Science Applications International Corp (SAIC) 2017 Q1 法說會逐字稿

Good day, welcome to the SAIC FY17 Q1 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Paul Levi, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us for SAIC's first-quarter FY17 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 will 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-Q 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 us cause actual results to differ materially from the 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. It is now my pleasure to introduce our CEO, Tony Moraco.

Thank you, Paul, and good morning. SAIC delivered solid results in the first quarter of FY17 that reflect continued momentum with our business strategy and execution of our shareholder value proposition. First-quarter revenue of approximately $1.2 billion reflects 12% total growth, and 3% internal revenue contraction, as compared to the prior-year quarter.

The internal revenue contraction is a result of decreased material volume on our supply chain contracts and reductions in our intelligence community portfolio, due to delays in contract awards and transition of work to small business set-aside contracts. Offsetting these impacts were increased revenues on newly-awarded programs such as FAA controller training, GSA Enterprise Operations or GEO and NASA LITES. It is encouraging that these new programs are in the process of ramping up, and will continue to contribute to revenues in subsequent quarters.

Adjusted EBITDA margin was 7.1%, excluding acquisition integration related costs. This represents 70 basis points improvement in our margins from the prior-year quarter. Adjusted diluted earnings per share was $0.80 for the first quarter, and operating cash flow of $35 million provided continued confidence in our ability to execute our capital deployment strategy. These financial results combined with notable business development achievements over the last year have produced a solid foundation for the remainder of FY17 and beyond.

Our customer outlook is consistent with last quarter, and demand for the SAIC expertise and capabilities remains strong. To that end, award activity of $1.3 billion in the first quarter translates to a book-to-bill of 1.0, demonstrating customer confidence in SAIC to assist them in their mission critical areas. First-quarter bookings included many task order awards and contract modifications, such as $190 million of aggregate awards on our AMCOM Express vehicle. As we have previously mentioned, our Army customer continues to execute their procurement strategy, and we have been successful in retaining work, moving to alternative contract vehicles such as GSA OASIS. Our excellent program execution remains the underpinning of our protect strategy, to continue support for this important Army customer regardless of contract vehicle.

We were also successful in a Navel Sea Systems Command recompete award of $141 million task order to continue providing technical solutions in the areas of systems engineering and ship integration and testing. Additionally, we were awarded contracts for continued support of the Naval Surface Warfare Center in Crane, Indiana, with a $73 million award of two task orders to provide engineering, technical and program management support services.

SAIC's diverse portfolio and broad array of customers is enabled by our wide range of IDIQ contract vehicles. With greater than 80% of our revenues generated from task orders on IDIQ vehicles, our up-front investment to participate on these vehicles is vital. SAIC was successful in two new IDIQ contract vehicles that provide revenue growth opportunities.

First, we were one of multiple awardees on a 10-year, $5.8 billion Human Capital and Training Solutions contract by the General Services Administration and Office of Personnel Management. Second, we were selected to compete for task orders on a $343 million IDIQ vehicle issued by the Naval Supply Systems Command to provide reengineering, development, and personal computer simulation services.

After the end of the quarter, we were successful in a key grow opportunity in the cyber domain. SAIC was awarded a position on a $460 million multiple award USCYBERCOM IDIQ contract to provide a broad set of cyber-related operations and capabilities. We expect this to be the primary contract vehicle used by USCYBERCOM in the coming years. As one of only six awardees, this award demonstrates SAIC's ability to differentiate in the cyber security market.

During our March call, I communicated that we won a $485 million recompete of our NASA EAST program that was protested shortly after award in January. The protest was resolved recently in our favor, and will contribute to second-quarter bookings.

To wrap up my comments on business development results, SAIC's total contract backlog is $7.2 billion, essentially unchanged from the end of last quarter. Funded backlog for the first quarter is $2.1 billion, up 12% from the end of last quarter. The estimated value of SAIC's submitted proposals awaiting award is over $15 billion, up $2 billion from last quarter.

The programs contributing the most to this increase in submitted proposals are a new defense logistics agency, industrial prime vendor contract to provide supply chain management support to the Air Force, and a recompete of the Army's information technology enterprise solutions contract. We are confident in realizing our FY17 goals due to strong bookings in the first quarter, coupled with a high quality pipeline of expanded business opportunities.

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

Thank you, Tony, and good morning, everyone. I would like to remind you that our FY17 is a 53-week year, which we experience every six years. This extra week occurred during our first quarter. Our first-quarter revenues of approximately $1.2 billion represent 12% total revenue growth and 3% internal revenue contraction, compared to the first quarter of last fiscal year, adjusted for the extra week.

Total revenue growth is primarily attributable to the Scitor acquisition that was completed at the start of the second quarter of last fiscal year. The internal revenue contraction for the quarter was primarily due to a recompete loss of a relatively low margin supply chain contract last fiscal year. This decrease was partially offset by revenues on newly-awarded programs that Tony outlined earlier.

Operating income of $66 million in the first quarter resulted in an operating margin of 5.4%, which was negatively impacted by $7 million of acquisition-integration costs, that if excluded, results in an adjusted operating margin of 6.0%. The first-quarter acquisition integration costs were higher than previously estimated, due primarily to increased facility lease exit costs. At this point, we expect an additional $3 million of acquisition-integration costs in the second quarter. In addition, and not related to the acquisition-integration costs, this adjusted operating margin included approximately $2 million of severance expense in the quarter, which negatively impacted profitability.

For the first quarter, EBITDA as a percentage of revenues was 6.7%, and after adjusting for the integration related costs, adjusted EBITDA was 7.1%, up from 6.4% year over year. These results reflect strong contract performance across the portfolio, and the inclusion of the higher margin intelligence community business. With strong contract performance expected for the year, we have confidence that we will be able to achieve our targeted margin improvement.

Net income for the first quarter was $33 million, and diluted earnings per share was $0.71 for the quarter. Excluding acquisition-integration costs, adjusted diluted earnings per share was $0.80 for the quarter. The tax rate for the quarter was about 37%, and we expect this to be our normative tax rate going forward.

Cash flow continues to be a strength of SAIC's shareholder value proposition. SAIC generated operating cash flow of $35 million, and free cash flow of $31 million in the first quarter. Days sales outstanding of 56 days is generally consistent with our normative operating range in the mid-50s.

However, the current-quarter DSOs were negatively impacted by about 3 days, as a result of the payment terms on the AAV contract that used an incremental $7 million of working capital during the quarter. We still expect the AAV impact to normalize by year end, but should generally be replaced by a similar working capital investment on the ACV contract. Additionally, first-quarter cash flows was negatively impacted by the normal payment of our annual cash bonuses of about $25 million.

The first quarter ended with a cash balance of $154 million, which is in line with our targeted average operating cash balance of $150 million. As a result of acquired debt payments and strong operating results, our total debt is now under $1.1 billion, equating to a leverage ratio of just under 3 times debt to adjusted bank EBITDA at the end of the first quarter. Accordingly, we are no longer limited to our credit agreement restrictions on share repurchases of $50 million per FY.

As I have stated several times before, we do not plan on accumulating cash above our $150 million average target, but rather we expect to deploy it to maximize shareholder value. During the first quarter, we deployed $59 million of capital, consisting of $14 million in cash dividends, $15 million of debt repayments, and $30 million of share repurchases, representing about 622,000 shares. With the knowledge that the share repurchase restriction would be lifted upon reporting our first-quarter financial results, we increased our daily pace of share repurchases during the quarter from about $330,000 to $670,000.

With continued confidence in our cash flow generation and our desire to return capital to shareholders, this action was taken consistent with our expectation of paying FY17 dividends of about $55 million, making scheduled debt repayments of $54 million, and using the remainder of our cash in excess of our desired average balance for other deployments such as share repurchases, among other alternatives.

With normalized annual free cash flow of $240 million, plus the excess cash we had on hand at the end of the last FY, the cash in excess of our desired average balance for FY17 after dividends and debt repayment is estimated to be about $150 million. As announced in our press release today, our Board of Directors has approved a quarterly dividend of $0.31 a share, payable on July 29 to shareholders of record on July 15.

That concludes my remarks on the first quarter, and I would like to reiterate our long-term financial targets. We have continued confidence in our ability to generate 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%. In terms of cash generation, we continue to expect generation of about $240 million of free cash flow annually. As a reminder, FY17 will be negatively impacted by about $25 million, due to the extra bi-weekly payroll payment due to the previously mentioned 53 weeks in FY17, but this is not expected to impact our capital deployment activities.

Tony, back to you for concluding remarks.

Thanks, John. Let me comment on the ongoing search for our new CFO. We continue to make progress in the comprehensive CFO search, and we'll issue a press release at the appropriate time.

Last week, we held our annual stockholder meeting, and the proposals outlined in our proxy statement were overwhelmingly approved by our stockholders. Thanks to all who attended the meeting, as well as participated in the process.

Operator, we are now ready to take your questions.

Thank you.

(Operator Instructions)

We'll take our first question from Amit Singh from Jefferies.

Hi, guys. Thank you for taking my question, and great quarter. So you provided the long-term outlook of low single-digit organic growth. But as we are looking at -- and I know you don't provide annual, specific annual guidance, but considering your recent strong bookings trend, is it safe to assume that even in this year, you guys would be able to do this low single-digit internal growth, especially considering the extra week of this year?

Yes, good question. We do believe we can achieve the low single-digit revenue growth this year, and that would be excluding the extra week. So everything that we report to you as far as internal revenue growth, or total growth takes into account that extra week, so it is comparable year-over-year.

Okay. So you're saying low single-digit, even excluding that extra week if I hear you right?

That is correct.

Okay. And if you could give a little bit details on how much did Scitor generate in revenues this quarter? And off of that $88 million extra revenue, if you could break that down as well, between Scitor and organic? Basically, what I'm trying to get to is, what was the growth rate in your sort of ex-Scitor business, and the growth rate in Scitor business?

The businesses are pretty well integrated at this point. I think the performance to date is very consistent with the prior quarter performance as we've been reporting. We're not going to give out the specific relative components of that. The portfolio's been mixed and shifted a bit, to support our matrix operations.

But we did state that the contraction is again, consistent with what we saw from a year ago, attributed to the attrition that we experienced, and the loss of some particular positions within the contract base, contract activities around small business set-asides with our customers, where we've had to flip and become a sub to some of the small business primes. So that's had some downward pressure. But overall, very confident in that portfolio growth.

We had a good quarter in bookings and awards in the intelligence community portfolio. In fact, Q1 awards were above all of the three quarters in FY16. So the synergies and the pipeline development that we started since the acquisition, I think has taken hold, as we had said, take about 12 months to come through, and our submitted proposals are also double over where we ended FY16. So confident that will continue as we develop that portfolio, in concert with the other businesses that we run.

And regarding the $88 million for the extra week, that is the total Company. Scitor, the ex-Scitor business, which again has been integrated, so we can't track it exactly year-over-year, you can consider that makes up about 12% of our business. So if you just take 12% of the $88 million, that would attribute how much of the extra week goes to Scitor.

Great. And just one last one from me, on the lower volume of supply chain material sort of impacting your 1Q revenue by $41 million year-over-year. I think previously, you had provided a full year headwind guidance of $50 million to $100 million. Does that still remain -- does that still remain the same for the full year?

Yes, that's pretty consistent with what we see. It's still a little spotty on the supply chain. You get some surge now and then. But generally, that's what we see in the portfolio year-over-year in the supply chain variance.

All right. Perfect. Thank you very much.

You're welcome. Thanks.

Moving on, we'll take our next question from Cai von Rumohr from Cowen and Company.

Yes. Thanks so much, and good quarter, guys. With the pick up in the bids outstanding, and the NASA EAST win and some of those other contracts you indicated, could you give us some color on where you -- the bookings, book-to-bill might be here in this quarter?

In Q2?

Yes.

Well, we saw in Q1, the book-to-bills were from a wide range of task orders. So that was good, kind of recurring flow, without a significant number of big ticket items. So with NASA EAST showing up as a booking, north of $400 million in Q2, expect pretty strong bookings. I don't have the numbers, Cai, to point to that, but confident that we'll come in that same range that we've been operating in, it fluctuates, again, based on some of the bigger deals. But that's the biggest one we've seen this quarter.

Got it. And then, so if you've seen this nice pick up you alluded to in the intel space, should we expect Scitor -- and I'm not asking for an exact number -- but should we expect that the Scitor legacy business to basically turn up here, maybe in the second or third quarter?

Yes, expect we're going to see the award activity. Again, it's dependent on that. The pipeline is strong. We're seeing the cross-sell into the IC, into the intelligence community, as well as outside, to the other businesses.

So as we've said, I think we're going to see the performance which has been quarter to quarter pretty consistent. We'll start seeing those awards come in, just like our other portfolios. And it will contribute as we've said, I think with the same low single-digit growth that we're seeing with the broad portfolio, and reflected in the results through the course of the year.

Okay. And then turning to cash flow, it looks like a payroll was a source. Usually you have fairly big payments in the first quarter. How come that changed, and what are we looking there? I mean, the $25 million, that's going to -- when is all of that going to hit?

Okay. So the $25 million in the first quarter was related to our annual bonus payment. And so, there was not an extra payroll in Q1. Now it gets a little complicated when you go to Q2, Q3 and Q4. Year-over-year, Q2 does have an extra payroll in it, payroll payment. Q3 has one less payroll payment in it. Q4 has one more payroll payment in it.

And so, that's in essence, where the extra payroll comes throughout the year. So there was no extra payroll in Q1, one in Q2, one less in Q3, and one more in Q4. And that's about $30 million per payroll.

Got it. And then, your DSOs, they nudged up a little bit here. I mean, do you think you can get them back down a little below 55 again, or is it, we're going to stay more or less in this range?

With the ACV coming in to replace AAV, mid-50s is probably reasonable. But I wouldn't be surprised to see it below 55, come the end of the year, just through just strong cash collections.

Got it. And the last one is, you were pretty aggressive in buying shares in the quarter, and obviously, you may have other things you're considering. But how should I think about the way you approach repo, now that things seem to be on a pretty stable course? Should we expect fairly consistent repo, and this is obviously, unless you have an acquisition opportunity that comes up? So every quarter, you should be within $10 million or $15 million of $150 million? Or you're going to let it drift up, and then buy more, depending on where the stock price is?

I think it's fair to expect absent other alternatives, a consistent repurchase throughout the remainder of the year.

Terrific. Thank you very much, and, John, congratulations. I think you've been a terrific CFO.

Thank you, Cai.

Moving on, we'll take our next question from William Loomis with Stifel.

Hi, thank you. Good morning. Good quarter. Just looking at the intelligence market, Scitor, obviously your awards are up in the quarter, and then your submittals are up, and you expect low single-digit growth on the Scitor business. Is that your performance, in terms of the changes you've done at Scitor, and the workforce stabilizing under new ownership? Or is there something also more positive going on at the customer base?

I'd probably attribute it more to the collaboration between the two businesses, in the expansion of the business development pipeline. Scitor has a great presence in their organic capabilities if you will, and I think both companies saw the opportunity in synergies to sell more services to that customer base.

SAIC wanted access to that market so we could sell our services through things like cyber. The USCYBERCOM award is an example of some of those synergies, where it's a partnership between the legacy businesses. So I'd say, it's most attributed to a broader view of a business development pipeline, how it's expanded given the broad sense of what we can sell through the matrix, as opposed to any major changes in customer acquisition behaviors. In fact, that's probably created more headwinds than tailwinds.

But we have expanded our reach. We've reconciled any other market concerns. We've sustained the customer presence and confidence throughout the process, and just look forward to delivering broader services.

Okay. And then, on cash deployment, so you're going to have consistent repurchases through the year. But you're still -- are you still looking at larger acquisitions potentially as well? Would you have more of that cash going to debt paydowns, so when you make an acquisition you can leverage back up to pay for it, as opposed to having it go out the door in share buybacks? Or do you not expect to see any more larger acquisitions down the road, just smaller ones?

Yes, I'll cover the capital deployment side of things. We don't at this time, have any intention of pre-paying the debt. We intend at this point in time, to stick to the scheduled debt repayments, that by the time we get to the expiration of the term loan A, which is in just a couple years, we'll be at about a book debt-to-EBITDA of about 2.5 times. I'll let Tony comment on the likelihood of acquisitions.

Yes. As far as the M&A markets, as you know there's a lot of market consolidations. I think a lot of businesses are trying to rationalize their portfolios on one hand, and others I think are trying to get another level of scale. I think we're in the -- as being one of the larger government service providers, I don't see the need to further scale up the organization in sheer dollars. We are still looking at opportunities in market access, as we did with the intelligence business, in whether it's in broader federal civilian agencies or others.

So I don't see the need for, as you said large acquisitions or transformational to get to a new business condition, but rather market access and capability development to expand our services along with our client base. So we'll look across the portfolios, see what makes sense for us. But I'd say it's, just again a constant look, with something that's more in the modest range, versus something I think that's large.

Got it. Okay. Thank you, Tony.

Yes.

Moving on, we'll take our next question from Jon Raviv from Citi.

Hi, good morning, everyone. Thanks for taking the questions. Just following up on that question about M&A, just to confirm. When you say, not large or transformational, rather market access, Scitor was market access. But would you still consider that a large one, such that going forward you don't expect to spend another roughly $100 million on an acquisition again?

Yes, that's -- I'd say that's definitely on the larger side, definitely falls short of anything that's transformational. Again, if you look at the market consolidations that are occurring. So say a market access, you can see below the Scitor elements that reflect more again, targeted, trying not to buy the overlap, as we have great contract vehicles today in a prime position. So I think we can be more selective, and look at a more targeted acquisition strategy, and we're just being thoughtful about that.

And on organic sales, you're still talking about some organic internal revenue contraction in the past -- this quarter, and the past couple quarters. When do you see that actually shifting? I mean, you've talked about low single-digit for the full year. Do we see that start to come through next quarter, or really only fiscal second half?

We'd expect to start to see it turn next quarter, and then continue throughout the year.

Okay. And then, just following up on the Scitor plans, with the roughly doubling in AIT costs planned for this year, you talked about facility exits. What other, what exactly else are you doing with those higher costs?

Yes. So the higher costs, it's not that we're exiting additional facilities, so it is the facilities we intended to exit. But there was an event that created the market of a certain area that we're vacating, for that market price to decrease. And it was as a result of some of the consolidation that went on. There's excess space that's being dumped on the market, which will make the price per square foot come down, based on what some of the consolidators are doing to exit and jettison some space. And so, that's going to lower the -- our ability as far as price, to find a tenant. And also it will lengthen the time it will take to find a tenant, because it is a significant amount of space in that area.

And is that some sort of ongoing risk, or do you expect to have that all complete, and not have it hanging around your neck, so to speak, for much longer?

We don't expect it to be a tremendous risk. We think the -- our estimate of what it's going to take is reasonable, and should be able to execute within that envelope. We'd love to exceed it if possible, but again, whenever you're dealing with real estate, there's always a little bit of risk there.

Got it. And then, just sorry about this, just a final question, still fair to see $240 million of free cash flow for this year, excluding the extra pay period, that gives us about $215 million free cash flow this year?

That is a fair estimate.

Okay. And then, just in light of that, if you can do $215 million this year excluding the extra payroll [$240 million], and you talked about low single-digit organic growth, margin expansion, what's the opportunity to exceed that [$240 million], going forward, as you do hit those long-term year to year targets?

Yes. As we grow, that [$240 million], obviously will grow as well, providing that we don't look at some high working capital business, which we don't intend to. We intend to stay on the side of low capital up front. And so, that [$240 million] should grow as the overall profit of the Company grows.

Got it. Thanks so much, and, John, congrats, and enjoy the sun.

Thank you, sir.

Moving on, we'll take our next question from Tobey Sommer from SunTrust.

Thanks. Wondered if you could give us an update on ACV, and what sort of milestones going forward we should think about? Thank you.

On the assault or the amphibious combat vehicle program, we're cranking that up with the customer. It's in its early phases as we go forward. The deliveries on -- between long lead items, are working with our suppliers, establishing that baseline. It's on track for what we need to do on the milestones. As you know, there's a number of prototype units that will get delivered in phases.

And so, I think it's on track, moving forward. We're working off synergies that exist with the assault amphibious vehicle program. So we're taking advantage of that, where possible. But overall, working closely with the Marine Corps, on meeting the milestones that are in place.

And Tony, you mentioned the USCYBERCOM contract maybe being one of the principal contracting vehicles over a longer period of time. Is that to say that over time, the contract ceiling value's likely to be increased as the customer applies more capital to -- more spend to that vehicle?

It's possible. It's a little early to tell how the Command will move their money through. We'll see that through the task order volumes, and their distribution of those funds. But odds are, that as we've seen with other customers on the large vehicles, as it becomes more utilized, then they have the ability to increase those ceilings when they feel it's appropriate.

Okay. And on Scitor, when do we lap the impact of the small business set-asides?

I'm not sure when that occurs, and it's not unique to the intelligence community. It's happening in various segments. I think the Air Force, maybe wants those services has been pretty aggressive there, as far as its utility, the government's going through their acquisition reforms. We're working closely with them to influence a balance between large and small, so they get the actual service delivery that they require, as opposed to trying to meet small business criteria.

So that's just in partnership with them, and partnership with the small businesses. It's not unique to the IC, intelligence community, or that portfolio. I think it's just one of the market conditions that we continue to navigate. So I wouldn't say it's improving or declining. It's just about the same, and it's -- but broader than what would affect the legacy business.

Thank you very much.

Moving on, we'll take our next question from Edward Caso from Wells Fargo.

Hi. Good morning. Congrats on the quarter. Can you break up your business sort of mission operations versus IT? And sort of the -- which group is growing better than the other?

Generally, I'd split the mission engineering work about 60/40 with the enterprise IT work overall. That's kind of the two major elements across the service lines and the customer groups. The business overall fits in those two buckets. There's growth in both, and same market dynamic.

I think we've seen enterprise IT expanding, given the cyber threat and cyber security components in one dimension. And the constant cost efficiencies the government seeks in data center migrations to try and virtualize some of their networks and the like. So I think we're going to see across DoD and federal civilian enterprise IT initiatives continue. Yes, mission engineering also has its opportunities, as we think about the global threats, weapon system upgrade, modernization programs.

I think we're well-positioned for modernization and sustainment, as well as the broad range of training and simulation services to maintain readiness for the force. So it's kind of balanced, Ed, between the two with that 60/40 split, but market opportunities I think exist in both areas.

Great. Thanks. During our bus tour last week, we heard several times that the clients were starting to move away from cost plus here. I guess, they're already starting to move away from low price, technically acceptable, but that was a new data point for us. Are you seeing that, this move away from more cost plus to more T&M and fixed price?

I think at this point, there's still a growing desire to move away from cost plus fixed price, perhaps fixed fee to fixed price. We haven't seen much movement to T&M, to time and materials overall. I think we're still looking at the customers' wanting to buy outcomes as opposed to hours, labor hours alone. So I'd say, there's a modest shift, an intent to do more fixed price, shift the risk to private sector, as they seek more innovative solutions on the technology side.

So I think there is a movement to think about an outcome, what is it they desire, what private sector support those delivery of systems, than the government buying labor, and then looking to apply that and resource it within their organic asset base. So a modest shift. And to your point, we are seeing some, again modest movement away from LPTA to much more of a best value conversation, driven by I think a stronger alignment on requirements, definition, and more clarity on the evaluation criteria that they're using on their bids.

We also picked up that contract duration is starting to extend again. Is that what you're seeing? And does it differ by the various client bases?

Well, there's some variability amongst the client base. But I think it's been fairly consistent in that overall contract awards in the five year time frame, a base year or two, with some option years. So maybe we're seeing that early commitment, instead of one year, maybe it's a two year base, is maybe a directional. But the option years, I think will continue to flow on an annual basis.

So I think it's in that same ballpark, some contract, longer term IT. We're seeing maybe some stretch beyond five, because they do realize that those are large, transformational and longer enduring programs. So we are seeing some potential extensions in the IT domain.

Last question. Can you talk a little about where your -- the pricing is of your current portfolio of contracts? In other words, is the -- are you -- is the marginal pricing much below the pricing of the contracts that are coming up for recompete? Thanks.

I think the pricing -- there's still the price competitive aspect throughout, but I don't see a dramatic shift to where we're having to change pricing strategies dramatically. I think, again, it's in line with the best value orientation of price, what's there. In fact, I think the government is a little more sensitive to those lower prices, and doing a bit better [should] cost, and excluding the lowest bidders.

So I think industry's been pretty responsive. We kind of understand where the competitive landscape is. The pricing reflects that.

And as companies are looking at the requirements, and a shift to a more outcome-oriented, I think we'll see a -- maybe a rational pricing strategies that are -- that are tied to solutions, that fit well against our portfolio and technology integration, continue to use those pricing leverages with our supplier base, also affects that overall pricing strategy. But overall, I think the labor costs, pricing are pretty much in line. And you're looking at solutioning overall, and price models I think are still well within range, without a dramatic shift up or down.

So just to be clear. So the marginal -- as contracts recompete then, you're not looking at that as a growth headwind that you have to overcome?

I think we're seeing it fairly flat. We're seeing less of the contract contraction in the recompetes. I think some of our customers, particularly on those recompetes, have hit their new budget realities and budget floors. So I'd say, there's a little bit less headwind than we experienced over the last two or three years in that capacity, as far as price pressures in total award values on contracts that we're recompeting. There's still some, again it's just a general comment, but generally it's not as strong as it was, [or it seems].

Thank you.

You're welcome.

Moving on, we'll take our next question from Michael French from Drexel Hamilton.

Good morning, gentlemen. Congratulations on the strong performance. I had a quick one for John. Did you say that the integration expenses would be $3 million in 2Q? And then, the follow-up on that is, should we expect it to end after 2Q?

It is expected to be $3 million in Q2, and that should be the entirety of it.

Okay. Good. And I'd also like to jump back to the CYBERCOM contract for a second. Are you aware of any task orders that have been issued? I've heard that Vencore got one. And then from an unreliable source I suppose, or to be determined if it's a reliable source, I've heard that you got one as well? So is that true, or is it premature?

It's a little early, but I believe they did award one task order, as far as the overall release, and it went to Vencore.

Okay. But nothing to you guys yet? And then Tony, I'd like to ask you to follow-up on the comments you made about M&A. You mentioned market access and capabilities are two things that you're interested in. Are there any particular holes in terms of capabilities, or areas that are specifically what would be interesting to you? And kind of the same question on market access, is there any particular agency or entity where you're really keen to get into?

As we talked before, the Air Force has opportunities, whether it be in some of the unmanned system domains. So it's a pretty modest part of our portfolio at scale. We like to run those businesses, and those market accesses closer to $1 billion, so we look to fill contract vehicles and market access that may fit that bill.

The federal civilian marketplace is very fragmented. Still see expansion opportunities, again whether it be in public sector health areas, critical infrastructure, areas around other parts of the security infrastructure, physical security, DHS and the like. So I'd say there's broader expansion, market access given the fragmentation in fed/civ, that would potentially be attractive from an M&A perspective to fill a hole, and get to market faster, than from an organic play.

Great. Thank you. Appreciate it.

Sure.

At this time, that will conclude our question-and-answer session. I'd like to turn the conference back over 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 today's call. Please have a good day.

Thank you. That will conclude today's conference. We thank everyone for their participation.