Science Applications International Corp (SAIC) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to SAIC's Q1 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, and thank you for joining SAIC's First Quarter Fiscal Year 2021 Earnings Call.

My name is Shane Canestra, Vice President of Investor Relations.

And joining me today to discuss our business and financial results are Nazzic Keene, SAIC's Chief Executive Officer; and Charlie Mathis, our Chief Financial Officer.

Today, we will discuss our results for the quarter ended May 1, 2020.

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-Q to be filed soon, should be utilized in evaluating our results and outlook along with the 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 view 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, Nazzic Keene.

Thank you, Shane, and good afternoon.

While I am pleased to discuss SAIC's first quarter results and outlook, I want to first take a moment to extend my hope that each of you and your loved ones are healthy in managing through the disruptions in this unprecedented times.

Each of us has been affected in some way, and it is my sincere wish that you and your families are well.

I intend to cover several items that I know are of interest to you, including the impact of COVID-19 on the business, an update on our completed acquisition of Unisys Federal and a significant contract win in our AMCOM portfolio.

Before discussing these items, let me touch briefly on our first quarter results, which included about 7 weeks of Unisys Federal performance.

Additionally, as our quarter ended on May 1, the quarter contained roughly the same 7 weeks of COVID-19 impact, a larger time frame than those with the March quarter end.

Charlie will provide more detailed information on the quarter and our outlook for the fiscal year.

SAIC has started fiscal year 2021 on a very strong note, highlighted by revenue growth, consistent profitability and healthy free cash flow, all while navigating this unprecedented business environment.

These results are attributable to the dedication of our approximately 26,000 employees, and I want to thank our entire team for their resolve during this challenging time.

I am so proud of the men and women of SAIC.

Despite the modest impact of COVID-19 to first quarter revenues, SAIC achieved organic revenue growth of 3% as compared to the prior year quarter.

Adjusting for the COVID-19 impact, organic revenue growth would have been 5%.

Free cash flow was strong and reinforces the resiliency of our market and of SAIC as well as continued confidence in our liquidity and rapid delevering plan.

As for the impact of COVID-19, SAIC has been operating as an essential business in a very resilient market.

We are fortunate that the demand for our services is essentially unchanged.

I'm extremely proud that we can provide these vital services to our customers and support our country at a time of global crisis.

SAIC has experienced only a modest financial impact.

I would, however, like to talk about our focused response to this crisis in 3 areas: employees, customers and shareholders.

First and foremost, we immediately prioritized our employees' safety and well-being.

In mid-March, we responded decisively and advised our employees where possible to work remotely.

Our customers also adjusted quickly and have been very accommodating and supportive, allowing for remote work, alternative work schedules or modified-office environments to ensure social distancing.

About 75% of our employees are currently working remotely, while others work at work sites following CDC and local guidelines.

We are working very hard to support our employees when they need us most.

We are advancing leave to employees who need more time to care for themselves and family members.

Many SAIC employees are donating their accrued leave to fellow employees, and we are committed to providing all direct charge employees with paychecks at least through August 1.

In addition, SAIC is setting up a charitable foundation to further support employees, their families and our communities that are struggling due to COVID-19 related financial or health setbacks.

We've also increased our recruiting pace throughout this period, as we continue to attract skilled, talented people who are looking for the opportunity to work and thrive in a stable business environment.

You've often heard me talk about our deep commitment to our employees and SAIC's focus and priority in winning the war for talent.

These priorities have never been more true than today and continues to inform the decisions we make, even more so in these trying times.

Second, we are focused on ongoing high-quality customer performance to ensure continued mission execution through this pandemic.

The level of customer demand for our core services is essentially unchanged.

Although we are seeing an increased interest in solutions that will help modernize the government and support the remote workforce of the future.

We are developing and deploying solutions to meet those needs, initially with agencies that are already looking ahead to a post-COVID work environment, and we are here to support their digital transformation.

I am extremely proud of the work our teams have done to help the U.S. government respond to the needs of our nation and our fellow Americans virtually overnight.

As government employees quickly pivoted to work from home, SAIC provided virtual infrastructure engineering and help desk services to return agency employees to productivity.

And through our mobile ops rapid deployment kit, we are deploying IT and communications infrastructure for use by temporary hospitals and medical test facilities, allowing them to become operational within 24 hours.

To assist our health care heroes in their life-saving work, our data science and analytics services help produce high-quality predictive models for demand and supply of health care materials.

Third, we have ensured the stability of the business and protected shareholder interest.

I'm proud that our strategy to align our company to missions critical to our nation's priorities have allowed us to continue operating as an essential service and support our country in this time of crisis.

While we successfully navigate a myriad of operational challenges and individual customer needs, we have managed a stable business for our shareholders.

We continue to maintain an ample amount of liquidity, manage our cost profile, reallocate resources where necessary and continue our focus on business development and growth for the long-term future of our company.

While navigating through the pandemic, it should not be lost that during the first quarter, SAIC successfully completed the acquisition of Unisys Federal.

While less complicated to the integration of Engility, the successful integration of Unisys Federal is an absolute priority for me and the enterprise.

We are leveraging our previous integration experience and success into this integration, and we're off to a great start and are on track.

One of the first items that we accomplished was to home the intellectual property and technology-driven offerings in our Solutions and Technology Group and begin to leverage these assets in our business development efforts.

Key leaders are working in their new roles and are looking to capitalize on the new customer access they now have.

SAIC, through the Unisys Federal portfolio, was recently awarded a $630 million new business contract to provide Technology Application Development and Sustainment, or TADS, to support the U.S. Air Force Weather Agency.

This award is a great early proof point of the value that Unisys federal acquisition brings to our shareholders.

Charlie will soon share our business development results, but I'm thrilled that after we closed the first quarter, we were awarded the first task order in the series of our U.S. Army Aviation and Missile Command, or AMCOM, recompetes.

The task order valued at $2.9 billion over a 5-year period of performance resecures about $300 million of annual contract revenue and provides potential new business revenue in the $100 million to $150 million range.

This is the largest contract awarded to SAIC since the separation in 2013, and I couldn't be more proud of this exceptional team.

Building off the deep relationship we have with our AMCOM customer, our proposed systems engineering solutions was recognized as the best opportunity for AMCOM to drive future digital transformation.

The award of this task order significantly derisks the AMCOM recompete portfolio and gives us confidence in the successful award of several remaining task orders.

I'd like to ask Charlie to share our quarterly business development and financial results as well as our outlook.

Thank you, Nazzic.

SAIC started fiscal year 2021 with strong results, particularly in organic revenue growth, free cash flow and contract awards, while effectively navigating a variety of issues associated with the COVID-19 pandemic.

We also closed a very strategic and financially accretive Unisys Federal acquisition.

As Nazzic mentioned in her remarks, the first quarter contained about 7 weeks or a little over half of the quarter of both COVID-19 and Unisys Federal impact.

Let me begin with our strong business development results.

Net bookings for the first quarter were approximately $1.6 billion, translating to a quarterly book-to-bill of 0.9.

While our first quarter book-to-bill ratio is in line with first quarters historically, it does not fully represent the success of contract awards in the quarter.

In addition to contract bookings, we were awarded approximately $4.6 billion of single-award IDIQ contracts, our largest quarterly amount ever.

These contract awards do not immediately contribute to backlog for our bookings policy, but will add to bookings for the next several years.

Of these single-award IDIQs, approximately half were for new business awards.

This included the new business wins on the U.S. Air Force EDIS and Defense Logistics Agency FSG-80 contracts.

Also, we were awarded a new business contract valued at $368 million (sic) [$378 million] to provide support services across the FAA's workforce of more than 50,000 people.

The single-award IDIQ also included the successful recompetes of our Department of Justice Asset Forfeiture contract worth up to $1.3 billion, and our FAA controller training contract valued at $653 million.

It was a very exciting quarter of new business awards and maintaining large recompetes.

The momentum continued in the second quarter.

Subsequent to the end of the quarter, and as Nazzic mentioned, SAIC was awarded the first in a series of AMCOM portfolio recompetes.

This $2.9 billion task order has been a notable and significant recompete for SAIC, and we are proud to continue this important work for our AMCOM customer.

For Unisys Federal, we are also awarded another new business contract from the Air Force worth $630 million.

Not only were our contracts award strong, but our contract submittals continue to be robust as well.

SAIC's value of submitted proposals at the end of the first quarter was $15.6 billion, up from the end of the fourth quarter.

This improvement from a combination of strong quarter of internal submittals and the addition of Unisys Federal outstanding proposals.

At the end of the first quarter, SAIC's total contract backlog stood at approximately $16.6 billion, which included the addition of approximately $1.5 billion from Unisys Federal.

Let me now turn to the financial results for the quarter.

Our first quarter revenues of approximately $1.8 billion, reflect total revenue growth of 9%, which was a balanced mix of acquisitive and organic revenue growth.

Organic revenue grew 3% year-over-year.

This was mainly due to on-contract growth and new business awards.

First quarter revenues were negatively impacted by approximately $33 million from COVID-19, largely due to canceled or delayed activities in our defense and intelligence business, a slowdown in our supply chain business due to reduced operational tempo and our military forces as well as in our FAA training services.

Excluding the COVID-19 headwinds, organic revenues grew by 5%.

First quarter adjusted EBITDA was $137 million, and adjusted EBITDA margins were 7.8% as a percentage of revenues.

COVID-19 negatively impacted adjusted EBITDA margins by $8 million or 30 basis points.

This was primarily due to uncertain profit recovery and our intelligence community business on ready-state labor cost.

We are grateful for the recognition of the CARES Act.

They've been keeping our workforce ready and available.

Adjusted EBITDA excludes $28 million of net acquisition and integration-related costs in the quarter.

Net income for the first quarter was $36 million and diluted earnings per share was $0.62.

Excluding the $28 million of net acquisition and integration costs as well as amortization of intangibles, our adjusted diluted earnings per share was $1.38 per share for the first quarter.

The $8 million of COVID-19 impact profitability equated to about $0.11 per share.

The effective tax rate for the quarter was approximately 18%, modestly below our full year rate, which was expected to be 23% to 25%.

First quarter free cash flow was $158 million, reflecting a quarter of strong collections and great start to fiscal year 2021.

The free cash flow generation in this particular quarter reflects the resiliency of the government services market and reinforces our confidence in our rapid delevering profile.

During the quarter and included in our free cash flow, our onetime acquisition and integration cash expense of $29 million.

And finally, the $158 million of free cash flow does not include the $200 million impact from the accounts receivable purchase agreement that we initiated as part of the financing for the Unisys Federal acquisition.

A full reconciliation can be found in our press release and supplemental financial presentation slides.

Pro forma days sales outstanding at the end of the quarter after adjusting for the impact of sale of receivables were 60 days.

We finished the quarter with cash on hand of $276 million.

During the first quarter, we deployed $39 million of capital, consisting of $23 million of dividends and $16 million of mandatory debt repayment.

We did not make any voluntary debt repayments in the first quarter out of an abundance of caution for potential COVID-19 impacts.

However, given our strong first quarter cash flow, ample liquidity and continued confidence in the full year, we recently made a $125 million voluntary debt repayment.

I should note that as announced in our press release today, our Board of Directors has approved a quarterly cash dividend of $0.37 a share payable on July 31 to shareholders of record on July 17.

Now turning to our forward outlook.

In our late March call, we provided a framework for how we viewed fiscal '21 prior to the emergence of the COVID-19 pandemic, but did not provide formal guidance given the deep uncertainty at that time.

There is still uncertainty related to the course and effects of the pandemic, particularly around the timing of returning to secured facilities, FAA training and the operational tempo of the Department of Defense.

But given the strength and stability of SAIC in our market, we wanted to provide the investment community with formal guidance for fiscal year 2021 based on what we know today.

For fiscal year 2021 and including 10.5 months of Unisys Federal, we believe revenues will be between $7.1 billion and $7.3 billion, implying organic revenue growth between 1% and 4%.

This revenue range assumes a full year impact of approximately $150 million from COVID-19 primarily associated with the same factors that affected the first quarter.

This estimated COVID-19 revenue impact equates to about 2 points of organic revenue growth.

Without the COVID-19 impact, we would be back at the organic revenue growth range of 3% to 6% framework that we provided in March.

With regards to profitability, adjusted diluted earnings per share are expected to be between $5.80 and $6.10.

This includes a negative profit impact of approximately $25 million from COVID-19 primarily due to the uncertain profit recovery in our defense and intelligence community business on ready-state labor.

This was the same impact we saw in the first quarter.

Turning to free cash flow.

Despite the revenue and profit impacts from COVID-19, we expect free cash flow to be equal to or greater than $500 million, an increase of $50 million from our previous communications.

This includes the favorable timing impact of $70 million from deferred payroll tax payments afforded by the CARES Act and a negative impact of $20 million from COVID-19 related reduced profitability.

And of course, this excludes the $200 million impact from the sale of accounts receivable.

One final point, and as a reminder, our free cash flow this fiscal year is negatively impacted by approximately $40 million of expected tax adjusted Unisys Federal transaction-related outflows.

We are committed to the rapid delevering plan that we initially communicated in February at the announcement of the Unisys Federal acquisition.

With our increased cash flow outlook for the year, we will be able to pay down debt somewhat faster than previously planned.

We are confident in meeting our targeted net leverage ratio of 3.0x by the end of fiscal year 2022.

In conclusion, it was truly a remarkable quarter of financial resilience as evidenced by revenue growth, consistent profitability, strong cash generation and exciting contract awards during one of the worst crisis our country has faced.

We are tremendously fortunate and proud to continue to support our country with critical missions and solutions during these challenging times.

Nazzic, back to you for concluding remarks.

Thank you, Charlie.

We have always been recognized as a market leader in our industry, but now we can proudly say that we are a leading company across all industries.

A few weeks ago, SAIC was named to the prestigious Fortune 500 list for the first time.

With an initial ranking of 466, we have been recognized for transforming from a spin-off company 6 years ago to the much larger and powerful business force we are today.

And as we add the Unisys Federal portfolio and accelerate organic revenue growth, I am confident that we will increase our position on the list next year.

With profitable revenue growth as SAIC's strategic priority, we have made an incredible hire to further drive that momentum over the long term.

We are pleased to welcome Dee Dee Helfenstein to the company as Executive Vice President and Chief Strategic Growth Officer.

This new position was created to drive the company's organic growth and market leadership by aligning capabilities with customer needs and market opportunities.

Dee Dee will lead SAIC's corporate strategy and growth initiatives reporting directly to me.

Our Solutions and Technology Group and our strategic development team will be key parts of Dee Dee's organization to strengthen the company's ability to bring innovative, differentiated solutions to our customers and deliver digital transformation to the federal government.

As indicated through our results and commentary today, there is a great deal of momentum in our business.

I have often said that we, at SAIC, are driven by mission, united by purpose and inspired by opportunity.

This crisis that we're all living with, although incredibly tragic, creates the opportunity for a purpose-driven company to align and come together in support of each other, in partnership with our customers and in service to our nation.

I have never been more proud to be a leader of such an incredible team of men and women that live this every day with selflessness, passion, commitment and true purpose.

Thank you to all my SAIC colleagues.

Operator, we are now ready to take questions.

(Operator Instructions) And you have a question from the line of Sheila Kahyaoglu with Jefferies.

This is actually Greg on for Sheila.

I was just hoping you could provide an update on AMCOM.

You had some color in your opening commentary, kind of when the next RFPs are, how much upside you see to the total scope of the contract and just timing on some other awards within that contract.

Yes.

This is Nazzic.

So as we reported, we're very thrilled that we won the first one, and certainly secures a significant portion of our revenue and derisks the year for us.

So very excited to be able to share that news with you.

The AMCOM recompete portfolio has multiple contracts that will go up for bid between now and the course of probably the next 12 to 18 months.

And so we'll continue to examine and look at those where we believe we're the best suited to win and in a great position to be very, very competitive.

At this stage, this win secures most of the revenue or significant part of the revenue for the year.

And the rest of them then will start to fall into place from an award cycle as we get later in this year and into next.

And then just one follow-up on Unisys.

You had the TADS win in the quarter.

I mean how incremental was that to kind of the growth expectations you laid out when you acquired the business?

And how do we kind of think about the ramp on that win?

Yes.

So that was actually in the plan.

There was a number of new proposals in there.

We knew that going in.

We had a very good chance of winning those when we did the due diligence and it came to fruition.

So that's part of the expectation of Unisys Federal providing double-digit revenue growth for the next couple of years.

So yes, that was factored in.

Your next question comes from the line of Cai von Rumohr with Cowen and Company.

So you explained the cash flow variance this year, but I guess your guide had been for $500 million next year, and now you have a $35 million headwind from the deferred payroll tax.

Is $500 million still kind of -- are you still thinking about that kind of a number?

Yes.

Thanks, Cai.

It's a good question.

First of all, we're very happy to get off to such a strong start with the free cash flow in the very difficult times.

And like you said, because of the provision in CARES Act, we're able to defer payments and accelerate the free cash flow this year.

That's why we increased from the $450 million previous guidance to $500 million.

Now it's really a timing issue because, previously, the $550 million that we talked about with Unisys Federal, we would have to pay that back.

So it's really timing related.

But between the 2 years, we were projecting $1 billion of free cash flow, and we're still projecting $1 billion of free cash flow between the 2 years.

Got it.

That's terrific.

And can you give us some color on the expected margin profile over the year?

I guess if you add back the COVID, your margins were flat year-over-year.

How much of that was Unisys?

And kind of how should we expect the profile of margins over the years?

Yes.

Thanks, Cai, that's a great question there.

And let me just add a few additional comments on the margins.

Just to be clear, the margin outlook provided in our guidance, excluding COVID, is in line with the pre-COVID outlook provided in March.

Nothing has changed as far as the margin outlook previously, except that COVID we're going to have, we're expecting to have a $25 million profit impact.

Most of that impact is related to nonrecoverable of the feeds on the ready-state workforce.

So our margin -- and additionally, I would say, our second half margins have historically been higher than our first half.

The future quarters will contain a full quarter of Unisys Federal margin contribution.

This quarter, you only had half.

And there are some Engility synergies impacts that are stronger in the second half that we're still realizing.

So we have good line of sight to the margins.

And again, nothing has changed from our pre-COVID outlook, except the fact that we have this $25 million impact.

Does that help?

That's terrific.

One last one.

Could you give us some color, you mentioned AMCOM on other recompetes or your bookings prospects for the year?

Yes, Cai, this is Nazzic.

So it's a great question.

Obviously, retiring the significant recompetes that Charlie mentioned in his opening comments put us in a very strong position going into the year.

And certainly, we're very pleased to be able to retire.

The risk of recompetes as it related to FSA of $1.3 billion, of the AMCOM at $2.9 billion and the FAA at $650 million.

So retiring those, going into the year, certainly derisks the year.

Those were the 3 most significant recompetes that had any type of material revenue impact to us for this year.

And so we have the normal cycle of recompete, as you can imagine.

But nothing of that size or scale that would have that kind of impact.

So we feel very good about going into and retiring that risk at this stage of the year.

Yes.

And Cai, don't overlook the $4.6 billion of single-award IDIQs in the quarter.

I mean that was the largest-ever that the company has experienced.

And in there's a lot of new business wins, FSG-80, 950 million units is Federal that TADS win; $630 million, FAA; [another one ISC], $358 million.

So it was a very robust quarter of contract awards.

So I know those don't show up in a book-to-bill, but that is a very substantial number.

And I can continue to say that, as we said before, the momentum of submittals and proposals were extremely busy and the momentum there continues on the BD efforts.

Your next question comes from the line of Jon Raviv with Citigroup.

Just a quick follow-up, Charlie, on the free cash flow comment.

So you're still seeing the $1 billion across the 2 years, I understand the timing nature of the tax -- of the tax holiday, so to speak.

Can you just be a little more specific?

So we saw $550 million in FY '22, is $550 million now going to be $480 million?

Sort of losing the $70 million?

Or what the $550 million going to be in FY '22?

And where does that $20 million loss COVID play into that still seeing $1 billion across the 2 years are we essentially making up the $20 million elsewhere?

Or it's kind of a rounding area that...

Yes.

So good question, Jonathan.

And let me just do a little walk here to help you through this.

So our previous guidance was the $450 million.

You got to add the $70 million from the CARES Act on the deferred payroll tax, right?

And then you subtract $20 million from the profit impact of COVID.

That's how we get to the $500 million this year, right?

So next year, FY '22, $450 million baseline, and we also had the A&I cash impact in FY '21 that we won't have in '22.

So you have to add that back to get a revised base of around $490 million free cash flow.

We don't anticipate having COVID headwinds next year.

That's $20 million we're having this year.

And next year also increased profit of $20 million to $30 million gets you to around $540 million, of which we have to pay $35 million back deferred payroll tax.

Okay.

So that's how you get $500 million this year and $500 million next year.

And hopefully, if we need to go -- to take this offline and go over this again, but that's the kind of the walk and roll up.

Does that helps?

Yes, it does.

I just want to make -- I'm just really making sure that we're still at that $550 million-ish level, but you said approaching $550 million in FY '22, that one is squeezed.

So that helps a lot.

And then in terms of a lot of the new wins that you have come across here.

How do you think about the margin profile of those wins?

You're still targeting 8% to 9% ex COVID for this year.

Where do these things go thereafter?

Appreciating that Unisys is accretive, but I don't know if some of those things coming in that are starting up new are going to be dilutive?

Yes.

I'm very pleased by the margin profile and going after firm fixed-price contracts, more solutions oriented.

If you look at some of our disclosures as far as the -- our own direct labor content, so we have some very favorable trends happening at a macro level that gives us confidence in that increased margin profile.

There's always pressures with the number of recompetes that we have -- that we have to deal with, for sure.

But we've made good progress in just because going after more firm fixed-price contracts should help with the margins in the future.

Your next question comes from the line of Gavin Parsons with Goldman Sachs.

I wanted to ask on organic revenue growth, right?

It was 3% in the quarter and your full year guide is 1% to 4%.

But I think you've previously spoken about growth accelerating throughout the year, kind of as your new work ramps up.

Obviously, the COVID headwind looks like it might be more impactful going forward than it was this quarter.

But on the upside, you have locked in AMCOM and TADS, and you have got the $4.6 billion of single-award IDIQs.

So I mean is there any reason organic should decelerate from the current pace?

And then what might actually get you to the low end of that range?

Like was there any pull forward in the quarter?

No.

When you look out to Q2, we've got probably more COVID related than we had in Q1 because that really started halfway through the quarter.

And a lot of it is driven by operational tempo for supply chain business.

There was a stop-movement order.

There was a lot of training exercise canceled.

That had an impact on the revenue top line there.

So most of this impact, again, is going to be in the first half of the year.

We do see modest improvements in the second half of the year related to the COVID impact.

That's how we're planning for this.

But again, as we said, when we gave the guidance, we don't actually -- no, there's still uncertainty related to the pandemic, but this is the best that we know at this time.

Got it.

So there's nothing abnormal in the 5% underlying ex COVID growth rate this quarter?

No.

Okay.

Great.

And then longer term, obviously, a lot of moving pieces, and you've spoken about the COVID uncertainty.

But I mean you guys had a prior target of fiscal '20 to '22 organic growth of 3%.

Is that something that you could still achieve?

So repeat that again?

You're saying for our longer-term view of 3%?

Yes?

Yes.

Is that something you could still achieve over fiscal '20 to '22?

Yes.

We still feel confident in our growth profile.

That's obviously a key priority of ours as we shared with you.

And as from Charlie and myself, we're seeing good momentum in the pipeline development.

We continue to see the opportunity to drive growth in the business.

Obviously, we are dealing with a headwind that is a bit unpredictable, although we have good visibility into at least the actions that are being taken right now with the customers.

So at this stage, we do feel -- we still feel comfortable and confident with that projection.

Your next question comes from the line of Joseph DeNardi with Stifel.

Nazzic, can you just talk a little bit about kind of the nature of the impact on the business?

It sounds like it's primarily folks not being able to get where they need to be.

But is there anything on the award activity side that's kind of factored into the guidance?

And then in terms of the areas of the business that are being impacted, are you having conversations with customers in terms of like a time line to get back to normal?

Or is that still to come?

Just trying to understand when you think of the business kind of gets back to where you thought it would be.

No.

Great question.

So I think on the first part of your question, most of the impact that we see is in areas that are -- so as an example, the intelligence community and all of us in this market that serve the intel community are dealing with the same challenge.

And that is, for the most part, it is always exceptions.

Many of the individuals that serve that community work in skips.

And so ensuring that we can protect the health and well-being of our employees, collectively, customer employees as well as ours, be able to respect the social distancing creates an opportunity or a challenge to make sure that we work in a method that allows us to protect that.

So think about shift work, think about spreading out a bit.

And so that's been one area of impact.

Fortunately, the customers and those of us serving these customers have been working very, very closely together to make sure that we can continue to support the missions.

They're incredibly critical while protecting the well-being of our employees.

And so that's an example of where impact exists.

And then as Charlie mentioned, there's just some tempo type of thing.

So one example is in the FAA.

We do training for air traffic controllers.

There's not a lot of activity right now as it relates to commercial flying.

And so that's an area where we've seen a slowdown, and so that's another area of impact.

So we've certainly seen those types of impacts.

For the most part, though, the work that we do continues, and it just continues.

In some cases, we do work hand in glove with the customer.

We're on customer site, we're on our site, because that's where the work has to get done.

But we're doing so in fashion that allows us to protect our employees and provide them a work environment that allows them to protect themselves.

But in some cases, in many, many cases, where about 75% of our workforce now is working remotely, working from home.

And so the work that we can do, we can effectively be able to support our customers' missions in that regard as well.

So on the work side, those were some of the impacts.

As it relates to the timing of getting back, I've had extensive conversations with several customers, and we're all navigating this in a very real-time method as we sit here today.

So in some cases, we're looking at the option to do work in a combination of our location and the customer location, again, to be able to spread out a bit more.

So we're coming to the table with some creative ideas on how to leverage our facilities and service of the customers.

In some cases, we're able to deploy technology that allows the customer to do the work in a different fashion as well.

And so I wouldn't say there is a date certain in which I could certainly predict that we'll get back to normal.

I can tell you that we are all in the industry side as well as the customer side, looking at the opportunity to continue to do the work that we do today as well as to be able to close the gap on some of the areas where there's been challenges.

But I think it will continue to be days and weeks and possibly months, in some cases, as we continue to navigate that.

Does that answer your question?

Okay.

That's very helpful.

It does.

It does.

And then I'm wondering just on the Engility side.

Can you just talk about the revenue synergies, the extent to which you've recognized or realized any at this point as you guys look at it internally?

What have you won that you couldn't have won independently?

Or is that opportunity still in front of you, do you think?

Yes.

So a couple of comments.

One, we fully integrated the Engility business with the SAIC business upon closing that acquisition.

And so as we're now in year 2 of that, we don't really look at the business from what was Engility or could have been or what was SAIC.

We look at it collectively.

An example I can give you is EDIS is a great example of one where coming together.

Obviously, we were able to secure that win and deliver at this juncture.

The other thing I'll tell you is we look at it probably in broader conversations.

So space is an example where the 2 of us together are so much stronger in serving the space missions.

And that continues to be a very, very robust part of our pipeline and part of our strategy.

And so I know that, that probably didn't get to exactly what you're looking for.

But I can tell you that the revenue synergies we see as a result of that acquisition are in the portfolio development in some critical areas like the intelligence communities, like the space missions that we are seeing growth.

You have a question from the line of Edward Caso with Wells Fargo.

Just looking for some clarification here on the COVID-19 impact in the guidance.

The support and the CARES Act goes through September 30.

So are you assuming that the arrangement will go to then?

And by that point, all the adjusted work plans will go away?

Is that what the assumption is in the guide?

That is basically the assumption.

However, we do believe some of this will be carried till the end of the year, of which -- potentially the CARES Act could be extended or not.

But our assumption is most of this risk is in the first half of the year or until the time that the CARES Act ends.

But we still have -- we believe we still have some COVID impact until the end of the year that's not covered.

And I guess the second question is the client historically, the client generally, has been reluctant to do things out of greater DC, do things off client sites.

Now that we are sort of into the business -- back to business sort of as usual, the clients are starting to see what are lessons learned.

Do you sense any break in that unwillingness to consider alternative models?

That's a great question.

And I've actually had that specific conversation with several customers over the course of the last 12 weeks or so.

And I think you're exactly right.

I think there is an appreciation and a willingness to look at different ways to deliver work.

We have many customers that would never have contemplated being able to do the types of work that they do in a remote fashion.

And fortunately, working hand in glove with them, helping create some of the technology-based solution and demonstrating that we can, in fact, be as successful in a different delivery model than what they're accustomed to.

If there's a silver lining, maybe that's one of them of this challenging way which we're working.

So I do believe that as we go forward, it's an opportunity for us to look at different bases, around the U.S., being able to bring in talent from across the country and, in some cases, be able to reduce the costs or improve profitability as it relates to different talent mixes.

So I think it's a great question and it's something that we are talking about.

And I do believe could have sustained -- kind of a sustained rhythm going forward.

Your next question comes from the line of Matt Akers with Barclays.

I wonder if you could comment a little bit about your thoughts on kind of the longer-term demand environment post-COVID.

Are there certain areas of the budget that you think you can target, that may be sort of higher priorities, offer -- sort of [cleared offer]?

Or I guess how do you think about positioning the portfolio to best go forward?

Yes, great question.

So we're very fortunate to have a diversified portfolio across the customers we serve as well as what we do.

And I think that, that continues to serve us well and will continue to serve us well in the months and years to come.

As I think about the potential of where we could see increased interest as we lean forward.

Certainly, there has been an appreciation that the digital transformation, the IT modernization, the leverage of cloud technologies and all of that, that enables organization to work in a different environment has certainly become more important collectively across the federal landscape.

And so I think that's an area of opportunity.

We're very, very well positioned to continue to serve the customers in that regard and bring solutions to bear that allowed them to meet some of those objectives.

So that would be one example where we could see increased interest, increased funding to be able to solve some of the challenges that exist in a more traditional IT back office.

And so that would certainly be an example.

Cyber, the way that cyber feeds in, being able to manage the cybersecurity infrastructure in a distributed model, certainly, is an area that's getting a lot of attention and focus as well.

Got it.

And then, I guess, if you could update us on, I guess, thoughts on working capital.

You had talked in the past about maybe trying to improve DSOs.

And how much room is sort of still left on there?

Yes.

Good question, Matt.

So we're very pleased with the DSOs of 60 days that we had in the quarter.

And that was also reflected and the fact that people are working from home, collecting and billing and going through that cycle.

So actually very pleased with that.

So we're looking to maintain that kind of level of DSOs for the remainder of the year.

And our team has done a great job of adjusting to this environment.

So that's -- I would say that's our target looking forward.

Your next question comes from the line of Tobey Sommer with SunTrust.

I wanted to ask a question about the single-award IDIQs, that 50% that's new business.

What's sort of the arc and the cadence of that new business ramping in coming quarters?

What do you think at this stage?

Well, I think some of the single-award IDIQs have started FSG-80, for example, Air Force CDIs.

And those are ramping up a little bit slower than we had initially hoped for, particularly with the supply chain, FSG-80, just because of the operational tempo.

But I would say that we're on track as before, except for the COVID related on these ramps.

And I know there's a lot of focus on our team to transition quickly to get these ramped up and just very pleased that we're in this position that we are to having won these, and now is transitioning and booking revenue.

So good question.

And then my follow-up is based on your cash flow outlook, when will your leverage be at a level that you can reassess your capital deployment priorities?

And then specifically, could you kind of speak to the company's exposure in the public health arena and whether that would be an area of focus?

I'll take the first one on this one.

So we did make the $125 million voluntary debt payment last week.

Based on our outlook, we believe we can make another $200 million of voluntary debt payments if we so choose to, and we'll evaluate that as we go through the year.

So that would be a total of $325 million of voluntary debt, combined with the $75 million of mandatory.

So it's about $75 million more of debt repayments than we had initially planned.

And that would take our leverage down to quite a bit of an improvement given the fact that when we close Unisys Federal, we're at 4.4x, and this would be really cutting a lot of that off in that 3.6, 3.7 type of range by the end of the year.

And then we feel very confident in getting that to the 3.0x net debt-to-EBITDA by the end of fiscal '22.

So I would say that we're focused on continuing to repay debt this year, and we'll reevaluate next year as far as capital deployment, any changes there.

Yes.

This is Nazzic.

So I'll touch briefly on the public sector health market.

Certainly, it's getting a lot of attention as we sit here today.

Over the course of the last couple of years, as I have talked about the priorities, if and when we were to look external, that was one of the areas that I gave as an example.

We do not have a significant portfolio serving that part of our market.

And it has been and continues to be something of interest.

Now the good news is that we do have solutions that we can take to that market today.

And so if you think about public sector health and their need to modernize their systems, their need to go through digital transformation, those solutions that we have can serve that market and do serve that market, and we'll continue to do so.

But as it relates to the deep domain expertise, that would be something as we look forward in the months and years to come as an opportunity to not just organically but potentially inorganically look to be able to complement that.

And your next question comes from the line of Louie DiPalma with William Blair.

Nazzic, you referenced your Engility space assets.

Last week, SpaceX completed an exciting mission as part of NASA's commercial crew program.

You are obviously one of the largest providers for NASA and the Space Force.

What are your thoughts about the future budget plans for the Space Force, NASA and the moon mission?

Do you think that there's bipartisan support there?

I certainly can't begin to predict what could happen with whether it's a new administration or even the existing administrations down the road.

I can't tell you that we're very fortunate to serve that customer and to serve these critical missions.

And our team takes great pride in it.

We bring a tremendous amount of great engineering and related IT work to support the mission.

So at this juncture, they are getting good support.

At this juncture, they are getting -- being awarded -- afforded the budget to help serve their missions, and we're very, very happy to be part of that.

And Charles, can you quantify the amount of integration and restructuring costs for the Unisys acquisition that remain for the rest of the year?

Well, it's pretty small.

I can't -- let's see, less than $10 million on Engility.

He asked Unisys.

Yes, Unisys Federal, right?

Unisys?

Yes.

Yes.

Let me get back to you on that one because I'm not exactly sure.

I don't want to give you a wrong number here.

We have some acquisition integration related to -- still to Engility, a very small part of that.

And then we have Unisys Federal, of which a large part of that was taken acquisition integration in the first quarter.

So we would like to follow-up with you and get back to you more specifically on that.

But Louie, this is Shane.

I think in total for the year between the 2 efforts, it still remains $60 million for the full year, and we'll get this breakout.

You have another question from the line of Jon Raviv with Citigroup.

Just to -- I asked you one earlier, Nazzic.

Nazzic, any sort of perspective on creating that role for Dee Dee and bringing her on?

I mean it's a pretty notable hire someone with a long career at a competitor involved in a group, driving a lot of change in that other company.

What are your plans for SAIC?

I know you've previously talked about some pivots that you guys looking to make.

So what are you looking for out of this particular change?

Great question.

So as we looked at the priority of the company, the strategy of the company, I've really reinforced one of my top 3 priorities is to pivot us to profitable organic growth.

Then in working with the leadership team, we decided that having somebody who we all wake up every day focused on it, but who really look across the enterprise, across the customer groups, across the solutions of technology group to really help us strengthen our position and strengthen our resolve and focus on growth would be a terrific position and money well spent.

And so as I think about it, it really is to continue to strengthen the leadership team and bring on somebody like Dee Dee, and we're thrilled that she joined us to really help us strengthen our commitments, strengthen our resolve, bring us some best practices as we continue our journey on driving growth.

You have another question from the line of Cai von Rumohr with Cowen and Company.

So you had $33 million of D&A in the first quarter, flat year-over-year, even though you had 7 weeks of Unisys.

How come it wasn't higher?

And where should we model D&A for the full year?

Yes.

So Cai, let me give you just some general guidance on this.

So depreciation and amortization for the full year is about $175 million: $135 million is amortization of intangibles, $35 million depreciation.

Okay.

And how come it wasn't higher in the first quarter given that you had Unisys for half of the quarter?

Yes.

I'm not sure why that is.

I'd have to get back to you on that, Cai.

Let me give you a couple of other just kind of guidance assumptions here why we have -- the tax rate, we're assuming for the full year is 23% to 25%.

We're also assuming interest expense of $31 million to $32 million per quarter.

And we're assuming in that guidance, share count on average of 58.7 million year-end diluted shares.

And I will get back to you as far as the depreciation and amortization on Q1.

Your final question comes from the line of Gavin Parsons with Goldman Sachs.

Do you expect AMCOM and TADS to be protested?

And is there any risk to your guidance if those go into an extended protest cycle like you experienced last year?

Yes.

The good news is, and I'm happy to report, they are both out of their protest cycle.

And there are currently no other questions.

I would now like to turn the call back to Shane with any closing remarks.

Thank you very much for your participation in SAIC's First Quarter Fiscal Year 2021 Earnings Call.

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

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.