Good day, and welcome to the SAIC to acquire Engility Conference Call. This conference is being recorded. At this time, I’d like to turn the conference over to Shane Canestra. Please go ahead, sir..

Good morning, and thank you for joining us on a rather short notice to discuss an important announcement that SAIC released earlier this morning. This morning, SAIC and Engility issued a joint press release announcing SAIC’s intention to acquire Engility.

This press release and presentation slides to be utilized in conjunction with today’s call can be found at investors.saic.com. Please take a moment to obtain the presentation slide as we intend to utilize them significantly during this call. We have filed a Form 8-K regarding this announcement and I ask that you refer to that filing as well.

Additionally, we have also distributed a separate press release announcing our results for the second quarter of fiscal year 2019. I encourage you to review that release as we also discuss those results during the call.

You have allotted approximately one hour for this call, so we ask that participants limit themselves to one question and then reenter the question queue if time permits. Joining me today to discuss the intended acquisition by SAIC’s CEO, Tony Moraco; COO, Nazzic Keene; and CFO, Charlie Mathis.

We’re also joined by Lynn Dugle, Chairman of the Board, President and Chief Executive Officer of Engility.

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, as more fully described on Slide 2.

I refer you to SEC filings of both SAIC and Engility for a discussion of these risks, including the Risk Factors section of annual reports 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. As you turn to Page 6 of the presentation slides, it is my pleasure to introduce SAIC’s CEO, Tony Moraco..

Good morning, and thank you for joining us to discuss the strategic move that SAIC has taken in the federal government services market. This morning, we announced our intention to acquire Engility in a value-creating opportunity for shareholders, customers and employees of each company.

I’m excited to host this call along with Charlie, Nazzic and Lynn Dugle. As detailed in the press release, SAIC intends to acquire Engility to accelerate both companies’ long-term strategies and unite two leading government services providers.

This all equity-based transaction is valued approximately $2.5 billion and is subject to regulatory and customary closing requirements. With $6.5 billion in pro forma last 12 months revenues and approximately 23,000 employees, the combination of SAIC and Engility will be a powerful force in the marketplace.

While there is a large array of benefits of this transaction, it is rooted in three equally important strategic tenets. First, this transaction will combine two leading government services providers with highly complementary capabilities, customers and cultures.

The combination of these two well-known and respected companies creates a second-largest pure-play government technical services provider. Second, this compelling combination accelerates both companies’ long-term strategies, creating market subsegment scale and strategic business areas of national interest.

This acquisition is another step in the execution of SAIC’s long-term strategy, Ingenuity 2025, [indiscernible] development of a comprehensive range of innovative solutions and services with a broader diversified customer portfolio and improved competitiveness.

As both companies approach this partnership, it became clear that companies will be stronger together in a combined enterprise within each other’s interest.

The combined company’s position for growth is accelerated as Engility’s market access to include, but not limited to, important intelligence and space customers is highly complementary to SAIC’s strong IT and mission-focused offerings to provide customers with full suite of technical services.

Third, we expect to enhance shareholder value through improved cash flow and margin profile, driven by cost synergies and increased growth, enabled by greater customer access with more competitive and differentiated solutions.

The combination of these two complementary businesses will accelerate each company’s growth strategy, to improved market presence and annual net cost synergies to increase competitiveness.

Through accelerated revenue growth, the increased profitability and greater cash flow generation, this transaction provides an opportunity for significant long-term shareholder value creation. Slide 7, please.

Expanding on the strategic rationale, this transaction will create a leading technology integrator in government services, with $6.5 billion in pro forma last 12 months’ revenues.

The two complementary organizations, strategies and cultures are expected to broaden customer reach, provide additional opportunities to capture market share and expand employee career opportunities.

The combined businesses will create a further diversified portfolio, with continued focus on performance to deliver comprehensive range of innovative services and solutions for our customers.

Enhanced portfolio of diverse customers and contract types provides balance and flexibility, to not only take advantage of near-term market opportunities in this improved federal market environment, but also provide downside protection against perturbations in the longer-term funding profiles of individual customers.

The powerful combination of SAIC and Engility creates a compelling financial profile and opportunities for shareholder value creation. With a pro forma last 12 months’ adjusted EBITDA margin profile of 9% after a full realization of projected net cost synergies, this transaction is expected to improve SAIC’s profitability profile.

With improved pro forma annual free cash flow, a strong balance sheet and a reasonable leverage profile, we will continue to have flexibility for future shareholder value creation, including the payment of our quarterly dividend.

We’ve taken a hard look at potential synergies and identified $75 million of expected annual run rate net cost synergies that enables improved profitability and competitiveness due to lower indirect cost structure. Charlie will expand on profitability and cost synergies in a few minutes.

All the rationales I just discussed contribute to the underlying objectives by both SAIC and Engility to create value for shareholders. This transaction provides opportunity – a greater opportunity for revenue and earnings growth and upside from projected revenue synergies.

This transaction is compelling because of natural alignment of our long-term strategy, Ingenuity 2025 and Engility’s existing business strategy. To discuss the transaction from the Engility’s viewpoint, I’d like to turn the call over to Lynn Dugle. Lynn, thanks for joining us today..

Thank you, Tony, and thank you for giving me the opportunity to share the excitement of the Engility Board and the Engility leadership team as we join our two companies together and giving me the chance to share the Engility journey that has brought us to this very positive outcome.

Many of you on the call have heard me say many times that I was not interested in a M&A deal that was primarily a scale or cost-savings proposition. But that I would be intrigued by a combination of companies that had notable revenue synergies and the near-term ability to invest more in distinct and differentiated solutions.

I said I was not interested in scale-for-scale sake, but clearly understood that we were experiencing the best market conditions we’ve seen in a decade and adding the capacity to attack that market and pursue multiple large pursuits simultaneously could be an important advantage moving forward.

So as the market continued to improve and the hard work, successful market repositioning and the strong execution of the Engility team resulted in improved performance, we caught industry’s attention and we received multiple expressions of interest from various parties.

As we objectively evaluate – evaluated our strategic alternatives, it became very obvious that a combination with SAIC represented a superior option for our collective shareholders, customers and employees.

The coming together of our two companies represents a unique and very timely way for each company to accelerate the achievement of our strategic goals, take advantage of the positive budget environment and increase our joint ability to invest at a higher level, while delivering sustained profitable growth.

Engility is very proud to bring a broader space and intel portfolio to SAIC, and we’re looking forward to bring the SAIC’s enhanced mission IT and logistics offerings to our customers.

But perhaps the most important aspect of this transaction is that, our two companies share not just complementary business strategies, but very similar cultures, values and priorities.

The combination of our two companies creates an even stronger base of talent, uniting two highly skilled workforces that share an unmatched commitment to serving our customers and making a difference for our country.

As we look forward to successfully completing the deal early next year, the Engility team is focused on closing the year strong, delivering on our commitments to all of our stakeholders and working with Tony, Nazzic, Charlie and the rest of the SAIC team to complete a smooth and very successful transition. Tony, back to you..

Thank you, Lynn. Please turn to Slide 8 of the presentation materials. With a transaction value of approximately $2.5 billion, including $900 million of Engility net debt at closing, SAIC will issue Engility’s shareholders consideration of 0.450 SAIC’s shares for each share of Engility.

On a pro forma basis, current SAIC shareholders will own 72% and Engility shareholders will own 28% of SAIC at closing. In this transaction, SAIC will be acquiring tax attributes with a net present value of approximately $250 million. Excluding these tax attributes, the implied transaction value is approximately $2.25 billion.

While Charlie will provide further details on the financial aspects, we expect the acquisition of Engility to be immediately accretive to cash EPS, excluding acquisition amortization and nonrecurring costs.

With the full realization of estimated net cost synergies of $75 million, pro forma adjusted EBITDA margins are expected to be 9%, a significant increase from our current EBITDA margin profile. The pro forma enterprise is expected to generate over $375 million of free cash flow annually also after full utilization of expected synergies.

A financing commitment has been obtained to refinance Engility’s existing credit facility and outstanding notes through incremental borrowings on SAIC’s existing credit agreements.

With an initial pro forma leverage ratio at closing of 3.0 times net debt to EBITDA, we’re committed to maintain our existing credit rating and this balance sheet profile provides future flexibility. Our current dividend policy is expected to be unchanged post-closing.

With regards to the corporate governance and executive management, I will continue to be in my current role as Chief Executive Officer and Sandy Sanderson, SAIC’s current Chairman of the Board, will continue in that capacity.

The SAIC will expand its current Board of Directors by two additional Board members to be selected from Engility’s existing Board of Directors. This will bring the combined company’s Board of Directors to 11 members. This transaction has been unanimously approved by both SAIC’s and Engility’s Board of Directors.

As a part of the proposed transaction, a voting agreement is in place with two of Engility’s largest shareholders, General Atlantic and KKR. Details can be found on our 8-K filing, which contains the merger agreement.

Closing is subject to approval by both SAIC and Engility’s shareholders and customary regulatory approvals, with an expected closing in the fourth quarter of SAIC’s fiscal year 2019. Please turn to Slide 9. The combination of these two great companies creates a stronger federal government services provider in today’s marketplace.

With pro forma last 12 months’ revenues of approximately $6.5 billion, SAIC takes an increased leadership position by operating as a number two in the peer set. Slide 10, please.

As I mentioned, one of the strategic tenets of this transaction is increased shareholder value through improved cash flow and margin profile, driven by greater customer access with more competitive and differentiated solutions. Individually, SAIC and Engility perform services for customers of notable size and importance to our country.

SAIC has been very consistent in our remarks regarding our M&A evaluation filters and Engility’s diverse customer and contract portfolio met our primary filter of new customer and greater market access.

As demonstrated on this page, while there are some common customers, this transaction provides both companies with access to new customers for each several opportunity to sell their capabilities into or to leverage each other’s offerings into their existing customer base.

Although we do share certain customers, we often provide different mission capabilities in different geographic concentrations. These capabilities position us in the marketplace to provide leading solutions in space systems, train and simulation, data analytics and cyber solutions.

Through this transaction, SAIC is expanding our cleared workforce by approximately 50%, significantly increasing our capacity to win larger-scale national security contracts.

Both companies have outstanding reputations for program performance and those that operate in our market space understand that past performance is critical to protecting our current business or expanding and growing with new customers. Please turn to Slide 11.

The combination of these two very complementary businesses provides a balanced profile from a customer-mix perspective. Combining SAIC’s more DoD heavy customer mix with Engility’s intel and federal civilian business creates a more diversified and balanced portfolio.

In the pro forma portfolio, the cost-plus contract content remains relatively consistent, while adding the higher-margin cost-plus content of Engility..

Thank you, Tony, and good morning, everyone. Please turn to Slide 12, which provides an overview of the pro forma financial profile.

On the pro forma basis, this transaction creates a $6.5 billion government service market leader, provides a transformational improvement in our margin profile when included the impact of run rate synergies and combines two of the industry leaders in free cash flow generation.

Pro forma trailing 12 months’ revenues are $6.5 billion and pro forma adjusted EBITDA margins for the combined company, excluding non-recurring costs are 7.8%. When factoring in the full run rate synergies of $75 million, the pro forma adjusted EBITDA margin is approximately 9%, 180 basis points improvement from our current margin profile.

In addition, the combined enterprise has a cash generation profile with pro forma 12 – trailing 12 months free cash flow generation in excess of $375 million after full realization of the expected synergies. This is an 80% increase from our last 12 months standalone free cash flow generation.

This transaction is expected to be immediately cash EPS accretive, excluding acquisition transaction costs and we expect low double-digit cash EPS accretion, including the projected full run rate net cost synergies. Now turning to Slide 13. Let me cover the cost synergies. The two companies offer a tremendous opportunity for significant synergies.

We have conducted a detailed analysis of potential cost savings, enabled by the removal of redundant costs, streamlining go-to-market initiatives and facilities optimization.

We’re projecting annual gross savings of approximately $150 million, or 2.3% of combined revenues and net cost synergies of $75 million after factoring for the combined companies’ cost-plus contract mix of approximately 50%. We expect to fully realize the savings by the end of second year.

Also, we believe that favorable revenue synergies are possible over time as a result of this transaction. Turning to capitalization and capital deployment on Slide 14.

As Tony mentioned in his remarks, this is an all-stock transaction in which we plan on repaying all of Engility’s existing debt through incremental borrowings under our existing credit facility. We have committed financing in place to refinance the debt and expect to maintain our current credit ratings.

At closing, we expect to have total pro forma debt of about $1.9 billion, equating to a net leverage of 3.0, assuming full run rate of expected net cost synergies. The pro forma leverage ratio expected to be in line with our current SAIC’s net leverage ratio today.

With projected strong pro forma annual free cash flow and a reasonable leverage profile, we expect to continue with our balanced capital deployment strategy, which includes continued payment of a quarterly dividend, mandatory debt repayment and return capital in excess of operating needs to shareholders in absence of higher return capital deployment opportunities.

With a strong balance sheet and reasonable leverage at closing, we will continue to have flexibility for future shareholder value creation. We expect to maintain an average operating cash balance in the $200 million range, on average and over time and a target and optimal capital leverage ratio of 2.5 to 3.0 times.

Now if you would turn to Slide 15 and I’ll cover our strong second quarter results. As Shane mentioned, we issued a separate press release announcing our second quarter results and that release can be found on our website.

Our second quarter revenues of approximately $1.1 billion reflect internal growth of 3.4%, as compared to the second quarter of last fiscal year. Our 4th straight quarter of revenue growth was driven by the EPA end-user services and NASA OMES programs, as well as increased orders within our supply chain portfolio.

These revenue increases were partially offset by the completion of certain contracts and other net decreases across the portfolio. Revenue growth on a year-to-date basis is 5% and attributable to the same factors that drove the second quarter.

Second quarter EBITDA was $84 million, equating to 7.5% as a percentage of revenues, driven by strong program performance and effective cost controls.

Subsequent to the end of the second quarter, we received a partial stop work order for 90 days on the AAV program, while the Marine Corps evaluates its strategic direction on Amphibious Assault Vehicles.

At the Marine Corps request, we will continue to deliver a limited number of vehicles as the future plans for the program are being evaluated and we expect a decision on the program during our third quarter. Net income for the second quarter was $49 million and diluted earnings per share was $1.13 for the quarter.

The effective tax rate for the quarter was approximately 23%, slightly above our previously communicated expected full-year rate of 20% to 22%, although we still expect our full-year tax rate to be within this range. Second quarter operating cash flow and free cash flow were a use of $12 million and $24 million, respectively.

This was an improvement over last year and we expect cash flow to be close to zero this quarter due to additional payroll and to income tax payments. Cash flow was also impacted by higher working capital usage in our platform integration business. Day sales outstanding at the end of the quarter was 58 days.

We expect our DSOs to return to the low 50s in the second-half of the fiscal year within our normal operating range. During the second quarter, we deployed $22 million of capital, consisting of $13 million in cash dividends and $9 million of term loan debt repayment.

We did not make any share repurchases during the second quarter, as we paused our repurchase program in contemplation of acquiring Engility. Before moving on, I’m pleased to report that we have concluded remediation actions and cleared our previously disclosed material weaknesses during the second quarter.

SAIC is committed to full compliance with regards to our business controls and our swift action on this issue is evidence of this commitment. Contract award activity in the second quarter led to bookings of approximately $1.5 billion, which translates to a book-to-bill of 1.4 for the quarter.

Over the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.3, which is a strong leading indicator for low single-digit internal revenue growth in fiscal year 2019 and beyond. Now let me turn to our full-year outlook.

With regards to fiscal year 2019 specifically and consistent with our previously communicated outlook for the year, we expect revenue growth and margin improvement as measured by EBITDA margin and free cash flow generation to be in line with our long-term targets and previously communicated outlook last quarter.

Our announcement today to acquire Engility is another milestone in the long, proud history of SAIC in its enduring mission to serve our country. The combination of these two great companies accelerates our long-term strategy, meaningfully impacts our long-term financial profile and significantly increases value to our shareholders.

Please turn to Slide 16 as I turn it back over to Tony..

Thanks, Charlie. Depicted are a few milestones that you can anticipate as we jointly move towards the transaction closing in SAIC’s fourth quarter. Each company will continue to operate as an individual company as they do today. We will be coordinating as appropriate on transition activities and integration planning.

You will see various SEC and regulatory filings from SAIC and Engility as we make progress in these activities. We anticipate conducting an Investor Day to be followed by shareholder votes by each company as we approach closing of the transaction. As the schedule of these events becomes available, we will notify you accordingly.

Please turn to Slide 17. As I conclude our prepared remarks, I would like to reemphasize three points in regards to our announcement today. First, this transaction combines two leading government service providers with highly complementary capabilities, customers and cultures.

Second, this compelling combination accelerates both companies’ long-term strategies, creating market subsegment scale in strategic business areas of national interest, such as the critically important areas of intelligence and space.

And last, we expect to enhance shareholder value through improved cash flow and margin profile, driven by cost synergies and increased growth from greater customer access and more competitive and differentiated solutions.

The time is ripe for this combination with an improving market environment and clear line of sight of how to achieve sustained profitable growth.

We’re very excited about our two companies becoming one compelling market force, and both companies are passionately dedicated to solving our customers’ most critical challenges and contributing to our nation’s security.

Again, thank you for joining us on a relatively short notice to discuss what we believe is a very compelling opportunity for our shareholders, our customers and our employees. Lynn, Nazzic, Charlie and I will now take your questions..

Thank you. [Operator Instructions] We’ll take our first question from Krishna Sinha from Vertical Research Partners..

Hi, thank you. So typically, when we see a large-scale integration in this space, the book-to-bill suffers for upwards of a year, maybe a little bit more than that.

Can you just comment on why you’re doing the deal here now? And what will you expect in terms of maybe your market share or your bookings as a combined company over the next 12 to 18 months as you do this integration?.

I’ll start. I believe that our book-to-bill profiles will be sustained as both companies have very strong market presence. Both carry a fairly large submit profile awaiting award, that is obviously a driver for the near-term, given our sales cycles now run still 18 to 24 months.

So this next year’s revenue profiles and book-to-bills will be largely predicated on existing submits from both firms, both of which I believe are very strong. As we looked at through due diligence the compatibility of our pipelines, there is a lot of opportunity for partnering continuing to advance the business as one.

As we think about execution, we’re very confident in the current submit profiles and the timing today, as Lynn and I’ve discussed it, is critical that we’re together now to be able to begin submitting against the market demands that are there today.

So we’re positioned at – towards what will likely be the mid or tail end of this more favorable market environment. So we want to be bidding now on the opportunities in a slightly different profile being stronger together to maximize our opportunities as we think about the end of government FY 2019 going into 2020..

And then on your hardware programs, AAV being stopped here is a little bit of a surprise.

How does this deal maybe augment your ability to go after the hardware programs like Mobile Protected Firepower that you had been outlining? And are you still committed to the – to being a hardware integrator as you have been in the recent past?.

Hi, this is Nazzic. So, yes. So the partial stop work on AAV is something that we’re working very closely with the Marine Corps to fully understand the long-term strategy there. But as it relates to either the transaction or our long-term strategy, it remains intact. This is an important part of the business for us.

It is an area that we believe will drive sustained profitable growth in the months and years to come and we will continue to focus on that and invest in that..

Thank you..

Moving on, we’ll take our next question from Sheila Kahyaoglu from Jefferies..

Good morning, everyone, and congratulations on the deal. Tony, maybe can you comment [indiscernible] on the past five years I believe, how do we think about integration, maybe the first three months after close in February 2019 in the first year post the deal closure? If you could walk us through integration steps..

Sure. I’ll give you kind of a high-level profile and we’ll cover more details on Investor Day as we have more clarity. But as we looked at the two businesses, we would expect that our ability to integrate is facilitated by strong alignment of the strategies that are already in place combined with the organizational structures that look very similar.

Our lines of business and business units are still very much organized around the defense sector, federal civilian agencies and intelligence and national security. So we see very strong alignment there, not a lot of disruption in – or, let’s say, complication. So we expect the alignment is going in very strong.

It should simplify the integration, as Lynn and I’ve discussed it. We expect that it will actually facilitate our ability to have the business operating as one on a shorter time line than perhaps in some other transactions in the marketplace. So I’m very comfortable that within that first 90 days, we’ll have a lot of that alignment in place.

We’ll look at resourcing on our investment profiles, given the fact that we’ll have increased capacity to look at our pipeline as one entity, to look at what deals we would maybe shift resources to where we’re better positioned now together. So we’ll look at those investment profiles.

I think that again will be facilitated by the direct alignment of the existing organizations, and our pipeline is blended. We did a lot of that work through due diligence and we reconciled the puts and takes between the businesses.

And we found a very favorable way of more synergies than we probably have expected in part not just between the complementary customers, but the fact that in some cases, Engility is providing or bidding on mission-type services, where we may be providing more IT type of bidding and contract execution.

So I would think those again are complementary and should project more of a full service to those customers across that mission and IT domain. I’ve talked a lot about that in the past. We want to maintain that balance, because they’ve become very blended.

And the market opportunities in areas like modernization exist on both the IT side for the enterprises that we serve, as well as on the mission systems that are critical for national security as the customers look very hard now under this new budget environment to accelerate their technology profile and regain some of that technical superiority that some believe we’ve kind of lost in the past 5 to 10 years..

Okay, thank you. And maybe just one more follow-up, if possible. You mentioned loss of activity in the space early about the transaction. You mentioned Engility provides 50% higher clearances with the addition of their workforce.

How does that kind of change the scope of your bid profile going forward, or what does it open up in terms of the market?.

It is a significant impact on SAIC’s profile to bid into other agencies. One aspect, as we’ve continued to message from the very beginning that the intelligence community has always been a target for us for M&A.

In that, it is a very tough market to grow organically if you don’t have the people, clearances and contract access in place, and you can’t get those unless you have the contract vehicle. So that Catch 22 is challenging. So M&A has been a target for us.

We saw the opportunity here that in one transaction near-term, we could actually increase our presence in the various intelligence agencies with one transaction in multiple places.

We both have very strong positions already at the NRO, but our improvement and presence at the various other three-letter agencies has dramatically improved from an SAIC perspective.

And the fact that we have this large cadre of cleared workforce at different levels of clearance and access is critical in the intelligence community to be able to bid these larger contracts in this customer traditionally and continues to look at the subject matter expertise is very broad in the key personnel and verification that you actually have the cleared resources.

They acknowledge as well the cleared workforce is limited. And unless you can actually deliver and have those assets on hand, they’re very reluctant to shift and move their capabilities to a new contractor.

So with this increase, we gain access to new intelligence agencies and it’s facilitated in large part by the broad expansion of cleared workforce at multiple levels of clearances and accesses and look forward to be able to bid larger programs as a result of that..

Thank you..

Moving on, we’ll take our next question from Edward Caso from Wells Fargo..

Good morning.

Can you go over the OCI issues that you have, please? And how much revenue will have to be moved on?.

Yes. We’ve done a lot of work on the OCI side and really see very limited conflicts. The Engility business when you think about the core intel business is very compatible with our intel business that we acquired with Scitor. So we’re not crossing boundaries in the intelligence community.

That was always been a key filter for us, given we’ve had to navigate that challenging environment. So that, in part, had limited our ability to go after certain intel portfolios. So we see very high compatibility there.

A very limited OCI at a very immaterial level, a couple of contracts that you recognize that we just have to reconcile or doing maybe one or two things for certain customers. And we recognize that in those cases where there is a potential overlap that one of the opportunities will be significantly smaller than the other.

And it will be fairly easy to navigate that through either attrition or working with the customer to move outward to other scope contracts..

I’m sorry, I just hopped on the call a few minutes late.

Did you mention what the top management structure is going to be post-deal?.

Just mentioned that I’ll continue to be the CEO, Sandy Sanderson will be the Chair and working with Nazzic and Lynn’s team. We’re working through structures of part integration on how the two organizations will blend from our capabilities’ perspective. As always, our focus is on the contract execution, mission continuity.

And so the program management level, the technical talent, their alignment to the customers is expected to be unchanged.

We really just need to spend sometime reconciling the senior management and corporate structures in part to make sure we can operate effectively and efficiently, capture the synergies appropriately and then take best practices for both enterprises with the best talent that’s available across the organization..

Again, I apologize if this was answered already.

But do you have the ability before the close to bid with a pro forma cap rate – wrap rate?.

No, I don’t believe that’s the case. We will run and bid under our independent current indirect rate structures. We won’t have the opportunity. Once we close, we’ll have a blended rate structure.

We’ll provide that information to the regulators and then we will be able to bid after close, but we will not have the ability to enter bids or submit bids in advance of close on a blended rate basis..

Great. Thank you..

Thanks, Ed..

Moving on, we’ll talk our next question from Jon Raviv from Citi..

Hey good morning, and Happy New Year to those [indiscernible]. What are some of the big things that you can bid on now that you could not do before, or maybe just those big things, just things in general? Can you give an example of the types of work that governments are looking for? Thanks..

I’m not going to talk about specific bids, Jon, on which bids exactly. I think as we go forward and I’ll probably defer that to the Investor Day. We’ll probably give you more color on existing portfolios we have in the key market subsegments that we’ve talked about.

And it’s not just the space and intel portfolios, there’s opportunities within the defense sector, as well as federal civilian. We’re looking to see how we can in fact consolidate and take advantage of capabilities and market channels that transfer in both directions between the firms.

So it’s a little premature as to say where we’re going to shift those resources. I think we’ll be better prepared under the certain market subsegments of the target of opportunities that will be at scale.

I think it will be fairly clear given the public domain of what the opportunities are out there and we will be able to draw a correlation to that, but we’re not going to talk about the specific contracts today..

Thanks. I’ll stick to one and hop back in the queue..

Moving on, we’ll take our next question from Brian Ruttenbur from Drexel Hamilton..

Yes, thank you very much. So a couple of questions. First of all, GA and KKR, the plans for a lockup. I know they’re out of their lockup.

Are they going into a new lockup with this transaction?.

No, there are no restrictions for GA or KKR as far as stock lockups or other ownership positions going forward. Proactively, they own about 7% of the pro forma company each after close. So I think that’s an area we’re able to navigate that without any lockup conditions in the agreement..

Okay. And then if I could ask another follow-up question, actually two more.

But is the – were you guys the high bid or best bid? Can you talk a little about that? You mentioned that there was competition for the Engility asset, but can you talk a little bit about the bid process?.

No, I can say that we were the best bid..

Okay, fair enough. That would be easy answer. And then last question, your long-term targets. You talk about integration with Engility, where you’re going to get to in a year to two down the road. And then you also talk about your own internal single-digit growth 10 to 20 basis point margin expansion.

Do you anticipate two years down the road to have those same kind of growth characteristics of single-digit growth with Engility and margin expansion from the – kind of the pro forma basis?.

Well, as we’ve looked at the future projections, I would say that those long-term goals and objectives are, in fact, intact. As we’ve seen, as the market dynamics move, you move a few points up or down.

I think we’re in a slightly favorable marketplace, where we can – we’ve messaged before overachieve from, say, last year’s performance on the revenue side, lot of market dynamics yet to play out. But I think in the government services sector, you look at the macro economics, we’re still in a low single-digit government marketplace.

We’ve got such a broad portfolio that it’s a good correlation. There will be exceptions, where we think again, optimistically, we can outperform that and get the required growth – requisite growth by working together. The margin profile has been something that we’ve been trying to move our baseline from spin.

This creates a substantial step function opportunities to move our margins to market median. Yet even with that, we do expect our ability to continue on modest margin expansion in that 10 to 20 basis points. Again, each year is slightly different.

But I do expect that our long-term targets of low single-digit growth and 10 to 20 basis points of margin improvement to be sustained from year two and beyond..

Okay. Thank you..

Moving on, we’ll take our next question from Cai Von Rumohr from Cowen. Cai, your line is open. You may have yourself muted..

Yes. You’ve said, you expect to achieve these synergies sooner than others. When do you expect to hit the $150 million? What do you think it will cost you to get there? And how much of the net $75 million are you likely to reinvest in terms of bid and proposal and other things? A - Charles Mathis] Hey, Cai, this is Charlie. Let me take that.

So we anticipate within two years, we’re going to achieve the full run rate cost synergies, the $75 million. So by fiscal year 2022, you will see the full annual impact. We’ve done considerable work to identify these opportunities. As we discussed, we feel confident we can execute on at least half by the end of the first year.

So that’s our target half by the end of first year. We’ve also factored in cost to achieve these synergies. It’s estimated at $75 million, 50% in year one, 50% in year two. Again, we would anticipate identifying these as one-time costs and they wouldn’t be included in the cash EPS that I’ve discussed..

Okay. And – no, that’s very helpful. And then just – so two unrelated. First, if you look at other integrations, DSOs usually have extended.

What are the key challenges you face in integrating these two companies? And what sort of accretion are we looking at, because as I do the numbers, it looks like it’s very, very modestly accretive barring revenue synergies?.

Well, the cash EPS will be accretive from year one – from day one. We expect if you factor in the full run rate cost synergies to be in the low double-digit cash EPS accretion in year one..

Okay.

And the key challenges? Are you expect you can hold the DSOs for both of the organizations?.

The companies have both the top quartile, I would say, in DSOs. Ours are a little bit better than Engility’s. We think there is opportunities there for additional cash generation if we can move Engility’s closer to our DSOs and that’s what the intent would be and that’s what we’d look to do going forward..

Terrific. Thanks so much..

Moving on, we’ll take another question from Jon Raviv from Citi..

Thanks for taking the follow-up. Tony, on the – in your prepared remarks, you mentioned something about the larger company providing some downside protection from market perturbations. Can you give us some context for what you meant by that comment? Thank you..

I think it’s really tied to the two-year budget cycle that we continue to live with, with the government.

I think there’s expectations that we’ve got the government FY 2018/2019 favorable budget, driven in large part by the drive for innovation, modernization, accelerate those technology developments that would fit well into our strategy and our current capabilities. It’s really a think through.

You think about 2022/2025 that range that most expect the current budget levels are not going to be sustained. And so that’s more austere budget environment right now all the way back to sequestration, but back to a flatter environment is more likely to occur.

And so we believe that we can take advantage of the upside that exists near-term and in turn be better positioned and stronger together in a marketplace to navigate a flatter budget environment, a one that’s slightly behind not dramatically, but by slightly lower than the current FY 2018/FY 2019 profiles that are out in the Budget Control Act and then subsequent budget deal.

Again, we’ll still need another deal 1.5 year out, sequestration is still in place. So it’s really just pointing to the fact that at – that with this diversification in our portfolio and the broad set of capabilities, it provides that downside protection from individual agency’s movement up or down if priorities shift from defense to domestic.

And so it’s really in that context, Jon, that we speak of, of being able to navigate that with higher confidence and stronger long-term performance with less impact to the overall financial business as enterprise..

Understood on that one. And then just a quick follow-up. Just the – are you seeing any difference in your customer set now? There has been some concern that the civil side is a little bit weaker, some customers are less certain there.

Anything – any intrinsic comment on there?.

No. It’s been pretty consistent. I think we get a lot of compatibility with Engility on an overall basis. The pipelines have compatibility again in the context of mission and IT.

So I think, we’re broadening kind of insights to doing more services to our current customer – what would be our current customers together and as we found in the past, creates opportunity. We’ve called large scope contracts, IDIQ contracts that provide convenient mechanisms for customers to get at those services.

So increased capabilities combined with the broad scope of the IDIQs, we think give us more tangible market access in the near-term. So I think, the fed civ side. Again, it’s really an agency-by-agency.

But I’m pleased that so far the budget side at the macro level continues to be supportive in both the national security interest, as well as federal civilian. But it’s an agency level and again, diversification helps mitigate any potential change from one particular customer..

Thank you..

Moving on, we’ll take our next question from Joe DeNardi from Stifel..

Hey, guys. This is Jon Ladewig for Joe DeNardi.

First question is focused really on getting a sense of what’s changed in the past, say, six months that made you more into go out there and make this deal? Was there something in the market? What’s pushing this drive to get larger?.

Well, first, it’s not just to get larger, but I think the market consolidations, the real positioning, we – again, the same story on – you’ve got a market environment that’s slightly improved. We’re trying to move forward with the ability to establish near-term and long-term market positions.

We’ve always talked about being biased to mid-to-larger deals as opposed to a lot of small tuck-in capabilities. So that we can take full advantage of cost synergies, operations. The maturity of those companies tends to be one that fits well within our business from an integration perspective.

So overall, I think we’re in a good position collectively as two companies coming together. I don’t see any major challenges in that and we’re going to be positioned in the marketplace.

There’s up in it – there’s a core driver, although just part of our long-term acquisition strategy, we’ve looked at many deals over the years, not a high-volume buyer, but more strategic and we found that this one fit a lot of our filters.

And then as we explored it in more detail, we were actually more and more confident that there were opportunities even beyond those we first saw from a distance.

So very pleased with our ability to partner up with Lynn and her team to bring our technical talent together and really position ourselves as market leaders in the segments that we elect to serve and provide a broad diversification portfolio to our customers and a very strong financial profile.

That in large part the punch line on getting together is increased capacity for our ability to invest in the solutions that are necessary in this time line, invest in larger contracts that support the business as a whole and allow us then with the flexibility in part through the margin profile, the cash generation, and in this case, a very manageable leverage position.

We maintain full flexibility to allow our organic growth to be very successful and driven by the solutions and the market access along with complements on the acquisition side as we look to try and continue balanced mission and IT and continue to access new customers under new contract vehicles in the future..

Then at this time, that will conclude the question-and-answer section. I’d like to turn it back over to our speakers for any additional or closing remarks..

Thank you very much for your participation this morning. We previously had announced that we would release our second quarter results and conduct a conference call this Wednesday evening. Obviously, with this morning’s announcement and release of our second quarter results, that call will not be necessary.

We appreciate your interest and look forward to continue dialogue as we progress through the transaction. This concludes today’s call..

Again, that will conclude today’s conference. We do thank you for your participation. The phones lines may now disconnect..