Science Applications International Corp. (SAIC) Q3 2018 Earnings Conference Call Transcript

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Science Applications International Corp. (NYSE: SAIC)
Q3 2018 Earnings Conference Call
Nov. 7, 2017, 5:00 p.m. ET

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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the SAIC Fiscal Year 2018 Q3 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Shane Canestra, Investor Relations. Please go ahead, sir.

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Shane Canestra -- Director of Investor Relations

Good afternoon. My name is Shane Canestra, SAIC's Director of Investor Relations, and thank you joining our third quarter fiscal year 2018 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 other members of our management team.

This afternoon, we issued our earnings release, which can be found at investors.saic.com, where you'll also find supplemental financial presentation slides to be utilized in conjunction with today's call. Both of these documents, in addition to our Form 10-Q, to be filed soon, should be utilized in evaluating our results and outlook along with information provided on today's call. Please note that we may make forward-looking statements on today's call that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the 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 -- Chief Executive Officer

Thank you, Shane and good afternoon. SAIC's third quarter results reflect improved performance as compared to the last two quarters. Nazzic and Charlie will provide details on the operational and financial results. So, let me provide you with a few highlights of the quarter, our assessment of the market environment, and the status of our more notable platform integration programs.

Third quarter internal revenue grew by 3% as compared to the prior year quarter, primarily due to recently awarded new business with NASA and the Environmental Protection Agency. As previously communicated, we expect an improved profitability in the second half of the fiscal year, and we have delivered on that expectation for the third quarter. Adjusted EBITDA margins of 7.4% for the third quarter were primarily due to strong program performance and cost efficiency measures that we put in place in the first half of the year.

Following very strong bookings of over two times revenue in the second quarter, SAIC continues to execute its go-to-market strategy, resulting in a book-to-bill of 2.3 for the third quarter. A result of our recent strong contract awards, total backlog is up 16% as compared to the second quarter, and funded backlog, which is an indicator of potential near-term revenues, is up 45%. Additionally, our $15 billion of submitted proposal value remains very strong as we continue to pursue a healthy business opportunity pipeline across a diversified set of existing and new customers.

With regards to two notable efforts on our platform integration business, the Marine Corps AAV and ACV programs continue to perform as expected. On the AAV program, we are executing the low rate initial production, or LRIP, phase of the contract, where we expect to begin delivery of vehicles in the spring of 2018. We have successfully completed delivery of all 16 ACV prototype vehicles, are supporting ACV testing, and expect a down select decision in the early summer 2018 timeframe.

With regards to the market environment, we are encouraged by the expectation of an improved budget in government fiscal year '18. The majority of our customers are awarding contracts with relative budget confidence and investing in their operations after many years of a more conservative spending profile. Evidence of this current confidence is demonstrated by the second straight quarter of significant contract bookings, that provide a solid base for future growth. Looking farther out, we're optimistic about our market environment, as our customers have sealed a desire to adopt technology innovations to ensure mission success.

We are positioned well in areas of customer emphasis, such as training and simulation, military modernization and readiness, data analytics, and cyber, to name a few. With an improving environment and demand signals from areas that align with SAIC's strategy, I have confidence that we will perform in alignment with our long-term financial targets.

I'll now turn the call over to our COO, Nazzic Keene.

Nazzic Keene -- Chief Operating Officer

Thank you, Tony. I'm excited to join the call today as SAIC's Chief Operating Officer and share our business development results, as well as an update on actions that are being taken to improve profitability and execute our long-term business strategy.

Contract award activity in the third quarter led to bookings of approximately $2.6 billion, which translates to a book-to-bill of 2.3 for the quarter. With another quarter of book-to-bill over two times revenue, this demonstrates that our customers value SAIC's capabilities in differentiated offerings. Over the trailing 12 months, SAIC has produced a book-to-bill ratio of 1.6, which is a strong leading indicator for low single-digit internal revenue growth as we look to fiscal year '19 and beyond.

Third quarter bookings included the recompete or protect win of around $970 million of our AMCOM customer's "Battlefield Systems" task order. This award was the largest and most visible recompete this year, and further stabilizes our revenue base for another three years. Congratulations to the team for this important protect win.

In the expand and grow categories contributing to this quarter's booking was a grow award of a $272 million contract to support the Virginia Information Technologies Agency, and an expand award of $237 million contract from the U.S. Army to lead a consortium in developing an experimental prototype of their next generation combat vehicle. Also contributing to this quarter's booking was an important grow opportunity of $93 million from U.S. Cybercom to support their efforts in securing, operating, and defending the Department of Defense Information Network. Various other awards and contract modifications across the portfolio make up the balance of this quarter's extraordinary booking.

At the end of the third quarter, SAIC's total contract backlog stood at approximately $10.7 billion, an increase of 16% from the second quarter, and a 30% increase from the third quarter of last year. Funded contract backlog, an indicator of potential near-term revenue generation, was $2.6 billion, up 45% from the second quarter. The estimated value of SAIC's submitted proposals awaiting award is $15 billion, unchanged from the second quarter, despite the third quarter's large customer contract awards.

Throughout the third quarter, we submitted several large contract proposals, many with an award value of greater than $200 million. Several of these proposals are in the expand category within our defense portfolio and are expected to be awarded in the first half of next fiscal year. As we continue to invest in the future of SAIC, it is encouraging to see strong demand for the services and solutions we offer. We will continue to use a disciplined approach to our investment spend as we pursue a strong pipeline of business opportunities.

As previewed last quarter, we have reviewed our operating model and cost structure to improve profitability and align to our long-term strategy, Ingenuity 2025. We have and are continuing to take actions to achieve our objective and provide for long-term shareholder value creation. As announced in October as part of a broad companywide restructuring, we offered a voluntary retirement incentive package to approximately 100 senior managers, as we consolidated five customer groups into three groups and six capabilities-focused service lines into three market segments. While committed to keeping our successful matrix operating model intact and driving performance for our customers, we have adjusted our operating model in alignment with our long-term strategy.

As a result of the voluntary retirement incentive packages, and including a modest amount of additional involuntary employee departures, we eliminated approximately 70 positions through this restructuring effort. With these reductions, along with several other actions completed or in process, we estimate we will reduce our annual operating costs by approximately $20 million. While Charlie will provide you with the third quarter and estimated fourth quarter financial impact for these actions, our restructuring will create a more efficient and effective operating model that will enable the successful execution of our business strategies.

Charlie, over to you for our financial results.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Thank you, Nazzic, and good afternoon. Our third quarter revenues of approximately $1.1 billion reflect internal growth of 3%, as compared to the third quarter of last fiscal year. Revenue growth was driven by new information technology contracts, such as the Army HITS and EPA end-user services programs, and mission-oriented services on the NASA OMES contract. Increased revenue due to the new program was partially offset by the completion of contracts such as DHS integration program almost a year ago and other net decreases across the portfolio.

Third quarter adjusted EBITDA was $85 million, equating to 7.4% as a percentage of revenues. This quarter, profitability was driven by strong program performance and cost reduction initiatives that we implemented in the first half of the year in an advance of our current restructuring efforts. These costs efficiency measures remain in place today and complement the larger restructuring program.

During the third quarter, we incurred approximately $1 million of restructuring cost, mainly related to severance. We expect to incur an additional $10 million of restructuring cost in the fourth quarter, primarily related to voluntary retirement incentive program and facilities consolidation efforts. In total, including the second and third quarter cost of $3 million, we estimate to incur $13 million of restructuring cost for the full year and expect to complete all restructuring efforts in the fourth quarter.

With regards to the annual cost savings of approximately $20 million from our restructuring efforts that Nazzic mentioned, I anticipate approximately $11 million of net annual cost savings, due to our contract mix of approximately 45% cost type contracts. Adjusted operating income was $73 million in the third quarter, resulting in adjusted operating margin of 6.4%, consistent with the prior year quarter. Net income for the third quarter was $43 million, and diluted earnings per share was $0.98 for the quarter, inclusive of the third quarter restructuring cost of $1 million, which impacted earnings by $0.02. The effective tax rate for the quarter was approximately 31%.

Looking to the full fiscal year, we estimate our fiscal year 2018 tax rate to be approximately 23% to 25%, down slightly from our previously communicated expectations. Third quarter operating cash flow and free cash flow were $80 million and $72 million respectively. Cash collections were impacted in the quarter by delayed payments from one of our largest contracts, but we do not anticipate these delays to endure, and in fact have partially recovered so far into our fourth quarter. Days sales outstanding at the end of the quarter was 57 days. Looking forward to the fourth quarter, we expect our DSOs to return to the low fifties within our normal operating range, and I do not expect any disruption to our capital deployment strategy.

The third quarter ended with cash balance of $125 million, below our average operating cash balance target of $150 million, and attributable to the delay in payments that I just mentioned. During the third quarter, we deployed $59 million of capital, consisting of $39 million of planned share repurchases, representing about 562,000 shares, $12 million in cash dividends, and $8 million of term loan debt repayment.

We are committed to our long-term financial targets, and they remain unchanged. With regards to fiscal year '18 specifically, we expect revenue to be slightly positive, and continue to expect full-year profitability as measured by adjusted EBITDA margin to be in the 7% range. For fiscal year '18, we still expect $240 million of free cash flow, excluding the expected restructuring costs we anticipate this year. I should note that of the $13 million of expected restructuring costs this fiscal year, roughly half will impact cash flow this year.

This cash flow outlook, and when combined with the excess cash we carried at the end of the last fiscal year, the execution of the capital deployment strategy is unchanged. In fiscal year '18, we expect to pay dividends of about $55 million, make total term loan debt repayments of approximately $25 million, with the remainder of cash in excess of $150 million available for further share repurchases and strategic M&A, should it arise.

Finally, I should note that our Board of Directors will meet next week to consider the approval of our quarterly dividend, which is typically payable at the end of January.

Tony, back to you for concluding remarks.

Tony Moraco -- Chief Executive Officer

Thanks, Charlie. As a leading technology integrator, I'm optimistic about the market environment and the actions we are taking to ensure the future success of SAIC. I wish you and your families and all SAIC employees a happy holiday season.

Operator, we are now ready to take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. If you would like to ask a question today, you may do so by pressing *1 on your telephone keypad. If you are using your speakerphone, please release your mute function to allow your signal to reach our equipment. Once again, that is *1, and we'll pause for just a moment. And your first question will come from Cai Von Rumohr.

Lucy Guo -- Cowen and Company -- Analyst

Hi, it's Lucy on for Cai.

Tony Moraco -- Chief Executive Officer

Hi, Lucy.

Lucy Guo -- Cowen and Company -- Analyst

So, it's a good performance quarter. Wanted to follow up on maybe execution. You talked about performance on the vehicles, ACV and AAV, are as expected. Are there any milestones coming up? And if you can, maybe in Q4 and also into next year, if you can give us an update on that?

Tony Moraco -- Chief Executive Officer

The way we do AAV, we continue to prepare for the low rate production activities. Long lead items, procurement activities, and production preparations are under way as part of that. That will likely, on a performance basis, be more relevant in the spring as we begin delivering our first units. And on ACV, we continue to support the testing activities after delivering all 16 EMD vehicles. So, it's pretty much in a test environment there. So, not as many deliverables, if you will, as we've seen in the past through the test activities and the preparation. We'll see the ACV award again late or early summer of 2018, and we'll be able to report on it in the spring.

Lucy Guo -- Cowen and Company -- Analyst

You have a couple of -- you have the Army product win, and then maybe two other RFPs are coming up here for other vehicles -- I believe one Army, and one for the Marine Corps. Can you maybe talk about what sort of expectations you have on those, and how some of the lessons learned on the AAV and ACV may be borrowed to improve performance on those bids?

Tony Moraco -- Chief Executive Officer

Sure. You're referencing the next gen combat vehicle prototype with the Army? So, we're excited about the Army portfolio as a large customer, which affects the vehicle demand and which complements the Marine Corps. We have taken lot of lessons learned from the Marine Corps programs, both in terms of our preparation and execution on the programs themselves internally; our supply chain management activities, which were fundamental to these programs for delivery, and quality, and on time; and also probably that we've been able to use those lessons learned in the models to influence other portfolio and pipeline opportunities.

So, we're trying to stay aligned again in each area that we are gonna see ourselves. On tactical vehicles, still focused on survivability and mobility as differentiators within that platform, and our business model on technology integration and system integration on those platforms. So, still moving forward on our investments, but also developing the pipeline parallel with that.

Lucy Guo -- Cowen and Company -- Analyst

That's great. On margin performance, the improvement that you expected came through in Q3. Were there any noticeable contract mix tailwind or headwind, and also any one-time items in the quarter?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

No. Lucy, this is Charlie. For the quarter, we had about $5 million of positive adjustments. Part of that was related to strong program performance, and part to contract closeouts. Over the course of the year, we'll have write-ups and writedowns, but it was a net $5 million positive on our EAC adjustments.

Lucy Guo -- Cowen and Company -- Analyst

And was that anticipated as you headed into the quarter?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Yes, that was anticipated.

Lucy Guo -- Cowen and Company -- Analyst

Got it. And then, maybe if you can talk about any color or early read into next year's margin levers? I believe the AMCOM recompete contracts coming up may be slightly less favorable. And then you also have, perhaps, a weaker federal civilian mix next year. Anything favorable that you can point to?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Well, let me just give a little color about the expectations for fiscal year '19. So, as we said before, we expect to exit fiscal year '18, and the adjusted EBITDA margin run rate in the second half of the year is a reasonable baseline, which we would grow margins going forward. And that would include certain headwinds we have from AMCOM type of programs. So, growing margins from there, that would be -- as we're completing our FY '19 planning process -- we've not completed that. But we expect to grow margins in line with our long-term target of 10 to 20 basis points improvement on that baseline that I just talked about.

Lucy Guo -- Cowen and Company -- Analyst

Gotcha. I'll pass it on. Thank you.

Tony Moraco -- Chief Executive Officer

Thanks, Lucy.

Operator

Next, we'll hear from Sheila Kahyaoglu.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi, yeah. Good afternoon, everyone. Thanks for taking my questions. Just following up on some of the margin commentary. To confirm the bookings mix should align with your margin outlook of 10 to 20 basis points a year, is there any sort of contract mix we should be taking account with the bookings?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Well, I think, as we talked about before, we still have the challenges that we had in the previous quarter with the cost plus mix that we're having to endure. So, we're pretty pleased with the performance this quarter. And again, the run rate in the second half of the year, we expect that to be the baseline. We expect to be able to increase 10 to 20 basis points based on the portfolio that we have and the bookings that we've had.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, thank you. And then, just on free cash flow, the bridge to year to-date, to the guidance of $240 million, so about $100-plus million or $130 million. Can you walk us through what gets there and what the pickup is in Q4?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Yes. It's pretty simple. The pickup is to catch up on the delayed payments from one of our largest contracts that we're -- that I talked about in the script. Once we're able to do that, then we believe we're back on track. We do have visibility to the $240 million. We still believe we'll get there. There is an impact on this restructuring of about $5 to $10 million of cash impact that will reduce that slightly. But we still anticipate getting to the $240 million, excluding the restructuring.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, thank you. And so, just the delayed payments, that was about $90 million in total? Am I correct? Or I might be missing it.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

No, it was less than that. It was around $40 million, $50 million of delayed payments on one of our largest contracts.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thanks a lot.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And we'll hear from Edward Caso.

Edward Caso -- Wells Fargo Securities -- Analyst

Hi, good evening. Congrats on the nice numbers here. Can you tell us and give us a sense on the direct labor growth relative to ODC?

Tony Moraco -- Chief Executive Officer

That's pretty consistent. Nothing material on our shift. We did have, as far as the overall numbers, a slightly higher materials carry than direct labor. But the direct labor itself is holding. A slight uptick given the contract start-ups we talked about that are contributing to the revenue growth, but it's been a bit of a mix. But nothing significant. We do get that material fluctuation at times, as Charlie mentioned on the call, and Nazzic as well.

Edward Caso -- Wells Fargo Securities -- Analyst

Can you just level set us again on the AMCOM recompete, the three pieces -- where they are, what's left to be done? Thanks.

Nazzic Keene -- Chief Operating Officer

Yeah, this is Nazzic. Hi. So, the Battlefield is the one that I referenced that we just closed out this last quarter. And then, virtual was one earlier in the year. And the one that's still outstanding of these three pieces is the strategic system that is still going through its protest cycle.

Edward Caso -- Wells Fargo Securities -- Analyst

Is there a date on the hundred days or whatever on the protest that we should be watching for?

Nazzic Keene -- Chief Operating Officer

Yeah. I'm not aware of a date. It's going through -- it's kind of got through its first phase of that, and so, the government is looking at various corrective actions, and there's not hard date. We're watching it daily, as you would anticipate.

Edward Caso -- Wells Fargo Securities -- Analyst

Great. Can you give us your initial sense on what you're seeing out of the tax reform legislation, sort of good news and things you may be -- less good news?

Tony Moraco -- Chief Executive Officer

Well, we're waiting to see what happens. We do see the tax reform as positive to earnings and cash flow. And also, we'll continue to maintain our capital deployment strategy of returning excess cash to shareholders. So, we believe it's good news for SAIC.

Edward Caso -- Wells Fargo Securities -- Analyst

Can you talk at all about -- obviously, it'll be a benefit to everybody in the government services space -- sort of the intent of how much you return to shareholders and how much you put back into the business maybe to drive growth?

Tony Moraco -- Chief Executive Officer

Well, we'll wait and see what the final bill is and determine that at the time. But we're very comfortable with our capital deployment structure, and we have a target of cash we need. Excess cash, we always return to our shareholders, and that's what we'll continue to do.

Edward Caso -- Wells Fargo Securities -- Analyst

Great. Thank you.

Tony Moraco -- Chief Executive Officer

Thanks, Ed.

Operator

We'll go to Tobey Sommer.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. What is the incremental revenue in fiscal '19 from AAV as you start delivering LRIP?

Tony Moraco -- Chief Executive Officer

It looks like the AAV delta, as we think about this year to next year, is in the $60 million to $70 million range. And picking up, we think, about the quarter's mid-year.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

So, is that $60 million to $70 million the fiscal '19 impact or full annualized impact that might not all catch in '19?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

That would be an AAV number. The ACV is down, so let's be clear on that as well. So, we're down about $35 million or so year-over-year on that. So, we're probably in that $30 million net impact from the major programs based on the -- [inaudible] [00:27:47] AAV delivery.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. Is there a reasonable -- from your perspective, reasonable pipeline of opportunities that we talked about already on this call, as well as things that you're looking at that maybe have not been announced that were not in the public eye, such that SAIC could kind of viably compete for multiple opportunities each year -- perhaps win one? Or are these kind of comparable opportunities less frequent than that?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Are you speaking about the broad portfolio in general or the --

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Yeah, the broad portfolio. Not specifically vehicles, but the system integration aspect of your business.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Sure. Well, with the $15 billion submitted or pending award, I think we've been very consistent. As Nazzic said, on the differentiation in the domain, we think we have some strength in, based on the past performance. We're still driving, I think, a good balance between the mission-related work like the NASA OMES, as well as the broad enterprise IT. We've talked about IT being driven by efficiencies in the cloud, as well as the heavy demand in cyber security initiatives across government. And we believe that we're well positioned on both sides. I won't speak to any particular program or deal. We do anticipate next year to have a slightly lower recompete profile. So, that's good news as we think about our bid strategies and our ability to perhaps seek, expand, and grow opportunities a bit more aggressively than trying with the protects. That's how I'd characterize it, but nothing substantially that's gonna drive it on a pipeline basis.

Nazzic Keene -- Chief Operating Officer

One thing I will note -- sorry, one thing I will note -- this is Nazzic. We do have -- we are looking forward to the announcement of what we call Task Order 33, which is another AMCOM recompete. It wasn't one of those coms that we originally talked about earlier in the year, but that -- we're looking forward to that award any time. And that's about in excess of $100 million a year. So, we're looking forward to that recompete.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. With respect to the incremental investments that you put into the business to support LRIP over the summer and fall, are those kind of investments leverageable on potential future contract wins because they're kind of infrastructure related, or they more specifically applicable to the contracts that you're already active in?

Nazzic Keene -- Chief Operating Officer

This is Nazzic. Most of them are applicable across the portfolio on our platform business. So, whether it's technologies, infrastructure, tools -- we look to make the investments on those that will support not only the existing programs, but those programs that are in the pipeline, and we aspire to win in the months and years to come.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. Last question from me. On the civil side, not too long ago, you were talking about kind of a slower pace of contract awards in business, perhaps as agencies were responding to commentary about potential budget cuts in those areas. Could you update us on what you're hearing and what the tenor of business is on the civil side?

Tony Moraco -- Chief Executive Officer

Yeah. I think we're seeing, as the budget bills are being discussed, probably more positive posture on the federal civilian side. Whether it's sustained in the current status quo is totally favorable, I think, than concerns that existed six months ago. So, we are starting to see some activity and dialogue as it pertains to that. But I do think we'll see fed civ maybe slightly improve as, one, the transition of the administration continues, the leadership is in place, we have some stability in the overall government budget. But we don't see the Fed as much as the bill payer as was once talked about. It's still maybe under some pressure. But the mission alignment, the things that they still need to accomplish, I think, is adequate dollars to continue the pipeline development, and would expect awards on fed civ to be about what we've seen of late, or maybe a slight improvement.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you for answering my questions, Tony.

Tony Moraco -- Chief Executive Officer

Thanks, Tobey.

Operator

And your next question will come from Krishna Sinha.

Krishna Sinha -- Vertical Research Partners -- Analyst

Hi. Thank you for taking my question. Just a couple of cleaning up questions real quick. Did I hear you in your prepared remarks, that you said that FY '19 revenue would be slightly positive, or was that FY '18?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

That was FY '18.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay, '18. And then, just to clarify on that margin comment or commentary that you gave earlier. So, I mean, earlier this year, you said your adjusted EBITDA margin would be in the 7% range. And so, if you did 7.4% this quarter, that would imply something like 6.9% for the second half? Are you saying that 6.9% is the baseline, of which you expect to then to grow the 10 to 20 bps that you're expecting in FY '19?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Well, just to be clear, we expect to end fiscal year '18 with an adjusted EBITDA margin of 7%. And if you take that, then the second half run rate would be a reasonable baseline to which to grow the margins 10 to 20 basis points. That's what we said.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay. And then, on your free cash flow, year-to-date, you've done $120 million, and earlier again this year, you said you were gonna do $240 million for the full year. You reiterated that target. So, that implies you have to do 50% of your full-year free cash flow next quarter, which is a little bit higher than we've typically seen. So, can you just walk us through the moving parts of how you get to that $240 million free cash flow target? I mean, are you getting a milestone payment or something?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

No. Like I said, it was delays in the third quarter on a large contract. Once we're able to clear the delays on this payment -- it's around $40 million or $50 million -- then we'll be able to catch up for the full year. So, we're working that every day. It's an administrative exercise in order to get the billings matched up directly in the system in order to get paid. And that's what we're looking to do.

Krishna Sinha -- Vertical Research Partners -- Analyst

Okay, that's great. That's all for me. Thank you.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And next, we'll hear from Jon Raviv.

Jon Raviv -- Citigroup -- Analyst

Hey, good afternoon, everyone. Thanks for taking the questions.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Hi, Jon.

Jon Raviv -- Citigroup -- Analyst

Hi, Charlie. Just to nail you down a little bit more on that previous question on margins, just to get a sense. I mean, your fiscal full year is 7%. I mean, your fiscal second half is more in the 7.3%, 7.4% range -- maybe 7.2%, let's call it. So, 10 to 20 basis points off of that -- is that what we should be thinking about?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Yeah. Let's call it 7.2%, and let's say 10 to 20 basis points off of that.

Jon Raviv -- Citigroup -- Analyst

Okay. Great, thank you. And then, I think one of the concerns heading into next year is really that AMCOM recompete flipping from SP -- sorry, form fixed price to -- or from T&M, excuse me -- to cost plus. Can you talk about some of the margin mechanics around that switch -- how much pressure you expect there, if any?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

It's a modest amount. As we looked at the conversion of the labor mix, the materials mix, the fee structures shifted slightly between labor and subcontractors. So, I think we're successful in continuing to negotiate positions to actually mitigate the contract conversions from fixed price T&M to cost reimbursable, perhaps more so and more favorably than we thought going into the bid process. So, we think we're optimistic of closing that gap as we go into '19, how that converts.

Jon Raviv -- Citigroup -- Analyst

Okay. And then, so if you have low single-digit sales growth in FY '19 and margin expansion in FY '19, which seems to be pretty good on a year-on-year basis, is there any reason that free cash flow cannot grow with net income in FY '19?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Well, yes. It should grow with earnings, as we said before, so an increase in earnings would increase the free cash flow. We're in the planning process, however, right now for fiscal year '19. And the planning process includes how we use the capital, including on platform integration. So, I'll have to give you a better answer at the end of next quarter and an update on that.

Jon Raviv -- Citigroup -- Analyst

Okay. Fair enough. And then, just to clarify this year's target of 240, it's 240, but less some part of the restructuring, so that implies low 230s this year. Is the rest of that restructuring gonna come out of next year's number, or just what are some of the big moving pieces from this year into next year that we should think about?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

The restructuring piece, the $13 million total restructuring, about half of that relates to the severance payouts and associated to that. The other part of the restructuring is more reserve type of issues related to real estate and closing real estate, so that's over a longer term. Not just over next year, but a four to five-year term.

Jon Raviv -- Citigroup -- Analyst

Got it. I'll hop back in the queue. Thanks.

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Okay. Thanks, Jon.

Operator

And once again, everyone, that is *1 to ask a question. We'll go to Brian Ruttenbur.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Yes, thank you very much. Two questions. First of all, on the rebids, can you just run down through the big ones? And '19, that was AMCOM 33. Just list them off in the size. And then, number two, I'm giving you a macro. Tell me about timing of the CR sequestration -- how far are they gonna kick the CR down the road this time, and when do you expect passage?

Nazzic Keene -- Chief Operating Officer

This is Nazzic. I'll comment on a couple of the major recompetes, I touched on the AMCOM Task Order 33 we're awaiting as we sit here today. And then next year, the two big ones would be the next generation SeaPort-e, which is an IDIQ, multi-award IDIQ. And then the recompete was some additional work of our Global Tires Program. So, those are the two largest that we've got our eyes on going into next year. And I --

Brian Ruttenbur -- Drexel Hamilton -- Analyst

And could you give me sizes of those?

Nazzic Keene -- Chief Operating Officer

Well, the SeaPort-e is a multi-award IDIQ, so several billion dollars. $200 million.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Well, can you tell me how much revenue you're generating now off that?

Nazzic Keene -- Chief Operating Officer

Yeah. We do about $200 million a year on that today.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Okay. And then, the other one was what?

Nazzic Keene -- Chief Operating Officer

The other one is the Global Tires Program. And that's about --between $100 million and $150 million a year on that one for us.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Perfect. And then the CR question.

Tony Moraco -- Chief Executive Officer

Yeah, the CR and the sequestration -- it's Tony. So, we're seeing the House taking action today. Before I get to the two-week extension that people have been talking about, there's still a lot of conversation around short-term, long-term Defense Senate bill emphasis to get that through. Some questions on the rest of the bills -- on the funding side, perhaps, we'll likely see another short term CR. A lot depends on negotiations. There's a lot of emphasis to also address the broader Budget Control Act constraints, as the last deal had expired. So, I think there's a lot of discussion trying to converge. So, I'd expect some short term CRs, Defense bill perhaps clearing first. We'll just have to see how the rest of the politics play out and what gets bundled for the rest of the budgets, and hopefully not a long-term CR.

From our personal impact on the contract side, there's very little exposure on the CR. We've been through this process, unfortunately, so many times. But we don't have a lot of exposure under the CRs. Our biggest impact would be on things like the ACV award. So, being on the Defense side, that's probably not at risk from a decision perspective. But that's what we're kind of seeing play out on the Hill.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Okay. So, you said it's gonna be kicked down the road likely two weeks, and then possibly kicked down the road until mid-January, or do you anticipate a passage by calendar year-end?

Tony Moraco -- Chief Executive Officer

Yes. And we have -- the two weeks is most likely. I think the House passed it today. I don't think we'll see a government shutdown, although the rhetoric's pretty high, but don't quote me on that. Who knows how this year's politics will in fact unfold. But I would expect that some portion of a smaller, shorter-term CR, if you assume they won't get everything done by the 22nd of December. But we hope that that would be the extent of it, and perhaps that would go, again, two to four weeks into January, or Congress to reengage. Well, that'd be my best guess on a short-term. And then -- I think then it's wide open on whether or not they'll be able to cover the year or not, but we hope that they'll clear the bills collectively in January timeframe.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Great. Thank you very much.

Tony Moraco -- Chief Executive Officer

You're welcome.

Operator

We'll take the follow up from . . .

Analyst

I didn't hear. Is that -- am I on the line right now?

Operator

Yes, sir.

Analyst

Oh, OK. All right. Thank you. So, just want to talk about your forward dynamics a little bit. Obviously, you guys sound confident in your reiterating your targets for low single-digit growth. But given all the drivers you've just talked about, in terms of all the income pieces, AAV, ACV, what you're expecting from fed civil, can you just talk about what would move you toward the higher end of that low single-digit guidance as opposed to the lower end, and kind of what your bookings that you've just previously -- your strong bookings in the last two or three quarters, how that's gonna affect sort of your next 12 months' or 18 months' worth of revenue growth?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Sure. We still think we'll be in the low single-digits. The strength of our recent book-to-bills are probably impacting two things. It's reducing our revenue risk profile because of the high volume of large recompetes, so that's a very strong position to be in. We're seeing some of the incremental expanding growth opportunities contribute modestly as we go forward on those transitions. We've also mentioned that the recompetes are a bit more at a run rate than a steady state, and having to fill gaps by a lower volume on those contracts. And I think we're gonna see that low single-digit growth. But I think the trading portfolio and the offsets will not move us beyond that unless there is a significant change in award activity across industry that we haven't seen to date.

So, we've seen a modest improvement over the last 12 months across the sector. I think that's going to be the new steady state, and I would not expect it to move much beyond that low single-digit. But I think that's a very positive place to be. And our ability to convert that to earnings and then distribute that, I think, sustains our long-term targets and value proposition that we have out there.

Analyst

Assuming that the defense budget and the fed civil project in aggregate grow sort of 1% to 2%, which is, I think, what the sort of peer consensus is at this point, your low single-digit growth could imply that you grow in line with the budgets, or maybe slightly above. So, can you just talk about how you see yourself in that dynamic? Are you taking a little bit of market share here, and therefore, you're gonna grow a little bit better than the end market? Or you think just for the medium-term, you'll be just basically in line with the end market?

Tony Moraco -- Chief Executive Officer

I think we're generally in line and slightly above the market, as evidenced by the last four years of performance. We were successful in retaining our revenue profile, so I think through the expand and grow efforts, as other peers perhaps contracted over that period of time. So, I do think we are successful in the quality of our bids in the form of either new starts, but against takeaways in our expanding growth, expanding this growth and sell through of our IDIQs. So, I think we're well positioned to continue on that path, and we should outperform slightly in that market. So, again, low single-digit, but probably at above the one to two if we think about this quarter's performance and the strong book-to-bills, with the foundation of a very strong recompete baseline that we just secured.

Analyst

Okay, great. Thank you.

Tony Moraco -- Chief Executive Officer

You're welcome.

Operator

And we'll go Jon Raviv.

Jon Raviv -- Citigroup -- Analyst

Hey, guys. Thanks for taking this follow-up. Can you just clarify on some of the free cash flow trends in FY '19, including the discussion you'll be having at the board about cash deployment or investments next year? What's the menu of options you're discussing with the board? I think you mentioned vehicle integration. What sort of investments would that mean?

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Oh, yeah. The capital deployment strategy is pretty clear. We have the dividend payments, in which we make about $55 million a year. We have the loan debt repayment of $25 million a year. What remains is -- the options are share repurchase and strategic M&A, should it arise. The amount of working capital that we're talking about platform integration is not gonna be that significant. It hasn't been in the last two, three years. The model is set up that it is not a very capital-intensive model, so we don't see that changing it. I just didn't want to give you an exact type of number about fiscal year '19 free cash flow at this point in time. I'd be happy to when we meet in the next quarter.

Jon Raviv -- Citigroup -- Analyst

All right. Looking forward to it. And then, you brought it up, Charlie, -- just on M&A appetite, what are you seeing out there in the market right now? I think you guys had previously talked about health and intel as interesting areas. Just getting a sense of what you think's available, what pricing looks like, what side of the equation you think you're gonna be on.

Tony Moraco -- Chief Executive Officer

Yeah, Jon, this is Tony. Yeah, the market access is still the principal filter as we think about areas that we're underserving. Even today, the public health sector, different intelligence agencies, the Air Force, and some space domains on the market access side, I was interested in the new capabilities on data analytics, and training simulation and cyber security. But at the same time, some of the multiples are pretty high on some of the capability sets on the smaller properties. We've dialed into something that's in our mid-range on the side phase, and so, it's material, and builds up those portfolios with a -- really a modest scale within that segment. But really unchanged, watching the market. There's a lot of activity and a lot of planning, but we're watching it. But again, we're very comfortable with the organic exposure we have, the investments that we're making. And I think Q3, rather than go -- we can keep that going and complement organic flow with M&A periodically on a strategic basis.

Jon Raviv -- Citigroup -- Analyst

And what kind of filters are you using for determining if M&A fits or doesn't fit? It is purely -- it's not purely strategic, but do you have any kind of timeline around your cash on cash returns, accretion? Sort of kind of some of that -- in line with that question, what kind of size are you thinking about? Another site to work type thing, or you have to do it more string of smaller acquisitions?

Tony Moraco -- Chief Executive Officer

We would probably shy away from the string of smallers. They're a little challenging. I don't think we're set up or interested in those profiles. There's challenges with some of the smaller companies, both in compliance, maturity, ownership. So, again, starting that mid-range, though, I'd say we'd shy away from small business. One of the key filters is prime contract market access. It is not small business. So, full and open portfolios are much more attractive, because we've seen how those small business portfolios convert on a negative basis fairly quickly. So, scale is probably defined by full and open portfolios companies that are a little more mature in that process, because we can sustain that as a prime. Sometimes IDIQ, sometimes it's contracting, and traditional contracts, but that's the essence of it.

The financial measures, Charlie and the team are pretty traditional and fundamental on an accretion basis when we think about the cash and the margins of the loan.

Jon Raviv -- Citigroup -- Analyst

Great. Thanks a lot for the time.

Tony Moraco -- Chief Executive Officer

You're welcome.

Operator

And ladies and gentlemen, that does conclude today's question and answer portion. At this time, I would like to turn the call back over to Shane Canestra for any additional or concluding remarks.

Shane Canestra -- Director of Investor Relations

Thank you very much for your participation in SAIC's Third Quarter Fiscal Year 2018 Earnings Call. This concludes the call, and we thank you for your continued interest in SAIC.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.

Duration: 52 minutes

Call participants:

Shane Canestra -- Director of Investor Relations

Tony Moraco -- Chief Executive Officer

Nazzic Keene -- Chief Operating Officer

Charles A. Mathis -- Executive Vice President and Chief Financial Officer

Lucy Guo -- Cowen and Company -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Edward Caso -- Wells Fargo Securities -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Krishna Sinha -- Vertical Research Partners -- Analyst

Jon Raviv -- Citigroup -- Analyst

Brian Ruttenbur -- Drexel Hamilton -- Analyst

More SAIC analysis

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