Good day. And welcome to the SAIC Fiscal Year 2018 Q2 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shane Canestra. Please go ahead sir..

Good afternoon. My name is Shane Canestra, SAIC's Director of Investor Relations, and thank you joining our second quarter fiscal year 2018 earnings call.

Joining me today to discuss our business and financial results are, Tony Moraco, SAIC's Chief Executive Officer; Charlie Mathis, our Chief Financial Officer; and other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com where you'll also find supplemental financial presentation slides to be utilized in conjunction with today’s call.

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

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

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 the reconciliations to the most comparable GAAP measures. It is now my pleasure to introduce our CEO, Tony Moraco..

Thank you, Shane and good afternoon. SAIC's second quarter results reflect flat revenues in line with expectations, profitability challenges in specific areas of the business, and exceptional business development results.

Charlie will provide you with detailed explanations of the quarterly results but I'd like to summarize the second quarter, provide you with my view on the market environment, discuss business development results and finally give you an update on our platform integration portfolio.

Second quarter revenues of approximately $1.1 billion demonstrate internal contraction of 1% as compared to the prior-year quarter. Second quarter EBITDA margin of 6.5% represents challenges in contract profitability primarily attributable to headwinds in certain federal civilian customers.

While we did not have contract execution issues, several of our federal civilian customers are reacting to propose government fiscal year 2018 budget shifts. These customers are sustaining operations but are suspending enhancement activities such as technology upgrades and IT modernization.

These reductions coupled with discrete corporate expenses resulted in lower profitability for the quarter. Contract mix also provided a headwind to margins as we have continued to see an increase in cost reimbursement type contracts.

While we have worked to increase margins by expanding our fixed price contract portfolio, the market is moving slower than our expectations to more fixed price contracting. In fact some of our customers have elected to move away from fixed price and time materials contract types to cost reimbursable contracts including our notable AMCOM recompetes.

As we entered the last few weeks of government fiscal year '17, the market environment continues to be challenging with ongoing budget uncertainty in the near-term but with expectations of modest improvement as we look to next government fiscal year.

As demonstrated in our second quarter bookings of over $2 billion, contract awards have increased as customers look to sustain operations by obligating funds. Contract award decision making continues to be steady thus far into our third quarter.

As we look to government's fiscal year 2018, we continue to believe that our continuing resolution will be enacted to begin the year. Looking further out, I'm optimistic about our market environment.

While some federal sitting customers are taking a cautious approach to next government's fiscal year, there is an expectation of a modest increase to the fiscal year 2018 defense budget, thus providing opportunities for growth in the largest portion of our customer base.

Our defense and intelligence community customers are making contract award decisions and are looking to increase funding in areas of emphasis such as military readiness, IT modernization, cyber operations and training and simulation.

Therefore our long-term outlook remains the same with expected modest growth in our markets for the next two few years consistent with our long-term financial targets. Contract award activity in the second quarter led to bookings of approximately $2.1 billion which translates to a book-to-bill of 2.0 for the quarter.

This is the largest quarterly bookings amount and book-to-bill ratio to-date and is reflective of our ability to respond to our customers most critical needs.

For the vast majority of the current quarter bookings be in the protect category, we have de-risked significant portion of the portfolio and are looking to an improved environment to fuel new business growth.

Looking at the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.4 which enables low single digit organic growth as we look at fiscal '19 and beyond. Second quarter bookings included the recompete or protect wins of $621 million of our U.S.

Central Command IT support services contract and approximately $400 million for our AMCOM customers virtual systems task order after a competitive protest was resolved in June. Additionally we awarded new business with NASA OMES II contract, the total value of over $620 million to SAIC.

In the second quarter we recognized $146 million of task quarter bookings on this contract with the remaining value of providing further bookings and expand category over the next five years.

Various other awards and contract modifications across the portfolio make up the balance of this quarter's extraordinary bookings and we continue to pursue a very healthy business development pipeline.

At the end of the second quarter, SAIC's total contract backlog stood at approximately $9.2 billion, an increase of 13% from the first quarter and a 24% increase from the second quarter of last year. Funded contract backlog was $1.8 billion consistent with the first quarter.

Unfunded backlog of $7.4 billion reflects this quarter's notable bookings and a longer period of performance for some customer contracts. The estimated value of SAIC's submitted proposals awaiting award is $15 billion up from last quarter by $1.8 billion despite the second quarter's large customer contract awards.

Throughout the second quarter, we submitted several contract proposals each with an award value greater than $200 million. Several of these proposals are in the expand category within our Defense and Intel portfolios.

Our pipeline of contract opportunity is very healthy and we continue to be disciplined in our use of business development resources to protect our existing book of business and pursue new business for sustained profitable growth.

Turning to one of our highly visible recompetes for this year, our largest contract AMCOM EXPRESS is transitioning to individual task orders on the GSA OASIS vehicle. These large task orders individually known as virtual systems, strategic systems and battlefield systems are in various stages of the procurement process by the customer.

As mentioned, we have won a virtual systems task order and booked at this quarter. The second task order on a strategic systems, was awarded to a competitor and our prime contractor has protested that award. We expect resolution of the protest in late September.

The third and largest task order recompete known as battlefield systems with nominal revenue of $1 billion over a three year execution period has been submitted to the customer and is now expected to be awarded in early November. Let me conclude with an update on our platform integration portfolio.

I'm pleased that the Marine Corps has executed the milestones fee decision of the AAV program that authorizes the low rate initial production of 52 vehicles during this phase of the program. We expect to deliver the first lot of 25 vehicles over the next two years.

Moving to ACV, we have delivered '14 of '16 prototype vehicles to the Marine Corps and are completing production of the final two units. Testing of the ACV vehicles by the Marine Corps will continue through early summer of 2018 at which we'll make a production downselect contract decision.

Before turning it over to Charlie, I’d like to emphasize that SAIC has been and will continue to be a leading technology integrator with a long-term strategy and strong value proposition to shareholders. Since separation almost 4 years ago, SAIC has maintained a large and diverse contract portfolio with significant cash flow generation.

SAIC has been very consistent and predictable in deploying cash back to shareholders through dividends and share repurchases. Despite near-term profitability challenges, I expect no disruption or changes in that shareholder value creation proposition. With that, I'll turn it over to Charlie for discussion of our financial results..

Thank you, Tony, and good afternoon. Our first quarter revenues of approximately $1.1 billion reflect contraction of 1.4% as compared to the second quarter of last fiscal year. Revenue performance was impacted by the DHS integration program recompete loss late last fiscal year and other net declines across the portfolio.

These decreases were partially offset by higher revenues on our new NASA OMES and EPA end user service contracts, the ACV platform integration program, and the Army HITS program won late last year's. Second quarter adjusted EBITDA was $70 million equating to 6.5% as a percentage of revenues.

This quarter EBITDA was negatively impacted by lower contract profitability in certain federal civilian customers as discussed by Tony, and lower profitability in our supply chain business.

We also incurred discrete expenses of $3 million including facilities consolidation and severance costs to reduce our cost structure and improve profitability in the longer term.

In our June call, we communicated that approximately $12 million of increased cost and investments in our platform integration business would be made throughout fiscal year '18 with $9 million occurring in the first quarter.

As expected, we recognized $1 million of the remaining $3 million in the second quarter and continue to expect the remaining amount to be recognized in the second half of the year.

Adjusted operating income of $59 million in the second quarter resulted in an adjusted operating margin of 5.5% compared to 6.7% in the prior-year quarter primarily due to the same current quarter impacts as mentioned with regards to EBITDA. Net income for the second quarter was $36 million and diluted earnings per share was $0.80 for the quarter.

The effective tax rate for the quarter was approximately 27% impacted by the previously communicated first quarter adoption of the new accounting standard for excess tax benefit on stock-based compensation. In the second quarter, we recognized the tax benefit of $4 million as a result of adopting the new accounting standard.

Looking to the full fiscal year, we estimate our full fiscal year 2018 tax rate to be approximately 24% to 26% modestly lower than our previous estimate of 26% to 28%. We anticipate the effective tax rate to be in the low 30% range for the second half of the year.

Second quarter operating cash flow and free cash flow were negative $35 million and negative $38 million respectively. This cash flow performance was driven by forecasted advanced in such as one additional payroll as compared to the first quarter impacting cash flow by approximately $60 million.

We had two tax payments falling within the second quarter impacting cash flow by approximately $40 million. In addition, we had temporary payment delays at one of our customer payment centers. This was not forecast and impacted cash collections by about $45 million.

The customer has now resolved their payment issue and we have received the delayed payments. Day sales outstanding at the end of the quarter was 54 days including a four-day impact from the customer payment center delay. Looking forward to the rest of year, we expect our DSOs to return to the low 50s within our normal operating range.

The first quarter ended with a cash balance of $140 million slightly below our average operating cash balance target of $150 million. This balance included $25 million that we borrowed at quarter end from our revolving credit facility while we worked with our customers payment center on collection delays.

As cash returned to normative levels after the end of the quarter, we repaid the $25 million and no longer have any borrowings under the revolving credit facility. During the second quarter, we deployed $51 million of capital consisting of $37 million of planned share repurchases, representing about 510,000 shares and $14 million in cash dividends.

We are committed to our long-term financial targets on average and over time and they remain unchanged. With regards to fiscal year '18 specifically, we expect full-year profitability as measured by EBITDA margin to be in the 7% range.

Margin pressures for the year due to investments in our platform integrating portfolio, headwinds in a few federal civilian customers, and profitability challenges as a result of the shift to more cost reimbursable type contracts.

In response to these headwinds, and as I mentioned we have taken cost reductions in the quarter and are continuing to review our cost structure with the intention of addressing short-term margin pressures while protecting our long-term financial targets.

With regards to full year cash flow, I continue to expect $240 million of free cash flow for the fiscal year 2018. This outlook is enabled by reductions in working capital through better billing terms on newly awarded contracts offsetting reduced profitability.

This cash flow outlook and when combined with the excess cash we carried at the end of last fiscal year, the execution of our capital deployment strategy is unchanged.

In fiscal year '18, we expect to pay dividends of about $55 million, make total term loan debt repayments of approximately $25 million with the remainder of cash in excess of $150 million available for further share repurchases and strategic M&A should it arise.

As I wrap up my remarks, I should note that our Board of Directors will meet in early October to consider the approval of our quarterly dividend which is typically payable at the end of October. Tony back to you for concluding remarks..

Thanks Charlie. With over 250 employees in the Houston area, our thoughts are with them and their families as they recover from the hurricane and catastrophic flooding.

If they continue to help NASA and other SAIC customers get back on our feet, they speaks volumes regarding the resiliency and customer dedication while dealing with very difficult circumstances.

As we look to execute our long-term strategy in Ingenuity 2025 on navigation market dynamics, our focus is to provide for sustained profitable growth and long-term shareholder value creation.

As we invest in the early phases of our platform integration business as a disruptive entrant into that market, we are further differentiate ourselves in the broad technology integration services space.

This strategy along with SAIC's cash generation characteristics and direct return of capital to shareholders continues to be at the center of our shareholder value proposition. Operator, we are now ready to take your questions..

[Operator Instructions] We'll go ahead and take our first question from Cai Von Rumohr with Cowen and Company..

It’s Lucy Guo on for Cai.

So, wanted to ask about second half margin dynamics, can you maybe just highlight, how the headwind and few of the tailwinds that you've highlighted, whether how those are going to change in the second half because given the 7% EBITDA margin outlook, it seems like little bit of the hockey stick going from first half to second half?.

So Lucy, if we normalize our first half performance for discrete events, such as the platform integration investments, facility consolidation, severance cost, EBITDA margins around that 7% range in the first half is where we see a normalized margin in the first half. And in the second half we expect to the margins to be in the low 7% range.

So, we do expect improvement in the second half, but we really believe that's off of this normative 7% when you take out this discrete events. We’re also reviewing our cost structure and margin improvement initiatives to improve second half profitability and it also gives us confidence in the second half margins..

Where there any meaningful EACs in the second quarter, any that you are anticipating in the second half that we should note?.

So, there was not any noticeable write-downs of EACs. As we mentioned on the federal civilian customers, a few of those customers we had less EAC write ups than we've had in the previous year and that was also what was causing the margin difference on that year-over-year basis..

And then maybe if you can help us understand, just going forward you haven’t changed our long-term target, the bar set on that margin improvement year-over-year will be lower for next year FY’19. Your organic growth hopefully should improve given the new programs ramping up and you have less draw down on the programs that have ended.

Can you just talk a little bit more about the dynamics going into ‘19?.

As I said previously in the script there, we expect to end fiscal year ‘18 with EBITDA margin in the 7% range for the full year. We haven’t conducted or concluded our fiscal year ‘19 planning process but we expect to grow margins in line with this long-term target that we set 10 to 20 basis points.

We expect that as we exit fiscal year ’18, the margin run rate of low 7% range is a reasonable baseline of which to grow margins thereafter and we expect to headwinds of the contract mix and the federal civilian customer budget constraints to endeavor at least in the near-term, so we do have those, but as I mentioned before, we are reviewing the cost structure to ensure we meet this long-term targets..

How about on the topline growth given how strong your bookings are this quarter.

Do you feel better about next year?.

We do feel good about next year. The bookings activities over the course of the last two quarters, the combination of the diversified portfolio we have today. The bookings that we realized particularly in the expand area. We try to articulate little bit there.

The combination of derisking, the current portfolio with the volume of protect activity that we continue to talk about, and I’ll recompete, all give us I think a more confident base line. We would experience revenue contractions in the past of year-over-year.

Do you think that’s stabilized now and our upcoming budget environment with a slightly higher FY’18 perhaps the lead to CR level, that’s commensurate with ’17 all project a positive trend.

We are with less contraction, a stronger baseline, strong pipeline and the recent awards that we’re onboarding activities as we speak, all provide at least for the first and probably for the last few years, upside on positive growth going into ‘19 and beyond, aligned with the customer budgets given the loss of different agencies..

The next question comes from Krishna Sinha with Vertical Research Partners..

Just a few questions for you here. You had some major recomplete wins in the quarter. Can you just kind of tell us or give us some color on what your trailing 12 months recompete win rate is at this point, and how that compares to sort of the industry average of 90% to 95%. Just like that..

Sure. We've operated in that same industry band on the recompete high confidence of the incumbents capture positioned on the protect. As we said, Centcom and the first AMCOM, the three largest task orders all very favorable.

But the recompete rates again very consistent quarter-to-quarter year-to-year, but I think there are collective competitive win rates, particularly on the expand and growth side, also again give us confidence in the top line that we talked about.

So, if we do operate slightly above market on the non-recompete portion of the portfolio I think that’s evident in the strong book-to-bill..

And then just on a broader sort of strategic question. You noted some lower profitability on supply chain contracts.

Are you expecting margins in that business to remain under pressure going forward and then you know it seems like that line of business overall may be depressing your overall corporate margins regardless of you know, the issues that you mentioned this quarter.

So do you have any interest in divesting that piece of the business or just not competing on that? I know in the past you talk about that being a core competency for you.

But it just seems like maybe some value could be unlocked if you got out of that business going forward?.

Well, it’s true that the supply chain business, it’s about $0.5 billion of revenue. It does have about 50 basis point compression as we look at our peers who don't carry that. Although it’s fixed price and high cash generation, it is one that operates on average in the 3% to 5% margin band. So, it's definitely lower than the rest of our portfolios.

So, it’s good for you from that perspective. We really look at the market dynamics. We have limited our investments, relative to the non-compete, to the recompete, not pursuing as many expand and grow in the supply chain domain. But it is important for us to sustain the supply chain portfolio particularly in support of logistic agency.

There is a linkage to our platform integration business which is depended on this long supply chain expertise. Again we’ll see based on up-tempo what’s going on relative to deployments.

When we do see some increase in volume, that in turn does increase margins on our modest basis just based on the fixed cost, yes the larger volume of procurement activities on our procurement platforms.

I won’t be talking much about divestiture exclusively but we’re always looking at the portfolio so we have continuously try to be transparent in the nature of that $0.5 billion and that fixed price component is very different than fixed price contract activities that we talked about or that we prudently talk about..

Next question comes from Jon Raviv with Citi..

Quick question on the battlefield recompete, I think you mentioned on the previous call that you essentially sold the whole on the strategic systems loss.

Is there stuff in the pipeline that will fill a whole on a potential battlefield loss I guess the question and of is can you grow in FY ‘19 without battlefield?.

That would be a challenge for us on the battlefield system. It has a multi-$100 million about $300 million a year in revenue that passes through at least a comparable scope of work on the AMCOM task orders that we think it’s generally aligned with the battlefield system.

We think that recompete and that award will be decided in November timeframe after the strategic systems protest is resolved. The customers look at those sequentially but to answer specific question a lot on the battlefield would put pretty substantial headwinds on the next year's revenue stream.

Some opportunities to close that gap but I would say it would be unlikely to close it entirely, but we do expect to retain that work and to go require much earlier on modest growth on the topline..

I appreciate that Tony.

Is there something different or how would you compare battlefield to virtual and strategic which each had differing initial outcomes just give us some color on how those different task orders might compare and how you think like you’re positioning on each one in retro respect of the outcomes on the first two?.

Well, all three - slightly different script work, customer acquisition approach was to break them into logical work packages around certain boundary conditions. So I think it’s a logical on how it’s broken up. Yes, we’re well-positioned on all three as a long time incumbent very strong subcontractor base on our team that apply to that.

There was not substantial changes in scope necessarily where we feel disadvantage of not having legacy capability.

So we put that in the recompete category even though its restructured and though generally have a high levels of award so on a percent basis so highly confident that we're well-positioned for it and I don't see any other major changes from acquisition of the Scitor work as been of itself..

And then also in your prepared remarks you mentioned that there's some moving from fixed price to cost plus I think you mentioned that include some of the AMCOM work as well.

What exactly is going on with the customer, because it seems like for a while the message was customers can actually save money and they prefer we’re telling them or educating them that they can achieve things more efficiently with fixed price what’s going on there, what’s kind of prompting some of that move in the other direction so to speak?.

Well it’s true you’ll see it in the Q that we’ve seen year-over-year our cost plus cost reimbursable contract mix actually increase by about 3% from 41% to 44%, as we’ve message from the beginning movement to higher fixed price and less cost reimbursable is a margin driver.

And so it’s a disappointing that we aren’t seeing that movement potential your question relative to transaction the root cause, the fixed price nature there has been some movement and some consistency on the IT domain service level agreement, software services but the complex system development its very challenging to put together a fixed price proposal that has clearly articulate requirements that industry can be responsive to.

So that partnership from the customer to private sector to align on the requirements at cost basis that manages the risk between the two. Absent a strong statement of work it’s very challenging to have balanced between the risk and the price against those requirements.

So we see our customers a little of intent to go fixed price to draft RFPs and customer contacts and industry days. We tend to see more tenancy to move from a fixed price intent to across reimbursable contract exercise.

So it’s that balance where we're trying to make sure that requirements are clearly articulated and it is around the statement of work that really is driving the movement I think from fixed price to cost reimbursable..

[Operator Instructions] We next move to Edward Caso with Wells Fargo..

You talked a little bit about our shift from fixed price to cost plus but could you also talk about what trend you're seeing in direct labor versus ODCs. Are you getting more of your people deployed or is there - are the margins being hurt a little bit by more pass through? Thanks..

I think it’s has been fairly flat and steady between year-over-year on our direct labor we saw in an early surge maybe a year and a half ago two years, it’s leveled out in part I think based on the combination of our ability to establish strong senior relationships.

We are protecting I think higher value and labor categories to better aligned SAIC's expertise and be more selective in our subcontract activities.

But as part of the technology integration play and our market position we have seen a slight increase in the number of materials that we are deploying under contract not to supply chain but talking about materials on our system engineering, system integration technology integration contracts.

Sometimes that’s in the form of our systems hardware, sometimes it also in the form of IT equipment as it move through.

So modest increase in materials is affecting the margins a minor amount but we are working continuously to make sure that the labor content is well aligned in our fiscal set and we are making progress and making sure that we’re holding our line on our labor versus something out to - for the partners..

You mentioned cost plus at 44% what fixed price and type of materials is a percent of revenue?.

Let me take a quick look, time materials is around 30%, our fixed price it's we got split that it’s 30 in the aggregate what about half of that is supply chain and other half is what I would designate the traditional fixed price technical service forward. So split that 15/15 roughly..

You had a departure of one of your leading execs not that long ago is that had any impact on some your client relationships?.

No really is not so we’ve got strong alignment through multiple levels of management and so we don't see any impact disruptions on that change in management..

Other than Scitor you sort of stayed away from acquisitions - where is it in your order priority how important our acquisitions so to hit those long-term targets?.

It’s still strategic, we’ve messaged consistently that we are not going to be high volume buyer but I think one will proceed that there very strong strategic buyer would say there is a lot of interest as a buyer as the market has gone through its consolidation. We continuously see sellers that are interested.

There are a lot of compatible elements and properties we’ve been very selective with our filters which is principally general market access of new clients its complement with our portfolio, margin accretion and stability in the pipeline are also key components of that.

And we’re bias to things that are slightly at scale versus doing a number of tuck-ins. So we’ve been selective, we’re focused on our organic growth and we’ll continue looking for market for strategic opportunities to complement the portfolio that will be accretive both in margins and in cash by going forward.

So we're looking at the market everyday and we’ll inform you if situations change. But as Charlie said in regard to capital deployments have been very consistent based on the strong cash generation as we think about the dividends modest debt repayment and the consistent capital deployment on the share repurchases.

But our strategic position potentially changes as time moves on..

Next question comes from Sheila Kahyaoglu with Jefferies..

So just to follow-up on one question that has been asked, how do you think about the booking mix as it relates to fixed price contracts and what are your thoughts for the current quarter?.

The bookings mix is bias to the cost reimbursable so that again on the project to recompete and some on the new contract we expand like not owns is cost reimbursable. So it’s again average margins, nothing excessive in either direction but the recent booking have been a bit heavier on the cost reimbursable of the 15 billion of what submitted.

We've got a good mix across that still but the contract awards as it turns out is based on the cycle that we’re in tends to be bias to the cost reimbursable right now. It will take given the revenue challenges that we had over the years so it’s given that..

And then one maybe Charlie it’s for you just so I didn’t missed anything on the free cash flow, is your guidance still 220 for the year and kind of what are the levers to get there in the second half?.

So actually the guidance is $240 million of free cash flow that’s been the long-term targets the $240 million of free cash flow. And the reduced profitability that we expect this year is really offset by favorable billing terms, less working capital on newly awarded contracts and lower tax payments that’s how we get back to the $240 million..

And then just the last one on the current budget environment and what happens if there is no deal reached by December 8 on AAV the platform programs the AAV and is that ACV?.

Well it’s a milestone fee decision on AAV and the existing program budget authorities we don’t believe that AAV is subject to impacts from a CR or from other government activities.

There is an outside chance that the down select from the ACV and during the manufacture design phase EMD phase with that down-select and subsequent award for low rate production could be caught up from a CR and they may have to wait for that will probably characterize as a new start if we are under a CR that award decision is not expecting to occur until late spring, early summer.

So we would have even a six months CR would still be - will be outside of that window. So we don’t see in the near-term over to FY ‘19 any impacts on the CR. We can continue operations, we’ve navigated that as others have pretty consistently and we don't think even for all of extension would have significant impact to us going forward..

Next question comes from Tobey Sommer with SunTrust..

As we look at your book-to-bill in recent quarters could describe any changes in the content tractoration or other characteristics of the book-to-bill that we could use to inform our forecasting of how that will flow into the income statement over the next year or two? Thanks..

The one actually we talked about is our season mix but in term we’ve also seen slightly longer periods of performance across that book-to-bill so couple dynamics. The recompete obviously continue going forward the run rate on the revenue side.

The expand awards again we’re seeing some that are generally streamlined but in turn we’re seeing longer periods of performance that’s a reversal of a trend that we saw shorter periods.

And also I want to point out that the nature of our business also is changing and that be things like the platform integration work are not flat line, straight line revenue streams as some of the traditional technical services work.

They tend to come out later on the front end to the engineering phases and then start to ramp with higher volume as you get into low rate and then full rate production. So the technical integration program and sells even some of the IT contracts have slightly different time profile and revenue profiles over this extended period of time.

So on balance it stays relatively predictable but it does increase a little bit off of variability the supply chain is another factor that moves into that.

But again I think to summarize it’s really around longer periods of performance slight variability in the revenue for the quarter based on contract phases from the front end nonrecurring to sustainment efforts overall.

Other than that we’re seeing that longer-term percent comp for example is that recompete it’s for seven years where traditionally we had seen a five year on some of the more run rate contracts in past quarters..

As you look at the changes that you’ve seen in contract mix, do you think that that’s reflective of the overall marketplace or more function of the portfolio and customers that you see and deal on a regular basis..

I think it’s definitely targeted overall market, and I guess I would characterize it is - if the customer are procuring fixed price there is a likelihood they can continue to do so. Well we’re seeing challenges as we increase of moving from cost plus to fixed price.

It’s a different acquisition model, it’s a change in ability to move from cost reimbursable domain to stronger fixed price requirement as we think authorized as described earlier. So again I think it sustainable in the mix that exists.

We’re seeing a slight uptick in cost reimbursable increases for us is rather intent to go to fixed price given the opportunity with government side of transferring some of that risk to private sector. So we’ll see if that trend reverses.

The IT domain is probably the largest opportunity there we’ll see advances in fixed price as we think about cloud and IT as a service and those business model shifting particularly as the government looks to buy more commercial flight technologies and SAIC can be a channel for those commercial technologies into the government marketplace.

So that's all I characterize the trends on the overall basis. Existing portfolios as I said play into that based on our high recompetes and the takeaways that are challenging on the extended growth side. So again it’s pretty sustainable given the mix that you have today and it doesn't move in extreme fashions year-to-year..

The last question for me over the medium term do you see more opportunities emerging for you to get into low rate production type contracts and if you could just talk about that over multiyear outlook that would be helpful?.

I’d say if we think about the sales cycle it still north of two years over the course of three or five we do see a healthy pipeline of technology integration modernization type program.

As the government again looks to modernize current equipment work in this concept of non-developmental items of which ACV is one where they’re avoiding long-term heavy research and development type programs but rather going in commercial markets we think that plays well to our technology integration strategy.

So we believe there is a healthy pipeline we continue to segment that it has been focused on tactical vehicles is an area of expertise, but there's other areas that we didn't explore that are adjacent to that that are still part of the technology integration play.

So we do see over that medium-term a viable pipeline that we think aligns well to our portfolio and our capabilities on making the investments to not only execute on the current programs and these EMDs and now phases will also be prepared to expand our modest basis as we evolve that FY strategy..

Next question comes Brian Ruttenbur with Drexel Hamilton..

My first question is about impacting the storms I know it's really hit on it that much besides you saying that you had 250 employees in Houston, how many do you have in Florida and can you talk a little bit about what you're encouraging those employees do protected time off how will that impact cash flows in the next quarter or two and again number of employees in Florida in your financial impact potentially from the next series of storms?.

Let me talk about for Harvey we had about 250 - we have 250 employees in the Houston area combination of largest reporting NASA but some other customers as well. Johnson Space Center has been closed for the week.

Our staff is generally on administrative leave during any kind of outage whether be a customer location unless we have a large presence there they tend to follow the customer activities.

We've been in daily contact, worried about the safety of our employees, first and foremost, they in turn care taking of customer mission capabilities, obviously a lot of high value assets in the different marketplaces. So, we’re very pleased and proud of our staff's ability to maintain continuity in mission.

Very little impact under this administrative, a week’s worth of time. Some contract activity we can do remotely. In some cases, we can make up that time. And so, we may see a very modest impact on billable hours. We don't see much impact on cash flows in a broad sense as an impact. But we’re going to see, how our customers also react.

So, it’s on a case by case basis of how we’re allowed to either recover some of that works, some not so much. But in general it’s around mission continuity, maintaining the safety of staff. And then the outreach that we have through local shareholder services, as well as what we can do for those that are displaced.

We have about 10 or 12 employees that I’d say went through some catastrophic losses in their home, in their housing, and vehicles, and we’re doing our best to support them. In Florida, anticipating your muscle impact is about thousand employees.

About 350 in Tampa supporting the Centcom customer principally, our IT offices in Orlando about 100, in Panama City is about 60 folks are some of the larger concentrations. So, we are taking precautionary actions for those sites.

Again, in support of our customers, assets and in turn, we are doing some advanced planning in Charleston, through our platform integration work and hardware integration activities. Just in case, there is 900 people in Charleston area. So, we are comparable on the contract side. Safety first, of course we will stay on evacuated et cetera.

We'll promote is a way to gap fill and then we will address on a contract by contract basis, administrative activities and how we can recover the mission work that's necessary for the customers..

So, just in summary, even though you have over 2000 employees impacted by these events, you don't see an impact to your cash flows any significant impact to the cash flow guidance.

Is that correct or any significant impact to revenue?.

We figured that, on average a week, the downtime, is there a recoverable and in the context of the broad enterprise scale that we have, it’s really not going to have a long term impact as we recover most of it..

And then my second question just real quick. Kind of your guidance long-term has always been about, you know margin expansion, I believe it’s been 20 to 40 basis points per year of margin expansion.

With your current bookings, as you see them right now, and they are extremely strong, do you still see that you can expand margins at that, I believe 20 to 40 basis points per year?.

We thought, the message that is 10 to 20 on average in the - 10 to 20. We have a good track record from the spin of delivering on that going forward, the last four years from 63, 68, 72, 74, so it’s been a steady progression in line with that. Given the current contract mix activities we have, we see short-term pressures on that.

Not worried about it in the long-term. So, what are the 10 to 20 basis point shift in the other direction temporarily, I think we can overcome that.

We do think that with the strength of the bookings, and a return to positive revenue growth that will also provide increased earning dollars in our ability to deploy more cash as a result of the generation, even with a flat margin activities over the course of the near-term.

But still looking for the margin expansion is the same thing we’ve talked about in the levers of fixed price more labor on our contracts and effective and efficient cost investment profile..

Next question comes from Josh Sullivan with Seaport Global..

Just with regard to the cost reduction actions.

Can you just expand on those efforts? The more facility consolidations, you can do or what are you targeting in the near term?.

As I mentioned, in the second quarter there was facilities consolidation. There was some severance related to that and also that we’re looking at the reviewing our cost structure. But with the intent of addressing the short-term margin pressure, while protecting our long term financial targets and I think that’s important as Tony said.

Particularly on the revenue side, see an expansion there. We have to ensure that, we’re protecting these long-term targets and not just cutting cost for short-term margin pressures. Those are the things that, we are looking at and reviewing our cost structure to make sure, it’s similar..

And then just as a follow-up to the questions on the six contracts content. What are the catalyst to get that trend reversed.

I mean this budget clarity, how far is it just the customer really need to get comfort with the risk sharing?.

We have the combination of both. I think the budget clarity does provide the customers little more confidence to extend their services, to take on some of that fixed price work that, again industry is bidding.

I think we’re doing our best collectively to put forward, competitive fixed price alternatives as we again mentioned as a service as a market shift, which I think industry developing expertise experience in that work for the government a fixed price opportunity those full commercial terms if you will.

So, I think it’s a combination of getting the customer more comfortable. Finding the right nature of the work, that can build fixed price and then showing the customer kind of the way to get there, that’s a balance between the budgets and risk profile.

So budget clarity, it helps with some of that and I think just the education of both sides, the work that is out of possible ties into the fixed price. Again, probably emphasize the IT side a bit more. Where we made some more advances on the fixed price before we see it on the engineering side..

The next question comes from Jon Raviv with Citi..

Tony some perspective on your commentary or further perspective on your commentary about federal civilian customers. Was there some sort of more sudden change in their behavior and their willingness to spend money because we’ve known about these cost cutting proposals from the Trump administration for some months now.

And then related to that is, why does that kind of federal civilian behavior impact margin today, but not impact sales growth tomorrow?.

The federal civilian customers have reacted to the rhetoric around reductions in that part of the federal government. As we've seen the promotion of spending in the defense and intelligence sector, given the national security interest.

So, at the macro level, there has been a shift there, as you know the previous administration tries to strike a balanced on budget spending on both sides. There seem to be potential shift. It does bias the new budgets to the defense and fed says, I will see reductions. That rhetoric is still in place through the administration.

Through the leadership that is there. So, we’re seeing the program managers, contract administrators reacting to that and protecting their budget lines with an indication that they may be lower than they have been in the past. So, that’s really the nature of the fed space, customer space.

We look at the portfolio, both the revenues where we see some growth, the demand is still high on cloud, cyber security, IT modernization. So, as we look at, whether it be through executive order or through government compliance, there is continual demand to upgrade legacy systems.

And so, even though there is potential cost pressure at the macro level, there are opportunities for growth in the fed seated market that again align to as they got non-discretionary spend. IT modernization, IT operations, and the ability increase security on that front.

We’re well aligned with those systems engineering and we really did see isolated impacts relative to margin activities, lower contracts out of mix of fixed price and materials which has caused reimbursable, sub tasks, so the customers in case - some cases have flexibility to move between them to think about a baseline operation, maybe there is surge task on our subsystem modernization component at shorter-term, sometimes accurate the higher margin.

So it's really down within the contract on larger ones longer term ones that we would see some shift in flexibility.

But at the macro level at some budget pressures, some demand exists, alignment important and then within the contract and IDIQ vehicles that we have, we also see some fluctuation on the bias to sustain operations as opposed to significant upgrades.

At least until the administration, the leadership and budget become more stable if we think will happen as we go to FY '18..

Ladies and gentlemen, with no further questions in queue at this time, I would like to turn the conference back over to Shane Canestra for closing remarks..

Thank you very much for your participation in SAIC second quarter fiscal year 2018 earnings call. This concludes the call and we thank you for your continued interest in SAIC. Have a good night..

Thank you. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect..