Good day. And welcome to the SAIC Fiscal Year 2019 Q4 and Year-End Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Shane Canestra, SAIC's Vice-President, Investor Relations. Please go ahead, sir..

Good afternoon. My name is Shane Canestra, SAIC's Vice-President of Investor Relations, and thank you for joining our fourth quarter and full fiscal year 2019 earnings call.

Joining me today to discuss our business and financial results are Tony Moraco, SAIC's Chief Executive Officer; Nazzic Keene, SAIC's Chief Operating Officer Elect; Charlie Mathis, our Chief Financial Officer, and the 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. Before I provide a few highlights of the fourth quarter and full fiscal year 2019 results I would like to take a moment to publicly welcome the approximately 7500 Engility employees, the SAIC family as a result of our acquisition of Engility in mid-January.

The management team has taken the opportunities at many sites recently to welcome Engility employee at SAIC, like all of our employees with an updated overview of the company and discuss our long term strategy Ingenuity 2025. Response from employees has been very positive.

SAIC’s full year results reflect our strongest financial performance in five years and we are better positioned than ever to accelerate our strategy to deliver sustained, profitable growth.

Nazzic and Charlie will provide details on the operational and financial results demonstrating our strong performance while managing the business through a partial government shutdown and executing the acquisition of Engility.

With a strong end to fiscal 2019 and continued confidence in the combined company's outlook, SAIC restarted its share repurchase program immediately following the close of Engility. Our Board of Directors has also significantly increased our quarterly dividend based on the financial strength of the business and our increased cash generation profile.

Turning to the market environment, we now have full federal government fiscal year 2019 budget appropriations. We continue to operate in a favorable environment with customers performing their missions with increased funding levels compared to past years.

While the President and Congress work on government fiscal year 2020 budgets and the recently issued request reflects potential funding shifts, SAIC’s balance and diversified portfolio provide strong market access to maintain stability, should shifts and individual agency funding profiles occur.

Our customers are investing confidently in our operations in an area that SAIC has strategically positioned itself such as IT modernization, Cybersecurity, Intelligence, Space Systems, Data Analytics and training and readiness.

Engility acquisition strengthens our competitive stance in many areas, but most significantly in the space domain, a rapidly evolving market with increased government investment.

With this backdrop of a favorable budget environment, and SAIC’s stronger competitive position, I announce my decision to retire as Chief Executive Officer effective July 31st of this year and the board has elected Nazzic to succeed me.

I'm extremely proud of what SAIC has accomplished over the past five and half years and I'm excited about what the future holds.

Having worked alongside Nazzic for several years, I have the utmost confidence of her ability to accelerate SAICs mission focused strategy and continued to deliver outstanding value for our customers, employees and shareholders. Nazzic over to you for discussion of our business operations..

Thank you, Tony. I am extremely humbled and honored by Tony and the Board's confidence to lead this great company. I'm excited about the opportunities for even greater success as we realize our newly strengthened scale and breadth of capabilities.

With our exceptional leadership team, and a deep bench of talent, SAIC is well positioned to be the federal government's premier technology integrator, lead the markets we choose to serve, and make a meaningful difference for all our stakeholders.

While I am incredibly pleased and excited to take the helm, I'm also somewhat saddened that I will no longer be working day to day with Tony as he has been a great mentor and friend. Over the next few months, Tony and I will work together for an effective and seamless transition of CEO responsibilities.

Our partnership and collaboration is best exemplified in our long term strategy Ingenuity 2025 in the four enduring key messages provided at our January Investor Day. These are core to the strategy and underpin our approach to shareholder value creation.

First, SAIC is repositioned as a stronger government technology integrator poised to capitalize on favorable market dynamics and accelerate our growth. Second, with additional market access and technical talent, we have increased our capacity and leadership position in market segments in which we operate.

Third, we are confident in our strategy to drive growth based on current contracts and growth opportunities that are aligned with areas of strategic national importance. And last, SAIC’s significant increase in cash flow and disciplined capital deployment creates value for our shareholders.

These four strategic themes will drive our ability to deliver value to all our stakeholders going forward. Now moving on the results for the quarter, contract award activity in the fourth quarter led to net bookings of $917 million but does not include approximately $2 billion of single-award IDIQ contract ceiling value.

Fourth quarter net bookings were comprised of a wide variety of contract awards and contract modifications, including a recompete award of a classified contract valued in excess of $230 million to provide systems engineering and integration leveraging our extensive capabilities and solutions in Digital Engineering.

SAIC was also awarded several notable IDIQ contracts during the quarter to ensure continuation of existing revenues and provide for revenue growth through expanded scope or new business opportunities.

Of note, our two single award IDIQ contracts that de-risk the revenue profile through recompete awards and provide increased confidence in our ability to accelerate growth through new task orders. First, SAIC was successful in our recompete award of our Defense Logistics Agency's Tire's program in our supply chain portfolio.

Under the single award, IDIQ contract valued up to $1.7 billion over 10 years, SAIC will continue to act as lead supply chain manager and integrator for DLA’s Tire delivery program. I should also note that this award provides expanded scope to support the U.S. Navy, previously not supported on the predecessor contract.

Second, the US Air Force Space and Missile Command awarded SAIC through our recent acquisition of Engility a $655 million single award IDIQ contract to provide systems engineering, planning integration services.

This new business win is a great proof point of our thesis in acquiring Engility and expanding our presence in the space and intelligence community. Now this award was subsequently protested by a competitor and we expect resolution in the June timeframe.

Additionally, multiple award IDIQ contracts are also important to our business as they often provide flexibility for a broad range of customers to obtain SAIC capabilities. In the recompete category, we were successful in retaining our prime position on the U.S.

Navy SeaPort Next Generation IDIQ contract, the follow on contract to the successful SeaPort-e contract. SAIC is the Navy's leading provider of high end engineering and other technical services on SeaPort-e.

And finally, SAIC was awarded a prime position on the Information Technology Enterprise Solutions, three services or ITES-3S contract to provide the full range of IT services and solutions to the federal government.

At the end of the fourth quarter, SAIC’s total contract backlog stood at approximately $14 billion with funded contract backlog of $3 billion.

The estimated value of SAIC’s submitted proposals awaiting award at the end of the fourth quarter was approximately $13 billion principally impacted in a positive manner by the award of several IDIQ contracts I just mentioned.

With an improving market outlook, and 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 utilize a disciplined approach to our investment stand as we pursue a strong pipeline of business opportunities. Now before turning the call over to Charlie.

I'd like to give you a brief update on the integration of the Engility acquisition. I'm very pleased to report that the integration of Engility is on schedule and on budget. As we anticipated at our January Investor Day, we successfully achieved 85% of the year one cost synergies of $38 million upon close on January 14th.

The remainder of our synergy targets have been identified and are well on track. As a result, we've accelerated a majority of the year one cost to achieve into the fourth quarter of fiscal 2019 providing even more confidence in the margin improvement in fiscal year 2020.

I will update you as we progress through the year, but I'm very pleased with our progress to date. Charlie, over to you for our financial results..

Thank you, Nazzic and good afternoon everyone. During my remarks I will primarily focus on SAIC’s fourth quarter performance with references to full year results in specific areas.

Our fourth quarter revenues of approximately $1.2 billion reflect growth of 6% as compared to the fourth quarter of last fiscal year primarily due to revenues associated with the Engility acquisition and new contracts supporting IT modernization.

Excluding the impact of the three weeks of the Engility acquisition and the impact of six weeks of partial government shutdown, fourth quarter revenues contracted year-over-year by 2% driven by non-recurring increase supply chain materials last year and lower fixed price vehicle production volume and our platform integration business.

Full fiscal year 2019 revenue growth excluding revenues from acquisition and the impact of the government shutdown was approximately 3%. Fourth quarter adjusted EBITDA was $95 million, a $12 million increase from the prior year. Adjusted EBITDA margin equated to 8% after adjusting for $72 million of acquisition and integration cost.

Fourth quarter margin performance was strong due to program performance and continued cost discipline. For the full fiscal year, adjusted EBITDA margin was 7.6% 60 basis points above our prior fiscal year and higher than our communicated expectation of 20 basis points to 40 basis points due to the very strong fourth quarter.

The three weeks of Engility acquisition contributed approximately 10 basis points to the full year margin. Full year acquisition and integration cost were $86 million in line with SAIC acquisition and integration cost $54 million and approximately $32 million related to Engility.

Because of our successful day one execution of our integration plan, in the fourth quarter of fiscal year 2019, we are essentially ahead of schedule and the spending needed to obtain our net cost synergy target of $75 million.

We continue to expect $38 million of integration cost in fiscal 2020 at which point we will be mostly done with integration costs this year. The significance of this relates to fiscal 2021 cash flow, which is expected to be about $30 million higher than previously planned due to this acceleration.

Net income for the fourth quarter was a negative $9 million and diluted earnings per share was a negative $0.20 for the quarter, inclusive of the fourth quarter acquisition and integration cost of $72 million. Excluding acquisition and integration cost as well as amortization of intangibles, our adjusted diluted earnings per share was $1.17.

One time favorable tax treatment from the Engility acquisition contributed about $0.17 to EPS. Our full year effective tax rate was approximately 19% lower than our previous expectation of 20% to 22% due to the mentioned one time Engility acquisition impact. Turning to free cash flow generation.

I am pleased to report that SAIC as a standalone achieved our previously communicated expectation of $250 million of free cash flow after adjusting for the impact of the acquisition and integration cost and the impact of partial government shutdown.

The shutdown negatively impacted cash collections at the end of the fiscal year 2019 by $25 million dollars and deferred their collections into fiscal 2020. We ended the fourth quarter with Day sales outstanding of 58 days, an improvement of one day from the end of the third quarter.

The fiscal year ended with a cash balance of $237 million slightly above our updated average operating cash balance target of $200 million. We begin fiscal year 2020 with a strong cash balance to continue our consistent capital allocation strategy.

Immediately following the close of the Engility acquisition, SAIC resumed its share repurchase program and over the 13 trading days until the end of the quarter deployed $8 million of capital by repurchasing 119,000 shares.

The resumption of the share repurchase program so quickly after the close of a significant acquisition demonstrates our confidence in the cash generation profile of the combined company and our desire to return excess capital to shareholders.

Included in our press release today, we have announced that our Board of Directors has increased their share repurchase authorization program to 16.4 million shares, an increase of 4.6 million shares, bringing the total amount remaining for repurchase to 6.5 million shares giving us even greater capacity to return capital to shareholders.

In addition, we also announced today that their board of directors has approved an increase to SAIC’s quarterly dividend from $0.31 a share to $0.37 a share, a significant increase of approximately 20%.

This is another demonstration of the confidence in the acquisition, the long term sustainable cash generation profile of the combined companies and our desire to return excess capital to shareholders following a successful acquisition. This increased dividend will be payable on April 26 to shareholders of record on April 12.

Turning to the balance sheet, debt at the end of the fiscal year stood at approximately $2.1 billion.

This increase reflects the approximate $1.1 billion Term loan A incremental borrowing necessary to close the acquisition of Engility to fund the transaction and integration expenses and for general corporate purposes during the partial government shutdown.

After the end of fourth quarter with closing complete and normal customer payments resumed, we voluntarily repaid debt of approximately $150 million with our excess cash bringing our debt today to approximately $1.9 billion. We anticipate that our year-end leverage will be consistent with the leverage profile presented at our January Investor Day.

I should note this voluntary repayment does not impact our previously communicated expectation of deployable cash in fiscal 2020 or our capital deployment strategy. We remain very confident in our forecast of deployable cash available for disciplined capital allocation for the next several years.

Now turning to our forward outlook for fiscal year 2020. At our January 7th Investor Day, we communicated our financial expectations for fiscal year 2020 and a change from our historical practice.

I presented ranges for revenue, adjusted EBITDA margin and free cash flow generation target, as we believe that it was prudent to provide quantifiable expectations in light of a significant acquisition. Our expectations are unchanged for the revenue and adjusted EBITDA margin presented then.

In terms of an adjusted EBITDA margin profile through fiscal year 2020, we believe that margins will be lower in the first half and stronger in the second half, consistent with our recent history.

Our free cash flow target for fiscal year 2020 is now increased from $400 million to $425 million reflecting the $25 million of deferred customer payments in fiscal 2020 as a result of the partial government shutdown. Our full year effective tax rate is expected to be 20% to 25%.

The tax assets acquired through the Engility acquisition and the acceleration of their use result in an expected cash tax rate of 13% to 15%. SAIC finished fiscal year 2019 with great momentum and we are off to a strong start in fiscal 2020.

I have confidence in meeting the short and long term outlook that I provided at our Investor Day, and I'm excited about the opportunities for shareholder value creation that lie before us. Tony, back to you for concluding remarks..

Thanks, Charlie. I would like to announce that our annual shareholder meeting will take place on June 7. Similar to last year, we will be conducting a virtual shareholder meeting, whereby shareholders will participate online. Instructions on how to participate virtually will be included with the proxy voting ballot, as well as on our Investor website.

I am very excited for what lies ahead for the company. The combination of the favorable market environment, a newly positioned company and the value creation opportunity that we have creates good timing for a leadership transition.

I have every confidence in Nazzic and the leadership team to accelerate the execution of SAIC strategy, and guide SAIC into the next chapter of delivering outstanding value for our customers, employees and shareholders. Operator, we are now ready to take your questions..

Thank you. [Operator Instructions] We'll go first to Edward Caso with Wells Fargo..

Hi, good evening Tony. Great run here. Enjoy the fishing. Maybe a more macro question.

How difficult is it for you to get the people that you need? How sensitive are you to the greater DC market? And how much of a headwind would that be to meeting your goals in 2020?.

Well let me start. I think that the talent base is critical to our business, both retention and attracting. We have looked through across the U.S. really to diversify the geographic components. We've mentioned in the past that I think our customers see that same talent challenge, and so are more open to a virtual workforce.

So with our Tennessee tax relationship and gateway in Cookeville, one example. There's a couple others. But top of mind for us is to really draw that talent in. Mission, I think still is a critical factor as well as the culture of the company. I think our added scale provides a lot of career opportunities for folks to actually join, to join us.

But it has its challenges and we're going to try and differentiate. Now we've been focused on that same thing going forward. And now it’s important to the enterprise, but I think we can draw the talent in, and retain the ones we need and that will drive the growth of the business going forward..

My other question is on the awards and the backlog. Can you dissect them between the Engility and legacy SAIC, particularly the backlog numbers? Thanks..

Not really on a backlog to drilling on a trend, dissect that if you will. I think we've got a strong integrated backlog. It's consistent with our diligence analysis today. We start the year I think with a very strong backlog, consistent with what we've had in the past, translate it to this scale.

And so I think we're very proud of how we've seen the current pipeline and contract baseline come together, as an enterprise, and then we'll see how it plays out. But the backlog is in a pretty strong position going forward. I don’t want to dissect that thing..

Hey, yes this is Shane Canestra. Just thought that I’d add that the Engility contribution to backlog was $3.6 billion in the quarter. You'll see that in our 10-K I believe. If I was here shortly, but the contribution just adding to backlog is $3.6 billion..

Right. Thanks, all the best, Tony..

Thanks, Ed..

And we'll go next to Tobey Sommer with SunTrust..

Thank you. I was wondering if you could talk to us little bit more about something you mentioned at the Investor Day at the beginning of the year in about how you had gone to great lengths to – well, complying with all rules to get ready to make joint bids as soon as possible.

And you could describe that process? And how you think it's gone as you think about trying to queue up sales and backlog in coming quarters?.

Yes. This is Nazzic. So, I'd certainly build on little bit of what we shared in January. So, as anticipated we were able to really hit the ground running upon close. We have done some work prior to close using a third party to kind of protect the confidentiality pretty close of the pipeline.

And so, as a result to that we had great visibility when we’re able to close the transaction and to what was in the pipeline, where it's complementary [Indiscernible] overlap. So we were able to very quickly come out of shots, navigate that and then make quick decisions with that data versus having to start from scratch.

And as a result to that and as a result of the work we’ve done in integration really standing of the organization. So we’re ready to go on day one. The sales organization, the business development team, the capture team were able to really focus on going to market versus trying to go through and navigate the pipeline analysis.

So it’s proved to be true and really good position and we are in the markets as we sit today pursuing opportunities consistent with our strategy..

Thanks.

How meaningful does growing the Air Force with the Tires program, what does that mean in terms of incremental opportunity there?.

Well, the tires program is -- has partially competed and then also have some of the uplift for the Navy portfolio. And certainly will – that’s protracting as we go. Its about 15% to 20% uplift from the legacy program, so that will drive revenue growth flows as well. I believe that you’re reporting to Air Force EDIS program.

Is that one you’re referring to?.

Thank you..

Yes. So that is one, I’ve mentioned that we were awarded not too long ago. It is under process at this point and the process should get resolved within the normal 100 day timeframe, but that is new business for us, so that will drive new revenues once that's adjudicated..

Thank you very much, Tony. Good luck..

Thanks Tob..

And we’ll go next to Cai Von Rumohr with Cowen & Company..

Yes. Thank you very much and congratulations, good quarter.

Maybe sort of update us on what percent of your revenues this year are up from re-compete? Give us some color you kind of exited the year with the government shutdown and sort of some color of the booking – book-to-bill cadence as we go through the year? And maybe where you think the range of where book-to-bill might be? Thank you..

Cai, this is Nazzic. So, I think to the first question, just to give some color on the book-to-bill. So, we ended the year really right around where we usually end the year. So it tends to be one of our softer quarters due to the holidays and how it's resolved. And so we didn’t see anything of concern there.

We did have a little bit of headroom with government shutdowns, so there was some impact. It was bit hard to measure, but we’ve seen a little bit of the uptick. Couple of other things that I’ll point out is really start book-to-bill, and I know you just have this conversation before.

We had well in excess of $4 billion of single award, IDIQ awarded last year for us well and we don’t tend to comp those against our book to bill. But that is in excess of double of what we have seen in the years past. So, that gives us revenue access, profitability access and drive de-risks the revenue profile going forward.

And I think you had one more and I’m trying to remember..

Recompete..

The recompete. Thank you very much. Yes. So, the volume of this year we’re holding it around 13% of our business is subject to re-compete. So again, relatively light for us, which allow us to focus greater attention, greater investments and the growth opportunities for us going forward.

Did I get all your questions?.

You did. That’s terrific. So, just to switch to the margins, sort of you spend more on acquisition integration, you got that out of way sooner.

Does that give us any opportunity that your adjusted EBITDA margins might be above the eight/one [ph] to eight/four [ph] range you kind of laid out for fiscal 2020?.

Cai, hey, this is Charlie. So it really does not impact the adjusted EBITDA, because we’re always adjusting out the integration cost to achieve in the years. And unadjusted EBITDA number would impact? I think the more significant impact that was on the free cash flow.

I think you’d asked me in the past, we’ve laid out at Investor Day this three-year target starting at $400 million gone up to $500 million with a sequence of 400 to 450 to 500 something like that.

So, now we would expect that to be actually 425 in first-year, 480 in the second year and 500 million in the third year just because we have the cash outflows for the cost to achieve earlier than expected. So that's the really significant impacts from the integration standpoint..

Terrific. Thank you very much..

And we’ll go next to Jon Raviv with Citi..

Hey, thanks everyone and congratulations to Tony and Nazzic. Nazzic, can you talk – I think everyone always ask this question when sort of change is announced. But could you talk a little bit about what your goals are? It sounds like there’s might be a lot that stays the same given that you had a long partnership with Tony here.

But also what change is your mind?.

Yes. So thanks for the questions. And I think to your point, the reality is that Tony and I have been partner through the last several years and have formed strategy that shaped the company and got us to where we are.

And so with that my objective is to keep all the goodness that we have to-date, keep that momentum, but with the on-boarding and the acquisition of Engility and the repositioning gives us in the market certainly look to accelerated a few areas and build upon that.

As I look forward, the priorities are certainly consistent with prior ones that areas of which will continue to put maybe little more focus. So, Tony touched briefly on the talent equation and so we want to continue to really work and be that career choice for the top talent in the industry across the nation.

Continue our journey to become and maintain the position of premier technology integrator and solution oriented organization providing solutions to our customers as well. Continue and accelerate our ability to bring the best of commercial technologies to bear and given our greater access to the areas of space.

As an example, we have even greater opportunity to do that. And then look to balance all that and we continue to drive shareholder value in consistent with what we’ve done in years past. But again, as bigger scale, a bigger organization, more access to cash and the cash flow that Charlie touches on, we have a greater platform to build on that.

So, I think it’s certainly a combination of keeping the business that got us to where we are under Tony’s leadership and accelerating where we have the opportunity based on our newly strengthened company..

Got it. Thank you. And then on the – and Charlie you mentioned some of those free – reminder of the free cash flow targets which we know on those so well from the Investor Day.

But at the same time probably Nazzic, Tony, you do sounds like confident in the process for accelerating growth? But can you just remind us of what growth is assumed in those targets? And what opportunities for little bit of upside in those targets beyond the changes in the spending across to achieve just the real organic upside based on things like DLA contract being bigger than you anticipated et cetera et cetera?.

When we spoke at the Investor Day and we outlined the three-year target, we really had low single digit revenue growth with the 3% CAGR. I think was what we were projecting as far as topline growth goes. And then we gave quantifiable ranges for 2020 on revenue and on the margins.

And one of the significance of the outlook is that it really comes up – and now we’re saying that this guidance that we gave is consistent and this comes after very detailed and fully integrated annual operating plan process. At the Investor Day we didn't have this. We had to close.

And we’re not able to work closely with both teams who come up with this fully integrated plan. So, I’m very pleased that the outlook is consistent two and a half months later gives us greater confidence. We’ve acted on that confidence. We’ve increase the dividend.

Looking to put other returns to shareholder capital employees, as well as meeting of financial commitments. So, we’re much more confident in that after going to that planning process than we were two and a half months ago..

The other couple of points that I’ll just make is, Jon, we talked about the $13 million of proposals submitted awaiting awards. The good news is about half of that is new business. And so – so we’ve got good visibility and good opportunity to drive growth through new business admits.

And then just reinforce that one of the great values in the Engility’s acquisition is now the combined company that access to lot of custom based and able to bring solutions to bear. So, we are really focused on the revenue synergy story, ensuring that we bring the best of SAIC solutions to the Engility’s customers, vice versa.

And so driving that revenue synergy discipline over the course of the next several months will also give us opportunity to drive growth..

Jon, that’s a question on the talent, given again the reposition with the higher cleared workforce really allows us with based on talking customers about proven your ability to execute, manage the risk, broader based with technology experts, boarder based that are very clear and that will facility additional growth for the cross-sell of SAIC capability into legacy, Engility channels.

So I think that -- it’s a broader people dimension that are presence to a broader set of customers always facilitate opportunities for further growth as we go to market together..

Great. Thanks guys..

Thanks Jon..

And we’ll go next to Sheila Kahyaoglu with Jefferies..

Hi. Thank you. Congratulations Tony at your retirement and Nazzic on your promotion. I guess just on the last point, what are you finding as the biggest advantage going to market as a combined organization. Is it that the cleared workforce? Is that a growing pipeline due to the connection? How do we think about that? Thank you..

Yes. I think it’s all of those things. So certainly Tony's touched on the workforce and the cleared workforce is simply important to our business, and so having greater capacity there. And then also the greater the capacity, the more you deploy referrals to more access to the broader talent based in particular areas. So I certainly think that is one.

I touched on the other and that is although we were very complementary company, the access that the Egility portfolio brought to Intel community complemented the access that we had in Intel. So, we broaden the portfolio customers that we can go and serve. And I think that will drive growth.

And then coming together, the two organizations and particular with state domain which is an area that is getting certainly a tremendous amount of national attention, it’s a national priority and will drive incremental funding over the month and years to come, gives us a terrific position as a leader in that domain to drive growth opportunity to serve our country.

So those are good some examples, but we’re very confident that we did a very -- I think very good job in getting the integration plan well, so that when we close in January we were up in the market and we were out pursuing business and serving our customers. So, I think those are some of the proof points that come to mind..

And Sheila, I'd add that the scale and yet focus on the capability set we’ve really increased our critical mass and well aligned to what we sees ongoing customer demand in the data analytics that leads to the machine learning, then artificial intelligence type of markets.

Our activities in cloud and cyber, continue to broad enterprise is our key modernization that ask you telling across the government. And then the train simulation components, I think those domains provide focus for us on investments that will increase both our increased capacity on the people side as well as on technology tools with our partners.

And I think that puts us in the differentiated position as we look to grow going forward..

Sure. Thanks you both. And then Charlie, one for you and we’ve touched upon this already, but 60 days, two and a half months of events you’re already raising the 400 million guide for free cash flow.

How do you kind of think about the biggest risk? I mean the topline doesn’t seem like a risk, neither do the margins where you maybe with working capital, how do you think about that? Are the ERP systems integrated? Are there any measure CapEx assumptions there? Maybe can you just talk about the biggest once again to that given your raising so early? Thank you..

Well, always the biggest risk we have on the cash flow is just timing issues of in the past certainly we’re focus on the cash generation. And we’re focus on the DSOs. Our DSO reported 58 days. We’re looking to improve in that and improve in the cash flow target.

So again, we went through a very detailed review and process and with the fully integrated team. So I’m very confident that we’re able to meet and excess the $425 million of free cash flow and with the longer term targets that we talked about.

And I think the reason that we look to increase the dividend and look to have more capacity for the share repurchases because of this confident that we see in the free cash flow and the generation that the combination of the companies and how we can – you know, as I mentioned in past we had optionality about 300 million free cash flow in 2020 that we needed to decide what to do with.

So part of that was do increase the dividend and give us more capacity for share repurchases if we chose to do that..

Great. Thank you..

Thank you..

[Operator Instructions]. And we’ll go next to Krishna Sinha with Vertical Research Partners..

Hi. Thanks. Maybe one for Charlie. So I'm just looking at your cash flow guidance. You guided to -- for fiscal year 2019, you guided to $200 million of free cash flow, excluding the $50 million of acquisition and integration costs. And you ended up at $156 million.

You already explained that $25 million of that shortfall is from the shutdown, which you're going to recover in fiscal year 2020, and that's why the new guidance is $425 million. But you also said that you pull forward some integration costs.

So shouldn't then the free cash flow for fiscal year 2020 be even higher than [Indiscernible] should it be $450 million or more? But can you just explain where that sort of $25 million of free cash flow went in between the fiscal year 2019 and fiscal year 2020 guidance?.

Yes. So let me just clarify. Let me go from the reported numbers of free cash flow, the $156 million.

So, we had cash outflows related to the acquisition and integration, part of which was pulled forward of 70 million and the government shutdown was 25 million, so this is how we got back to the $250 million of free cash flow that's the base -- that was the baseline.

And then from there it was a combination of how you get this $400 million was the amount of the Engility free cash flow contribution, the lower interest savings and the lower tax cash savings is how you got to the $400 million, so that’s our consistent. The one component we’ve added was the 25 million to get to the 425.

We still have -- in fiscal year 2020; we still have $38 million of cost outflow, cash outflow in the cost to achieve the synergy, so that's why it’s not higher, which is being pulled in from 2021..

Okay. But the original outlook, I think, for fiscal year 2020 was also $38 million of integration, right? So really, fiscal year 2021, we'll see less integration than what you'd expected.

Is that fair?.

Exactly right. Yes. That’s why I mentioned that, that’s where you'll see cash flow impact in 2021..

Okay. But I guess, just going back to that integration pull forward, you said roughly $50 million was your initial expectation for that in fiscal year 2019. You actually came in at near $80 million.

So that $30 million delta, I guess, that's...?.

Yes. Let me explain. So there was $86 million acquisition integration. That was a booked cost. That wasn't cash. Cash was of $70 million, about – and that included the acquisition as well as integration costs. Of that $70 million about $55 million was integration and then that was $35 million pulling forward on the cash outflow that we pulled forward..

Okay, great. Yes, yes, that works. And then on your book-to-bill or bookings, obviously you already talked about what Engility or SAIC core bookings were.

But can you just talk about whether you experienced any key bookings or consolidation of bids as a result of the integration?.

So the one thing I would say on this and its consistent with the Investor Day is these synergies revenue, these synergies that we anticipated about $100 million and that’s consistent for 2020 as we laid out at the Investor Day..

On booking side we didn’t see any anomalies across any dynamics favored bookings, de-bookings..

Got you. Got you. Great. Thank you guys..

And we’ll go next to Joe DeNardi with Stifel..

Yes. Good evening everybody. Charlie, even with the dividend increase it still seems like the next few years you’re going to have a lot of excess cash remaining kind of after the dividend and debt paydowns.

So, can you just talk about priority of that between I guess accelerating the deleveraging, accelerating the buyback or kind of storing of cash for another deal? Thank you..

Yes. So, it's a good problem to have, obviously with the cash generation profile that we have. The excess cash, we said that we would return that the shareholders if there's not a strategic M&A use for that. We’re continuing to evaluate and always evaluate pipeline and other alternatives, but that is the priority.

With the mandatory debt payments that we have, if you look at the leverage profile that are laid out, we should be under three times on a book to bases by 2021 that's within their targeted range. So we don’t look to really deleverage a lot. And in the next years we feel like we’re in a good leverage situation.

So that would be the priorities of looking at again strategic M&A capabilities and other gaps in the portfolio and absence [ph] that we will look to return the access cash to shareholders..

Okay. And then, Nazzic, just your kind of preference for M&A going forward, I think market's reaction to the Engility deal is little bit mixed, but you all feel obviously very good about the integration so far and the free cash flow story of the next year.

So, does your experience with Engility thus far make you more or less interested in being a buyer again in the future? Thank you..

Sure. So you know, so far so good with the Engility acquisition, but its early days and so we effectively manage it and watch it and remain confident in the two companies coming together. And with that our posture is such and relatively unchanged. We will – we certainly will look to M&A as a factor in our growth, but we’re going to be very selective.

It’s going to be areas that [Indiscernible] strategy, give us market access, give us competencies or capabilities or solutions that we can bring to bear. So I don’t know that our posture has changed dramatically one way or other, but it is something that will remain on the radar. We’ll keep our eye open. We’ll be proactive where it makes sense.

But again, it would that -- I think we’ll remain pretty selective ensuring that we do right deals at right time..

Thank you very much..

And we’ll go next to Josh Sullivan with Seaport Global..

Hi. Good evening..

Hi. Josh..

With the budget request out and thinking about the initial strategy for the time with Engility, were there any surprises in the budget received either more or less funding than you guys originally expected?.

No. I think, still early in the game of some request to reality, but overall no major swings. I think we’ll still see the high demand there that we positioned for. Obviously, we've been focused a lot on Engility deals relating to the space and space system, so I think there’s direct alignment on that with the space force.

Its aligned under Air Force at this momentum and the space development agencies and other elements around space and mission capabilities, the missile-defense and hypersonic and the like. I think we’re well-positioned across that whole spectrum to the budget numbers there.

We’d expect the diversity we have with Defense with Intel to further go forward as for customer seek monetization and higher impacts to deal with global threats. And then [Indiscernible] agencies really good.

To be determined, I think you saw and heard lot of the rhetoric when the administration first got started, frankly with the next Congress I don't see a lot of shifts dramatically one way or the other. It’s kind of counterbalance. So I translate that actually fairly stable budget environment.

There will be some shifts but with diversification, we can file the money to the contract vehicles that we have across the federal government. So I don’t see ongoing rhetoric moving the needle too much nor our outlook changing as a result as we had in this year and reconcile of budget request of probably get into the next 2020..

Thanks.

And then just curious if you seen an ability to drive any fixed price of contracts at this point either through Engility gives you the ability to do that or if customers are any more receptive at this point?.

Well, this is Nazzic. So, I mean, that continues to be priority and there’s good solution that we bring to bear that can lend itself the fixed price. And we are seeing certainly more discussion about it as the customers think about how to acquire more outcomes versus just the traditional mechanism to solving their challenges.

So we’re seeing more conversations. We are bringing forth some ideas and solutions where it makes sense.

We haven’t seen a dramatic change in their buying behavior, but we continue to have those conversations and some times it’s the conversation really at the government side between the contract organization and the program side help figure out the best way to acquire. So we’re consciously optimistic. It is something we’ll focused on.

But I don’t think we’ve seen a huge shift to-date..

Thank you. And congrats..

Thank you..

We’ll go next to see Jon Raviv with Citi..

Hey, thanks for taking the follow-up. On the de-risking point as you brought the two organizations together. I certainly understand that you hit the ground running on the things you want to pursue, but often times the issues encountered are balls dropped, so to speak.

So what are you doing to address sorts of risk? What sorts of things are you watching? And how do you intent to avoid those sorts of outcomes?.

Yes. Jon, I’ll address it couple of ways. So, as I mentioned on the organizational side, we outline the organization. We made the people decisions and we were ready to kind of standup the combined organization on day one.

And since we are organized by portfolio and within portfolio by account there’s very clear visibility to the accounts that coming together that both company serve on the portfolio they count, the revenue profile, the profit profile and certainly the pipeline.

And so, with the way that we’re organized and way we go to market its very clear where opportunities lies or programs lies and there’s minimal risk of things getting fallen between the crack because there’s just clear lines responsibility. So I feel confident that we have full visibility on the program side.

We have full visibility on the pipeline side. And because of the work we did and the pipeline analysis that we’re able to continue to prosecute [ph] pipeline in a very aggressive manner close.

So that gives me good confidence just knowing that we have the organization, the team and those decisions were made and we’re not trying to navigate that workflows.

And then we also put together the workflows, the work streams around pipeline management immediately upon close, and we have a very pretty regular systematic ways of walking through and understanding what’s on drive.

So, I feel confident that the teams have their responsibilities and accountability, and we got the visibility needed to ensure that those don’t falls to the crack.

Does that help?.

Yes. Thank you, Nazzic..

Yes, sure..

At this time I would like to turn the call back over to Shane Canestra for any additional or closing remarks..

Thank you very much for your participation in SAIC’s fourth quarter and fourth fiscal year 2019 earnings call. This concludes the call and we thank you for your continued interest in SAIC..

That does conclude today's conference. We thank you for your participation..