Science Applications International Corporation (SAIC) CEO Tony Moraco on Q3 2019 Results – Earnings Call Transcript

Science Applications International Corporation (NYSE:SAIC) Q3 2019 Earnings Conference Call December 6, 2018 4:30 PM ET

Executives

Shane Canestra – IR

Tony Moraco – CEO

Nazzic Keene – COO

Charlie Mathis – CFO

Analysts

Greg Konrad – Jefferies

Cai Von Rumohr – Cowen & Company

Joseph Thompson – SunTrust Robinson Humphrey

Josh Sullivan – Seaport Global

Brian Ruttenbur – Drexel Hamilton

Jon Ladewig – Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the SAIC Fiscal Year 2019 Q3 Earnings Call. Today’s conference is being recorded.

And at this time, I’d like to turn the conference over to Shane Canestra, SAIC’s Director of Investor Relations. Please go ahead, sir.

Shane Canestra

Good afternoon. My name is Shane Canestra, SAIC’s Director of Investor Relations, and thank you for joining our third quarter fiscal year 2019 earnings call. Joining me today to discuss our business and financial results are Tony Moraco, SAIC’s Chief Executive Officer; Nazzic Keene, our Chief Operating Officer; Charlie Mathis, our Chief Financial Officer, and the other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you’ll also find supplemental financial presentation slides to be utilized in conjunction with today’s call. Both of these documents, in addition to our Form 10-Q, that will be filed this evening, should be utilized in evaluating our results and outlook along with information provided on today’s call.

Please note that we may make forward-looking statements on today’s call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from statements made on this call. I refer you to our SEC filings for a discussion of these risks, including the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, the statements represent our views as of today, and subsequent events may cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

In addition, we will discuss non-GAAP financial measures and other metrics, which we believe provide useful information for investors, and both our press release and supplemental financial presentation slides include reconciliations to the most comparable GAAP measures.

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

Tony Moraco

Thank you, Shane, and good afternoon. As we prepare for the future, we continue to focus on delivering strong performance across our contract portfolio, as evidenced by our third quarter results. SAIC’s third quarter performance of fiscal year 2019 continues to reflect sustained revenue growth and improved profitability. In alignment with our long-term strategy, Ingenuity 2025, our current performance and investments for the future are guided by a disciplined approach to address a favorable market environment. Areas of strategic importance and focus are IT modernization, cybersecurity, data analytics, readiness and training, space systems and mission application development.

With the fifth consecutive quarter of year-over-year revenue growth, the third quarter delivered internal revenue growth of 3% as compared to the prior year quarter. Year-over-year growth was primarily attributable to sustaining our recompete contracts, combined with newly awarded contracts across the customer portfolio, including a fixed price IT modernization program in the state and local market, and an IT support contract to a new customer, the Department of Health and Human Services. Also providing growth in the quarter were increased orders in our supply chain portfolio supporting the military’s increased focus on readiness and sustainment.

Strong adjusted EBITDA margins of 8.3% for the third quarter, up 90 basis points from last year, resulted from improved program performance across the portfolio. Strong cash flow performance was improved from the second quarter and a year ago, in line with our expectations. Charlie will expand further on the financial results in a few minutes. We continue to be in a favorable market as we begin the new government fiscal year. A majority of our customers are operating with appropriate budgets, and continue their investment decisions with confidence from the end of government fiscal year 2018. Our customers that are operating under a continuing resolution are doing so at prior year funding levels, which are higher than in past years.

In this favorable market environment, I am confident that SAIC is positioned well to accelerate growth through a variety of enablers. SAIC’s business development investments have not only produced several Expand and Grow new business contract awards, but continues to carry that momentum forward into next fiscal year with a significant amount of new business opportunities and our submitted proposals awaiting award.

With recent recompete awards of several notable contracts; SAIC is now able to focus additional investment dollars on new business opportunities, providing confidence in our ability to accelerate future growth. And finally, with our customers’ desire to adopt commercially available technologies, SAIC position as a technology integrator allows us to advance innovative solutions through our many commercial alliance partners, further enabling growth opportunities.

SAIC recently announced the opening of a virtual lab environment, known as the Innovation Factory, to deliver software, services, and solutions more quickly to our government customers. Using technologies developed and refined by SAIC as well as Red Hat, the Innovation Factory will enable customers to make rapid progress towards IT modernization and application transformation projects.

We also recently announced it through our alliance partnership with Amazon; we have achieved Amazon Web Services Government Competency Status. This designation recognizes that SAIC provides solutions and has deep experience working with government customers to deliver mission critical workloads and applications using AWS. Achieving this significant milestone differentiates SAIC as an AWS partner that possesses deep mission expertise in defense systems, national security, and federal civilian agencies, and our technical expertise of application and migration to the cloud using AWS capabilities and services.

As we focus on growing the business organically our long-term strategy, Ingenuity 2025, also contains a strategic M&A component to broaden customer access and obtain new capabilities to accelerate market penetration. As I discussed on September 10th, there are three tenants to the strategic acquisition of Engility. First, this transaction combines two leading government services providers with highly complimentary capabilities, customers, and cultures. The combination of these two well known and respected companies strengthens our position as a market-leading pure-play government technology services provider. Second, this transaction accelerates both companies’ long-term strategies, creating market sub-segment scale across a diverse set of strategic business areas of national interest, including the intelligence community and space domain.

Third, we expect to enhance shareholder value through improved profitability and cash flow driven by cost synergies and increase revenue growth enabled by greater customer access and more competitive and differentiated solutions. We’ve been actively engaged with our employees, customers, and the investment community recently as we progressed towards closing the transaction. Integration planning, led by Nazzic, is well underway, and our intent is to address the marketplace aggressively from day one. With a relatively low amount of recompete pursuits in Year One, we will be able to direct more business development resources to new business opportunities to drive future growth.

A few days ago, SAIC and Engility filed the final joint proxy in advance of shareholder meetings, on January 11th, with closing expected shortly thereafter. I encourage you to review this document to understand what a great opportunity this presents for the creation of shareholder value.

I will now turn the call over to our COO, Nazzic Keene

Nazzic Keene

Thank you, Tony. Contract award activity in the third quarter led to bookings of approximately $1.2 billion, which translates to a book-to-bill of 1.0 for the quarter. I would also like to mention that SAIC has been successful in the aware of several single-award IDIQ vehicles that de-risk the revenue profile through recompete awards and provides increased confidence in our ability to accelerate growth through new task orders. During the third quarter, SAIC was awarded several single-award IDIQ vehicles with a ceiling value of $1.2 billion. An example is the recompete award of a single-award IDIQ with a total potential value of $861 million to continue support to our U.S. Navy SPAWAR customer.

During the quarter, and contributing to bookings, SAIC was awarded a recompete, or Protect contract, valued at approximately $255 million over five years to continue space systems support for a sensitive government customer. Also in the Protect category was a three-year $98 million contract award from our AMCOM customer to continue providing aviation and unmanned systems technical support. Additionally, SAIC was awarded a new business or Expand category contract valued at $77 million over five years from Orange County California to provide information technology managed services and solutions. That concludes the most notable contributions to our third quarter bookings, with the balance comprised of other awards and contract modifications across our portfolio.

Subsequent to the end of the third quarter, we were awarded a significant recompete single-award IDIQ contract in our supply chain business. The approximately $1.7 billion 10-year Global Tire’s program, or more commonly known as TIRES, continues logistical and readiness support to our Defense Logistics Agency customer. Although the recompete award protected SAIC’s legacy contract revenues, significant new work was consolidated into the vehicle from a competitor’s contract. This great win de-risks an already low recompete year next fiscal year. At the end of the third quarter, SAIC’s total contract backlog stood at approximately $10.4 billion with funded backlog of approximately $2.4 billion, up 14% from the second quarter.

The estimated value of SAIC’s submitted proposals awaiting award is $17 billion, a decrease of $3 billion of the second quarter, but still above our normal historical average. I should note that of this amount approximately 50% of submitted proposals as in the Expand or Grow category, an indicator of a favorable market environment and the potential for SAIC to accelerate growth.

Before turning the call over to Charlie, I’d like to give you an update on our Marine Corps Assault Amphibious Vehicle, or AAV, program. In September, we announced that we received a partial Stop Work Order from our Marine Corps customer on this program. During the quarter, the customer issued a termination for convenience as they have changed their amphibious vehicle strategy. As these contract decisions are not uncommon, there is a formal process from the customer that handles these contract actions, and we are fully engaged in that process. While it will likely take some amount of time to fully resolve, we are committed to ensure that SAIC’s financial interests are protected appropriately.

As we execute our current business, we are also diligently preparing for the future. Integration planning for our acquisition of Engility has been underway since shortly after announcement, and great progress has been made in preparing to welcome Engility into the SAIC family. While work continues in order to hit the ground running, I am encouraged by both SAIC’s and Engility’s efforts to help ensure a successful integration. A few notable achievements so far include the validation of minimal organizational conflict of interest from both a current business standpoint as well as future contract pursuits.

We’ve spent considerable effort in the area of change management and we have confirmed the cultures between the two companies are compatible which mitigates integration risk. And lastly, we have executable action plans and increased confidence in achieving the $75 million of net cost synergies that will be realized over a two-year period. These are just a few achievements that have occurred since announcement, and the teams are making progress as we head towards closing of the transaction. Like Tony noted, I too am very excited about our future with the addition of Engility into the SAIC portfolio.

Charlie, over to you for our financial results.

Charlie Mathis

All right, thank you, Nazzic, and good afternoon. Our third quarter revenues of approximately $1.2 billion reflected internal revenue growth of 2.8%, as compared to the third quarter of last fiscal year. This was our fifth straight quarter of year-over-year revenue growth, and revenue growth on a year-to-date basis is 4.2%. Third quarter adjusted EBITDA was $98 million after excluding $14 million of acquisition and integration-related cost equating to a very strong 8.3% as a percentage of revenues. This quarter’s adjusted EBITDA generation and margin percentage is the highest since our separation over five years ago.

Third quarter profitability was strong, despite a large non-recurring negative adjustment as we realized a $25 million inventory provision partially offset by one-time positives of $19 million of VAC adjustments, mainly related to platform programs. While the third quarter had some large one-time adjustments, our normalized adjusted EBITDA margin for the quarter is in the low 8% range, reflecting very strong performance in the majority of the portfolio.

Adjusted operating income of $87 million in the third quarter resulted in an adjusted operating margin of 7.4%, up significantly from the prior year quarter due to improved performance across the portfolio and lower indirect cost. Net income for the third quarter was $48 million, and adjusted diluted earnings per share was $1.35, after excluding the $14 million impact of the acquisition and integration costs I just mentioned. The effective tax rate for the quarter was approximately 18%, slightly below our previously communicated expected full-year rate of 20% to 22%. We continue to expect our full-year tax rate to be within this range. Third quarter operating cash flow and free cash flow were a source of $86 million and $80 million respectively. Third quarter cash flow was negatively impacted by $5 million of cash paid for acquisition and integration costs.

On a year-to-date basis, we have generated $138 million of free cash flow this fiscal year, which is a $20 million increase from this time last year. Day sales outstanding at the end of the quarter were 59 days. The third quarter ended with a cash balance of $193 million above our average operating cash balance target of $150 million, principally due to the suspension of share repurchases as we work towards closing the Engility acquisition.

During the third quarter, we deployed $30 million of capital consisting entirely of cash dividends. Net debt at the end of the third quarter was approximately $1 billion and our net debt to trailing 12-month bank EBITDA leverage ratio is less than three times, reflecting our strong balance sheet.

Before moving on, let me touch on the capital structure enhancements that we realized through the restructuring of our credit agreement, which we closed at the end of October, and as detailed in our November 5th 8-K filing. We are very pleased with this transaction as it not only solidifies the committed financing required to close the pending acquisition of Engility, but also improves our borrowing rate, extends our debt maturity, and post closing, our new capital structure will benefit from increased liquidity through our upsize revolver. Additionally, it provides greater flexibility and capacity for capital deployment through modified covenants terms and conditions.

Concurrently, we also hedged our interest rate variability for a new $500 million seven-year interest rate swap, which together with our $365 million interest rate swap, effectively converse 80% of our $1 billion in floating rate debt to fixed rate. With these capital structure enhancements in place, we have improved on an already attractive pro forma balance sheet, and will have ample capacity and flexibility for the future.

Let me speak to SAIC’s outlook for the full fiscal year 2019. Consistent with our previously communicated outlook for the year, we expect internal revenue growth and margin improvement as measured by adjusted EBITDA margin to be in line with our long-term targets. As a reminder, we ended last fiscal year with an adjusted EBITDA margin of 7%, and have communicated that we can increase margins 20 to 40 basis points this fiscal year. We are confident in this outlook and are likely to achieve margins at the upper end of that range by year-end. As a reminder, this outlook excludes the expected total acquisition and integration cost of approximately $50 million in fiscal year 2019.

We continue to expect approximately $250 million of free cash flow in fiscal year 2019, excluding the expected acquisition and integration expenses I just mentioned. I should note that our Board of Directors will meet next week and consider the approval of our quarterly dividend, which is typically payable at the end of January.

Before taking your questions, I would like to take a moment to emphasize the compelling opportunity the Engility acquisition has for shareholder value creation. Tony mentioned the acquisition’s strategic alignment to our long-term strategy, Ingenuity 2025. And I would like to add that this is also aligned from a financial perspective. While creating a leading government services company from a revenue perspective, it provides an incremental step function in terms of adjusted EBITDA margin profile, going from the low 7% range to a 9% range after full realization of the expected $75 million of cost synergies after year two.

The transaction is expected to be immediately EPS accretive excluding transaction cost and intangible amortization, with about 9% accretion in year one, assuming realization of half of the anticipated cost synergies in the first year, and about 16% accretion in year two with full run rate cost synergies. When combining our expected annual free cash flow of $250 million with Engility’s, along with the expected interest savings and accelerated use of Engility’s tax assets, we expect to achieve approximately $400 million of free cash flow in year one. And after clearing cost synergies and cost to achieve at the end of year two, we expect free cash flow generation to approach $500 million.

This significant free cash flow generation provides additional flexibility in terms of capital deployment opportunities for shareholder value creation through the combination of debt pay downs, dividends, share repurchases, and strategic M&A.

Tony, back to you for concluding comments.

Tony Moraco

As we approach the anticipated closing of the Engility acquisition in mid January, I encourage shareholders of SAIC and Engility to review the recently filed joint proxy. I also encourage you to vote in favor of the transaction in advance of the January 11th special shareholder meetings.

Additionally, SAIC will be hosting an investor day on the afternoon of Monday, January 7th, in New York City. While the event will also be webcast, we encourage members of the investment community to attend in person, where we intend to discuss SAIC’s long-term strategy in more detail, Engility’s strategic fit within that framework, and the value-creating opportunity of the acquisition.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we have Greg Konrad with Jefferies.

Greg Konrad

Good evening. Just was hoping to start with cash. I mean, you’ve done $130 million in the first three quarters. You said $250 million for the year. Just if you could help us bridge the final quarter, and then just maybe the moving pieces to get to the $400 million?

Charlie Mathis

Hey, Greg, this is Charlie. So, $138 million for the first three quarters, as I said, we’re $20 million ahead of free cash flow from last year, operating cash flow $30 million. We expect the DSOs to be in the low to mid 50s at quarter end as compared to last year. And so, we’re confident in being able to get to that $250 million due to the greater profitability of the company, the lower cash tax payments that we have and being able to achieve that DSO target number.

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Greg Konrad

Thank you. And then you mentioned some consolidation in the Tires program. I mean, what’s the incremental of that new contract versus the previous one you were operating under?

Nazzic Keene

Hi, this is Nazzic. So yes, at this point we anticipate somewhere between 15% and 25% incremental revenue on our existing base business.

Greg Konrad

Thank you. And I might as well just sneak in…

Nazzic Keene

Yes, it’s about $15 million to $25 million incremental.

Greg Konrad

Perfect. And then just to sneak in one last one, is there any update on Mobile Protected Firepower, I thought that was going to be in November, but haven’t seen anything as of late?

Nazzic Keene

Yes, so we’re still waiting. We expect that award to be somewhere in the December timeframe. That’s what we understand. And we’re just anxiously awaiting the award.

Greg Konrad

Thank you. Great quarter.

Nazzic Keene

Thank you.

Tony Moraco

Thanks, Greg.

Operator

And moving on, from Cowen, we have Cai Von Rumohr.

Cai Von Rumohr

Yes, thank you very much. So I guess the release talked about the strong profitability reflecting $22 million of performance, $14 million of EACs. And I think, Charlie, you mentioned $19 million, and then the $25 million inventory charge. So maybe walk us through all of those items, if you could. Thanks so much.

Charlie Mathis

Yes, okay, Cai, let me walk you though this and explain better. So the third quarter EBITDA margin was a very strong 8.3%, and this did exclude the $14 million of acquisition and integration cost. There was a large negative non-recurring adjustment of $25 million related to inventory and purchase commitment provisions. And in the quarter, this was offset by one-time positives of $19 million of EAC adjustments mainly related to platform programs and other one-time items. These one-time adjustments essentially netted each other out. And aside from that, we had a very strong performance in our defense systems and Fed/Civ portfolios mainly due to product service mix, [indiscernible] short-term contracts. And this led to a normalized low 8% EBITDA margin as I stated, of which we’re very pleased with that.

Cai Von Rumohr

So what about the — is it a misprint, the $14 million that’s in the release?

Charlie Mathis

The $14 million is the year-over-year comparison. That’s —

Cai Von Rumohr

Got it, okay.

Charlie Mathis

Okay, and $19 million — it is in the quarter.

Cai Von Rumohr

Got it. That’s very helpful. And you mentioned the tax rate, 22% to 23%. That’s the fourth quarter or the year, because if it’s the year you basically are going to have a huge step up in the fourth quarter?

Charlie Mathis

Yes, for the full-year, 20% to 22% is where we think we’ll be, somewhere in that range.

Cai Von Rumohr

But if you were there, that’s like 35% in the final quarter. Is that — so you’ll have 35% to 38%, is that essentially what we’re talking about?

Charlie Mathis

Yes, there were some discreet items in Q3 related to our tax filings and tax credits that made the Q3 number 17% favorable. So overall, you should be modeling for the full-year in that 20% to 22% range. Probably the lower end of that range would be advisable.

Cai Von Rumohr

Got it, okay. And then — so I think at one point you were talking about Engility 2020 — well, excuse me, fiscal ’21 cash flow of $450 million. And today you talked of $500 million. Maybe walk us through the differences between those two numbers.

Charlie Mathis

Yes, so let me walk you through the cash flow. So year one, after the acquisition, free cash flow go from $250 million to $400 million. By year three, when we clear all the cost synergies and costs to achieve, we should be approaching $500 million in free cash flow. There’s about $38 million to $40 million in the middle year there related to the cost synergies that we would take out? So it really goes $400 million, $450 million, $500 million would be the cash flow walk.

Cai Von Rumohr

And so the $500 million is really fiscal year ’22?

Charlie Mathis

Yes.

Cai Von Rumohr

That’s correct. Okay, that’s terrific. And then the interest in other, it looks like it was a negative of $15 million. Why was it that high, and what should we look for the year?

Charlie Mathis

I’m sorry, was that — you said the interest?

Cai Von Rumohr

Interest expense and other expense looked like it was like a $15 million negative in the third quarter. Why was it so high, and what should we consider for the year?

Charlie Mathis

Yes, so there was again because of the refinancing of the debt that occurred in the third quarter there was additional expense that went through there on the amortization and the interest expense. So you should really look to get back on the interest expense to a normalized amount that we had in the previous two quarter, which is around 10% or 11%, so that’s — okay.

Cai Von Rumohr

Yes.

Operator

And moving on, we have Tobey Sommer with SunTrust.

Joseph Thompson

Hey, guys, this is Joseph Thompson on the line for Tobey Sommer. Talking a little bit about MDF and platform business, are there any other platforms that SAIC is targeting that you could discuss? Thank you.

Tony Moraco

Joseph, this is Tony. We’re looking at broad complex system integration across the portfolio. The Army does some modernization programs that we would consider. We don’t want to talk about anything specific in the pipeline, but there are modernization type programs, probably smaller in scale than MPF that we would consider. That’s kind of the high end of that, but we’re looking at modernization components that fit our business model and that would be attractive to the customers as an alternative to the OEMs.

Joseph Thompson

All right. And the moving on, could you talk a little bit about the single-award IDIQs that were not included in book-to-bill, what areas are they in, and are they categorized as Protect, or Expand, or Grow in year four.

Nazzic Keene

Hi, this is Nazzic. So as we look back to Q3, the largest one is the one I referenced in my notes, and that is a single-award IDIQ with the recompete supporting our SPAWAR customer. And then there’s various other smaller ones that go into the portfolio. We did do about, as I mentioned, $1.2 billion in single-award IDIQs in Q3. And of course that will de-risk the revenue profile going forward. The other one that I’ll note, and again I mentioned this but I’ll just reinforce it is, after the quarter closed we were awarded the Tires program that I mentioned. And that is a single-award IDIQ with additional revenue opportunities in the consolidation of two previous contracts.

Joseph Thompson

Thank you. And then following up about the Tires program, what does the margin profile look like on that?

Nazzic Keene

It’s consistent with the overall margin of that portfolio, but we don’t speak to specific margins at the program level.

Joseph Thompson

Got you. And my final question is, how would you describe your business with federal agencies that the subject to continuing resolution? I know you mentioned earlier that you guys have seen more consistent or I guess more consistent budgets from a lot of the agencies you work with, but what about the ones on continuing resolution? Thanks.

Tony Moraco

Yes, we don’t really see much of an impact on the continuing resolution. Looks like if we might get a two-week extension. But overall, with the bills that have been signed to start ’19, which was — I think everyone’s excited about and then because we haven’t seen it in a while, that the remaining bills, we don’t have a significant exposure within those. It’s still important to get those passed through, but since those same customers are operating at FY ’18 levels, the [indiscernible] lines are pretty strong and robust, so really no impact on the CR for the remaining bills yet to be signed.

Joseph Thompson

Thanks guys. That’s all for me.

Tony Moraco

Thanks.

Operator

[Operator Instructions] Next, from Seaport Global, we have Josh Sullivan.

Josh Sullivan

Hey, good evening.

Tony Moraco

Hi, Josh.

Josh Sullivan

Just looking at some of the budget figures that are fermenting out there, are your long-term SAIC targets you’ve given still in place if we see a $700 billion budget next year?

Tony Moraco

Yes, I’d say that we’re confident in the growth profiles that we’ve had. The budget environment, I think, is still fairly robust. The current rhetoric around declines, wouldn’t be surprised if it comes off of the FY ’18 FY ’19 budget deal levels, but we don’t expect it to be a dramatic drop off, just as we kind of incrementally moved up, we’ll probably incrementally move down that scale. The market demand is still very significant, whether it be in the defense sector on mission system modernization or IT modernization across the entire government. So although we’ll have operational impact perhaps within some of the government profiles I see will impact the opportunities that we have, our market position, and therefore would not shift off of our long-term revenue growth projections.

Josh Sullivan

Okay. And I guess on that IT modernization comment, I think Pat Shanahan made some comments recently about wanting to migrate to the cloud a little faster, but the pace was a little frustrating. Are you able to capitalize on that with the AWS relationship or otherwise? And is there any way to kind of size that opportunity for us or what you’re currently doing?

Tony Moraco

Well, it does give an advantage, our ability through the partnerships to continue to find innovative ways to accelerate the application migration from legacy systems, address the information assurance and security demands on the customers and yet still providing that innovation that allows them to serve mission capabilities differently. Hard to quantify, we got a fairly robust enterprise IT portfolio. So about 40% of our portfolio is in that IT domain, and a significant amount of that is in cloud migration activities and/or cyber security. So we do see those opportunities continuing. And our partnerships with companies like AWS and others allow us to get to market faster with some solid solutions.

Josh Sullivan

Okay. And then just one last one, I think you made some comments about investing dollars in new opportunities. Any way to size that or what are the large opportunities you’re going after in that?

Nazzic Keene

So this is Nazzic. No, I mean, I really don’t want to touch on specific large opportunities. We continue to pursue the market in the areas that Tony mentioned, our strategic focus areas. We do have, as we’ve noted before, a relatively low recompete year next year, and so that will allow us to have greater investments in the areas of expanding the business and expand our Grow categories serving our customers. So we see the opportunities to drive incremental investments in growing the business based on that profile of recompetes for next, but probably don’t want to touch on specific opportunities.

Tony Moraco

Yes, this is Tony. I would just highlight that we think that we’ve got about 16% of our portfolio is in recompete next year, and that is inclusive of the Engility portfolio, so as an enterprise. Typically, given the contract terms, we run in the low 20s, 20% to 25%. So we’re very excited about the opportunity to shift next year’s dollars in part to not only cover our recompetes but also increase the joint bidding as we look to expand and grow with Engility compliment to the portfolio.

Josh Sullivan

Okay, thank you.

Tony Moraco

You’re welcome.

Operator

Next, we have Brian Ruttenbur with Drexel Hamilton.

Brian Ruttenbur

Yes, my first question, just real quick, is trying to understand Cai’s earlier question, and a clarification around that, because I did the similar math and then got confused on the answer. So I hate to repeat a question, but the tax rate in the fourth quarter is what? Can you fill in the blank for me?

Charlie Mathis

Yes, the tax rate, between 35% and 40%.

Brian Ruttenbur

Okay, good. So that’s what I heard — and — yes.

Charlie Mathis

Yes, I was focusing on the full-year tax rate of 20% to 22%.

Brian Ruttenbur

Okay, perfect.

Charlie Mathis

But fourth quarter —

Brian Ruttenbur

Go ahead.

Charlie Mathis

Okay.

Brian Ruttenbur

No, and then second question — I interrupted you too much, I apologize. The strategy for growth going forward, you talk about business development, I hear a lot about synergies. Do you expect, with Engility, that there’s going to be an acceleration in growth? It sounds like a lot of your — at least initial it’s going to be all about saving money, but is there going to be an acceleration due to the combination, is that what you’re anticipating, Tony?

Tony Moraco

Largely it’s — in year one, our opportunity to exploit the existing IDIQ contracts between the two companies to secure new task orders would be the means to work on a shorter sales cycle. The larger opportunities, multi-hundred million dollar opportunities to bid jointly, we will be working out through the pipeline next year, and given where we’re still on that 12 to 24 month sales cycle, really we will see incremental revenue growth as a result of those bids until a year or two out in our FY ’21 and ’22.

So I think it will be a gradual increase, and we will let you know as we go forward where the source of those revenue streams are coming from, but still confident in the alignment, the compatibility, the strategy, I would say the existing portfolios have very little overlap in conflicts. So we have to eliminate certain opportunities and we’re still at record level amidst winning award that we think again support growth going forward, but we will have to wait and see on incrementals with the market, year or two, we will be very aggressive in filling that pipeline based on our collective capabilities.

Nazzic Keene

And a little bit of color, I will add, so I touched on the fact that we’ve been doing the integration planning, but we are doing all the organizational design, all the integration planning in this phase, and so when we do close as we get towards the mid to late January timeframe, we absolutely plan on hitting the ground running from a sales perspective and from investment perspective. And so, I think that will allow us to accelerate the opportunities that Tony just touched on as we work through next year.

Brian Ruttenbur

Great. Thank you very much.

Operator

Next we have Joe DeNardi with Stifel.

Jon Ladewig

Hello. Yes, this is Jon Ladewig on for Joe DeNardi. My first question is around awards. Can you kind of give us some color on fourth quarter awards to-date that you’ve seen, and as it pertains to the extension for defense and other government, excuse me, other national security related contract awards from FY ’18?

Nazzic Keene

This is Nazzic. As far as this quarter, we’re seeing pretty normative activity. So nothing — certainly I touched on the TIRES program, and that’s a big single event, but otherwise it’s pretty normative. I’m not sure exactly what the other question was on — as it relates to fiscal ’18, I didn’t quite follow that, I’m sorry.

Jon Ladewig

Oh, no problem, Nazzic. For FY ’18 allowed for additional dollars to be put on contract in fiscal first quarter ’19, I was just seeing if that’s been — have you seen any impact from that so far this quarter?

Nazzic Keene

No, I have not seen that. I will note that, and we touched on this on the single award IDIQs; we are seeing greater use of those and greater traction there. We have seen that over the course of the year. So that’s probably the only thing that’s probably out of the ordinary as we look at these last couple of quarters as well as into Q4, but otherwise, we’re seeing pretty normative type activity.

Jon Ladewig

Okay. Kind of along the same lines for the budget kind of outlook for FY ’20, is the customer changing their order behavior in regards to the budget, or is it steady as she goes?

Tony Moraco

I’d say it’s a bit more steady as she goes. We’ll see just as we see some of the year-over-year money rolling through; again don’t expect the large investments, the modernization programs to shift dramatically. I think the customers to-date have been both focused in their strategic priorities, that’s established I think their award decisions. So I don’t think there’s too much on the fringe that would be eliminated. So I think it’s just steady as she goes. We’ll see down modest macro budgets as Congress and administration sort through those elements, but as far as addressable market, we really don’t see a dramatic change in FY ’20 profile. We do anticipate another two-year deal. Some sequestration doesn’t get repealed, but again, we shouldn’t expect to see an addressable market shift off of our segment as a result.

Jon Ladewig

All right. Thank you very much.

Tony Moraco

Okay.

Operator

And ladies and gentlemen, that does conclude our question-and-answer session for today. I would like to turn the floor back to Shane Canestra for additional or closing remarks.

Shane Canestra

As Tony mentioned, we are excited to host an Investor Day on the afternoon of January the 7th. Communication will be coming out shortly regarding registration and details. If you wish to attend, please contact me to be added to the distribution list. Thank you very much for your participation in SAIC’s third quarter fiscal year 2019 earnings call. This concludes the call, and we thank you for your continued interest in SAIC.

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