Science Applications International Corp
NASDAQ:SAIC
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Science Applications International Corp
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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 Nazzic Keene, SAIC’s Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.
This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you will also find supplemental financial presentation slide 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 the statements made on this call. I refer you to our SEC filing for a discussion of these risks including the risk factors section of our annual report on Form 10-K and quarterly report 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, Nazzic 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. 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 am 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 2020 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 2021.
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 2021 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 impact to 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 recompete 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 am incredibly proud to report that SAIC has been awarded all four of the AMCOM 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 in the 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 in the senate, we have not seen notable changes in customer behavior.
The President will deliver his government fiscal year 2022 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 deliver 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 with the acquisition.
While we continue to meet our commitment of achieving a net leverage of around 3 times by the end of fiscal ‘22, I am 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 Prabu Natarajan. We are very excited to have Prabu as part of executive management team, bringing with him a track record of success as the finance executive in the aerospace, defense and technology markets.
I’d like to ask Prabu to share our results for the fourth quarter and our fiscal year 2022 outlook.
Thank you, Nazzic, and good afternoon, everyone. I am extremely honored to have joined a best-in-class government services company and 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 Nazzic 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, this latter being the second in the series of four task order awards in our AMCOM recomplete portfolio. While these awards have notable award values in excess of $2 million, I would note that these are ceiling values that may defer from amounts included in backlog.
Although, these contracts contain room for us to drive additional revenues, it is our backlog policy the book amounts that have reasonable line of sight and then revised based on the volume of work funded over the next several years.
As Nazzic mentioned, subsequent to the end of the quarter, SAIC completed the successful capture of the remaining two of four AMCOM 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 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 Unisys 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 a $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 cost. 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 generated, 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 were strong at 59 days.
We deployed nearly 100% of the free cash flow we generated last year through dividends, debt repayment and as Nazzic highlighted share repurchases. Our Board of Directors has approved a quarterly dividend of $0.37 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 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 8.6% and 8.8%;, adjusted diluted earnings per share between $6 and $6.25; free cash flow of between $430 million and $470 million.
On slide eight, we have provided several works 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% organic 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 2.5% headwind to growth in fiscal year 2022 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 AMCOM portfolio. However, one notable contract that is up for recompete and should be decided in the summer time frame is our NASA NICS contract now being called AEGIS. The remainder of annual revenues being recompeted 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 FY ‘21’s strong adjusted EBITDA performance of 8.9% included about 20 basis points of successful but non-recurring resolutions of program contract matters. Our FY ‘22 guidance on adjusted EBITDA margin is in line, therefore, with our FY ‘21 performance. On EBITDA dollars, we expect COVID to have approximately a $10 million to $15 million of impact in fiscal 2022.
With regard to free cash flow, our guidance range includes $155 million downward pressure as compared to fiscal ‘21 relating 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 ‘22. Finally, as Nazzic mentioned, we reinitiated 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 seven.
To conclude, I am 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.
Nazzic, back to you for concluding remarks.
Thanks, Prabu. 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 customer’s 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 and engineering by deepening our digital engineering capability so that we can help the government advance complex systems integration, saving costs and increasing mission readiness. And we are 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 have 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 and 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 acknowledged 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 are now ready to take your questions.
[Operator Instructions] We have our first question from the line of Cai von Rumohr. 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 as you won all of the AMCOM recompetes. It was $900 million annualized, up from $600 million and obviously you won’t get all of it, but you should get some of it. And also your margin given that you won AMCOM 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, Cai. Prabu, here. Thanks for the question. So on revenue guide, organically we flagged flat to 3% growth and we have also flagged about a 2.5% headwind for COVID. A way to think about it is 2.5% and 5.5% on ex-COVID basis.
Having said that, clearly, we are disappointed that we are still being impacted by COVID and we are really hopeful that the headwinds abate soon and so the year-over-year difference in terms of COVID impacts, let’s call it, between $50 million and $100 million.
You are correct, we have had large notable wins over the past year, and as we have talked about another forums these are long-term programs that will provide sustainable growth opportunities over a several year period.
Let’s talk about AMCOM maybe a little bit so we can sort of peel this in subtle layers. So within AMCOM, we have to think about this is sort of a setup basic task course. 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 set of new business opportunities, things that will bring into the AMCOM portfolio as a result of working with the customer there. So there is clearly some potential for revenue growth from the second layer.
There is a third layer, which is a material supplier in the ceiling award. In other words, effectively, the customer has the ability to bring in materials into the AMCOM program that will allow us to generate revenue growth, but I’d caution that that materials plug tends to be lower margin work.
And then finally, there are 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 some of the first three layers.
And as we work through the AMCOM portfolio, clearly, we are going to go and 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 has set up.
So I think we are optimistic that over time you will see incremental revenue from the AMCOM portfolio and but that’s solely the reason why we are not seeing that immediate impact of revenue in FY ‘22 and therefore is in the guidance.
And just sort of put a ribbon on it, I think, we are expecting growth within the intelligence based 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 FY ‘22.
But just one follow-up. That still looks low, if we look at the midpoint, we are talking about $150 million of revenue increase and 75% of that -- $75 million of that is from COVID and you should get about $100 million I would estimate, probably, more from have 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 -- given the very strong bookings you have had, one would have thought that there was going to be some growth?
So, I agree, Cai. 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, I think we are bounded by the fact that we are living through a COVID environment and we are seeing some impacts from COVID.
So maybe another data point here is, if you can think about that supply chain business because that continues to be headwind, we can sort of think about this in weekly revenue terms and so that continues to be actually a 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 ‘21 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 basis points to 150 basis points of growth, again three or four very different opportunities in different customer sets and that’s 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 Jon Raviv from Citi. Your line is now open.
Hey, everyone. Good afternoon. So, I guess, let’s continue on this talking FY ‘22. Prabu, can you do a similar walk on the margin from ‘21 to ‘22? I guess there are a lot of moving pieces. But if I pull out everything that you have disclosed on an underlying basis in ‘21, I don’t know, I guess, 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, I don’t know, it gets to something below 9%. So is Unisys ramping year-over-year, just help me understand also supply chain being down year-over-year, which is lower margin. Why is the overall margin down year-on-year on a fully clean underlying basis? So I have the extended question, but there’s a lot of -- trying to figure this out?
Yeah. So thanks for the question, Jon. And maybe I will try to keep it at the high level and then we can dive in couple levels if we need to. So we ended FY ‘21 at a margin rate -- adjusted EBITDA rate of 8.9%.
And over the course of FY ‘21, specifically in Q2, we have called out certain non-recurring one-time items. But if you think about it, there were effectively about a 20 basis point tailwind in the margins in FY ‘21.
And obviously as we go into FY ‘22, we are assuming that those tailwinds won’t recur, and therefore, effectively if you then step back and look at the guidance for FY ‘22 of 8.6%, 8% paid [ph] at the midpoint of that guide range, I’d say, we are reasonably in line with performance from FY ‘21.
I’d probably add a couple of other data points. I’d say, Unisys Federal brought with it a good healthy mix of firm fixed price work and we are continuing to see good performance on the Unisys Federal side of the portfolio.
I would also note that AMCOM, when we won the recompetes, as we previously talked about, win from the I’d say T&M contract into a cost plus contract. I mean, there is a little bit of a change in the structure of that contract that’s also causing a little bit of downward pressure on margin range, but I really stepped back and said, 8.7% [ph] sort of on adjusted basis for FY ‘21 compared to a midpoint of the guidance range that’s sitting at 8.7%.
And finally, the last comment is, as we have talked about, EBITDA dollars and margin rates or 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 derisk the portfolio over the course of the year and harvest the opportunities over the rest of the year.
So I’d say, our initial guide is very consistent with our performance in FY ‘21 and we have got about 10 months left in the year to go, and hopefully, we will be better than what we are seeing year-to-date.
Yeah. No. I appreciate that. Thank you. I just have 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 still seem that margins are down a bit, maybe at the AMCOM piece. I guess assuming a big picture, should we still think about this as a sustainably 9% plus 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 have said this in other forums before, we tend to think about this on a long-term basis and we are fully striving for balance between investments and profitability.
And so we are working on margins over time, we have proven that we have the ability to deliver margins incrementally. We have actually, as Nazzic 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 are continuing to differentiate ourselves in 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 will we get to 9% in the year or just over 9% is going to function -- is going to be a function of how well we execute in a particular year, but I think qualitatively not much has changed in the portfolio.
Okay. And…
Hey, Jon. This is Nazzic. One thing I will add and I know we have had this conversation as well is, if you think about the areas that one was just the catalyst for the Unisys Federal acquisition. But as we think about our strategy and our focus and in some of the priorities in the nation on IT modernization, digital transformation, those can and 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 well for improving margins over time.
Thanks, Nazzic. I will pass the line. Thank you.
Next is Sheila Kahyaoglu from Jefferies. Your line is now open.
Hey. Good afternoon, guys, and welcome Prabu. 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 CADS or FSTAD, I know they have been around for a while now. How big are those wins and then you mentioned some small program roadblocks, is that a point headwind to revenue overall?
So maybe I will start with the last piece first. I would say, in terms of the losses, they are probably between $100 million to $125 million, $130 million. They were all predominantly towards the latter part of Q4 of FY ‘21.
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 between $0.1 and $0.5 revenue so on a year-over-year basis.
And in terms of the ramp, I’d say the most material portions of the ramp will be in our risk program and that ramp we are expecting to see in the second half of the year. And I’d say, there is a variety of other programs, I’d say no one individual program is ramping up beyond $20 million, $30 million a year on a year-over-year basis. But again, I’d say, if you step back a year later, you would expect to see a little bigger ramp on our AMCOM portfolio. So that’s sort of a way to bridge between ‘21 into ‘22 and then ‘22 into ‘23.
Okay. And then just a follow-up on the COVID impacting, are you assuming in, 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, Sheila is, 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 of weekly revenue from our supply chain business. If you did the math, it will get you roughly $600 million for the year.
And if you then map out the revenue on the program against the V-curve with respect to COVID, what you will find is that at the peak of COVID, which is sort of at the bottom of the revenue curve, we are at about $10 million a week. At the top, we are 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 the $10.5 million and $11.5 million 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 toward the end of the year at Q4. So that’s the math we have got. But you will see it in the compare at least for the first half of the year and you will start to see dissipate in the second half.
Okay. Thank you.
We have our next question from Gavin Parsons from Goldman Sachs. Your line is now open.
Hey. Good evening, gentlemen.
Hi.
Hey, Gavin.
I wanted to ask you about your revenue visibility and beyond fiscal ‘22 and I appreciate there are lot of unknowns with the COVID and with the budget, but 1.7 book-to-bill this year, 1.2 the year before your backlog has pretty much have doubled over the last three years. So I was wondering if you take a stab at a multi-year growth outlook from there.
Hi, Gavin. This is Nazzic. How are you?
Good. Thank you.
Yeah. I think -- yeah. A couple of things that I might want to highlight. We have -- to the conversation in my comments earlier, I did talk about the fact that, the assumptions, I think, in general the industry that the budgets are going to be relatively flat if we look forward. And I think that’s how most of us were thinking about it, even as far back of the year or two ago so even pre-COVID.
But with that, we do see that there is opportunities within the next couple of years and we are seeing some of that highlighted now and some of the conversation coming out of the administration and again we will get some more clarity over the course of the next few months.
But we are seeing some increased appetite interest in IT modernization, certainly, the cyber emphasis on that, the working from home. We are seeing that the drive to modernize being very important. We are seeing some focus on the 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 flattish 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 have outlined is to drive to a growth outlook that is greater than the overarching market and that’s how we are thinking about the next few years, if that helps.
Got it. That’s helpful.
Prabu, do you have…
Again, maybe one other comment here. So I think you are absolutely correct, we do have $21.5 million in backlog at the end of the year. We had a 1.7 book-to-bill in FY ‘21. 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 often maybe a couple of other data points, in 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 is enough there at less than I’d call it approximately 10% of the revenue coming from the recompetes and the new business assumptions are modest this year.
But when you step into FY ‘23 from FY ‘22 I think you are 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 have observed in the 90 odd days here is a remarkable win rate on recompete. So we do our share of recompetes really, really well. But there is always a flavor 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 have got the visibility from the base programs that we have in the portfolio and then we have got to keep winning our share of recompletes, which are again remarkably high for a company of this size and we also have to win our share of new business still we continue to see that progression for long-term revenue growth.
That’s helpful. I guess what I don’t understand is how familiar a bottoms up standpoint with this many new wins as many upsized recompete wins that -- there isn’t more visibility to kind of a multiyear bridge. 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 revenue?
This is Nazzic. I guess, there’s -- it’s impossible to say that risk doesn’t exist, because the way the government operates, the way they -- if you keep your budget and there’s always some element of that risk. We don’t believe that the high risk as we sit here today.
And as Prabu indicated, where we did see some, some bookings and some wins that it 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 work that we do based on annual budgets in the government cycle.
Got it. Okay. Thank you.
Thank you.
Next is Seth Seifman from JPMorgan. Your line is now open.
Hey. Thanks very much. Good afternoon, everyone.
Good morning, Seth.
Hey. So just maybe following up on that last point on the change to the backlog and evaluation of the backlog that happened, is that -- was that concentrated particularly in one or two programs and so can you share with one or with that a very wide range of programs, because absence that allowance, it looks like the book-to-bill would have actually been quite strong in the quarter and so I am just wondering what drove the reassessment and what drove it at this time?
Yeah. So thanks for the questions, Seth. I think, first of all, the valuation adjustment that you referred to is consistent with the policy that we have had of recognizing into backlog, what’s going to realize into revenue overtime.
So I’d say the reason you are seeing that up a little more a guarantee this time around is the size of the Unisys. I’d say the vast majority of the adjustments were sort of in year awards. So FY ‘21 awards that we -- if you think about it as derisking a little bit and based on the backlog policy we have.
So and I am going to get back to the AMCOM example. If we don’t have clear sort of line of sight into revenue on a six years, sort of seven years or eight years of period of performance, I think it’s our policy to require an adjustment to the backlog.
The backlog does not go away. The award is still there. But into the extent we are able to bring new work into the contract. We effectively, if you think, better 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 are seeing that. So I see nothing unusual there.
Okay. Great.
Okay. Yeah.
Thank you. Then as a follow-up, it looks like Unisys -- probably, on a 12-month basis, it looks like Unisys heard about $735 million of sales. And I just wanted to get levels that -- I know there were some contract transitions going on there, at least one -- significant one. So just to get level set, 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 of that business is making in fiscal ‘22?
All right. So I’d say, the Unisys Federal businesses in performing in line with our acquisition model. And I think your math is about right actually, so we did expect about $700 million revenue on a full year basis, if you will, from Unisys Federal and pretty much got to that number.
So I’d say, we knew where the ramps were going to be in -- at the time that we were evaluating particular opportunity to particular acquisition and so that’s sort of built in the ramp and so I’d say that business is performing in line.
I’d say one of the reasons we looked at Unisys 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 close that deal the first day the pandemic shutdown the business.
So I think there is actually early days to allow Unisys Federal, the revenue plan is actually performing in line with our expectations and I might there say that making a little bit of opportunity on the margin rate side, given the mix of fixed price work there is on the program.
Okay. Cool. And then if I could sneak in fast one for Nazzic. I know the supply chain work has been definitely in the crosshairs of the pandemic. But when we step back from the numbers in the model and we think about like it in the real world like what has to start happening for that business to get sort of back on track? Is it sort of -- is it lifting of certain restrictions, is it scheduling and the occurrence of certain training exercises, like, what really drives that business so that we can know that the pandemic impact is abating?
Yeah. So, I think, a couple of 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, study 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 in the world are under.
So as those start to roll out and there will be more opportunity to have exercises and the OPTEMPO of the military, then we will step up and if that steps up that will drive more need and more demand for the supply that run through the supply chain portfolio. So it really is just the continued working through the impacts that COVID has on the OPTEMPO of the broad nation. I guess, I am not giving a lot of specifics, but that’s how I think about it.
So as Prabu indicated, as we have assumed 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 toward the end of the year, a more normalized operating model and OPTEMPO, that’s how we would absolutely expect the -- that part of the business to stay in line with that.
Great. Thank you very much.
Thank you, Seth.
Next is Tobey Sommer from Truist 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 free cash flow, we have guided $430 million and $470 million. And at the midpoint of that guide, we are sitting at about, let’s call it, $450 million. FY ‘21, we ended the year at a record $525 million and so if you think about it, as we said, payroll deferrals, both accounting for the benefit from the payroll deferral in FY ‘21, as well as to give back in FY ‘22 get you to a $150 million adjustment to your $525 million. So think of that as $375 million.
And so stepping forward, $375 million at the midpoint of that ‘22 guidance gets to about $450 million. 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 really the bridge to get you back to the midpoint of that FY ‘22 guidance, if that helps.
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 have had a relatively good experience with that. But I am curious about your appetite as the budget kind of flattens out and you are still trying to accelerate your organic growth? Thanks.
Yeah. Yeah. So good question. I’d say, we said this before, we want this to be balanced. Our capital deployment to always be balanced in the way we think about it. We are very proud of the fact that we delever very quickly, as Nazzic said, down to, let’s call it, a little over 3.5% from the highs of the acquisition and so -- and we have got some commitments around paying down some incremental that this year.
And then given the fact that we are in historically low interest rate times, I’d say, there is probably not a compelling reason to pay down a whole lot more debt on a voluntary basis after FY ‘22, 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 value accretive, capital deployment strategies.
And actually on M&A, we are -- we have said this also before, we are 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.
And so we think that equity is a precious commodity and therefore we are going to be an improvement into 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 ways.
Operator, are you there?
We have our next question -- yes, sir. We have our next question from Joseph DeNardi from Stifel. Your line is now open.
Thanks. Good afternoon.
Hi, Joe.
Now that probably you talked about starting of 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 are actually seeing for growth is not used, just few, obviously, across industry, but pre-buying back stock because you see the softness is temporary, can you talk about that a little bit? Thanks.
Yeah. 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 again to repurchase program allows you to be in the market on a consistent basis, because I think that’s a key focus, if you will, for long-term value creation. As we also closed out FY ‘21, 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-insured buyers, so we are 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 generating 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 valuation. We think about it in the context of multiples. And I would say, if there is an opportunity to acquire shares at multiples, below trading multiples or where others may be trading at, I think, inherently 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, Prabu, I think, you mentioned that it’s somewhat routine, but can you remind us -- I know you are new, but maybe, Nazzic, can you remind us the last time the backlog was adjusted down by 10%, if there be adjustment of anything to do with your arrival Prabu?
No. I would say -- I will 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 FY ‘21 that drove the adjustment, and I would say, now we are near 10% in prior years. But we have had a few hundred million dollars of backlog adjustments. It’s fairly routine in the business and -- so that’s probably what I will leave that with.
Okay. And then...
This is Nazzic, Joe. We appreciate it. We love the fact that Prabu is here, thrilled to have 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, the new awards that we received this year having been our biggest award year since we spun out in 2013.
Okay. And then just last as of this year, next year that Defense supply chain are flat and then intel and space are expected to grow. Actually 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 will try to do is give you some color on how we think about where the opportunities could exist. And obviously the budget still have to go through their process and we are all trying to read the tea leaves as best as we can.
But some areas and the area of IT modernization or digital transformation, spans all of our portfolio. And so whether it’s the civil space, the defense space or in the intel space, those are offering that we can support our broad portfolio.
I think it depends greatly as we all navigate this on where we -- where the budgets had left, where the pressures end up. But the areas that we have elected to invest and the areas that we believe will be a catalyst to our ability to grow above market in the years to come really are those areas that I have touched on, IT modernization, the digital engineering, again across the entire portfolio, the space domains. And so we are 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 we will get disproportionately invested in to drive long-term value.
Thank you.
Next is David Strauss from Barclays. Your line is now open.
Thanks. Good afternoon.
Hi, David.
Prabu, the working capital, I think, you are talking about relatively flat working capital this year, 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?
Yeah. 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 company has done a really nice job on cash generation.
Having said that, I think, one of the things we are 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, it’s very hard to outmaneuver a bad contract, so getting into a 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. It is an important incentive comp metric and we always start here in certain place and the teams do what they have to do over the course of the next 10 months 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 will see us continue it better.
Okay. So a couple of clarification questions. So is the share count through ‘22 assumed relatively flat, you are going to do share repo to kind of keep that neutral? And then the just outlook like you are calling for a decent step down in D&I, 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 are assuming roughly flat on share count year-over-year and we will have to play this out over the course of the year.
On D&I, I think, primarily, I’d say, call it, the burn up of 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 140 and depreciation is going up just a little bit. We had a little more capital that’s getting depreciated. So that’s difference effectively on depreciation and intangible amortization.
Got it. Thanks.
Next is Louie DiPalma from William Blair. Your line is now open.
Nazzic, Prabu and Shane, good evening.
Hi, Louie.
Hi.
Where is most of the backlog adjusted related to the recent notable awards in the third quarter in the $2.9 billion AMCOM expressed for a lifecycle award?
So I just say that they are primarily related to the big awards in FY ‘21. So I’d say that’s a good working assumption there.
Okay. And did the customer for these large awards, they communicate anything to SAIC subsequent to, I guess, the end of the third quarter that gives you less confidence that you will be able to achieve the ceiling of this awards or was this just SAIC’s own due diligence into potential revenue trajectory and you are taking a more conservative assumption than you previously did?
So it’s always our call on backlog adjustments. There has been no communication from the customer. We understand how the ceiling works and as we tried 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 revenue and you got to have line of sight to be able to see that over and we are not talking two years periods of performance, the average AMCOM period of performance is between five years and eight years.
And so when you put all of that together, it leaves you with a little bit of 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 or amplified by the size of the awards here. Appreciate the question, Louie.
Great.
Thanks.
Thank you very much.
Thank you.
Next is Jon Raviv from Citi. Your line is now open.
Yeah. Thanks for the follow-up. Just going to catch for moment, thinking about big picture cumulative between ‘21 and ‘22, the low end of the guide is for $960 million, we have been talking about $1 billion. I know its 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 Engility, the target for FY ‘22 I believe was $500 million, units as was supposed to be 10% accretive to $550 million, that’s the guidance is what it is. I mean is there -- are we going to get to $550 million at some point here? I appreciate this $40 million of payroll repayment? But just any thoughts on getting to underlying $550 million number with an upgrade on those old multiyear cash target you guys just have?
Sure. Thanks for the question, Jon. So, as you noted, we had a good FY ‘21 cash. We ended the year at $525 million and our first guide at the start of last year was $450 million. So we did about $75 million better than our first guide last year.
If you then took the midpoint of the current year guide, FY ‘22 guide, together we get to a pretty darn close significant numbers. So I’d say, on a year-over-year basis, where I see roughly in line with $1 billion that we previously communicated.
Now, I think the big drive from $500 million to whether it’s $525 million or $550 million, it’s going to come from, I think, two places. One, delivering outline 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 FY ‘22 and beyond. So, I think, you will 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 teams are incentivized to get to better cash numbers and new punch line 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 have got some work to do and teams are mitigating that effectively.
Got it. And then just on CapEx, you guided 45 to 55 [ph] 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, with the increase in the national security in the space market, specifically the requirements we have within some of our prospective customers. You are seeing like 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 there is a little bit of capital that goes into that.
As the third component would be the infrastructure and the IT networks that we are 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 space or some restricted facilities requirements, you will see some pressure -- I’d say, upward pressure on capital, but obviously that’s a conversation we are deeply engaged with the customer and we recognized with one of the values of this particular business as capital-light 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 expected to come back to something that’s more normalized over the next couple of years, Jon.
Thank you. And then just 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 have any bearing on the bookings numbers you have been reporting all year?
Yeah. So think of book-to-bill close at 2.0 and so 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 the 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.