Science Applications International Corp Q4 FY2021 Earnings Call

Welcome to SAIC’s Fourth Quarter and Full Fiscal Year 2021 Earnings Call. At this time, I would like to turn the conference over to Shane Canestra, SAIC’s Vice President of 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 2021 earnings call. Joining me today to discuss our business and financial results are Nazzic Keene, SAIC’s Chief Executive Officer; and Prabu Natarajan, our Chief Financial Officer.

Good afternoon, and thank you for joining us to discuss SAIC’s fourth quarter full fiscal year 2021 results and our outlook for fiscal year 2022. Our momentum increased throughout the year and SAIC continues to be very well-positioned for long-term shareholder value creation. On March 15th of last year, SAIC quickly adapted to a significantly different operating environment as a result of the pandemic. Although not without challenges, SAIC operated effectively throughout the fiscal year and continues to do so today. Our focus has always been the safety and welfare of our employees, continued high-level performance for our customers and successfully managing the business for our shareholders. I want to thank the employees of SAIC for their dedication and flexibility both personally and professionally through an incredibly challenging time. The end of each fiscal year allows us to look back, reflect on our achievements, as well as our journey over time. As we think about what SAIC is today, I am even more encouraged about our future. Over the past few years, we have grown our annual revenue from around $4.5 billion to more than $7 billion, concurrently expanding our adjusted EBITDA margins from the low 6% range to close to 9% today, an almost 300 basis point improvement. Over the same period, we have more than doubled our free cash flow.

Thank you, Nazzic, and good afternoon, everyone. I am extremely honored to have joined a best-in-class government services company and a top-notch management team. SAIC’s culture is rooted in its mission focus and performance, continuous self-reflection and improvement, and execution of a thoughtful long-term strategy. I look forward to actively working with Nazzic and the senior management team to continue building and executing the strategy to deliver long-term shareholder value. Now turning to our results. SAIC’s fourth quarter fiscal year 2021 results reflect modest organic revenue growth, strong profitability and seasonally in line cash flow generation. Contract award activity in the fourth quarter translated to a book-to-bill of 0.4 for the quarter and 1.7 for the full-year. Fourth quarter net bookings were driven by two large contract awards, the U.S. Corps of Engineers RITS and the AMCOM Hardware-in-the-Loop Aviation Services contract, this latter being the second in the series of four task order awards in our AMCOM recompete portfolio. While these awards have notable award values in excess of $2 million, I would note that these are ceiling values that may differ from amounts included in backlog.

Thanks, Prabu. While continuing to navigate challenges related to the pandemic, we also look to what a new normal will be for our industry, our company and our people. Across the government, SAIC is enhancing our customer’s ability to deliver and enable the adoption of advanced technologies. Government, as well as SAIC, is driving towards faster rates of technology adoption and achievement of mission outcomes. To this end, we are shaping and pursuing a growth agenda tied to longer term needs in government. We are expanding our IT modernization focus into broader digital transformation. We are building on our heritage and engineering by deepening our digital engineering capability so that we can help the government advance complex systems integration, saving costs and increasing mission readiness. And we are also looking at the growing and evolving missions of our customers especially in areas like space and health where there are new agencies, missions and requirements. We have all contemplated what our personal and professional lives look like when we get to the other side of the pandemic. While I certainly look forward to SAIC returning to a more normal environment, the pandemic has forced us to operate differently, and in some ways, some of those might endure for good reason. A more remote work environment has proven to both us and our customers that we can continue to effectively operate and deliver on our programs. SAIC is looking at the future of work including potentially lowering our facilities footprint and expanding our reach for employees that deliver services partially or entirely remotely. While our analysis is underway and the transition will take many years, we are guided by a general concept, foster an enterprise flex work culture in partnership with our customers that enhances SAIC’s position as a destination employer, attracting, nurturing and retaining diverse high performing talent regardless of location. Wrapping up, I’d like to note a few awards that SAIC received recently that acknowledged our success in being a destination employer. SAIC was recently honored by Fortune’s Most Admired Companies list and ranked sixth within the information technology services category alongside some of the world’s largest and well-known companies. This is the company’s fourth recognition on Fortune’s List since SAIC’s inception in 2013. Additionally, for the third consecutive year SAIC was recognized by the Human Rights Campaign Foundation and received a perfect score as one of the best places to work for LGBTQ employees. In conclusion, we are proud of our achievements in fiscal year 2021, an unprecedented year. We enter fiscal year 2022 focused on executing our strategy to deliver high-value solutions to our customers to foster a work environment that attracts and retains the best talent and to deliver long-term value creation for our shareholders. Operator, we are now ready to take your questions.

We have our first question from the line of Cai von Rumohr. Please ask your question.

Yes. Thank you very much. So your revenue guide looks a lot lighter than I think we would have thought, given as I recall as you won all of the AMCOM recompetes. It was $900 million annualized, up from $600 million and obviously you won’t get all of it, but you should get some of it. And also your margins, given that you won the AMCOM being down 30 basis points at the midpoint, looks lighter than we would have thought. Maybe give us some color on that if you could?

Hi, Cai. Prabu, here. Thanks for the question. So on revenue guide, organically, we flagged flat to 3% growth and we’ve also flagged about a 2.5% headwind for COVID. One way to think about it is 2.5% and 5.5% on an ex-COVID basis. Having said that, clearly, we are disappointed that we are still being impacted by COVID and we are really hopeful that the headwinds abate soon and so the year-over-year difference in terms of COVID impacts, let’s call it, between $50 million and $100 million. You are correct, we’ve had large notable wins over the past year. And as we have talked about in other forums, these are long-term programs that will provide sustainable growth opportunities over a several year period. Let’s talk about AMCOM maybe a little bit, so we can sort of fill this in several layers. So within AMCOM, the way to think about this is sort of a setup basic task course. So think of that as sort of the base revenue in the program. That’s what we do today and we know what that revenue profile looks like going forward. The second layer within AMCOM would be set of new business opportunities, things that will bring into the AMCOM portfolio as a result of working with the customer there. So there is clearly some potential for revenue growth from the second layer. There is a third layer, which is a material supplier in the ceiling award. In other words, effectively, the customer has the ability to bring in materials into the AMCOM program that will allow us to generate revenue growth, but I’d caution that that materials plug tends to be lower margin work. And then finally, there are sort of a little bit of work there on top what we call excess ceiling that’s sort of the difference between the total award and some of the first three layers. And as we work through the AMCOM portfolio, clearly, we are going to get the first layer, a good bit of the second layer over the next couple of years, let’s say, and then the way the waterfall works on the AMCOM portfolio is you really have to work through and burn off the old task orders before you get into the new awards and that’s sort of how the waterfall has been set up. So I think we are optimistic that over time, you will see incremental revenue from the AMCOM portfolio and - but that’s solely the reason why we are not seeing that immediate impact of revenue in FY 2022 and therefore is in the guidance. And just sort of put a ribbon on it, I think, we are expecting growth within the intel and the space portfolio. Our defense business is expected to be, I’d say, roughly flat and our supply chain business is roughly flat, if you think about it on a year-over-year basis and that’s sort of a fuller context perhaps for the guidance for FY 2022.

But just one follow-up, that still looks low. If we look at the midpoint, we are discussing a $150 million increase in revenue, with 75% of that, or $75 million, stemming from COVID. I would estimate that you should see about $100 million more from Unisys for the full year. Essentially, it appears there is zero growth when those factors are excluded. Do you anticipate AMCOM to decline? What other areas are experiencing a downturn? Given the very strong bookings you’ve had, one might have expected some growth.

So, I agree, Cai. I think there is a year-over-year impact from Unisys. So we think of that as about four to six weeks on a year-over-year basis. That’s the difference from the Unisys Federal portfolio. I’d say, I think we are bounded by the fact that we are living through a COVID environment and we are seeing some impacts from COVID. So maybe another data point here is, if you can think about that supply chain business because that continues to be a headwind. We can sort of think about this in weekly revenue terms and so that continues to be actually a little bit of a headwind to growth. And then finally, I would probably also note, there were probably a couple of small contracts at the end of FY 2021 that in the aggregate were not material, but there were program losses and again not material individually. And in the aggregate, they probably cost us about, let’s call it, 100 basis points to 150 basis points of growth, again, three or four very different opportunities in different customer sets and that’s probably the headwind that you probably are trying to figure out. So that’s probably the last piece there.

Thank you very much.

We have our next question from the line of Jon Raviv from Citi. Your line is now open.

Hey, everyone. Good afternoon. Let’s continue discussing FY 2022. Prabu, could you walk us through the margin from 2021 to 2022? There are quite a few moving parts. If I look at everything you've disclosed on an underlying basis for 2021, it seems to be just over 9%, including COVID. If I take your guidance for 2022 and remove just the COVID impact, it looks like it's below 9%. Is Unisys experiencing growth year-over-year? Also, considering the supply chain being down year-over-year, which affects the margin, why is the overall margin decreasing year-on-year on a completely clean underlying basis? I have more questions, but I'm trying to understand this better.

Thank you for the question, Jon. I’ll keep it high level and we can delve deeper if needed. We finished FY 2021 with an adjusted EBITDA margin rate of 8.9%. Throughout FY 2021, particularly in Q2, we identified certain non-recurring one-time items. When considering this, there was effectively about a 20 basis point positive impact on our margins for the year. As we move into FY 2022, we assume these positive factors won’t repeat. Looking at our guidance for FY 2022, which indicates a margin range of 8.6% to 8.7%, we feel that this is reasonably aligned with our performance in FY 2021. Additionally, Unisys Federal has provided a strong mix of firm fixed price work, and we are seeing solid performance on that side of the portfolio. I also want to mention that with AMCOM, as we discussed, we transitioned from a time-and-materials contract to a cost-plus contract, which has introduced a bit of downward pressure on our margin range. Overall, if we consider the adjusted basis for FY 2021 alongside our guidance midpoint of 8.7%, they are consistent. Lastly, as we've previously stated, EBITDA dollars and margin rates are important metrics for our team. We start the year acknowledging certain risks and opportunities, and we expect our team to be motivated to address these risks and take advantage of opportunities throughout the year. Our initial guidance aligns with our FY 2021 performance, and with about 10 months remaining in the year, we are hopeful that we will see improved outcomes compared to year-to-date results.

Yes. No. I appreciate that. Thank you. I just have a quick follow-up there on a clarification. So 8.7% in ‘21 and 8.7% in ‘22, but you had more COVID impact in ‘21 and less COVID impact in ‘22, so if we clean out COVID also, it still seem that margins are down a bit, maybe at the AMCOM piece. I guess assuming a big picture, should we still think about this as a sustainably 9% plus margin business if we kind of try to eliminate all the noise here?

If we consider the long-term margin rate trends for our business, we view this from a long-term perspective and aim to balance our investments with profitability. We are focused on improving margins gradually and have shown our ability to increase margins incrementally. As mentioned, we have raised our margin rates by nearly 300 basis points over the last few years, and margin improvement is a key aspect of our long-term planning. On a long-term basis, given that our portfolio is largely cost-plus, we need to excel in executing our fixed-price programs and carefully reinvest the funds from our cost-plus programs to maintain our competitive edge over the long term. I believe it is reasonable to expect that this portfolio will trend towards around 9%. The specifics of reaching 9% in any given year will depend on our execution, but qualitatively, there hasn’t been a significant change in the portfolio.

Okay. And…

Hey, Jon. This is Nazzic. One thing I will add and I know we have had this conversation as well is, if you think about the areas that one was just the catalyst for the Unisys Federal acquisition. But as we think about our strategy and our focus and in some of the priorities in the nation on IT modernization, digital transformation, those can and lead to more fixed price as a service type contracts. And that is part of our strategy, our long-term strategy, we look for the opportunity to influence the portfolio again over time with that mix of work and I think that can be a catalyst well for improving margins over time.

Thanks, Nazzic. I will pass the line. Thank you.

Next is Sheila Kahyaoglu from Jefferies. Your line is now open.

Hey. Good afternoon, guys, and welcome Prabu. I guess, if we could talk about the revenue bridge a little bit more. Can you maybe talk about how you think about the new contract wins that you guys have had whether it’s CADS or FSTAD, I know they have been around for a while now. How big are those wins and then you mentioned some small program roadblocks, is that a point headwind to revenue overall?

So maybe I will start with the last piece first. I would say, in terms of the losses, they are probably between $100 million to $125 million, $130 million. They were all predominantly towards the latter part of Q4 of FY 2021. So the compares around program losses will be unfortunately here with us for a few more quarters. So, just to be able to think about that, so think of that as between $0.1 and $0.5 revenue so on a year-over-year basis. And in terms of the ramp, I’d say the most material portions of the ramp will be in our risk program and that ramp we are expecting to see in the second half of the year. And I’d say, there is a variety of other programs, I’d say no one individual program is ramping up beyond $20 million, $30 million a year on a year-over-year basis. But again, I’d say, if you step back a year later, you would expect to see a little bigger ramp on our AMCOM portfolio. So that’s sort of a way to bridge between ‘21 into ‘22 and then ‘22 into ‘23.

Okay. And then just a follow-up on the COVID impacting, are you assuming in, it’s an issue for the entire year or is it only in the first half?

We anticipate that COVID will have an ongoing presence for most of the year, with the majority of its impact expected in the first half when compared year-over-year. A helpful way to evaluate our supply chain business is by looking at our weekly revenue, which typically ranges between $10 million and $13 million. If you extrapolate that, you would arrive at an estimated total of around $600 million for the year. When aligning those figures with the impact of COVID, we noted that during the peak of COVID, our weekly revenue was about $10 million, while at the peak recovery, it approached $15 million on a COVID-adjusted basis. Currently, we are seeing weekly revenue between $10.5 million and $11.5 million, and we expect this to increase in the second half of the year, ideally tapering off significantly by the end of Q4. This trend will be reflected in comparisons, particularly for the first half of the year, with a gradual decrease anticipated in the latter half.

Okay. Thank you.

We have our next question from Gavin Parsons from Goldman Sachs. Your line is now open.

Hey. Good evening, gentlemen.

Hi.

Hey, Gavin.

I wanted to ask you about your revenue visibility and beyond fiscal ‘22 and I appreciate there are a lot of unknowns with the COVID and with the budget, but 1.7 book-to-bill this year, 1.2 the year before your backlog has pretty much doubled over the last three years. So I was wondering if you take a stab at a multi-year growth outlook from there.

Hi, Gavin. This is Nazzic. How are you?

Good. Thank you.

Yes, there are a couple of points I would like to emphasize. Reflecting on my earlier remarks, I mentioned that the general assumption within the industry is that budgets are likely to remain relatively flat moving forward. This perspective has been held by many of us even before the COVID pandemic, perhaps as far back as a year or two ago. However, we do see emerging opportunities in the coming years, and we are beginning to notice some of these developments, especially in discussions coming from the administration. We expect to gain more clarity in the months ahead. Currently, we are observing an increased interest in IT modernization, particularly with an emphasis on cybersecurity and remote work. The drive to modernize is becoming increasingly crucial. We also see a focus on space-related missions. Therefore, as we consider the next few years, we will maintain a strong emphasis on the segments of our portfolio that present potential for growth, even with a relatively flat budget. Our goal, as outlined in our strategy, is to pursue a growth outlook that exceeds the overall market, and that is our focus for the near future.

Got it. That’s helpful.

Prabu, do you have…

Again, maybe one other comment here. So I think you are absolutely correct, we do have $21.5 million in backlog at the end of the year. We had a 1.7 book-to-bill in FY 2021. We do have with the AMCOM portfolio secured, good visibility, better visibility stepping into next year than we did stepping into this time last year. I’d say, therefore, there is certainly more visibility. And then I often maybe a couple of other data points, in this business as you know there is always an element of recompete risk. In the prepared remarks we said, this particular year, the recompete risk is enough there at less than I’d call it approximately 10% of the revenue coming from the recompetes and the new business assumptions are modest this year. But when you step into FY 2023 from FY 2022 I think you are going to see a little bit of a higher level of recompete not unusual in this business and a little more in the way of new business that you have to go with. What I have observed in the 90 odd days here is a remarkable win rate on recompete. So we do our share of recompetes really, really well. But there is always a flavor that we don’t ever get to and we expect our new business to step in and actually fill the bucket here. So the strategy is very clear. We have got the visibility from the base programs that we have in the portfolio and then we have got to keep winning our share of recompletes, which are again remarkably high for a company of this size and we also have to win our share of new business still we continue to see that progression for long-term revenue growth.

I find it puzzling that with so many new wins and upsized recompete wins, there isn't more clarity on how this translates into a multiyear perspective. Is it possible that due to budget constraints, we may not see most of the growth from the unfunded backlog reflected in revenue?

This is Nazzic. It's difficult to claim that risk doesn't exist because of the government's operations. As long as you maintain your budget, there will always be some level of risk involved. However, we don't perceive it as high risk at this moment. As Prabu mentioned, we experienced some bookings and successes that may have carried some risk with the excess ceiling, and we made that adjustment in Q4. While I wouldn’t categorize this as high risk, it is always a factor in the nature of our work, given the annual budget cycles in government.

Got it. Okay. Thank you.

Thank you.

Next is Seth Seifman from JPMorgan. Your line is now open.

Hey. Thanks very much. Good afternoon, everyone.

Good morning, Seth.

Hey. I’d like to follow up on the recent changes to the backlog and how it was evaluated. Was this change primarily seen in one or two specific programs, or was it across a broad range of programs? Without that adjustment, it seems like the book-to-bill ratio would have actually been quite strong this quarter. I'm curious about what prompted the reassessment and why it happened at this particular time.

Thank you for the questions, Seth. The valuation adjustment you mentioned aligns with our policy of recognizing what will convert to revenue over time in backlog. The increase this time is largely due to the size of the Unisys and most adjustments were related to awards made in the year, particularly for FY 2021. You can view this as a way of derisking based on our backlog policy. Regarding the AMCOM example, if we do not have clear visibility into revenue over a long period, our policy dictates an adjustment to the backlog. The backlog remains intact, and while the award is still valid, we aim to integrate new work into the contract, effectively reversing the adjustment booked in Q4. This situation isn't unique to any particular quarter; what makes this noteworthy is the large amounts from significant awards we secured during the year, which explains why you're seeing this adjustment. There's nothing particularly unusual about it.

Okay. Great.

Okay. Yes.

Thank you. As a follow-up, it seems that Unisys generated about $735 million in sales over the past 12 months. I wanted to clarify the situation, especially with some contract transitions happening, at least one significant one. Can you confirm if that figure serves as a baseline for growth? I assume that Unisys is performing well year-on-year. Is that the correct way to consider the contribution of that business in fiscal '22?

The Unisys Federal business is performing in line with our acquisition model. We expected about $700 million in revenue for the full year from Unisys Federal, and we are reaching that figure. We were aware of the ramps when evaluating this acquisition, and that understanding has been integrated into our expectations. One reason we considered the Unisys Federal business was its mix of fixed-price work, which adds value to our portfolio. We closed that deal on the first day of the pandemic shutdown, so it's still early days for Unisys Federal, but the revenue plan is aligning with our expectations. Additionally, we see some opportunity to improve margins due to the fixed-price work in the program.

Okay. Cool. And then if I could quickly ask Nazzic about the supply chain work during the pandemic. When we look beyond the numbers and consider the real-world situation, what needs to happen for that business to get back on track? Is it the lifting of certain restrictions, scheduling specific training exercises, or something else that drives that business so we can determine if the impact of the pandemic is lessening?

Yes, a couple of factors need to be considered. We've done a good job of explaining our business from a numerical and analytical viewpoint. What's essential is the distribution of vaccines and moving past the quarantine and isolation phases that many people are experiencing globally. As vaccines are rolled out and we resume military training exercises, there will be an increase in demand for the supplies that flow through our supply chain. It’s really about continuing to navigate the effects of COVID on the overall pace of operations in the country. While I may not provide many specific details, that's how I view the situation. As Prabu mentioned, we have anticipated a greater impact from COVID in the first half of the year, with a gradual decrease as the year progresses. By the end of the year, we expect to see a more normalized operating environment and pace of operations, aligning that aspect of the business with those expectations.

Great. Thank you very much.

Thank you, Seth.

Next is Tobey Sommer from Truist Securities. Your line is now open.

Thanks. Could you discuss the cash flow for this fiscal year and what the puts and takes are relative to COVID contribution or drag?

Yes. So thanks for the question. So I’d say on free cash flow, we have guided $430 million and $470 million. And at the midpoint of that guide, we are sitting at about, let’s call it, $450 million. FY 2021, we ended the year at a record $525 million and so if you think about it, as we said, payroll deferrals, both accounting for the benefit from the payroll deferral in FY 2021, as well as to give back in FY 2022 get you to a $150 million adjustment to your $525 million. So think of that as $375 million. And so stepping forward, $375 million at the midpoint of that ‘22 guidance gets to about $450 million. And it’s a variety of different things including some improved profitability, assumptions around improvement in working capital. We see some potential to get better there. Obviously, some improvement in cash taxes as we go through and that’s really the bridge to get you back to the midpoint of that FY 2022 guidance, if that helps.

Thanks. And as my follow-up, I was wondering if you could speak to your acquisition appetite? You did Unisys Federal, it seems like you have had a relatively good experience with that. But I am curious about your appetite as the budget kind of flattens out and you are still trying to accelerate your organic growth? Thanks.

Yes, that's a good question. We've mentioned before that we aim for a balanced approach to our capital deployment. We're proud that we've reduced our debt efficiently, down to just over 3.5% from the high point following the acquisition, and we have commitments to pay down additional debt this year. With interest rates at historically low levels, there's likely no strong incentive to significantly pay down more debt voluntarily after FY 2022. Considering the sustainable free cash flow this company can generate, we have plenty of liquidity for value-accretive capital deployment strategies. Regarding M&A, we have stated before that we're not looking to acquire just for the sake of scale; we are satisfied with our current scale. However, we are actively reviewing our portfolio for any gaps, and if opportunities arise that fill those gaps, we will consider them. We view equity as a valuable asset, and we plan to be strategic in using it for acquisitions in a low-interest-rate environment. Overall, we have a significant amount of available resources to deploy in ways that enhance value.

Operator, are you there?

We have our next question from Joseph DeNardi from Stifel. Your line is now open.

Thanks. Good afternoon.

Hi, Joe.

Now that probably you talked about starting of the buyback again, can you talk about why that’s the right use of capital now given how big of a difference there is between market expectations and what we are actually seeing for growth is not used, just few, obviously, across industry, but pre-buying back stock because you see the softness is temporary, can you talk about that a little bit? Thanks.

Yes. Yes. So maybe a different flavor of the previous response, so we want to be balanced in the way we think about capital deployment and we do think that having again to repurchase program allows you to be in the market on a consistent basis, because I think that’s a key focus, if you will, for long-term value creation. As we also closed out FY 2021, we were also ahead of our debt repayment schedule and so that gave us the ability to flexibly deploy a little more capital. And finally, as I mentioned, we are in a low-insured buyers, so we are carefully balancing the need to pay down some debt and opportunistically returning capital. And so when you put all of that together and the fact that we have inherently good confidence in the capacity of this business generating cash. I think it does leave you with a fair number of tools in your arsenal to be able to deploy. And so we do think about valuations in the context of relative valuation. We think about it in the context of multiples. And I would say, if there is an opportunity to acquire shares at multiples, below trading multiples or where others may be trading at, I think, inherently offers you an ability to deploy capital when you see those dislocations in the market. So think of it that way.

Okay, that’s helpful. Regarding the backlog, Prabu, you indicated it’s somewhat routine. Could you remind us, Nazzic, when was the last time the backlog was adjusted down by 10%? Is there any connection to your arrival, Prabu?

No, I would say I will answer the latter part first. No, I’d say this is entirely consistent with our backlog policy. It’s the size of the awards that we received in FY 2021 that drove the adjustment, and I would say we are now near 10% in prior years. However, we have had a few hundred million dollars of backlog adjustments. It’s fairly routine in the business, so that’s probably what I will leave that with.

This is Nazzic, Joe. We appreciate it. We love the fact that Prabu is here, thrilled to have him as part of the team. But that was not a change in our policy in any form or fashion. It really just had to do with the size of the bookings, the new awards that we received this year having been our biggest award year since we spun out in 2013.

Okay. And then...

I will share some insights on where we see potential opportunities. The budget process still needs to proceed, and we are all trying to interpret the situation as best as we can. However, areas such as IT modernization and digital transformation are prevalent throughout our portfolio. This applies across civil, defense, and intelligence sectors, where we can support our diverse offerings. The direction will depend significantly on how the budget is allocated and the pressures we face. Our focus is on investing in areas that we believe will enable us to achieve growth that exceeds market expectations in the coming years, particularly in IT modernization and digital engineering across all sectors, including space. We are committed to investing in these areas for long-term growth, acknowledging that there may be some budget challenges, although we are not certain of this. These investments are intended to create long-term value.

Thank you.

Next is David Strauss from Barclays. Your line is now open.

Thanks. Good afternoon.

Hi, David.

Prabu, you're discussing relatively flat working capital this year, and I understand it might be early for you. How do you assess the overall levels of net working capital for the corporation? Is there a possibility to free up some cash as we move ahead?

Yes. Thanks for the question, David. I would say the short answer is yes. I think we track our working capital metrics very, very diligently. This company has done a really nice job on cash generation. Having said that, I think, one of the things we are having conversations around is, specifically the contract structures we have, the timing of payments, liquidation events and things that drive positive cash flow over the life of the contract. And I would leave you with this that, it’s very hard to outmaneuver a bad contract, so getting into a contract structure that allows you to get paid fairly and paid well is an important consideration as we think about working capital management over time. And therefore, I think, it’s fair to say the team is going to be laser focused on ensuring we continue to do better. It is an important incentive comp metric and we always start here in certain place and the teams do what they have to do over the course of the next 10 months to 12 months. So I would say fundamentally an opportunity to get better on cash and cash conversion, converting EBITDA into cash and it’s an important thing for us and you will see us continue to improve.

Okay. So a couple of clarification questions. So is the share count through ‘22 assumed relatively flat, you are going to do share repo to kind of keep that neutral? And then the just outlook like you are calling for a decent step down in D&I, what is that associated with?

So I would say on the share count, I’d say that’s a good assumption. I’d say, we are assuming roughly flat on share count year-over-year and we will have to play this out over the course of the year. On D&I, I think, primarily, I’d say, call it, the burn up of the intangibles, amortization out of Unisys Federal. That’s what’s causing the intangible amortization number to go down to about 110 I believe from 140 and depreciation is going up just a little bit. We had a little more capital that’s getting depreciated. So that’s the difference effectively on depreciation and intangible amortization.

Got it. Thanks.

Next is Louie DiPalma from William Blair. Your line is now open.

Nazzic, Prabu and Shane, good evening.

Hi, Louie.

Hi.

Where is most of the backlog adjusted related to the recent notable awards in the third quarter in the $2.9 billion AMCOM expressed for a lifecycle award?

So I just say that they are primarily related to the big awards in FY 2021. So I’d say that’s a good working assumption there.

Okay. And did the customer for these large awards, they communicate anything to SAIC subsequent to, I guess, the end of the third quarter that gives you less confidence that you will be able to achieve the ceiling of these awards or was this just SAIC’s own due diligence into potential revenue trajectory and you are taking a more conservative assumption than you previously did?

So it’s always our call on backlog adjustments. There has been no communication from the customer. We understand how the ceiling works and as we tried to lay out over the course of the call here, there are multiple tiers to it. And because it’s our backlog policy to only book into backlog what’s realizable in revenue and you got to have line of sight to be able to see that over and we are not talking about two years periods of performance, the average AMCOM period of performance is between five years and eight years. And so when you put all of that together, it leaves you with a little bit of the reserve, if you will, on your backlog again with the ability for the teams to go execute with their customer counterparts to ensure that we continue to deliver upside to what might be potentially reflected here. So I would not view this as conservative. I would not view this as a change. It is just how we do it and obviously magnified or amplified by the size of the awards here. Appreciate the question, Louie.

Great.

Thanks.

Thank you very much.

Thank you.

Next is Jon Raviv from Citi. Your line is now open.

Thanks for the follow-up. Looking at the overall picture between 2021 and 2022, the low end of our guidance is $960 million, while we've been discussing $1 billion as the high end. Can you provide any insight into the differences between the low and high ends of the guidance for these two years? Additionally, reflecting back to the period after Engility, I recall that our target for fiscal year 2022 was $500 million, with a goal to increase that by 10% to $550 million, which is the current guidance. Are we on track to reach the $550 million target at some point? I appreciate the $40 million in payroll repayment, but I would like your thoughts on achieving the underlying $550 million goal alongside any updates on those previous multiyear cash targets you have.

Sure. Thanks for the question, Jon. So, as you noted, we had a good FY 2021 cash. We ended the year at $525 million and our first guide at the start of last year was $450 million. So we did about $75 million better than our first guide last year. If you then took the midpoint of the current year guide, FY 2022 guide, together we get to pretty darn close significant numbers. So I’d say, on a year-over-year basis, where I see roughly in line with $1 billion that we previously communicated. Now, I think the big drive from $500 million to whether it’s $525 million or $550 million, it’s going to come from, I think, two places. One, delivering outline that converts into EBITDA and converting that EBITDA into cash and obviously, the team is committed to doing that effectively. We will start to see the headwinds from the payroll deferral dissipate as we get into FY 2022 and beyond. So, I think, you will see a little bit of that. And we do expect to see some element of improvement in working capital. So I would say that’s the target that squarely in front of us and all I will leave you with is the teams are incentivized to get to better cash numbers and new punch line in the guide. But we need to work that over the course of the year. And suffice it to say, again, it’s a good way directionally to think about where the free cash flow potential is for the company, but we have got some work to do and teams are mitigating that effectively.

Got it. And then just on CapEx, you guided 45 to 55 it’s a pretty hefty number. What’s going on there? Is that a new run rate or something specific that you have to spend on here?

Yes, that's a good question. With the increasing focus on national security in the space market and specific requirements from some of our potential customers, we are seeing capital expenditures rise slightly. This also includes ongoing costs for facility optimization. Additionally, we are investing in infrastructure and IT networks to support a hybrid work model, which is impacting our capital in the near term. While I wouldn't consider the range of 50 to 60 as a standard run rate for capital in this business—I'm actually expecting us to decrease that over the next few years. However, if we encounter program or contract requirements related to space or specific facility needs, we might experience upward pressure on capital. We're actively engaging with customers on this, as one of the strengths of our business model is being capital-light, and we aim to maintain that balance. I anticipate these elevated levels to normalize over the next couple of years.

Thank you. And then just last clarification for me is just on the backlog revaluation, does that have any bearing on the 1.7 times book-to-bill or should I say does have any bearing on the bookings numbers you have been reporting all year?

Yes. So think of book-to-bill close at 2.0 and so the 1.7 that we reported at the end of the year. So it does have about a 0.3 impact to that book-to-bill number, so...

Okay. Thanks.

No further questions at this time. I turn the call back over to Mr. Shane Canestra for closing remarks.

As we conclude, I would like to announce that our Annual Shareholder Meeting will take place on June the 2nd. Similar to last year, we will be conducting a virtual shareholder meeting whereby all 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. Thank you very much for your participation in SAIC’s fourth quarter and full fiscal year 2021 earnings call. This concludes the call and we thank you for your continued interest in SAIC.

This concludes today’s conference call. Thank you for participating. You may now disconnect.