Good day everyone, and welcome to the SAIC Fiscal Year 2018 Q3 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shane Canestra, Investor Relations. Please go ahead sir..

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

Joining me today to discuss our business and financial results are Tony Moraco, SAIC's Chief Executive Officer; Nazzic Keene, our Chief Operating 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 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 third quarter results reflect improved performance as compared to the last two quarters. Nazzic and Charlie will provide details on the operational and financial results.

So let me provide you with a few highlights of the quarter; our assessment of the market environment and the status of our more notable platform integration programs. Third quarter internal revenue grew by 3% as compared to the prior year quarter primarily due to recently awarded new business with NASA and the Environmental Protection Agency.

As previously communicated, we expected improved profitability in the second half of the fiscal year and we have delivered on that expectation for the third quarter. Adjusted EBITDA margins of 7.4% for the third quarter were primarily due to strong program performance and cost efficiency measures that we put in place in the first half of the year.

Following very strong bookings of over two times revenue in the second quarter, SAIC continued to execute its go-to-market strategy resulting in a book-to-bill of 2.3 for the third quarter.

A result for our recent strong contract awards total backlog is up 16% as compared to the second quarter and funded backlog which is an indicator of potential near-term revenues is up 45%.

Additionally, our $15 billion of submitted proposal value remains very strong as we continue to pursue a healthy business opportunity pipeline across our diversified set of existing and new customers. With regards to two notable efforts on our platform integration business, the Marine Corps AAV and ACV programs continue to perform as expected.

On the AAV program we are executing the low rate initial production or LRIP phase of the contract, but we expect to begin delivery of vehicles in the spring of 2018. We have successfully completed delivery of all 16 ACV prototype vehicles, our supporting ACV testing, and expected down select decision in the early summer 2018 time frame.

With regards to the market environment, we're encouraged by the expectation of an improved budget in government fiscal year 2018. The majority of our customers are awarding contract with relative budget confidence and investing in their operations after many years of a more conservative spending profile.

Evidence of this current confidence is demonstrated by the second straight quarter of significant contract bookings that provide a solid base for future growth. Looking further out, we’re optimistic about our market environment as our customers have sealed a desire to adopt technology innovations to ensure mission success.

We are positioned well in areas of customer emphasis such as training and stimulation, military modernization and readiness, data analytics and cyber, to name a few. With an improving environment and demand signals from areas that align with SAIC’s strategy, I have confidence that we will perform an alignment with our long-term financial targets.

I’ll now turn the call over to our COO, Nazzic Keene..

Thank you, Tony. I'm excited to join the call today as SAIC's Chief Operating Officer and share our business development results, as well as an update on actions that are being taken to improve profitability and execute our long-term business strategy.

Contract award activity in the third quarter led the bookings of approximately $2.6 billion which translates to a book-to-bill of 2.3 for the quarter. With another quarter of book-to-bill over two times revenue this demonstrates that our customers value SAIC’s capabilities in differentiated offerings.

Over the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.6 which is a strong leading indicator for low single-digit internal revenue growth as we look to fiscal year 2019 and beyond. Third quarter bookings included the recompete or protect win of around $970 million of our AMCOM customers battlefield system task order.

This award was the largest and most visible recompete this year and further stabilizes our revenue base for another three years. Congratulations to the team for this important protect win.

In the expand and grow categories contributing to this quarter’s booking was a grow award of $272 million contract to support the Virginia information technologies agency and an expand award of $237 million contract from the U.S. Army to lead a consortium in developing and experimental prototype of their next generation combat vehicle.

Also contributing to this quarter’s booking was an important grow opportunities of $93 million from U.S. Cybercom to support their efforts in securing, operating and defending the Department of Defense Information Network. Various other awards and contract modifications across the portfolio makeup the balance of this quarter's extraordinary booking.

At the end of third quarter SAIC’s total contract backlog stood at approximately $10.7 billion, an increase of 16% from the second quarter and a 30% increase from the third quarter of last year. Funded contract backlog, an indicator of potential near-term revenue generation was $2.6 billion, up 45% from the second quarter.

The estimated value of SAIC’s submitted proposals awaiting award is $15 billion unchanged from the second quarter despite the third quarter’s large customer contract awards. Throughout the third quarter we submitted several large contract proposals many within award value of greater than $200 million.

Several of these proposals are the expand category within our defense portfolio and are expected to be awarded in the first half of next fiscal year. As we continue to invest in the future of SAIC it is encouraging to see strong demand for the services and solutions we offer.

We will continue to use a disciplined approach to our investment spend as we pursue a strong pipeline of business opportunities. As previewed last quarter, we have reviewed our operating model and cost structure to improve profitability and align to our long-term strategy, Ingenuity 2025.

We have and are continuing to take actions to achieve our objective and provide for long-term shareholder value creation.

As announced in October it is part of a broad company-wide restructuring we offered a voluntary retirement incentive package to approximately 100 senior managers as we consolidate five customer groups into three groups and six capabilities focused service lines into three market segments.

While committed to keeping our successful metrics operating model impact and driving performance for our customers, we have adjusted our operating model in alignment with our long-term strategy.

As a result of the voluntary retirement incentive packages and including a modest amount of additional involuntary employee departures, we eliminated approximately 70 positions through this restructuring effort.

With these reductions along with several other actions completed or in process, we estimate we will reduce our annual operating costs by approximately $20 million.

While Charlie will provide you with the third quarter and estimated fourth quarter financial impact for these actions, our restructuring will create a more efficient and effective operating model that will enable the successful execution of our business strategies. Charlie, over to you for our financial results..

Thank you, Nazzic and good afternoon. Our third quarter revenues of approximately $1.1 billion reflect internal growth of 3% as compared to the third quarter of last fiscal year.

Revenue growth was driven by new information technology contracts such as the Army HITS and EPA end-user services programs and mission oriented services on the NASA OMES contract.

Increase revenue due to the new program was partially offset by the completion in contracts such as DHS integration program almost a year ago and other net decreases across the portfolio. Third quarter adjusted EBITDA was $85 million equating to the 7.4% as a percentage of revenues.

This quarter profitability was driven by strong program performance and cost reduction initiatives that we implemented in the first half of the year in an advance of our current restructuring efforts. These costs efficiency measures remain in place today and complement the larger restructuring program.

During the third quarter we incurred approximately $1 million of restructuring cost mainly related to severance. We expect to incur an additional $10 million of restructuring cost in the fourth quarter primarily related to voluntary retirement incentive program and facilities consolidation efforts.

In total including the second and third quarter cost of $3 million, we estimate to incur $13 million of restructuring cost for the full year and expect to complete all restructuring efforts in the fourth quarter.

With regards to the annual cost savings of approximately $20 million from our restructuring effort that Nazzic mentioned, I anticipate approximately $11 million of net annual cost savings due to our contract mix of approximately 45% cost type contracts.

Adjusted operating income was $73 million in the third quarter resulted in adjusted operating margin of 6.4% consistent with the prior year quarter. Net income for the third quarter was $43 million and diluted earnings per share was $0.98 for the quarter inclusive of the third quarter restructuring cost of $1 million which impacted earnings by $0.02.

The effective tax rate for the quarter was approximately 31%. Looking to the full fiscal year, we estimate our fiscal year 2018 tax rate to be approximately 23% to 25% down slightly from our previously communicated expectations. Third quarter operating cash flow and free cash flow were $80 million and $72 million respectively.

Cash collections were impacted in the quarter by delayed payments from one of our largest contracts but we do not anticipate these delays to endure and in fact have partially recovered so far into our fourth quarter. Days sales outstanding at the end of the quarter was 57 days.

Looking forward to the fourth quarter, we expect our DSOs to return to the low 50s within our normal operating range and I do not expect any disruption to our capital deployment strategy.

The third quarter ended with cash balance of $125 million below our average operating cash balance target of $150 million and attributable to the delay in payments that I just mentioned.

During the third quarter, we deployed $59 million of capital consisting of $39 million of planned share repurchases representing about 562,000 shares, $12 million in cash dividends and $8 million of term loan debt repayment.

We are committed to our long term financial targets and they remain unchanged, with regards to fiscal year ’18 specifically we expect revenue to be slightly positive and continue to expect full year profitability as measured by adjusted EBITDA margin to be in the 7% range.

For fiscal year '18, we still expect $240 million of free cash flow excluding the expected restructuring costs, we anticipate this year. I should note that of the $13 million of expected restructuring costs this fiscal year roughly half will impact cash flow this year.

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

In fiscal year ’18, we expect to pay dividends of about $55 million to make the 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.

Finally, I should note that our Board of Directors will meet next week to consider the approval of our quarterly dividend which is typically payable at the end of January. Tony back to you for concluding remarks..

Thanks Charlie. As a leading technology integrator, I'm optimistic about the market environment and the actions we are taking to ensure the future success of SAIC. I wish you and your families and all SAIC employees a happy holiday season. Operator, we’re now ready to take your questions..

[Operator Instructions] And your first question will come from Cai Von Rumohr..

Hi, it’s Lucy on for Cai. So it’s a good performance quarter. Wanted to follow up on maybe execution, you talked about performance on the vehicles ACV and AAV are as expected.

Are there any milestones coming out and if you can maybe in Q4 and although into next year, if you can give us an update on that?.

The ways to AAV, we're continuing to prepare for the low rate production activities, long lead items, procurement activities and production preparations are on the way. As part of that that will likely performance basis, few more relevant in the spring as we begin delivering our first units.

And on ACV, we continue to support the testing activities after delivering all 16 EMD vehicles. So it’s pretty much of a test environment there. So not as many deliverables if you will as we’ve seen in the past through the test activities in preparation, we will see the ACV award again later early summer of 2018 and available in the spring..

You have a couple, you have the Army product win and then maybe two other are keys coming up here for other vehicles, I believe one Army and one for the Marine Corp can you maybe talk about what sort of expectations you have on those and how some of the lessons learned on the AAV and ACV maybe be borrowed to improve the performance on those bids?.

Sure, you’re referencing NextGen combat vehicle prototype with the Army. So we’re excited about the Army portfolio as large customer which affects the vehicle demand as a component in Marine Corp. We have taken lot of lessons learned from the Marine Corp programs both in terms of our preparation and execution on the programs themselves internally.

Our supply chain management activities which were fundamental to these programs for delivery and quality and on time. And also probably factor we’ve been able to use those lessons learned in the models to influence other portfolio and pipeline opportunities.

So we’re trying to stay aligned again in each area that we're going to see ourselves on tactical vehicles still focused on survivability and mobility as differentiators within that platform and our business model on technology and system integration on those platforms.

So still moving forward on our investments but also developing the pipeline parallel with that..

Margin performance - the improvement that you expected came through in Q3, were there any noticeable contract mixed tailwind or headwind and also any one-time items in the quarter?.

For the quarter, we had about $5 million of positive adjustments, part of that was related to strong program performance and part two contract closeouts, over the course of the year, we’ll have write-ups and write-downs but it was net 5 million positive on our EAC adjustments..

And was that anticipated as you headed into the quarter?.

Yes that was anticipated..

And then maybe if you can talk about any color or early read into next year's margin levers.

I believe the AMCOM recompete contracts coming out maybe slightly less favorable and then you also have perhaps the weaker Federal civilian mix next year, anything favorable that you can point to?.

Let me just give a little color about the expectations for fiscal year ’19, so as we said before we expect to exit fiscal year ’18 and the adjusted EBITDA margin run rate in the second half of the year is a reasonable baseline which we would grow margins going forward and that would include certain headwinds we have from AMCOM type of programs.

So growing margins from there that would be as we’re completing our FY '19 planning process, we have not completed that but we expect to grow margins in line with our long term target of 10 to 20 basis points improvement on that baseline that I just talked about..

Next we’ll hear from Sheila Kahyaoglu..

Just following up on some of the margin commentary, to confirm the bookings mix should align with your margin outlook of 10 to 20 basis points a year.

Is there any sort of contract mix we should be taking account of the bookings?.

Well I think as we talked about before, we still have the challenges that we had in previous quarter with the cost plus mix that we’re having mid-year.

So we’re pretty pleased with the performance this quarter and again the run rate in the second half of the year we expect that to be the baseline, we expect to be able to increase 10 to 20 basis points based on the portfolio that we have and the bookings that we’ve had..

And then, just on free cash, the bridge to year to-date to the guidance of 240, so about 100 plus million or 130 million.

Can you walk us through what gets there and what the pick -up is in Q4?.

Yes. It's pretty simple, the pick-up is to catch up on the delayed payments from one of our largest contracts that we’re - I talked about in the script. Once we’re able to do that then we believe we’re back on track. We do have visibility to the 240. We still believe we’ll get there.

There is an impact on this restructuring of about $5 to $10 million of cash impact that will reduce that slightly. But we still anticipate getting to the 240 million excluding restructuring..

And just the delayed payments, that was about 90 million in total? Am I correct or am I maybe missing it?.

No, it was less than that - its around $40 million, $50 million of delayed payments on our largest contract..

And we’ll hear from Edward Caso..

Can you tell us and give us a sense on the direct labor growth relative to ODC?.

That's pretty consistent, nothing material on our shift. We did have as far as the overall numbers, slightly higher materials carry than direct labor.

But the direct labor itself holding, is slight uptick given the contract startups that we talked about that are contributing to the revenue growth, but it’s been a bit of a mix but not being significant, but we do get that material fluctuation at times as Charlie mentioned on the call and Nazzic as well..

Can you just level set us again on the AMCOM recompete, the three pieces where they are. What’s left to be done? Thanks..

So the battlefield is the one that I referenced but we just closed out this last quarter. And then virtual was one earlier in the year and the one that’s still outstanding of these three pieces is a strategic systems that are still going through its protest cycle..

Is there a date on the 100 days or whatever on the protest that we should be watching for?.

Yes. I’m not aware of a date. It’s going through - it’s kind of got through its first phase of that and so the government is looking at various corrective actions and there’s not hard date, we’re watching it daily as you would anticipate..

Can you give us your initial sense on what you’re seeing out of the tax reform legislation sort of good news and things you may be less good news?.

Well, we’re waiting to see what happens. We do see the tax reform as positive to earnings and cash flow. And also we’ll continue to maintain our capital deployment strategy of returning excess cash to the shareholders. So we believe it’s a good news for SAIC..

Can you talk at all about obviously it will be a benefit to everybody in the government services space, sort of the intent to how much you return to shareholders and how much you put back into the business maybe to drive growth?.

Well, we’ll wait and see what the final bill is and determine that at the time, but we are very comfortable with our capital deployment structure and we have a target of cash. We need excess cash we always return to our shareholders and that’s what we’re continuing to do..

We’ll go to Tobey Sommer..

What is the incremental revenue in fiscal 2019 from AAV as you start delivering LRIP?.

The AAV delta as we think about this year to next year is in $60 million to $70 million range. And picking up, we think about the quarter’s mid-year..

So is that $60 million to $70 million, the fiscal 2019 impact or full annualized impact that might not all catch up in 2019?.

That would be an AAV number. The ACV is probably is down, so we must be clear on that as well. So we’re down about $35 million or so year-over-year on that. So we’re probably in that $30 million net impact from the major programs based on the - AAV delivery..

Is there a reasonable - from your perspective reasonable pipeline of opportunities that we talked about already on this call, as well as things that you’re looking at that maybe have not been announced that we’re not in the public eyes such that SAIC kind of viably compete to multiple opportunities each year perhaps win one or the kind of comparable opportunities less frequent than that?.

Are you speaking about the broad portfolio in general or is…?.

Yes, the broad portfolio, not specifically vehicles, but the system integration aspect of your business?.

Well, with the $15 billion submitted or pending award that we’ve been very consistent. As Nazzic said on the differentiation in the domain, we think we have some strengthen based on the past performance. We’re still driving I think a good balance between the mission related work like the NASA OMES as well as the broad enterprise IT.

We’ve talked about IT been driven by efficiencies in the cloud, as well as the heavy demand in cyber security initiatives across government. And we are well positioned on both sides. Won’t speak to any particular program or deal, we do anticipate next year to have slightly lower recompete profile.

So that’s a good news as we think about our bid strategies and our ability to perhaps see, expand and grow opportunities a bit more aggressively than environmental protect. That’s how I’ll characterize it, but nothing substantially, it's going to drive it on a pipeline basis..

One thing I will note. This is Nazzic. We do have - we are looking forward to the announcement of what we call [indiscernible] which is another AMCOM recompete. It wasn’t one of those comps that we originally talked about earlier in the year, but that - we’re looking forward to that award any time and that’s about in excess of $100 billion a year.

So looking forward to that recompete..

With respect to the incremental investments that you put into the business to support LRIP over the summer and fall.

Are those kind of investments leverageable on potential future contract wins because they’re kind of infrastructure related or they more specifically applicable to the contracts that you’re already active in?.

Most of them are applicable across the portfolio on our platform business. So whether its technologies, infrastructure, tools, we look to make the investments on those that will support not only the existing programs but those programs that are in the pipeline and we aspire to win in the months and years to come..

Last question from me on the civil side, not too long ago, you talking about in terms slower pace of contract award in business perhaps as agency were responding to commentary about potential budget customers areas, could you update us on what you’re hearing and what the tenor of business is on the civil side..

Yes. I think we’re seeing as a budget bills are being discussed far more positive posture on the federal civilian side whether it's sustain the current status or so favorable and again, concern that existed six months ago. So we are starting to see some activity and dialogues as it pertains to that.

But you think you’ll see fed maybe slightly improve as one the transition of the administration continues, the leadership is in place. We have some stability in the overall government budget.

But we don’t see the fed to read much of the bill payers as was once talked about, it still maybe under some pressure but the machine alignment the thing that they still need to accomplish, I think adequate dollars continued pipeline development and would expect awards on that to be about what we’re seeing of late moving slight improvement..

And your next question will come from Krishna Sinha..

Just a couple of questions real quick, did I hear you in your prepared remarks that you said that FY '19 revenue would be slightly positive or was that FY '18?.

That was FY '18..

Okay '18.

And then just to clarify on that margin comments or commentary that you gave earlier, so I mean earlier this year you said your adjusted EBITDA margin would be in the 7% range and so if you did 7.4% this year that would imply something like 6.9% for the second half or you think that 6.9% is the baseline of which you expected then to grow the 10 to 20 bps that you’re expecting in FY '19?.

Just to be clear, we expect to end fiscal year '18 with an adjusted EBITDA margin of 7% and if you take that and the second half run rate would be a reasonable baseline to which to grow the margins 10 to 20 basis points, that’s what we said..

And then on your free cash flow year-to-date, you’ve done $120 million and earlier again this year you said you’re going to be $240 million for the full year, you reiterate that target so that implies you have to do 50% of your full year free cash flow next quarter which is little bit higher than we typically seeing strategic, walk us through the moving parts of how you get to that $240 million free cash flow target, I mean are you getting milestone payments or something?.

No, like I said it was delays in the third quarter on a large contract, once we’re able to clear the delays on those payments it’s around $40 million to $50 million and we will be able to catch-up for the full year.

So we’re working that every day, it’s an administrative exercise in order to get the billings matched up directly in the system in order to get paid and that’s what we’re looking to do..

Next we’ll hear from Jon Raviv..

Just to get little bit more on that previous question on margin just to get a sense, I mean your fiscal full year of 7% and your fiscal second half is more in the 7.3, 7.4 range maybe 7.2 let’s call it, so 10 to 20 basis points off of that is that what we should be thinking about?.

Yes let’s call it 7.2 and let’s say 20 basis points off of that..

And then I think one of the concerns heading into next year is really that AMCOM recompete flipping from fixed price to - from T&M excuse me to cost plus.

Can you talk about some of the margin mechanics around that switch, how much pressure you expect there if any?.

It’s a modest amount as we looked at conversion of the labor mix, the materials mix, the fee structures shifted slightly between labor and subcontractors.

So I think we’re success in continuing to negotiate positions to actually mitigate the contract conversions from fixed price T&M to cost reimbursable perhaps also more favorably than thought one of the bid process. So we think they are more optimistic of pulling that cap as we go into ’19 with that converts..

And then so if you have low single digit sales growth in FY '19 and margin expansion in FY ’19 which seems to be pretty good on a year-on-year basis, is there any reason that free cash flow cannot grow with net income in FY ’19?.

Yes it should grow with earnings as we said before, so an increase in earnings would increase the free cash flow. We’re in the planning process however right now for fiscal year ’19 and the planning process includes how we use the capital including on platform integration.

So I have to give you a better answer at the end of next quarter and an update on that..

And then just to clarify this year’s target of 240, it’s 240 but less some part of the restructuring so that implies low 230s this year is the rest of restructuring coming out next year’s number or what are some of the big moving pieces from this year into next year that you think about?.

The restructuring piece, the $13 million total restructuring about half of that relates to the severance payout and associated to that. The other part of the restructuring is more reserve type of issues related to real estate and closing real estate, so that’s over a longer term not just over next year but four to five year term..

[Operator Instructions] We'll go to Brian Ruttenbur..

Two questions, first of all the rebids can you just run down through the big ones and 19 that was AMCOM 33 just list them off in the size and then number two given your macro, tell me about timing of the CR sequestration how far they’re going to get the CR down the road this time and when do you expect passage?.

Just I will comment on a couple of the major recompetes, I touched on the AMCOM task order 33 we’re waiting as we sit here today, into next year the two big ones would be the next generation SeaPort which is an IDIQ, multi-award IDIQ and then the recompete was some additional work of our global tires program, so those are the two largest that we’ve got our eyes on going into next year and I guess that….

Can you give me sizes of those?.

Well the SeaPort is a multi-award IDIQ, so several billion dollars $200 million..

Can you tell me how much revenue you’re generating now of that?.

We do about $200 million a year on that today..

Okay.

And then the other one was what?.

The other one is the global tires program and that’s about between $100 million and $150 million a year on that one for us..

Perfect..

The CR sequestration, it’s Tony. So we’re seeing House taking action today before I get to two weeks extension people have been talking about, there is still lot of conversations around short term, long term emphasis to get that through.

Some questions on the rest of the bills on the funding side perhaps we'll likely see another short term CR, lot depends on negotiations, there is lot of emphasis to also address the broader control constraints as the last deal had expired.

So I think there is a lot of discussions trying to converge expect some short term CRs, defense bill perhaps clearing first will get to see how the rest of the politics play out and what gets bundled for the rest of the budgets and hopefully not a long-term CR.

From our personal impact on the contract side, there is very little exposure on the CR, we’ve been through this process for many times but we don’t have a lot of exposure under the CRs, our biggest impact would be on things like the ACV award.

So being on the defense side, that’s probably not at risk from a decision perspective, that’s how we’re seeing our plan out..

So you said it’s going to be kicked down the road likely two weeks and then possibly kick down the road until mid-January or do you anticipate a passage by calendar year-end?.

We've got the two weeks is most likely I think the House passed it today, I don’t think we will see government shutdown, the lever is pretty high but don’t quote me on that.

Who knows how this year's politics will in fact unfold but I would expect that some portion of our smaller shorter term CR if you assume that wanted everything done by the 22nd of December but we hope that would be the extent of it and perhaps that would go two to four weeks into January or a Congress reengage.

That'd be my best guess on a short term, and that I think then is wide open on whether or not we'll be able to cover a year or not, but we hope to deliver those collectively in January timeframe..

We'll take the follow up from….

So just want to talk about your forward dynamics a little bit. Obviously, you guys sound confident in your reiterating your targets for low single digit growth. But given all the drivers you've just talked about in terms of all the income pieces, AAV, ACV, what you're expecting from fed civil.

Can you just about what would move you towards the higher end of that low single digit guidance as opposed to the lower end, and kind of what your bookings that you've just previously - you know, your strong bookings in the last two or three quarters, how that's going to affect sort of your next 12 months or 18 months with the revenue growth?.

We still think we’ll be in the low single digit. The strength of our recent book-to-bills are probably impacting two things, its reducing our revenue risk profile because of the high volume of large recompetes. That's a very strong position to be in.

We're seeing some of these incrementals expanding growth, opportunities contribute modestly as we go forward on those transitions. We've also mentioned that the recompetes are a bit more at a run rate as steady state and having to fill gaps by our lower volume on those contracts. And I think we're going to see that low single digit growth.

But I think the trade of the portfolio and the offsets will not move us beyond that unless there is a significant change in award activity across industry that we haven't seen to date. So we've seen a modest improvement over the last 12 months across the sector.

I think that's going to be the new steady state, and I'd not expect it to move much beyond that low single digit. But I think that's a very positive place to be. And our ability to convert that to earnings and distribute that sustains our long term targets and value proposition that we have out there..

Assuming that the defense budget and the fed civil project in aggregate grow sort of 1% to 2% which is I think what the sort of peer consensus is at this point. Your low single digit gross could imply that you grow in line with the budgets or maybe slightly above.

So can you just talk about how you see yourself in that dynamic? Like are you taking a little bit of market share here and therefore you're going to grow a little bit better than the end market? Or you think just for the medium term, you'll be just basically in line with the end market?.

I think we're generally in line and slightly above end market. I think evidenced by the last four years of performance we were successful in retaining our revenue profile, we’ve been through the expanded grow efforts as other peers perhaps contracted over that period of time.

So I do think we are successful in the quality of our bids in the form of either new starts against takeaways in our expanding growth, expanding this growth and sell through of our IDIQs. So I think we're well positioned to continue on that path, and we should outperform slightly in that market.

So again low single digit, but probably at above the one to two if we think about this quarter's performance and the strong book-to-bills with the foundation of a very strong revenue baseline that we just secured..

And we'll go Jon Raviv..

Can you just clarify on some of the free cash flow trends in FY '19 including the discussion you'll be having at the Board about cash deployment or investments next year? What's the menu of options you're discussing with the Board? I think you mentioned vehicle integration.

What sort of investments would that mean?.

The capital to deployment strategy is pretty clear. We have the dividend payments in which we make about 55 million a year. We have the long debt repayment, 25 million a year. What remains is options are share repurchase and strategic M&A shouldn't rise.

The amount of working capital that we're talking about platform integration is not going to be that significant. It hasn't been in the last two or three years. The model is set up that it is not a very capital intensive model. So we don't see that changing it.

I guess didn't want to give you an exact type of number about fiscal year '19 free cash flow at this point in time. We'd be happy to when we meet in next quarter..

And then you brought it up Charlie just on M&A appetite, what are you seeing out there in the market right now? I think you guys have previously talked about the health and Intel as interesting areas. Just give me a sense of what you think is available, what pricing looks like, what side of the equation you think you're going to be on..

The market access is still the principal filter as we think about areas that we're underserving. Even today, public health sector, different intelligence agencies, air force, and some space domains on the market access side, we're interested in new capabilities, data analytics, and training simulation and cyber security.

But at the same time, some of the multiples are pretty high on some of the capabilities sets on the smaller properties. We've developed something that's in our mid-range on the side phase, so its material and builds up those portfolios with a modest scale within that segment. That's really unchanged watching the market.

There's a lot of activity and a lot of planning, but we're watching it. But again, we're very comfortable with the organic exposure we have, the investment that we're making. And I think you keep that going and complement organic play with M&A periodically on a strategic basis..

And what kind of filters are you using for determining if M&A fits or doesn't fit? It's a purely strategic. But do you have any kind of timeline around your cash and cash returns, attrition? Also kind of some of that in line with that question, what kind of size you're thinking about.

Another site more type thing or you have to do it more string and smaller acquisition..

We'd probably shy away from the string of smaller's. They're real challenging. I don't think we are set up or interested in those profiles with challenges with some of the smaller company both in compliance, maturity, ownership. So we've been starting that mid-range, I'd say we'd shy away from small business.

One of the key filters is prime contract market access. It is not small business. So full and open portfolios are much more attractive as we’ve seen how those small business portfolios convert on a negative basis fairly quickly.

So, scale is probably defined by full and open portfolios companies that are little more mature in that process because we can sustain that as a prime. Sometimes IDIQ, sometimes it's contracting, official contracts but that's the essence of it.

The financial measures, Charlie and the team are pretty traditional and fundamental on attrition basis, we think about the cash and the margins of the loan..

And ladies and gentlemen, that does conclude today's question-and-answer portion. At this time, I would like to turn the call back over to Shane Canestra for any additional or concluding remarks..

Thank you very much for your participation in SAIC third quarter fiscal year 2018 earnings call. This concludes the call, and we thank you for your continued interest in SAIC..

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation. And you may now disconnect..