Science Applications International Corp (SAIC) 2019 Q4 法說會逐字稿

Good day, and welcome to the SAIC Fiscal Year 2019 Q4 and Year-end Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice President, Investor Relations.

Please go ahead, sir.

Good afternoon.

My name is Shane Canestra, SAIC's Vice President of Investor Relations, and thank you for joining our fourth quarter and full fiscal year 2019 earnings call.

Joining me today to discuss our business and financial results are Tony Moraco, SAIC's Chief Executive Officer; Nazzic Keene, SAIC's Chief Executive Officer-Elect; 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'll also find supplemental financial presentation slides to be utilized in conjunction with today's call.

Both of these documents, in addition to our Form 10-K to be filed soon, should be utilized in evaluating our results and outlook, along with information provided on today's call.

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

I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, the statements represent our views as of today, and subsequent events may cause our views to change.

We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.

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

Thank you, Shane, and good afternoon.

Before I provide a few highlights of the fourth quarter and full fiscal year 2019 results, I would like to take a moment to publicly welcome the approximately 7,500 Engility employees to the SAIC family as a result of our acquisition of Engility in mid-January.

The management team has taken the opportunity to visit many sites recently to welcome Engility employees to SAIC, provide all of our employees with an updated overview of the company and discuss our long-term strategy, Ingenuity 2025.

Response from employees have been very positive.

SAIC's full year results reflect our strongest financial performance in 5 years and we are better positioned than ever to accelerate our strategy to deliver sustained profitable growth.

Nazzic and Charlie will provide details on the operational and financial results, demonstrating our strong performance while managing the business through a partial government shutdown and executing the acquisition of Engility.

With a strong end to fiscal 2019 and continued confidence in the combined company's outlook, SAIC restarted its share repurchase program immediately following the close of Engility.

Our Board of Directors has also significantly increased our quarterly dividend based on the financial strength of the business and our increased cash generation profile.

Turning to the market environment.

We now have full federal government fiscal year 2019 budget appropriations.

We continued to operate in a favorable environment, with customers performing their missions, with increased funding levels compared to past years.

While the President and Congress work on government fiscal year 2020 budgets and the recently issued request reflects potential funding shifts, SAIC's balanced and diversified portfolio provides strong market access to maintain stability should shifts in the individual agency funding profiles occur.

Our customers are investing confidently in our operations and in areas that SAIC has strategically positioned itself, such as IT modernization, cybersecurity, intelligence, space systems, data analytics and training and readiness.

The Engility acquisition strengthened our competitive stance in many areas, but most significantly in the space domain, a rapidly evolving market with increased government investment.

With this backdrop of a favorable budget environment and SAIC's stronger competitive position, I announce my decision to retire as Chief Executive Officer effective July 31 of this year, and the board has elected Nazzic to succeed me.

I'm extremely proud of what SAIC has accomplished over the past 5.5 years and I'm excited about what the future holds.

Having worked alongside Nazzic for several years, I have the utmost confidence in her ability to accelerate SAIC's mission-focused strategy and continue to deliver outstanding value for our customers, employees and shareholders.

Nazzic, over to you for a discussion of our business operations.

Thank you, Tony.

I am extremely humbled and honored by Tony and the board's confidence to lead this great company.

I'm excited about the opportunities for even greater success as we realize our newly strengthened scale and breadth of capabilities.

With our exceptional leadership team and a deep bench of talent, SAIC is well positioned to be the federal government's premier technology integrator, lead the markets we choose to serve and make a meaningful difference for all our stakeholders.

While I am incredibly pleased and excited to take the helm, I'm also somewhat saddened that I will no longer be working day-to-day with Tony as he has been a great mentor and friend.

Over the next few months, Tony and I will work together for an effective and seamless transition of CEO responsibilities.

Our partnership and collaboration is best exemplified in our long-term strategy, Ingenuity 2025, and the 4 enduring key messages provided at our January Investor Day.

These are core to the strategy and underpin our approach to shareholder value creation.

First, SAIC is repositioned as a stronger government technology integrator, poised to capitalize on favorable market dynamics and accelerate our growth.

Second, with additional market access and technical talent, we have increased our capacity and leadership position in market segments in which we operate.

Third, we are confident in our strategy to drive growth based on current contracts and growth opportunities that are aligned with areas of strategic national importance.

And last, SAIC's significant increase in cash flow and disciplined capital deployment creates value for our shareholders.

These 4 strategic themes will drive our ability to deliver value to all our stakeholders going forward.

Now moving on to results for the quarter.

Contract award activity in the fourth quarter led to net bookings of $917 million, but does not include approximately $2 billion of single-award IDIQ contract ceiling value.

Fourth quarter net bookings were comprised of a wide variety of contract awards and contract modifications, including a recompete award of a classified contract valued in excess of $230 million to provide systems engineering and integration, leveraging our extensive capabilities and solutions in digital engineering.

SAIC was also awarded several notable IDIQ contracts during the quarter to ensure continuation of existing revenues and provide for revenue growth through expanded scope or new business opportunities, of note, our 2 single-award IDIQ contracts that derisk the revenue profile through recompete awards and provides increased confidence in our ability to accelerate growth through new task orders.

First, SAIC was successful in a recompete award of our Defense Logistics Agency's tires program in our supply chain portfolio.

Under the single-award IDIQ contract, valued up to $1.7 billion over 10 years, SAIC will continue to act as lead supply chain manager and integrator for DLA's tire delivery program.

I should also note that this award provides expanded scope to support the U.S. Navy, previously not supported on the predecessor contract.

Second, the U.S. Air Force Space and Missile Command awarded SAIC, through our recent acquisition of Engility, a $655 million single-award IDIQ contract to provide systems engineering, planning and integration services.

This new business win is a great proof point of our thesis in acquiring Engility and expanding our presence in the space and Intelligence Community.

Now this award was subsequently protested by a competitor, and we expect resolution in the June time frame.

Additionally, multiple-award IDIQ contracts are also important to our business as they often provide flexibility for a broad range of customers to obtain SAIC capabilities.

In the recompete category, we were successful in retaining our prime position on the U.S. Navy SeaPort Next Generation IDIQ contract, the follow-on contract to the successful SeaPort-e contract.

SAIC is the Navy's leading provider of high-end engineering and other technical services on SeaPort-e.

And finally, SAIC was awarded the prime position on the Information Technology Enterprise Solutions - 3 Services, or ITES-3S, contract to provide the full range of IT services and solutions to the federal government.

At the end of the fourth quarter, SAIC's total contract backlog stood at approximately $14 billion, with funded contract backlog of $3 billion.

The estimated value of SAIC's submitted proposals awaiting award at the end of the fourth quarter was approximately $13 billion, principally impacted in a positive manner by the award of several IDIQ contracts I just mentioned.

With an improving market outlook and 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 utilize a disciplined approach to our investment spend as we pursue a strong pipeline of business opportunities.

Now before turning the call over to Charlie, I'd like to give you a brief update on the integration of the Engility acquisition.

I'm very pleased to report that the integration of Engility is on schedule and on budget.

As we anticipated at our January Investor Day, we successfully achieved 85% of the year 1 cost synergies of $38 million upon close on January 14.

The remainder of our synergy targets have been identified and are well on track.

As a result, we have accelerated the majority of the year 1 cost to achieve into the fourth quarter of fiscal 2019, providing even more confidence in the margin improvement in fiscal year '20.

I will update you as we progress through the year, but I'm very pleased with our progress to date.

Charlie, over to you for our financial results.

Thank you, Nazzic, and good afternoon, everyone.

During my remarks, I will primarily focus on SAIC's fourth quarter performance, with references to full year results in specific areas.

Our fourth quarter revenues of approximately $1.2 billion reflect growth of 6% as compared to the fourth quarter of last fiscal year, primarily due to revenues associated with the Engility acquisition and new contracts supporting IT modernization.

Excluding the impact of the 3 weeks of the Engility acquisition and the impact of 6 weeks of partial government shutdown, fourth quarter revenues contracted year-over-year by 2%, driven by nonrecurring increased supply chain materials last year and lower fixed price vehicle production volume in our platform integration business.

Full fiscal year 2019 revenue growth, excluding revenues from acquisition and the impact of the government shutdown, was approximately 3%.

Fourth quarter adjusted EBITDA was $95 million, a $12 million increase from the prior year.

Adjusted EBITDA margin equated to 8% after adjusting for $72 million of acquisition and integration costs.

Fourth quarter margin performance was strong due to program performance and continued cost discipline.

For the full fiscal year, adjusted EBITDA margin was 7.6%, 60 basis points above our prior fiscal year and higher than our communicated expectation of 20 to 40 basis points due to the very strong fourth quarter.

The 3 weeks of Engility acquisition contributed approximately 10 basis points to the full year margin.

Full year acquisition and integration costs were $86 million, in line with SAIC acquisition and integration costs of $54 million and approximately $32 million related to Engility.

Because of our successful day 1 execution of our integration plan in the fourth quarter of fiscal year '19, we are essentially ahead of schedule in the spending needed to obtain our net cost synergy target of $75 million.

We continue to expect $38 million of integration costs in fiscal 2020, at which point we will be mostly done with integration costs this year.

The significance of this relates to fiscal 2021 cash flow, which is expected to be about $30 million higher than previously planned due to this acceleration.

Net income for the fourth quarter was a negative $9 million, and diluted earnings per share was a negative $0.20 for the quarter, inclusive of the fourth quarter acquisition and integration costs of $72 million.

Excluding acquisition and integration costs as well as amortization of intangibles, our adjusted diluted earnings per share was $1.17.

Onetime favorable tax treatment from the Engility acquisition contributed about $0.17 to EPS.

Our full year effective tax rate was approximately 19%, lower than our previous expectation of 20% to 22% due to the mentioned onetime Engility acquisition impact.

Turning to free cash flow generation.

I am pleased to report that SAIC, as a standalone, achieved our previously communicated expectation of $250 million of free cash flow after adjusting for the impact of the acquisition and integration costs and the impact of partial government shutdown.

The shutdown negatively impacted cash collections at the end of the fiscal year '19 by $25 million and deferred their collections into fiscal '20.

We ended the fourth quarter with days sales outstanding of 58 days, an improvement of 1 day from the end of the third quarter.

The fiscal year ended with a cash balance of $237 million, slightly above our updated average operating cash balance target of $200 million.

We begin fiscal year 2020 with a strong cash balance to continue our consistent capital allocation strategy.

Immediately following the close of the Engility acquisition, SAIC resumed its share repurchase program and over the 13 trading days until the end of the quarter, deployed $8 million of capital by repurchasing 119,000 shares.

The resumption of the share repurchase program so quickly after the close of a significant acquisition demonstrates our confidence in the cash generation profile of the combined company and our desire to return excess capital to shareholders.

Included in our press release today, we have announced that our Board of Directors has increased their share repurchase authorization program to 16.4 million shares, an increase of 4.6 million shares, bringing the total amount remaining for repurchase to 6.5 million shares, giving us even greater capacity to return capital to shareholders.

In addition, we also announced today that our Board of Directors has approved an increase to SAIC's quarterly dividend, from $0.31 a share, to $0.37 a share, a significant increase of approximately 20%.

This is another demonstration of the confidence in the acquisition, the long-term sustainable cash generation profile of the combined companies and our desire to return excess capital to shareholders following a successful acquisition.

This increased dividend will be payable on April 26 to shareholders of record on April 12.

Turning to the balance sheet.

Debt at the end of the fiscal year stood at approximately $2.1 billion.

This increase reflects the approximate $1.1 billion term loan A incremental borrowing necessary to close the acquisition of Engility to fund the transaction and integration expenses and for general corporate purposes during the partial government shutdown.

After the end of the fourth quarter, with closing complete and normal customer payments resumed, we voluntarily repaid debt of approximately $150 million with our excess cash, bringing our debt today to approximately $1.9 billion.

We anticipate that our year-end leverage will be consistent with the leverage profile presented at our January Investor Day.

I should note, this voluntary repayment does not impact our previously communicated expectation of deployable cash in fiscal '20 or our capital deployment strategy.

We remain very confident in our forecast of deployable cash available for disciplined capital allocation for the next several years.

Now turning to our forward outlook for fiscal year 2020.

At our January 7 Investor Day, we communicated our financial expectations for fiscal year 2020.

In a change from our historical practice, I presented ranges for revenue, adjusted EBITDA margin and free cash flow generation target as we believe that it was prudent to provide quantifiable expectations in light of a significant acquisition.

Our expectations are unchanged for the revenue and adjusted EBITDA margin presented then.

In terms of an adjusted EBITDA margin profile through fiscal year 2020, we believe that margins will be lower in the first half and stronger in the second half, consistent with our recent history.

Our free cash flow target for fiscal year '20 is now increased from $400 million to $425 million, reflecting the $25 million of deferred customer payments in fiscal '20 as a result of the partial government shutdown.

Our full year effective tax rate is expected to be 20% to 25%.

The tax assets acquired through the Engility acquisition and the acceleration of their use result in an expected cash tax rate of 13% to 15%.

SAIC finished fiscal year 2019 with great momentum, and we are off to a strong start in fiscal 2020.

I have confidence in meeting the short- and long-term outlook that I provided at our Investor Day, and I'm excited about the opportunities for shareholder value creation that lie before us.

Tony, back to you for concluding remarks.

Thanks, Charlie.

I would like to announce that our Annual Shareholder Meeting will take place on June 5. Similar to last year, we will be conducting a virtual shareholder meeting, whereby shareholders will participate online.

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

I'm very excited for what lies ahead for the company.

The combination of a favorable market environment, a newly positioned company and the value-creation opportunity that we have creates good timing for a leadership transition.

I have every confidence in Nazzic and the leadership team to accelerate the execution of SAIC's strategy and guide SAIC into the next chapter of delivering outstanding value for our customers, employees and shareholders.

Operator, we are now ready to take your questions.

(Operator Instructions) We'll go first to Edward Caso with Wells Fargo.

Tony, a great run here.

Enjoy the fishing.

Maybe a more macro question.

How difficult is it for you to get the people that you need?

How sensitive are you to the greater D.C. market?

And how much of a headwind would that be to meeting your goals in 2020?

Well, let me start.

I think that the talent base obviously is critical to our business, both retention and attracting.

We have looked across the U.S. really to diversify the geographic component.

We've mentioned in the past that our customers see that same talent challenge and so are more open to a, I would say, a virtual workforce, so with our Tennessee Tech relationship and the gateway in Cookeville, as one example.

There's a couple others.

But top of mind for us is to really draw that talent in.

Mission, I think, still is a critical factor as well as the culture of the company.

I think our added scale provides a lot of career opportunities for folks to actually join -- to join us.

But it has its challenges, and we're just going to continue to try to differentiate.

Nazzic's been focused on that same thing going forward and it's important to the enterprise, but I think we can draw the talent in, retain the ones we need, and that will drive the growth of the business going forward.

My other question is on the awards and the backlog.

Can you dissect them between the Engility and legacy SAIC, particularly the backlog numbers?

Not really on the backlog, drilling on the trend to dissect that, if you will.

I think we've got a strong integrated backlog.

It's consistent with our diligence analysis to date.

We started the year, I think, with a very strong backlog, consistent with what we've had in the past, translated for the scale.

And so I think we're very proud of how we're seeing the current pipeline and contract baseline come together as an enterprise, and then we'll see how it plays out.

But the backlog's in a pretty strong position going forward.

I don't want to dissect that.

Shane?

Hey, Ed.

This is Shane Canestra.

I just thought I'd add that the Engility contribution to backlog was $3.6 billion in the quarter.

You'll see that in our 10-K, I believe, filed here shortly.

But the contribution, just adding to backlog, was $3.6 billion.

And we'll go next to Tobey Sommer with SunTrust.

I was wondering if you could talk to us a little bit more about something you mentioned at the Investor Day at the beginning of the year about how you had gone to great lengths to, while complying with all rules, get ready to make joint bids as soon as possible.

And could you describe that process and how you think that's gone as you think about trying to queue up sales and backlog in the coming quarters?

Yes, this is Nazzic.

So I'll certainly build on a little bit of what we shared in January.

So as anticipated, we were able to really hit the ground running upon close.

We had done some work prior to close using a third party to kind of protect the confidentiality pre close of the pipeline.

And so as a result of that, we had great visibility when we were able to close the transaction into what was in the pipeline, where it was complementary, where there might have been some duplicative overlap.

So we were able to very quickly come out of the shute, navigate that and then make quick decisions with that data versus having to start from scratch.

And as a result of that and as a result of the work we had done in integration and really standing up the organization so we were ready to go on day 1, the sales organization, the business development team, the capture teams were able to really focus on going to market versus trying to go through and navigate the pipeline analysis.

So it proved to be true.

We were in a good position and we are in the markets, as we sit today, pursuing opportunities consistent with our strategy.

How meaningful does rolling the Air Force with the tires program, what does that mean in terms of incremental opportunity there?

Well, the -- so the tires program is -- has partial recompete and then also has some of the uplift for the Navy portfolio.

And certainly, we'll -- that's reflecting as we go.

It's about a 15% to 20% uplift from some of the legacy programs.

So that will drive some revenue growth for us as well.

I believe that you're referring to the Air Force EDIS program.

Is that the one you're referring to?

Thank you.

Yes.

So that is one, as mentioned, that we were awarded not too long ago.

It is under protest at this point, and the protest should get resolved within the 100 -- the normal 100-day time frame.

But that is new business for us, and so that will drive new revenues once that's adjudicated.

And we'll go next to Cai von Rumohr with Cowen and Company.

Maybe sort of update us on what percent of your revenues this year are up for recompete.

Give us some color.

You kind of exited the year with a government shutdown and so some color of the booking -- book-to-bill cadence as we go through the year and maybe where you think the range of where book-to-bill might be.

Hi, this is Nazzic.

So I think to the first question, just to give some color on the book-to-bill.

So we ended the year really right around where we usually end the year, so it tends to be one of our softer quarters due to the holidays and how everything falls.

And so we didn't see it to be anything of concern there.

We did have a little bit of a headwind with the government shutdown, so there was some impact.

It's a bit hard to measure, but we've seen a little bit of the uptick.

A couple other things that I'll point out as it relates to our book-to-bill, and I know we've had this conversation before.

We had well in excess of $4 billion of single-award IDIQs awarded last year for us as well, and we don't tend to count those against our book-to-bill.

But that is in excess of double of what we have seen in the years past.

And so that gives us revenue access, profitability access and drives -- derisks the revenue profile going forward.

And I think you have one more, and I'm trying to remember.

The recompete.

Oh, the recompete.

Thank you very much.

Yes, so going into this year, we're holding it around 13% of our business is subject to recompete.

So again, relatively light for us, which allows us to focus greater attention, greater investments in the growth opportunities for us going forward.

Did I get all your questions?

You did.

That's terrific Q&A.

So I'll just switch to the margins.

Sort of you spent more on acquisition and integration.

You got that out of the way sooner.

Does that give us any opportunity that your adjusted EBITDA margins might be above the 8.1% to 8.4% range you've kind of laid out for fiscal '20?

Cai, hey, this is Charlie.

So it really does not impact the adjusted EBITDA because we're always adjusting out the integration cost to achieve end of years.

An unadjusted EBITDA number it would impact.

I think the more significant impact though is on the free cash flow.

I think you had asked me in the past, we laid out at the Investor Day this 3-year target starting at $400 million, going up to $500 million, with a sequence of $400 million to $450 million to $500 million, something like that.

So now we would expect that to be actually $425 million in the first year, $480 million in the second year and $500 million in the third year just because we have the cash outflows for the cost to achieve earlier than expected.

So that's the really significant impact from the integration standpoint.

And we'll go next to Jon Raviv with Citi.

And congratulations to Tony and Nazzic.

Nazzic, can you talk -- I think everyone always asks this question when a change is announced.

But can you talk a little bit about what your goals are?

It sounds like there might be a lot that stays the same given that you had a long partnership with Tony here.

But also, what changes in your mind?

Yes.

So thanks for the question.

And I think the -- to your point, the reality is that Tony and I have been partners for the last several years and have put forth the strategy that's shaped the company and got us to where we are.

And so with that, my objective is to keep all the goodness that we have to date, keep that momentum.

But with the onboarding and the acquisition of Engility and the repositioning it gives us in the market, we certainly look to accelerate in a few areas and build upon that.

As I look forward, the priorities are certainly consistent with prior ones, that areas of which we'll continue to put maybe a little more focus.

So Tony touched briefly on the talent equation.

And so we want to continue to really work and be that career choice for the top talent in the industry across the nation, continue our journey to become and maintain this position of a premier technology integrator and solutions-oriented organization, providing solutions to our customers as well, continue and accelerate our ability to bring the best commercial technologies to bear and given our greater access to the areas of space, as an example, we have even greater opportunity to do that, and then look to balance all that and continue to drive shareholder value and consistent with what we've done in the years past, but again, at a bigger scale, a bigger organization, more access to cash and the cash flow that Charlie touches on, we have a greater platform to build on that.

So I think it's certainly a combination of keeping the goodness that got us to where we are under Tony's leadership and accelerating where we have the opportunity based on our newly strengthened company.

Got it.

And then on the -- and Charlie, you mentioned some of those free -- reminder of the free cash flow targets which we know, all know so well from the Investor Day.

At the same time, Charlie, Nazzic, Tony, you do sound quite confident in the prospect for accelerating growth.

But can you just remind us of what growth is assumed in those targets and what the opportunity is for a little bit of upside in those targets beyond the changes in the spending of cost to achieve, just the real organic upside based on things like the DLA contract being bigger than you anticipated, et cetera, et cetera?

When we spoke at the Investor Day and we outlined the 3-year target, we really had low single-digit revenue growth.

A 3% CAGR, I think, was what we were projecting as far as top line growth goes.

And then we gave quantifiable ranges for 2020 on revenue and on the margins.

And one of the significance of the outlook is that it really comes out that now we're saying that this guidance that we gave is consistent and this comes after a very detailed and fully integrated annual operating plan process.

At the Investor Day, we didn't have this.

We hadn't closed, and were not able to work closely with both teams to come up with this fully integrated plan.

So I'm very pleased that the outlook is consistent 2.5 months later, gives us greater confidence.

We've acted on that confidence.

We've increased the dividend, looking to put other returns and shareholder capital in place as well as meeting our financial commitments.

So we're much more confident in that after going through that planning process than we were 2.5 months ago.

The other couple of points that I'll just make is we talked about the $13 billion of proposals submitted awaiting awards.

The good news is about half of that is new business, and so we've got good visibility and good opportunity to drive growth through new business submits and then just reinforce that one of the great values in the Engility acquisition is now the combined companies have access to a broader customer base and being able to bring solutions to bear.

So we are really focused on the revenue synergy story, ensuring that we bring the best of SAIC solutions to the Engility customers, vice versa.

And so driving that revenue synergy discipline over the course of the next several months will also give us some opportunities to drive growth.

And also on that, Jon, back to Ed's question on the talent.

Given again the reposition with the higher cleared workforce really allows us with the -- based on talking to customers about proving your ability to execute and manage the risk, we've got a broader base of technology experts, a broader base of those that are cleared.

I think that will facilitate additional growth in the cross-sell of SAIC capabilities into legacy Engility channels.

So I think just the broader people dimension and our presence with a broader set of customers always facilitate opportunities for further growth as we go to market together.

And we'll go next to Sheila Kahyaoglu with Jefferies.

Congratulations, Tony, on your retirement and Nazzic, on your promotion.

I guess just on the last point, what are you finding is the biggest advantage going to market as a combined organization?

Is it the cleared workforce?

Is it a growing pipeline due to the connection?

How do we think about that?

Yes.

I think it's all of those things.

So certainly, Tony touched on the workforce.

And the cleared workforce is simply important to our business and so having greater capacity there.

And then also the greater the capacity, the more you get employee referrals, the more access to the broader talent base in particular areas.

So I'd certainly think that is one.

I touched on the other, and that is although we're very complementary companies, the access that the Engility portfolio brought to the Intel Community complemented the access that we had in intel.

So we broadened the portfolio of customers that we can go in and serve.

And I think that will drive growth.

And then coming together, the 2 organizations, in particular, the space domain, which is an area that is getting certainly a tremendous amount of national attention as a national priority and will drive incremental funding over the months and years to come, gives us a terrific position as a leader in that domain to drive growth opportunities and serve our country.

So those are just some examples that we're very confident that we did a very, I think, a very good job of getting the integration planned well, so that when we closed in January, we were up in the market and we were out pursuing business and serving our customers.

So I think those are some of the proof points that certainly come to mind.

Yes.

And Sheila, I'd add that with kind of the scale and yet focus on the capability set, we've really increased our critical mass and well aligned to what we see is ongoing customer demand in the data analytics.

That leads to the machine learning, then in artificial intelligence type of markets.

Our activities in cloud and cyber continue the broad enterprise, that key modernization that is compelling across the government.

And then the training and simulation components, I think those domains provide focus for us on investments that will increase both our increased, I think, capacity on the people side as well as on technology and tools with our partners.

And I think that puts us in a differentiated position as we look to grow going forward.

Sure.

And then, Charlie, one for you, and we've touched upon this already.

But 60 days, 2.5 months into this, you're already raising the $400 million guide for free cash flow.

How do you kind of think about the biggest risks?

I mean, the top line doesn't seem like a risk, neither do the margins.

Where are you maybe with working capital?

How do we think about that?

Are the ERP systems integrated?

Are there any major CapEx assumptions in there?

And maybe if you could just talk about the biggest risks once you get into that, given you're raising so early.

Yes, well, always the biggest risk we have on the cash flow is just timing type of issues of -- in the past, certainly, we're focused on the cash generation, we're focused on the DSOs.

Our DSO reported were 58 days.

We're looking to improve in that and improve in the cash flow target.

So again, we went through a very, very detailed review and process with the fully integrated team.

So I'm very confident that we'll be able to meet and exceed the $425 million of free cash flow and with the longer-term targets that we talked about.

And I think the reason that we look to increase the dividend and look to have more capacity for the share repurchase is because of this confidence that we see in the free cash flow and the generation and the combination of the companies and how we can -- as I mentioned in the past, we have optionality of about $300 million of free cash flow in 2020 that we needed to decide what to do with.

So part of that was to increase the dividend and give us more capacity for share repurchase if we chose to do that.

So...

(Operator Instructions) And we'll go next to Krishna Sinha with Vertical Research Partners.

Maybe one for Charlie.

So I'm just looking at your cash flow guidance.

You guided to, for fiscal year '19, you guided to $200 million of free cash flow, excluding the $50 million of acquisition and integration costs.

And you ended up at $156 million.

You already explained that $25 million of that shortfall is from the shutdown, which you're going to recover in fiscal year '20, and that's why the new guidance is $425 million.

But you also said that you pulled forward some integration costs.

So shouldn't then the free cash flow for fiscal year '20 be even higher than $425 million?

Shouldn't it be $450 million or more?

Can you just explain where that sort of $25 million of free cash flow went in between the fiscal year '19 and fiscal year '20 guidance?

Yes.

So let me just clarify.

Let me go from the reported numbers of free cash flow, the $156 million.

So we had cash outflows related to the acquisition and integration, part of which was pulled forward of $70 million, and the government shutdown was $25 million.

So this is how we got back to the $250 million of free cash flow.

That's the basis -- that was the baseline.

And then from there, it was a combination of how you get to $400 million, was the amount of the Engility free cash flow contribution.

The lower interest savings and the lower tax cash savings is how you got to the $400 million.

So that's all consistent.

The one component we've added was the $25 million to get you to $425 million.

We still have, in fiscal year 2020, we still have $38 million of cost outflow -- cash outflow in the cost to achieve, the synergy, so that's why it's not higher, yes, which is being pulled in from 2021, right, from...

Okay.

But the original outlook, I think, for fiscal year '20 was also $38 million of integration, right?

So really, fiscal year '21, we'll see less integration than what you'd expected.

Is that fair?

Exactly right, yes.

That's why I mentioned that that's where you'll see the cash flow impact in 2021, right?

That's right.

Okay.

But I guess, just going back to that integration pull forward, you said roughly $50 million was the initial expectation for that in fiscal year '19.

It actually came in at -- near $80 million.

So that $30 million delta, I guess, that's...

Yes, let me explain.

So the -- there was $86 million of acquisition and integration.

That was a booked cost.

That wasn't cash.

Cash was about $70 million, about -- and that included the acquisition as well as integration costs.

Of the -- of that $70 million, about $55 million was integration, and of that was the $35 million of pulling forward on the cash outflow that we pulled forward.

Hopefully, that...

Okay.

Great.

Yes, and then -- yes, yes, that works.

And then on your book-to-bill or bookings, obviously, you already talked about what Engility or the SAIC core bookings were.

But can you just talk about whether you experienced any debookings or consolidation of bids as a result of the integration?

So the only thing I would say on this, and it's consistent with the Investor Day, is dyssynergies revenue, dyssynergies that we anticipated, about $100 million, and that's consistent for 2020 as we laid out at the Investor Day.

So on the bookings side, we didn't see any anomalies across any dynamic.

Standard bookings, debookings.

And we'll go next to Joseph DeNardi with Stifel.

Charlie, even with the dividend increase, it still seems like the next few years, you're going to have a lot of excess cash remaining kind of after the dividend and the debt pay downs.

So can you just talk about priority of that between, I guess, accelerating the deleveraging, accelerating the buyback or kind of storing up cash for another deal?

Yes.

So it's a good problem to have, obviously, with the cash generation profile that we have.

The excess cash, we've said that we would return that to shareholders if there's not a strategic M&A or a use for that.

We're continuing to evaluate and always evaluate the pipeline and other alternatives.

But that is the priority.

The mandatory debt payments that we have, if you look at the leverage profile that I laid out, we should be under 3x on a booked basis by 2021.

That's within their targeted range.

So we don't look to really deleverage a lot in the next years.

We feel like we're in a good leverage situation.

So that would be the priorities of looking at, again, strategic M&A capabilities and other gaps in the portfolio.

And absent that, we would look to return the excess cash to shareholders.

Okay.

And then Nazzic, just your kind of preference for M&A going forward.

I think the market's reaction to the Engility deal was a little bit mixed, but you all feel obviously very good about the integration so far and the free cash flow story over the next few years.

So does your experience with Engility thus far make you more or less interested in being a buyer again in the future?

Sure.

So far so good with the Engility acquisition, but it's early days, and so we aggressively manage it and watch it and remain confident in the 2 companies coming together.

Now with that, I think our posture is such and relatively unchanged.

We will -- we certainly will look to M&A as a factor in our growth, but we're going to be very selective.

It's going to be areas that, to Tony's point, that complement our strategies, give us market access and give us competencies or capabilities and solutions that we can bring to bear.

So I don't know that our posture has changed dramatically one way or the other, but it is something that will remain on the radar.

We'll keep our eyes open.

We'll be proactive where it makes sense.

But again, it's -- we will be that -- I think we'll remain pretty selective, ensuring that we do the right deal at the right time.

And we'll go next to Josh Sullivan with Seaport Global.

With the budget request out and thinking about the initial strategy for the tie-up with Engility, were there any surprises in the budget received, either more or less funding than you guys originally expected?

No.

I think it's still early in the game of from request to reality.

But overall, no major swings.

I think we'll still see the high demand areas that we positioned for.

Obviously, we've been focused a lot on the Engility deal as it relates to space and the space systems.

So I think there's obviously direct alignment on that with the Space Force.

It's aligned under the Air Force at this moment and the space development agencies and other elements around space and mission capabilities, as it relates to missile defense and hypersonic and the like.

I think we're well positioned across that full spectrum to the budget numbers there.

We expect the diversity we have with defense and intel to further go forward as our customers seek modernization and a higher impact to deal with global threats.

And then the federal civilian agencies to be determined.

I think we saw and heard a lot of the rhetoric when the administration first got started.

Frankly, with the mixed Congress, I don't see a lot of shifts dramatically one way or the other.

It's kind of counterbalanced.

So I translate that to actually fairly stable budget environment.

There will be some shifts, but with that diversification, we can follow the money to the contract vehicles that we have across the federal government.

So I don't see the ongoing rhetoric moving the needle too much nor our outlook changing as a result as we head in -- to finish this year and then reconcile the budget request to finally getting to the next government in 2020.

And then just curious if you're seeing an ability to drive any fixed-price contracts at this point, either through Engility, gives you an ability to do that or if customers are any more receptive at this point.

Yes, this is Nazzic.

So I mean, that had continued to be a priority, certainly, and there's good solutions that we bring to bear that can lend itself to fixed price.

And we are seeing certainly more discussion about it as the customers think about how to acquire more outcomes versus just the traditional mechanisms of solving their challenges.

So we're seeing more conversations.

We are bringing forth some ideas and some solutions where it makes sense.

I will tell you, we haven't seen a dramatic change in their buying behavior, but we continue to have those conversations.

And sometimes, it's the conversation really at the government side, between the contract organization and the program side, to help figure out the best way to acquire.

So we're cautiously optimistic.

It is something we're focused on.

But I don't believe we've seen a huge shift to date.

We'll go next to Jon Raviv with Citi.

On the derisking point, as you brought the 2 organizations together, we certainly understand that you've hit the ground running on the things you want to pursue, but oftentimes, the issues encountered are balls dropped, so to speak.

So what are you doing to address those sorts of risks?

What sorts of things are you watching?

And how do you intend to avoid those sorts of outcomes, please?

So yes, so Jon, I'll address it in a couple of ways.

So as I mentioned on the organizational side, we outlined the organization, we made the people decisions and we were ready to kind of stand up the combined organization on day 1. And since we are organized by portfolio and within portfolio by account, there is very clear visibility to the accounts that's coming together to both companies served on the portfolio of the accounts, the revenue profile, the profit profile and certainly, the pipeline.

And so with the way that we're organized in the way we go to market, it's very clear where opportunities lie, where programs lie, and there's minimal risk of things getting -- falling between the cracks because there's just clear lines of responsibility and authority.

So I feel confident that we have full visibility on the program side, we have full visibility on the pipeline side.

And because of the work we did in the pipeline analysis, that we're able to continue to prosecute the pipeline in a very aggressive manner post-close.

So that gives me good confidence just knowing that we have the organization, the team and those decisions were made, and we're not trying to navigate that post-close.

And then we also put together the workflow, the work streams around pipeline management immediately upon close.

And we have a very pretty regular systematic way of walking through and understanding what's on the horizon.

So I feel confident that the teams have that responsibility and accountability, and we've got the visibility needed to ensure that those don't fall through the cracks.

Did that help?

Yes.

At this time, I would like to turn the call back over to Shane Canestra for any additional or closing remarks.

Thank you very much for your participation in SAIC's Fourth Quarter and Full Fiscal Year 2019 Earnings Call.

This concludes the call, and we thank you for your continued interest in SAIC.

That does conclude today's conference.

We thank you for your participation.