Good day, and welcome to the SAIC Fiscal Year 2015 Q4 and Year-End Conference Call. Today's conference is being recorded. .

At this time, I'd like to turn the conference over to Paul Levi, Investor Relations. Please go ahead, sir. .

Good morning, and thank you for joining us for SAIC's Fourth Quarter and Fiscal Year-End 2015 Earnings Call. This morning, we issued our earnings release, and joining me today to discuss our business and financial results are Tony Moraco, our CEO; and John Hartley, our CFO. .

Today's call is being webcast at investors.saic.com, where you will also find the earnings release and supplemental financial presentation slides to be utilized in conjunction with today's call.

Both of these documents, in addition to our Form 10-K to be filed soon, should be utilized in evaluating our results and outlook, along with the information provided on today's call. .

Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call.

I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. .

In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. .

It's now my pleasure to introduce our CEO, Tony Moraco. .

Thank you, Paul, and good morning. SAIC's fourth quarter and full fiscal year 2015 results reflect continued execution of our business strategy and delivering our shareholder value-creation proposition. Fiscal 2015 revenue of $3.8 billion and operating margin of 6.3% resulted in diluted earnings per share of $2.91.

John will cover the financial results in more detail, but fourth quarter revenues of $941 million resulted in the second straight quarter of year-over-year revenue growth and 6.3% operating margin. .

We continued our strong cash flow performance with approximately $100 million of operating cash flows in the quarter and $277 million for fiscal year 2015. Finishing our first full year as an independent company, we made significant progress on our strategy execution and most importantly, performed well for our customers.

We are carrying that momentum forward in the fiscal year 2016. From a market standpoint, there have been no significant shifts in the environment, which is generally good news. Our federal customers are working with appropriated budgets through September 30, the end of government fiscal year '15.

There appears to be optimism as a result of the President's budget recommendation for fiscal '16 and early feedback from congressional committee deliberations. However, there's also caution, as demonstrated by our customers, as the pace of contract awards has not changed significantly and the sales cycle remains longer than historical trends.

However, we continue to see demand for the capabilities that SAIC provides and new contract opportunities for us to pursue. Our PROTECT/EXPAND and GROW strategy remains unchanged, and we continue to execute that strategy. .

Similar to our third quarter, SAIC had a large volume of task order renewals, and with our revenue profile coming largely from IDIQ contracts, these renewals are vital in protecting our base, providing opportunities to expand our services to these customers.

Fourth quarter award activity translated to a book-to-bill of 0.7, which follows our historical pattern of lower fourth quarter awards. SAIC total contract backlog at the end of the fourth quarter stood at $6.2 billion, of which funded backlog is $1.7 billion.

Historically, our fourth quarter backlog is the lowest of the year, as we see customer awards slow due to the holiday season and a lull coming off of the usually higher third quarter. The value of our submitted proposals awaiting awards is $12.7 billion, up from about $11 billion at the end of the third quarter.

This is largely due to the resubmittal of the NASA Human Health and Performance Contract proposal. We anticipate an HHPC contract decision this summer. .

Subject to the end of the quarter, the United States Marine Corps exercised a contract option for SAIC to continue into the next phase of the Assault Amphibious Vehicle Survivability Upgrade program.

After nearly a year-long competitive down-select process, we were selected to continue with the next phase of this vital effort to support Marine Corps amphibious capabilities. Since last May, we completed preliminary and critical design reviews, and SAIC will now perform initial upgrades to 10 Assault Amphibious Vehicle prototypes.

Following this, additional options, if exercised, will lead to developmental testing and low rate initial production, delivering 52 vehicles for operational test and evaluation to Marine Corps units. The total value of this contract, if all options are exercised, is $194 million over 5 years.

This important effort is another example of our strategy to expand the work with current customers by leveraging our existing capabilities across our customer sets.

In partnership with the Marine Corps, we leveraged our differentiated services model to provide a cost-effective value proposition in direct competition with OEM primes, applying our integration services capabilities and partnering with key subcontractors.

With the capabilities demonstrated on previous vehicle upgrade programs to the Department of Defense, such as MRAP and AAVC7, we were able to leverage our domain knowledge to the Marine Corps and help them ensure their warfighter safety and amphibious mission success. .

Now I'd like to comment on our planned acquisition of Scitor Corporation. Announced at the beginning of this month, we're on schedule to close the Scitor acquisition in May of this year. We have progressed on the financing and received clearance under the Hart-Scott-Rodino Act, and are excited by this shareholder value-creation opportunity.

Along with the Scitor management team, I have visited several Scitor customers and intelligence community leaders in order to express my commitment to their critical national security missions.

In our discussions with them, the reaction has been positive and our understanding of the vital role that Scitor plays, and the security of this nation has been reinforced. During these visits, customers have expressed their appreciation with the high-caliber technical talent of Scitor employees.

I look forward to close -- to the closing schedule for May and to officially welcome the employees of Scitor to the SAIC family. .

I will now turn it over to our CFO, John Hartley, to discuss our financial results. .

Thank you, Tony, and good morning, everyone. Consistent with my remarks in prior calls, my comments today will exclude the minor amount of revenues and costs performed by our former parent, which generate no profit for us and will decline over time as that work scope is completed.

Also, I will primarily focus on SAIC's performance for the fourth quarter as opposed to the full year. .

Fourth quarter revenues of $941 million reflects 1% growth as compared to the fourth quarter of last year. This is our second straight quarter of year-over-year revenue growth and is in line with our belief that we can achieve organic annual revenue growth in the low single digits, on average and over time.

As I have previously communicated, our fourth quarter revenue is typically the lowest of the year and, as anticipated, decreased by about 5% from the third quarter due to the holiday season. Operating income of $59 million in the fourth quarter resulted in an operating margin of 6.3%.

This operating margin is in line with recent performance and is encouraging, given the lower fourth quarter revenues due to the holidays. .

Net income for the fourth quarter was $36 million, and diluted earnings per share was $0.75, representing an increase of 14% from the fourth quarter of last year.

Our income tax rate for the quarter was about 35%, which benefited from the federal government's extension of the R&D tax credit retroactive to the beginning of the year, and positively impacted EPS by about $0.03. .

Now on to cash and cash flows. In the fourth quarter, we had cash flow from operations of $96 million, and resulted in an FY '15 ending cash balance of $301 million. Cash flow from operations for the year were $277 million.

Our days sales outstanding stood at 52 days at the end of the fourth quarter, which is an improvement from our third quarter of 5 days, contributing about $50 million of additional cash flow. We have taken many actions designed to accelerate cash flow, and I am very pleased with our cash collection performance.

This leading performance is the direct result of the focus we place on cash flow because of its importance to shareholder value. However, we do expect our DSOs to return to a more normative level in the mid-50 day range.

Capital expenditures for the quarter were $7 million, slightly above our normative quarterly amount but generally in line with our long-term expectation of about $20 million annually. .

Moving on to capital deployment. We continued our capital deployment activities during the first half of the fourth quarter through share repurchases at about the same daily pace we had in previous quarters. Accordingly, we repurchased 455,000 of our shares by deploying about $25 million.

This brings our fiscal year 2015 share repurchases to 3.2 million shares, for about $140 million, and we have repurchased 7% of our shares, or 3.5 million shares for $150 million since the initiation of our repurchase program in December of 2013.

We ceased repurchasing stock in the open market in mid-December under the existing share repurchase plan, which continues to have 1.5 million shares available for repurchase. We intend to use this accumulated excess cash on hand of $150 million as one of the funding sources for the Scitor acquisition when it closes in early May. .

Additionally, today we announced the approval of our quarterly cash dividend of $0.28 per share, payable on April 30.

Our capital deployment actions in FY '15 resulted in deployment of about 75% of our fiscal 2015 free cash flow, but if you include the $150 million that we anticipate to utilize in the Scitor acquisition, the percentage increases to about 130%. .

As mentioned on our March 2 call to announce the signing of the Scitor acquisition agreement, and based upon estimated pro forma historical results, we communicated our expectation to have a debt-to-EBITDA level of approximately 3.6x for the combined company.

While we fully expect to continue our quarterly dividend at its current level, our expectation is to use future excess cash to pay down debt until we reach our previously communicated target debt level of between 2.5x and 3x EBITDA.

At that point, we expect to continue our disciplined capital deployment program, evaluating options of share repurchases, dividends, M&A and additional debt repayment. I would like to reiterate that our long-term financial targets remain substantially unchanged, and I will provide any modest updates following the close of the Scitor acquisition. .

Tony, back over to you for concluding remarks. .

Thanks, John. Our proxy statement will be distributed soon to shareholders, and I would like to announce that our Annual Shareholder Meeting will take place on June 3 at our McLean, Virginia offices, and I encourage shareholders to attend this event. .

Concluding our first full year as an independent company, I would like to thank the SAIC team for a job well done. Your continued dedication in pursuit of our strategy and customer/mission success has resulted in a successful year, and positions us very well for fiscal '16. .

Operator, we're now ready to take your questions. .

[Operator Instructions] We'll take our first question from Jason Kupferberg with Jefferies. .

Just wanted to start with a question on book-to-bill. I know you have some seasonality impact always in the January quarter. We tend to look at the metric more on a trailing 12-month basis to try and adjust for that seasonality.

And actually, on that basis, it looked like your book-to-bill ticked up a little bit this quarter as compared to where it was on trailing 12-month basis last quarter. So wanted to get a sense from you guys in terms of how you're thinking about potential book-to-bill expectations for full year fiscal '16.

It sounds like, from an overall market standpoint, things haven't gotten worse, though they haven't necessarily gotten much better either, just in terms of sales cycles.

So how does that kind of net out at the end of the day? I mean, should we be looking for a similar book-to-bill in '16 as in '15?.

Well, yes, Jason, I think it's going to be very similar. I mean, we still target that 1.0. It has its cycles. But we saw the seasonal aspect that you mentioned. The 1.0, in the aggregate, looking at each of the various customer groups, we're confident that we continue to sell through the task orders on the large IDIQ contracts.

The pent-up demand on the submit, they're still out there for some of the larger non-IDIQ deals. So you'll get a little bit of that fluctuation quarter-to-quarter, but very comfortable with the prospect that are in the pipeline right now. As you mentioned, we think that the customer budgets have stabilized over the last couple of years.

We're kind of at that new normal in the bottom and looking to '16 FY -- government FY '16 and '17 to kind of get back on that track.

So I think our customers have adjusted, and I believe that we're well aligned to the demands that they still put forward on the services side on what they -- continue to contract for them and the services that we deliver. So I wouldn't expect much change, but we still have around that 1.0 up or down just with the quarter fluctuations. .

And Jason, I will point out that the FY '14 Q4 book-to-bill of 0.3, we believe, was episodically low, so I wouldn't use that for comparison for any forward years. .

Okay, that's all helpful. And then just a question on Scitor. I know you guys said that it should be accretive to adjusted EPS in year 1, but what else can you tell us just in terms of annualized revenue contribution and sort of sizing that EPS accretion? Not sure how modest you're expecting that to be.

I understand you haven't quite closed it yet, but any general thoughts there would be helpful for modeling purposes. .

Yes. Well, we gave the historical run rate for the pro forma activity of the Scitor acquisition. You can see that in the March 2 presentation. And also, it does have adjusted EBITDA of higher than what we run, but if you look at it, they're adding about -- we said about $600 million on a historical basis.

They're growing at, we believe, about a mid-single digit run rate. So you can think of that for what our FY '16 would lead to.

We expect their margins that you would've seen in the pro forma trailing 12 months to hold consistent generally, except for the transaction cost that we'll have, and then also -- also, the intangible amortization that we're in the process of determining that amount.

So the adjusted non-GAAP should very much follow those pro formas once you put on that mid-single digit growth to the activity that we had on the pro formas. We'll go into much more detail on that in June but, hopefully, that's enough to get you by for now. .

It is, it is. And then just last question for me on cash flow. In FY '15, looks like you did quite a bit better than your typical annual target.

So if we think about the prospects for fiscal '16, I guess just kind of putting Scitor on the side for now, were there timing benefits? It sounds like you're expecting DSO to go back up to the mid-50s, I guess, as we go through fiscal '16.

So can you still do something in the neighborhood of $200 million of operating cash in fiscal '16, even with some of these working capital movements?.

Yes, it'll be tough to hit $200 million but we're certainly going to push for it. We don't expect to be far off that number. .

We'll go next to Cai Von Rumohr with Cowen and Company. .

Could you maybe update us, I guess you had, on the HITS contract, where you are there; and the NASA Health?.

Sure. This is Tony. We have resubmitted Human Health and Performance contract back in the late January, February time frame. We still expect that decision to be made sometime this summer. So they did hold to their original schedule on the proposal track. So that is in and we expect that to move forward.

On HITS, that's still back at corrective action at the agency core and we do again expect to get some decision over probably the next maybe 3 to 4 months. Hard to predict on that, but we're in that probably couple of months. That's the best we can tell you as far as timing. Both are in and are going through considerations by the customers. .

Okay. And then on Scitor, I mean, I gather you have some tax benefits.

If your free cash flow is in the area of $200 million, presumably, how much would Scitor add to that on an annual basis? Can you give us any help there?.

We think on a normal annual run rate, it should provide $50 million to $60 million when you take into account the $20 million of additional cash flow from the tax asset amortization and that lasts, at least at the $20 million level, for the next 7 years. .

Got it. Okay. And then if you've passed Hart-Scott-Rodino, and I guess I gather the financing's pretty close to in place, how come it takes until May? Is the plan to -- sometimes, people close, like, at the last day of the quarter or the first day of the new quarter.

Can you tell us a little bit more about that?.

Well, coincidentally, it is the first day of our second quarter. So when we put the plan together and put all the financing activities together, it looked like things were culminating around that date, and so that's how we've laid up all the communications with our rating agencies and then our term loan B activities.

And we just think that's how long it's going to take, and so if it's within -- if we're ready within a week's time of that, we will probably just wait until the first day of the quarter just to ease the disruption to the financial statement reporting and the like. .

Terrific. And last one, you've still got some OCO Afghanistan business.

Could you comment how big was it last year and with the decision to kind of delay withdrawal of troops, what you see directionally for 2016?.

So the majority of what we see is in the supply chain area. That's about in the $80 million a year range. It certainly -- it ebbs and flows depending on what's going on because we've had things like Ebola and stuff like that, that have delivered to that. In '15, we had about $100 million in total. It'll slightly be lower in '16.

We expect about $90 million. Again, the vast majority of it, over $60 million coming from our supply chain, with tires and POLChem, and then we have a little bit under warfighter and a little bit under AMCOM EXPRESS. But we don't expect that to cause any step changes. .

We'll go next to Jon Raviv with Citi. .

Tony, you mentioned that customers seem to have adjusted. I was wondering if you could comment on how you think the environment is going to trend over the next few months given the gulf we still have between budget proposals and sequester caps and whatnot, and how you think those debates are going to sort themselves out. .

I think with the budget cap baseline, the President's budget, the Republican's position on national security and defense, I think, again, we've seen the bottom of a general cycle, we do expect there'll be some activity around sequestration relief, to a degree.

I don't think anybody's expecting a full repeal on sequestration, but they're working around it relative to legislation. Do think that the customers have already self-selected down to the appropriate levels. Most that I've talked to are planning on that DCAA level with some upside based on how the budgets and the markups actually play out.

So really don't see huge fluctuations. It'll be pockets probably on the sequestration relief side. You may see a fluctuation, plus or minus 5%. It's kind of hard to see at individual account levels, but I think they're going to be much more selective, make the broader program decisions.

And as it reflects on our business, we're still seeing fairly high demand for the technical expertise that the customer continues to seek across the portfolio. And the diversification of the portfolio helps in meeting both their IT program upgrades but also the system engineering and the mission capability.

So I think we're still going to be fairly stable, as we've messaged before, kind of getting back into this normative really FY '16 -- government FY '16 and beyond, we've been saying '17 to '20. It looks like we're reaching a stable platform on budgets right now, so we're well positioned for that, so expect few changes. .

Okay, great. And then how could you -- you guys pointed to in your programs ramping up, helping your sales numbers, and certainly you're outperforming.

How do you characterize the new business, the new programs? Is it mostly brand-new business? Is it expansion of current work? Is it pure takeaways from large OEMs and pure competitors? How would you characterize that?.

It's still a very competitive environment. It's a mix of what you described. We have, I think, been more focused with this operating model, with the customer groups able to focus the pipeline decisions around where we're best aligned, increase our probability to win.

We're seeing our competitive win rates hold, so it's a combination of selling through the large IDIQ platforms that we have to secure the task order volume. I think in terms of securing work on the PROTECT side but within those vehicles, we are looking to expand our services using those vehicles that we have in place.

Separate from that, like with AAV, we do think that our -- ensuring capabilities through the service lines, we can leverage our past performance and again sell -- ensure capabilities to customers we know but customers maybe we haven't delivered that specific service to. So more on the EXPAND side as far as that market opportunity.

We are still focused on the GROW side. The emphasis this year, obviously, will be on the intelligence community and leveraging the Scitor acquisition. So we're looking to align to the portfolio that Scitor has created and then complement that with what we need going forward to grow that particular market segment. .

[Operator Instructions] We'll take our next question from Edward Caso with Wells Fargo. .

I was wondering if you could talk a little bit about pricing.

What we hear is that there may be some flexibility in the noncommodity end of the market, so maybe you could help us if, one, is that right? And two, can you differentiate your revenue between sort of value add and commodity?.

Sure, we spend most of the time on the value-add services, very little on the commodity side relative to, perhaps, the supply chain being the exception, but that's just a slightly different business model.

But on the straight services, it's still very much on the higher-end technical service capabilities, and that's both on the mission engineering side as well as on the enterprise IT. So we tend to try and stay on the higher value-add architectures, application development and migration to newer systems.

And I think the technology integration aspect of the portfolio also allow us to deliver an end-state solution. Relative to the flexibility, we are looking to position more on the fixed price side where we have capabilities.

There's a number of programs, like AAV, where we can model our program capabilities and promote a fixed price model for the government. Most of the IDIQs offer flexibility to use costs reimbursable or fixed price. And we're starting to see, perhaps, some hybrids where we can be more cost-effective, take on the fixed price work.

On here, I'm thinking where we can manage the risk, it's mature systems and capabilities that we have. But at the same time, there's appropriate levels of the cost reimbursable and when we'd use those with the customer side.

So the flexibility does exist, I don't know that it's necessarily growing, but we are also seeing, although very price competitive, that the slight pullback on the formal Low Price Technically Acceptable fewer, let's say, formal LPTA, I think the government's had a taste of that and realized that there is still a value proposition on a best-value solution, so we're again, trying to influence that on the procurement decisions that they're undertaking today.

.

John, could you talk about direct labor versus ODCs? In the press release, there are several comments about notable material pass-throughs. So if you could maybe give us growth rates in the quarter and the year for direct labor versus ODC. .

Yes. A lot of what we did see in this quarter was surge in materials. Our labor remains fairly constant as a run rate, considering the holidays, we'll always see a dip in labor a little more than we do in materials.

Just as an example, our supply chain material, where we saw the largest increase, averaged about 16% for the year but in Q4, it ran about 17% for the fourth quarter. So we had that 1% to 1.5% tick-up in the fourth quarter associated with that. But we did maintain our percentage of our labor compared to subcontractors' labor.

That mix for the year ended at 58% our labor, 42% subcontract and we ended the fourth quarter -- just the fourth quarter by itself stand-alone, were those same numbers, 58%, 42%. So we'll always take those revenue pass-throughs, especially when they're on supply chain. Because of the fixed cost, it's spread over a larger base.

That becomes more profitable for us, relatively, than having a lower base on that material. So it is still good profit-generating revenue, but majority of the surge we saw, that 1%, was in the materials area. .

John, you mentioned that the long-term guidance was substantially unchanged. Now was that a before-Scitor comment? And if that's what it is, give us some body language on what part of the model -- the outlook may be different. .

Yes, it really is both. It is a with -- kind of leaning towards "with Scitor" comment. And what will change is more or less the starting point, so where our operating margin will be. We've said 10 to 20 basis points of margin improvement per year, on average over time, starting though in the low 6%.

We have to reevaluate where that new starting point is going to be once we bring on Scitor. On a GAAP basis, we do not yet know that number because of the purchase price allocation and intangible valuation we're going through at this point. But we will update those in June so we have a good picture.

But all in all, we think those same items, the low single-digit revenue growth, the 10 to 20 basis points of improvement, the return of capital in excess of what we said is about $150 million we need on average and then, maintaining our financial leverage at an appropriate level for SAIC's cash-generating characteristics. .

Last question, clarification.

In your bookings, do you count wins that are still under protest?.

We do not. .

[Operator Instructions] That concludes today's question-and-answer session. Mr. Levi at this time, I'll turn the conference back to you for any additional or closing remarks. .

Thank you very much. I'd like to thank you all for your participation and interest today, and we look forward to speaking to you again in the future. This concludes today's call. .

This concludes today's conference. Thank you for your participation..