Good day everyone and welcome to the SAIC Fiscal Year 2016 Q3 Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Mr. Paul Levi, Investor Relations. Please go ahead, sir..

Good morning and thank you for joining us for SAIC’s third quarter fiscal year 2016 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-Q 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 the 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 is now my pleasure to introduce our CEO, Tony Moraco..

Thank you, Paul and good morning. SAIC’s third quarter results demonstrate strong performance in areas of cash flow, earnings per share, and contract award activity. The quarter revenues of over $1.1 billion reflect 14% total growth and internal revenue contraction of 2% for the third quarter, resulting in year-to-date internal growth of 0.3%.

Third quarter adjusted operating margin was 5.8%, and adjusted EBITDA was 7.3%, both excluding $1 million of acquisition and integration related costs. These results reflect our continued focus on delivery of improved profit margin.

Adjusted diluted earnings per share was $0.73 in the quarter, operating cash flow of $68 million was a return to more normative level for the business as compared to the first half of the year with continued confidence in cash generation, we repurchased $18 million of our shares in the third quarter.

John will provide detailed financial results in a moment. Let me provide an update on the performance of our recent Scitor acquisition. The Scitor portfolio contributed $148 million to SAIC’s revenue in the third quarter, reflecting year-over-year internal revenue contraction of $10 million or 6%.

Although we’re disappointed in the quarterly revenue, we’re addressing the revenue shortfall by expanding our hiring initiatives, and by going to market together, we’re addressing the competitive headwinds by adding $3 billion to our qualified pipeline, we’re offering more of SAIC’s capabilities to the intelligence community.

While we believe that Scitor’s top line will continue to show slight contraction to flat for the next few quarters, the long-term outlook of mid single-digit revenue growth and our intelligence portfolio is unchanged. We continue to be pleased with Scitor’s EBITDA contribution in the quarter, which was in excess of 10% with strong cash generation.

Turning to the broader federal market, our customers’ fiscal environment has improved as a result of a two-year budget deal and related appropriations working our way through the legislative process. This should facilitate our customers making award decisions with increased confidence, after a significant period of pent-up demand.

To that point, our third quarter award activity of $1.4 billion translates to a book-to-bill of $1.2 billion with significant contract awards in all areas of our protect, expand and grow strategy.

Included in third quarter bookings are notable wins such as the General Services Administration, Enterprise Operations Contract, and extension of our largest task order on our AMCOM EXPRESS vehicle and an increase in task order volume that replenishes the work on previously won IDIQ vehicles.

With a successful win in the grow area, the General Services Administration selected SAIC to manage its IT infrastructure through a $549 million contract knows as GSA Enterprise Operations or GEO.

Under this cost plus award fee task order, SAIC will provide a broad array of information technology services to support GSA’s 11 regions and global operations.

As another takeaway win, we successfully differentiated our proposal while delivering a team of key personnel to demonstrate the technical understanding of the GSA operating model and staffing the program to appropriately meet the needs of GSA without adding unnecessary costs or assuming excessive growth.

In the re-compete or protect category, SAIC was awarded a $757 million task order to continue support the United States Army under the AMCOM EXPRESS vehicle. This systems and computer resources single award task order extends the efforts conducted on our largest task order on the AMCOM EXPRESS BPA.

Strong customer affinity and demonstrated past performance excellence were the key elements of this award. As a reminder, we take the AMCOM Express backlog credit as technical instructions are issued under the task order, which means bookings will occur over the life of this task order.

For the sales cycle ranging from about 12 to 24 months, we’re beginning to see award adjudication from proposals submitted since the time of our separation. You will recall that one of the reasons for our separation of independent company was an increased market access and investments in our end markets with the expand and grow strategy.

During the quarter, we were awarded a $200 million single award IDIQ contract to expand our services to NASA. Under the Langley Information Technology Enhanced Services 2 or LITES II contract, SAIC will provide a variety of IT support services to include science and engineering applications, and project management support.

This takeaway win was awarded to us through the combination of proposing well respected key personnel, as well as demonstrating a mission understanding superior to our competitors. After the end of the quarter, we were awarded two notable contract that provides further momentum as we end SAIC’s fiscal ’16 and begin fiscal ’17.

Successful in another protect opportunity, the United States Department of Agriculture’s risk management agency awarded SAIC a five-year $156 million task order to provide full lifecycle information technology services.

Under this effort, SAIC will provide IT services, which will include program management, enterprise architecture, software development, IT operations and maintenance, and end-user support. Additionally, last week we were one of the two down-select awardees for the United States Marine Corps Amphibious Combat Vehicle 1.1 competition.

This is a new program for the Marine Corps and SAIC will be under contract for the engineering, manufacturing, and development phase. This $122 million fixed price award is to produce 13 prototype Amphibious Vehicle and is expected to be completed by September of 2017.

If down-selected in the second phase, there are options for 60 low rate initial production vehicles and 148 full rate production vehicles that could bring the full value of this contract over a $1 billion.

At the end of the third quarter, SAIC’s total contract backlog was $7.4 billion, of which $2.1 billion is funded up slightly from last quarter due to the start of the government fiscal year. The estimated value of SAIC’s submitted proposals awaiting awards is over $13 billion or about three times our annual revenues.

Of the $13 billion of submitted proposals, it is split roughly in half or about $6.5 billion in standard contract and task orders, and the balance in estimated SAIC value of future task orders on IDIQ vehicles.

Furthermore, our opportunity for revenue growth is evidenced by the composition of about two-thirds of the submitted standard contracts in the expanding grow category. Before concluding my remarks, I’d like to congratulate the team on our recent significant recognition.

SAIC was recognized by the Military Training Technology Publication for the 2015 top simulation and training Company.

This award recognizes SAIC as a company that has made many significant contributions on the military training and simulation industries across a vast array of technologies and has allowed U.S airmen, marines, sailors, soldiers, and coast guardsmen to train and rehearse for missions in theatre or to prepare for deployment while at home station.

This year SAIC was recognized for its solutions and serious games, human performance and cognitive training, provocative training, trial based simulation to support training and workforce development. Congratulations for the team for their hard work to ensure readiness of our war fighters. John, over to you 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.

Our third quarter revenues of approximately $1.1 billion represents 14% total growth and 2% internal revenue contraction as compared to the third quarter of last fiscal year.

The internal revenue contraction for the quarter is primarily due to reduced materials on our supply chain operations of $19 million and the contraction in our intelligence portfolio of $10 million that Tony mentioned earlier.

Looking forward, I remind you that our fourth quarter is historically our lowest revenue volume quarter of the year due to the holiday season, which we expect to occur in the current year as well.

Operating income of $64 million in the third quarter resulted in an operating margin of 5.7%, which was negatively impacted by $1 million of acquisition and integration costs that if excluded, result in adjusted operating margin of 5.8%.

As communicated during our second quarter call, we expect additional integration costs of approximately $5 million in the third and fourth quarters as we complete the integration of Scitor’s IT systems. This generally holds true as we expect $3 million to $4 million of these IT related costs in the fourth quarter.

In addition, as a result of further study of Scitor facility needs, we have identified opportunities to further reduce costs through facility consolidation that will reduce annual operating expense by about $6 million.

However, this will result in additional acquisition integration expense of approximately $10 million and will be recognized over the next few quarters depending on when we’re able to complete these consolidation activities.

Continuing on third quarter margin, we believe EBITDA is also an important metric to assess our profitability as a result of the sizeable amount of intangible asset amortization expense resulting from our recent acquisition.

As communicated previously, following the acquisition of Scitor, we expect adjusted EBITDA to start in a range of around 7% and we believe we can increase this by 10, 20 basis points annually on average in over time.

We expect some additional improvements over the next couple of years as a result of the cost synergies resulting from the Scitor acquisition. For the third quarter, EBITDA as a percentage of revenues was 7.2% and after adjusting for the $1 million of acquisition related costs, adjusted EBITDA was 7.3%.

These results reflect strong overall contract performance across the portfolio. Looking forward, we’ve historically experienced a meaningful reduction in profitability in the fourth quarter caused by the normal seasonal reduction in revenue, which I mentioned earlier and we expect that to occur in the current year as well.

Net income for the third quarter was $34 million and diluted earnings per share was $0.72 for the quarter. Net income and earnings per share were favorably impacted by lower tax rate of about 32%, increasing earnings per share by about $0.06.

This reduction in tax expense for the quarter was primarily the result of our completion of an in-depth review of our expenditures that qualify for the manufacturer’s tax deduction and the federal research tax credit for prior fiscal years. Going forward, we expect to return to a more normative tax rate of about 38%.

Additionally, third quarter EPS was negatively impacted by $0.01 as a result of the acquisition integration costs. Excluding these acquisition costs, result in adjusted diluted earnings per share of $0.73 for the quarter.

In the area of cash flow, SAIC delivered on its strong cash flow value proposition by generating operating cash flow of $68 million and free cash flow of $63 million. Our day sales outstanding at the end of the quarter decreased from the second quarter by one day to 54 days.

Consistent with my second quarter remarks, these results include our internal investment of working capital of about $20 million in support of our important Marine Corps Assault Amphibious Vehicle contract which is progressing on schedule.

As a reminder, this fixed price contract calls for scheduled milestone payment as certain contract deliverables are met. Based on the contract schedule, the working capital investment is expected to grow to a total of $30 million by the end of the fiscal year and should normalize in the first half of fiscal year ’17.

Even with this investment, our third quarter cash flow demonstrates a strong cash flow value proposition of SAIC and we continue to expect fiscal ’16 full-year cash flow from operations approaching $200 million.

With this level of cash generation, SAIC’s current free cash flow yield is attractive and along with our capital deployment intension is at the heart of our value proposition. We ended the third quarter with a cash balance of $184 million, which is above our minimum operating cash balance target of $150 million.

Our total debt is now approximately $1.1 billion equating to a leverage ratio of about 3.5 times pro-forma debt to adjusted EBITDA.

Since the announcement of the Scitor acquisition in March, we’ve communicated that we intend to deploy excess cash by honoring our recurring dividend of approximately $55 million annually, meeting our required debt obligation estimated to be $43 million in the fourth quarter of FY16 and about $60 million in FY17 and deploying the excess cash for shareholder value creation.

This level of debt repayment is expected to result in reaching a leverage ratio below 3 times debt to adjusted EBITDA by the end of FY17. We’ve executed on this strategy this quarter by paying dividends of $13 million, making debt payments of $13 million and repurchasing $18 million of our stock or about 430,000 shares.

Under our credit facility, we’re currently restricted through share repurchases of $50 million for fiscal year until a certain leverage ratio is reached, which we expect to occur in the second half of FY17 at which time the capital deployment restrictions generally will not limit the Company from repurchasing shares at that leverage ratio.

Finally, our long-term financial targets remain unchanged and can be found in the supplemental presentation to this call on our Investor Relations Web site. Operator, we’re now ready to take questions..

Thank you. [Operator Instructions] And our first question will come from Jason Kupferberg, Jefferies..

Hi guys, this is Amit Singh for Jason. Just to start off on the material volume on the supply chain contracts, they were down year-over-year and it seems like fourth quarter is going to be, again, seasonally a low quarter.

How should we think about this volume level sort of next year, when we’re looking at next year versus this year? Should we see an increase more in line with your overall revenue growth?.

Are you referring specifically to the supply chain activity?.

Yes..

The supply chain activity will be down year-over-year. There was one re-compete PVMRO contract that we were not successful in, and so that has ramped down in the second half of this year. And so the supply chain on the PVMRO will be down about $50 million year-over-year..

And how should we think about this for next year, next fiscal year?.

That’s what I’m referring to. That’s next fiscal year is down $50 million from this year..

Okay. And then on your overall revenues, I think in the last quarter, you had broadly spoken about expecting largely flattish revenue growth in fiscal ’16, both for your non-Scitor and Scitor revenue.

Is that expectation still hold?.

Relatively flat is still hold for this fiscal year. We do, as I said, fairly meaningful drop-off in revenue in the fourth quarter. Last year wasn’t quite as bad, because we did at year-end, see a surge of supply chain materials come in of about additional $40 million to $50 million.

That muted a little bit of the decrease, but the holiday season does have a seasonal impact to our revenue. So it tends to come down. We will probably see a little bit of contraction in the fourth quarter from the year-ago quarter, primarily driven by that surge last year in supply chain materials..

Okay, great. And just last one on Scitor, you broadly mentioned, over the next few quarters, we should see a year-over-year decline.

But again, as we’re looking at next year and provide a little bit more color on what the next few quarters mean? On a yearly basis, next year, should we start seeing an improvement in that revenue? And when should we expect -- I think before acquisition, Scitor was growing, I guess, mid single digits, when should we expect that type of growth …?.

This is Tony. I think that we will see as I said over the few quarters.

As a year-over-year comparison, some of that contraction that was similar in some our other markets, in feds and defense over the recent years with maybe it was around slight reductions in the re-competes with the government, look at their budgets, increasing competition to get better pricing, as well as some shifts in the contract portfolios to small business set asides that eliminate some of our subcontractor revenues.

So we’re well positioned in our prime locations. We will have some modest headwinds that, I think, represent that contraction over these quarters.

And in turn, we’re building a quality pipeline under our protect, expand, grow strategy to continue to sell additional services that Scitor did not have, but using their market access that we gain when we acquire them..

Thank you very much..

Thank you..

And the next question will come from Cai von Rumohr with Cowen & Company..

Yes. Thank you, and good quarter, guys..

Thank you..

So could you give us a little bit more color on why Scitor volume is light and maybe what their book-to-bill was in the third quarter?.

As I just mentioned Cai, the pressure we saw I think would be they’re not concentrated in any one area. It’s similar to what we saw in the other market segment in this space. We look at the timing. When we look at the acquisition through due diligence, the recent quarters, I think are consistent with that $600 million portfolio.

We don’t expect that to drop-off substantially. Its really year-over-year and that year-over-year comparison does reflect some of the acquisition strategies where we saw some small business set asides and some contracts pulled apart where we did loose some of that subcontractor revenue stream.

But confident that we will continue to close those gaps and as importantly manage the margins and the earnings generation and cash that’s coming out of that portfolio as we continue to grow in that market space..

As far as -- Cai, as far as the book-to-bill goes, the Scitor alone book-to-bill was lower than the total for the Company, but Scitor’s book-to-bill is going to be a little more volatile because of the few number of contracts they have compared to SAIC’s overall contract portfolio that utilized a lot of IDIQ contracts that get task orders and have a lot of task order churn.

Scitor is more standard contracts and they’re two and three to five years in length, and so they -- it’s a little more volatile for Scitor standalone..

Terrific. And then -- so you had mentioned -- and thank you for highlighting the takeaway wins.

Were there any other takeaway wins that you haven’t mentioned we should think about, and could you mention any re-compete losses? You mentioned the one materials, but were there any others we should think about?.

I think we highlighted the fundamental takeaways the task orders churn continues. We talked about the replenishment as the fiscal year crosses over, we will perhaps see some additional moment there. No real losses of any substance in the quarter that diminish that on the book-to-bill..

Got it.

And Scitor, is there any opportunity that as a result of the Paris attacks, that we could see expanded spending that would benefit Scitor or is that not on the horizon at this point?.

Think in a broader sense, our positions with Scitor and Intel, and the broader defense sector that I think collectively with the global activities, anything related to national security interest for the country, we will be responsive to.

I think its little early to reflect any direct correlation, but we will see I think further support based on the rhetoric that’s going on in the global community. And we’re positioned with our customers to manage those surges, whether again it’s through some of the supply chain, logistics, and positionings for forward deployments, the operational.

We don’t have in-country exposure as much, but we do on occasion do access those with the customers utilize the contract vehicles that we’ve at our disposal. So I think we will some discontinued efforts, but it’s really not getting any safer, so we expect that we will see some potential impact..

Thank you. And the last one, you had mentioned spending $10 million of additional kind of acquisition integration expenses to save $6 million. That seems like a high number to spend to save $6 million.

And could you tell us, like of the $10 million, how much of that is recoverable under cost plus contracts and how much of the $6 million in cost savings would you retain?.

Right. So that is $6 million annually. So those are long-term leases. Costs are made up of breakup fees, some vacant facilities and also some assumed losses on subleases. So that’s a complete run rate.

Our cost reimbursable portion is about 50% of our business when you break it down and so the other 50% would stay with us and then would churn out over time. That expenses, it may hit as early as the fourth quarter and run through the second quarter as we complete those consolidation activities, but it may all slide into FY17 as well..

Thank you very much..

Thank you, Cai..

And the next question comes from Jon Raviv with Citi..

Hey, good morning, guys. To beat a dead horse, just on Scitor a couple more follow-ups there. Multi-part. What do you’ve to do to bring that business back to growth? You talked about some hiring processes, could you lay out more of a game plan there, in terms of what you have to do? Because it’s clearly been a disappointment, it seems.

And then also on Scitor, would it be fair to characterize the sales pressure there being on the lower margin subcontract sales? Such that, should we still expect to see $60 million of cash flow benefiting next year?.

Yes, let me touch on that. I think the growth side with Scitor very consistent with what we’ve been doing over the years, we got a market that is making budget adjustments.

We have represented in the past that throughout this budget constraint, I’d probably put in the order of Fed Civ Defense and IC on a time basis, they’re moving to the budget realities.

There is still high demand in all of those segments given what's going on and our return to growth if you will in Scitor is around shaping that portfolio, revolving in any of the small business set aside and replenishing the revenue stream that’s a result of some of those acquisitions. We haven’t lost anything substantial in any of the markets.

Our award fees are still as high as, as they were, and our confidence in the margins is very, very strong on the earnings side. So I don’t really expect any pressures on the margin side.

I think we have more levers in our control to manage those even with higher price competition in the sensitivity side, but we’re well positioned to compete in that space. There are still very high barriers to entry.

So confident in the sustainment of the re-competes have to offset any revenue contraction that’s part of those re-competes is from a budget -- customer budget perspective, and then we’ll continue to expand our ability to sell the product, capabilities of SAIC, the most prominent would be along our enterprise IT portfolio where we have strong past performance, that in the past Scitor has not really sold IT type services.

So we see the growth being driven in part there, but also based on the subject matter expertise in the core areas that they’ve served the country over the last 30 years..

And I’ll touch on the subcontract content in that reducing. We do have fairly substantial margins in Scitor subcontract revenue, not as high as our direct labor but still fairly high, much higher than the SAIC average subcontract profit.

So that being said, we still would expect in the range of $50 million to $60 million of free cash flow coming from Scitor on a normalized basis and that includes the utilization of the tax asset that we acquired in the acquisition..

John, can you specify what Scitor is adding this year in terms of free cash flow including the entity cost?.

I’m sorry.

Including the what cost?.

Any of the -- what is Scitor adding in cash flow this year versus what is Scitor adding in cash for this year versus what is it costing to integrate this year and how should that flip into next year? Just trying to figure out heading into next year what the comp should be?.

Right. I think if you see -- if you just look at the acquisition, the integration cost line you can see kind of what the drag is from that. It’s certainly providing more cash flow than that drag is.

But on a normalized basis ignoring the intangible or I’m sorry, the integration and acquisition cost, its running at that $50 million to $60 million annually with ebbs and flows just based on working capital..

Okay. Thanks. And then on some of the recent wins, I was wondering if you could just be more -- specify a bit more on the growth trends heading into next year especially in light of the AMCOM expiration, obviously that you had one large win for a big slug of that.

How should we expect AMCOM to impact next year?.

Right now with the AMCOM re-compete if you will the recent award does basically protect the up-wide ‘17 revenues as we see it. The acquisition, strategies of the Army will evolve. We’re working closely with them. We reported earlier that different scope of work ASRC moved to the oasis IDIQ vehicle is one example of following that work.

So we’re confident that the acquisition cycles really won't have a major impact on FY’17 particularly given the recent awards. So AMCOM is pretty stable going forward..

So we should still think about that is about a $600 million to $700 million business? Or how should we think about AMCOM?.

Yes. We do..

Okay. And then last for me, just on free cash flow. I think you guys have previously talked about roughly a $240 million normalized free cash flow generation rate.

What are the moving pieces this year that shouldn’t repeat next year that will help us get to that number? And on a related note, is there any working capital build associated with the ACV win?.

Right. So the $240 million on an ongoing basis is still a reasonable estimate and that’s on average over time. The things that won't repeat from this year obviously is the build in the AAV which is about $30 million as we approach year end that will be the working capital investment as of the end of the following quarter.

Also there’s an additional quarter of Scitor that will be included in next year that was not included this year since we acquired them at the beginning of the second quarter. So as you look forward $240 million is on average and over time a pretty good way to think about it.

I can tell you that by virtue of the fact that we have a 53 week fiscal year next year. There is one extra payroll in next year. And so that has a drag on a normalized basis, very temporary in nature of about $25 million for that extra week because of that payroll. As far as ACV, ACV has a fairly similar cash flow or working capital buildup as the AAV.

So as the AAV comes down and normalizes in the first half of FY’17, ACV will be growing over that same timeframe getting up to about $30 million by the end of the fiscal year if everything stays on schedule and again that’s assuming no protest.

It won't be a huge drag on this year although we’ll have some buildup in working capital, but it’s not significant like AAV..

So, when just thinking about moving from this year operating cash flow approaching $200 million aside from the additional Scitor quarter next year, it seems like not a lot changed because that the AAV release is offset by the ACV build.

Is that the right way to think about it?.

That is right, but it’s neutralized. So while we had to build this year, there is no total build next year..

Understood. Thanks..

Yes..

And we’ll go next to William Loomis with Stifel..

Good morning. Just one more quick one on Scitor.

Can you talk about turnover at the business since you acquired, is there any material executive changes or changes in business development or anything like that so far this year?.

Bill, the retention at the senior levels was all intact. We’ve I think done a good job to make sure that we protect our customer access. The staffs are doing a great job to service the customers. We are seeing a slightly higher attrition rate compared to historical levels a year ago pre-acquisition.

So I think that’s going to line with those small company, large company transition. We’ve got a very affective hiring mechanism while continuing to take advantage of to make sure the customer contracts are staffed appropriately. But I think at this point it’s in line, slightly higher than we would have expected perhaps than historical levels.

But we’re managing through that work force challenge..

Okay.

And then just one on the AAV, is this the TERREX vehicle that you’re going forward with?.

I’m sorry.

Could you ask that question again?.

Yes.

On the AAV contract, is this the TERREX vehicle that you’re going forward with on that program, on the prototype?.

TERREX is on an ACV..

ACV..

It’s a combat vehicle that was recently awarded, down selected..

Okay. Well, can you talk about just the risk of the program? I know its fixed price.

How much work is being done by yourself on the build versus subcontractors?.

It’s a broad team. I mean we’re obviously working off of that existing platform. I don’t think the risk is necessarily going to change substantially. We’ve done a lot of work upfront as the market has generally to put forward a fairly strong system that’s operational.

And so, as you think that we’re seeing in system integration upgrades, it’s really enhancements off of the previous platform.

But I think in our case it is not a new build from scratch and we’ll leverage our prior experiences in AAV and alike in the expertise that we have to mitigating the risk that are going to be part of the program working with the customer..

Any big new components like you got to be tested the hybrids, the drive system or anything like that that could provide unusual risk?.

Not that I’m aware of. As far as major sub-systems are pretty much intact, that was part of the acquisition strategy from the Marine Corps to ensure that they had a more operational system than a research and development platform. So I’m pretty confident that we have a fairly high maturity level on our major sub-systems..

And at least in the early part say the next 18 months, do you expect that program other than the working capital build to -- what type of margins do you expect above average, below average, red line type margins?.

They’ll be above average from our historical trends on the portfolio we’ve had..

Okay. Great. Thank you..

Thank you..

And the next question comes from Edward Caso with Wells Fargo..

Hi, good morning. This is actually Tyler Scott on for Ed. Thank you for taking my question. First I was just hoping John; you could level set us on what exactly the acquisition integration expenses are going to be.

I know you had mentioned $5 million next year, but is that all in, including this new $10 million fee that you mentioned?.

It is not. So we expect about $3 million to $4 million of IT integration cost as we complete our IT integration next quarter. In addition to that there’s upwards of about $10 million of facility consolidation that will additive to that additional $3 million to $4 million that you’ll see in the fourth quarter.

That can happen over the next three quarters. We’re working to accelerate that as much as we can to get it behind us. So we may see about half of that or so hit in the fourth quarter or it may slide to Q1. So we’ll be working with our board and coming to a final conclusion on that. So you should see that $10 million hit over the next three quarters..

Thank you for that.

And then just any comments on award activity in FQ4 [ph] so far? Have you guys seen any uptick or change in client behavior since the Bipartisan Budget Act was signed?.

We noted the ….

2015 or so, I guess..

Yes, we noted the two probably major ones since the quarter is closed with ACV and the Army, re-competes so that -- those are probably the most substantial.

I think with the budget deal, expectations are that there is a slightly higher confidence to maybe award some of this submitted proposal portfolio that’s hanging out there, and my take is that, with the two year deal and the ability for some higher confidence that they’ll invest in some of those larger programs with single award contracts that have been hanging there, where they haven’t been maybe fully committed.

So we’ve seen the past quarter is pretty steady. They are running their day to day operations, but perhaps we’ll see development programs or upgrade whether it be on IT or on the mission side maybe realized as we move past the holidays and into 2016 calendar..

Okay. That’s great.

And then maybe just on the awards; I don’t know, has there been any material change in sort of the pricing environment, use of LPTA or anything around that?.

Now the pricing competition I think is positive as it’s been. Everyone is kind of been reacted to the general market. So I don’t see any additional pricing pressures. I think we would represent that perhaps there’s a little backing off of explicit LPTA as and with more emphasis on best value.

The differential on price is still pretty narrow, but at least we’re seeing some awards that are not solely the lowest bidder.

Partly I think that’s attributable to the fact that the customers got what they paid for, when they went low a few years ago we’ve seen some and this is a earlier re-compete, three years instead of five when they haven’t been getting the services that they actually require to conduct their missions..

Great. Thank you very much..

You are welcome..

And the next question will come from Brian Ruttenbur with BB&T Capital Markets..

Yes. A lot of my questions have been answered, but I’ve got two little housekeeping. The headcount on Scitor now and when you acquired them? That’s number one.

And then number two, I want to understand the flexibility on your debt repayment? What percentage of your free cash flow will have to go to debt repayment in order for you to hit the three times debt to EBITDA number by the end of fiscal ‘17?.

I’ll address the headcount, and John, can give you a sense on the debt side. The portfolio within Scitor evolves about 1500 people. We’ve seen just a modest net reduction in that headcount, again we backfill. So I’d say that we have slightly higher than historical attrition, the hiring strategies are in place, the backfill to serve the customers.

So it’s a very modest net headcount reduction.

We have -- when you think about the billable direct side, we have as we look to that cost synergies, taking a look at the broader so, you’ve got to rationalize a little bit that the net headcount should be down slightly as we link cost synergies, but on the billable side, I’d say its just modest balance every try and I’ll make sure that we’re serving the customers..

On the debt repayment side we’ll see about $40 million or so in the fourth quarter of debt repayment that includes the mandatory repayment plus we have an excess cash flow repayment requirement as defined in the agreement. So that makes up the remainder of it. So we’ll see $40 million to $45 million in the fourth quarter.

Next year we’ll see $60 million in required debt repayments. Those required debt repayments should get us to a book level of debt to EBITDA by the end of FY’17 or a little bit below on the bank -- the debt to bank EBITDA which is a little more forgiving because you get to add back stock comp.

We expect to hit that about half way through the middle of the year and that’s when our repurchase restrictions would be removed and we generally wouldn’t be restricted from repurchasing shares as long as we stay at that leverage ratio..

Okay. Thank you very much..

The next question comes from Michael French, Drexel Hamilton..

Good morning, gentlemen. Congratulations on the strong results..

Thank you..

The first question I have is on bid and proposal activity.

Has the two year budget deal or any other factor altered your approach to that area?.

I’d say on the bid and proposal overall the demand signal that is still there, the volume has been pretty steady over the recent years. Our attention on leveraging the operating model and the metrics, the isolation of the customer facing groups I think has allowed us to build a higher quality pipeline.

So although the volume is probably just as high, I believe we have probably a stronger probability of win portfolio than we did a couple of years ago. So I think it’s a focus on each customer making sure that our bids are aligned to our capabilities and our strong past performance.

And I think that’s what we’re seeing in some of the recent award activities. But generally the flow is about the same. We’re exploiting the IDIQ’s that we have; we’ve got great market access across the board. So we’re just continuing to prioritize and there are still probably more opportunities up than we can actually service.

So we’re being very selective so that we can sustain the business and serve the customers..

Okay. Very good.

And kind of following up on a point about the probability of winning and competition overall, so CSRA is out there now and obviously they’ve combined two companies, and they’re not shy about pointing to you and others in the space and saying, we’re bigger than them and this is about scale, and since we’re the biggest, we’re the best position, I mean that’s out of their mouths.

And since they haven’t been shy about talking about this, I figured its fair to give you a chance to react to what they’re saying..

Well, I think our position right now is that, our diversified portfolio at over $4 billion gives us adequate scale. I think the diversification across the Federal Civilian Defense and Intel segments is very strong.

And further one differentiator is that we carry a much broader mission subject matter expertise orientation with our customers than strictly enterprise IT portfolio so we serve it on both sides of that. So I think that that’s our opportunity to serve customers on a broader basis than maybe some of our competitors..

Right. And on your point about the mission expertise, will the Marine Corps amphib -- will this in any way help you go after or create other opportunities, whether its new platforms or integrating systems on platforms. Because it seems to be a nice showcase if you will..

Yes, definitely. So the combination of AAV and ACV do give us further credibility and past performance on our hardware integration activities, in this case centered on Ground Tactical Vehicles.

So there are other platforms and other services such as the Army that obviously have a large fleets that do sustainment of modernization that outfits that portfolio. We believe that some of that same capability could be extended to the other services perhaps if we think about avionics and other areas within the defense sector.

So we do believe that it does create a very strong platform. It’s a differentiated business model and how we’re partnering with the customer on a very cost effective basis. So we’re very confident that we can continue to use, the expand and grow strategy off of those key programs..

Very well. Thank you..

You are welcome..

[Operator Instructions] And it appears there are no further questions at this time. Mr. Levi, I’d like to turn the conference back to you for any additional or closing remarks..

Operator, thank you very much. I’d like to thank you all for your interest in SAIC and participating in the call today. Have a good day. That concludes our call for today..

Thank you. And that does conclude today's conference. Thank you for your participation..