Science Applications International Corporation

Good afternoon and welcome to SAIC's first quarter 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 second 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 Naza Keen, SAIC's Chief Executive Officer, and Charlie Mathis, our Chief Financial Officer. Today, we will discuss our results for the quarter ended July 31, 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 views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures. It is now my pleasure to introduce our CEO, Nizit Keen.

Thank you, Shane, and good afternoon. Before discussing SAIC's performance and forward outlook, it is my sincere hope that each of you and your loved ones are healthy and managing through the continued challenges related to the pandemic. To those SAIC employees who have been directly or indirectly impacted by COVID-19, we continue to support you and provide assistance where we can for you and your families. Charlie and I have a lot of details to cover today, but I am pleased to report that SAIC continues to operate from a position of strength despite a challenging macroeconomic environment. We've been operating in this environment now for six months, and I'm proud to say our employees and our organization have adapted very well. While we have experienced isolated pockets of COVID-19 related impact, customer demand for our offerings remains strong, as evidenced by our positive business development and financial achievements. Let me briefly discuss our second quarter results. SAIC continues to demonstrate a resilient and stable portfolio as evidenced by our strong revenue base, improved profitability, excellent cash flow generation, and the highest bookings and book-to-bill ratio in our seven-year history. Internal revenue growth for the second quarter, excluding the impact of COVID-19, was in line with our expectations at 3%, demonstrating the underlying strength of the business. SAIC exited the second quarter with the highest backlog in our company history, a proof point of our go-to-market strategy and acceleration of our business momentum. These are notable achievements considering the many COVID-related issues we are all navigating. In June, I communicated our focused response to the pandemic in three areas, employees, customers, and shareholders. Our efforts continue in these key areas, but as it relates to our shareholders specifically, while we navigate the pandemic-related headwinds, our attention is on managing the business to meet our commitments and create shareholder value. We are focused on managing profitability, generating substantial cash, meeting our delevering commitment, and continuing our business development and growth activities to ensure the long-term success of our company. SAIC is grateful to operate in a market that has been minimally impacted by the pandemic. We continue to play a vital role in our customers' missions across our broad customer set, but in particular those responsible for ensuring our nation's health and security. As the expiration of many parts of the CARES Act approaches, particularly Section 3610 that provides for the maintenance of ready state labor, we are hopeful and confident that the provision will be extended, allowing us to continue our vital support to our national security customers. Looking a bit into the future, government fiscal year 2021 is almost assured to start under a continuing resolution, which will likely remain in place until after the November elections. SAIC is accustomed to operating in a CR environment, and we know how to navigate potential disruptions. I'd like to take a minute to discuss talent acquisition and retention during the pandemic. By making talent a priority and a key element of our strategy, we have maintained our ability to recruit and retain best-in-class technical talent, while also benefiting from an all-time low in voluntary turnover. We have over 500 direct open positions available, and we believe that SAIC provides a very attractive career opportunity in a stable market, providing customers with technological solutions of national importance. Speaking of valuable talent, let me provide a quick update on our acquisition of Unisys Federal. Unisys Federal contributed for the entire second quarter and has operated very well during the pandemic, similar to the rest of SAIC. As I have mentioned before, the integration of Unisys Federal is much less complicated than the integration of Agility, and I am proud to say that the work of the integration team has exceeded our expectations. We are infusing their commercial-style delivery model and go-to-market approach in key markets and with receptive government customers. While we remain focused on our strategic priorities, we also periodically review the portfolio for non-strategic areas to de-emphasize or divest. During the second quarter, SAIC sold a few State Department and Department of Justice International law enforcement support contracts. These contracts were obtained through our acquisition of agility and were not viewed as strategically important to our strategy or our future. They were also dilutive to our margin profile and not financially material to the company. As it relates to our strategy execution, we are seeing the positive impact of past year's technology investments and acquisitions in our ability to cross-sell capabilities to new and existing customers. Most notable and exciting is the increased interest by intelligence community and defense customers in our IT modernization capabilities, especially in advanced analytics, software and app modernization, and cloud migration. Our digital transformation capabilities, strengthened by the Unisys federal acquisition, are also creating growth opportunities through increased customer and market access. This is an example of a realization of our strategy that continues to guide our investments and priorities and will provision SAIC for sustained profitable growth. Before turning the call over to Charlie, I want to take a moment to discuss his recently announced retirement. Charlie has decided to retire, but has graciously agreed to stay until the end of our fiscal year, allowing for a smooth transition to a new CFO and a continued successful year as we navigate the pandemic challenges. I am very appreciative of Charlie's financial leadership over the past four years, and in particular, supporting me through my transition as CEO. His extensive experience in financial acumen has helped SAIC grow from a $4.5 billion business to the over $7 billion company we are today. Although we will miss Charlie's passion and commitment to SAIC, we congratulate him for reaching this milestone, and I ask you to join me in wishing him well and celebrating his recent decision to retire.

Thank you, Nozick, for the very kind words. This has been one of the most rewarding times of my career. SAIC has a wonderful purpose statement and mission to advance the power of technology. As a former Marine, SAIC gave me the opportunity to continue supporting our great country. I am proud to have been part of such a talented group of people pursuing a common goal. But I'm not quite done yet. As Nozick mentioned, I will retire at the end of the fiscal year and will focus my remaining time in two areas. First, I will look to close out another year and continue to deliver on the financial commitments we have made. Second, I will help ensure the smooth transition to a new CFO. The company is operating from a position of strength and leadership, and I will do all I can to enable the future success of a new CFO. Now moving on to the results for the second quarter and our outlook. SAIC continues to demonstrate exceptional resiliency in a challenging market. We continue to build momentum across all aspects of our business operations, business development functions, and financial metrics. SAIC's results for the second quarter fiscal year 2021 reflect solid revenues, strong profitability, and free cash flow, and outstanding contract rewards, all while absorbing COVID-19-related headwinds. Let me begin with our strong business development results. Net bookings for the second quarter were approximately $4.6 billion, translating to a quarterly book-to-bill of 2.6, the highest book-to-bill in our history. The most significant contribution to our quarterly bookings was the award of the Amcom software lifecycle development contract, with a total contract value of $2.9 billion. In addition, and not contributing to our second quarter bookings, we received over $1 billion of single award IDIQ contracts, with one of the awards being a $630 million contract to provide IT modernization to the U.S. Air Force Weather Agency. The Technology Application Development and Sustainment, or TAS, contract was won as a result of the UNISIS federal acquisition. Not only were our contract awards strong, but our contract submittals continued to be robust as well. Even with the strong bookings in the quarter, SEIC's value of submitted proposals at the end of the second quarter was $20.6 billion, up $5 billion from the end of the first quarter. This is the highest amount of submitted proposals in our history and approximately 80% of the value of submitted proposals is for new business opportunities. At the end of the second quarter, SAAC's total contract backlog stood at approximately $19.4 billion, up 40% from prior year quarter, which includes funded backlog of $3.1 billion. Let me now turn to the financial results for the quarter. Our second quarter revenues of approximately $1.8 billion reflect total revenue growth of 11%, with generally flat year-over-year organic contraction of 1%. On a year-to-date basis, revenues reflect organic growth of 1%. Negatively affecting second quarter revenues were approximately $65 million of COVID-19 headwinds, resulting from the same factors that impacted the first quarter, a slowdown in our supply chain business due to lower operational tempo in our military forces, reduced FAA training services, and the maintenance of ready state labor in our national security portfolio. Excluding the COVID-19 headwinds, organic revenues grew by 3% in the quarter and 4% year-to-date, in line with our expectations for the year prior to the onset of the pandemic. Second quarter adjusted EBITDA was $167 million, and adjusted EBITDA margins were 9.5%. as a percentage of revenues. On a year-to-date basis, adjusted EBITDA margins are 8.6%, up 20 basis points from the prior year six-month period. As with the first quarter, COVID-19 negatively impacted adjusted EBITDA margins by about $8 million, or 10 basis points. This was primarily due to uncertain profit recovery in our intelligence community business on ready state labor costs and reduced volume in our supply chain business. We are grateful for the provisions from Section 3610 of the CARES Act in keeping our workforce ready and available. However, offsetting the negative COVID-19 impact in the quarter were a couple of favorable one-time non-recurring items of $17 million related to the resolution of certain legal and program contract matters. As evidenced by our strong profitability, SAIC continues to operate efficiently during these challenging times, reflecting both the resiliency of both our business model and the government services market. Finally, and as Nasik mentioned, during the quarter we sold non-strategic international law enforcement contracts obtained from the agility acquisition, which accounts for most of the acquisition and integration costs in the quarter. Net income for the second quarter was $51 million and diluted earnings per share was 87 cents. Excluding the $15 million of net acquisition and integration costs, as well as amortization of intangibles, our adjusted diluted earnings per share was $1.63 per share for the second quarter. The $8 million of unfavorable COVID-19 impact profitability equated to about 10 cents per share. The effective tax rate for the quarter was approximately 25%, in line with our continued full-year rate expectation at 23 to 25%. Second quarter free cash flow was $90 million, reflecting another quarter of strong cash generation. The second quarter contained one more payroll cycle as compared to the first quarter, which is consistent with historical years. The free cash flow generation continues to reinforce our confidence in our rapid delivering profile. Days sales outstanding at the end of the quarter were 63 days, excluding the impact of accounts receivable sale facility. We finished the quarter with cash on hand of $197 million. During the second quarter, we deployed $163 million of capital consisting of $21 million in dividends, and $17 million and $125 million of mandatory and voluntary debt repayment, respectively. Additionally, and subsequent to the quarter, due to the continued strength in cash flow generation and our outlook, we made $100 million voluntary debt repayment, continuing a rapid de-levering plan and commitment. I should note that as announced in our press release today, our Board of Directors has approved a quarterly cash dividend of 37 cents a share, payable on October 30th to shareholders of record on October 16th. Now turning to our forward outlook. As noted in our press release, we are updating a portion of our previously provided guidance for full fiscal year 2021. Our updated guidance assumes continued impact from the COVID-19 pandemic at a similar pace that we have seen thus far and now through the end of fiscal year 2021. Our previous guidance assumed lessening headwinds and a return to a more normal operational tempo in the third and fourth quarter, but we now believe the impacts of COVID-19 will persist through the end of the fiscal year. So the increase is due to longer duration, not new or previously unidentified impacts. For fiscal year 2021, and including 10 1⁄2 months of unisys federal, our revenue expectations are between $7.1 billion and $7.2 billion, implying organic revenue growth between 1% and 3%. However, this revenue range now assumes a full fiscal year impact of approximately $250 million from COVID-19, up from the previous expectation of $150 million, and primarily associated with reduced volume in our supply chain portfolio. We believe that this updated estimate of COVID-19 full year revenue impact fully addresses the risk to the portfolio as we see it today. This updated estimate equates about four points of organic revenue growth for the year. The revised revenue guidance accounts for the increase in pandemic-related headwinds and the foregone revenue associated with the sale of international law enforcement contracts, partially offset by improvements in the strength of the underlying portfolio. With regards to profitability, expectations for the adjusted diluted earnings per share are unchanged. at between $5.80 and $6.10. This includes a negative profit impact of approximately $35 million from COVID-19, up from our previous expectation of $25 million. However, due to the year-to-date profitability, we expect to offset the increased COVID-19 impact estimate. Turning to free cash flow, we still expect free cash flow to be equal to or greater than $500 million, also consistent with our previous expectations. We are committed to the rapid delevering plan that we initially communicated in February at the announcement of the Unisys federal acquisition. We are confident in meeting our target net leverage ratio of 3.0 times by the end of fiscal year 2022. and have made significant progress so far. To that point, including the debt repayments through today, we are now at a net leverage ratio of just under 4.0 times and are ahead of our debt repayment plan. Nazit, back to you for concluding remarks.

Thank you, Charlie. Before taking your questions, I would like to take a moment to reaffirm SAIC's commitment to a very important social issue, inclusion and diversity. We recently issued a sustainability and social responsibility report that details our emphasis, accomplishments and progress in this area and much more in our environmental, social and governance profile. The report can be found on our investor relations page and I encourage you to review the report to see the many good things SAIC is doing in these areas. Along with this report, Recent events have been an urgent call to action and have driven the need to have broader and more meaningful discussions about social inequality and how SAIC can make a greater impact within our company, in our communities, and across the country. We are taking this opportunity to build on what SAIC was already doing, but we also know we can and must do more. It is critically important that all SAIC employees feel welcome and have an equal opportunity to achieve their goals. Hearing directly from our employees about their personal experiences and challenges have only strengthened our resolve and commitment to build on the progress to date and reminded us there is more work ahead. SAIC will aggressively work to ensure that we have a workforce that represents the best of our country, a broad tapestry of age, color, Gender, Gender Identity, and Ethnic Backgrounds. Operator, we are ready to take questions.

In order to ask a question, you will need to press star 1 in your telephone. To withdraw your question, please press the pound key. And your first question comes from the line of John Ravie from Citi. Your line is open.

Thank you and good afternoon. On the growth dynamic, appreciating these full-year impacts that you're feeling this year, to what extent, and you mentioned the 400 basis points of growth headwind this year, to what extent should we be able to almost recapture that growth at least in the next fiscal year? Maybe not all the dollars, the dollars are missing, the dollar is gone, but the growth rate. It feels like we should be above that 3% long-term number you've always talked about.

Yes. Hey, Jonathan. Yes, I would agree with that assumption that the growth rate that we would be projecting next year would be in line with our pre-COVID estimates and that we would be growing 3% or excess of 3%. If you look at the amount of business development momentum The backlog, the book to bill, the contracts to middles, 80% of which is new business. There's a great deal of momentum that's generating. And so, yes, the growth rate going forward out to next year, I think, would be meet or exceed what we would have this year, excluding COVID.

Got it. And then on margin, I mean, I appreciate that the 9.5 has had a net benefit from some one-timers that you outlined. But, you know, combined with the performance here today, what you're seeing in the backlog, getting rid of some dilutive businesses, you know, you're well on your way, I think, to the mid-8s this year. You know, is there room for margin to accelerate much above, you know, 9% on a more sustainable basis going forward, as you just mentioned, some of that growth momentum picking up as well?

Yes, well, let me just make a couple comments on the margins and again, normalize the margins from the one-time favorable impact of the 17 million. That's about 100 basis points for the quarter, so the 9.5 would really translate to an 8.5%. However, on the other hand, we had $8 million in negative COVID impact, and if you add back the COVID revenue and the profit impact, You get to 10 basis points improvement there. So a normalized margin for the quarter is about 8.6%. We expect the slightly higher margins in the second half of the year. And that's consistent with our guidance and our previous communication. We're benefiting from the UNIS federal impact in the second half. and we would look for that dynamic to continue as we move forward in higher margins in next year. We are bidding. These contracts are being bid with higher solutions, more firm fixed price contracts, all translating into higher margins. So, way too early to give any guidance for next year or any of that, but certainly the way we're going would suggest that we are going into higher margins.

I think, Charlie, the right answer is FY22 is not your problem, but that's okay. Congratulations on the retirement. Thanks again, guys.

Your next question comes from the line of Greg Conrad from Jefferies. Your line is open.

Good evening and congratulations, Charlie. Just wanted to follow up on COVID. I mean, is it isolated to supply chain, FAA, and Intel? Are you seeing any types of delays on some of the ramps on some of these new contracts that you've won?

This is an issue of duration, not depth. We laid out what was impacting us. It was supply chain, FAA, The national security and that that's what we're seeing. We're seeing this person persisting to the end of the year We thought there would be lessening headwinds From this dynamic going into the fall that didn't happen and and the majority of this is the operational tempo around the supply chain it just hasn't gotten back to the levels that we were The pandemic impact is just continuing to the end of the year, and that's what the assumptions are.

I'll just add to that. So Charlie did an excellent job of capturing those pockets that are impacted. On the positive side, the vast majority of our employees are working, many working still remotely. So we've worked exceptionally well in concert with our customers to ensure that the vast majority of our work continues. and in many cases, new delivery models for that work. And so I think in general, although we are impacted and we've certainly outlined that, it's just important to remember that most of the company continues to operate just as it has operated before. And also, you know, bringing in new technologies and new delivery models that allow us to do so.

That kind of ties into the next question. You mentioned submitted proposals are up 5 billion sequentially with 80% new business. I know you typically don't mention contracts that you're bidding on, but any color in terms of areas maybe where you're seeing the most opportunity?

Well, I think one way to think about it is we've been sharing our focus areas and our strategy. So if, you know, the areas that we see the opportunity to drive growth in digital transformation, IT modernization, cloud migration, the space domain, readiness in the armed forces, so there's, you know, it's very consistent with the strategy that we've laid out and we are seeing the opportunity to drive long-term revenue growth in those areas.

Thank you.

Mm-hmm.

Our next question comes from the line of Kaivan Ruman from Callen. Your line is open.

Thank you very much. So I assume we exclude the $630 million PADS award from your award given it's an IDIQ, and therefore it looks like you've got about a billion dollars of unidentified sort of miscellaneous stuff other than the stuff you laid out. That looks like a pretty big number. Is there anything in particular that's worth citing there?

No, I think we've laid out in the press release most of the notable awards that were contained in there. And, you know, there were some $150, $170 million, a few of those, but, you know, Nothing one big time other than the software lifecycle.

And then, let's see, you mentioned the $17 million legal gain. How much were contract adjustments or EACs in the quarter?

Yeah, there was no significant EAC adjustments in the quarter. The $17 million included legal settlements and contract resolvements that were not related to EACs, but were related to us negotiating on certain contract terms, I would say, that proved to be favorable. So So it wasn't EACs. The EACs for the quarter were zero. Year-to-date, 3 million.

Got it. Okay. And then the last one, you know, it looks like you raised the COVID estimate for sales, 100 million, the P&L impact by 10 million. And yet if the main area of exposure is the supply chain, their margins are way below average. So how come it's 10 million on 100 million?

Yeah, so the $10 million relates to the no fee on idle time that's been an impact for us for the first two quarters. So that's extended until the end of the year. We thought that that would lessen in the fall, but that's where most of the profit comes from is the extension of that no fee on idle time. National Security.

Great. Thank you very much.

Your next question comes from the line of Joseph Dinardi from Stiegel. Your line is open. Hey, good evening.

Charlie, the flexibility on the market is very strong and that tends to correlate to, I don't know, north of 5% organic growth across the industry the past couple of years. So is there anything from a Recompete standpoint, we should consider kind of as an offset to that in terms of why organic growth shouldn't be quite strong next year. And then to what extent are you all seeing bridges and extensions that may defer some of that recompete risk into subsequent years? Thank you.

Hi Joseph, this is Nozick. So a couple things. We really have, for the most part, retired the re-compete risk as it relates to the rest of this year. There's certainly small things that are still out there, but as we think about for the remainder of this year, most of that re-compete was retired, certainly with the ANCOM resolution in our favor. So the way that I would think about it is the wins that we will continue to gain, the solid backlog as we go in the next year will drive the growth as we go in the next year. We are seeing, in some cases, extensions. And so that's a normal course of business. In some cases, we're hearing extensions as a result of COVID. In some cases, it's just, you know, it's a normal way of of dealing with re-competes and procurement. So we are seeing some of that, nothing significant at this juncture, but again, I think as we look forward to the rest of this year, most of the re-compete risk has been retired.

Okay, and then as it relates to units as federal, can you just talk about employee retention there, what you've been seeing over the past few months? Thank you.

Yeah, absolutely. So the integration of Unisys Federal continues to go very well. In general, and I think it's relatively consistent with the rest of our industry, the turnover rates have been relatively low in light of the impact of COVID. So we're seeing very high stability in the Unisys Federal portfolio, very consistent with Unisys. with the same rates of turnover we would see in our overall portfolio, so that continues to go well. I'll give you a little color on the integration. As I mentioned, we closed that acquisition, and day one was in the beginning of the COVID challenges, and so that is something that we've paid close attention to and making sure that we communicate and we've integrated as successfully as we can. It is a much less complicated integration than agility-wise, If you think about the fact that we bought a portion of the business, not an entire company. And so the next steps for us is we continue to look at harmonization of benefits, and that's well on track, as well as the financial system full integration. And, again, that's well on path. So I'm very pleased with how that integration has gone, very pleased with the integration of the employees and the solutions and the customer access. And so I just wanted to give you that general update as well.

Thank you very much.

Our next question comes from the line of Seth Seifman from J.P. Morgan. Your line is open.

Thank you very much. Good afternoon and congratulations. I wanted to ask first, I guess, about the COVID-19 impact. I realize that you and everybody else, everyone dies one day at a time. And so is it that you see visibility on this persisting to the end of the year and kind of letting up in terms of the, you know, the pace of activity in the logistics business? Or is it that, you know, it kind of continues at this pace until the end of the year and, you know, possibly into the first quarter of next year depending on, you know, what the virus is doing and whether there's a vaccine? and you know this will go away at some point but you know this date is not necessarily in sight.

Yeah I would say that that's we're looking at this to persist to the end of the year. We're looking at the impact on COVID the revenue to be consistent in the next two quarters. Year-to-date, we've had 110 million, so there's 140 million more to go. It's consistent. And, you know, the opportunity is if this thing went away faster and the operational tempo turned around by the fourth quarter, then we could see improvements. But right now we have – We don't see any further risk on the downside related to this. We've factored in everything we believe to be the case.

Okay, great. Thanks. And then maybe if you could talk about the future AMCOM, obviously an important win to start off the recon piece there, but the future AMCOM award opportunities and then when you expect them.

Yeah, this is not the CAPI-2. So again, we're very pleased that we were able to secure the first of these. There are several more that we are pursuing of significant size and scale. We believe the next one could be awarded as early as late September into mid-October. And so we look for that one. And then a few more then would come as we close out this fiscal year, possibly into early next fiscal year. And so, again, we believe we're very well positioned. It does create an opportunity not only to secure our recent heat and our current revenue stream, but provide for some growth opportunities as well in that portfolio.

Great. Thank you very much.

You're welcome.

Our next question comes from the line of Gavin Parsons from Goldman Sachs. Your line is open. Hey, good afternoon.

Hi, Gavin.

Is given the 1-3% total organic growth rate guidance with a 4% headwind, did you raise the 3-6% underlying ex-COVID organic guidance?

No, we haven't raised that. And, you know, the 1-3%, the 4%, those rounded approximate numbers there, so... I would say that, you know, the underlying strength of our portfolio leads us to the top end of that pre-COVID estimate on the revenue growth. So I would say we're more there than raising any pre-COVID estimates.

Got it. So reiterating the three to six ex-COVID but towards the high end?

Yes.

So does that imply something like a six or even 7% growth rate organic ex-COVID in the back half of the year?

I think we were roughly 5% is where we're taking, excluding COVID, the impact there. Again, five, 6%. That's the higher end of that range that we gave.

Okay, thanks. And then, Now, Nazik, just given the repositioning of the digital transformation space, Intel focus, what's the target business mix of those categories or those segments relative to where you are today? Thanks.

Are you asking, just to make sure I get the question, so as it relates to our overall portfolio, what portion of our business is in that category, IT modernization, digital transformation? Is that the question?

Yeah, exactly. What it is today versus where you aspire that to be.

Yeah, I don't have the exact number. I would say it's, you know, one and a half to two billion, somewhere in that range, but I don't have that exact number. Significant portion of our portfolio today, and it's a significant portion of our pipeline going forward as well.

Got it. And then just quickly, the $17 million gain on EBITDA, was that expected or considered in EBITDA margin guidance for the year?

No, that was one time non-recurring that was not in the guidance. So that helps offset the additional negative COVID impact we have in the back half of the year. The favorable contract, you know, program contract matters and legal settlements.

Got it. So, what's the new percentage guidance for full year, please?

Yes. So, we, you know, we've given guidance as far as revenue and ETFs and cash. And we've given, I think, pretty much all the factors you need to calculate that. And And also, I mentioned earlier that that was a normal margin of 8.6% EBITDA in the quarter, and we expected the back end to be slightly higher in the second half. And I would just leave it at that for now. Got it. Thanks very much.

Our next question comes from the line of Toby Palmer from Truist. Your line is open.

Thank you. If we look at the pipeline compared to the income statement and profit profile that you're reporting currently, how much of a difference is there? In other words, maybe give us a sense of how much more profitable the pipeline is than your current book. Thanks.

I would... I'd say slightly favorable because we're always looking to increase the value added portion of our work. I think the business that we're going after, NASIC puts a lot of screening into making sure that these margins are higher and accretive. We're always looking for accretive margins. I don't have the exact number of what it would be.

Looking at Unisys Federal and that marketplace, can you tell me about what the pipeline looks like for that and any numbers you could talk about? We need to believe people look for sort of evidence. And I say that assuming that the TADS was a fairly well-formed bid prior to the acquisition.

Yeah, so you broke up a little bit towards the end, so I'll try to address the question. But if I didn't capture it, I didn't get the last couple sentences. But I think what you're asking is the units of federal acquisitions starting to influence pipelines. If so, how and where? I'll address that. If that's not it, let me know. The answer is absolutely yes. In particular, as I called out, we're seeing increased pipeline activity as it relates to IT modernization, cloud migration, digital transformation, and those areas in our intelligence community and in our DOD pipelines. It doesn't mean it's not in the rest of the portfolio, but those are the areas that have the most significant opportunities in terms of building on what we do in the civilian space. So we're absolutely seeing the infusion of that, the solutions into our pipeline development, and so we believe that to be a true benefit and advantage of that acquisition. Did I answer your question, or did I miss something?

We have lost your line. Your next question comes from the line of Matthew Akers from Barclays. Your line is open.

Hey, good afternoon, guys. Thanks for the question. On the guidance, this is a little bit nitpicky, but I guess the legal gain, I think, was $17 million, and I think you increased your COVID profit impact by 10. Was there another negative offset that sort of made you keep the guidance the same for the full year?

No, I can't think of anything there. Like I said, there was underlying strength in the portfolio and the revenue side. And again, I want to emphasize that $17 million wasn't just legal settlement. There was also some favorable contract matters that were also in there as well. But no, there's, other than the underlying strength of portfolio, nothing in there that I can think of.

Okay. And then I guess just one other one. So there's the SMTrees squad vehicle award, the score that one of your competitors took, I guess. Could you just comment on, you know, that sort of portfolio business, how that could fit into your portfolio in the future? you know, vehicles or sort of product-related business, something that you plan to pursue more and all in the future?

Yeah, this is Navik. You probably don't want to put too much color on any particular deal. What I can tell you is the nature of that business for us, since we made the pivot 18 months or two years ago, is really around the engineering. And so that continues to be a strength at SAIC. That absolutely is part of our go-to-market strategy, bringing, you know, digital engineering and complex engineering technology to serve the DOD. So that aspect of our business continues. Obviously, we were disappointed, but probably don't want to say much more on that particular deal.

Got it. All right. Thanks, guys.

Mm-hmm. Your next question comes from the line of Josh Sullivan from the Benchmark Company. Your line is open.

Good evening.

Hi, Josh.

You know, I think as you invest today, you put out some longer-term assumptions on defense outlays. You know, any updated thoughts to that outlook or maybe game theory just as the November election approaches here?

Yeah, this is Nazik. So, you know, as we sit here today with some of the headwinds, you know, certainly that COVID has created in many industries and certainly at our – Potential impact to the budgets going forward as well as the election. You know, that's all something that we're all watching. We're all paying close attention to. We don't see any, you know, there's no immediate impact to DOD budgets. No impact that we see across the board. But we also recognize that that's a potential. And so we navigate that. We watch that very closely. I will tell you that the nature of the work that we do, the areas that we've elected to emphasize and focus on from a portfolio standpoint, give us some diversification if that headwind does create some negative challenge. We feel very good about our posture going into this next cycle. We feel that the work that we do, we know the work we do is mission critical. Again, the areas as IT modernization, the focus on space, those are areas that are enduring regardless of different pressures that could happen. So we continue to navigate it. We feel positive about it, but we recognize that that is, you know, there's potential there, and we'll work our way through that.

And then just on the 500 open positions you mentioned, you know, is there a way to frame those, you know, what the revenue opportunity might be, you know, what number of those are in the digital transformation areas you're focused on, and then maybe what timeline we could think about some of those positions being opened or being closed?

As you would expect, with over 26,000 employees, we always have open positions. The way that I think about it is we've been very, very good over the course of these last few months at leveraging the technology to onboard new talent, to recruit and onboard new talent, and that continues to be a strength of ours. So I think it's a proof point that we're still hiring. It's a proof point that we still have needs. I don't have the categorization in front of me, but it routinely is a cross-section of the company. So it's a cross-section of engineers, technology workers, cloud engineers. And so I'm certain it's across the gamut of the types of work that we do and for the most part across the country. So we think about it in that regard.

Got it. Thank you for your time.

And we have a follow-up question from the line of John Ravie from Citi. Your line is open.

Thank you very much for that. Nazik, I was wondering if you could comment, and I've got BD on the team for three more months. Can you just sort of talk a little bit about maybe what you're seeing together, what kind of changes or what kind of further pivots you might make, and if there's a time frame around any of those changes that you're making?

Great question, Chuck. So we're thrilled to have her on the team. She's amazing. You know, I think anytime you can bring, you know, bring somebody on in a senior position with a diverse background and diverse set of ideas. It makes us collectively better. We're very pleased to have her on our team. Where she's helping us focus is continued refinement of our strategy to ensure that, as I referenced here, that we're focusing on the right things, that we're investing in the right areas. In many cases, it's been a good confirmation that we are. In some cases, there might be some slight pivots. And I really mean that in the exact term, slight pivots, where we might want to emphasize something within our portfolio a little more or de-emphasize. And so she's led that charge for us. As we've shared with you all before, we really do look at strategy in a very agile and dynamic way. And so she's continuing that for us. And then she also will play a key role as we look to technology investments and solution investments as we go forward. So that's how I would really put some color around where she's spending her early days. But again, very pleased that she's on our team.

Okay, yeah, thank you for that. And then just one last one for Charlie, just on the free cash flow trajectory, the Understand Reader rating, $500 million this year, excluding the AR facility. Any thoughts on the multi-year factor? I know you have the payroll tax ups and downs, so to speak. We used to think about 550 as sort of a centering number over the multi-year period. Is that still fair to think about, again, if we sort of clean out all the payroll tax stuff?

Absolutely. I would just say that not only am I reaffirming our expectation of meeting or exceeding the $500 million of free cash flow this year, but also reaffirming what we said last time, our outlook for next year, a meeting or exceeding the 500 million of free cash flow. That's consistent with the billion dollars we talked about. Now, if you normalize next year and think that we're paying back the, we have a repayment on the payroll tax deferral of 40 million, that's a normalized 550 million of free cash flow next year which I think is consistent with what we have talked about.

Yes, very much so. Thank you very much.

And your next question comes from the line of Toby Sommer from Truist. Your line is open.

Thank you. Navik, could you speak to the company's ability to ramp contract wins from a staffing perspective in whether to the extent that this environment has slowed it, kind of how much?

No, good question, Toby. This environment has not slowed our ability to staff at all. We've actually remained consistent in our ability to hire, to bring on talent. If it's rebadging as a result of a contract win, whatever that is, we've seen no challenges in being able to staff. And actually, in some cases, quite the opposite. We're seeing great talent come from some other industries, technical talent that are more impacted as a result of COVID-19. And so for us, it's been probably more of a positive than a negative on that particular aspect of our business. But we haven't seen any of those issues.

Okay. And if I could, one more and I'll be done. How would you describe the pace of contract awards in the final federal fiscal month?

Yeah, I think, I guess I would describe it as not real surprising. It's, you know, it's certainly... It was hard to predict when we went into the COVID environment how contracts were going to get less, how RFCs were going to happen, how orals were going to happen. But the government has done an excellent job, for the most part, in adapting to technology to help make this happen. So certainly there's some cases where something gets flipped. There's some cases where they might do a bridge. But that happens even in a normal environment. So I don't believe there's been any significant change Impact on contract RSPs or contract awards. Again, there's pockets, but at the macro level, I've not seen it. Thank you. You're welcome.

And there are no further questions at this time. Mr. Shane Canestra, I turn the call back over to you for some final closing remarks.

Thank you very much for your participation in SAIC's second 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.