Science Applications International Corporation

Good afternoon, and thank you for joining SAIC's third quarter fiscal year 2021 earnings call. My name is Shane Kinestra, 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 October 30th, 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 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 core 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 in both our press release and supplemental financial presentation slides to include reconciliations to the most comparable GAAP measures. It is now my pleasure to introduce our CEO, Isaac Keen.

Thank you, Shane, and good afternoon. As reported in our press release today, SAIC's third quarter results continue to reflect SAIC's strong financial performance momentum through our second straight quarter of highest book to bill and backlog in our seven-year history. Over the past few months, we have focused on the health and welfare of our employees, assisting our customers as they rapidly transition to a more virtual environment, and continuing the strong program execution that SAIC is known for. As these efforts continue, we've also taken strategic, organizational, and leadership steps that are foundational to the long-term success of SAIC. We are building on our past while positioning for the future. I am very pleased with the progress we've made, but before I discuss how we're shaping our future, let me briefly discuss our third quarter results. SAIC continues to deliver strong revenues and profitability, excellent cash flow generation, and outstanding business development results. Internal revenue growth for the third quarter, excluding the impact of COVID-19, was 3%, our third consecutive quarter of organic growth. And on a year-to-date basis, again, if you exclude the temporary impact of the pandemic, organic growth was 4%. our shareholders, we delivered another strong quarter of profitability in cash generation. Our record high book-to-bill ratio and backlog was a result of the refreshed organic strategy coupled with our ability to leverage the capabilities and market access from our recent acquisitions. As we navigate the dynamics of both the recent presidential election and the impacts of the coronavirus pandemic, we continue to serve a market that, while not immune to time to be very resilient. Our customers' need for technology solutions and digital transformation is growing, and we continue to win and deliver on large and attractive business opportunities. SAIC's portfolio of offerings are strategically aligned with the enduring requirements of our government. Digital transformation is a critical component of our nation's security, efficient operations, and the ability of government to provide better services for the advancement of our collective interest. It will continue to be a priority and focus of the solutions that we provide for our customers. The demand by our customers for digital transformation was a core strategic rationale for our acquisition of Unisys Federal. Speaking of Unisys Federal, I should note that the integration continues to go very well, and I am excited about the opportunities ahead resulting from this very successful acquisition. At the beginning of our next fiscal year in February, we will complete one of the last integration milestones, the conversion of the accounting system. We have an experienced and talented team working on this transition, having recently completed the successful conversion of agility systems. Government fiscal year 2021 continues to operate under a continuing resolution, and we expect that it will be extended past its current expiration of December 11th. It is a continuation of customer budget levels from last fiscal year, which were robust and provided for investments by our customers. Should there be substantial change to government spending, SAIC is well positioned to meet a wide array of government priorities. I mentioned earlier that we're building on our legacy while positioning for our future. In that regard, we recently announced several key personnel and organizational changes designed to assure our long-term success. In September, we announced Jim Scanlon's decision to retire after 30 years of service to SAIC. Jim recently led the company's defense systems group and was instrumental in shaping SAIC's legacy. He will be missed. With Jim's retirement, however, we took the opportunity to reevaluate our organizational structure to more closely align it to our strategy and growth priorities. Effective at the beginning of our fourth quarter, SAIC is transitioning to two operating sectors, Defense and Civilian, led by Sector President Bob Chenter, and National Security and Space, led by Sector President Michael LaRouche. Additionally, we are realigning our horizontal, market-driven organization, led by Didi Helfenstein, to align with our customers' most pressing current and future needs, including digital transformation, IT modernization, digital engineering, and artificial intelligence. This streamlined organization will better enable our strategic imperative of driving profitable organic growth as we focus on effectively selling and efficiently delivering digital transformation solutions to the U.S. government. Our nation is facing evolving and more complex national security, space, defense, and civilian needs, and SAIC is now exceptionally well-positioned to support these critical missions. Charlie, if you would now please discuss our third quarter results in financial outlook for the rest of the year.

Thank you, Nasik. SAIC delivered another quarter of strong performance across a variety of business development and financial measures, while continuing to build momentum for the next fiscal year and beyond. SAIC's results for the third quarter of fiscal year 2021 reflect solid revenues, strong profitability and free cash flow, and another outstanding quarter of contract awards resulting from effective strategy execution and investments in customer priority areas. Let me start with our strong business development results. Net bookings for the third quarter were approximately $5 billion, translating to a quarterly book-to-bill of 2.7, setting another historically high book-to-bill after setting an all-time high last quarter 2.6 times. The most significant contributions to our quarterly bookings are noted in our press release today, but I would also note the significant amount of new business awards, further proof of our building business development momentum. While producing exceptional bookings in the quarter, contract submittals continue to increase as well, setting another record for an all-time high in SAIC's value of submitted proposals. at the end of the third quarter the value of submitted proposals was 22.1 billion dollars up 1.5 billion dollars from the end of the second quarter also for the second consecutive quarter we have the highest amount of submitted proposals in our history and approximately 80 percent of the value of submitted proposals is for new business opportunities At the end of the third quarter, SAIC's total contract backlog stood at approximately $22.6 billion, up 16% from the second quarter and 55% from a year ago. Let me now turn to financial results for the quarter. Our third quarter revenues of approximately $1.8 billion was like total revenue growth of 12%, with generally flat year-over-year organic contraction of 1%. On a year-to-date basis, revenues reflect organic growth of 1%. Negatively affecting third quarter revenues were approximately $60 million of program-related COVID-19 headwinds, resulting from the same factors that impacted the first two quarters. Excluding the COVID-19 headwinds, organic revenues grew by 3% in the quarter and 4% year-to-date, in line with their expectations for the year prior to the onset of the pandemic. Third quarter adjusted EBITDA was $164 million, and adjusted EBITDA margins were 9% as a percent of revenues. For the quarter, COVID-19 negatively impacted adjusted EBITDA margins by about $9 million. On a year-to-date basis, adjusted EBITDA margins are 8.8%, up 50 basis points from the prior year nine-month period. Net income for the third quarter was $60 million, and diluted earnings per share was $1.02. Excluding $5 million in net acquisition and integration costs, restructuring costs, as well as amortization of intangibles, our adjusted diluted earnings per share was $1.62 per share for the third quarter. The effective tax rate for the quarter was approximately 22%, and we now believe that our full year expected tax rate to be approximately 23%. Third quarter free cash flow was $222 million, an outstanding quarter of strong cash generation. On a year-to-date basis, we have generated $470 million of free cash flow. Day sales outstanding at the end of the quarter were 61 days. excluding the impact of accounts receivable sale facility. During the third quarter, we deployed $239 million of capital, consisting of $21 million in dividends and $18 and $200 million of mandatory and voluntary debt repayment, respectively. We ended the quarter with a net leverage ratio of approximately 3.8 times ahead of our previously communicated rapid delivery profile. I should note that as announced in our press release today, our Board of Directors has approved quarterly cash dividend, 37 cents a share, available on January 29th to shareholders of record on January 15th. Now turning to our forward outlook. As noted in our press release, we are updating certain elements of our previously provided guidance for full fiscal year 2021. For fiscal year 2021, our revenue is expected to be between $7.1 and $7.15 billion, implying organic revenue growth of between 1% and 2%. This continues to assume a full fiscal year program impact of approximately $250 million from COVID-19, which, if excluded, would equate to about 9% of organic revenue growth this year. With regards to profitability, we have narrowed the expected range and raised the midpoint for adjusted diluting earnings per share based on year-to-date performance. Now expect between $5.95 and $6.05. This includes an unchanged negative profit impact of approximately $35 million to adjusted EBITDA from COVID-19. Turning to free cash flow, given our tremendous cash generation year-to-date and continued confidence, we now expect free cash flow to be equal to or greater than $515 million, an increase of $15 million from our previous expectation. As previously announced, I'm retiring at the end of the fiscal year, and this is my last earnings call for the company. As part of an exceptional team, I am proud of what we have accomplished here together. but even more excited about what the future holds for SAIC and its highly talented people. SAIC has a bright future with wonderfully focused leadership. I could not be happier at the direction of the company and more thankful for the opportunity over the last four years. Nazik, back to you for concluding remarks.