for FY17.

I echo Tony's comment that we have significant momentum going into FY17, and our long-term financial targets remain intact. Based on significant new awards in the latter half of FY16 and an improving market environment, we have continued confidence in low single digit internal revenue growth annually and profitability improvement of 10 to 20 basis points annually with a FY16 adjusted EBITDA baseline of 7.2%.

Regarding operating margins, we expect to obtain a lift of about 20 basis points due to reduced intangible amortization in FY17. We will also continue our margin improvement initiatives and grow annual operating margin by 10 to 20 basis points annually on average and over time, in line with our long-term targets.

In terms of cash generation, after normalizing for events such as the FY16 AAV and expected FY17 ACV working capital investment, we continue to expect generation of about $240 million of free cash flow annually. FY17 will be impacted by about $25 million due to an extra payroll week, as FY17 is a 53-week year that we experience every six years. However, this is not expected to impact our capital deployment activities. I should note that the extra week will occur in the first quarter of our FY17.

Before I turn it back over to Tony for his closing remarks, I would like to briefly comment on my departure from SAIC that we communicated last week. SAIC is in a strong, competitive and financial position. This allows for a good time for me to step down and facilitate a smooth transition to a new CFO.

Tony, back to you for concluding comments.

Thanks John, and I want to thank you for your contributions to SAIC throughout your 15-year tenure. John was essential in the early design and implementation of our business model that puts SAIC in today's market leader position. We're grateful for what he has helped us accomplish. During this transition period we have initiated a search to identify a new CFO to succeed John in order to facilitate a smooth transition and to build on the solid financial foundation that John and our finance team have established.

Additionally, I would like to announce that our annual shareholder meeting will take place on June 8 at our McLean, Virginia offices and our proxy statement will be distributed to shareholders at the end of April. I encourage our shareholders to attend this event.

I want to close by congratulating and thanking the SAIC team for a job well done in FY16. With many program successes and opportunities for business expansion, the momentum that we carry is significant and the dedication of our 15,000 employees gives me confidence we're very successful FY17.

Operator, we are now ready to take your questions.

Thank you.

(Operator Instructions)

We'll go to our first question from Edward Caso with Wells Fargo.

Hi. Good morning and congratulations here. Could you update us on your major contracts that are either coming up for recompete, or possibly restructuring? In particular AMCOM EXPRESS? Thank you.

Thank you, Ed. The recompetes this year that we're tracking, or the most impactful are the NASA East that we touched on. [As far as] that's been awarded but under protest as far as continuity.

The AMCOM EXPRESS portfolio continues to go through an acquisition strategy shift as we move away from perhaps the broader BPA under AMCOM. We've seen some movement of vehicles like the Oasis contract IDIQ. That's successful in moving work there.

Would expect that to process to continue through the latter part of this year and likely into next year. So probably an incremental shift of the portfolio, not a one massive move. And then a third area we're tracking is our supply chain [Pulcam] portfolio, and the contracts there are also up for recompete. So I think we're well positioned for maintaining continuity there, have the contract vehicles in place for AMCOM transitions as they may occur, and very competitive on both NASA East and the Pulcam side.

Are you seeing any incremental impact from sort of this small business initiative or an effort in the intel community to sort of reduce the contractor content? Thanks.

Probably more so on the small business strategies than on any insourcing at this point collectively. So I'd say that the government is still dependent on the private sector for some of that subject matter expertise and services that we provide. So probably less pressure there. But there is consistent ongoing pressure and changes to support small business. And that results in small business set-asides. Across our portfolio, historically last probably two or three years, more recently with Scitor and that portfolio as it converts, small business pressures are probably the one that's our biggest headwind as we can still support those small businesses, but as they convert contracts to prime positions, our role in likely situations turns into a subcontractor to them. And that creates some revenue contraction on our overall portfolio.

I was hoping to stick one in for John since it's my last opportunity. Just wanted to confirm. I think I heard you say $240 million, or at least that number for F17 in operating cash flow. I just wanted to make sure that that included the ACV/AAV impact, the extra week both on the positive side and the extra payroll. If all that was adjusted in, is that the number we should be thinking about, $240 million?

Thanks, Ed. Just to repeat what I had said in the earlier version or the earlier discussion, it's $240 million on average and over time. The $240 million will be -- and it is free cash flow, not operating cash flow. That free cash flow of $240 million will be impacted by about $25 million in FY17 as a result of that extra payroll week. Obviously that just turns around very quickly thereafter.

So $225 million is the number. Thanks.

We'll go to our next question from Tobey Sommer with SunTrust.

Thank you. Could you talk about the pace of contracting in the procurement environment and the tenor out of customers, now that we're several months into having a budget in place and seemingly sort of a low growth environment? Just curious how you're seeing that establishing itself. Thanks.

Thanks, Tobey. It's Tony. I tell you, we're in a slightly improved environment, more confident in the overall budget profiles that our customers are seeing as a result of the budget deal, the two-year outlook and supported by some of the recent budgets submitted and some of the committee activities that we have visibility to. I'd say the government spending outlook is slightly positive from the last couple years, at least.

We've seen steady procurement going forward. The demand on proposals, requests for proposals is still sustained, evidenced by the high level of submitted. So we are hopeful that that outlook then converts to decisions on larger and longer-term contracts.

I think we've seen steady and consistent sustainment of task orders, mission operations and the like. But the larger contracts, multi-hundred million dollar contracts for IT upgrades, upgrades in mission capabilities, those are what we're now seeing most likely to come through decision over this next time horizon. We'll see some maybe stall in the election cycle for 6 to 9 months as we get closer to late summer into spring based on political appointments.

But again, our portfolio is less subjected to those elections. Those are some of the big programs that tend to require a policy shift. So we're less subject to that.

But you do see some on those larger contracts. We expect good continuity throughout the next year with those larger contracts perhaps getting awarded with maybe some slight delay as we look at the end of the calendar year going into next year.

Thank you. And then based on the commentary on cash flow and where you sit relative to your leverage ratios, should we assume that the Company's going to be dedicating more resources towards share repurchase? Or in the same context maybe you could comment on what your acquisition appetite is, if that's an alternative use of cash. Thank you.

Hi, it's John Hartley. I'll you address the cash flow and the use of it. We have found it to be most effective and efficient to deploy our cash through share repurchases. Like I said, we'll be free from the $50 million restriction by the end of the first quarter when we report our results. And then I'll let Tony address the acquisition side of things.

The market has a lot of activity as different companies are shifting their portfolios. To John's point, with support on the dividend, the modest debt repayments and the share repurchase focus, those are the priorities. But we're paying attention to the market dynamics from a competitive landscape perspective, see how those portfolios shift. And if there are any opportunities that round out our market access has been our primary filter, where it's advantageous for us in the long term we'll consider those opportunities. But we'll be more in that strategic buyer mode than looking for any kind of acquisitions just for the sake of bulking up.

Thank you very much.

Thank you.

We'll go to our next question from Jon Raviv with Citi.

Hey, good morning everyone. Could you just talk about what enabled you to outperform your approach $200 million for operating cash flow this year? You mentioned better collections and that that would be sustainable. And if that is sustainable, would it be fair just right out to say that $215 million is the right number to think about for free cash flow in FY17?

On the cash flow, we did experience some -- on larger programs, some payments. They weren't in advance but we were able to get them in before the end of the year. So that certainly helped.

That's what caused us to exceed that approaching $200 million of operating cash flow. We are probably being a little conservative because of that $30 million working capital investment that we had on AAV. But we were able to overcome that and sustain the 54 days, and that includes that over $30 million in the DSOs.

We do feel that is sustainable going forward. And like we said, the $240 million is what we would expect on a normal year at this point in time for free cash flow, and that would be negatively impacted by about $25 million. So if you do that math, it is about $215 million of free cash flow expectation for FY17.

Okay. Great. And then on Scitor down 4% in the quarter it seemed. It seems like it's a market thing but it's also a small business thing. Can you characterize what you're losing, where you're losing and when that trend might end and what you're doing to reverse that? And then related to that, is Scitor even though the sales might be falling short, how is it doing on the EBITDA and cash generation that you guys had you outlined when you first made the acquisition?

On the last point it's performing as expected with a higher margin portfolio, and the profitability and the cash performance are all in line. I think we've done a good job to manage the investment track to sustain those margins. On the market-facing elements, still very optimistic on the market access that we now have through the Scitor acquisition to be able to address the intelligence community and a broader Air Force portfolio.

The competitive pressures that Scitor was experiencing as they shifted from a legacy sole source, very insular position with their customers to one that's continued to become more competitive is the same trend we saw in some of the other markets over the last few years. We've messaged that the IC's lagged a bit in that. Overall the small business pressure is just one dynamic of that portfolio. But contractor competitiveness is still there.

We think we have very strong positions yet with the staff and the relationships and the subject matter expertise. The demand is still there for program continuity based on what our portfolio supports today. So very confident in where we sit.

The turnaround through the year, we've been investing in expanding the business development pipeline, both for what you'd consider to be organic for the Scitor portfolio to sustain that work but also with SAIC's broader capabilities to look for other agencies and other programs that we can now compete in. We've got good line of sight on a submitted and to be submitted proposal track on the pipeline that again further provides confidence that we can have the Scitor legacy portfolio, our current intelligence community Air Force portfolio contribute to the low single digit revenue growth and sustain the higher margins, we posted that 10%, and deliver the cash that we expected which was the thesis surrounding the acquisition.

Understood. I'm just trying to get an idea of when Scitor stops being a drag. Is it a target for this year? Is it a goal for next year? When do you see that happening based on those submits?

I would say it's through the year. And I don't characterize Scitor as being a drag on our business, but just the opposite as a market opportunity. That's why we bought it.

The modest revenue contraction on our portfolio is one we're obviously sensitive to, but as important watching the margins, it's one of our highest margin portfolios. That was, again, one of the investment thesis. And the capabilities that they have, the barriers of entry in that space are still in place to protect what we have and grow forward.

So I think through the year we'll continue to see revenue contributions while we sustain the higher margin elements. I think it's all market access. And I wouldn't characterize it as a drag on our business at all.

Understood. Apologies for the characterization. Thanks so much.

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

Thank you very much. And good performance, guys. So Tony, I think you said about two-thirds of the bid pipeline is expand-and-grow. Can you explain a little bit, that's a relatively large number. A little more color on when you say expand-and-grow, can you give us a little more granularity, specifically what kind of areas? And when are those decisions, if it's that big a number, when over the years -- over the year should we expect those decisions to come up?

Sure, Cai. The expand-and-grow is this whole strategy on protect our core business, the recompetes that again are a normal part of our business, but the two-thirds, a real focus on expand-and-grow is the investment in the quality business [owned] pipeline that really leverages our operating model in the matrix to deliver more capabilities to the customers we know on the Expand side. And then build on our past performance and take those same proven capabilities to new customers.

I think we characterized the momentum as an element around the key program wins from last year between the FAA program, the GSA GEO program on the IT front and the hardware integration programs. Collectively are areas where we've taken capabilities, training simulation an example on the FAA, for our ability to grow those accounts and bring a customer relationship and a capability, and have that intersection give us a competitive advantage in the marketplace. And we're seeing that through the awards that we announced through last year. I think our pipeline going forward has similar profile of types of programs.

So it's a conscious effort to invest and grow the top-line revenues by well positioned captures that are built on our past performance and that expand and grow. The areas of growth and investment are along the lines of our enterprise IT with cyber-security components and the cloud migrations, training and simulation as a broad capability across our market where it's a leverage point for our customers to further enhance readiness, the vehicle modernization program we touched on supported by additive manufacturing and 3D printing, all support our engineering components where we see growth across the federal marketplace and we'll continue to build on that past performance. And the pipeline reflects that.

Terrific. John, I just want to say you've done a terrific job, a job well done. Tony, when did you know that John was going to make this decision to return to California? And where are you in the process of search for a new CFO? Is it likely to be internal and external, and when do you expect to have that billet filled? Thanks so much.

John's done a great job. The team collectively has. The discussions and announcements last week were a result of recent conversations with John just over the last short period of time, culminated in a conversation with our Board at our Board meeting last week. And hence we felt it was appropriate to announce a transition. So very recently through a conversation.

The transition itself, as we announced, targeting the end of June to have a smooth transition where John and the finance team maintain the continuity of the business. We're executing to our succession planning that includes consideration of internal candidates and includes an external search as well. So we can make sure that we have that long-term continuity based on John's performance to date that's consistent with the strategies and our business model that we've talked about. So don't really expect a changed heading forward, either.

Do you expect to get that done, and that's a relatively short time frame for an important billet to fill.

I think so. You always have a succession planning process. So we're not starting from scratch. You have a lot of depth in what's there. And I think we've got a real attractive business that we'll also be able to attract a high quality CFO, or build it internal. I'm very confident that that's a reasonable time frame. And we'll adjust accordingly based on our success in the market.

Thank you very much.

We'll go to our next question from Amit Singh with Jefferies.

Hi, guys. Thank you for taking my question. So your pipeline looks very strong. And the long-term revenue growth target of low single digit, that seems very doable. As we're looking at FY17, and I look at your current year bookings which are strong, but book-to-bill of 1. But is that enough to drive that type of growth sort of in the near term if you're looking at just FY17?

I think it is. The book-to-bills are an interesting measure that give us some optics of where we're headed. Our portfolio is so predicated on the task order flow, and the book-to-bill itself as we've seen the duration of contracts and total revenues shorten in total scope, but very much a recurring process that we kind of normalized around the 1. There will be fluctuations as we win some large awards where it can go up. But again, we've messaged consistently that we operate in that 0.9 to 1 on a sustained basis and then you get some fluctuation, another 1 point off of that will sustain a revenue growth outlook as we go forward us because those incremental changes do contribute. And if in fact the customer confidence moves forward and we see less revenue contraction as they've stabilize their budgets, we also think is a tailwind in that we're not back-filling for revenue losses on the recompetes but rather everything we do win is in fact additive, even though the book-to-bills may appear modest.

Great. And then for FY17 are you guys expecting some year-over-year headwinds from the lower material volume in supply chain contracts?

We expect some. It would be less than $100 million. Still we consider that in considering the low single digit revenue growth for FY17. So I think about $50 million to $100 million, in that range. And that's on all the supply chain business.

Perfect. Great. And just the last one on margins. So just trying to get and understand, what will be the primary drivers of margin growth from here? Is that primarily Scitor driven, or are there other factors in there as well?

Certainly is Scitor. We'll have the full year of Scitor versus just three quarters this year. But there are the other margin improvement initiatives that we continue to work, which obviously are things like converting to more of our labor content versus subcontractors. Also some of the vehicle integration programs certainly have a higher margin profile than just the pure services business. So there are a number of drivers in there that we continue to work. So we think that's sustainable, that 10 to 20 basis points of growth on average and over time, is sustainable for the next several years.

All right, perfect. Thank you very much.

We'll take our next question from Bill Loomis with Stifel.

Thank you. Good morning. Just on Scitor. Tony, I just want to be clear on prior comments you gave on Scitor. Did you say that the lower Scitor revenues will likely be down in FY17 as they face more small business and other transition issues?

No, I didn't say they'll be down. I say they will likely go to flat based on what they've been. I think they'll contribute collectively on our revenues as we get past the 12 month mark, given the sales cycle's still 12 to 18 months. Efforts that we put in place since the time of acquisition will add [content] and contribute to that revenue growth overall.

I think adding more business development resources to the organic portfolio, organic resources that Scitor had in place further complement our ability to protect what we have and look for expand-and-grow opportunities in the intelligence community. I think it's going to flat off of their last year baseline that we've reported on and further contribute overall as we look at synergies in both selling through into the IC legacy Scitor market access. But also bringing the Scitor resources to bear in some of the other business, whether it be in NASA, given their space capabilities, or in other areas. I think we're going to see continued contributions from the Scitor acquisition. But it's going to flat as we -- maybe is how you may want to think about that aspect of our portfolio.

Okay. And then just on Scitor, can you tell us what their book-to-bill was over the last year? And kind of a sense of the proposals, the bid activity in Scitor specifically?

On the bid activity on the pipeline, again, it continues to develop. They've had -- their recompete profiles, traditional capture look, we've been focused on the expand and grow with the broader capabilities. And we don't report on book-to-bills at the organizational component of the business.

Okay. Did they have awards to your expectation? Is it kind of greater than average, can you talk about?

Expectations of winning the work that we needed them to continue to hold onto. On the recompetes, though absent a customer acquisition change like a small business set-aside, they have sustained to our expectations their win rates on the programs that they had in had their pipeline.

Okay. Great. And then on ACV on the margin -- vehicle work would be higher margins you've said, but on the prototype contract do you expect that to be -- on ACV to be higher margins? And if so, is it significantly higher?

That's the expectation, that it is higher. Think of more like double-digit starting with just over 10%, somewhere around there. So that's what the expectation would be. But we'll see how we perform on the program.

Okay. And just one quick one on supply chain. If you're seeing lower materials, and that's obviously your lower margin type work, of your 10 to 20 basis points goal, how much of that is due just because of the lower pass-throughs on supply chain?

We really weren't contributing almost anything to that. So it really is not a big component of it.

Okay. But the revenue drop, the material drops, those would be lower margin business, right, that $50 million to $100 million lower revenues this year would be on quite lower margin?

Yes, it is.

Okay. Thank you.

You get the impact but not necessarily -- it's not one of the drivers when we talk about our 10 to 20 basis points. It's not through the reduction of the supply chain volume that we see that result. It's on other initiatives. It may be an outcome but that's not the initiative.

Okay, great. Thank you.

We'll take our next question from Michael French with Drexel Hamilton.

Good morning, gentlemen.

Good morning.

So John, congratulations on finding a way to return to San Diego. I know that's easier said than done because I've been trying to do that myself for 25 years and it's still 2,000 miles away. So wish you the best.

Thank you.

First one to Tony on the long-term internal revenue growth target. Similar to what you had last year, and because the reasons that we went through you didn't quite hit that. I just wanted to ask you to address your level of confidence this year compared to last year on the outlook for the top line?

Higher confidence in the low single digit growth. I think a couple factors.

One, we've seen maybe some slight stability in the revenue contraction side as run rate programs have gotten to a new budget baseline. So we see less headwind of replacement dollars on the recompete side. So every new expand-and-grow opportunity does create upside on the revenue profile overall.

The wins in FY16 as a result of capture that occurred after we spun, 18 to 24 months later, we are now seeing those programs convert to revenues. So we know we have some tailwind on the revenue profile, given the five or six programs that we've talked about that were new between GSA GEO, FAA NASA Lights, and the vehicle programs. So that tailwind is there. That again gives us higher confidence of getting above -- into positive revenue growth profile.

And as we've seen last year and a confidence in the quality of our pipeline, we would expect some sustainment of award activity that would be again favorable in the expand-and-grow category, given our investments to date in that area. We expect it to be sustained. Could be at a lower level, task orders and the like, but we think that adds further confidence of why we expect that low single digit revenue growth in FY17.

Okay. Very good. On Scitor there had been some employee turnover. Has that stabilized? Or could you explain the situation with the churn on the employee base?

It's stabilized to a degree, but it does fluctuate. There are certain elements through the year from the acquisition, conversion of benefits that have a direct impact on employees. But I think overall we've managed that process very well.

We expected a slightly higher attrition rate than on average. Honestly, it did go higher than what we would have expected by a few percentage points. We've been able to also back-fill and hire successfully.

So we've minimized any revenue consequence. So I think the attrition, although slightly higher than we would have liked, is one that we're managing through. And as we go through a full year now and have hit most of the major gates that affect the employees, most understand where they sit today and how the business is converted. And I think we'll see further stability in the attrition numbers.

Very good. Thank you and good luck.

Thank you.

We'll go now to an additional question from Cai von Rumohr with Cowen and Company.

Yes, thanks so much. So I think you guys noted that there were some EACs in the final quarter. Could you give us a little more color on what were those related to? Were they at the parent at Scitor? And how big were they?

It was a number of small items, Cai. So there wasn't a significant driver. It was across the portfolio, and there was just strong program performance.

We also did have a slight indirect rate under-run that trued up in the fourth quarter. So that flows through to all the programs, at least the fixed price and the T&M. And so that helps a little bit as well. So it really wasn't any specific item. It was across the portfolio.

Thank you. And then in looking at your adjusted EBITDA, you kind of had a take-out of $3 million [DA] an overlap with acquisition expense. How big would that number be in FY17?

There would be -- you mean the overlap number?

Yes.

The overlap number was accelerated depreciation, so it was obviously in the D line. So you can't take it out twice. And so I would expect, since there's going to be about $5 million-ish of integration-type cost all related to facilities, I would think that it really shouldn't exceed $1 million or $2 million of that. The rest are lease buyouts and the like.

Terrific. Thank you very much.

Thank you, Cai.

And that concludes today's question-and-answer session. I'd like to turn the conference back to Paul Levi for any additional or closing remarks.

Thank you very much. I'd like to thank you all for your interest in SAIC and participating in the call today. Have a good day.

That concludes today's conference. We appreciate your participation.