Science Applications International Corp (SAIC) 2021 Q4 法說會逐字稿

Welcome to SAIC's Fourth Quarter and Full Fiscal Year 2021 Earnings Call. At this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice President of 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 2021 earnings call. Joining me today to discuss our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you 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 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, where possible, to the most comparable GAAP measures.

It is now my pleasure to introduce our CEO, Nazzic Keene.

Good afternoon and thank you for joining us to discuss SAIC's fourth quarter full fiscal year 2021 results and our outlook for fiscal year 2022. Our momentum increased throughout the year, and SAIC continues to be very well positioned for long-term shareholder value creation.

On March 15 of last year, SAIC quickly adapted to a significantly different operating environment as a result of the pandemic. Although not without challenges, SAIC operated effectively throughout the fiscal year and continues to do so today. Our focus has always been the safety and welfare of our employees, continued high level performance for our customers and successfully managing the business for our shareholders. I want to thank the employees of SAIC for their dedication and flexibility, both personally and professionally, through an incredibly challenging time.

The end of each fiscal year allows us to look back, reflect on our achievements as well as our journey over time. As we think about what SAIC is today, I'm even more encouraged about our future. Over the past few years, we have grown our annual revenue from around $4.5 billion to more than $7 billion, concurrently expanding our adjusted EBITDA margins from the low 6% range to close to 9% today, an almost 300 basis point improvement. Over the same period, we have more than doubled our free cash flow.

We are now in the Fortune 500 and one of the top providers in the government services market and we have even more to accomplish as we continue to push forward through focused strategy execution. Our journey continues, and with a long-term eye on the business, I am confident in continued progress.

I would like to highlight a few areas of strong performance in fiscal year 2021. Compared to fiscal year '20, revenues grew by 11%. Adjusted EBITDA margins improved by 50 basis points. Adjusted diluted earnings per share grew by 11%. And we generated a record high free cash flow of $524 million.

Organic revenues grew by 1% in fiscal year '21. While we can't ignore the effects of COVID, revenues grew organically by 4% excluding the approximately $250 million of foregone revenue related to the pandemic.

SAIC delivered strong profitability and cash generation that met the expectations we set at the beginning of the year. Last March, we laid out a pre-COVID framework. As these were the early days of pandemic, the effect on our business and the nation was uncertain. Our expectations at that time for fiscal '21 was 3% to 6% organic revenue growth, adjusted EBITDA margins in the high 8% to 9% range, and free cash flow of at least $450 million. While adjusting for the impacts of the business from the pandemic, we largely met those expectations. While we continue to experience impacts from the pandemic into this fiscal year, we remain focused on business execution.

We also had a very successful business development year with a book to bill of 1.7x revenue through a healthy mix of recompete and new business awards. One of the most important business development priorities for the company was to secure our position in the AMCOM portfolio in a very competitive market. I'm incredibly proud to report that SAIC has been awarded all 4 of the AMCOM recompete task orders. We received 2 of the awards during fiscal year 2021 and 2 early in this quarter. Each of the 4 task orders contains elements of new business. And while the transition of the new work will happen over time into fiscal year '23, we are very pleased to continue supporting these important missions.

Turning to the market environment. Our customers continue to execute their missions and priorities with confidence. Though there has been a change in both administration and control of the Senate, we have not seen notable changes in customer behavior. The President will deliver his government fiscal year '22 budget request in the next few weeks. This will show intent, the administration's priorities and desired direction. While we do not expect significant changes that would negatively impact our business, we do anticipate overall customer budgets to remain flat for the most part into next fiscal year and potentially beyond.

However, within those budgets, there will be faster streams of priorities and investments. So while the budget environment might present a headwind to overall industry growth, direct alignment of our strategy to high priority and potential growth areas could be a tailwind that will enable us to outperform the market environment. Growth will be enabled by the execution of our long-term strategy, elements of which you will hear throughout our remarks today.

As we navigated a challenging year, we remain focused on our commitment to delever following our successful acquisition and integration of Unisys Federal, and we made tremendous progress. During the year, we paid down $400 million of debt, exiting the year at a net leverage ratio of 3.7x, down from approximately 4.5x at the time of the acquisition. While we continue to meet our commitment of achieving a net leverage of around 3x by the end of fiscal '22, I'm also pleased to report that we started repurchasing shares midway through the fourth quarter, deploying $19 million to repurchase approximately 200,000 shares.

Joining us today for his first earnings call as SAIC's Chief Financial Officer is Prabu Natarajan. We are very excited to have Prabu as part of the executive management team, bringing with him a track record of success as a finance executive in the aerospace, defense and technology markets. I'd like to ask Prabu to share our results for the fourth quarter and our fiscal year 2022 outlook.

Thank you, Nazzic, and good afternoon, everyone. I'm extremely honored to have joined a best-in-class government services company and a top-notch management team. SAIC's culture is rooted in its mission focus and performance; continuous self-reflection and improvement; and execution of a thoughtful, long-term strategy. I look forward to actively working with Nazzic and the senior management team to continue building and executing the strategy to deliver long-term shareholder value.

Now turning to our results. SAIC's fourth quarter fiscal year 2021 results reflect modest organic revenue growth, strong profitability and seasonally in line cash flow generation. Contract award activity in the fourth quarter translated to a book to bill of 0.4 for the quarter and 1.7 for the full year.

Fourth quarter net bookings were driven by 2 large contract awards: the U.S. Corps of Engineers RITS and the AMCOM Hardware-in-the-Loop Aviation Services contract. This latter being the second in the series of 4 task order awards in our AMCOM recompete portfolio. While these awards have notable award values in excess of $2 billion, I would note that these are ceiling values that may differ from amounts included in backlog. Although these contracts contain room for us to drive additional revenues, it is our backlog policy to book amounts that have reasonable line of sight and then revise based on the volume of work funded over the next several years.

As Nazzic mentioned, subsequent to the end of the quarter, SAIC completed the successful capture of the remaining 2 of 4 AMCOM recompete task orders. They are noted in today's press release. We will evaluate the bookings position on these task orders as we close out the first quarter of fiscal '22, but it is remarkable to have run this table on this recomplete series.

At the end of the fourth quarter, net of a backlog adjustment in the fourth quarter, SAIC's total contract backlog stood at approximately $21.5 billion, with funded contract backlog of $3 billion. The estimated value of SAIC submitted proposals awaiting award at the end of the fourth quarter was approximately $21.5 billion, with about 2/3 relating to new business opportunities.

Let me now turn to our financial results, and 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 $1.7 billion reflect growth of 11% as compared to the fourth quarter of last fiscal year, primarily due to revenues associated with the Unisys Federal acquisition. Excluding the impact of the acquisition, fourth quarter revenues grew year-over-year by 1% driven by new business primarily supporting civilian customers and the Air Force, partially offset by impacts from COVID-19. Full year 2021 revenue, excluding the Unisys Federal revenues, grew approximately 1% and included an approximately 3% headwind or about $250 million of negative impact from COVID.

Fourth quarter adjusted EBITDA was $159 million, a $25 million increase from the prior year. Adjusted EBITDA margin equated to 9.3% after adjusting for $7 million of acquisition and integration costs. Fourth quarter margin performance was strong through exceptional program performance. For the full fiscal year, adjusted EBITDA margin was 8.9%, 50 basis points above our prior fiscal year, reflecting the addition of Unisys Federal and gains from onetime resolutions of certain program matters earlier in the year, partially offset by about $25 million of negative COVID-19 impact.

Net income for the fourth quarter was $61 million and diluted earnings per share was $1.05 for the quarter, inclusive of the fourth quarter acquisition and integration costs of $7 million. Excluding these costs as well as amortization of intangibles, our adjusted diluted earnings per share was $1.67. Our full year effective tax rate was approximately 22%, lower than our previous expectation of 23%.

Turning to cash flow generation. SAIC generated a record $524 million of free cash flow for the year and exceeded our December guidance of $515 million for the year. Days sales outstanding at the end of the quarter was strong at 59 days. We deployed nearly 100% of the free cash flow we generated last year through dividends, debt repayment and, as Nazzic highlighted, share repurchases. Our Board of Directors has approved a quarterly dividend of $0.37 a share payable on April 30 to shareholders of record on April 16.

I would now like to turn to our forward outlook as noted on Slide 7 of the presentation slides. For fiscal year 2022, we expect the following: revenues between $7.1 billion and $7.3 billion; adjusted EBITDA margins between 8.6% and 8.8%, adjusted diluted earnings per share between $6 and $6.25, free cash flow between $430 million and $470 million.

On Slide 8, we have provided several walks from fiscal year 2021 performance to the fiscal 2022 guidance ranges provided today to further assist you in understanding our guidance. Our revenue guidance range reflects flat to 3% organic revenue growth in fiscal year 2022. We expect continued negative impact from the pandemic of $150 million to $200 million of revenue, primarily in our supply chain portfolio. So approximately a 2.5% headwind to growth in fiscal year '22 is included in our guidance. We anticipate that the majority of this impact will be in the first half of the year and lessen in the second half, and we will continue to monitor this carefully. Consequently, our revenue growth will be more weighted towards the second half, given the ramp-up on new programs and lessening COVID headwinds.

I would note that our recompete risk at about 10% this year is below our typical average as a result of having successfully retired the risk on our AMCOM portfolio. However, one notable contract that is up for recompete and should be decided in the summer time frame is our NASA NICS contract now being called AEGIS. The remainder of annual revenues being recompeted in fiscal year 2022 are an aggregation of lower-volume contracts and task orders.

With respect to our adjusted EBITDA margin rate guidance, I would remind you that FY '21's strong adjusted EBITDA performance of 8.9% included about 20 basis points of successful but nonrecurring resolutions of program contract matters. Our FY '22 guidance on adjusted EBITDA margin is in line, therefore, with our FY '21 performance.

On EBITDA dollars, we expect COVID to have approximately a $10 million to $15 million of impact in fiscal 2022.

With regard to free cash flow, our guidance range includes a $155 million downward pressure as compared to fiscal '21 related to the payment of half of the payroll tax deferral from last year. We expect our cash conversion to remain strong and working capital to improve in FY '22.

Finally, as Nazzic mentioned, we reinitiated our share repurchase program in the fourth quarter of fiscal year '21.

Other items associated with our guidance such as estimated interest, depreciation and amortization, tax rate and capital expenditures can also be found on Slide 7.

To conclude, I'm very excited to have joined SAIC. We will continue to create value through a few fundamental business imperatives: execution of a well-defined and focused strategy, sustainable and differentiated long-term growth in key market areas; and finally, improved profit margin and cash generation; and the thoughtful and opportunistic deployment of that capital for the benefit of our shareholders. Nazzic, back to you for concluding remarks.

Thanks, Prabu. While continuing to navigate challenges related to the pandemic, we also look to what a new normal will be for our industry, our company and our people. Across the government, SAIC is enhancing our customers' ability to deliver and enable the adoption of advanced technologies. Government as well as SAIC is driving towards faster rates of technology adoption and achievement of mission outcomes.

To this end, we are shaping and pursuing a growth agenda tied to longer-term needs in government. We are expanding our IT modernization focus into broader digital transformation. We are building on our heritage and engineering by deepening our digital engineering capabilities, so that we can help the government advance complex systems integration, saving costs and increasing mission readiness. And we're also looking at the growing and evolving missions of our customers, especially in areas like space and health where there are new agencies, missions and requirements.

We've all contemplated what our personal and professional lives look like when we get to the other side of the pandemic. While I certainly look forward to SAIC returning to a more normal environment, the pandemic has forced us to operate differently. And in some ways, some of those might endure for a good reason. A more remote work environment has proven to both us and our customers that we can continue to effectively operate and deliver on our programs. SAIC is looking at the future of work, including potentially lowering our facilities footprint and expanding our reach for employees that deliver services partially or entirely remotely.

While our analysis is underway and the transition will take many years, we are guided by a general concept: Foster an enterprise flex work culture in partnership with our customers that enhances SAIC's position as a destination employer, attracting, nurturing and retaining diverse, high-performing talent regardless of location.

Wrapping up, I'd like to note a few awards that SAIC received recently that acknowledge our success in being a destination employer. SAIC was recently honored by Fortune's Most Admired Companies list and ranked sixth within the information technology services category along some of the world's largest and well-known companies. This is the company's fourth recognition on Fortune's list since SAIC's inception in 2013.

Additionally, for the third consecutive year, SAIC was recognized by the Human Rights Campaign Foundation and received a perfect score as one of the Best Places to Work for LGBTQ Employees.

In conclusion, we are proud of our achievements in fiscal year 2021, an unprecedented year. We entered fiscal year 2022 focused on executing our strategy to deliver high-value solutions to our customers, to foster a work environment that attracts and retains the best talent and to deliver long-term value creation for our shareholders.

Operator, we're now ready to take your questions.

(Operator Instructions)

We have our first question from the line of Cai von Rumohr.

So your revenue guide looks a lot lighter than I think we would have thought, given as I recall if you won all of the AMCOM recompetes, it was $900 million annualized, up from $600 million. And obviously, you won't get all of it, but you should get some of it. And also your margins, given that you won the AMCOM, being down 30 basis points at the midpoint looks lighter than we would have thought. Maybe give us some color on that, if you could?

Cai, Prabu here. Thanks for the question. So on revenue guide, organically we flagged flat to 3% growth. And we've also flagged about a 2.5% headwind from COVID. One way to think about it is 2.5% to 5.5% on an x COVID basis. Having said that, clearly we're disappointed that we're still being impacted by COVID, and we're really hopeful that the headwinds abate soon. And so the year-over-year difference in terms of COVID impacts, let's call it between $50 million and $100 million.

You are correct. We've had large notable wins over the past year. And as we've talked about in other forums, these are long-term programs that will provide sustainable growth opportunities over a several-year period.

Let's talk about AMCOM maybe a little bit so we can sort of fill this in several layers. So within AMCOM, the way to think about this is sort of a set of basic task orders. So think of that as sort of the base revenue in the program. That's what we do today, and we know what that revenue profile looks like going forward.

A second layer within AMCOM would be a set of new business opportunities, things that we'll bring into the AMCOM portfolio as a result of working with the customer there. So there's clearly some potential for revenue growth from the second layer.

There's a third layer, which is a materials plug in the ceiling award. In other words, effectively the customer has the ability to bring in materials into the AMCOM program that will allow us to generate revenue growth, but I caution that that materials plug tends to be lower-margin work.

And then finally, there's sort of a little bit of work there on top, what we call excess ceiling that's sort of the difference between the total award and the sum of the first 3 layers. And as we work through the AMCOM portfolio, clearly we're going to go get the first layer, a good bit of the second layer over the next couple of years, let's say. And then the way the waterfall works on the AMCOM portfolio is you really have to work through and burn off the old task orders before we get into the new awards. And that's sort of how the waterfall is set out.

So I think we're optimistic that, over time, we will see incremental revenue from the AMCOM portfolio. And -- but that's sort of the reason why we're not seeing that immediate impact of revenue in FY '22 and, therefore, is in the guidance.

And just to sort of put a ribbon on it, I think we're expecting growth within the intel and the space portfolio. Our defense business is expected to be, I'd say, roughly flat. And our supply chain business is roughly flat if you think about it on a year-over-year basis. And that's sort of a fuller context perhaps for the guidance for FY '22.

But just one follow-up, that still looks low. If we look at the midpoint, we're talking about $150 million of revenue increase and 75% of that -- $75 million of that is from COVID. And you should get about $100 million I would estimate, probably more, from having Unisys for the full year.

So essentially it looks like 0 growth if we take those items out. I mean do you expect AMCOM to be down? What are other areas that are down? Because most -- given the very strong bookings you've had, one would have thought that there was going to be some growth.

So I agree, Cai. I think there is a year-over-year impact from Unisys. So when you think of that as about 4 to 6 weeks on a year-over-year basis, that's the difference from the Unisys Federal portfolio. I'd say I think we're bounded by the fact that we're living through a COVID environment, and we're seeing some impacts from COVID.

So in a way maybe another data point here is if you think about that supply chain business, that continues to be a headwind. We can sort of think about this in weekly revenue terms. And so that continues to be, I'd say, a little bit of a headwind to growth.

And then finally, I would probably also note there were probably a couple of small contracts at the end of FY '21 that in the aggregate were not material, but there were program losses. And again not material individually and in the aggregate it probably cost us about, let's call it, 100 to 150 basis points of growth. Again, 3 or 4 very different opportunities and different customer sets. And that probably is the headwind that you probably are trying to figure out. So that's probably the last piece there.

We have our next question from the line of Jon Raviv from Citi.

So I guess let's continue on this, talking FY '22. Prabu, can you do a similar walk on the margin from '21 to '22? I get there are a lot of moving pieces. But if I pull out everything that you've disclosed on an underlying basis in '21, I don't know, I get to like just over 9%, let's say, that includes COVID. Then if I take your guidance from '22 and I pull out just the COVID item, I get to something below 9%.

So if Unisys is ramping year-over-year, just help me understand also supply chain being down year-over-year, which is lower margin, why is overall margin down year-on-year on a fully clean underlying basis? Sorry for the extended question, but there's a lot of trying to figure this out.

Yes. So thanks for the question, Jon. And maybe I'll try to hit it at the high level, and then we can dive in a couple of levels if we need to. So we ended FY '21 at a margin rate, adjusted EBITDA rate of 8.9%. And over the course of FY '21, specifically in Q2, we've called out certain nonrecurring onetime items. But if you think about it, they were effectively about a 20 basis point tailwind to margins in FY '21. And obviously as we go into FY '22, we're assuming that those tailwinds won't recur. And therefore effectively if you then step back and look at the guidance for FY '22 of 8.6% to 8.8%, at the midpoint of our guide range, I'd say we're reasonably in line with performance from FY '21.

I'd probably add a couple of other data points. I'd say Unisys Federal brought with it a good healthy mix of firm express work, and we're continuing to see good performance on the Unisys Federal side of the portfolio. I would also note that AMCOM, when we won the recompetes as we previously talked about, went from being a, I'd say, a T&M contract into a cost-plus contract. To me there is a little bit of a change in the structure of that contract that's also causing a little bit of downward pressure on margin rates. But I'd really step back and say 8.7% sort of on an adjusted, adjusted basis for FY '21 compared to a midpoint of a guide range that's sitting at 8.7%.

And then finally, the last comment is as we've talked about, EBITDA dollars and margin rates are incentive comp metrics for the team. We start the year with a set of risks and opportunities. And we expect the team to be fully incentivized to derisk the portfolio over the course of the year and harvest the opportunities over the rest of the year.

So I'd say our initial guide is very consistent with our performance in FY '21. And we've got about 10 months left in the year to go, and hopefully we do better than what we're seeing here today.

Yes. No, I appreciate that. And just a quick follow-up there on a clarification, so 8.7% in '21 and 8.7% in '22, but you had more COVID impact in '21 and less COVID impact in '22. So if we clean out COVID also, it seems like margins are down, but maybe that's the AMCOM piece. I guess assuming a big picture, should we still think about this as a sustainably 9%-plus-margin business if we kind of try to eliminate all the noise here?

So if you think about long-term margin rate trends for this business, and I've said this in other forums before, we tend to think about this on a long-term basis, and we're truly striving for a balance between investments and profitability. And so we're working on margins over time. We've proven that we have the ability to deliver margins incrementally.

We've actually, as Nazzic mentioned, increased our margin rates by nearly 300 basis points over the last few years. And margin improvement is actually integrated in the way we think about our long term planning. So I'd say on a long-term basis, with a portfolio that is predominantly cost-plus still, we really have to be very, very good at executing on our fixed-price programs and then thoughtfully reinvest the dollars from our cost-plus programs to ensure that we're continuing to differentiate ourselves on a long-term basis.

So I'd say it's a fair characterization that over time, we expect this portfolio to be around 9%. And again, the mechanics of whether we get to 9% in the year or just over 9% is going to function -- is going to be a function of how well we execute on a particular year, but I'd say qualitatively not much has changed in the portfolio.

Jon, this is Nazzic. One thing I'll add, and I know we've had this conversation as well, is if you think about the areas that -- one was just the catalyst for the Unisys Federal acquisition. But as we think about our strategy and our focus in some of the priorities in the nation on IT modernization, digital transformation, those can lead them -- lead to more fixed price as a service type contracts.

And that is part of our strategy, our long-term strategy. We look for the opportunity to influence the portfolio again, over time, with that mix of work. And I think that can be a catalyst as well for improving margins over time.

Next is Sheila Kahyaoglu from Jefferies.

Welcome, Prabu. I guess if we could talk about the revenue bridge a little bit more. Can you maybe talk about how you think about the new contract wins that you guys have had, whether it's TADS or FSG-80? I know they've been around for a while now. How big are those ramps? And then you mentioned some small program roll-offs. Is that a point headwind to revenue overall?

So maybe I'll start with the last piece first. I would say in terms of the losses, they're probably between $100 million to $125 million, $130 million. They were all predominantly towards the latter part of the Q4 of FY '21. So the compares around program losses will be, unfortunately, here with us for a few more quarters. So just to be able to think about that, so think of that as between 1 point and 1.5 points of revenue so on a year-over-year basis.

And in terms of the ramp, I'd say the most material portions of the ramp will be in our RITS program. And that ramp, we're expecting to see in the second half of the year. And I'd say there's a variety of other programs. I'd say no one individual program is ramping up beyond $20 million, $30 million a year on a year-over-year basis. But again, I'd say if you step back a year later, we would expect to see a little bigger ramp on our AMCOM portfolio. So that's sort of a way to bridge between '21 into '22, and then '22 into 23.

Okay. And then just a follow-up on the COVID impact. Are you assuming it's an issue for the entire year? Or is it only in the first half?

Right. So we expect COVID to be with us for most of the year. We expect most of the impact to be in the first half of the year, at least on a year-over-year basis. And one way to think about this, and I alluded to this in a previous response, Sheila, is we tend to see revenues from the supply chain business on a weekly average. That's a good way to think about this business, between $10 million and $15 million of weekly revenue from our supply chain business. And if you did the math, it will get you roughly $600 million for the year.

And if you then map out the revenue on the program against the V curve with respect to COVID, what you'll find is that at the peak of COVID, which is sort of the bottom of the revenue curve, we're at about $10 million a week. At the top, we're nearly at about $15 million a week if you think about it on a COVID-adjusted basis or pre-pandemic basis.

Where we are right now is somewhere between, I'd call it, 10.5 and 11.5 a quarter -- a week, rather. And that -- and the plan is for that to ramp up in the second half of the year and hopefully start to dissipate nearly fully towards the end of the year at Q4.

So that's the math we've got, but you'll see it in the compare, at least for the first half of the year. And you'll start to see it dissipate in second half.

We have our next question from Gavin Parsons from Goldman Sachs.

I wanted to ask about your revenue visibility then beyond fiscal '22. And I appreciate there a lot of numbers with the COVID and with the budget. But 1.7 book-to-bill this year, 1.2 the year before, your backlog has pretty much doubled over the last 3 years. So I was wondering if you could take a stab at a multiyear growth outlook from here.

Gavin, this is Nazzic. Yes, a couple of things that I might want to just highlight. We've -- the conversation in my comments earlier, I did talk about the fact that the assumptions I think in general in the industry is that the budgets are going to be relatively flat if we look forward. And I think that's how most of us were thinking about it even sort of back 1 year or 2 ago, so even pre-COVID.

But with that, we do see that there's opportunities within the next couple of years. And we're seeing some of that highlighted now in some of the conversation coming out of the administration. And again, we'll get some more clarity over the course of the next few months. But -- and we're seeing some increased appetite interest in IT modernization. Certainly, the cyber emphasis on that, the working from home, we're seeing that the drive to modernize being very important. We're seeing some focus on the space-related missions.

And so the way that we think about the next few years is continued emphasis and focus on those parts of our portfolio that we believe, even with a flattish budget over the next few years, these could be areas of higher growth opportunities. And so it's our objective, and the strategy that we've outlined is to drive to a growth outlook that is greater than the overarching market. And that's how we're thinking about the next few years, if that helps.

Got it. that's helpful.

And Gavin, maybe one other comment here. So I think you are absolutely correct, we do have $21.5 billion in backlog at the end of the year. We had a 1.7 book-to-bill in FY '21. We do have, with the AMCOM portfolio, secured good visibility, better visibility stepping into next year than we did stepping into this time last year. I'd say, therefore, there is certainly more visibility. And then I'd offer maybe a couple of other data points.

In this business, as you know, there's always an element of recompete risk. In the prepared remarks, we said, this particular year, the recompete risk is very nominal at less than, I'd call it, approximately 10% of the revenue coming from the recompetes. And the new business assumptions are modest this year. But when you step into FY '23 from FY '22, I think you're going to see a little bit of a higher level of recompete, not unusual in this business, and a little more in the way of new business that you have to go with.

What I've observed in the 90-odd days here is a remarkable win rate on recompetes. So we do our share of recompetes really, really well. But there's always a sliver that we don't ever get to, and we expect our new business to step in and actually fill the bucket here.

So the strategy is very clear. We've got the visibility from the base programs that we have in the portfolio. And then we've got to keep winning our share of recompetes, which are again remarkably high for a company this size. And we also have to win our share of new business, so we continue to see that progression for long-term revenue growth.

That's helpful. I guess what I want to understand is how from a bottoms-up standpoint with these many new wins, these many upsized recompete wins, that there isn't more visibility to kind of a multiyear bridge. I mean is there a possibility that based on the budgets you don't actually see the lion's share of that unfunded backlog growth, but it doesn't translate into revenue?

This is Nazzic. I guess there's -- it'd be impossible to say that risk doesn't exist. Because the way the government operates, the way they do keep their budgets, there's always some element of that risk.

We don't believe that's a high risk as we sit here today. And as Prabu indicated, where we did see some bookings and some wins that may have had some of that risk with the excess ceiling, we took that adjustment in Q4. So I wouldn't say that's a high risk, but it's always a risk in the nature of the work that we do based on annual budgets in the government cycle.

Next is Seth Seifman from JPMorgan.

Okay. So just maybe following up on that last point, the change to the backlog and valuation of the backlog that happened. Was that concentrated particularly in 1 or 2 programs? And so can you share which one? Or was that on a very wide range of program? Because AMCOM's got allowance, it looks like the book-to-bill would have actually been quite strong in the quarter. And so just wondering what drove the reassessment, and what drove it at this time?

Yes. So thanks for the question, Seth.

I think first of all, the valuation adjustment that you referred to is consistent with the policy that we've had, recognizing into backlog what's going to realize into revenue over time. So I'd say the reason you're seeing that pop a little more apparently this time around is the size of the awards. I said the vast majority of the adjustments were sort of in-year awards, so FY '21 awards that we -- if you think about it as derisking a little bit, and based on the backlog policy we have, so.

And I'm going to get back to the AMCOM example. We don't have clear sort of line of sight into revenue on a 6 or 7 or 8 years of period of performance. I think it's our policy to require an adjustment to the backlog. The backlog does not go away. The award is still there. But -- and to the extent we're able to bring new work into the contract, we effectively if you think of that as sort of reversing the adjustment that we booked in Q4. So think of it that way, nothing particularly unique to do that in a particular quarter.

I think what stands out this time around is the fact that it was a large number based on the fact that we have these very material large awards that we booked over the course of the year, and that's why you're seeing that pop. So I'd say nothing unusual there, Seth.

Okay, got it. Great. then as a follow-up, it looks like Unisys -- probably on a 12-month basis, it looks like Unisys delivered about $735 million of sales. And just want to get a level set, I know there were some contract transitions going on there, at least one significant one. So just to get a level set, is that a baseline from which to grow? And I assume that the Unisys piece is growing reasonably well year-on-year. Is that the right way to think about the contribution that that business is making in fiscal '22?

Right. So I'd say the Unisys Federal business is performing in line with our acquisition model. And I think your math is about right actually. So we did expect about $700 million revenue on a full year basis, if you will, from Unisys Federal. And you pretty much got to that number.

So I'd say we knew where the ramps were going to be in -- at the time that we were evaluating this particular opportunity to this particular acquisition. And so that's sort of built in the ramp. And so that business is performing in line.

I'd say we -- one of the reasons we looked at Unisys Federal business was the mix of fixed-price work that that particular business brings to the portfolio. And I think if you think about it, we closed that deal the first day the pandemic shut down the business.

So I'd say there is actually early days still on Unisys Federal. The revenue plan is actually performing in line with our expectations. And I might dare say there may be a little bit of opportunity on the margin rate side, given the mix of fixed-price work there is on the program.

Okay. And if I could just sneak a last one for Nazzic. I know the supply chain work has been definitely in the crosshairs of the pandemic. But when we step back from the numbers in the model and we think about like in the real world, like what has to start happening for that business to get sort of back on track?

Is it sort of -- is it lifting of certain restrictions? Is it scheduling and the occurrence of certain training exercises? Like what really drives that business, so that we can know that the pandemic impact is abating?

Yes. So I think a couple of things to think about as we probably did an excellent job of kind of outlining how we think about the business from a numbers perspective or revenue perspective. The things that have to happen are the rollout of vaccines and getting through the quarantine isolation phase that so much of the nation and the world are under. So as those start to roll out, then there'll be more opportunity to have exercises. And the op tempo of the military then will step up.

And as that steps up, that will drive more need and more demand for the supply that runs through supply chain portfolio. So it really is just the continued working through the impacts that COVID has on the op tempo of the broad nation. I guess I'm not giving you a lot of specifics, but that's how I would think about it.

So as Prabu indicated, as we have assumed greater impact from COVID through the first half of our year, slightly decreasing over the course of the year, and then hopefully as we get towards the end of the year a more normalized operating model and op tempo, that's how we would absolutely expect the -- that part of the business to stay in line with that.

Next is Tobey Sommer from Truist Securities.

Could you discuss the cash flow for this fiscal year and what the puts and takes are relative to COVID contribution or drag?

Yes, so thanks for the question. So I'd say on free cash flow, we've guided $430 million to $470 million. And at the midpoint of that guide, we're sitting at about, let's call it, $450 million. FY '21, we ended the year at a record $525 million.

And so if you think about it -- and we said payroll deferral, both accounting for the benefits from the payroll deferral in FY '21 as well as the give back in FY '22, gets you to a $150 million adjustment to your $525 million, so think of that as $375 million.

And so stepping forward, $375 million at the midpoint of that '22 guidance gets to about $450 million. And it's a variety of different things, including some improved profitability, assumptions around improvement in working capital. We see some potential to get better there. Obviously, some improvement in cash taxes as we go through. And that's sort of the bridge to get you back to the midpoint of that FY '22 guidance, if that helps.

And as my follow-up, I was wondering if you could speak to your acquisition appetite. You did Unisys Federal. It seems like you've had a relatively good experience with that. But I'm curious about your appetite, as the budget kind of flattens out and you're still trying to accelerate your organic growth.

Yes, yes, so good question. I'd say, we've said this before. We want this to be balanced. Our capital deployment will always be balanced in the way we think about it. We are very proud of the fact that we delevered very quickly, as Nazzic said, down to let's call it, a little over 3.5 from the highs of the acquisition.

And so -- and we've got some commitments around paying down some incremental debt this year. So -- and then given the fact that we're in historically low interest rate times, I'd say there's probably not a compelling reason to pay down a whole lot more debt on a voluntary basis after FY '22. Which then if you think about that in the context of the free cash flow that this company can sustainably generate, it gives you ample amount of liquidity to think about value-accretive capital deployment strategies.

And actually on M&A, we're -- we've said this also before. We're not looking to buy for the sake of scale. We like the scale we have. Having said that, we have an active process where we look at gaps in the portfolio. And if there are things that will fill the gap, that's the way we think about M&A.

And so we think of equity as a precious commodity. And therefore, we are going to be an improvement in the use of equity to finance an acquisition in a low interest rate environment. But all I will leave you with is a fair amount of dry powder to deploy in accretive ways.

We have our next question from Joseph DeNardi from Stifel.

Nazzic or Prabu, you talked about starting up the buyback again. Can you talk about why that's the right use of capital now, given how big of a difference there is between market expectations and what you're actually seeing for growth? Not you, just you, obviously, across the industry. But are you buying back stock because you see this softness is temporary? Can you talk about that a little bit?

Yes, yes. So maybe a different flavor of a previous response. So we want to be balanced in the way we think about capital deployment. And we do think that having a repurchase program allows you to be in the market on a consistent basis. Because I think that's a key point, if you will, for long-term value creation. As we also closed out FY '21, we were also ahead of our debt repayment schedule. And so that gave us the ability to flexibly deploy a little more capital.

And finally, as I mentioned, we are in a low interest rate environment. So we're carefully balancing to have the need to pay down some debt and opportunistically returning capital. And so when you put all of that together and the fact that we have inherently good confidence in the capacity of this business to generate cash, I think it does leave you with a fair number of tools in our arsenal to be able to deploy.

And so we do think about valuations in the context of relative valuations. We think about it in the context of multiples. And I would say if there is an opportunity to acquire your shares at multiples below trading multiples or where others may be trading at, I think inherently it offers you an ability to deploy capital when you see those dislocations in the market. So think of it that way.

Okay. That's helpful. And then just on the backlog, and Prabu, I think you mentioned that it's somewhat routine. But can you remind us -- I know you're new, but maybe Nazzic, can you remind us the last time the backlog was adjusted down by 10%, if the adjustment have anything to do with your arrival, Prabu?

No, I would say -- I'll answer the latter part first. No, I'd say this is entirely consistent with our backlog policy. I'd say it's the size of the awards that we received in FY '21 that drove the adjustment. And I would say nowhere near 10% in prior years, but we've had a few hundred million dollars of backlog adjustments. It's fairly routine in the business. And so that's probably what I'll leave that with.

Yes. We appreciate it. We love the fact that Prabu is here, thrilled to have him as part of the team. But that was not a change in our policy in any form or fashion. It really just had to do with the size of the bookings and the awards that we received this year, having been our biggest award year since we spun out in 2013.

Okay. And just last -- you mentioned that next year that defense and supply chain are flat and then intel and space are expected to grow, is that your framework for how the business looks in general in a flat budget? And if so, can you kind of size the space and intel piece that you expect to grow for us?

I think what I'll try to do is give you some color on how we think about where the opportunities could exist. Now obviously, the budget still have to go through their process, and we're all trying to read the tea leaves as best as we can. But some areas, and I'll use the area of IT modernization or digital transformation, spans all of our portfolio. And so whether it's in the civil space, the defense space, or in the intel space, those are offerings that we can support our broad portfolio.

I think it depends greatly as we all navigate this on where the budgets end up, where the pressures end up. But the areas that we've elected to invest in and the areas that we believe will be catalysts to our ability to grow above market in the years to come really are those areas that I've touched on: the IT modernization, the digital engineering, again across the entire portfolio, the space domains. And so we're investing in those areas for long-term growth, recognizing that even if there are some budget headwinds -- and again, we don't know that to be the case. It's just some assumptions that many of us in the industry are making, that we believe those are areas that we'll get disproportionately invested in to drive long-term value.

Next is David Strauss from Barclays.

Prabu, the working capital, I think you're talking about relatively flat working capital this year. But -- I know it's early for you, but how do you view working capital, overall net working capital levels, overall for the corporation? Is there an opportunity there to unlock some cash as we go forward?

Yes. Thanks for the question, David. I would say the short answer is yes. I think we track our working capital metrics very, very diligently. This company has done a really nice job on cash generation. Having said that, I think one of the things we're having conversations around is specifically the contract structures we have, the timing of payments, liquidation events, and things that drive positive cash flow over the life of the contract.

And I would leave you with this, that it's very hard to outmaneuver a bad contract. So getting into a contract such that it allows you to get paid fairly and paid well is an important consideration as we think about working capital management over time. And therefore, I think it's fair to say the team is going to be laser-focused on ensuring we continue to do better. It is an important incentive comp metric.

And we always start the year in a certain place, and the teams do what they have to do over the course of the next 10 to 12 months. So I would say, fundamentally an opportunity to get better on cash and cash conversion, converting EBITDA into cash. And it's an important thing for us, and you'll see us continue to get better.

Okay, so a couple of clarification questions. So is the share count for '22 assumed relatively flat? You're going to use share repo to kind of keep that neutral? And then the step -- it looks like you're calling for a decent step-down in D&A. What is that associated with?

So I would say on the share count, I'd say that's a good assumption. I'd say we're assuming roughly flat on share count year-over-year. And we'll have to play this out over the course of the year.

On D&A, I think primarily I'd say call it the burn-off of the intangibles amortization out of Unisys Federal. That's what's causing the intangible amortization number to go down to about 1 10, I believe, from 1 40. And depreciation is going up just a little bit. We had a little more capital that's getting depreciated. So that's the difference effectively on depreciation and intangible amortization.

Next is Louie from William Blair.

Was most of the backlog adjustment related to the recent notable awards in the third quarter and the $2.9 billion AMCOM EXPRESS software life cycle award?

So I'd just say that they are primarily related to the big awards in FY '21. So I'd say that's a good working assumption you made.

Okay. And did the customer for these large awards, did they communicate anything to SAIC subsequent to, I guess, the end of the third quarter that gives you less confidence that you'll be able to achieve the ceiling of this award? Or was this just SAIC's own due diligence into the potential revenue trajectory, and you're taking a more conservative assumption than you previously took?

So it's always our call on backlog adjustments. There's been no communication from the customer. We understand how the ceiling works. And as we tried to lay out over the course of the call here, there are multiple parts to it. And because it's our backlog policy to only book into backlog what's realizable in the revenue and you've got to have line of sight to be able to see that over, and we're not talking 2 years' period of performance. The average AMCOM period of performance is between 5 and 8 years.

And so when you put all of that together, it leaves you with a little bit of a reserve, if you will, on your backlog, again with the ability for the teams to go execute with their customer counterparts to ensure that we continue to deliver upside to what might be potentially reflected here. So I would not view this as conservative. I would not view this as a change. It is just how we do it, and obviously magnified or amplified by the size of the awards here. I appreciate the question, Louie.

Next is Jon Raviv from Citi.

Just going to cash for a moment, thinking about big picture cumulative between '21 and 22. The low end of the guide is for $960 million. We had been talking about $1 billion. I know it's the high end of the guide. So any color on difference between low end and high end when I think about '21 and 22 together?

And then also if I go back long enough post Engility, the target for FY '22 I believe was $500 million. Unisys was supposed to be 10% accretive, so $550 million. The guidance is what it is. I mean is there -- are we going to get to the $550 million at some point here? I appreciate there's $40 million of payroll repayment. But just any thoughts on getting to an underlying $550 million number and an update of those old multiyear cash targets you guys used to have?

Sure. Thanks for the question, Jon. So as you noted, we had a good FY '21 on cash. We ended the year at $525 million. And our first guide at the start of last year was $450 million. So we did about $75 million better than our first guide last year.

If you then took the midpoint of the current year, FY '22 guide, together we get to pretty darn close to $1 billion. So I'd say on a year-over-year basis, we're, I'd say, roughly in line with $1 billion that we previously communicated.

Now I think the big drive from $500 million to whether it's $525 million or $550 million is going to come from I think 2 places: One, delivering top line that converts into EBITDA and converting that EBITDA into cash, and obviously the team is committed to doing that effectively. We will start to see the headwinds from the payroll deferral dissipate as we get into FY '23 and beyond. So to be -- I think you'll see a little bit of that. And we do expect to see some element of improvement in working capital.

So I would say that's the target that's squarely in front of us. And all I will leave you with is teams are incentivized to get to better cash numbers than we've outlined in the guide. But we need to work that over the course of the year. And suffice it to say again, it's a good way directionally to think about where the free cash flow potential is for the company. But we've got some work to do, and the team is committed to doing that effectively.

Got it. And then just on CapEx, you guided $45 million to $55 million. It's a pretty hefty number. What's going on there? Is that a new run rate or something specific that you have to spend on here?

Yes, good question. I would say with the increase in the national security and the space markets, specifically, the requirements we have within some of our restricted customers, you're seeing, I'd say, capital a little more elevated. I'd say part of what is also reflected there is some of the ongoing costs around facility optimization. So there's a little bit of capital that goes into that.

The third component would be infrastructure and the IT networks that we're investing in to allow people to work in a hybrid work model. That also has some near-term impacts to capital. So as you think about it, I wouldn't think of $50 million to $60 million as a run rate of capital for this business. I expect us to trend down over the next couple of years.

And finally, the last comment would be to the extent we see program or contract requirements or skip space or some restricted facility requirements, and you'll see some pressure, I'd say upward pressure on capital. But obviously that's a conversation we're deeply engaging with the customer. And we recognize that one of the values of this particular business is its capital-light model. And to ensure that we maintain the balance in that is an appropriate way for us to work our way through it. So I'd say temporarily elevated. We expect it to come back to something that's more normalized over the next couple of years, Jon.

All right. And then just last clarification for me is just on the backlog revaluation. Does that have any bearing on the 1.7x book-to-bill? Or should I say does it have any bearing on the bookings numbers you've been reporting all year?

Yes. So think of the book-to-bill closer at 2, 2.0 instead of the 1.7 that we reported at the end of the year. So it does have about a 0.3 impact to that book-to-bill number.

No further questions at this time. I turn the call back over to Mr. Shane Canestra for closing remarks.

As we conclude, I would like to announce that our Annual Shareholder Meeting will take place on June 2. Similar to last year, we will be conducting a virtual shareholder meeting whereby all 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.

Thank you very much for your participation in SAIC's Fourth Quarter and Full fiscal Year 2021 Earnings Call. This concludes the call, and we thank you for your continued interest in SAIC.

This concludes today's conference call. Thank you for participating. You may now disconnect.