SAIC Q4 Earnings Conference Call: Full Transcript

Operator: Good day and welcome to the SAIC Fiscal Year 2016 Quarter 4 and Year-End Conference Call. Today's conference is being recorded. At this time, I will turn the conference over to Paul Levi, Investor Relations. Please go ahead. Paul Levi: Investor Relations: Good morning and thank you for joining us for SAIC's fourth quarter and fiscal year-end 2016 earnings call. This morning we issued our earnings release , and joining me today to discuss our business and financial results are Tony Moraco, our CEO; and John Hartley, our CFO. Today's call is being webcast at investors.saic.com where you'll also find the earnings release and supplemental financial presentation slides to be utilized in conjunction with today's call. Both of these documents, in addition to our Form 10-K to be filed soon, should be utilized in evaluating our results and outlook along with the information provided on today's call. Please note 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, these statements represent our views as of today and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. It is now my pleasure to introduce our CEO, Tony Moraco. Anthony J. Moraco: Chief Executive Officer: Thank you, Paul and good morning. SAIC's fourth quarter and full fiscal year 2016 results demonstrate a growing momentum in the execution of our strategy and delivering our shareholder value proposition. Fourth quarter revenue of approximately $1.1 billion reflects 13% total growth and 1% internal revenue contraction as compared to the prior year quarter. Full fiscal year 2016 revenue of approximately $4.3 billion reflects 12% total growth and internal revenue was essentially flat over the prior year. John will discuss the fourth quarter financials in more detail. The fourth quarter adjusted EBITDA margin was 7.5% and for fiscal year Adjusted EBITDA margin was 7.2%, excluding acquisition and integration related costs. This represents a 40 basis points increase from the prior year, consistent with our long-term profitability improvement targets. Adjusted diluted earnings per share was $0.74 for the quarter and $2.85 for the year. A particularly strong fourth quarter operating cash flow of $108 million due to strong year-end collections resulted in full year operating cash flow of $226 million. This demonstrates our continued ability to generate cash flow for shareholder value creation. These financial results enabled by strong contract performance and execution of our business strategy reflect a building momentum that SAIC is carrying into fiscal year 2017. Our primary customer, the U.S. Federal Government, is operating in a relatively stable environment and recent federal budget clarity provides opportunity for modest growth of government spending in IT, in mission-critical areas where SAIC has proven capabilities. The demand for the services and solutions SAIC provides continue to be strong as demonstrated by our significant amount of submitted proposals which further supports our long-term revenue growth outlook. Our confidence in revenue growth is further bolstered by significant new business awards in FY '16 such as NASA Live's GSA GEO, FAA controller training and successes in our vehicle integration business. Award activity of $855 million in the fourth quarter translates to a book-to-bill of 0.8, in line with our seasonal bookings profile and historical fourth quarters. The quarter included many small awards as well as contract modifications and extensions and a significant program award of the United States Marine Corp. Amphibious Combat Vehicle or ACV program. This program contributed to our bookings in the fourth quarter, following GAO's recent protest decision upholding the ACV contract award to SAIC. As a reminder, this is a new program for the Marine Corp and by bringing to bear a market disrupting business model, SAIC was success on winning the ACV award against traditional platform manufacturers. This $122 million fixed price award to produce 13 prototype amphibious vehicles is expected to be completed by September of 2017. If down-selected in the second phase for additional vehicle production, the full value of this contract could be over $1 billion. Additionally, our vehicle integration business recently achieved a significant milestone, with a delivery of the first of 10 Amphibious Assault Vehicle survivability upgrades or AAV ahead of schedule to the Marine Corp. These two programs are a continuance of our proud history of vehicle integration in support of our war fighters and amplified success or innovations in this business area. During the quarter, we're also successful with a $485 million award on our NASA EAST program recompete. There was protest shortly after award and we expect resolution in the second quarter as we continue serving NASA on the current contract. SAIC continued to be successful with the award of IDIQ contracts in the fourth quarter that provide valuable market access and opportunities for business expansion. In a protect win, we are awarded a position on the US Army Chemical and Biological Defense IDIQ contract where we will compete for task orders to assist the joint program executive office for chemical and biological defense. After the end of the quarter, we were awarded a $93 million task order under the GSA OASIS IDIQ contract by the US Army A Aaviation & Missile Research, Development, Engineering Center, to provide human performance training services to special operation soldiers, federal agencies, and civilian employees. This protect award will allow us to continue support of our current AMCOM EXPRESS customer. At the end of the fourth quarter, SAIC's total contract backlog was over $7 billion, of which about $2 billion was funded. The estimated value of SAIC submitted proposals awaiting award is $13.4 billion or about 3 times our annual revenues. Our submitted proposals are split roughly in half with about $6.5 billion in standard contracts and task orders and the balance in estimated SAIC value of IDIQ contracts. As previously communicated, our opportunity for revenue growth is enabled by our continued investment in the development of our pipeline is demonstrated by two-thirds by the submitted standard contracts in the expand and grow categories. Before I ask John to discuss the financial results, let me provide a quick update on the Scitor integration. I am very pleased that we have completed the final phase of the Scitor integration with the transition of Scitor to SAIC's enterprise systems. This is a tremendous accomplishment and I thank the team for job well done. We continue our focus on business execution, and expanding our business development pipeline by leveraging all the people and our capabilities to expand our presence in the intelligence community, and air force markets. Our collaboration across the enterprise will help us realize revenue synergies and sustain our ability to provide high value services with above average margins. John, over to you, to discuss our financial results. John R. Hartley: Executive Vice President and Chief Financial Officer: Thank you Tony and good morning everyone. I will primarily focus on SAIC's performance for the fourth quarter with references to the full year results where it make sense. Our fourth quarter revenues of approximately $1.1 billion represent 13% total growth and 1% internal revenue contraction as compared to the fourth quarter of last fiscal year. The full fiscal year 2016 internal revenue was basically flat, consistent with our previous communications. The internal revenue contraction for the quarter is primarily due to reduced materials in our supply chain operations of approximately $30 million, the completion of a navy technical program of $11 million and $6 million of Scitor revenue contraction from their prior fourth quarter. These revenue contractions were partially offset by increased subcontract or activity on our AMCOM EXPRESS program and the ramp up of the FAA controller training program. Operating income of $54 million in the fourth quarter resulted in an operating margin of 5.1%, which was impacted by $10 million of acquisition and integration cost that if excluded results in an adjusted operating margin of 6%. Looking forward and consistent with the amounts that I discussed in our December call, we expect additional acquisition and integration costs related to facility consolidation of approximately $5 million in the first half of fiscal '17 with most coming in the first quarter. This will complete the Scitor integration cost one year following acquisition. Back to fourth quarter margin performance. For the fourth quarter, EBITDA as a percentage of revenues was 6.8% and after adjusting for integration-related cost, adjusted EBITDA was 7.5%, up 70 basis points from the fourth quarter of last year. These results reflects strong program performance across the portfolio and our focus on disciplined indirect spending. Adjusted EBITDA for the full year FY16 was 7.2%, up 40 basis points from full year fiscal '15 reflecting the addition of Scitor's higher margin business to the SAIC portfolio and our ongoing margin improvement initiatives. Going forward, 7.2% adjusted EBITDA is our new base line for margin improvement, in line with our long-term financial targets of 10 to 20 basis points annually on average and over time. Net income for the fourth quarter was $28 million and diluted earnings per share was $0.60 for the quarter. Earnings per share were impacted by $0.14 as a result of integration costs. If these costs were excluded, it results in adjusted diluted earnings per share of $0.74 for the quarter. In addition to the strong operating performance, fourth quarter EPS was favorably impacted by lower effective tax rate of about 31%, increasing earnings per share by about $0.03. This reduction in cash expense for the quarter was primarily the result of the retroacted passage of the federal research tax credit which is now permanent. Accordingly, we expect our normative tax rate going forward to be in the range of 37% to 37.5%. Robust cash flow continues to be a catalyst for our shareholder value proposition. We believe our fourth quarter days sales outstanding of 54 days is sustainable and reflects our focus on cash flow. SAIC generated operating cash flow of $108 million and free cash flow of $99 million in the fourth quarter, resulting in full year operating cash flow of $226 million. These results include our previously discussed internal investment of working capital of about $30 million in support of the Marine Corp. AAV contract. We still expect this to normalize in the first half of fiscal year '17, but should generally be replaced by a similar working capital investment on the ACV contract. We ended the fourth quarter with cash balance of $195 million, which is above our targeted average operating cash balance of $150 million. Our total debt is now just under $1.1 billion, equating to leverage ratio just over three times debt to pro forma adjusted bank EBITDA. I will remind you that we have a credit agreement restriction on share repurchases of $50 million per fiscal year until we are below the leverage ratio of three times. As a result of the strong FY16 performance and three scheduled debt repayments in our first quarter, we expect to be free from this share repurchase restriction after the first quarter as opposed to our previously anticipated second quarter. As I have stated several times, we do not plan on accumulating cash of over our $150 million average target, but rather deploy it to maximize shareholder value. During the fourth quarter, we deployed $46 million of capital consisting $14 million in cash dividends and $32 million of share repurchases representing about 700,000 shares. During the last two quarters of FY16, when we resumed our share repurchase program following the acquisition of Scitor, we repurchased $50 million of our shares representing about 3% of our total shares outstanding and the maximum amount under our current debt covenant restriction. We also made fourth quarter debt repayments of $43 million on our term-loan debt. Looking to FY17, we expect to pay dividends of about $55 million, make scheduled debt repayments of $54 million with the remainder of our cash in excess of $150 million available for other deployments such as share repurchases, among other alternatives. To that end, as announced in our press release today, our Board of Directors has approved a quarterly dividend of $0.31 a share payable to shareholders on April 29. That concludes my remarks on the fourth quarter and I would like provide commentary regarding the expectations for fiscal year '17. I echo Tony's comments that we have significant momentum going into fiscal '17 and our long-term financial targets remain intact. Based on a significant new awards in the latter half of FY16 and an improving marketing environment, we have continued confidence in low single-digit internal revenue growth annually and profitability improvement of 10 to 20 basis points annually with a fiscal year '16 adjusted EBITDA base line of 7.2. Regarding operating margins, we expect to obtain a lift of about 20 basis points due to reduced intangible amortization in fiscal '17. We will also continue our margin improvement initiatives and grow annual operating margin by 10 to 20 basis points annually on average and overtime, in line with our long-term targets. In terms of cash generation, after normalizing for events such as the FY16 AAV and expected FY17 ACV working capital investment, we continue to expect generation of about $240 million of free cash flow annually. FY17 will be impacted by about $25 million due to an extra payroll week as FY17 is a 53-week year that we experience every 6 years. However, this is not expected to impact our capital deployment activities. I should note that the extra week will occur in the first quarter of our fiscal year '17. Before I turn it back over to Tony for his closing remarks, I would like to briefly comment on my departure from SAIC that we communicated last week. SAIC is in a strong competitive and financial position. This allows for a good time for me to step down and facilitate a smooth transition to a new CFO. Tony, back to you for concluding comments. Anthony J. Moraco: Thanks John, and I want to thank you for your contributions to SAIC throughout your 15-year tenure. John was essential in the early design and implementation of our business model that puts SAIC in today's market-leader position, we are grateful for what he has helped us accomplish. During this transition period, we have initiated search to identify a new CFO, succeed John in order to facilitate a smooth transition and to build on a solid financial foundation that John and our finance team have established. Additionally, I would like to announce that our Annual Shareholder Meeting will take place on June 8 at McLean, Virginia offices and our proxy statement will be distribute to shareholders at the end of April. I encourage our shareholders to attend this event. I want to close by congratulating and thanking the SAIC team for job well done fiscal year '16. With many program successes and opportunities for business expansion, the momentum that we carry is significant and the dedication of our 15,000 employees gives me confidence for a very successful fiscal year '17. Operator, we are now ready to take your questions. Operator: Thank you. If you would like to ask a question please signal by pressing star one, on your telephone keypad. If you are using speaker phone please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up before returning to the queue. Again press star, one to ask a question. We will go to our first question from Edward Caso with Wells Fargo. Edward Caso: Wells Fargo: Hi, good morning and congratulations here. Could you update us on your major contracts that are either coming up for recompete or possibly a restructuring, in particular AMCOM EXPRESS? Thank you. Anthony J. Moraco: Thank you Ed. The recompete this year that we're tracking, probably most impactful are the NASA EAST that we touched on, that's been awarded but under protest as far as continuity. The AMCOM EXPRESS portfolio continues to go through an acquisition strategy shift as we move away from perhaps the broader BPA under AMCOM. We've seen some movements vehicles like the OASIS contract, IDIQ been successful in moving work there. We expect that, the process to continue through the latter part of this year and likely into next year. So probably an incremental shift of the portfolio, not a one massive move, and then the third area we tracking is our supply chain FALCON portfolio and the contracts there also for recompete. So I think we're well positioned for maintaining continuity there of the contract vehicles in place for AMCOM transitions as they may occur, and very competitive on both NASA EAST and FALCON side. Edward Caso: Are you seeing any incremental impact from sort of the small business initiative or an effort in the Intel community to sort of reduce the contract or content? Thanks. Anthony J. Moraco: Probably more so on the small business strategies than on any insourcing at this point collectively. But the government is still dependent on the private sector for some of that subject matter expertise and services that we provide. So probably less pressure there. But there's consistent ongoing pressure and changes to support small business and that results in small business satisfied. So, across our portfolio, historically lapped by 2 or 3 years, more recently with Scitor in that portfolio, with its converts, small business pressures are probably the one that's our biggest headwind as we can still support those small businesses, but as they convert contracts to prime positions, our role in likely situations turns into a subcontractor to them and that creates some revenue contraction on our overall portfolio. Edward Caso: I was hoping to stick one end for John since it's my last opportunity. Just wanted to confirm, I think I heard you say $240 million or at least that number for F17 in operating cash flow. I just wanted to make sure that included the ACV, AAV impact the extra week both on the positive side and the extra payroll. If all that was adjusted in, is that the number we should be thinking about, 240? John R. Hartley: Yes, thanks Ed. And just to repeat what I had said in the earlier version or the earlier discussion, it's $240 million on average and over time. The $240 million will be and it is free cash flow, not operating cash flow. That free cash flow of 240 will be impacted by about $25 million in FY17 as a result of that extra payroll week, obviously that just turns around very quickly thereafter. Edward Caso: So, 225 is the number. Thanks. Operator: And we will go to our next question from Tobey Sommer with SunTrust. Tobey Sommer: SunTrust: Thank you. Could you talk about the pace of contracting in the procurement environment in the tenure out of customers now that we're several months into having a budget in place and seemingly sort of a low growth environment, just curious how you are seeing that establishing itself? Thanks. Anthony J. Moraco: Thanks Tobey, it's Tony. I tell you, we are in a slightly improved environment, more confidence in the overall budget profile that our customers are seeing as a result of the budget deal, two year outlook and supported by some of the recent budget submitted in some of the committee activities that we have a visibility to. So I'd say the government spend outlook is slightly positive from last couple of years at least. We're seeing steady procurement going forward, the demand on proposals, requests or proposals is still sustained, evidenced by the high level of submitted. So we are hopeful that that outlook then converts to decisions on larger and longer term contracts. I think we have seen steady and consistent sustainment of task orders, mission operations and the like. But the larger contract, multi hundred million dollars for IT upgrades, upgrades in mission capabilities, relative to what we are now seeing most likely to come through decision over this next time horizon. We will see some maybe stall in the election cycle for 6 to 9 months as we get closer to late summer into spring based on political appointments. But again, our portfolio is less subjected to those elections, but there is some of those the big programs that tend to require a policy shift. So we are less subject to that. But you do see some on those larger contracts. We expect good continuity throughout the next year with those larger contracts perhaps getting awarded with maybe some slight delay if we look at the end of the calendar year and going into next year. Tobey Sommer: Thank you and then based on the commentary on cash flow and where you sit relative to your leverage ratios, should we assume that the Company is going to be dedicating more resources towards share repurchase or in the same context may be you can comment on what your acquisition appetite is as an alternative use of cash? Thank you. John R. Hartley: Hi, it's John. I will address the cash flow and the use of it. We have found it to be most effective and efficient to deploy our cash through share repurchases. Like I said we'll be free from the $50 million restriction by the end of the first quarter when we report our results and then I'll let Tony address the acquisition side of things. Anthony J. Moraco: The market is lot of activity as different companies are shifting their portfolios. To John's point with support on the dividend, the modest debt repayments and the share repurchase focus, those are the priorities but we are paying attention to the market dynamics from a competitive landscape perspective, see how those portfolios shift and if there are any opportunities that round out, our market access has been our primary filter, where it's advantageous for us in the long-term, we will consider those opportunities. But we'll be more in that strategic buyer mode than looking for any kind of acquisitions just for the sake of bulking up. Tobey Sommer: Thank you very much. Anthony J. Moraco: Thank you. Operator: We will go to our next question from Jon Raviv with Citi. Jon Raviv: Citi: Hey good morning everyone. Could you just talk about what enabled you to outperform your approaching $200 million for operating cash flow this year, you mentioned that are collections and that that would sustainable. And if that is sustainable, would it be fair just to say that $215 million is the right number to think about for free cash flow in FY17? John R. Hartley: So yes, so on the cash flow, we did experience some, on larger programs, some payments in advance, but we were able to get them in before the end of the year. So that certainly helped. That's what caused us to exceed that approaching $200 million of operating cash flow. We are probably being a little conservative because of that $30 million working capital investment that we had on AAV, but we were able to overcome that and sustain the 54 days and that includes that over $30 million in the DSOs. We do feel that is sustainable going forward and like we said, the $240 million is what we would expect on a normal year at this point in time for free cash flow and that would be negatively impacted by about $25 million. So if you do that math it is about $215 million of free cash flow expectation for FY17. Jon Raviv: Okay, great. And then on Scitor, down 4% in the quarter it seemed. It seems like it's a market thing, but it's also a small business thing. Can you characterize what you are losing, where you are losing and when that trend might end and what you are doing to reverse that and then related to that is on the Scitor even your sales might be following short. How is that doing on the EBITDA and cash generation that you guys have outlined when you first made the acquisition? Anthony J. Moraco: On the last point performing as expected with the higher margin portfolio and the profitability and the cash performance are all in line, certainly done a good job to manage the investment track to sustain those margins. The market facing elements so very optimistic the market access that we now have to the Scitor acquisitions to be able to address the intelligence community and a broader Air Force portfolio. The competitive pressures that the Scitor was experiencing as they shifted from a legacy very into position with their customers to one that's continue to become more comparative is the same trend we saw in some of other market over the last few years, we've matches that ITs lag that they didn't had. But overall the small business pressures just one dynamic of that portfolio but contractor competitiveness is still there, we think we have very strong position with the staff and the relationships and the subject matter expertise, the demand is still there for a program continuity based on what our portfolio supports today. So very confident in where we sit the turnaround through the year we've been investing and expanding the business development pipeline our goal for what should consider be organic to the Scitor portfolio to sustain that work but also with the SAICs broader capabilities to look for other agencies and other programs that we can now compete in, we've got good line of sight on a submitted an to be submitted proposal track on the pipeline that again further provide confidence that we can have the Scitor legacy portfolio or our current intelligence community portfolio contribute to the low single-digit revenue growth and sustain the high margin in the close to 10% and deliver the cash we expected which is -- around the acquisition. Jon Raviv: Yes I understand, I'm just trying to get an idea of when Scitor, that's being dragged, whether this is a target for this year, that it go for next year or do you see that happen based on those summits? Anthony J. Moraco: I would say it's through the year and I won't characterize if Scitor is been a drag on our business what just the opposite as a market opportunity that's why we brought it. The modest revenue contraction in our portfolio is one we're obviously sensitive to but as important watching the margins is one of our highest margin portfolios that was again one of the investment pieces and the capabilities that they have the various of entry in that space are still in place to protect what we have and grow forward. So I think through the year we'll continue to see revenue contributions while we sustain the high margin elements. So I think it's all market access and I wouldn't characterize as a drag on our business at all. Jon Raviv: Understood and apologies for the characterization. Thanks so much. Operator: We will go to our next question from Cai von Rumohr with Cowen and Company. Cai von Rumohr:Cowen and Company: Thank you very much and good performance guys. So Tony I think you said about two thirds of the bid pipeline is expand and grow can you explain little bit that's a relatively large number a little more color on when you say expand and grow can you give us a little more granularity specifically what kind of areas and when are those decisions if it's that bigger number when over the years of the year should we expect those to decisions to come up? Anthony J. Moraco: Sure Cai. The expanding growth this whole strategy on protect our core business to recompete, again our normal part of our business and that the two thirds are real focus on expand and grow the investment and the quality of a quality business owned pipeline. That really leverages our operating model and make us to deliver more capabilities for the customers we known the expense side and then build on our path performance and take those same improvement capabilities to new customers. I think, we characterize momentum as an element around the key program wins from last year between the SAA program the GSAGO program on the IT front and hardware integration program, collectively our areas where we've taken capabilities -- stimulation example on the SAA. Our ability to grow those accounts and bring a customer relationship and capability and how that intersection give us competitive advantage in the market place and we are seeing that through the awards that we announced last year. I think our pipeline going forward has similar profile of such programs. So the conscious efforts to invest and grow the topline revenues by well positioned on captures that are built on our past performance and that expand and grow. The areas of growth and investment are along the lines of our enterprise IT with cyber security components the call migrations, train and simulation as a broad capability across our market where it's a leverage point for our customers to further enhance readiness the vehicle monetization program that I touched on supported by other manufacturing and 3D printing all support our engineering components where we see growth across the federal market place and we continue to build on our past performance and reflects that. Cai von Rumohr: Terrific and then John I just want to say you have done a terrific job, job well done. Tony when did you know that John was going to make his decision to kind of to return to California and where are you in the process of search for a new CFO as it likely to be internal and external and when do you expect to have that billet filled? Thanks so much. Anthony J. Moraco: John has done a great job, the team collectively has the discussions and announcements last week, the result of recent conversations with John just over the last for a period of time, in a conversation with our board at our board meeting last week and hence we felt that was appropriate to announce transition, so where recently through conversation the transition itself as we announced targeting the end of June to have a smooth transition or John and the finance team maintain a continuity to business. We are executing to our succession planning that includes consideration of internal candidates and include an external search as well. So we can make sure that we have that long-term continuity based on John performance today that consistent with the strategies on our business model we talked about so don't expect to change having forward either. Jon Raviv: I mean do you expect to get that done and that's a relatively short time frame for an important billet to fill. Anthony J. Moraco: I think so. You know always have a succession planning for assets, so we are not starting from scratch and we have a lot depth and what's there and I think we've got a real attractive business that we'll also be track high quality CFO or build it internal so I am very confident that's a reasonable time frame and we will adjust accordingly based on our success in the market. Cai von Rumohr: Thank you very much. Operator: And we will go to our next question from Amit Singh with Jefferies. Amit Singh: Jefferies: Hi guys. Thank you for taking my question. So your pipeline looks very strong and long-term revenue growth target of low single-digit that seems very doable. But as you are looking at fiscal '17 and I look at your current year bookings which are strong but book-to-bill of one but is that enough to drive that type of growth sort of in the near-term if you are looking at just fiscal '17? Anthony J. Moraco: Yes I think it is the book-to-bills are an interesting measure that give us some optics of where we're headed. Our portfolio is so predicated on the past quarter flow and the book-to-bill itself as we've seen the duration of contract and total revenues shorten and total scope very much recurring process that we try to normalize around the 1.0 there will be fluctuations as we went some larger words where it can go up but again we have match it consistently that we offering that 0.9 to 1 on a sustain basis and then you get some fluctuation another point after that. Will sustain our revenue growth outlook as we go forward because of incremental changes to contribute and if in fact the customer confidence moves forward and we see less revenue contraction as they stabilize their budget that we also think is a tailwind and that we're not back filling for revenue losses on the recompete but rather everything we do win is in fact additive even though the book-to-bills may appear modest. Amit Singh: Great and then for fiscal '17 are you guys expecting some year-over-year headwinds from lower material volume and supply chain contract? Anthony J. Moraco: We expect some it would be less than a $100 million and that still we consider that in considering the low single-digit revenue growth for FY17 so think about $50 million to $100 million in that range and that's on all the supply chain business. Amit Singh: Perfect great and just the last one on margins. So just trying to get and understand what are the or what will be the primary drivers of margin growth from here is that primarily a Scitor driven or there are other factors in there as well? Anthony J. Moraco: Certainly at Scitor we will have the full year of Scitor versus just three quarters this year but there are the other margin improvement initiatives that we continue to work which are which obviously are things like converting to more of our labor content versus sub-contractors also some of the vehicle integration programs certainly have a higher margin profile and just the peer services business but there are a number of drivers in there that we continue to work so we think that sustainable that 10 to 20 basis points of growth on average an overtime its sustainable for the next several years. Amit Singh: Alright. Perfect. Thank you very much. Operator: We will take our next question from Bill Loomis with Stifel. William Loomis:Stifel: Hi. Thank you. Good morning. Just on the Scitor, Tony I just want to be clear on prior comments you gave on Scitor, did you say that the drag being lower the Scitor revenues will likely be down in fiscal '17 as they face more small business and another transition issues? Anthony J. Moraco: No I don't think that they'll be down so that they will likely go to flat base on what they have done. I think that will contributed collectively on our revenues as we get past to 12 months mark given the sales cycle -- 12 to 18 months so efforts that we put in place since the time of acquisition we will add and contribute to that revenue growth overall. I think adding more business development resources to the organic portfolio organic resources that Scitor had in place further complement our ability to protect what we have and look for expand and grow opportunities in the intelligence community. So I think it's going to flat off of their last year baseline that we reported on and further contribute overall as we look at synergies in both selling through into the IT legacy Scitor market access but also bringing the Scitor resources to bear in some other business will it be a NASA given our space capabilities or another areas. So I think we are going to see continued contributions from Scitor acquisition but it's going to flat as we just maybe just how you may want to think about that aspect of our portfolio. Amit Singh: Okay and then just on Scitor, can you tell us what their book-to-bill was over the last year and kind of sense of the proposals the bid activity in Scitor specifically? Anthony J. Moraco: On the bid activity on the pipeline again it continuous to develop they've had their re compete profile, traditional capture look, we have been focused on the expand and grow with the broader capabilities and we don't report on book-to-bill organizational components for the business. Amit Singh: Okay by I mean did they have what's your expectations is that kind of greater than the average, can you talk about. Anthony J. Moraco: Our expectation of when and the work that we needed them to continue to the whole on to on the recompete slow a customer acquisition chain like a small business satisfied. They have sustain our expectation, their win rates on the programs that they have in their pipeline. Amit Singh: Okay. Great and then on ACV on margin vehicle work will be higher margins you said but on the prototype contract do you expect that to be on ACV to be higher margins and if so significantly higher? Anthony J. Moraco: Well that's the expectation that it is higher and think of more like double-digit you know starting with just over 10% somewhere around there so that's what the expectation would be but we'll see how we perform on the program. Amit Singh: Okay and just a one quick one supply chain. If you are seeing lower materials and that's obviously lower margin type work of your 10 to 20 basis points goal. How much of that is due just because of a lower pass through on supply chain? John R. Hartley: We really what contributing almost anything to that so it's really not a big component of it. Amit Singh: Okay but the revenue drop, the material drop so as would be lower margin business right that $50 million to a $100 million lower revenues this year would be on quite lower margin? John R. Hartley: Yes it is. Amit Singh: Okay. Thank you. Anthony J. Moraco: We've got the impact but not necessarily it's not one of the drivers when we talk about 10 to 20 basis points just not through the reduction of the supply chain volume that we see that result it's some other initiatives, maybe an outcome but that's not the initiative. Amit Singh: Okay great. Thank you. Operator: And we will take our next question from Michael French with Drexel Hamilton. Michael French: Drexel Hamilton: Good morning gentlemen. John R. Hartley: Good morning. Michael French: So john congratulations on finding a way to return to San Diego. I know that's easier done because I have been trying to do that myself for 25 years and it's still 2000 miles away so wish you the best? John R. Hartley: Thank you. Michael French: As first one to Tony on you know the long-term internal revenue growth target similar to which you had last year and because the reasons that we went through didn't quite hit that and I just wanted ask you to address level of confidence this year compared to last year on the outlook for the topline? Anthony J. Moraco: Our confidence in the low single-digit growth I think couple of factors; why we have seeing maybe some slight stability in the revenue contraction side as run rate programs have gotten to new budget baseline so we see less headwind of replacement dollars on a recompete size. So every new expanding grow opportunity does create upside on the revenue profile overall. The wins in FY '16 as result of capture that occurred after respond 18 to 24 months later we are now seeing those programs convert to revenues that we know we have some tailwind on the revenue profile given the 5 or 6 program that we talked about that we were knew between GSAGO SAA and the vehicle programs. So that tailwind is there again gives us higher confidence of getting above positive revenue growth profile. And as we've seen last year and a confidence in the quality of our pipeline we would expect some sustainment of award activity that we'll be again favorable in the expand and growth category given our investments today in that area to expected to be sustain to be at a lower level past quarters and like. But we think that adds us further confidence of why we expect that low single-digit revenue growth in FY '17. Michael French: Okay very good and on Scitor, there had been some employee turnover has that stabilize or could you just explain the situation with the churn on the employee base? John R. Hartley: It stabilize to a degree but it does fluctuate there are certain element through the year from the acquisition conversion of benefits that have a direct impact on employees. But I think overall we have managed that process very well. We expected you know slightly higher attrition rates on average it did go higher than we would expected by a few percentage points we've been able to also back fill and higher successfully. So we have minimize any revenue consequence. So I think the attrition slightly higher than we would like as one that we're managing through and as we go through a full year now and its hit most of the major gates for the factory employees most understand where they should today and how the business is converted and I think we'll see further ability on the attrition numbers. Michael French: Very good. Thank you and good luck. Anthony J. Moraco: Thank you. Operator: And we will go now to an additional question from Cai Von Rumohr with Cowen and Company. Cai von Rumohr:Cowen and Company: Yes. Thanks so much so I think you guys noted that there were some EACs in the final quarter could you give us a little more color on what those related to where they had the parent at Scitor and how big were they? Anthony J. Moraco: It was number of small items Cai so, there wasn't a significant driver it was cross the portfolio and that with just strong program performance. We also did have a slight indirect rate under run that trued up in the fourth quarter and so that flows through to all the programs with at least the fix price and the TNM and so that's helps a little bit as well. So it really wasn't any specific item it was across the portfolio. Cai von Rumohr: Thank you and then looking at your Adjusted EBITDA you kind of had a take out of $3 million of that was an overlap with acquisition expense. How big would that number be in fiscal '17? Anthony J. Moraco: That would be -- you mean the overlap number. Cai von Rumohr: Yes. Anthony J. Moraco: The overlap number was accelerated depreciation so it's obviously in the and so you can take it out twice and so I would expect since there is going to be about $5 million -- of integration type cost all related to facilities. I would think that it really shouldn't exceed a million or two of that the rest are at least by out in the like. Cai von Rumohr: Terrific. Thank you very much. Operator: And that concludes today's question-and-answer session. I would like to turn the conference back to Paul Levi, for any additional or closing remarks. Paul Levi: Thank you very much. I'd like to thank you all for your interest in SAIC and participating the call today. Have a good day. Operator: That concludes today's conference. We appreciate your participation.