Science Applications International Corporation Common Stock

Welcome to SAIC's fourth quarter and full fiscal year 2021 earnings call. At this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice President of Investor Relations. Please go ahead, sir.

Good afternoon. My name is Shane Canestra, SAIC's Vice President of Investor Relations, and thank you for joining our fourth quarter and full fiscal year 2021 earnings call. Joining me today to discuss our business and financial results are Naza Keen, SAIC's Chief Executive Officer, and Prabhu Natarajan, our Chief Financial Officer. This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you'll also find supplemental financial presentation slides to be utilized in conjunction with today's call. Both of these documents, in addition to our form 10 K to be filed soon, should be utilized in evaluating our results and outlook along with information provided on today's call. Please note that we may make forward looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to defer materially from statements made on this call. I refer you to our SEC filings for our discussion of these risks, including the risk factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations, where possible, to the most comparable GAAP measures. It is now my pleasure to introduce our CEO, Nazik Keen.

Good afternoon and thank you for joining us to discuss SAIC's fourth quarter full fiscal year 2021 results and our outlook for fiscal year 2022. Our momentum increased throughout the year and SAIC continues to be very well positioned for long-term shareholder value creation. On March 15th of last year, SAIC quickly adapted to a significantly different operating environment as a result of the pandemic. Although not without challenges, SAIC operated effectively throughout the fiscal year and continues to do so today. Our focus has always been the safety and welfare of our employees, continued high-level performance for our customers, and successfully managing the business for our shareholders. I want to thank the employees of SAIC for their dedication and flexibility both personally and professionally through an incredibly challenging time. The end of each fiscal year allows us to look back, reflect on our achievements, as well as our journey over time. As we think about what SAIC is today, I'm even more encouraged about our future. Over the past few years, we have grown our annual revenue from around $4.5 billion to more than $7 billion, concurrently expanding our adjusted EBITDA margins from the low 6% range to close to 9% today, an almost 300 basis point improvement. Over the same period, we have more than doubled our free cash flow. We are now in the Fortune 500 and one of the top providers in the government services market, and we have even more to accomplish as we continue to push forward through focused strategy execution. Our journey continues, and with a long-term eye on the business, I am confident in continued progress. I would like to highlight a few areas of strong performance in fiscal year 2021. Compared to fiscal year 20, revenues grew by 11%, adjusted EBITDA margins improved by 50 basis points, adjusted diluted earnings per share grew by 11%, and we generated a record high free cash flow of $524 million. Organic revenues grew by 1% in fiscal year 21. While we can't ignore the effects of COVID, revenues grew organically by 4%, excluding the approximately $250 million of foregone revenue related to the pandemic. SAIC delivered strong profitability and cash generation that met the expectations we set at the beginning of the year. Last March, we laid out a pre-COVID framework. As these were the early days of the pandemic, the effect on our business and the nation was uncertain. Our expectations at that time for fiscal 21 was 3% to 6% organic revenue growth, adjusted EBITDA margins in the high 8% to 9% range, and free cash flow of at least $450 million. While adjusting for the impacts of the business from the pandemic, we largely met those expectations. While we continue to experience impacts from the pandemic into this fiscal year, we remain focused on business execution. We also had a very successful business development year with a book to bill of 1.7 times revenue through a healthy mix of re-compete and new business awards. One of the most important business development priorities for the company was to secure our position in the AMCOM portfolio in a very competitive market. I'm incredibly proud to report that SAIC has been awarded all four of the AMCOM re-compete task orders. We received two of the awards during fiscal and two early in this quarter. Each of the four task orders contains elements of new business, and while the transition of the new work will happen over time into fiscal year 23, we are very pleased to continue supporting these important missions. Turning to the market environment, our customers continue to execute their missions and priorities with confidence. Though there has been a change in both administration and control of the Senate, we have not seen notable changes in customer behavior. the President will deliver his government fiscal year 22 budget request in the next few weeks. This will show intent, the administration's priorities, and desired direction. While we do not expect significant changes that would negatively impact our business, we do anticipate overall customer budgets to remain flat for the most part into next fiscal year and potentially beyond. However, within those budgets, there will be faster streams of priorities and investments. So while the budget environment might present a headwind to overall industry growth, direct alignment of our strategy to high priority and potential growth areas could be a tailwind that will enable us to outperform the market environment. Growth will be enabled by the execution of our long-term strategy, elements of which you will hear throughout our remarks today. As we navigated a challenging year, we remained focused on our commitment to de-lever following our successful acquisition and integration of Unisys Federal, and we made tremendous progress. During the year, we paid down $400 million of debt, exiting the year at a net leverage ratio of 3.7 times, down from approximately 4.5 times at the time of the acquisition. While we continue to meet our commitment of achieving a net leverage of around three times by the end of fiscal 22, I'm also pleased to report that we started repurchasing shares midway through the fourth quarter, deploying $19 million to repurchase approximately 200,000 shares. Joining us today for his first earnings call as SAIC's Chief Financial Officer is Prabhu Natarajan. We are very excited to have Prabhu as part of the executive management team, bringing with him a track record of success as a finance executive in the aerospace, defense, and technology markets. I'd like to ask Prabhu to share our results for the fourth quarter in our fiscal year 2022 outlook.

Thank you, Nazik, and good afternoon, everyone. I am extremely honored to have joined a best-in-class government services company in a top-notch management team. SAIC's culture is rooted in its mission, focus, and performance, continuous self-reflection and improvement, and execution of a thoughtful long-term strategy. I look forward to actively working with Nozick and the senior management team to continue building and executing the strategy to deliver long-term shareholder value. Now turning to our results. SAIC's fourth quarter fiscal year 2021 results reflect modest organic revenue growth, strong profitability, and seasonally in-line cash flow generation. Contract award activity in the fourth quarter translated to a book-to-bill of 0.4 for the quarter and 1.7 for the full year. Fourth quarter net bookings were driven by two large contract awards, the U.S. Corps of Engineers RITS and the AMCOM Hardware in the Loop Aviation Services Contract, the latter being the second in the series of four task order awards in our AMCOM ReCompete portfolio. While these awards have notable award values in excess of $2 billion, I would note that these are ceiling values that may differ from amounts included in backlog. Although these contracts contained room for us to drive additional revenues, it is our backlog policy to book amounts that have reasonable line of sight and then revise based on the volume of work funded over the next several years. As Nazik mentioned, subsequent to the end of the quarter, SAIC completed the successful capture of the remaining two of four MCOM recompete task orders. They are noted in today's press release. We will evaluate the bookings position on these task orders as we close out the first quarter of fiscal 22, but it is remarkable to have run this table on this recompete series. At the end of the fourth quarter, net of a backlog adjustment in the fourth quarter, SAIC's total contract backlog stood at approximately $21.5 billion with funded contract backlog of $3 billion. The estimated value of SAIC's submitted proposals awaiting award at the end of the fourth quarter was approximately $21.5 billion with about two-thirds relating to new business opportunities. Let me now turn to our financial results, and I will primarily focus on SAIC's fourth quarter performance with references to full year results in specific areas. Our fourth quarter revenues of approximately $1.7 billion reflect growth of 11% as compared to the fourth quarter of last fiscal year, primarily due to revenues associated with the Unisys federal acquisition. Excluding the impact of the acquisition, Fourth quarter revenues grew year over year by 1%, driven by new business primarily supporting civilian customers in the Air Force, partially offset by impacts from COVID-19. Full year 2021 revenue, excluding the UNICEF federal revenues, grew approximately 1% and included an approximately 3% headwind, or about $250 million of negative impact from COVID. Fourth quarter adjusted EBITDA was $159 million, a $25 million increase from the prior year. Adjusted EBITDA margin equated to 9.3% after adjusting for $7 million of acquisition and integration costs. Fourth quarter margin performance was strong through exceptional program performance. For the full fiscal year, Adjusted EBITDA margin was 8.9%, 50 basis points above our prior fiscal year, reflecting the addition of Unisys Federal and gains from one-time resolutions of certain program matters earlier in the year, partially offset by about $25 million of negative COVID-19 impact. Net income for the fourth quarter was $61 million, and diluted earnings per share was $1.05 for the quarter, inclusive of the fourth quarter acquisition and integration costs of $7 million. Excluding these costs, as well as amortization of intangibles, our adjusted diluted earnings per share was $1.67. Our full-year effective tax rate was approximately 22%, lower than our previous expectation of 23%. Turning to cash flow generation, SAIC generated a record $524 million of free cash flow for the year and exceeded our December guidance of $515 million for the year. Day sales outstanding at the end of the quarter was strong at 59 days. We deployed nearly 100% of the free cash flow we generated last year through dividends, debt repayment, and as Nasik highlighted, share repurchases. Our Board of Directors has approved a quarterly dividend of 37 cents a share, payable on April 30th to shareholders of record on April 16th. I would now like to turn to our forward outlook, as noted on slide 7 of the presentation slides. For fiscal year 2022, we expect the following. Revenues between $7.1 billion and $7.3 billion. Adjusted EBITDA margins between 8.6% and 8.8%. adjusted diluted earnings per share between $6 and $6.25, free cash flow between $430 and $470 million. On slide eight, we provided several walks from fiscal year 2021 performance to the fiscal 2022 guidance ranges provided today to further assist you in understanding our guidance. Our revenue guidance range reflects flat to 3% organic revenue growth in fiscal year 2022. We expect continued negative impact from the pandemic of $150 to $200 million of revenue, primarily in our supply chain portfolio. So approximately a 2.5% headwind to growth in fiscal year 22 is included in our guidance. We anticipate that the majority of this impact will be in the first half of the year and lessen in the second half, and we will continue to monitor this carefully. Consequently, our revenue growth will be more weighted towards the second half, given the ramp up on new programs and lessening COVID headwinds. I would note that our recompete risk at about 10% this year is below our typical average as a result of having successfully retired the risk on our MCOM portfolio. However, one notable contract that is up for we compete and should be decided in the summertime frame is our NASA next contract now being called Aegis. The remainder of annual revenues being we competed in fiscal year 2022 are an aggregation of lower volume contracts and task orders. With respect to our adjusted EBITDA margin rate guidance, I would remind you that FY21's strong adjusted EBITDA performance of 8.9% included about 20 basis points of successful but non-recurring resolutions of program contract matters. Our FY22 guidance on adjusted EBITDA margin is in line, therefore, with our FY21 performance. On EBITDA dollars, we expect COVID to have approximately a $10 to $15 million of impact in fiscal 2022. With regard to free cash flow, our guidance range includes a $155 million downward pressure as compared to fiscal 21 related to the payment of half of the payroll tax deferral from last year. We expect our cash conversion to remain strong and working capital to improve in FY22. Finally, as Nozick mentioned, we re-initiated our share repurchase program in the fourth quarter of fiscal year 21. Other items associated with our guidance, such as estimated interest, depreciation and amortization, tax rate, and capital expenditures, can also be found on slide 7. To conclude, I'm very excited to have joined SAIC. We will continue to create value through a few fundamental business imperatives. Execution of a well-defined and focused strategy, sustainable and differentiated long-term growth in key market areas, and finally, improved profit margin and cash generation and the thoughtful and opportunistic deployment of that capital for the benefit of our shareholders. Nazik, back to you for concluding remarks.

Thanks, Prabhu. While continuing to navigate challenges related to the pandemic, we also look to what a new normal will be for our industry, our company, and our people. Across the government, SAIC is enhancing our customers' ability to deliver and enable the adoption of advanced technologies. Government, as well as SAIC, is driving towards faster rates of technology adoption and achievement of mission outcomes. To this end, we are shaping and pursuing a growth agenda tied to longer-term needs in government. We are expanding our IT modernization focus into broader digital transformation. We are building on our heritage in engineering by deepening our digital engineering capabilities so that we can help the government advance complex systems integration, saving costs, and increasing mission readiness. And we're also looking at the growing and evolving missions of our customers, especially in areas like space and health, where there are new agencies, missions, and requirements. We've all contemplated what our personal and professional lives look like when we get to the other side of the pandemic. While I certainly look forward to SAIC returning to a more normal environment, the pandemic has forced us to operate differently, and in some ways, some of those might endure for good reason. A more remote work environment has proven to both us and our customers that we can continue to effectively operate and deliver on our programs. SAIC is looking at the future of work, including potentially lowering our facilities footprint and expanding our reach for employees that deliver services partially or entirely remotely. While our analysis is underway and the transition will take many years, we are guided by a general concept. foster an enterprise flex work culture in partnership with our customers that enhances SAIC's position as a destination employer, attracting, nurturing, and retaining diverse, high-performing talent regardless of location. Wrapping up, I'd like to note a few awards that SAIC received recently that acknowledge our success in being a destination employer. SAIC was recently honored by Fortune's Most Admired Companies list and ranked sixth within the information technology services category, along some of the world's largest and well-known companies. This is the company's fourth recognition on Fortune's list since SAIC's inception in 2013. Additionally, for the third consecutive year, SAIC was recognized by the Human Rights Campaign Foundation and received a perfect score as one of the best places to work for LGBTQ employees. In conclusion, we are proud of our achievements in fiscal year 2021, an unprecedented year. We enter fiscal year 2022 focused on executing our strategy to deliver high-value solutions to our customers, to foster a work environment that attracts and retains the best talent, and to deliver long-term value creation for our shareholders. Operator, we're now ready to take your questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To draw your question, press the pound key. Please stand by while we compile the Q&A roster. We have our first question from the line of Syvon Remar. Please ask your question.

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

Hi, Kai. Prabhu here. Thanks for the question. So on revenue guide, organically we flag a flat to 3% growth. And we've also flagged about a 2.5% headwind from COVID. A way to think about it is 2.5% to 5.5% on an ex-COVID basis. Having said that, clearly we're disappointed that we're still being impacted by COVID. And we're really hopeful that the headwinds abate soon. And so the year-over-year difference in terms of COVID impacts is, let's call it, between $50 and $100 million. You are correct. You've had large, notable wins over the past year. And as we've talked about in other forums, these are long-term programs that will provide sustainable growth opportunities over a several-year period. Let's talk about ANCOM maybe a little bit so we can sort of peel this in several layers. So within ANCOM, a way to think about this is sort of a set of basic task orders. So think of that as sort of the base revenue in the program. That's what we do today, and we know what that revenue profile looks like going forward. The second layer within Amcom would be a set of new business opportunities, things that we'll bring into the Amcom portfolio as a result of working with the customer there. So there's clearly some potential for revenue growth from the second layer. There's a third layer. which is a materials plug in the ceiling award. In other words, effectively, the customer has the ability to bring in materials into the ANCOM program that will allow us to generate revenue growth, but I caution that that materials plug tends to be lower margin work. And then finally, there's sort of a little bit of work there on top, what we call excess ceiling. That's sort of the difference between the total award and the sum of the first three layers. And as we work through the AMCOM portfolio, clearly we're going to go get the first layer, a good bit of the second layer over the next couple of years, let's say. And then the way the waterfall works on the AMCOM portfolio is you really have to work through and burn off the old task orders before you get into the new awards. And that's sort of how the waterfall is set up. So I think we're optimistic that over time we will see incremental revenue from the AMCOM portfolio. But that's sort of the reason why we're not seeing that immediate impact of revenue in FY22 and, therefore, is in the guidance. And just to sort of put a ribbon on it, I think we're expecting growth within the Intel and this base portfolio. Our defense business is expected to be, I'd say, roughly flat, and our supply chain business is roughly flat, if you think about it on a year-over-year basis. And that's sort of a fuller context, perhaps, for the guidance for FY22.

But just one follow-up. That still looks low. If we look at the midpoint, we're talking about $150 million of revenue increase, and 75% of that, 75 million of that is from COVID-19. And you should get about 100, I would estimate, probably more from having Unisys for the full year. So essentially it looks like zero growth if we take those items out. I mean, do you expect Amcom to be down? What are other areas that are down? Because most, you know, given the very strong bookings you've had, one would have thought that there was going to be some growth.

So I agree, Kai. I think there is a year-over-year impact from Unisys. So we think of that as about four to six weeks on a year-over-year basis. That's the difference from the Unisys federal portfolio. I'd say, you know, I think we're bounded by the fact that we're living through a COVID environment and we're seeing some impacts from COVID. So maybe another data point here is if you think about that supply chain business, because that continues to be a headwind. You know, we can sort of think about this in weekly revenue terms. And so that continues to be, I'd say, a little bit of a headwind to growth. And finally, I would probably also note there were probably a couple of small contracts at the end of FY21 that in the aggregate were not material, but there were program losses. And again, not material individually. And in the aggregate, they probably cost us about, let's call it 100 to 150 basis points of growth. in three or four very different opportunities in different customer sets. And that probably is the headwind that you probably are trying to figure out. So that's probably the last piece there.

Thank you very much. Thank you very much.

We have our next question from the line of John Ravid from CDE. Your line is now open.

Hey, everyone. Good afternoon. So I guess let's continue on this, talking FY22. Prabhu, can you do a similar walk on the margin from 21 to 22? I get there are a lot of moving pieces, but if I pull out everything that you've disclosed on an underlying basis in 21, I don't know, I get to like just over 9%, let's say, that includes COVID. Then if I take your guidance for 22 and I pull out just the COVID item, I get to something below 9%. So if units is ramping year over year, to help me understand also supply chain being down year on year, which is lower margin, why is overall margin down year on year on a fully clean underlying basis? Sorry for the extended question, but there's a lot of, you know, trying to figure this out.

Yeah, so thanks for the question, John. And maybe I'll try to hit it at the high level, and then we can dive in a couple levels if we need to. So we, you know, ended FY21 at a margin rate, adjusted EBITDA rate of 8.9%. And over the course of FY21, specifically in Q2, we've called out certain non-recurring one-time items that, if you think about it, they were effectively about a 20 basis point tailwind the margins in FY21. And obviously, as we go into FY22, we're assuming that those tailwinds won't recur. And therefore, effectively, if you then step back and look at the guidance for FY22 of 86 to 88, at the midpoint of that guide range, I'd say were reasonably in line with performance from FY21. I'd probably add a couple other data points. I'd say, you know, Unisys Federal brought with it a good, healthy mix of, you know, firm express work, and we're continuing to see good performance on the Unisys Federal side of the portfolio. I would also note that, you know, AMCOM, when we won the re-competes, as we previously talked about, went from being a I'd say a T&M contract into a cost plus contract. To me, there's a little bit of a change in the structure of that contract that's also causing a little bit of downward pressure on margin rates, but I really step back and say, 8.7 sort of on an adjusted basis for FY21 compared to a midpoint of a guide range that's sitting at 8.7. And finally, the last comment is, as we've talked about, EBITDA dollars and margin rates are incentive comp metrics for the team. We start the year with a set of risks and opportunities, and we expect the team to be fully incentivized to you know, de-risk the portfolio over the course of the year and harvest the opportunities over the rest of the year. So I'd say, you know, our initial guide is very consistent with our performance in FY21, and we've got about 10 months left in the year to go, and hopefully we do better than what we're seeing here today.

Yeah, no, I appreciate that.

Thank you.

Just a quick follow-up there on a clarification. So 8.7 in 21 and 8.7 in 22, but you had more COVID impact in 21 and less COVID impact in 22. So if we clean out COVID also, it feels like margins are down a bit. Maybe that's the MCOM piece. I guess just zooming out the big picture, should we still think about this as a sustainably 9-plus percent margin business if we kind of try to eliminate all the noise here?

So if you think about long-term margin rate trends for this business, and I've said this in other forums before, we tend to think about this on a long-term basis, and we're truly striving for balance between investments and profitability. And so we're working on margins over time. We're improving that we have the ability to deliver margins incrementally. We've actually, as Nazik mentioned, increased our margin rates by nearly 300 basis points over the last few years. And margin improvement is actually integrated in the way we think about our long-term planning. So I'd say on a long-term basis with a portfolio that is predominantly cost plus still, we really have to be very, very good at executing on our fixed price programs and then thoughtfully reinvest the dollars from our cost plus programs to ensure that we're continuing to differentiate ourselves on a long-term basis. So I'd say it's a fair characterization that over time, we expect this portfolio to be around 9%. And again, the mechanics of whether we get to nine in a year or just over nine is going to function, is going to be a function of, you know, how well we execute in a particular year. But I'd say qualitatively, not much has changed in the portfolio.

Thank you. One thing I'll add, and I know we've had this conversation as well, is if you think about the areas that, you know, one was just the catalyst for the UNICEF's federal acquisition. But as we think about our strategy and our focus and some of the priorities in the nation on IT modernization, digital transformation, those can lead to more fixed price as a service type contracts. And that is part of our strategy, our long-term strategy. We look for the opportunity to influence the portfolio, again, over time with that mix of work. And I think that can be a catalyst as well for improving margins over time.

Thanks, Nazir.

Next is Sheila Kialu from Jefferies. Your line is now open.

Hey, good afternoon, guys, and welcome, Pabu. I guess if we could talk about the revenue bridge a little bit more. Can you maybe talk about how you think about the new contract wins that you guys have had, whether it's TAS or FST80? I know they've been around for a while now. How big are those wins? And then you mentioned some small program role loss. Is that a point headwind for revenue overall?

So maybe I'd start with the last piece first. I would say in terms of the losses, you know, they're probably between $100 to $125, $130 million. They were all predominantly towards the latter part of Q4 of FY21. So the compares around program losses will be, unfortunately, here with us for a few more quarters. So just to be able to think about that. So think of that as, you know, between a point and a point and a half of revenue. So on a year-over-year basis. And in terms of the ramp, I'd say the most material revenue portions of the ramp will be in our RITS program. And that ramp we're expecting to see in the second half of the year. And I'd say there's a variety of other programs. I'd say no one individual program is ramping up beyond $20 to $30 million a year on a year-over-year basis. But again, I'd say if you step back a year later, we would expect to see a little bigger ramp on our income portfolio. So that's sort of a way to bridge between $21 into $22 and then $22 into $23.

Okay, and then just to follow up on the COVID impact, are you assuming it's an issue for the entire year or is it only in the first half?

Right. So we expect COVID to be with us for most of the year. We expect most of the impact to be in the first half of the year, at least on a year-over-year basis. And one way to think about this, and I alluded to this in the previous response you left, is, you know, we tend to see revenues from the supply chain business on a weekly average. That's a good way to think about this business. Between, you know, $10 million and $15 million of weekly revenue from our supply chain business. You know, if you did the math, it'll get you roughly $600 million for the year. And, you know, if you then map out the revenue on the program against the V curve with respect to COVID, what you'll find is that at the peak of COVID, which is sort of the bottom of the revenue curve, we're at about $10 million a week. At the top, we're nearly at about 15 million a week, if you think about it on a COVID-adjusted basis or pre-pandemic basis. Where we are right now is somewhere between, I call it 10 and a half and 11 and a half a quarter, a week rather, And the plan is for that to ramp up in the second half of the year and hopefully start to dissipate nearly fully towards the end of the year at Q4. So that's the rank we've got. But you'll see it in the compare, at least for the first half of the year, and you'll start to see it dissipate in the second half.

Okay. Thank you.

Thank you. We have our next question from Gavin Parsons from Goldman Sachs. Your line is now open.

Hey, good evening.

Hi, Kevin.

I wanted to ask you about your revenue visibility then beyond fiscal 22. And I appreciate there are a lot of unknowns with COVID and with the budget. But 1.7 looked a little this year, 1.2 the year before. Your backlog has pretty much doubled over the last three years. So I was wondering if you would take a stab at a multi-year growth outlook from there.

Hi, Gavin. This is Nozick. How are you? I think a couple of things that I might want to just highlight. You know, we've, in the conversation and my comments earlier, I did talk about the fact that the assumptions, I think, in general in the industry, that the budgets are going to be relatively flat if we look forward. And, you know, I think that's how most of us were thinking about it even, you know, as far back as a year or two ago, so even pre-COVID. But with that, we do see that, you know, there's opportunities within the next couple of years. And we're seeing some of that highlighted now and from the conversation coming out of the administration. And again, we'll get some more clarity over the course of the next few months. But, you know, we're seeing some increased appetite and interest in IP modernization. Certainly, you know, the cyber emphasis on that, the working from home. We're seeing that the drive to modernize being very important. We're seeing some focus on the space-related mission. And so the way that we think about the next few years is, you know, continued emphasis and focus on those parts of our portfolio that we believe, even with a flat-ish budget over the next few years, these could be areas of higher growth opportunities. And so it's our objective and the strategy that we've outlined is to drive to a growth outlook that is greater than the overarching market. And that's how we're thinking about the next few years, if that helps.

And, Gavin, maybe one other comment here. So I think you are absolutely correct. We do have, you know, $21.5 billion in backlog at the end of the year. We had a 1.7 book to build in FY21. We do have, with the Amcom portfolio secured, good visibility, better visibility stepping into next year than we did stepping into this time last year. I'd say, therefore, there is certainly more visibility And then I'd offer maybe a couple of other data points. In this business, as you know, there's always an element of re-compete risk. In the prepared remarks, we said this particular year, the re-compete risk is fairly nominal at less than, I'd call it approximately 10% of the revenue coming from re-competes. And the new business assumptions are modest this year. But when you step into FY23 from FY22, I think you're going to see a little bit of a higher level of re-compete, not unusual in this business, and a little more in the way of new business that you have to go in. What I've observed in the 90 odd days here is a remarkable win rate on re-competes. So we do our share of re-competes really, really well. But there's always a sliver that we don't ever get to, and we expect our new business to step in and actually fill the bucket here. So the strategy is very clear. We've got the visibility from the base programs that we have in the portfolio. And then we've got to keep winning our share of weak and weak, which are, again, remarkably high for a company this size. And we also have to win our share of new business till we continue to see that progression for long-term revenue growth.

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

This is Nazik. You know, I guess it'd be impossible to say that risk doesn't exist because, you know, the way the government operates, the way they, you know, they adjudicate their budgets, there's always some element of that risk. We don't believe that's a high risk, as we sit here today. And as Prabhu indicated, you know, where we did see some, you know, some bookings and some wins, that may have had some of that risk with the excess ceiling, we took that adjustment in Q4. So I wouldn't say that's a high risk, but it's always a risk in the nature of the work that we do based on annual budgets in the government cycle.

Got it.

OK. Thank you. Next is from JP Morgan. Your line is now open.

Thanks very much. Good afternoon, everyone. So just maybe following up on that last point, the change to the backlog and evaluation of the backlog that happened, was that concentrated particularly in one or two programs? And if so, can you share with one? or was that a very wide range of programs? Because, you know, absent that allowance, it looks like the book-to-bill would have actually been quite strong in the quarter. And so just wondering what drove the reassessment and what drove it at this time.

Yeah. So thanks for the question, Seth. You know, I think, first of all, the valuation adjustment that you referred to is consistent with the policy that you had of recognizing into backlog what's going to realize into revenue over time. So I'd say the reason you're seeing that pop a little more apparently this time around is the size of the awards. I'd say the vast majority of the adjustments were sort of in-year awards, so FY21 awards that we, if you think about it as de-risking a little bit, and based on the backlog policy we have. So, you know, and I'm going to get back to the AMCOM example. If we don't have clear sort of line of sight into revenue on a six or a seven or eight years period of performance, I think it's our policy to require an adjustment to the backlog. The backlog does not go away. You know, the word is still there. And to the extent we're able to bring new work into the contract, we effectively, if you think of that as sort of reversing the adjustment that we booked in Q4. So think of it that way. Nothing particularly unique to do that in a particular quarter. I think what stands out this time around is the fact that it was a large number based on the fact that we have these very material, large awards that we booked over the course of the year. And that's why you're seeing that pop. So I'd say nothing unusual there, Sam.

okay thank you um then as a uh follow-up it looks like unisys probably on a 12-month basis it looks like unisys delivered about uh 735 million sales and just want to get level set i know there were some contract transitions going on there at least one significant one so just to get level set is that Is that a baseline from which to grow? And I assume that the Unisys piece is growing reasonably well year on year. Is that the right way to think about the contribution that that business is making in fiscal 22? Right.

So I'd say, you know, I'd say the Unisys federal business is performing in line with our acquisition model. And I think their math is about right, actually. So we did expect about $700 million in revenue on a full year basis, if you will, from Unisys Federal, and we pretty much got to that number. So I'd say, you know, we knew where the ramps were going to be in, you know, at the time that we were evaluating this particular opportunity to this particular acquisition. And so that sort of built in the ramp, and so I'd say that business is performing In line, I'd say, you know, one of the reasons we looked at the U.S. federal business was the mix of fixed price work that that particular business brings to the portfolio. And I think if you think about it, we closed that deal the first day the pandemic shut down the business. So I'd say there's actually early days still on U.S. federal. The revenue plan is actually performing in line with our expectations. And I might dare say there may be a little bit of opportunity on the margin rate side, given the mix of fixed price work there is on the forefront.

Okay, cool. And then if I could, for Nasik, I know the supply chain work has been definitely in the crosshairs of the pandemic. But when we step back from the numbers and the model and we think about like in the real world, like what has to start happening for that business to get sort of back on track? Is it lifting of certain restrictions? Is it scheduling and the occurrence of certain training exercises? What really drives that business so that we can know that the pandemic impact is abating?

Yeah, so I think a couple things to think about. As we probably did an excellent job of kind of outlining how we think about the business from a numbers perspective and revenue perspective, The things that have to happen are the rollout of vaccines and getting through the quarantine isolation phase that so much of the nation and the world are under. So as those start to roll out, then there'll be more opportunity to have exercises and the up-tempo of the military then will step up. And as that steps up, that will drive more need and more demand for the supplies that run through the supply chain portfolio. So it really is just the continued working through the impacts that COVID has on the op tempo of the broad nation. I guess without giving a lot of specifics, but that's how I think about it. So as Prabhu indicated, as we have assumed greater impact from COVID to the first half of our year you know, slightly decreasing over the course of the year, and then hopefully as we get towards the end of the year, a more normalized operating model and op tempo. That's how we would absolutely expect the, you know, that part of the business to stay in line with that.

Great. Thank you very much.

Thank you.

Next is Toby Sommer from Tourist Securities. Your line is now open. Thanks.

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

Yeah. So thanks for the question. So I'd say on pre-cash flow, we've guided 430 to 470. And at the midpoint of that guide, we're sitting at about, let's call it 450. FY21, you know, we ended the year at a record, you know, $525 million. And so if you think about it, and we said, you know, payroll deferral, both accounting for the benefits from the payroll deferral in FY21, as well as the give back in FY22, gets you to a $150 million adjustment to your 525. So think of that as 375. And so, you know, stepping forward, The 375 at the midpoint of that 22 guidance gets to about 450, and it's a variety of different things, including some improved profitability, assumptions around improvement in working capital. We see some potential to get better there. Obviously, some improvement in cash taxes as we go through, and that's sort of the bridge to get you back to the midpoint of that FY22 guidance, if that helps.

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

Yeah, yeah. So good question. I'd say, you know, we've said this before. You know, we want this to be balanced, our capital deployment to always be balanced in the way we think about it. We're very proud of the fact that we de-leveled very quickly, as Mazik said, down to let's call it a little over 3.5, you know, from the highs of the acquisition. And so we've got some commitments around paying down some incremental debt this year. So, and then, you know, given the fact that we're in historically low interest rate times, I'd say there's probably not a compelling reason to pay down a whole lot more debt on a voluntary basis after FY22, which then if you think about that in the context of the free cash flow that this company can sustainably generate, it gives you ample amount of liquidity to think about, you know, value accretive capital deployment strategies. And I'd say on M&A, you know, we're, You know, we've said this also before. We're not looking to buy for the sake of scale. We like the scale we have. Having said that, we have an active process where we look at, you know, gaps in the portfolio. And, you know, if there are things that will fill the gap, that's the way we think about M&A. And so we think of equity as a precious commodity, and therefore we're going to be prudent in the use of equity to finance an acquisition in a low interest rate environment. But all I will leave you with is a fair amount of dry powder to deploy in accretive ways.

Operator, are you there? Yes, sir. We have our next question from Joseph Denardi from Stifel. Your line is now open.

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

Yeah. So maybe a different flavor of previous response. So We want to be balanced in the way we think about capital deployment, and we do think that having a repurchase program allows you to be in the market on a consistent basis because I think that's a key fulcrum, if you will, for long-term value creation. As we also closed out FY21, we were also ahead of our debt repayment schedule, and so that gave us the ability to flexibly deploy a little more capital. And finally, as I mentioned, we are in a low interest rate environment, so we're carefully balancing the need to pay down some debt and opportunistically returning capital. And so when you put all of that together and the fact that we have inherently good confidence in the capacity of this business to generate cash, I think it does leave you with a fair number of tools in your arsenal to be able to deploy. And so we do think about valuations in the context of relative valuations. We think about it in the context of multiples. And I would say if there is an opportunity to acquire your shares at multiples, you know, below trading multiples or, you know, where others may be trading at, I think an inherent fee offers you an ability to deploy capital when you see those dislocations in the market. So think of it that way.

Okay. That's helpful. And then just on the backlog – And probably I think you mentioned that it's somewhat routine, but can you remind us, I know you're new, but maybe not, but can you remind us the last time the backlog was adjusted down by 10%? And did the adjustment have anything to do with your arrival, probably?

No, I would say, I'll answer the latter part first, no. I'd say this is entirely consistent with our backlog policy. I'd say it's the size of the awards that we received in FY21 that drove the adjustment. And I would say nowhere near 10% in prior years, but we've had a few hundred million dollars of backlog adjustments. It's fairly routine in the business. And so that's probably what I'll leave that with.

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

Okay. Next year, that defense and supply chain are flat, and then Intel and space are expected to grow. Is that your framework for how the business looks in general in a flat budget? And if so, can you kind of size the space and Intel piece that you expect to grow for us?

I think what I'll try to do is give you some color on how we think about, you know, where the opportunities could exist. Now, obviously, you know, the budgets still have to go through their process, and we're all trying to read the tea leaves as best as we can. But, you know, some areas, and I'll use the area of IT modernization or digital transformation, spans all of our portfolio. And so, you know, whether it's the civil space, the defense space, or in the Intel space, those are offerings that we can support our broad portfolio. I think it depends greatly, as we all navigate this, on where the budgets end up, where the pressures end up. But the areas that we've elected to invest in and the areas that we believe will be catalysts to our ability to grow above market in the years to come really are those areas that I've touched on, and IT modernization, the digital engineering, again, across the entire portfolio, the space domains. And so we're investing in those areas for long-term growth, recognizing that even if there are some budget headwinds, and again, we don't know that to be the case. It's just some assumptions that many of us in the industry are making. that we believe those are areas that will get disproportionately invested in to drive, you know, long-term value.

Thank you.

Thank you.

Next is David Shaw from Barclays. Your line is now open.

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

Thanks for the question, David. I would say the short answer is yes, I think. I think we track our working capital metrics very, very diligently. This company has done a really nice job on cash generation. Having said that, I think one of the things we're having conversations around is specifically the contract structures we have, the timing of payments, liquidation events, and things that drive positive cash flow over the life of a contract. And I would leave you with this, that it's very hard to outmaneuver a bad contract. So getting into a contract such as that allows you to get paid fairly and paid well is an important consideration as we think about working capital management over time. And therefore, I think it's fair to say the team's going to be laser focused on ensuring we continue to do better. It is an important incentive comp metric. And we always start the year in a certain place. And the teams do what they have to do over the course of the next 10 to 12 months. So I would say fundamentally an opportunity to get better on cash and cash conversion, converting EBITDA into cash, and it's an important thing for us, and you'll see us continue to get better. Okay.

A couple of clarifications. So is the share count for 22 assumed relatively flat? You're going to use share repo to kind of keep that neutral? And then the step – it looks like you're calling for a decent step down in DNA. What is that associated with?

So I would say on the share count, I'd say that's a good assumption. I'd say we're assuming roughly flat on share count year over year. And, you know, we'll have to play this out over the course of the year. On DNA, I think primarily I'd say call it the burn-off of the intangibles amortization out of unicellular federal funds. That's what's causing the intangible amortization number to go down to about 1.10, I believe, from about 140, and depreciation's going up just a little bit. We had a little more capital that's getting depreciated, so that's the difference, effectively, on depreciation and intangible amortization. Got it. Thanks very much.

Next is Louis de Parma from William Blair. Your line is now open.

Mazik, Prabhu, and Shane, good evening. Was most of the backlog adjustment related to the recent notable awards in the third quarter and the $2.9 billion Amcom Express Software Lifecycle Award?

So I'd just say that they are primarily related to the big awards in FY21. So I'd say that's a good working and functioning way.

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

So it's always our call on backlog adjustments. There's been no communication from the customer. We understand how the ceiling works. And as we try to lay out over the course of the call here, there are multiple tiers to it. And because it's our backlog policy to only book into backlog what's realizable in the revenue, and you've got to have line of sight to be able to see that over, and we're not talking two years' periods of performance. The average MCOM period of performance is between five and eight years. And so when you put all of that together, it leaves you with a little bit of a reserve, if you will, on your backlog, again, with the ability for the teams to go execute with their customer counterparts to ensure that we continue to deliver upside to what might be potentially reflected here. So I would not view this as conservative. I would not view this as a change. It is just how we do it and obviously magnified or amplified by the size of the awards here. I appreciate the question. Great. Thank you very much.

Thank you very much.

Next is John Raviv from Haiti. Your line is now open.

Yeah, thanks for the follow-up. Just going to cash for a moment, thinking about big picture cumulative between 21 and 22. The low end of the guide is for 960. We have been talking about a billion. I know it's the high end of the guide. So any color on difference between low end and high end when I think about 21 and 22 together? And then also, if I go back long enough, post-angility, the target for F-122, I believe, was 500 million. Unisys was supposed to be 10% accreted to 550. You know, the guidance is what it is. I mean, are we going to get to the 550 at some point here? I appreciate that there's $40 million of payroll repayment, but just any thoughts on getting to an underlying 550 number, an update of those old multi-year cash targets you guys used to have?

Sure. Thanks for the question, John. So as you noted, we had a good FY21 on cash. We ended the year at $525 million, and our first guide at the start of last year was 450. So we did about 75 better than our first guide last year. If you then took the midpoint of the current year guide, FY22 guide, together we get to a pretty darn close to a billion dollars. So I'd say on a year-over-year basis, we're, I'd say, roughly in line with the billion dollars that we previously communicated. Now, I think the big drive from 500 to whether it's 525 or 550 is going to come from, I think, two places. One, delivering top line that converts into EBITDA. and converting that EBITDA into cash. And obviously the team is committed to doing that effectively. We will start to see the headwinds from the payroll deferral dissipate as we get into FY23 and beyond. So to me, I think you'll see a little bit of that. And we do expect to see some element of improvement in working capital. So I would say that's the target that's squarely in front of us. And all I will leave you with is, The teams are incentivized to get to better cash numbers than we've outlined in the guide. But we need to work that over the course of the year. And suffice it to say, again, it's a good way directionally to think about where the free cash flow potential is for the company. But we've got some work to do, and the team's committed to doing that effectively.

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

Yeah, good question. I would say, you know, with the increase in the national security in the space market, specifically the requirements we have within some lower restricted customers, you're seeing, I'd say, capital is a little more elevated. I'd say part of what is also reflected there is some of the ongoing costs around facility optimization. So there's a little bit of capital that goes into that. The third component would be the infrastructure and the IT networks that we're investing in to allow people to work in a hybrid work model. That also has some near-term impacts to capital. So if you think about it, I wouldn't think of 50 to 60 as a run rate of capital for this business. I expect us to trend down over the next couple of years. And finally, the last comment would be, to the extent we see program or contract requirements for skip space or some restricted facility requirements, and you'll see some pressure, I'd say upward pressure on capital, But obviously, that's a conversation we're deeply engaged in with the customer, and we recognize that one of the values of this particular business is its capital-like model, and to ensure that we maintain the balance in that is an appropriate way for us to work our way through it. So I'd say temporarily elevated, we expect it to come back to something that's more normalized over the next couple of years. John?

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

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

Okay, thanks.

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

As we conclude, I would like to announce that our annual shareholder meeting will take place on June 2nd. Similar to last year, we will be conducting a virtual shareholder meeting whereby all shareholders will participate online. Instructions on how to participate virtually will be included with the proxy voting ballot as well as on our investor website. Thank you very much for your participation in SAIC's fourth quarter and full fiscal year 2021 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.

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