Q4 2021 Science Applications International Corp Earnings Call
Yeah.
Moving on.
[music].
Welcome to ask any ice's fourth quarter and full fiscal year 2021 earnings call.
Time, I would like to turn the conference over to Shane <unk> Saic's, Vice President of Investor Relations. Please go ahead Sir.
Good afternoon. My name is Shane <unk>, 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 <unk> Keene, Saic's, Chief Executive Officer, and probably net charge on our Chief Financial Officer.
This afternoon, we issued our earnings release, which can be found at investors SAIC Dot com, where you'll also find supplemental financial presentation slides to be utilized in conjunction with today's call.
These documents in addition to our form 10-K to be filed soon should be utilized in evaluating our results and outlook along with information provided on today's call.
Please note that we may make forward looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the statements made on this call.
Refer you to our SEC filings for a discussion of these risks, including the risk factors section of our annual report on form 10-K, and quarterly reports on form 10-Q.
In addition, the statements represent our views as of today and subsequent events may cause our views to change.
We may elect to update the forward looking statements at some point in the future, but we specifically disclaim any obligation to do so.
In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors and both our press release and supplemental financial presentation slides include reconciliations where possible to the most comparable GAAP measures.
It is now my pleasure to introduce our CEO <unk> Keene.
Good afternoon, and thank you for joining us to discuss Saic's fourth quarter full fiscal year 2021 results and our outlook for fiscal year 2022.
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.
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.
At the end of each fiscal year allows us to look back and reflect on our achievements as well as our journey over time as.
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 a low 6% range to close to 9% today and almost 300 basis point improvement.
Over the same period, we have more than doubled our free cash flow.
We are now in the Fortune 501 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 'twenty 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 'twenty one.
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-19 framework.
As these were the early days of the pandemic the effect on our business in the nation with uncertain our expectations at that time for fiscal 'twenty, one with 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 one seven times revenue through a healthy mix of Recompete and new business Awards.
One of the most important business development priorities for the company was to secure our position in the M com portfolio in a very competitive market.
I am incredibly proud to report that SAIC has been awarded all four of the AD Comm Recompete task orders.
We received two of the awards during fiscal year 2021, 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 'twenty. Three 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.
So there has been a change in both administrations and control of the Senate, we have not seen notable changes in customer behavior.
The president will deliver his government fiscal year 'twenty two budget request in the next few weeks.
This will show intent the administration's priorities and desire direction.
While we do not expect significant changes that would negatively impact our business. We do anticipate overall customer budgets to remain flat for the most part into next fiscal year and potentially beyond.
However, within those budgets, there will be faster streams of priorities and investments.
So while the budget environment might present, a headwind to overall industry growth direct alignment of our strategy to high priority and potential growth areas could be a tailwind that will enable us to outperform the market environment.
Growth will be enabled by the execution of our long term strategy elements of which you will hear throughout our remarks today.
As we navigated a challenging year, we remain focused on our commitment to delever. Following our successful acquisition and integration of Unisys Federal and we've made tremendous progress.
During the year, we paid down $400 million of debt exiting the year at a net leverage ratio of three seven times down from approximately four five 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 'twenty two.
Also pleased to report that we started repurchasing shares midway through the fourth quarter deploying $19 million to repurchase approximately 200000 shares.
Joining us today for his first earnings call as Saic's Chief Financial Officer is probably the net triage on we are very excited to have <unk> 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 probably to share our results for the fourth quarter and our fiscal year 2022 outlook.
Thank you Isaac and good afternoon, everyone I'm extremely honored to have joined a best in class government services company and a top notch management team.
She is culture is rooted in its mission focus and performance continue with self reflection and improvement and execution of a thoughtful long term strategy I look forward to actively working with NASDAQ and the senior management team to continue building and executing the strategy to deliver long term shareholder value.
Now turning to our results.
<unk> 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 one 7% for the full year.
Fourth quarter net bookings were driven by two large contract awards. The U S core of engineers routes and the M hardware in the loop Aviation services contract. This latter being the second in the series of four task Order awards in our income Recompete portfolio Wild.
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 continued room for us to drive additional revenues. It is our backlog policy to book amounts that have reasonable line of sight and then revised based on the volume of work funded over the next several years.
As <unk> mentioned subsequent to the end of the quarter SAIC completed the successful capture of the remaining two or four M. Comed 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 'twenty, two 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 U.
The estimated value of SAIC 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 from the Air force, partially offset by impacts from COVID-19 full.
Full year 2021 revenue, excluding the Unisys Federal revenues grew approximately 1% and included an approximately 3% headwind of 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 nine 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 eight 9% 50 basis points above our prior fiscal year, reflecting the addition of unisys federal and gains from onetime resolutions of certain program matters earlier in the year, partially offset by about $25 million of negative COVID-19 impact.
Net income for the fourth quarter was $61 million and diluted earnings per share was $1 <unk> 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 per 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 gnostic highlighted share repurchases. Our board of directors has approved a quarterly dividend of 37 per share payable on April 30 to shareholders of record on April 16th.
I'd now like to turn to our forward outlook as noted on slide seven 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 six an eight 8% adjusted diluted earnings per share between $6 $6 25.
Free cash flow between $430 and $470 million on slide eight we provide a several walks from fiscal year 2021 performance for the fiscal 2022 guidance ranges provided today to further assist you in understanding our guidance our revenue guidance range reflects flat to 3% or.
<unk> revenue growth in fiscal year 2022.
We expect continued negative impact from the pandemic of $150 million to $200 million of revenue primarily in our supply chain portfolio. So approximately a two 5% headwind to growth in fiscal year. 'twenty. Two is included in our guidance. We anticipate that the majority of this impact will be in the first half.
For 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-19 headwinds I.
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 <unk> portfolio. However, one notable contract that is up for Recompete and should be decided in the summer timeframe is our NASA mix contract now being called aegis the remainder.
<unk> annual revenues being re competed in fiscal year 2022 are an aggregation of lower volume contracts and task orders.
With respect to our adjusted EBITDA margin growth guidance I would remind you that FY 'twenty one strong adjusted EBITDA performance of eight 9% included about 20 basis points of successful, but nonrecurring resolutions of program contract matters.
Our FY 'twenty two guidance on adjusted EBITDA margin is in line, therefore, with our FY 'twenty one performance on EBITDA.
We expect COVID-19 to have approximately a $10 million to $15 million of impact in fiscal 2022.
With regard to free cash flow our guidance range includes a $155 million downward pressure as compared to fiscal 'twenty, one related to the payment of half of the payroll tax deferral from last year.
We expect our cash conversion to remain strong and working capital to improve in FY 'twenty. Two finally as <unk> mentioned, we re initiated our share repurchase program in the fourth quarter of fiscal year 'twenty one.
Other items associated with our guidance such as estimated interest depreciation and amortization tax rate and capital expenditures can also be found on slide seven to.
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 improve profit margin and cash generation.
And the thoughtful and opportunistic deployment of that capital for the benefit of our shareholders Nonstick back to you for concluding remarks.
Thanks Pat.
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.
Cross 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 and government.
We are expanding our monetization 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 advanced 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 are all contemplated what our personal and professional lives looked 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.
CIC 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 and enterprise Flex work culture, and 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 acknowledged our success and being a destination employer.
<unk> 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 <unk> inception in 2013.
Additionally for the third consecutive year SAIC was recognized by the human Rights campaign Foundation and received a perfect score. That's one of the best places to work for LGBTQ employees.
In conclusion, we are proud of our achievements in fiscal year 2021 and unprecedented here.
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 want me to press Star one on your telephone.
Please standby, while we compile the Q&A roster.
We have higher RSA question from the line of sight on Nomura. 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 the XI recall. If you won all of them calm recompete. It was $900 million annualized up from 600, and obviously you won't get all of it but you should get some of it.
And also your margins given that you won the M.
Being down.
30 basis points at the midpoint looks lighter than we would've thought maybe give us some color on that if you could.
Hi, Cai from Blue here, Thanks for the question.
On revenue guide organically, we flag flat to 3% growth.
And we've also flagged about a 2% headwind from Covid.
One way to think about it is two five percentage.
Percent ex Covid cases.
That.
Clearly, we're disappointed that we're still being impacted by Covid.
And we're really hopeful headwinds.
And so the year over year difference in terms of Covid impacts this let's call it between 50 and.
$100 million you are correct you had large notable wins over the past year.
And as we've talked about another forums. These are long term programs that will provide sustainable growth opportunities over several year period.
Let's talk about <unk>, maybe a little bit so we can sort of.
In this.
So well then.
Way to think about this as sort of a set of basic task orders will think of that as sort of the base revenue.
Yeah.
That's what we do today and we know what that revenue profile looks like going forward.
The second later with an income would be a set of new business opportunities.
Going into the income portfolio.
As a result of working with our customer there. So there is clearly some potential for revenue growth from the second measure.
There is a third layer.
As a material supplier in the New award in other words effectively the customer has.
Curios into the income program that will allow us to generate revenue growth, but I would caution that that material supply is 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.
The difference between the total award and some of the first two layers and as we worked through the income portfolio clearly, we're going to 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 portfolio is you really have to work through and burn.
Past quarters before you get into the new orders in industrial has a waterfall is set up so I think we're optimistic that over time, you will see incremental revenue from the income portfolio.
But thats the reason why we're not seeing that.
EBIT impact of revenue in FY 'twenty, two and therefore.
As is in the guidance.
To put our put a Brooklyn, Amit I think we're expecting growth within the talent base portfolio. Our defense business is expected to be roughly flat and our supply chain business is roughly flat. If you think about it on a year over year basis.
And that's sort of a fuller context, perhaps for the guidance for FY 'twenty.
But just one follow up that's still look silly.
Still a flow if we look at the midpoint, we're talking about 150 million of revenue increase and 75 per cent of the $75 million of that is from Covid.
And you should get about 100.
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 M com to be down.
What are other areas that are down because most.
Given the very strong bookings.
One would've thought, but those kind of day some growth so.
I agree I think there is a year over year impact from new users.
That is about four to six weeks on a year over year basis, that's the difference from.
From the Unisys Federal portfolio I'd say I think we are bounded by the fact that we're living through a COVID-19 environment.
Gene.
Cash from Covid.
Maybe another data point here is if you think about that supply chain business because that continues to be.
We can sort of think about this in weekly revenue terms and so that continues to be.
Little bit of a headwind to growth and then finally I would probably also note there were probably a couple of small contracts at the end of FY 'twenty one.
The aggregate were not material, Okay, where program losses.
And again not material individually and in the aggregate it probably cost us about let's call. It 100 to 150 basis points growth against three or four very different opportunities between customer sets.
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.
We have our next question from the line of revenue from Citi. Your line is now open.
Sure.
Hey, everyone. Good afternoon.
So I guess I'll just continue on this talking FY 'twenty two.
Per wheel can you do a similar walk on the margin from 'twenty one to 'twenty. Two I guess there are a lot of moving pieces, but if I if I pull out everything that you've disclosed on an underlying base from 'twenty, one I don't know I guess.
Like just over 9%, let's say that includes Covid then if I take your guidance for 'twenty, two and I pulled out just the COVID-19 items I get to something below 9%. So if a unit is ramping year over year. Just help me understand also supply chain being down year over year, which is lower margin. One is overall margin down year on year on a fully clean underlying.
Basis slightly extended question, but theres a lot of.
To figure this out.
Yes. So thanks for the question, John and maybe I'll try to hit them at the high level and then we can dive in a couple of levels that we need to so we ended FY 'twenty one at a margin rate adjusted EBITDA range from $8 96.
And over the course of FY 'twenty, one specifically in Q2, we called out certain nonrecurring onetime items.
You think about it they were effectively about a 20 basis point tailwind to margins in FY 'twenty, one and obviously as we go into FY 'twenty. Two we are assuming that those deal wins won't recur and therefore effectively if you then step back and look at the guidance for FY 'twenty two.
Eight.
Point of that guide rate I'd say, we're reasonably in line with performance from FY 'twenty, one I would probably add a couple of other data points I'd say unisys federal brought with it a good healthy mix.
Fixed price work and we're continuing to see good performance on the Unisys federal side of the portfolio.
I would also note.
That M com.
We wanted to re competes as we previously talked about wins from.
I would say PNM contract into a cost plus contract to me there is a little bit of a change in the structure of that contract is also causing a little bit of downward pressure on margin rates.
But I really step back and say eight seven sort of on an adjusted adjusted basis for FY 'twenty, one compared to our midpoint of our guidance range.
Seven and finally, the last comment is.
As we've talked about.
EBITDA dollars and margin rates, our incentive comp metrics from the team.
Start the year with a set of risks and opportunities and we expect that team to be fully incentivized to derisk the portfolio over the course of the year and harvest the opportunities over the rest of the year. So.
I would say our initial day is very consistent with our performance in FY 'twenty, one and we've got about 10 months left in the year ago, and hopefully moving better than what we're seeing with New Jersey.
Yes, no I appreciate that.
Just a quick follow up there on the clarification.
So eight seven in 'twenty, one and eight 7% and 22.
You had more COVID-19 impact in 'twenty, one and less COVID-19 impact in 'twenty. Two so if we clean out Covid also sales EBIT margins are down a bit maybe that the M. <unk> I.
I guess I'm, assuming a big picture should we still think about this as a sustainably nine plus percent margin business. If we if we kind of tried to eliminate all the noise here.
So if you think about long term margin rate trends.
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.
And that we have the ability to deliver margins incrementally.
He is not 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 would say on a long term basis with a portfolio that is predominantly cost plus two.
It really has to be very very good at executing on our fixed price programs and then possibly invest.
The $1 from our cost plus programs to ensure that we're continuing to differentiate ourselves in the 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 <unk>.
But when we get to 90 per year or just overnight, it's going to function is going to be a function of how well, we execute enough, particularly in Europe, but I would say qualitatively not much has changed in the portfolio.
Thanks.
One thing I'll add and I know, we've had this compensation as well as if you think about the areas.
One was just the catalyst for the Unisys Federal acquisition, but as we think about our strategy and our focus and.
The priority and the nation on it modernization digital transformation.
Those can lead them lead to more fixed price added service titles.
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 for improving margins over time.
Thanks.
Thank you.
Net.
Sheila <unk> from Jefferies. Your line is now open.
Hey, Anthony.
Welcome Pavel.
If we could talk about the revenue growth that anymore.
Maybe talk about how you think about the new contract win that you guys have had whether it's cash.
I know they've been around for a while now.
Hey, guys.
You mentioned growth program.
Is that a point headwind to revenue overall.
So maybe I'll start with the last piece first I would say in terms of the losses. There are probably between 100 to 120 $530 million. They were all predominantly towards the latter part.
Q4 of FY 'twenty, one so the competitors around program losses will be unfortunately here with us for a few more quarters. So just to be able to speak about that so think of that as accretive point at a point and a half revenue.
So on a year over year basis, and in terms of the ramp I would say the most material portions of the event will be in a rich program and Thats why were expecting to see in the second half of the year.
And I would say there is a variety of other programs I would say no one individual programs ramping up beyond 2000 $30 million per year on a year over year basis, and 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 thats sort of a way to bridge between 'twenty one into 'twenty two.
And then 'twenty two into 'twenty three.
Okay, and then just a follow up on the Covid impact.
Are you assuming it.
It's an issue for the entire year or is that only in the first half.
Right. So so we expect COVID-19 to be with us for most of the year. We expect most of the impact to be in the first half on a year over year basis, and one way to think about this and I alluded to this in the previous respond to that.
We tend to see revenues from the supply chain business on a weekly average that's a good way to think about this business between $10 million and $13 million in weekly revenue from our supply chain business.
That will get you to roughly $600 million per year, and if you then map out the revenue you want to program against a V curve with respect to Covid, what you'll find is that at the peak of Covid, which is below the bottom of the revenue per day, we're at about $10 million a week.
At the top.
<unk> nearly at about $15 million per week, if you think about it on a COVID-19 adjusted basis, our pre pandemic basis, where we are right now is somewhere between call. It 10, five and 11 and a half a quarter a week rather and then is 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 in Q4, so thats the math we've got.
Youll see it in exchange.
The cadence for the first half of the year and you'll start to see it dissipate in the second half.
Okay. Thank you.
We have our next question from Gavin Parsons from Goldman Sachs. Your line is now from.
Good evening.
Thanks, David.
I wanted to ask you about your revenue visibility then beyond fiscal 'twenty two.
There are a lot of unknowns with COVID-19 and with the budget.
One seven book to Bill this year of $1 two of the year before your backlog is pretty much doubled over the last three years. So I was wondering if you would take a stab at a multi year growth outlook.
Hi, Jeff and this is not like how are you.
Great.
Yes, I don't think that that I might want to just highlight.
We fat.
The conversation in my comments earlier I could talk about the fact that that the assumption I think in general in the industry that the budgets are going to be relatively flat, if we look forward and.
And I think that's how most of us were thinking about it even as far back as a year or two ago.
Pre COVID-19.
With that we do see that there is.
Opportunities within the next couple of years and we're seeing some of that highlighted now and from the conversations coming out of the administration and again, we'll get some more clarity over the course of the next few months.
We're seeing some increased appetite interest in it modernization certainly.
Cyber emphasis on that working from home.
Saying that the drive to modernize being very important we're staying focused on our space related mission and so the way that we think about the next few years is continued emphasis and focus on those parts of our portfolio that we believe even with a flat.
Cash budget over the next few years could be areas of higher growth opportunity and so it is our objective and the strategy that we've outlined is to drive to.
Both outlook that is greater than the overarching market and that's how we're thinking about the next few years if that helps.
Okay.
And Kevin maybe one other comment here. So I think you are.
Absolutely correct, we do have $21 million in backlog at the end of the year, we had $1 seven.
Book to Bill in FY 'twenty, one we do have with the outcome portfolio secured good visibility better visibility into next year than we did stepping into this time last year.
I would say therefore, theres certainly more visibility and then I would offer maybe a couple of other data points.
This business as you know there is always an element of recompete risk in the prepared remarks, we said this particular year the recompete risk.
M at less than call it approximately 10% of the revenue coming from.
And the new business assumptions are modest this year, but when you step into FY 'twenty three from FY 'twenty, two I think you're going to see a little bit of a higher level of recompete not unusual in this business and a little more in the way of new business that you have to go with what I've observed in the 90 odd days year isn't remark.
We'll win rate on Recompete. So we do our share of Recompete really really well, but there's always a slip I think we.
Don't ever get two and we expect our new business to step in and actually from the filling 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.
Which are again remarkably high for a company the size and we also have to win our share of new business do we continue to see that.
That progression for long term revenue growth.
That's helpful. I guess, what I'd want to understand is how familiar a bottoms up standpoint with this many new wins.
Upsides Recompete wins.
There isn't more visibility to kind of.
Multi year bridge I mean is there a possibility that based on the budget. So you don't actually see the lion's share of that unfunded backlog growth, but it doesn't translate into revenue.
This is a topic I guess.
It's impossible to say that risk doesn't exist because.
Yes, the way the government operates the way they.
Thank you Kate your budget.
Always some element of that risk, we don't believe that the high risk as we sit here today and as probably indicated where we did see.
From bookings and some wins that it may have had some of that risk with the excess ceiling.
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 budget.
From the cycle.
Got it okay. Thank you.
Next is Jeff SaaS. Thanks Man from Jpmorgan. Your line is now open.
Thanks, very much good afternoon, everyone.
Okay.
Just maybe following up on that last point.
The change to the backlog and valuation of the backlog that happened.
Is that was that concentrated particularly in one or two programs.
<unk>.
Can you share with one or more with that.
On a very wide range of programs.
Absent that allowance it looks like the book to Bill would've actually been quite strong in the quarter and so I was just wondering what the.
The reassessment and what drove it at that time.
So thanks for the question.
I think first of all.
Valuation adjustment that you referred to as a steward of the policy that we've had of recognizing into backlog, what's going to realize into revenue overtime. So.
I'd say the reason you're seeing that pop a little more apparently this time around is the size of deals.
I'd say the vast majority of the.
The adjustments were sort of in your awards. So FY 'twenty One awards that we if you think about it as Derisking Elizabeth.
And based on the backlog policy, we have so.
And I'm going to get back to the income example.
We don't have clear sort of line of sight into revenue on a six or seven or eight years appear to performance I think it's our policy to require an adjustment to the backlog.
The backlog does not go away.
Ward is still there and to the extent, we're able to bring new work into the contract we effectively 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.
Gary material large awards that we've booked over the course of the year and Thats why youre seeing that pop so I'd say nothing unusual there.
Okay great.
Thank you.
As a follow up it looks like.
<unk>, probably on a 12 month basis, it looks like <unk> heard about.
$735 million.
Sales.
Just wanted to get level set I know there were some contract transitions going on there at least one significant one.
Just to get level set.
That is that a baseline from which to grow and I assume that the United States is growing.
Reasonably well year on year.
Is that the right way to think about the contribution that that business is making in in fiscal 'twenty two.
So I would say.
Hey, the Unisys Federal business is performing in line with our acquisition model.
And I think your math is about right action.
Actually so we did expect about $700 million revenue on a full year basis. If you will from Unisys federal has pretty much got to that number so.
So I would say, we knew where the rents were going to be in at the time that we were evaluating this particular opportunity in.
Particular acquisition, so that's sort of built in the ramp and so I'd say that business is performing in line I would say, we one of the reasons, we looked at new 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 that first day.
The new shutdown of business. So I would say there is actually early days still on federal revenue plan is actually performing in line with our expectations and I might say that may be a little bit of opportunity on the margin rate side, given the mix of fixed price work there is on the floor.
Okay.
And then if I could identify.
For <unk> I know the.
Apply chain work has been definitely in the cross hairs.
But when we step back from the numbers in the model and we think about like in the real world like what has to start happening for that business.
To get sort of back on track is it sort of.
Lifting of certain restrictions as it scheduling and.
The occurrence of certain training exercises like what what really drives that business. So that we can know that the pandemic impact is data.
Yes.
So I think a couple of things to think about at least.
Probably did an excellent job of kind of outlining how we think about the business from a numbers perspective, 70 perspective, the things that has to happen or the rollout of vaccine and getting through getting through the quarantine isolation phase that.
Much of the nation.
And the world are under.
Those start to roll out that there'll be more opportunity to have exercises and the up tempo of the military that will step up in it that steps up that will drive more need and more demand for the supplies run through the supply chain portfolio. So it really is just the continued.
Working through the impacts that Covid has on.
On the op tempo.
The broad nation.
I guess without getting a lot of specifics, but but that's how I would think about it so that's probably as indicated.
Indicated as we as we have assumed a greater impact from Covid to the first half of our year.
Slightly decreasing over the course of the year and then hopefully as we get towards the end of the year are more normalized operating model and op tempo, that's how we would absolutely expect the.
That part of the business to stay in line with that.
Alright, Thank you very much.
Next phase Tobey Sommer from <unk> Securities. Your line is now open.
Thanks could you discuss free cash flow for this fiscal year and what the puts and takes are relative to COVID-19 contribution of drag.
Yeah. So so thanks for the question. So I would say on free cash flow, we've guided 430 to $4 70.
At the midpoint of that guide, we're sitting at about let's call. It.
FY 'twenty one.
We ended the year at a record $525 million.
So if you think about it and we said payroll deferrals, both accounting for the benefit from the apparel deferral in FY 'twenty, one as well as the give back in FY 'twenty. Two gets you to a $150 million adjustment to your 525. So think of that is $3 75, and so stepping forward to $3 10.
85 at the midpoint of that when you do guidance gets to about $4 50, and it's a variety of different things, including some improved profitability assumptions around improvements 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.
<unk> of that.
Turning to guidance if that helps.
Okay.
Thanks, and as my follow up.
I was wondering if you could speak to.
On your acquisition appetite you did unisys federal it seems like you've got a relatively good experience with that but.
But.
Curious about your appetite is the budget kind of flattens out.
We're still trying to accelerate your organic growth. Thanks.
Yes. So good question I would say we've said this before.
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 delever very quickly as Matt said.
Down to let's call it a little over three five.
From from the highs of the acquisition and so and we've got some commitments.
Moving down some incremental debt this year, so and then given the fact that we're in historically low interest rate times, I'd say, there's probably not a compelling reason to pay down a whole lot more debt on a voluntary basis after FY 'twenty, two which day.
And if you think about that in the context of the free cash flow that this company can sustainably generate it gives you ample amount of liquidity to think about value accretive capital deployment strategies and excellent M&A.
We've said this also before we're not looking to buy for the sake of scale, we like the scale we have.
Having said that we have an active process, where we look at gaps in the portfolio.
And if there are things that will fill the gap that's the way we think about M&A.
So we think that equity is 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 this fair amount of dry powder to deploy in accretive way.
Operator next question.
Yes, Sir.
Our next question from Joseph de Nardi from Stifel. Your line is now open.
Hi, Thanks, good afternoon.
As you know is it probably 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 we're actually seeing for growth not not.
You just you have obviously the growth industry, but free buying back stock because you see this softness is temporary.
Can you talk about that a little bit.
Yes, so maybe a different flavor of previous response, so we want to be balanced from that we would think about capital deployment.
And we do believe that having any repurchase program allows you to EBITDA market on a consistent basis, because I think that's a key.
Q4 clean fuel for long term value creation as we also closed out FY 'twenty. One. 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 and buyers were 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.
It does leave you with a fair number of tools in our arsenal to be able to deploy and so we don't think about valuations in the context of the relative valuations, we think about it in the context of multiples and I would say if there is an opportunity to acquire your shares at multiples below trading multiples or where other others maybe trading GAAP.
I think inherently offers you an ability to deploy capital when you see those dislocations in the market.
Think of it that way.
Okay. That's helpful and then.
Sure.
Just on the backlog and probably I think you mentioned that it somewhat routine, but can you remind us I know you're new but maybe not that can you remind us the last time the backlog growth.
Adjusted down by 10% and the adjustment of anything to do with.
With your arrival product.
No I would say.
I'll answer the latter part first no I would say this is entirely consistent with our backlog policy I would say, it's the size of the awards that we received in FY 'twenty, one 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 booking new business and so thats, probably what LNG Netherlands.
Yeah, Okay and then.
We appreciate it we love the fact that private <unk> thrilled to have him as part of the team but.
Yes.
But not a change in our policy in any form or fashion. It really just had to do with the size of the bookings and awards that we received this year, having been our biggest award year.
Since we spun out in 2013.
Okay, and then just with a lot.
Net next year that day and supply chain are flat and then Intel space are expected to growth is that your framework for how the business looks in general in a flat budget and if so can you kind of science the space and Intel piece that you expect to grow for us.
I think what.
Well I'll try to do is give you some color on how we think about where the opportunities could exist obviously.
The budget is still have to go through their process and we're all trying to read the tea leaves as best as we can.
But in some areas and not use the area of it modernization digital transformation spans all of our portfolio and so whether it's new 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 us on where we where the budgets end up where the pressures end up but the areas that we have.
<unk> to invest in the areas that we believe will be catalyst to our ability to grow above market in the years to come really are those areas that day.
I've touched on it modernization that digital engineering again across the entire portfolio the space domain 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, that's just an assumption that.
Or is the industry, you're making that we believe those are areas that will get disproportionately invested in to drive long term value.
Yes.
Thank you.
Next day, David Shaw from Barclays. Your line is now open.
Thanks Scott.
David.
The working capital I think I think you're talking about relatively flat working capital to share, but I know it's early for you, but how do you view working capital overall net working capital levels overall for the Corporation is there a is there an opportunity there to unlock some cash as we go forward.
<unk>.
Thanks for the question, David I would say the short answer is yes.
I think we track our working capital metrics very very diligently this from leased on a really nice job on cash generation.
Having said that I think one of the things we're having conversations around is.
Specifically the contract structures, we have the timing of payments liquidation events and things that drive positive cash flow over the life of the contract.
And I would leave you with this that theory.
Very hard to outmaneuver, a bad contract so getting into our contract structure 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 is going to be laser focused on ensuring we continue to do better.
400 incentive comp metric and we always start the year in certain place from 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 index.
Okay.
A couple of items there.
Yes.
So is the share count for 'twenty, two assumed relatively flat youre getting any share repo to kind of keep that neutral and then the.
It looks like Youre, calling for a decent step down in DNA, what is that associated with.
So I would say on the share count I would say that's a good assumption I would say, we're assuming roughly flat.
On share count year over year.
We will have to play this out over the over the course of the year.
And I think primarily I would say call it far enough up the intangibles amortization out of Unisys federal that's what's causing the intangible amortization number to go down to about 110, I believe from a 140 and depreciation is going up just a little bit we had a little more capital that's getting depreciate. It so thats shipments effectively on.
Depreciation and intangible amortization.
Got it thanks Darren.
Next day is literally day Parma from William Blair. Your line is now open.
Magic probably around <unk> good evening.
Hi.
From what.
Most of the backlog.
Jeff.
Related to the recent.
Notable awards in the third quarter.
Two 9 billion.
M Com Express software Lifecycle award.
So I would just say that they are primarily related to the Big awards in FY 'twenty one.
So I'd say, that's a good working from.
Okay and.
Did the customer.
For these large award 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 on where they are with this.
Saic's own due diligence into that potential revenue trajectory and we're taking a more conservative assumption than previous.
Okay.
As always our call on backlog adjustments.
And no communication from the customer understand how this works.
We tried to lay out the course of the call here.
Multiple tiers to it and because it's our backlog policy to only booked into backlog, what's realized reported revenue and you've got to have line of sight to be able to see that ore and we're not talking two years periods of performance. The average M comp performance between five and eight years.
When you put all of that together.
Leaves you with a little bit up the 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 are amplified by the size of New awards here.
Get that question.
Great great.
Thank you very much.
Next is John <unk>.
From Keybanc. Your line is now open.
Thanks for the follow up going to cash flow moment thinking about big picture cumulative between 'twenty. One 'twenty two the low end of the guide is for 960, we had been talking about $1 billion I know what's behind the guide so any color on the difference between the low end and high end when I think about 'twenty. One 'twenty two together and then also if I go back long enough.
<unk> the target for FY 'twenty two I believe it was 500 million units as was supposed to be 10% accretive to $5 50.
The guidance is what it is.
I mean is there is are we going to get to the 550 at some point here I appreciate that was $40 million of payroll repayment, but just any thoughts on getting new underlying $5 50 number.
An update on those old multiyear cash targets you guys used to have.
Sure.
Thanks for the question Jon So so as you noted we had a good FY 'twenty one on cash.
Here at $525 million in our first guide at the start of last year was <unk>. So we did about 75 better than our first guide last year.
If you then took the midpoint of the current year day FY 'twenty two guidance together, we get to a pretty darn significant orders. So I'd say on a year over year basis, where I'd say roughly in line with the $1 billion.
Previously communicated now I think the big drive from 500 to whether it's $525 to $5 50 is going to come from two places one.
Delivering topline 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 deferrals dissipate as we get into FY 'twenty three and beyond so to me I think youll 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 squarely in front of us and all I will leave you with is the.
The teams are incentivized to get to better cash numbers and we've outlined in the guide.
We need to work that over the course of the year and suffice it to say again.
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 keeps the day that effectively.
Got it and then just science Capex guided 45 to 55 is 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.
With the increasing the net security in the space markets specifically the requirements, we have within some of our research customers Youll see the capital a little more elevated I'd say part of what is also reflected there is some of the ongoing cost around facility optimization, so theres a little bit of capital that goes in.
After that as the third component would be the infrastructure and the work that we're investing in to allow people to work in a hybrid work model that also has some near term impacts to capital.
You think about it I wouldn't think of 50 to 60, a day run rate of capital for this business I expect us to trend down over the next couple of years.
And finally last comment would be to the extent, we see program or contract requirements for skip space, where some restricted facility requirements and you will see some pressure upward pressure on capital, but obviously, that's a conversation we're deeply engaged with the customer.
We recognized one of the values of this particular business is it's capital light model and to ensure that we maintain the balance and that is an appropriate way for us to work our way through it. So I would say temporarily elevated we expect it to come back to something that's more normalized over the next couple of years.
Alright. Thank you and then just last clarification from me is just on the backlog revaluation.
Does that have any bearing on the one seven times book to Bill or should I say does it have any bearing on the bookings numbers they've been reporting all year.
So think of the book to Bill closer to two.
And so the $1 seven that we reported at the end of the year. So it does have about a 0.3 impact to net book to Bill number so.
Okay. Thanks.
No further questions at this time I cannot call back over to Mr. Ken connector for closing remarks.
As we conclude I would like to note 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 <unk> 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.
Okay.
Yes.
Yes.
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