Science Applications International Corp (SAIC) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the SAIC Fiscal Year 2018 Q3 Earnings Conference Call. Today's conference is being recorded.

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

Good afternoon. My name is Shane Canestra, SAIC's Director of Investor Relations, and thank you for joining our Third Quarter fiscal year 2018 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 other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you will 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 to be filed soon, should be utilized in evaluating our results and outlook, along with information provided on today's call.

Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from 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.

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. SAIC's third quarter results reflect improved performance as compared to the last 2 quarters. Nazzic and Charlie will provide details on the operational and financial results, but let me provide you with a few highlights of the quarter, our assessment of the market environment and the status of our more notable platform integration programs. Third quarter internal revenue grew by 3% as compared to the prior year quarter, primarily due to recently awarded new business with NASA and the Environmental Protection Agency.

As previously communicated, we expected improved profitability in the second half of the fiscal year, and we have delivered on that expectation for the third quarter. Adjusted EBITDA margins of 7.4% for the third quarter were primarily due to strong program performance and cost-efficiency measures that we put in place in the first half of the year.

Following very strong bookings of over 2x revenue in the second quarter, SAIC continues to execute its go-to-market strategy, resulting in a book-to-bill of 2.3 for the third quarter. As a result of our recent strong contract awards, total backlog is up 16% as compared to the second quarter; and funded backlog, which is an indicator of potential near-term revenues, is up 45%. Additionally, our $15 billion of submitted proposal value remains very strong as we continue to pursue a healthy business opportunity pipeline across a diversified set of existing and new customers.

With regards to 2 notable efforts on our platform integration business, the Marine Corps AAV and ACV programs continued to perform as expected. On the AAV program, we are executing the Low-Rate Initial Production, or LRIP, phase of the contract, where we expect to begin delivery of vehicles in the spring of 2018. We have successfully completed delivery of all 16 ACV prototype vehicles, our supporting ACV testing and expect a down-select decision in the early summer 2018 time frame.

With regards to the market environment, we are encouraged by the expectation of an improved budget in government fiscal year '18. The majority of our customers are awarding contracts with relative budget confidence and investing in their operations after many years of a more conservative spending profile. Evidence of this current confidence is demonstrated by the second straight quarter of significant contract bookings that provide a solid base for future growth.

Looking farther out, we're optimistic about our market environment as our customers have signaled the desire to adopt technology innovations to ensure mission success. We are positioned well in areas of customer emphasis, such as training and simulation, military modernization and readiness, data analytics and cyber, to name a few. With an improving environment and demand signals from areas that align with SAIC strategy, I have confidence that we will perform in alignment with our long-term financial targets.

I will now turn the call over to our COO, Nazzic Keene.

Thank you, Tony. I'm excited to join the call today as SAIC's Chief Operating Officer and share our business development results as well as an update on actions that are being taken to improve profitability and execute our long-term business strategy.

Contract award activity in the third quarter led to bookings of approximately $2.6 billion, which translates to a book-to-bill of 2.3 for the quarter. With another quarter of book-to-bill over 2x revenue, this demonstrates that our customers value SAIC's capabilities and differentiated offerings. Over the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.6, which is a strong leading indicator for low-single digit internal revenue growth as we look to fiscal year '19 and beyond. Third quarter bookings included the recompete or Protect win of around $970 million of our AMCOM customers Battlefield Systems task order. This award was the largest and most visible recompete this year and further stabilizes our revenue base for another 3 years. Congratulations to the team for this important Protect win. In the Expand and Grow categories, contributing to this quarter's booking was a Grow award of a $272 million contract to support the Virginia Information Technologies Agency and Expand award of a $237 million contract from the U.S. Army to lead a consortium in developing an experimental prototype of their next-generation combat vehicle. Also contributing to this quarter's bookings was an important Grow opportunity of $93 million for the USCYBERCOM to support their efforts in securing, operating and defending the Department of Defense Information Network. Various other awards and contract modifications across the portfolio make up the balance of this quarter's extraordinary bookings.

At the end of the third quarter, SAIC's total contract backlog stood at approximately $10.7 billion, an increase of 16% from the second quarter and a 30% increase from the third quarter of last year. Funded contract backlog, an indicator of potential near-term revenue generation, was $2.6 billion, up 45% from the second quarter.

The estimated value of SAIC's submitted proposals awaiting award is $15 billion, unchanged from the second quarter despite the third quarter's large customer contract awards. Throughout the third quarter, we submitted several large contract proposals, many with an award value of greater than $200 million. Several of these proposals are in the Expand category within our defense portfolio and are expected to be awarded in the first half of next fiscal year. As we continue to invest in the future of SAIC, it is encouraging to see strong demand for the services and solutions we offer. We will continue to use a disciplined approach to our investment spend as we pursue a strong pipeline of business opportunities.

As previewed last quarter, we have reviewed our operating model and cost structure to improve profitability and align to our long-term strategy, Ingenuity 2025. We have and are continuing to take actions to achieve our objectives and provide for long-term shareholder value creation. As announced in October and as part of a broad, company-wide restructuring, we offered a voluntary retirement incentive package to approximately 100 senior managers as we consolidated 5 customer groups into 3 groups and 6 capabilities-focused service lines into 3 market segments. While committed to keeping our successful matrix operating model intact and driving performance for our customers, we have adjusted our operating model in alignment with our long-term strategy. As a result of the voluntary retirement incentive packages and including a modest amount of additional involuntary employee departures, we eliminated approximately 70 positions through this restructuring effort. With these reductions, along with several other actions completed or in process, we estimate we will reduce our annual operating costs by approximately $20 million. While Charlie will provide you with the third quarter and estimated fourth quarter financial impact for these actions, our restructuring will create a more efficient and effective operating model that will enable the successful execution of our business strategy.

Charlie, over to you for our financial results.

Thank you, Nazzic, and good afternoon. The third quarter revenues of approximately $1.1 billion reflect internal growth of 3% as compared to the third quarter of last fiscal year. Revenue growth was driven by new information technology contracts, such as the Army HITS and EPA end-user services programs and mission-oriented services on the NASA OMES contract. Increased revenue due to the new program was partially offset by the completion of contracts such as DHS integration program almost a year ago and other net decreases across the portfolio.

Third quarter adjusted EBITDA was $85 million, equating to a 7.4% as a percentage of revenues. This quarter, profitability was driven by strong program performance and cost reduction initiatives that we implemented in the first half of the year and in advance of our current restructuring efforts. These cost efficiency measures remain in place today and complement the larger restructuring program. During the third quarter, we incurred approximately $1 million of restructuring cost, mainly related to severance. We expect to incur an additional $10 million of restructuring cost in the fourth quarter, primarily related to voluntary retirement incentive program and facilities consolidation efforts. In total, including the second and third quarter cost of $3 million, we estimate to incur $13 million of restructuring cost for the full year and expect to complete all restructuring efforts in the fourth quarter.

With regards to the annual cost savings of approximately $20 million from our restructuring efforts that Nazzic mentioned, I anticipate approximately $11 million of net annual cost savings due to our contract mix of approximately 45% cost-type contracts. Adjusted operating income of $73 million in the third quarter resulted in adjusted operating margins of 6.4%, consistent with the prior year quarter.

Net income for the third quarter was $43 million, and diluted earnings per share was $0.98 for the quarter, inclusive of the third quarter restructuring cost of $1 million, which impacted earnings by $0.02.

The effective tax rate for the quarter was approximately 31%. Looking to the full fiscal year, we estimate our fiscal year 2018 tax rate to be approximately 23% to 25%, down slightly from our previously communicated expectations.

Third quarter operating cash flow and free cash flow were $80 million and $72 million, respectively. Cash collections were impacted in the quarter by delayed payments from one of our largest contracts, but we do not anticipate these delays to endure and, in fact, have partially recovered so far into our fourth quarter.

Days sales outstanding at the end of the quarter was 57 days. Looking forward to the fourth quarter, we expect our DSOs to return to the low 50s, within our normal operating range, and I do not expect any disruption to our capital deployment strategy.

The third quarter ended with cash balance of $125 million, below our average operating cash balance target of $150 million and attributable to the delay in payments that I just mentioned. During the third quarter, we deployed $59 million of capital, consisting of $39 million of planned share repurchases, representing about 562,000 shares, $12 million in cash dividends and $8 million of term loan debt repayment.

We are committed to our long-term financial targets, and they remain unchanged. With regards to fiscal year '18 specifically, we expect revenue to be slightly positive and continue to expect full year profitability as measured by adjusted EBITDA margin to be in the 7% range. For fiscal year '18, we still expect $240 million of free cash flow, excluding the expected restructuring costs we anticipate this year. I should note that of the $13 million of expected restructuring costs this fiscal year, roughly half will impact cash flow this year. This cash flow outlook, and when combined with the excess cash we carried at the end of the last fiscal year, the execution of our capital deployment strategy is unchanged. In fiscal year '18, we expect to pay dividends of about $55 million, make total term loan debt repayments of approximately $25 million with the remainder of cash in excess of $150 million available for further share repurchases and strategic M&A, should it arise.

Finally, I should note that our Board of Directors will meet next week to consider the approval of our quarterly dividend, which is typically payable at the end of January.

Tony, back to you for concluding remarks.

Thanks, Charlie. As a leading technology integrator, I'm optimistic about the market environment and the actions we are taking to ensure the future success of SAIC. I wish you and your families and all SAIC employees a happy holiday season.

Operator, we are now ready to take your questions.

(Operator Instructions) And your first question will come from Cai Von Rumohr.

It's Lucy on for Cai. So the -- it's a good performance quarter. Wanted to follow up on maybe execution. You talked about performance on the vehicles ACV and AAV are as expected. Are there any milestones coming up? And if you can -- maybe in Q4 and also into next year, if you can give us an update on that.

As it relates to AAV, we continue to prepare for the low-rate-production activities, long lead items, procurement activities. Production preparations are underway as part of that. That will likely, performance basis, be more relevant in the spring as we begin delivering the first units. And on ACV, we continue to support the testing activities after delivering all 16 EMD vehicles. So it's pretty much in a test environment there. So not as many deliverables, if you will, as we've seen in the past. Through the test activities and the preparation, we'll see the ACV award again late -- early summer of 2018, and we will be able to report on it in the spring.

You have a couple of -- you have the Army TARDEC win and then maybe 2 other RFPs coming up here for other vehicles. I believe one Army and one for the Marine Corps. Can you maybe talk about what sort of expectations you have on those? And how some of the lessons learned on the AAV and ACV may be borrowed to improve performance on those bids?

Surely, you're referencing the next-gen combat vehicle prototype with the Army. So we're excited about the Army portfolio as a large customer. With the tactical vehicle demands, it's a complement to the Marine Corps. We have taken a lot of lessons learned from the Marine Corps programs, both in terms of our preparation and execution on the programs themselves; internally, our supply chain management activities, which are fundamental for those programs, for delivery, on quality and on time; and also, probably the fact that we've been able to use those lessons learned in the models to influence other portfolio and pipeline opportunities. So we're trying to stay aligned again in the unique area that we kind of see ourselves in tactical vehicles. Still focused on survivability and mobility as differentiators. So within that platform and our business model and technology integration and system integration on those platforms. So still moving forward on our investments but also developing a pipeline in parallel with that.

That's a great. On margin performance, you -- the improvement that you expected came through in Q3. Were there any noticeable contract mix tailwind or headwind and also any onetime items in the quarter?

No. Lucy, this is Charlie. For the quarter, we had about $5 million of positive adjustments. Part of that was related to strong program performance and part 2 contract closeouts. Over course of the year, we'll have writeups and write-downs, but it was a net $5 million positive on our EAC adjustments.

And was that anticipated as you headed into the quarter?

Yes. That was anticipated.

Got it. And then, maybe if you can talk about any color or early read into next year's margin levers. I believe the AMCOM recompete contract is coming up maybe slightly less favorable, and then you also have perhaps a weaker federal-civilian mix next year. Anything favorable that you can point to?

Well, let me just give a little color about the expectations for fiscal year '19. So as we said before, we expect to exit fiscal year '18, and the adjusted EBITDA margin run rate in the second half of the year is a reasonable baseline by which we would grow margins going forward. And that would include certain headwinds we have from AMCOM type of programs. So growing margins from there, that would be -- as we are completing our FY '19 planning process, we have not completed that. But we expect to grow margins in line with our long-term target of 10 to 20 basis points improvement on that baseline that I just talked about.

Next, we'll hear from Sheila Kahyaoglu.

Just following up on some of the margin commentary. So to confirm, the bookings mix should align with your margins outlook of 10 to 20 basis points a year. Is there any sort of contract mix we should be taking account with the bookings?

Well, I think as we talked about before, we still have the challenges that we had in previous quarter with the cost-plus mix that we're having to endure. So we're pretty pleased with the performance this quarter. And again, the run rate in the second half of the year, we expect that to be the baseline. We expect to be able to increase 10 to 20 basis points based on the portfolio that we have and the bookings that we've had.

Okay. Just on free cash flow, the bridge to -- year-to-date to the guidance of $240 million, so about $100-plus million, $130 million. Can you walk us through what gets there and what the pickup is in Q4?

Yes. It's pretty simple. The pickup is to catch up on the delayed payments from one of our largest contracts that we're -- that I talked about in the script. Once we're able to do that and we believe we're back on track, we do have visibility to the $240 million, and we still believe we'll get there. We -- there is an impact on this restructuring of about $5 million to $10 million of cash impact that will reduce that slightly, but we still anticipate getting to the $240 million, excluding the restructuring.

Okay. And so just the delayed payments, those -- that was about $90 million in total. Am I correct? Or I might be missing it.

No. It was less than that. The -- it's around $40 million, $50 million of delayed payments on the largest contracts.

And we'll hear from Edward Caso.

Can you tell us -- give us a sense on the direct labor growth relative to ODC?

That's pretty consistent, nothing material on a shift. We did have, as far as the overall numbers, a slightly higher materials [carry] than direct labor. But the direct labor itself is holding, slight uptick in the contract startups that we talked about that are contributing to the revenue growth, but it's been a bit of a mix, but nothing significant. But we do get that materials fluctuation at times, as Charlie mentioned on the call and Nazzic as well.

Can you just level set us again on the AMCOM recompete, the 3 pieces, where they are, what's left to be done?

Yes. This is Nazzic. So the Battlefield is the one that I referenced, which is closed out this last quarter, and then virtual was won earlier in the year. And the one that's still outstanding of these 3 pieces is the strategic system that is still going through it's protest cycle.

So is there a date on the 100 days or whatever on the protest that we should be watching for?

Yes. I'm not aware of a date. It's going through -- it's kind of gone through its first phase of that. And so their -- the government is looking at various corrective actions, and there's not a hard date. We're watching it daily as you would anticipate.

Right. Can you give us some...

Go ahead. I'm sorry.

Can you give us your initial sense on what you're seeing out of the tax reform legislation, sort of good news and things you maybe -- less good news?

Well, we're waiting to see what happens. We do see it -- a tax reform as a positive to earnings and cash flow. And also, we'll continue to maintain our capital deployment strategy of returning excess cash to shareholders. So we believe it's good news for SAIC.

Can you talk at all about -- obviously, it'll be a benefit to everybody in the government services space. Sort of the intent of how much you'll return to shareholders and how much you put back into the business maybe to drive growth.

Well, we'll wait and see what the final bill is and determine that at the time. But we're very comfortable with our capital deployment structure, and we have a target of cash we need; excess cash, we'll always return to our shareholders. And that's what we're continuing to do.

We'll go to Tobey Sommer.

What is the incremental revenue in fiscal '19 from AAV as you start delivering LRIP?

The AAV delta, as we think about this year to next year, is in the $60 million to $70 million range, picking up, as we think about the quarters, midyear.

So is that $60 million to $70 million, the fiscal '19 impact or full annualized impact that might not all catch in '19?

That would be an AAV number. The ACV is down, so let's be clear on that as well. So we're down about $35 million or so year-over-year on that. So we're probably in that $30 million net impact from the major programs based on the (inaudible) AAV delivery.

Okay. Is there a reasonable -- from your perspective, reasonable pipeline of opportunities that we've talked about already on this call as well as things that you're looking at that maybe have not been announced or were not in the public eye such that SAIC can viably compete for multiple opportunities each year, perhaps win one, or are these kind of comparable opportunities less frequent than that?

Are you speaking about the broad portfolio in general or the...

Yes. The broad portfolio, not specifically vehicles, but the system integration aspect of your business.

Sure. Well, with the $15 billion submitted or pending award, I think we've been very consistent. As Nazzic said, on the differentiation and the domains, we think we have some strength in based on the past performance. We're still driving, I think, a good balance between the mission-related work (inaudible) like the NASA OMES as well as the broad enterprise IT. We've talked about IT being driven by efficiencies in the cloud as well as the heavy demands on cybersecurity initiatives across government, and (inaudible) that we're well positioned on both sides. Won't speak to any particular program or deal. We do anticipate next year to have a slightly lower recompete profile, so that's good news as we think about our bid strategies and ability to perhaps seek Expand and Grow opportunities a bit more aggressively than (inaudible) Protect. So that's how I'd characterize it. There's nothing substantial that's going to drive it on a pipeline basis.

The one thing I will note...

The investment...

Sorry. The one thing I will note -- this is Nazzic. We do have -- we are looking forward to the announcement of what we call task order 33, which is another AMCOM recompete. It wasn't one of the [TUMS] that we originally talked about earlier in the year, but that -- we're looking forward to that award anytime. And that's about in excess of $100 million a year, so looking forward to that recompete.

Okay. With respect to the incremental investments that you put into the business to support LRIP in -- over the summer and fall, are those kind of investments leverageable on potential future contract wins because they're kind of infrastructure related? Or are they more specifically applicable to the contracts that you're already active in?

This is Nazzic. Most of them are applicable across the portfolio on our platform business. So whether it's technologies, infrastructure, tools, we look to make the investments in those that will support, not only the existing programs, but those programs that are in the pipeline. And we aspire to win in the months and years to come.

Okay. Last question for me on the civil side. Not too long ago, talking about kind of a slower pace of contract awards and business perhaps as agencies were responding to commentary about potential budget cuts in those areas. Can you update us on what you're hearing and what the tenor of business is on the civil side?

Yes. I think we're seeing as the budget bills are being discussed, probably a more positive posture on the Federal/Civilian side, whether it's sustaining the current status quo [is always] favorable, I think, than concerns that existed 6 months ago. So we are starting to see some activity into the dialogue as it pertains to that. But I do think we'll see Fed/Civ maybe slightly improve as, one, the transition on the administration continues, the leadership's in place, we get some stability in the overall government budget. But we don't see the Fed/Civ as the -- much of the bill payers as was once talked about. It's still maybe under some pressure. But the mission alignment, the things that they still need to accomplish, I think has adequate dollars to continue the pipeline development and would expect the awards on Fed/Civ to be about to what we've seen of late but maybe a slight improvement.

And your next question will come from Krishna Sinha.

Just a couple of cleanup questions real quick. Did I hear you in your prepared remarks that you said that FY '19 revenue would be slightly positive? Or was that FY '18?

That was FY '18.

Okay, '18. And then, just to clarify on that margin comment or commentary that you gave earlier. So I mean, earlier this year, you said your adjusted EBITDA margin would be in the 7% range. And so, if you did 7.4% this quarter, that would imply something like 6.9% for the second half. Are you saying that 6.9% is the baseline of which you expect to then grow the 10 to 20 bps that you're expecting in FY '19?

Well, look, just to be clear, we expect to end fiscal year '18 with an adjusted EBITDA margin of 7%. And if you take that and the second half run rate would be a reasonable baseline to which to grow the margins 10 to 20 basis points. That's what we said.

Okay. And then, on your free cash flow, year-to-date, you've done $120 million. And earlier again this year, you said you were going to be $240 million for the full year. You reiterated that target. So that implies you have to do 50% of your full year free cash flow next quarter, which is a little but higher than we've typically seen. So can you just walk us through the moving parts of how you get to that $240 million free cash flow target? I mean, are you getting a milestone payment or something?

No. Like I said, it was the delays in the third quarter on a large contract. Once we're able to clear the delays on those payments, it's around $40 million or $50 million, then we'll be able to catch up for the full year. So we're working that every day. It's an administrative exercise in order to get the billings matched up correctly in the system in order to get paid, and that's what we're looking to do.

And next we'll hear from Jon Raviv.

Charlie, just to nail you down a little bit more on that previous question on margin, just to get a sense -- I mean, your fiscal -- at full year, 7%. I mean, your fiscal second half is more on the 7.3%, 7.4% range, maybe 7.2%, let's call it. So 10 to 20 basis points off of that, is that what we should be thinking about?

Yes. Let's call it 7.2%, and let's say 10 to 20 bps off of that.

Okay. Great. And then, just -- I think, one of the concerns heading into next year is really that AMCOM recompete flipping from FP -- sorry, from fixed price to -- or from T&M, excuse me, to cost-plus. Can you talk about some of the margin mechanics around that switch, how much pressure you expect there, if any?

It's a modest amount. As we've looked at the conversion of a labor mix, the materials mix, the fee structures shifted slightly between labor and subcontractors. So I think we're successful in continuing to negotiate positions that actually mitigate the contract conversions from fixed price, T&M to cost reimbursable, perhaps more so and more favorably than we thought going into the bid process. So we think more optimistic of closing that gap as we go into '19 as that converts.

Okay. And then -- so if you have low single-digits sales growth in FY '19 and margin expansion in FY '19, which seems to be pretty good on a year-on-year basis, is there any reason that free cash flow cannot grow with net income in FY '19?

Well -- yes, it should grow with earnings as we've said before. So an increase in earnings would increase the free cash flow. We're in the planning process, however, right now for fiscal year '19. And the planning process includes how we use the capital, including on platform integration. So I have to give you a better answer at the end of next quarter and an update on that.

Okay. Fair enough. And then, just to clarify this year's target of $240 million. It's $240 million but less some part of the restructuring, so that implies low 230s this year. Is the rest of that restructuring going to come out of next year's number? Or just what are some of the big moving pieces from this year into next year that you're thinking about?

The restructuring piece, the $13 million total restructuring, about half of that relates to the severance payouts and associated to that. The other part of the restructuring is more reserved type of issues related to real estate, closing real estate, so that's over a longer term, not just over next year, but 4- to 5-year term.

(Operator Instructions) We'll go to Brian Ruttenbur.

Two questions. First of all, the rebids. Can you just run down through the big ones? In '19, that was AMCOM 33. Just list them off and the size. And then number two, give me -- I'm giving you a macro. Tell me about timing of the CR sequestration. How far are they going to kick the CR down the road this time? And when do you expect passage?

So this is Nazzic. Just -- I'll comment on a couple of the major recompetes. So I touched on the AMCOM task order 33 that we're awaiting as we sit here today. And then, next year, the 2 big ones would be the Next Generation SeaPort, which is an IDIQ, multi-award IDIQ; and the recompete with some additional work of our Global Tires Program. So those are the 2 largest that we've got our eyes on going into next year, and I guess...

And can you give me sizes of those?

Well, the SeaPort is a multi-award IDIQ, so it's several billion dollars. $200 [billion.]

But can you tell me how much revenue you're generating now off that?

Yes. We do about $200 million a year on that today.

Okay. And then, the other one was what?

The other one is the Global Tires Program, and that's about $100 million -- between $100 million and $150 million a year on that one for us.

Perfect. And the CR question.

Yes. The CR sequestration -- this is Tony. We're seeing the House taking action today. We'll probably get the 2-week extension that people have been talking about. There's still a lot of conversation around short term, long term. It took the defense [bill's] emphasis to get that through. Some questions on the rest of the bills. On the funding side, perhaps we'll likely see another short-term CR. A lot depends on negotiations. There's a lot of emphasis to also address the broader [Budget] Control Act constraints as well as the last deal had expired. So I think there were a lot of discussions, trying to converge (inaudible) short-term CRs. Defense bill perhaps clearing first, and then we'll just have to see how the rest of the politics play out and what gets bundled for the rest of the budgets, and hopefully not a long-term CR. From our personal impact on the contract side, there's really little exposure on the CR. We've been through this process, unfortunately, many times. But we don't have a lot of exposure under the CRs. Our biggest impact would be on things like the ACV award. But being on the defense side, that's probably not at risk from a decision perspective. That's what we're kind of seeing playing out on the hill.

Okay. So you said it's going to be kicked down the road likely 2 weeks and then, possibly kicked down the road until mid-January. Or do you anticipate a passage by calendar year-end?

I'm guessing we got -- the 2 weeks is most likely. I think the House passed it today. I don't think we'll see a government shutdown, although the rhetoric is pretty high, but don't quote me on that. Who knows how this year's politics will, in fact, unfold. But I would expect that some portion of a smaller, shorter-term CR, if you assume they won't get everything done by the 22nd of December. But we hope that, that would get extent of it. And perhaps that would go again 2 to 4 weeks into January for our Congress to reengage, but that would be my best guess on a short term. And then, I think the window's wide open on whether or not they'll be able to cover the year or not, but we hope that they'll clear the bills collectively in January time frame.

We'll take a follow-up from

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I didn't hear. Is that -- am I online now? So just want to talk about your forward dynamics a little bit. Obviously, you guys sound confident in your -- reiterating your targets for low single-digit growth. But given all the drivers you've just talked about in terms of all the AMCOM pieces, AAV, ACV, what you're expecting from Fed/Civil, can you just talk about what you -- what would move you towards the higher end of that low single-digit guidance as opposed to the lower end? And kind of what your bookings that you've just -- your strong bookings in the last 2 or 3 quarters, how that's going to affect sort of your next 12 months' or 18 months' worth of revenue growth?

Sure. We still think we'll be in the low single digit. The strength of the recent book-to-bills are probably impacting 2 things. It's reducing our revenue risk profile because of the high volume of large recompetes, so that's a very strong position to be in. We're seeing some of the incremental expanding growth opportunities contribute in a modest way as we go forward on those transitions. We've also messaged that the recompetes are a bit more at a run rate at a steady state than having to fill gaps by lower volume on those contracts, and then I think we're going to see that low single-digit growth. But I think the trade of the portfolio and the offsets will not move us beyond that, unless there is a significant change in award activity across the industry that we haven't seen to date. So we've seen a modest improvement over the last 12 months across the sector. I think that's going to be the new steady state, and I would not expect it to move much beyond that low single digits. But I think that's a very positive place to be. And our ability to convert that to earnings and then distribute that, I think, sustains our long-term targets and the value proposition that we have out there.

Assuming that the Defense budget and the civil -- Fed/Civil budget, in aggregate, grow sort of 1% to 2%, which is I think what the sort of peer consensus is at this point. Your low single-digit growth could imply that you grow in line with the budgets or maybe slightly above. Can you just talk about how you see yourself in that dynamic? Like are you taking a little bit of market share here, and therefore you're going to grow a little bit better than the end market? Or you're going to -- you think you just -- for the medium term, you'll be just basically in line with the end market?

I think we're generally in line and slightly above the market. I think evidenced by the last 4 years of performance, we were successful in retaining our revenue profile, I think, through the Expand and Grow efforts as other peers perhaps contracted over that period of time. So I do think we are successful and the quality of our bids in the form of either new starts but -- against takeaways in our Expand and Grow, expanding the scope and sell-through of our IDIQs. So I think we're well positioned to continue on that path, and we should outperform slightly the market. So again, low single digit but probably at that -- above the 1% to 2% as we think about this quarter's performance and the strong book-to-bills with a foundation of a very strong recompete baseline that we just secured.

And we'll go to Jon Raviv.

Can you just clarify on some of the free cash flow trends in FY '19, including the discussion you'll be having with the board about cash deployment or investments next year? What's the menu of options you're discussing with the board? I think you mentioned vehicle integration. What sort of investments would that mean?

Well, the capital deployment strategy is pretty clear. We have the dividend payments, of which we make about $55 million a year. We have the loan debt repayment of $25 million a year. What remains is options are share repurchase and strategic M&A, should it arise. The amount of working capital that we're talking about, apart from integration, is not going to be that significant. It hasn't been in the last 2, 3 years. The model is set up that it is not a very capital-intensive model, so we don't see that changing it. I just didn't want to give you an exact type of number about fiscal year '19 free cash flow at this point in time, but I'll be happy to when we meet in next quarter.

All right. Looking forward to it. And then, you brought it up, Charlie, just on M&A appetite. What are you seeing out there in the market right now? I think, you guys have previously talked about health and intel as an interesting areas. Just give a sense of what you think is available, what pricing looks like, what side of the equation you think you're going to be on?

Jon, this is Tony. Yes, the market access is still the principal filter as we think about areas that we're undeserving. Even today, public health sector, different intelligence agencies, the Air Force and some of the space domains on the market access side. Always interested in new capabilities, on data analytics, in training and simulation and cybersecurity. But at the same time, some of the multiples are pretty high on some of the capability sets on the smaller properties. We probably looked at something that's in a midrange on a size basis, so it's material and fills up those portfolios with a reasonable, modest scale within that segment. But very unchanged, watching the market. There's a lot of activity and a lot of planning, but we're watching it. But again, we're very comfortable with the organic story that we have, the investments that we're making. And I think Q3 is evidence of, we -- can we keep that going and complement organic play with M&A periodically on a strategic basis.

And what kind of filters are you using for determining if M&A fits or doesn't fit? Is it purely strategic? But do you have any kind of time line around your cash-on-cash returns, accretion? Also kind of some of that -- in line with that questioning, what kind of size are you thinking about? I mean, another (inaudible) or type thing? Or are you happy to do a more string of smaller acquisitions?

We'd probably shy away from the string of smallers. It's a little challenging. I don't think we're set up or interested in those profiles. There's challenges with some of the smaller companies, both in compliance, maturity, ownership. So again, probably in that midrange, so I'd say we'd shy away from small business. One of the key filters is prime contract market access. It is not small business. So full and open portfolios are much more attractive because we've seen how the small business portfolios convert on a negative basis fairly quickly. So scale, probably defined by full and open portfolios, companies that are a little more mature in that process, because then we can sustain that as a prime. Sometimes IDIQ; sometimes it's contracting, accretion contracts. But that's the essence of it. The financial measures, Charlie and the team are pretty traditional and fundamental. On an accretion basis, so we think about the cash and the margins and all that.

And ladies and gentlemen, that does conclude today's question-and-answer portion. At this time, I would like to turn the call back over to Shane Canestra for any additional or concluding remarks.

Thank you very much for your participation in SAIC's Third Quarter Fiscal Year 2018 Earnings Call. This concludes the call, and we thank you for your continued interest in SAIC.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.