Science Applications International's (SAIC) CEO Tony Moraco on Q4 2016 Results - Earnings Call Transcript

| About: Science Applications (SAIC)

Science Applications International Corporation (NYSE:SAIC)

Q4 2016 Results Earnings Conference Call

March 29, 2016 08:00 AM ET

Executives

Paul Levi - IR

Tony Moraco - CEO

John Hartley - CFO

Analysts

Edward Caso - Wells Fargo

Tobey Sommer - SunTrust

Jon Raviv - Citi

Cai von Rumohr - Cowen & Company

Amit Singh - Jefferies

Bill Loomis - Stifel

Michael French - Drexel Hamilton

Operator

Good day and welcome to the SAIC Fiscal Year 2016 Quarter Four and Year-End Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Paul Levi, Investor Relations. Please go ahead.

Paul Levi

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 will 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 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, 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.

It is now my pleasure to introduce our CEO, Tony Moraco.

Tony Moraco

Thank you, Paul and good morning. SAIC’s fourth quarter and full fiscal year 2016 results demonstrated growing momentum and the execution of our strategy and delivering on 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 full fiscal year adjusted EBITDA margin was 7.2%, excluding acquisition and integration related costs. This represents the 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 to the 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 the building momentum the SAIC’s 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 and 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 FY16 such as NASA LITES, GSA, GEO, FAA Controller Training, and successes in our vehicle integration business. Award activity of $855 million in the fourth quarter translates for a book-to-bill of 0.8, in line with our seasonal bookings profile and historical fourth quarters. The quarter included many smaller awards as well as contract modifications and extensions and a significant program award of United States Marine Corps 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 awards SAIC.

As a reminder, this is a new program for the Marine Corps and by bringing to bear a market disrupting business model, SAIC was successful in winning the ACV award against traditional platform manufacturers. This $122 million fixed price award to produce 13 prototyped 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 the delivery of the first of ten Amphibious Assault Vehicle survivability upgrades or AAV, ahead of schedule to the Marine Corps. These two programs are a continuance of our proud history of vehicle integration in support of our war fighters and amplify the success of innovations in this business area.

During the quarter, we were also successful with $485 million award on a NASA EAST program re-compete. It was protested shortly after award and we expect resolution in the second quarter as we continue serving NASA on the current contract. SAIC continue 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 were awarded acquisition on the U.S. 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 U.S. Army Aviation and Missile Research Development Engineering Center to provide human performance training services to special operations 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 three times our annual revenues. Our submitted proposals are split roughly in half was 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 investments in the development of our pipeline as demonstrated by two-thirds of the submitted standard contracts in the expand and grow categories.

Before asking John to discuss the financial results, let me provide a quick update on the Scitor integration.

I’m very pleased that we have completed the final phase of the Scitor integration with a transition of Scitor to SAIC’s enterprise systems. This is a tremendous accomplishment and I thank the team for a 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 Hartley

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 makes 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 subcontractor activity on our AMCOM EXPRESS program and a 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 costs 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 reflect 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 baseline for margin improvement, in line with our long-term financial target 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 cost. 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 tax expense for the quarter was primarily the result of the retroactive 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 day 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 Corps AAV contract. We still expect this to normalize in the first half of fiscal year ‘17, which should generally be replaced by 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 a leverage ratio of just over three times debt to pro forma adjusted bank EBITDA. I’ll remind you that we have a credit agreement restriction on share repurchases of $50 million per fiscal year until we’re below the leverage ratio of three times. As a result of the strong FY16 performance and through scheduled debt repayment in our first quarter, we expect to be free from the 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 above our $150 million average target but rather deploy it to maximize shareholder value. During the fourth quarter, we deployed $46 million of capital, consisting of $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’ve 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 schedule debt repayments of $54 million with the remainder of our cash in excess of $150 million available for other components 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 29th.

That concludes my remarks on the fourth quarter and I’d like to provide commentary regarding the expectations for fiscal year ‘17. I echo Tony’s comment that we have significant momentum going into fiscal ‘17 and our long-term financial targets remain intact. Based on significant new awards in the latter half of FY16 and an improving market 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 over time, 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 six 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.

Tony 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 and we are grateful for what he has helped us accomplish.

During his transition period, we have initiated a search to identify a new CFO to 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 8th at our McClain Virginia offices and our proxy statement will be distributed 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 in 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll go to our first question from Edward Caso with Wells Fargo.

Edward Caso

Could you update us on your major contracts that are either coming up for re-compete or possibly restructuring, in particular AMCOM EXPRESS? Thank you.

Tony Moraco

The re-competes this year that we’re tracking, the 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 movement to vehicles like the OASIS contract IDIQ has been successful and moving work there. We expect that the process to continue through the latter part of this year and likely into next year, so probably incremental shift of the portfolio, not a one massive move. And then the third area we’re tracking is our supply chain [indiscernible] portfolio and the contracts there are also for re-compete. So, I think we’re well-positioned for maintaining continuity there, have the contract vehicles in place for AMCOM transitions as they occur and very competitive on both NASA EAST and [indiscernible] side.

Edward Caso

Are you seeing any incremental impact from some of the small business initiative or an effort in the intel community to reduce the contractor content? Thanks.

Tony Moraco

Probably more so on the small business strategies than on any in-sourcing at this point, collectively. So, I’d say that the government is still dependant on the private sector for some of that subject matter expertise and services that we provide, so probably less pressure there. But there is consistent ongoing pressure and changes to support small business and that results in small business set asides. So, across our portfolio, historically last by two or three years, more recently with Scitor and that portfolio as this 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, the prime positions our role in likely situations turns into a subcontracted to them and that creates some revenue contraction on our overall portfolio.

Edward Caso

I was hoping to stick one in 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 F ‘17 in operating cash flow. I just wanted to make sure that 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 Hartley

Thanks Ed and just to repeat what I had said in the earlier version or the earlier discussion. It’s 240 million on average in over time. The 240 million will be -- and it’s 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’ll go to our next question from Tobey Sommer with SunTrust.

Tobey Sommer

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.

Tony Moraco

Thanks Tobey, it’s Tony. I’d say, we’re in a slightly improved environment, more confident 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 budgets submitted and some of the committee activities that we have visibility to. So, I’d say the government spending outlook is slightly positive from last couple of years, at least. We’ve seen steady procurement going forward. The demand on proposals, request for proposals is still sustained, evidenced by the high level of submitted. So, we are hopeful that outlook then coverts to decisions on larger and longer term contracts. I think we’ve seen steady and consistent sustainment of task orders, mission operations and the like. But the larger contracts, a multi-hundred million dollar contract for IT upgrades, upgrades in mission capabilities, those are what we’re now seeing most likely to come through decision over this next time horizon.

We’ll see some maybe stall in the election cycle for six to nine months as we get closer to late summer into spring, based on political appointments. But again, our portfolio is less subjected to those elections; those are some of the big programs that tend to require a policy shift. So, we’re less subjective to that. But you do see some on those larger contracts. We except good continuity throughout the next year with those larger contracts perhaps getting awarded with maybe some slight delay as we look at the end of the calendar year, 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, maybe you could comment on what your acquisition appetite is, if that’s an alternative use of cash? Thank you.

John Hartley

Hi, it’s John Hartley. I’ll address the cash flow and the use of it. We have founded 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.

Tony Moraco

The market has a lot of activity as different companies are shifting their portfolios. To John’s point with support on dividend, the modest debt repayments and the share repurchase focus, those are the priorities. But we’re 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’ll consider those opportunities. But we’ll be more in the strategic buyer mode than looking for any kind of acquisitions just for the sake of bulking up.

Tobey Sommer

Thank you very much.

Tony Moraco

Thank you.

Operator

We’ll go to our next question from Jon Raviv with Citi.

Jon Raviv

Could you just talk about what enabled you to outperform you to approach 200 million for operating cash flow this year? You mentioned better collections and that that would be sustainable. And if that is sustainable, would it be fair just right out to say that 215 million is the right number to think about for free cash flow in FY17?

John Hartley

Yes. So on the cash flow, we did experience some -- on larger programs, some payments, they weren’t 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 seems like it’s a market thing but it’s also a small business thing. Can you characterize what you’re losing, where you’re losing and when that trend might end and what you’re doing to reverse that? And then related to that is Scitor even though the sales might be falling short, how is doing on the EBITDA and cash generation that you guys had you outlined when you first made the acquisition?

Tony Moraco

On the last point, it’s performing as expected with the higher margin portfolio and the profitability and the cash performance are all in line. I think we’ve done a good job to manage that the investment track to sustain those margins. On the market safety elements, still very optimistic the market access that we now have to the Scitor acquisition, 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 sole source, very insular position with their customers, the one that’s continued to become more competitive, it’s the same trend we saw in some other markets over the last few years. We’ve messaged that the ICs lagged a bit in that. But overall, the small business pressure is just one dynamic of that portfolio. But contractor competitiveness is still there. We think we have very strong positions yet with the staff and the relationships and the subject matter expertise. T he demand is still there for 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 in expanding the business development pipeline, both for what you consider to be organic to the Scitor portfolio to sustain that work but also with SAIC’s broader capabilities to look for other agencies and other programs that we can now compete in. We’ve got good line of sight on submitted and to be submitted proposal track and the pipeline that again further provides confidence that we can have a Scitor a legacy portfolio for our current intelligence community portfolio contribute to low the single-digit revenue growth and sustain the higher margins in 10% and deliver the cash we expected which was thesis around the acquisition.

Jon Raviv

I understand, I’m just trying to get an idea of when Scitor stop seeing a drag, is that target for this year or is that go for next year, when do you see that happening based on those units.

Tony Moraco

I’d say, it’s through the year. And I don’t characterize Scitor as being a drag on our business but you see opposite, is a market opportunity. That’s why we bought it. The modest revenue contraction on our portfolio is one we’re obviously sensitive to. But as important, watching the margins, it’s one of our highest margin portfolios that was again one of the investment thesis and the capabilities that they have, the barriers 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 higher 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. Thank you so much.

Operator

We’ll go to our next question from Cai von Rumohr with Cowen & Company.

Cai von Rumohr

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 those decisions, if it’s that big a number, when over the years should we expect those decisions to come up?

Tony Moraco

The expand and grow is a sole strategy to protect our core business, the re-competes again are normal part of our business. But the two thirds, a real focused on expand and grow is t the investment and the quality business own pipeline that really leverages our operating model and the metrics to deliver more capabilities, so the customers we know on the expand side, and then build on our past performance and take those same proven capabilities to new customers. And I think we characterize momentum as an element around the key program win from last year between FAA program, the GSA GEO program on the IT front and hardware integration programs collectively are areas where we’ve taken, capabilities, training stimulation example on the FAA, our ability to grow those accounts and bring customer relationship and a capability and have that intersection, give us a competitive advantage in the marketplace. And we’re seeing that through the awards that we announced through last year. I think our pipeline going forward has similar profile of types of programs. So, the conscious effort to invest and grow the top-line revenues by well-positioned on captures that are built on our past performance and that expand and grow. The areas of growth and investments are along the lines of our enterprise IT with cyber security components and the cloud migrations, training and simulations as a broad capability across our markets, whereas a leverage point for our customers to further enhance readiness, the vehicle monetization program that I’ve touched on supported by additive manufacturing and 3D training, all support our engineering components, where we see growth for us in marketplace and we’ll continue to build on our past performance and the pipeline reflects that.

Cai von Rumohr

Terrific. And then, John, I just want to say, you’ve done a terrific job, job well done. Tony, when did you know that John was going to make this decision to return to California? And where are you in the process of search for a new CFO; is it likely to be internal and external; and when do you expect to have that billet filled? Thanks so much.

Tony Moraco

John has done a great job. The team collectively has the discussions and announcements. Last week results of recent conversations with John just over the last short period of time culminated in a conversation with our board at our board meeting last week and hence we felt it was appropriate to announce the transition. So very recently few conversations -- the transition itself as we announced targeting the end of June to have a smooth transition where John and the finance team maintain a continuity of the business. We’re executing to our succession planning that includes consideration of internal candidates and includes an external search as well. So, we can make sure that we have that long-term continuity, based on John’s performance to-date that’s consistent with the strategies and our business model we talked about, so don’t expect to change having forward either.

Cai von Rumohr

Do you expect to get that done? And that’s a relatively short time frame for an important billet to fill?

Tony Moraco

I think so. You always have a succession planning process. So, we’re not starting from scratch and we have a lot of depth and what’s there. And I think we’ve got a real attractive business that we’ll also be able to track high quality CFO or build it internal. So, we’re confident that that’s a reasonable timeframe and we’ll adjust accordingly, based on our success in the market.

Operator

And we’ll go to our next question from Amit Singh with Jefferies.

Amit Singh

Your pipeline looks very strong and the long-term revenue growth target of low single digit that seems very doable. But as you’re looking at fiscal ‘17 and I look at your current year bookings, which are strong but book to bill of 1, but is that enough to drive that type of growth in the near-term if you are looking at just fiscal ‘17?

Tony 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 in total scope, but very much a recurring process that we normalize around the 1.0. There will be fluctuations as we win some large awards where it can go up. But again we message consistently that we operate in that 0.9 to 1 on a sustained basis and then you get some fluctuation and other point off of that. We’ll sustain a revenue growth outlook as we go forward because those incremental changes do contribute. And it’s in fact the customer confidence move forward and we see less revenue contraction as they stabilize the budget. That we also think is a tailwind and that we’re not backfilling for revenue losses on the re-compete but rather everything we do win is in fact additive, even though the book to bill may appear modest.

Amit Singh

And then for fiscal ‘17, are you guys expecting some year-over-year headwinds from the lower material volume and supply chain contracts?

John Hartley

We expect some. It would be less than $100 million and that still we consider that in considering the low single-digit revenue growth for FY17. So, I think about $50 million to $100 million in that range, and that’s on all the supply chain business.

Amit Singh

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 Scitor driven, or are there other factors in there as well?

John Hartley

It certainly is Scitor; we’ll 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 obviously are things like converting some more of our labor content versus subcontractors off of some of the vehicle integration programs, certainly have a higher margin portfolio than just the pure services business. So, there are a number of drivers in there that we continue to work. So, we think that’s sustainable that 10 to 20 basis points of growth on average and over time is sustainable for the next several years.

Operator

We’ll take our next question from Bill Loomis with Stifel.

Bill Loomis

Just on Scitor, Tony, I just want to be clear on prior comments you gave on Scitor, did you say that the drag is lower, Scitor revenues will likely be down in fiscal ‘17 as they face more small business and other transition issues?

Tony Moraco

I didn’t say to be done; I said that they will likely go to flat based on what they’ve been. I think they’ll contribute collectively on our revenues, as we get past the 12-month mark, given the sales cycle still 12 to 18 months. So efforts that we put in place since the time of acquisition 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 complements 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 IC, a legacy Scitor market access but also bring in the Scitor resources to bear in some of the other business, whether it be a NASA, given their space capabilities or in other areas. So, I think we’re going to see continued contributions from Scitor acquisition. But, it’s going to flat as we maybe s is how you may want to think about that aspect of our portfolio.

Bill Loomis

Okay. And then just on Scitor, can you tell us what their book-to-bill was over the last year and kind of a sense of the proposals, the bid activity in Scitor specifically?

Tony Moraco

On the bid activity on the pipeline, again it continues to develop. They’d had -- their re-compete profile, traditional capture, we’ve been focused on the expand and grow with the broader capabilities and we don’t report on book-to-bills at the organizational component of the business.

Bill Loomis

Okay. Did they have awards to your expectation? Is it kind of greater than the average, can you talk about?

Tony Moraco

And expectations of winning the work that we needed them to continue to hold on to, on the re-compete, so absent a customer acquisition change like a small business set aside, they have sustained our expectations, their win rates on the programs that they have in their pipeline.

Bill Loomis

Okay, great. And then on ACV on the margin side -- vehicle work would be higher margins you said, but on the prototype contracts, do you expect that to be on ACV to be higher margins, and if so, is it significantly higher?

John Hartley

That’s the expectation that it is higher. Think of more like double-digit 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.

Bill Loomis

Okay. And just one quick on supply chain. If you’re seeing lower materials and that’s obviously your lower margin type work, of your 10 to 20 basis points goal; how much of that is due just because of the lower pass-throughs on supply chain?

John Hartley

We really were contributing almost anything to that, so it really is not a big component of it.

Bill Loomis

Okay. But the revenue drop, the material drop, those would be lower margin business, right; that 50 million to 100 million lower revenue this year would be on quite lower margin?

John Hartley

Yes, it is.

Bill Loomis

Okay. Thank you.

Tony Moraco

You get the impact but not necessarily, it’s not one of the drivers when we talk about 10 to 20 basis points. It’s not through the reduction of the supply chain volume that we see that result. It’s on other initiatives. Maybe an outcome but that’s not the initiatives.

Operator

And we’ll take our next question from Michael French with Drexel Hamilton.

Michael French

So, John congratulations on finding a way to return to San Diego. I know that’s easier said than done because I’ve been trying to do that myself for 25 years and it’s still 2,000 miles away. So, I wish you the best.

John Hartley

Thank you.

Michael French

First one to Tony on the long-term internal revenue growth target. Similar to what you had last year and because the reasons that we went through you didn’t quite hit that. And I just wanted to ask you to address level of confidence this year compared to last year on the outlook for top-line?

Tony Moraco

Higher confidence in the low-single-digit growth, I think a couple of factors. One, we’ve seen maybe some slight stability in the revenue contraction side as run rate programs have gotten to a new budget baseline. So, we see less headwinds of replacement dollars on the re-compete side. So every new expand and grow opportunity does create upside on the revenue profile overall. The wins in FY16, as a result of capture that occurred after respond 18 to 24 months later, we are now seeing those programs convert to revenues. So, we know we have some tailwind on the revenue profile, given the five or six programs that we’ve talked about that were new between GSA, GEO, FAA, NASA LITES and the vehicle programs. So that tailwind is there that again gives us higher confidence of getting above the positive revenue growth profile. And as we’ve seen last year and the conference in the quality of our pipeline, we would expect some sustainment of award activity that would be again favorable in the expand and grow category, given our investments to date in that area. We expect it to be sustained. Could be at a lower level, task orders and the like, but we think that adds further confidence of why we expect that low-single-digit growth in FY17.

Michael French

Okay, very good. And on Scitor, there have been some employee turnover, has that stabilized or could you explain the situation with the churn on the employee base?

Tony Moraco

It’s stabilized, we’d agree but it does fluctuate. There are certain elements through the year from the acquisition, conversion of benefits that have a direct impact on employees but I think overall, we’d manage that process very well. We expected a slightly higher attrition rate than on average. Obviously it did go higher than we’d expected by few percentage points. We’ve been able to also backfill and hire successfully. So, we’ve minimized any revenue consequence. So, I think the attrition although slightly higher than we would liked is one that we’re managing through. And as we go through a full year now and have hit most of the major gates with effective employees, most understand where they sit today and now that business is converted. And I think we’ll see further stability on the attrition numbers.

Operator

And we’ll go now to an additional question from Cai von Rumohr with Cowen & Company.

Cai von Rumohr

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 were those related to; were they at the parent, at Scitor, and how big where they?

John Hartley

Yes, it was a number of small items, Cai. So, there wasn’t a significant driver. It was across the portfolio and it was just strong program performance. We also did have a slight indirect rate under-runs that trued up in the fourth quarter and so that flows through to all the programs, at least the fixed price and the T&M and so that helps a little bit as well. So, it really wasn’t any specific item that was across the portfolio.

Cai von Rumohr

And then looking at your adjusted EBITDA, you had a takeout of 3 million that was an overlap with acquisition expense, how big would that number be in fiscal ‘17?

John Hartley

There would be -- you mean the overlap number?

Cai von Rumohr

Yes.

John Hartley

The overlap number was accelerated depreciation, so was obviously in the D line; so you can’t take it out twice. And so, I would expect, since it’s going to be about 5 millionish of integration type cost overlay to facilities, I would think that it really shouldn’t exceed 1 million or 2 million of that -- the rest are lease buyouts and the like.

Operator

And that concludes today’s question-and-answer session. I’d 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 in the call today. Have a good day.

Operator

That concludes today’s conference. We appreciate your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!