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Science Applications International Corporation (NYSE:SAIC)
Q4 2018 Earnings Conference Call
March 29, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Shane Canestra -- Director of Investor Relations

Good morning. My name is Shane Canestra, SAIC's Director of Investor Relations, and thank you for joining our Fourth-Quarter and Full 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 morning, we issued our earnings release, which can be found at investors.saic.com, where you'll also find supplemental financial presentation slides to utilize 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 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 Factor 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.

Anthony J. Moraco -- Chief Executive Officer

Thank you, Shane, and good morning. SAIC's fourth-quarter results reflect the fundamental execution of our business strategy to position the company for sustained profitable growth. I'm pleased with SAIC's revenue growth in the fourth quarter and margin improvements in the last half of fiscal-year 2018. Nazzic and Charlie will provide details on the operational and financial results, but let me provide you with a few highlights of our fourth quarter and our assessment of today's market environment.

Fourth-quarter internal revenue grew by 10.3% as compared to the prior-year quarter, primarily due to new business contracts with NASA and the Environmental Protection Agency won earlier in the fiscal year and increased volume in our supply chain and U.S. Army portfolios. Full fiscal-year 2018 internal revenue growth was 2.5%, in line with our long-term financial targets. I'm proud of the revenue growth in the fourth quarter and the full fiscal year, as they both are the highest amounts for their respective timeframes since our spin in 2013.

SAIC performed well with regard to fourth-quarter profitability, which is typically a lower-margin quarter due to the holidays and surrounding employee vacation time. Fourth-quarter adjusted EBITDA margins after adjusting for restructuring costs were 7.4%, with full fiscal-year margins of 7%. As we previously reported, fiscal year '18 contained several portfolio challenges to margins in the early part of the year, but we took responsible action to help mitigate these challenges and improve profitability by year-end.

Throughout fiscal-year 2018, SAIC executed business development activities in alignment with our long-term market strategy, Ingenuity 2025, and positioned the company well for sustained profitable growth. With a fourth-quarter book-to-bill of 0.5 in what is typically a seasonably low bookings quarter, SAIC produced a full fiscal-year book-to-bill ratio of 1.5, de-risking several large protects or recompeting customer contracts while winning several expand-and-grow opportunities that enable future revenue growth. We continue to be encouraged by the demand signals from our customer base with a strong pipeline of contract opportunities and $15 billion of submitted proposal value, an amount consistent with the end of the third quarter.

Turning to the market environment, we now have federal government fiscal-year 2018 budget appropriations and a two-year budget agreement that also adjusts the budget caps for the following fiscal year. These actions provide our customers with more budget certainty to execute their mission priorities and plan for the future. With increases to both defense and better-than-expected federal civilian budgets, SAIC's balanced and diversified portfolio is well-positioned to help a broad array of customers.

Our customers are looking at companies such as SAIC to help infuse technologies to replace aging infrastructure and provide innovative solutions to meet ever-increasing challenges. In several areas -- particularly in our defense and national security portfolios -- our customers are placing an increasing priority on accelerating the delivery of mission capabilities. With strategic intent to maintain -- and in some areas, regain -- our technological superiority, our military forces are invested in areas such as modernization and readiness, looking to deploy capabilities faster through innovative and mature existing technologies.

The desire to adopt existing technologies and thus reduce the time to deploy aligns well with two tenets of our long-term market strategy. First, our emphasis on repeatable solutions helps our customers accelerate the fielding of mission-critical capabilities, but also allows them to do so with the confidence of deploying proven solutions. With an increasing focus by our customers to modernize their infrastructure, SAIC provides an effective channel to implement commercially available technologies.

Secondly, SAIC's approach to platform integration directly aligns with our customers' desire to adopt non-developmental items as a critical part of their acquisition strategy. As evidenced by our platform integration strategy, we are responding to our customers' desire to innovate faster through integrating existing hardware and technologies from a broad global supplier base to provide a complete system solution in a reduced timeframe.

Our focus on many mission areas that we expect will benefit from customer budget increases gives us confidence in the low single-digit internal revenue growth in our long-term outlook. SAIC's broad customer market access and a range of solutions for training and simulation, military modernization and readiness, and IT modernization and cybersecurity add the possibility to outperform should there be an increased pace of contract decisions and enactment of acquisition reforms.

We also expect to achieve our margin improvement and cash flow goals to realize the benefits of our restructuring efforts, mitigate conversions to cost-reimbursable-type contracts, and balance our investments for growth. SAIC is confident in our ability to achieve sustained profitable growth through organically driven efforts as well as the potential for M&A transactions in a consolidating market. Overall, the current market environment aligns very well to our long-term strategy, so we can achieve our financial targets and continue to provide long-term shareholder value creation. Nazzic, over to you for discussion of our business operations.

Nazzic S. Keene -- Chief Operating Officer

Thank you, Tony. Contract award activity in the fourth quarter led to bookings of $610 million, which translates to a book-to-bill of 0.5 for the quarter. For the full year, SAIC delivered a book-to-bill ratio of 1.5, a strong leading indicator of revenue growth as we look to fiscal year '19 and beyond. Fourth-quarter bookings included the recompete or protect wins of $57 million for continued support of our U.S. Navy SPAWAR customer to provide command, control, and situational awareness services.

Also contributing to bookings this quarter was a grow contract award, extending our services to new customers through the award of a blanket purchase agreement for the Department of Health and Human Services. Under this BPA, we were awarded a $74 million task order to support IT operation services, including service desk and deskside support, infrastructure, and data center operations. I'm very excited with this award, as it's a great proof point of our strategy coming to fruition, since we have consistently communicated our desire to grow into the public health market, either organically or through strategic M&A. Various other awards and contract modifications across the portfolio make up the balance of this quarter's bookings.

During our December call, I mentioned that a significant task order from our AMCOM customer was being recompeted and was under evaluation. Commonly referred to as Task Order 33, we were awarded this work during the quarter, but it was subsequently protested by a competitor. We expect resolution soon on this task order, valued at over $700 million, and should be included in our first-quarter bookings if resolved in our favor.

At the end of the fourth quarter, SAIC's total contract backlog stood at approximately $10.2 billion, a 28% increase from the fourth quarter of last year. Funded contract backlog was $2 billion. The estimated value of SAIC's submitted proposals awaiting award at the end of the fourth quarter was approximately $15 billion, unchanged from the third quarter. With an improving market outlook, and 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 utilize a disciplined approach to our investment spend as we pursue a strong pipeline of business opportunities.

Now, before turning the call over to Charlie, I would like to give you a brief update on the completion of our restructuring efforts. As discussed last quarter, we reviewed our operating model and cost structure to improve profitability and better align to our long-term strategy, Ingenuity 2025. We took actions to achieve our objectives and provide for long-term shareholder value creation. These actions included voluntary retirement incentive packages to certain senior managers. We also consolidated five customer-facing organizations into three groups and six capability-focused service lines into three market segments.

I am pleased to report that these actions -- along with others -- were completed during the fourth quarter, and we have entered fiscal year '19 with the benefits of these restructuring efforts. We have achieved our previously communicated goal of reducing our annual operating costs by $20 million. After adjusting for our cost-plus-contract mix, this provides for approximately $11 million of benefit to invest in growth initiatives and improved profitability. While Charlie will provide you with the fourth-quarter and full fiscal-year '18 financial impacts of these actions, we begin fiscal year 2019 with a more competitive operating structure poised to offer differentiated solutions to our diverse customer base and enable long-term shareholder value creation. Charlie, over to you for our financial results.

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

Thank you, Nazzic, and good morning, everyone. During my remarks, I will primarily focus on SAIC's fourth-quarter performance with references to full-year results in specific areas. Our fourth-quarter revenues of over $1.1 billion reflect internal growth of 10.3% as compared to the fourth quarter of last fiscal year. Revenue growth was driven by new business contracts with NASA and the Environmental Protection Agency and increased volume in our supply chain and U.S. Army portfolios. For the full year, internal revenue grew 2.5% year over year.

Fourth-quarter adjusted EBITDA was $83 million, a $12 million increase from the prior year, driven by revenue growth and lower SG&A costs related to our cost reduction initiatives. These increases were offset by net unfavorable changes in contract estimates on a number of programs, including increased cost and reserves on our platform integration programs supporting the United States Marine Corps. Adjusted EBITDA margin equated to 7.4% as a percentage of revenues after adjusting for the expected $10 million of restructuring costs. The expected restructuring costs were in line with our previous communications and were mainly related to severance and facility exit cost. The total full-year restructuring cost of $13 million was as expected and completed in the fourth quarter. We do not expect any further restructuring costs going forward.

Net income for the fourth quarter was $51 million and diluted earnings per share was $1.16 for the quarter, inclusive of the fourth-quarter restructuring cost of $10 million, which negatively impacted earnings by $0.22. Net income was positively impacted by $17 million due to recently enacted tax reform and the associated reevaluations of net deferred tax liabilities, which increased EPS by $0.39 per share. Our fourth-quarter effective tax rate was effectively zero and our full-year effective rate was approximately 17%, significantly lower than our previous expectation of 23% to 25%, due to recently enacted tax reform.

Before moving on to our financial results, let me discuss two items related to our annual 10-K filing that is expected to be filed this evening. First, SAIC management identified that we had recognized some revenues in excess of the contractual authorized amount on a specific program, primarily in fiscal year 2017. Therefore, in our 10-K, you will see that we have elected to revise fiscal year 2017, which results in a reduction of net income by $5 million. Although this amount is immaterial to our overall 2017 results, we revised fiscal '17 to provide greater transparency and comparability of the periods presented. We believe that there is no further financial exposure.

We will also be disclosing a material weakness in our internal controls related to the revenue recognized in excess of contractually authorized amounts. Upon discovery by SAIC management and subsequent review of the issue, we identified the root causes and believe that the issue is contained to one of our contracts. We have enacted a remediation plan with a number of actions already implemented, with others to be completed in the first quarter. It is our intent for the material weakness to be remediated in the first half of fiscal year 2019.

Now, let me turn back to the financial results. Fourth-quarter operating cash flow and free cash flow were $84 million and $77 million respectively. This performance resulted in $195 million of free cash flow for the year, lower than the expectation we delivered in our December call. A shortfall occurred due to unexpected delays in our supply chain business and a $30 million shortfall in cash receipts was received in the first two business days following year-end.

We ended the fourth quarter with day sales outstanding of 54 days, an improvement of three days from the end of the third quarter, continuing our best-in-class performance. Despite the free cash flow shortfall, the fiscal year ended with a cash balance of $144 million, in line with our average operating cash balance target of $150 million. We begin fiscal-year 2019 with a strong cash balance to continue our consistent capital allocation strategy.

During the fourth quarter, we deployed $58 million of capital, consisting of $36 million of planned share repurchases, representing about 478,000 shares, $14 million in cash dividends, and $8 million of term loan debt repayment. For full fiscal year '18, we deployed $229 million to our shareholders, consisting of $150 million of planned share repurchases, reducing our share account by over $2 million or approximately 4%. $54 million of dividends and $25 million of debt repayment rounded out our capital deployment for the fiscal year. Net debt at the end of the fiscal year stands at approximately $1 billion, and our net debt to trailing 12-months EBITDA leverage ratio is less than 3x.

Now, turning to our forward outlook for fiscal year 2019, we are committed to our long-term financial targets and they remain unchanged. On average and over time, we expect low single-digit internal revenue growth and remain confident in our long-term profitability improvement target of 10 to 20 basis points annually. With regard to fiscal year '19 specifically, we expect revenue and margin improvement as measured by EBITDA margin to be in line with these long-term targets and consistent with our previously communicated outlook on margin improvement.

We still believe the second-half normalized margin baseline is around the 7.2% range and that we can increase margins 10 to 20 basis points, consistent with our previous communication and long-term financial targets. In addition, we expect margins to be higher in the second half of fiscal '19 than in the first half. We expect a full-year effective tax rate of between 23% and 25%, an increase from fiscal '18, due to substantially lower expected tax benefits on stock-based compensation offset by the new federal corporate rate enacted by tax reform.

For fiscal year '19, we expect free cash flow of approximately $250 million. The partial recovery of the fourth-quarter delayed payments in our supply chain business and the permanent favorable impacts of tax reform positively impact our fiscal year '19 cash flow outlook by about $40 million from our targeted free cash flow of $240 million. However, we expected temporary increases in our working capital and capital expenditures to offset the increased cash flow by $30 million this fiscal year.

The investment and additional working capital is necessary to support new programs, such as our newly awarded Virginia Information Technology Agency contract, and the timing of expenditures related to our platform integration business. Also, we plan on increasing capital expenditures to support our internal infrastructure by $10 million to approximately $30 million. Both of these investments are necessary to sustain our long-term profitable growth and strategic initiatives.

Our capital deployment strategy remains consistent, with the intent to continue distributing excess cash to our shareholders through dividends, share repurchases, and strategic M&A, should it arise. I am pleased to announce that the Board of Directors has approved our next quarterly dividend at $0.31 per share and will be payable to shareholders on April 27th. Tony, back to you for concluding remarks.

Anthony J. Moraco -- Chief Executive Officer

Thanks, Charlie. I would like to announce that our annual shareholder meeting will take place on June 6th. Similar to last year, we will be conducting a virtual shareholder meeting whereby shareholders will participate online. Instructions on how to participate virtually will be included with a proxy voting ballot as well as on our investor website. With an improving market environment and the investments we have made to enable sustained profitable growth, we are well-positioned for a successful fiscal year '19, and with a leading position in the competitive markets we serve, SAIC continues to offer compelling shareholder value-creation opportunity. Operator, we are now ready to take your questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press *1. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press *1 to ask a question. We will take our first question from Jon Raviv from Citi. Please go ahead.

Jonathan Raviv -- Citigroup Research -- Vice President

Good morning, guys. Thanks for taking the questions, as always. On the free cash flow, can you just help us parse through some of the thoughts around where you see this over a long term? I think you used to talk $240 million, now the tax might be worth $10 million, so should $250 million be our new base? And also, to what extent is this CapEx and working capital investment -- is it structurally higher forever or is it a one-time thing this year to support some of the initiatives you have going on?

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

Thanks, Jonathan. We expect $250 million of free cash flow. We have a $20 million permanent favorable impact from tax reform, so our new annualized target is now $260 million. So, in addition to the partial recovery of the delayed payments of $20 million, this is offset by increased CapEx of $10 million, and that's really a one-year event in order to improve our infrastructure. We don't see that continuing and we'd be back into the $20 million range for CapEx on an annual basis. And then, there's the timing on the working capital related to platform integration and new VIDA programs of about $20 million, which is also a more annualized one-time event.

Jonathan Raviv -- Citigroup Research -- Vice President

Got it. And then, a bigger-picture question on the idea of scale in this space. That word is getting a lot of play in the enterprise IT environment. How are you competing against the larger providers, what's your perspective on some consolidation we've seen, and related to that -- sorry to lump on another question -- how do you weigh big versus small deals? How do you think about valuation? What is appropriate leverage for a business like this? We've seen a competitor want to do high 4s or 5s. Any and all thoughts around that would be great.

Anthony J. Moraco -- Chief Executive Officer

To your last point, we're still pretty comfortable with leverage around 3.0. It's a good operating model for us. It fits the capital structure real well. Surely, we can go above that -- the market is still favorable to get access to the capital as we need it -- but that's generally an operating level that we're comfortable with and the cash generation to do go-to-market. We'd draw that down to the 3.0 range pretty quickly. On the broader sense of scale, we're still very comfortable at $4.5 billion as far as the size of the company, the resources at our disposal, economies of scale on cost over that diversified base, opportunities in this market with an optimistic view of improvements given the budget field. That's like '18 and '19 government dollars in both defense and non-defense.

And, the demand for enterprise IT modernization -- I think we're well-aligned to take advantage of that. We do have capabilities and market access at the appropriate levels. As far as a consolidation, we're always looking for opportunities to expand our market leadership in the form of larger-scale positions with certain accounts or certain domains, expanding our differentiation and capabilities at this point going forward. So, that's where we're at. The market from M&A filters are still very consistent with what we were talking about in the past on market access and capability development, and we'll apply that in key areas and best position for the market as we see some optimism going forward for the next couple of years.

Jonathan Raviv -- Citigroup Research -- Vice President

Thanks. I'll be back in a few.

Operator

We will now take our next question from Greg Konrad from Jefferies. Please go ahead.

Greg Konrad -- Jefferies and Co. -- Vice President

Good morning. In terms of -- you think about the $11 million of savings that you expect from restructuring in '19. You got 20 basis points of improvement just from that. Is there an offset to that, or when we think about '19, should we expect margin expansion above that longer-term target?

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

Let me go back to margin outlook and give you a little more color around that. So, a simple way to look at it is to take the full-year 2018 results of 7% as a baseline, and our outlook would be 20 to 40 basis points of increase from that result there. That would include the restructuring savings, which is about 20 basis points. That would also include an increase in the performance of our platform integration year over year of about 20 basis points, and this is offset by additional costs in SG&A.

Greg Konrad -- Jefferies and Co. -- Vice President

Thank you. And then, when you think about that opportunity -- $15 billion pipeline -- it seems like budgets are moving in the right direction. As we move through fiscal-year '19, would you expect to exit the year at the higher number and is there any way to quantify the types of win rates that you're targeting?

Nazzic S. Keene -- Chief Operating Officer

We have very strong win rates and we look at our portfolio against the protect, expand, and grow that I'm sure you're familiar with -- first and foremost, protecting the business that we have, and then looking for expansion and grow opportunities into new customers and expanding our service offerings into existing customers. So, we do absolutely apply the lens that you've heard about previously in our strategy of looking for opportunities to drive more fixed-price work, more profitable work to marry into the current portfolio as it sits today. As we look forward into the new budgets and continue to get clarity on how those dollars will get spent and allocated and go through the procurement cycle, we're staying very close to that, and the areas that are being reinforced from our customers are areas that are very core to our business strategy, so we do have general optimism on the pipeline development as well as being able to close and prosecute that pipeline.

Greg Konrad -- Jefferies and Co. -- Vice President

Thank you.

Operator

We'll take our next question from Lucy Guo from Cowen and Company. Please go ahead.

Lucy Guo -- Cowen and Co. -- Vice President

Good morning, everyone. I wanted to follow up on this question of industry consolidation in the sense -- I'm wondering if there are any customers or capabilities that you can potentially compete better on if you had more scale at double your size or anything in between where you are now.

Anthony J. Moraco -- Chief Executive Officer

We're aligned with the strategy we've talked about in the past. On the market access side, we look for opportunities to take advantage of expansion in the intelligence community, public sector health is still in high demand on health IT infrastructure services across that whole market area. On the capabilities side, I think we're very well aligned but can also improve our portfolio on training and simulation capabilities that links with the simulation and data analytics skillsets that really are tied to modernization and readiness, particularly on the defense side. So, our alignment to get in the market fasters on channels, repeatable products and technologies, and expanding a couple different federal segments along with the readiness alignment on training and analytics are really aligned to where we're thinking about consolidation opportunities. We can get to market faster and not be solely dependent on the organic market opportunities that Nazzic just talked about.

Lucy Guo -- Cowen and Co. -- Vice President

Can you address specifically on potential for more wrap rate optimization, or just on the cost side of things between where your scale is now versus having more scale?

Anthony J. Moraco -- Chief Executive Officer

As I mentioned, as the $4.5 billion as an enterprise, I think we're realizing effective and efficient economies of scale that pertains to our wrap rates or the indirect rate structure on our investment portfolio that we think we fully serve appropriately given the pipeline development as one example. But, I really don't see intent on scale to drive a wrap rate reduction. It's more around alignment and increased capacity to compete in certain market segments, increase the volume of either capability development or increase our ability to submit a larger number of large-scale programs so that you can further diversify the market access. So, we see that in more forms of growth, capabilities, and markets than we would approach any scale as it relates to wrap rate or impact on actual pricing strategies.

Lucy Guo -- Cowen and Co. -- Vice President

That's good to know. Thank you. One last question. I just wanted to follow up on margin pluses and minuses. Are there any one-time items that we should be aware of? Also, maybe if you can just address contract mix change and recompete coming up here, whether that has any effect?

Anthony J. Moraco -- Chief Executive Officer

I'll address the one-time. So, we did have $4 million of net contract writedowns in the quarter, with the primary driver being our platform programs. On the other hand, we had favorable underruns in our SG&A and indirects, primarily related to fringe benefits like health insurance that are very hard to predict and very volatile. So, that was also a very favorable impact in the quarter.

Nazzic S. Keene -- Chief Operating Officer

I can touch quickly on the recompete question. We actually are going into this year in a little better position as it relates to recompetes. Last year was a very heavy recompete year. This year is more normative, if not slightly better than normal. We've got a couple of key recompetes that probably drive -- had a significant impact on the year. I touched on one a few minutes ago, which was Task Order 33. That's a significant recompete and we're just waiting on conclusion of that. As I mentioned on the last call, a second is our TIRES program, and that is in the process of being recompeted as well, although there is strong indication -- and it's highly likely -- that that could get pushed later in the year, so it would have minimal impact for this year as it relates to revenue.

Lucy Guo -- Cowen and Co. -- Vice President

Can you also talk about any one-time items as you see the changes in the AMCOM portfolio, how that may affect margin outlook for FY '19?

Nazzic S. Keene -- Chief Operating Officer

I'm trying to make sure I understand the question. So, that's the transition of some of the AMCOM from the legacy T&M construct to the cost-plus construct?

Lucy Guo -- Cowen and Co. -- Vice President

Exactly.

Nazzic S. Keene -- Chief Operating Officer

Yeah, there certainly is that transition that is taking place, and we certainly see a little bit of softness on the margins there, but nothing that is overly significant.

Lucy Guo -- Cowen and Co. -- Vice President

Got it. Thank you.

Operator

We'll take our next question from Edward Caso from Wells Fargo. Please go ahead.

Edward Caso -- Wells Fargo Securities -- Managing Director

Hi. Good morning. I was interested -- given the rather large increase in funding in the budget deal that was just cut a few weeks back -- why you haven't shifted up your long-term view. I understand that it's really more of a calendar '19 impact by the time all the contracting work gets done, but I didn't sense from your commentary that you were more positive on the outlook than a year ago.

Anthony J. Moraco -- Chief Executive Officer

Good question. I do think that we are in a position today -- as you mentioned -- still a bit of a wait-and-see. The budget deal was just signed. The monies will flow into this current quarter. The expectation is that the customers are going to work hard to commit that, preferably against our already-submitted pipeline and the large IDIQ presence that we have. Task orders are another convenient mechanism to put money on contracts faster. But, I do think that as we think about our FY 2019, we'll see a modest increase that will convert from award to revenue toward the tail end of the year. That does give us confidence in our ability to outperform FY '18 results, both top-line and bottom-line, as we think about that.

So, I'm much more optimistic and confident that we can exceed and outperform last year. A lot of good momentum came out of last year on book-to-bill. To your point, we'd expect to see further improvements into next fiscal year as we the -- hopefully, the government budgets reconcile. Maybe we get lucky on a shorter CR scenario for government '19, but I do think that the larger increase year over year will be in our FY '20 or government '19. So, I think your 2019 representations are accurate, but we're much more optimistic given the two-year deal that we can outperform prior-year targets.

Edward Caso -- Wells Fargo Securities -- Managing Director

Can you talk a little bit about your hiring and retention efforts? We continue to hear other providers saying that they could have had more revenue if they had more people, particularly on the cleared side. What steps are you taking to address the pipeline of people needed?

Anthony J. Moraco -- Chief Executive Officer

The workforce challenges still exist, principally in the cleared workforce. As an industry, we've been collectively talking to our customers about the impact to mission, looking for opportunities to increase reciprocity so that we can move externally cleared staff to clean customers and contracts to meet mission needs, so that's an element. But, we're also trying to reinforce the ability to increase the workforce by simplifying the pipeline of getting cleared new talent in new markets and new technologies through the federal system so that we can get them on contracts. So, it is a bit of a headwind. It's across industry, nothing unique to SAIC.

But, the alternative as we think about workforce optimization -- I think the customers are beginning to be more a little more open to a remote workforce. We really put an emphasis on the technology development, not so much the geographic location of where that staff is. Our opening of the Cookeville Technology Integration Center last year is another means to spread our workforce, get the right talent at the right levels, and still be able to serve our customers.

So, working clearances, working geographic positions to really take a broad view, but overall, I think we're well-positioned, attractive as an employer of choice for the technical talent that we need, so we're always monitoring that, but especially the people that are critical assets, and it does drive revenue to some degree. As we think about ability to solution more on outcome-based, we're probably moving to an environment where we're less dependent dollar for dollar on the labor, but it's through the total collective integrated solution, and we're well-positioned to be a channel for all those technologies, and we complement that with our talent, people, and resources.

Edward Caso -- Wells Fargo Securities -- Managing Director

If I could sneak in another quick one, the amphibious vehicle program is another adjustment here to the cost structure. What's the comfort that we've found bottom here as far as the cost side of the equation where we might not see more program writedowns?

Nazzic S. Keene -- Chief Operating Officer

I'll touch on that, and certainly, Charlie can chime in as well. As we went into this last quarter, we're entering into the limited-rate production phase of the AAV program. And so, as we go into production, get more clarity and visibility on the cost to complete the production phase, it does give us higher confidence that we have our hands around the material and the labor required to execute. So, we've done some thorough work, have very strong bids from our suppliers in a fixed-price manner, so at this juncture, we feel confident that we have a good understanding of what it's going to take for this phase and appropriately put those costs in Q4. Charlie, anything you want to add?

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

As Nazzic said, we reevaluated the schedule of material costs to complete it. We increased the reserves for fiscal-year '19 in anticipation of things that could possibly go wrong as we get to this critical time point. So, we feel very comfortable with the program, and where we're going, all these platform integration programs offer great opportunity for us and in the future, so we're moving along with some great people working on this and great leadership down in Charleston.

Edward Caso -- Wells Fargo Securities -- Managing Director

Thank you.

Operator

We'll take our next question from Tobey Sommer from SunTrust. Please go ahead.

Tobey Sommer -- SunTrust Robinson Humphrey -- Managing Director

Thanks. I have a question about the platform business. Is the success that you've had over the last few years changing the way that potential future bids come together? Are you getting approached by partners that are bringing ideas to you about things to bid on? I'm just curious how that success has changed the way you may look at future opportunities. Thanks.

Nazzic S. Keene -- Chief Operating Officer

Thanks, Tobey. In short, the answer is yes, and I'll provide a little bit of color. So, as we have stood up this business and formulated this business over the course of the last few years, we certainly are seeing some interest from our government customers as they look to be able to drive their readiness in a faster manner, and so, we are seeing some great interest, not only from suppliers but from customers, and we are seeing an increasing pipeline in opportunity as we look forward over the course of the next few years.

Tobey Sommer -- SunTrust Robinson Humphrey -- Managing Director

I know you touched on this in an earlier question, but I'd like to ask it again. The internal growth that the company has for a long-term target -- you were right in the thick of it in the reported fiscal year and exited that year with a book-to-bill that could suggest a faster rate of future growth. And, we have a better spending environment. How do we think about the influence of spending growth on the company's medium-term prospects for internal growth?

Anthony J. Moraco -- Chief Executive Officer

Again, I think the spending growth expectations are high, the conversion and execution of contract decision awards is still a bit premature. We've tried to temper the optimism -- even through the last year -- of what was talked about as far as opportunities and the reality of how things moved through the system. We have seen improvements, as you saw, in book-to-bills. We expect that to be the leading indicator of the progression of customer decisions under the new budget environment. So, perhaps watch for that in the mid-term cycles to see how that converts. Given the cycles, at the end of this government fiscal year, perhaps there will be that acceleration, so there's optimism that the back of the year could see further growth as we transition into new programs.

But, as I said, I think that we're very optimistic about our ability to outperform in that low single-digit -- we used that 2.5% last year as a baseline -- that the low single digits would get carried away to go to high single digits, but we can outperform last year, and in context of the last few years, it'd be great to see a sustained, positive, organic growth within SAIC and across the industry, and we all expect that to happen. It'll just be based on the customer decision process. But, we think our portfolio with contract vehicles positions us very well to take full advantage of improved budget environment and our ability to convert submitted proposals into contract terms, and subsequently, revenue. So, it'll take a little time. Probably in the next quarter, the industry as a whole will be able to provide some color on how fast the government's been able to react in a budget environment. It does have to go down to the program operations and contract officials to get the extra money on contracts.

Tobey Sommer -- SunTrust Robinson Humphrey -- Managing Director

Thanks for the color. With respect to the duration of contracts in the book-to-bill as well as the pipeline, are there any material changes to that that would inform us on how to view the connection between book-to-bill and future organic growth?

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

I would just say that earlier on, we saw some linking of the contracts -- typically five years, and some of these were being extended out to seven years -- but I would say it's not changed dramatically over the course of the last years.

Nazzic S. Keene -- Chief Operating Officer

Most of them fall between three to five years. We do see -- just to provide a little more color, we do see continued use of bridges when the time comes and the contract's organization or the customer hasn't fully finalized their next strategy, so when you're in an incumbent position, that's obviously a great thing. If you're looking to compete for the work, then it just elongates that process.

Tobey Sommer -- SunTrust Robinson Humphrey -- Managing Director

Thank you very much.

Operator

Again, as a reminder, to ask a question today, please press *1. We will take our next question from Krishna Sinha from Vertical Research Partners. Please go ahead.

Krishna Sinha -- Vertical Research Partners -- Vice President

Hi. Thanks, guys. Hopefully, I don't beat this growth question to death here, but I just want to come at it from a different angle. Some of your peers are guiding toward mid-single-digit growth or even higher than that. I know during the defense budget downturn, this was primarily a market-share environment where you had to take from somebody else in order to grow. To what extent have we exited that? Are there a lot of contracts that are new to the world that the government is pushing through the pipeline that you guys can win?

So, is the pie getting bigger with the budget deals and the budget growth that you're seeing, or are you still having to take away from other competitors in order to grow your top line? And, if you could, quantify -- if you're saying low single-digit growth -- maybe slightly higher than that in the medium term -- if the budget dollars are slow, how much of your growth will be you taking market share from competitors and how much will be coming naturally from the budget?

Nazzic S. Keene -- Chief Operating Officer

I'll try to answer a couple of these things, and certainly, Tony can add some color. For the most part, what we're seeing today in the submitted pipeline as well as the near-term pipeline is exactly what you referenced, and that's the same pie, just shifting in some cases or recompeting. So, to date, we're not seeing a lot of new work, but we are optimistic -- as you've heard -- that with the new budget deal, that frees up our customers to invest in new solutions, new technologies, new initiatives, new programs, and assuming that is that case -- which is what we expect -- then the other part of your question does hold through, and that is as we go later into this year and into next year, then hopefully, the direction would be that in addition to the takeaway work, there would be some new work as well. So, that is what drives the optimism as we look at later this year and into next year from the overall budget standpoint.

Anthony J. Moraco -- Chief Executive Officer

I think that's spot on. As we've talked about in the past, some of the pressures on organic growth have been on the recompetes to the existing contracts, and as the customers had to adjust to a more austere budget environment, the existing work declined -- the existing scope of work. So, I think there's a balance between the increased budgets in part, return -- I see modernization, for example, back to a level that perhaps we saw three or four years ago, where they've been in more of an operation and sustainment mode. The upside is around on existing contracts, increased scope to accelerate modernization. I think they may have delayed in enterprise systems, data centers, architectures, migration to the cloud. So, I think there's still a lot of work and a lot of these budget dollars will move through existing contracts.

To Nazzic's point, there will be some specific areas where there will be some new contracts for us, but I think that's the minority of the portfolio that we'll see. A lot of it will be expanding the existing scope on contracts that we hold today. And then, for future growth, it's still a bit more on the takeaway as you try and shift -- in our vernacular -- to an expand-and-grow of serving our customers. So, I think of it in terms of that as we see the budgets getting back to a better baseline. Takeaways will still be pretty prevalent on the growth side overall. The overall number, as I said, outperforming last year. You come into lower single-digit if you look at the scale, but maybe closer to low to mid, but I would not see expectations above that midpoint given the scale as I see it and the amount of money that moves through based on that baseline.

Krishna Sinha -- Vertical Research Partners -- Vice President

Okay. And then, just as a follow-up, who's losing in this market share environment? If you guys are growing, most of your peers are growing. That implies -- if the pie's not getting much bigger -- that you're taking share from other people, so who are the losers that are eroding their market share by not being competitive on costs or what-have-you?

Anthony J. Moraco -- Chief Executive Officer

I think the losers will be evidenced as the market plays out. It's hard to predict. We all see optimism in our ability to expand the scope of our work and existing contracts, so I think that is the basis of some of the optimism of growth that we haven't seen. So, that's a little bit more conservative, but the context of takeaways -- I think the market dynamics will still need to play out. We're not likely to see huge shifts. There are still very strong incumbent capture percentages, so the population -- as a takeaway, the percentages are still relatively small.

So, I think the growth optimism among our peers will in large part be on the existing contracts, so there aren't as many losers in that sense, but I do think that we'll have to wait to see how the market plays out. We all believe that we can effectively compete. As I've seen in the last three or four years, we've proven that we can outperform on the revenue side, whether we're filling gaps or on positive momentum. So, we're optimistic that we'll get our fair share on the growth side relative to our peers.

Krishna Sinha -- Vertical Research Partners -- Vice President

Thank you.

Operator

We'll take our next question from Josh Sullivan from Seaport Global. Please go ahead.

Josh Sullivan -- Seaport Global Securities -- Director

Good morning. In regard to the Ingenuity 2025, now that you've completed the restructuring efforts here, what other near-term steps might we look for in that plan?

Anthony J. Moraco -- Chief Executive Officer

Part of the intent on the growth is still around alignment of key technologies and looking at custom-based solutions with the domains we've talked about on training, model-based system engineering, readiness, IT modernization... I think we see opportunities to be able to continue to leverage commercial technologies via channels the government thrives and grows through. The 2025 element of our business is to get market share in specific segments that we think have got a good position. We continue to focus pipeline development on the expand-and-grow side so we can expand capabilities as well as seek adjacencies with new customers. But overall, our ability to increase and align outcome base and acquisition styles with improvements to add to service all provide opportunities to shift the opportunity set in our strategy to deliver more effective solutions that are differentiated, but again, should support growth in both revenues and margins.

Josh Sullivan -- Seaport Global Securities -- Director

I think you mentioned in the comments public health was a target. Related to that, what opportunities are out there and why are you well-positioned to take advantage of those opportunities at this point?

Nazzic S. Keene -- Chief Operating Officer

As we look at the portfolio that we hold and the market segments that we serve, we see the opportunity to expand a lot of the work that we do in two or three key areas. So, certainly the IT portfolio, training -- as Tony mentioned -- so there are several offerings we can bring to bear in the public-sector healthcare market. That's a market that we've underserved post-spin. That portfolio stayed with our previous parent. We have the opportunity to grow into that space. We've had some great success over the course of the last year doing that organically, and as Tony mentioned, it's also a filter as we look for potential M&A. It's a significant share of the market that we don't have significant scale in today, and it is one that we believe we can easily penetrate with the offerings and market segments that we bring to bear.

Josh Sullivan -- Seaport Global Securities -- Director

Okay, thank you.

Operator

We'll take our next question from Brian Ruttenbur from Drexel Hamilton. Please go ahead.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Yes. Thank you very much for taking my question. Just along the lines of the rising budgets, can you talk about the competitive environment? You hit on that a little bit, but as you see things in the future, do you see margins rising again overall for the entire industry? Are there going to be winners and losers that are going to get squeezed out? Over the last seven years, it's been brutal in this industry where there's been shrinking budget, shrinking margins. We're starting to see recovery, and I just wanted to hear some of your commentary for the industry and yourself, what you see in terms of recovery with these budgets going forward -- not necessarily in fiscal '19, but beyond.

Anthony J. Moraco -- Chief Executive Officer

I'll comment on that. The competitive environment is still very robust. It's an attractive market in the federal contracting community at all levels. There's still a lot of opportunity, as you say. It's been challenged given the budget environment since 2013, so we're seeing a little bit more optimism in the budget profile we talked about. Over the last few years, we've seen a move to more of what we'd call the best-value decision making and moving away from an LPJ -- low price technically acceptable. Price was the only driver three years ago just because budgets were so constrained and squeezing out folks. So now, I think there's more opportunity to blend technology advancements, modernization, bringing in innovative technologies, and perhaps a different style as a service, perhaps look at best-value opportunities.

So, I think the market improvements are there. The industry has been pretty responsive to understand the key pace of customer requirements. With the pipelines that have been submitted, it's leading off the customer -- even the budget environment -- never really pulled back on the request for proposals, and I think you see in industry that our $15 billion of submitted proposals have been winning awards. The demands have been there. Now, with the budget environment, we're really optimistic that they'll actually be able to execute those decisions on that pipeline, so I don't think we have to beef up the proposal activity. It's really trying to work with our customers to get execution on what they've already asked for. Now that the dollars are in place on a longer-term basis, we should be able to move forward.

Relative to winners and losers, I think we've seen the ability to maintain a diverse portfolio capabilities and market channels through customer and contract vehicles is very important. It's tough to get those in a new sense, so we've been able to sustain that over the last four years. We think we've definitely been on the winning side of that equation and will continue to be as competitive with our solutions, our presence to our customers, and diversity of our past performance.

You've seen us invest in areas such as the platform programs to really seek new market channels and we're very optimistic about our alignment as a technology integrator today to get more capability in the market faster, which is, again, very much aligned with our customers' needs for mission to the fields in a much shorter period of time. So, well-positioned, we'll see how the market shakes out, but the competitive landscape -- I don't see it changing dramatically relative to the dynamics on competition, but more so hopefully on increased volume.

Brian Ruttenbur -- Drexel Hamilton -- Analyst

Okay. Thank you very much.

Operator

We will take our next question from Jon Raviv from Citi. Please go ahead.

Jonathan Raviv -- Citigroup Research -- Vice President

Thanks for taking the follow-up. Charlie, can you just clarify the baseline for margin amounts in FY '19? I thought it would be that you're going to grow 10 to 20 off the fiscal second-half run rate.

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

Yes, Jonathan. There are two ways to look at it. One was what we talked about previously, looking at the second-half run rate -- again, we normalized that to 7.2%, looking for 10 to 20 basis points off of that. However, a simpler way to look at it is to take the full-year 2018 results, which came in at 7% margins, as the baseline, and we would look to grow 20 to 40 basis points' increase from that. Again, that's related to the restructuring savings, the increased performance of platform integration, offset by increases in SG&A costs.

Jonathan Raviv -- Citigroup Research -- Vice President

Got it. Thanks so much for that. And then, just on that, can you give us a sense -- I know we'll get the K later this evening -- just a sense of your perspective on the material weakness, exactly what it is, and what gives you confidence that it is contained to that one item that you flagged?

Anthony J. Moraco -- Chief Executive Officer

So, one of the things that's very important about this is that it's something that SAIC management identified. As we were getting late in the fourth quarter and toward the end of the year, we identified that there had been revenue recognized in excess of authorized amounts on a specific program, and we did a lot of investigation into this to make sure that we understood it all, that we had a fence around it, and that there was no further financial exposure.

However, due to the timing of this coming late in the year, we were not able to remediate the material weakness and be able to test it to ensure that the effective controls were in place, so that's why we elected to have this material weakness, which again, we believe will be remediated in the first half, and again, it's just being able to go back and test and verify that the controls are effective in the first half of the year.

Jonathan Raviv -- Citigroup Research -- Vice President

All right. Thanks so much for that color.

Operator

As there are no further questions in the queue, that will conclude today's question and answer session. I will now turn the call back to your hosts for any additional or closing remarks.

Shane Canestra -- Director of Investor Relations

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

Operator

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Duration: 62 minutes

Call participants:

Shane Canestra -- Director of Investor Relations

Anthony J. Moraco -- Chief Executive Officer

Nazzic S. Keene -- Chief Operating Officer

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

Jonathan Raviv -- Citigroup Research -- Vice President

Greg Konrad -- Jefferies and Co. -- Vice President

Lucy Guo -- Cowen and Co. -- Vice President

Edward Caso -- Wells Fargo Securities -- Managing Director

Tobey Sommer -- SunTrust Robinson Humphrey -- Managing Director

Krishna Sinha -- Vertical Research Partners -- Vice President

Josh Sullivan -- Seaport Global Securities -- Director

Brian Ruttenbur -- Drexel Hamilton -- Analyst

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