Leidos Holdings Inc (LDOS) 0 Q0 法說會逐字稿

My name is Aaron and I will be your conference operator today.

At this time I'd like to welcome everyone to the SAIC third quarter fiscal year 2008 earnings call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there'll be a question-and-answer session for our analysts and investors.

At this time I'd like to introduce our speaker for today's call, Stuart Davis, Senior Vice President, Investor and Employee Owner Relations.

Mr.

Davis, you may begin your conference.

Thank you, Aaron, and welcome everyone to our third quarter FY '08 earnings conference call.

Here today are Ken Dahlberg, our Chairman and CEO, Mark Sopp, our CFO and, for the first time, joining us will be Larry Prior, our COO for the Q&A session.

During this conference call we will make forward-looking statements to assist you in understanding the Company and our expectations about its future financial and operating performance.

These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made during this earnings call represent our views as of today.

We anticipate that subsequent events and developments will 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.

Ken?

Well, good afternoon, everyone.

Frankly my judgment, we just had a terrific third quarter.

With a solid funding environment in the quarter, we continued to accelerate revenue growth and expand margins.

We've set the stage for further top line and bottom line growth by winning significant new business opportunities and have initiated a corporate-wide project to become more efficient in our back-office functions.

Since our last call, our largest customer, the Department of Defense, had its funding approved for the year with a healthy increase.

The DOD appropriation includes solid funding for our largest program, the Future Combat Systems.

FCS received the lowest cut in its history, and support for the program is strong both in the Army and Congress.

Having said that, the rest of the government is operating under its second continuing resolution, which as you know, is set to expire at the end of the week.

The Congress will spend between now and the 21st of December on the final appropriations end game.

As expected the most contentious issue is the funding for war in Iraq.

To date, the war effort has received only a month and a half of funding as part of the first continuing resolution.

The Defense Department is now borrowing from its core operations and maintenance budget that would be spent in future quarters to pay for the war.

We've not seen a slow down yet, but if additional funds are not in place by Christmas, we expect that cutbacks and shutdowns will be implemented in early February.

Like everyone, we want to believe that Congress will find a way to fund the war cuts--costs, excuse me, before heading out for the Christmas recess.

They don't want to return to their districts and answer to constituents with furlough notices, especially after campaigning on a platform of effective government.

But there is clearly a great deal of dissention between Congress and the President over funding for the war so there is no guarantee.

The non-defense appropriation bills are ready to go to the President, but the two sides are arguing over about $10 billion of additional domestic spending within a $950 billion dollar discretionary budget.

As a result, the bulk of the bills are likely to be part of an omnibus spending measure that may include limited funding for the war.

Because about 70% of our revenues come through the DOD budget, none of the other bills are as critical as the DoD war funds, but their passage would be helpful, especially for the Departments of Homeland Security and Health and Human Services where there is a much higher demand for new program starts.

All these issues, while critically important to our near-term performance, will not affect our long-term performance and outlook.

We just completed a comprehensive Strategic Planning session with our senior management team and our Board of Directors and are convinced of the long-term health of the defense and homeland security markets.

The mission of our primary customer, the U.S.

Federal Government, is becoming more complex in an increasingly dangerous world while its organic capability is shrinking with the retirement of its senior workforce.

The addressable market should show modest but steady growth, and should there be another unfortunate domestic terrorist incident, demand could surge.

In addition, our core markets in the commercial sector, in both energy and health care, we believe are poised to grow for the foreseeable future.

Turning to business development, we just had one of the best quarters for new bookings in quite some time at $3.9 billion, for a book-to-bill ratio of 1.6.

Year-to-date and trailing 12 month book-to-bill ratios are now at about 1.1 and support our long-term organic growth targets.

Particularly noteworthy wins include the Business Transformation Agency contract, where we beat an entrenched incumbent on both price and technical quality and demonstrated our ability to compete successfully on the Army ITES-2 vehicle, and the NASA test facilities job where we're beginning to show immediate synergies with our Benham acquisition.

Remember the bookings total does not include any contribution from indefinite delivery/definite quantity awards, and we continued to do well in this area.

During the quarter, we secured prime positions on two multiple award, multi-billion dollar programs, Alliant from GSA, and the Enterprise System Development contract with the Centers for Medicare and Medicaid Services.

Although Alliant has since been protested, we expect to book more than $3 billion dollars under these two vehicles over the next 10 years.

In addition, we received two single- award ID/IQs from Space and Naval Warfare Systems Centers totaling more than $900 million in expected value.

We do not have to compete against other companies for task orders under single award IDIQs, so if the customer has a funded requirement within the scope of the contract, the work will generally come to us.

This quarter we grew total backlog by more than $1.7 billion, or 12%, and funded backlog by $900 million, or 20%.

As of the end of October, total backlog was $15.8 billion dollars of which $5.4 billion was funded.

Consistent with our backlog definitions, these figures include only task order awards to date on the $4 billion dollars plus of IDIQ awards this quarter.

Turning to other business matters, I want to update you on Project Alignment.

As you recall, this is our initiative focused on becoming more efficient in our back office infrastructure.

Since the last call, we have completed the initial assessment of all our back office functions, both the corporate and throughout the line organizations.

The centerpiece of the Project Alignment changes is a multi-functional shared services model.

We understand that this will not be an easy task, but it's the right thing to do.

Our major competitors have already adopted this model just as we do for many of our commercial customers.

This model will enable our line organizations to spend more time on market-facing growth opportunities as we make back office transactions more efficient.

We're now moving into the implementation stage.

We have identified a key executive to run the program and have staffed it with several high potential individuals.

We presented the assessment findings and recommendations to our entire management team and received their full support.

Although we need to complete the upgrade of our IT systems for some of the changes, we're launching those actions that we can take now.

We will be rolling out the program in four phases, over a six to nine-month period per phase, and I'm pushing the team to move as quickly as we can while not disrupting our business momentum.

I expect that we can lower our cost structure by $100 million dollars over the next two to three years, which will fund additional investments in internal research and development and training for our people, create more competitive bid rates, and enable us to meet our long-term growth and profitability targets.

On the acquisition front during the quarter, we saw very positive signs on the integration of Benham.

I recently visited the Benham headquarters and met with some of their key customers and key employees.

I was impressed how well the integration is proceeding and the potential for business acceleration by bringing our companies together.

The win that I mentioned earlier where SAIC's knowledge of NASA technology, its mission and infrastructure along with Benham's engineering capability led to a $50 million contract to design, engineer and build state-of-the-art testing facilities for the Orion and Constellation programs, and this is just the beginning of significant collaboration with Benham.

We also completed the acquisition of Scicom, an Indian-based provider for science and engineering services in the energy and healthcare markets.

Looking beyond Benham and Scicom, our M&A outlook remains positive, but company evaluations are still high.

We have deployed to date about $450 million in strategic acquisitions since the IPO and expect to be able to maintain a similar pace going forward.

In terms of our people, the third quarter was generally positive.

We had a slight up-tick in attrition, but we were able to crank up the recruiting engine substantially.

We're now at more than 700 net organic hires for the year with about 500 alone in the third quarter, and are slightly ahead of our labor plan for the year.

Even more important from a people perspective, the recent San Diego fires demonstrated how the Company rallies together around each other and our shared passion for serving our customers.

2,000 of our San Diego employees, including Mark, Larry and myself, were evacuated from their homes, and the Company tracked down all of our people, worked immediately to organize supplies and rental housing for them.

Just like after Katrina our people were as much motivated by their concern for their fellow employees and customers as they were for their own personal situation, and our company, once again, stepped up and did the right thing.

With that, I'll turn it to Mark for the financial details.

Mark?

Thanks, Ken.

Well, during the third quarter we capitalized on the strong funding environment that Ken mentioned but also capitalized on investments that we've been making all year to turn in internal revenue growth of 8% for the quarter.

With this we generated strong operating margins of almost 8% as well and delivered diluted earnings per share from continuing operations of $0.26.

As we stated during our Investor Day in October, all of our business areas are very well aligned with enterprise objectives with excellent focus on generating new business in a sustainable way and driving operating margin improvement from several sources.

Another element we're pleased to see is the maturing of our four business Groups and in particular, the amount of collaboration and synergies being generated both within each Group and between all Groups.

Focusing on the results themselves, we achieved record revenues of $2.37 billion, up a total of 14% and up internally over last year by 8%.

Our government segment provided most of this growth with contributions from across our diverse contract base driven by new wins we have registered throughout the year.

Our large POLCHEM award, which overcame a protest in August, the third quarter, got off the ground with negligible revenue in this quarter, but is expected to gradually ramp up to a run rate of $50 million to $75 million next fiscal year, and to the $100 million to $150 million per year run rate in the years beyond - with 10 years ahead of us as the period of performance.

Revenue mix was consistent with last year, I'm sorry, last quarter, with 61% of the revenue from SAIC labor sources and the remaining 39% from materials and subcontractors.

Contract mix was also the same at 48% cost reimbursable, 35% time and material and 17% fixed price.

On the profitability side, operating profit was $186 million for the quarter, representing 7.9% of revenues.

First and most importantly, our project execution was strong throughout the Company and we did not experience any material write-downs or write-ups on our programs in the period.

We had better profitability performance in our commercial segment, which has benefited from an improved cost structure, particularly in the U.K., and increases in energy consulting revenues at favorable margins.

As expected, we had a healthy delivery schedule for our high margin, border, port and mobile security systems, in which the revenue and associated profit is recognized upon delivery to the customer.

The other main contributor to the operating margin performance was strong labor utilization and direct headcount increases associated with expanded and new business.

In addition to generating revenue, these two components drove a favorable indirect rate variance in the third quarter, partially offsetting unfavorable variances generated and expensed during the first half of the year.

Non-operating items were relatively insignificant, although we did benefit from a slightly lower tax rate of 39% from necessary adjustments to reserves for tax contingencies.

Diluted earnings per share from continuing operations came in at $0.26 fueled by strong revenue growth and the higher operating margins.

The share count actually fell from the second quarter by 4 million shares from repurchase activity and a lower average stock price, but this did not affect the ending earnings per share result.

Cash flows from operations totaled roughly $100 million for the quarter - depressed somewhat from revenue acceleration coupled with a higher days sales outstanding metric of 70 days.

We have a few cases where we're experiencing slower payments than normal, a couple with respect to funding administrative issues with the customers and another concerning a customer's systems conversion.

We're not certain these matters will clear by year-end, which is one of the reasons why we're providing a more conservative cash flow expectation for the fourth quarter and I'll discuss that in a moment in the guidance area.

As Ken mentioned, we completed the Benham and Scicom acquisitions in the quarter which collectively used about $150 million in cash.

We also used about $100 million in cash for repurchases of stock.

Since the adoption of the 40 million share repurchase authorization announced approximately one year ago last December, we have bought back a total of about 13 million shares.

That wraps up what I wanted to cover regarding third quarter performance, let me now address our forward view.

We expect a modest, sequential decline in revenues in the fourth quarter due in part to four fewer working days, which are worth roughly $30 million each, fewer deliveries of border, port, and mobile security products and also likely--or most likely, a tougher funding environment.

Expected revenues for the fourth quarter coupled with our year-to-date performance allows us to confirm our existing revenue guidance range of $8.7 billion to $9 billion for the full year.

Consistent with our goals, we expect to finish the full year with operating margins 20 to 30 basis points above last fiscal year.

This improvement is derived from improved contract execution across our government business, more relative growth in our higher margin business areas such as homeland security, intelligence, and select government IT areas, and better recovery of indirect costs.

That said, compared to the strong third quarter we just posted, we expect a pull back in margin in the fourth quarter due to fewer high margin product deliveries, some restructuring charges to remove cost structure in our security products business, and costs related to our systems conversions, and Project Alignment that Ken mentioned a moment ago.

Earnings per share momentum has indeed been good the last two quarters with strong internal revenue growth, relatively high operating margins, and deployment of cash for stock repurchases.

Despite the expected modest revenue reduction and lower operating margin in the fourth quarter, we now expect the full fiscal year 2008 earnings per share from continuing operations to be at the high end or exceeding the existing guidance range of $0.83 to $0.88.

We expect cash flows from operations to be short of the existing guidance of $450 million for the year.

Part of this is actually good news.

We used our cash in a positive manner with respect to the mid-year AMSEC and Benham transactions, but from a timing perspective, each has a modest, negative cash flow expectation for this fiscal year.

In addition, our security products and logistics business have been growing faster than we had planned resulting in a greater investment in inventory, all in all, pretty good news.

These developments, coupled with some of the slower receivables earlier discussed, are expected to temporarily impair cash flow from operations this year.

That covers the '08 outlook, looking past this year we're introducing a new approach to guidance as it applies to fiscal '09 and beyond.

We want to keep our business focused on the long-term goals and strategies of the Company.

We believe our communications with investors, including our guidance policy, should also reflect that view.

The planning and forecast process we undertake quarterly and annually looks at both the forward annual period as well as the market dynamics for the longer term horizon as well.

We will share with our investors the results of that process, discussing our long-term financial goals and also any factors that we are aware of that may significantly influence the attainment of those goals either in the short, or in the long-term.

With that, we just completed our annual planning process in preparation for fiscal '09.

Our focus on business development, collaboration and more disciplined cost management over the last year has provided both solid foundation and strong momentum as we head into fiscal '09.

Our '09 business plan reflects this, with continued ramp up of contracts won during fiscal 08, a nice pipeline of new opportunities, a relatively low degree of recompetes, and continued visibility in our margin improvement initiative.

That said, we'll continue to invest, as Ken mentioned, to develop and further develop our science and technology platform with internal research and development projects, training and development of our people, a new university outreach program, and strategic hires.

Through this process we have validated the same three to five year long-term goals we've set forth during our IPO roadshow last year.

These goals were to grow revenue internally by 6% to 9% per year, continue to make strategic acquisitions, improve margins--operating margins 20 to 30 basis points per year until we reach a sustainable level of between 8% and 9%, and grow diluted earnings per share from continuing operations by 11% to 18% annually, with a target average of 15%.

For fiscal '09, we currently expect our financial performance to be consistent with these goals.

That then is our guidance for fiscal '09.

The primary assumption concerning '09 performance rests with the funding from our customers.

Even with the strong fundamentals that we currently have, the fact is that we are highly dependent on stability in funding from the U.S.

government, particularly, the DOD, Department of Defense.

While as Ken mentioned, the Department of Defense has a strong budget for the government fiscal year, the government does not have adequate supplemental budgets in place for the war at this time.

If supplemental budgets are not adequately in place and the war continues, we'd expect to see a reduction in spending on base defense programs for purposes of reallocation to pay for the war effort as a higher priority.

This is precisely what we saw in the spring of 2006.

At this time we hope and expect that adequate supplementals will be put in place, so our expectations for fiscal '09 assume Congress will pass sufficient supplemental budgets to avoid what we saw in 2006.

On a final note for fiscal '09 and consistent with the comments made during our Investor Day in October, the timing for fiscal year results in an additional payroll cycle to be paid on the last day of the year.

This will adversely affect cash flow from operations by $75 million in fiscal '09 which will effectively reverse the following year.

That wraps up my financial report.

I'll turn it back to Ken for some final remarks.

Thanks.

Thanks, Mark.

Before turning to your questions, I want to reflect on our first institutional investor conference this past October.

I know our entire senior management team business unit manages enjoyed meeting with you and sharing their perspectives on our company.

We understand that this company's breadth of capability while a great business discriminator makes it hard to get your arms around.

So we're committed to continue this kind of dialog with you in the future.

We expect to have a similar event on an annual basis so that you can make a more informed investment decision, and if you were not able to attend this year, we look forward to seeing you next year.

In the meantime, you can still access the webcast and the presentations from our website.

I believe we're now ready to take questions.

At this time we will open the line to take questions from our analysts and investors.

(OPERATOR INSTRUCTIONS)

Your first question comes from Cai von Rumohr with Cowen and Company.

Thank you, gentlemen, good quarter.

Your gross margin looks particularly good, up 30 basis points from a strong July, but your SG&A looks like it was off.

Could you comment on both of those trends, specifically was there anything in the SG&A or the gross profit for the Benham--Benham management retention and if so, how much?

Okay, Cai, this is Mark here.

First in general with respect to cost of sales, we had more favorable rate experience in the third quarter and we also had more favorable gross margin if you will from our security products business.

So that aided both year-over-year results and sequential results as it pertained to cost of sales.

On SG&A, we're up-ticking a little bit in our IT area for our systems conversion.

That really accounts for the bulk of that, there are no other major swings there.

In terms of Benham, we did advise during our Analyst Day that it would be dilutive to margins in the second half, that is occurring.

The amortization hits there in the SG&A category, so that did contribute to quarter-over-quarter--I'm sorry, quarter-over-quarter and quarter-to-quarter SG&A experience.

And could you comment if the amortization was up, how much was it, and how much of it was management retention and will that be repeated in the final quarter?

The management retention is--is in place but it is not significant enough to really move the needle.

In terms of amortization, just about $1 million, maybe $2 million more above where we were prior to the acquisition.

Okay and last one, because I'm sure you have other questions, you mentioned organic growth of 8%, that would suggest almost 6% from acquisitions, what was the acquisition add on and what was the factor that drove that number because it looks bigger than I think I and most others would have expected?

Shouldn't have been unexpected, we did pick up Benham for almost the full quarter.

That deal closed on August 3, I believe, so right at the beginning.

Scicom was about in the middle of the quarter.

AMTI was a pretty big deal that we closed last December, and so that's fully in there this quarter and didn't exist a year ago.

But so, how much--what was the contribution from Benham and AMTI to kind of get us to the number?

It's about 60, $70 million.

Each?

In the aggregate.

It's close to $100 million in total.

I'm sorry, I want Benham alone.

Right, about $100 million in total, Cai.

Okay, great.

Thank you very much, good quarter.

Terrific quarter.

Your next question comes from James Kissane with Bear, Stearns.

Terrific quarter, Ken.

Mark, you said the M&S was flat sequentially as a percentage of revenue, but it seems like the product sales were up somewhat even from a strong July quarter.

Can you give a little more insight into maybe what portion of M&S is the VACIS and other border, or security products?

Well actually on the grand scheme of things, the security products business is small in terms of revenue contribution, but big in terms of margin contribution.

So it's very possible that M&S in a given period could go down, security products could go up, and we could have a favorable margin impact, you know.

The M&S is north of $3 billion per year.

Right.

And that's dictated by material pass through and subcontractors on thousands of contracts.

Okay so you don't think--

We had a quarter of delivering VACIS units, and that really helped profitability.

Is it possible to size, kind of your product revenue, in some range?

$200 million per year roughly.

Okay, great, and then, I think you mentioned, when you were talking about the DSOs, some customer conversion issues.

Can you provide a little more insight into that?

We have an intelligence customer, I will not name the customer that's going through a systems conversion as our customers do from time to time, and we have some receivables held up there, and we're hoping to get it resolved as quickly as we can.

And your longer term target for DSOs?

We really believe we should be in the 65 to 70 days depending on what's going on in a particular quarter.

That should be our average.

Okay, great , and one last question, just an update, Mark on the Deltek

The Deltek implementation's going well.

We are live with our corporate organization and two business units as we speak.

So that's not changed from the plan we communicated to you in October.

So far, so good.

We--our next wave is going to be in the spring for a few more business units and each quarter, more business units to follow.

We're hoping to get the bulk done in fiscal '09, but as I said, back in October, good chance that'll spill over into fiscal '10, but so far so good.

Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

I think we lost them.

I think we lost the connection.

At this time I show no further questions in queue.

Let's just go ahead and stay on the line a bit more and give people a chance to reconnect.

We do have showing up questions.

So let's go ahead and take those now, Aaron.

Your next question comes from Edward Caso with Wachovia Securities.

Hi, thanks, Ed Caso, Wachovia.

Terrific quarter.

Is there anything in the larger than expected SG&A number related to the San Diego fire?

No, not really.

No.

Okay, and can you--can you give us an update on the Greek contract?

Greek contract?

We're prosecuting the strategy we talked about, Ed, with you last call and at the October meeting.

We've gotten a great number of the subsystems accepted and really now it's working principally the command and control subsystems along with the port area to get those implemented and sold off in a year's plus time.

So we're really in a quiet period while we're performing with our subcontractors.

Just held an extensive program review, things seem to be on course.

Larry Prior was over in Greece with Don Foley who's leading the effort for us, and things are progressing well.

And last question, the South Africa Telkom situation, can you update us?

Not much to update we're hoping that we can start working through arbitration and come to some resolve with TSA.

I'd like to say there's light at the end of the tunnel, but it's still too early.

We're encouraged.

Larry, you want to add something?

We're in the damages stage of arbitration.

So far the arbitrator upheld the interest portion which effectively doubles any damaged award, so Doug Scott and our legal team are hard on it, and we're looking for a positive outcome.

Thank you.

Next question comes from Joseph Vafi with Jefferies & Company.

Go ahead.

Go ahead, Mr.

Vafi.

Aaron, perhaps we can go onto the next question and maybe cycle back with Joe later on.

Not a problem.

Your next question comes from Alex Hamilton with Jessup and Lamont.

I'm not sure what's happening here, Aaron, it seems again that we're not getting anybody.

We'll certainly stay here and wait until you prosecute the line until you get a live question?

Hello?

Hi, Joe Vafi here.

Oh, hey Joe.

Hi, can you hear me?

Yes, we can.

Okay, great.

A couple questions, first of all, good quarter.

I think Ken, you were talking a little about this movement to a shared services model here on some of your internal operations, and you talked about $100 million in cost savings.

Is that incremental to what we should be thinking about relative to margin improvement or is that part of the strategy that has been in place all along?

That's part of the strategy that gives us this enduring 20 to 30 basis points over the foreseeable future.

Okay, and then you said you were ahead of your labor plan in terms of hiring, is that enough really to move the needle here in terms of margins on a gross basis when we kind of look at the overall mix in ODCs and if we're adding a little bit more direct content to the overall revenue line?

I would say we're slightly ahead, so slightly ahead won't really move the needle, but it sure positions us well going into the new year, let alone the fourth quarter.

It's been a tough environment to hire, but like I said in previous calls, we have a hiring machine and to be net 700 positive is, speaks well for our recruiters.

Right.

Right, okay and then I think you mentioned $900 million dollars and, in that single, in the single IDIQ.

Single award IDIQ.

How should we look at that because that number's generally not included in your backlog, is that correct because it's short term?

That's correct.

Any IDIQs not included in our backlog until it becomes a specific task order.

Joe, this is Larry Prior, as we tried to dissect that at the Analyst Meeting, when we do the multiple award IDIQs, it's not until we get a task order that we add it in.

With many of the single award IDIQs our group Presidents are very effective at trying to get all of that under contract.

Much of it though books within the same period, so it really benefits our awards and revenue.

Often it doesn't show up in the backlog and then as a COO, any time we get a single award IDIQ, I want our team going out and pushing it to the ceiling and then raising the ceiling.

Okay, that's fair.

So if we look at this $900 million in the single award IDIQs, is there a number that's converted at this point?

Just kind of trying to get a feel for revenue contribution coming from these awards.

No, we generally don't show it in terms of bookings, but everyone in our team, we hold our group Presidents accountable for delivering that almost completely in terms of revenue.

Okay, great.

Let me just clarify that.

Regardless of the backlog treatment, all awards including IDIQ are factored into our bottoms-up forecasting process on a quarterly basis.

Okay, that's helpful and then one final question, some of the higher margin border products, would you expect that, I mean, I don't know how much color you can provide at this point, but relative to the strength of that business here in this fiscal year, in fiscal '08, maybe an outlook on that business looking out into '09, if it would be up or down from this year?

Business is strong, we're, we're really excited about the Safe Ports Initiative, if the administration can come to some resolve on that, I think we mentioned in prior calls, we're in all but two of the ports, so we're moving towards a higher value product in the X-ray penetration market and so far things look good.

It will be growth of 8% to 10%, organic, kind of fits within our 6% to 9% organic growth, but again, the profitability is what's really super in that particular area.

And Joe, we've always been conservative in our outlook, but this is a market that has breakout potential.

We only do about 2% of the cargo coming into the country at this time, but we have the advantage of being most of--at the secure freight initiative ports as Ken mentioned.

So it is very important in terms of breakout potential and then we're also making the business much more efficient as Mark pointed out, some of our use of cash in the fourth quarter is to consolidate from three facilities to one here at Vista.

Probably half the square footage, much greater efficiency, so we're really doubling down and building this business for the long run.

We love Alex Preston's leadership on this and we're excited about it.

That's great, that's a great update, thank you so much.

Your next question comes from Bill Loomis of Stifel Nicolaus

That's Stifel Nicolaus.

Ken, terrific quarter.

Just looking at the port security business, with the DHS budget not passed, I know the quarter ended in October, when you said there was less sales of this in the January quarter, was it because of the budget reasons or just typical ordering cycle?

No, it's ordering cycle.

Okay, and let's say we get into a year-long continuing resolution with no funding increase, how do you see that impacting some of the port security programs?

It probably won't impact any of our current market entries.

It certainly would impact the Safe Port Initiative, so we would probably have to haircut that growth percentage a bit.

Yes.

Honestly, if we're in the continuing resolution for an entire year, we have got bigger problems than just security products.

I think we're ready for the next question, Aaron

Your next question comes from Julie Santoriello.

Good afternoon.

I guess the latest on the side of congress right now is for $70 billion supplemental perhaps is being proposed as part of the next omnibus, can you give us a feel for what the $70 billion means to your business in terms of timing, how long can that carry--carry DOD and keep them away from the rest of the OMB budget?

Go ahead.

Yes Julie, Larry Prior.

So remember, we have got the baseline defense appropriations bill of the $460 billion, and so as we're looking forward, the real fork in the road for us is if they fund any supplemental.

Any bridge funding it means they're going down the path of agreement across Congress and the executive branch and that in and of itself is good.

If you get the first $70 billion it's going to take you into the June, July timeframe which is kind of reminiscent to some of the scenarios we've had in the past.

What we think is the watershed moment is if they agree to that supplemental, it really underpins the stability of our plan for FY '09.

So any incremental funding we see as a positive, if they do as much as $70 billion that's probably a net gain on positive for us.

Aaron, I think we're ready.

Next question comes from Sam Hoffman of ADAR.

Yes, I apologize for popping on the call in the last maybe 20, 30 minutes, but I wanted to review two issues.

The first was your cash flow from operations, and when you think it's going to revert to normal including the DSOs and then the second issue is capital management, I'm not sure if you've addressed that, commenting on the size of your buy back in the quarter and what we should expect going forward?

Thank you.

Sam, Mark Sopp here.

I didn't understand the first part of your question with respect to operating cash flow.

It declined to $95 million in the quarter and it was commented in the press release that that was due to the DSOs.

Yes, well you're looking at year-over-year numbers in the third quarter of last year, fiscal '07, we had a decline in DSOs during that quarter and we had pretty flat revenue growth.

This year, conversely, we have great revenue growth and we have an uptick in DSO.

So that's the main year-over-year driver.

So our cash flow this quarter was about the same as net income.

Last year was about double that due to that better working capital performance on a relative basis.

On the second question, with respect to cash deployment, Ken mentioned some numbers, $450 million on cash deployment in acquisitions since the IPO.

During the quarter itself, we deployed about $100 million for stock repurchases in the third quarter, and that's been a pretty consistent run rate for each of our quarters so far this year.

Aaron, next question?

(OPERATOR INSTRUCTIONS)

So Aaron, let's stay on the line for a bit.

See if we can queue up another question, and be patient as we wait for our investors.

Your next question comes from Jeffrey Houston.

Hi guys, Jeff Houston for Laura Lederman from William Blair.

Quick question, could you talk about what voluntary and involuntary churn was, its actual percentage for the quarter?

Yes, as we mentioned, it had kicked up a little bit to 14.5% in terms of the voluntary turnover.

Our total's just below 20, but you want to put it against the context of the overall performance of our HR team and line managers.

As Ken, mentioned the organic headcount growth of about 700 employees.

We added just over 1,000 when you couple the acquisitions of Benham as well as Scicom.

We've got some significant promotions within the Company and some key executives joining us.

So Dr.

Amy Alving was our CTO, Kim Rupert joined us to head contracts for the Company, Mike Mendler has joined us to manage risk and then we promoted Amy Carlson to be our Chief Privacy Officer.

So across the enterprise, really good quarter in terms of hiring.

We did a very good job in redeploying over 725 employees across the Company and it looks like we're doing pretty well on our plan relative to our headcount.

Okay and then separately, as for the cash from operations guidance, how much below the prior $450 million should we be forecasting?

The way I look at it, Jeff, this is Mark, our year-to-date cash flows through the third quarter is about $225 million.

If you look at net income, you add back A&D for the fourth quarter, you get to the mid-300 range, 350ish as kind of a platform and we hope to do better in terms of DSO performance and maybe bleed out some of the inventory.

So we'd certainly like to be north of that, but I consider the floor and the 350 and 350-range with our team working really hard with great focus to do substantially north of that and maybe even march toward our original number, but we certainly can't count on it with some of the receivable issues that I discussed not being certain in terms of time resolution.

Having said that, this is a company that is committed to operating cash flows and cash calls and I think the discipline is there, and I'm looking to be surprised in a positive way.

Great, and then, lastly, I had a question on the supplemental bill.

What do you think the odds are that it will be signed before the Christmas break?

Are you taking a pool?

I am.

I think if cooler heads prevail, I'd--I doubt if the administration and Congress wouldn't come to some stop-gap measurement so that Congress would go home and their constituents wouldn't be upset as I pointed out about have furlough notices and so on, but whether it's an incremental or it's the big bang, frankly, your guess is as good as ours.

Okay, fair enough, thank you

Your next question comes from Jason Kupferberg with UBS.

Yes, hi, good afternoon, guys.

I just wanted to clarify first, is this a change in guidance policy kind of from here going forward in the sense of guiding us in the context of your long-term goals as opposed to giving us more specific ranges around revenues and EPS annually as you did for fiscal '08?

That's correct, we're taking a longer term view.

We just finished an off site with our board, and I think we're all convinced that we need to give enough clarity on short-term guidance with the models that you now have generated over the last year and--and continual updates by us when there are positives or negatives that you ought to be able to bind those ranges in a quantitative way as we give you qualitative descriptors.

Okay, so some of this is just a by-product of the incremental uncertainty in the overall spending environment related to that?

That's fair?

No sir, that had really nothing to do with it.

It was just a move that--we said at the IPO that we are taking a long-term view and that we had a multi-year thrust to improve top line, bottom line, and EPS growth, we're basically reaffirming that in this call and in subsequent calls we'll update you as to whether things change positively or negatively.

Okay, and just finally on the fiscal '09 cash flow outlook, I know Mark, you mentioned the $75 million headwind from the extra payroll, but is there any sort of rule of thumb at least relative to net income or anything in terms of how we should think about the operating cash flow profile in fiscal '09?

Jason in general we should be operating the Company north of the income from continuing operations.

We fully expect to continue strong management of working capital.

We will continue to be incentivized on that same metric in terms of minimizing DSOs and DPOs for that matter, so there's no cultural change there.

As we've said, we have modified some of our compensation systems in light of exchanging some cash for equity and we've articulated this since the IPO.

If you compare '05, '06 cash flow models which were pretty pure to today, there's about $75 million of more cash going out the door, all things considered, for compensation programs and in turn, we're not issuing the same amount of equity out which from a financing perspective is in our view positive.

So if you look at the episodic issue of the payroll cycle and then you factor in this change in compensation based on--or compared to historical models you should get pretty close.

You get really close.

Okay, sorry, just one clarification on the assumptions you're making around the bridge financing for the supplemental in the context to the fiscal '09 outlook, are you assuming, when you made the comments in the press release about the timing could be an issue here, are you talking about them getting a bridge in place by Christmas or getting a bridge in place by call it February when most people suggested the Army would run out of money?

Our assumption is that we'll see supplemental funding in February and that will, if that occurs, then it's the fundamental assumption of our FY '09 plan.

Having said that, we also wonder why before Congress leaves for Christmas recess that they don't do some--some type of bridging to continue this process.

So--

And we'll watch the drama play out this week as you see appropriations bills moved in both the House and the Senate relative to an omnibus for the non-DOD appropriations.

That'll be in tension and hopefully trade with war time supplemental funding, and hopefully congress and the executive branch will work their way to a solution.

We'd expect a CR that would extend the current resolution from this Friday the 14th at least until December the 21st, when they adjourn for the holidays, and just as you approach that December 21st period, there's always increased pressure to find a solution and then when you see, as Ken mentioned, the possibility of government employees being furloughed back in the districts, again, increased pressure for them to find good governance and to get a deal done.

So I'm optimistic, but as Ken said, your bet is as good as ours.

Stay tuned.

Thank you.

Your next question comes from Joe Nadol of JP Morgan.

Thanks, good afternoon.

First question is on the bookings and the backlog growth, which was really quite good this quarter.

If you step back, is there, is there any trend that sort of is underlying what happened because there really weren't any large awards of the non-IDIQ variety?

Did the task orders under existing IDIQs really pick up or was it something else?

We actually, this is Larry Prior, we had really great performance across all of the contributors to the top line performance of the Company.

When you think of each of our group Presidents, whether it's across the four groups or by type of business, just a general trend of good increases supporting our backlog.

On the new business, side great work on SeaPort-e and then you saw some of the announcements around air traffic control, the radio systems that we were working.

Tires and POLCHEM off to a good start, north of $50 million just coming out of the gate.

In terms of incremental funding, whether it's our work for NSA or just IT across a lot of incremental adds to those business units and then we really expect that both Benham and Scicom will contribute materially to the top line growth of the Company.

So it was spread nicely.

I was going to say, I'd turn it around.

I liked the fact it wasn't one or two big deals.

This shows the whole operation is really vibrant and we're seeing funding across a multiple amount of our markets which is encouraging for us.

Our recompete win rate, whether you're counting number of wins or dollar wins was north of 90%, and then Ken would probably say our win rate for new business is still a little bit too high as he's trying to press us to do more $100 million source of captures, and then when you just look at the pipeline going forward, we're still looking at over 100 plus opportunities over $100 million.

Only about 28 of those are recompetes.

So 3/4 of our going forward business is new work and we really have a great team, with Greg Henson and the business development folks in each of the groups recreating that top line energy while we still do the blocking and tackling for one job at a time.

Let me just also clarify, Mark here, the $50 million figure that Larry cited for POLCHEM and Tires is a funding or a task order delivery as opposed to revenue production.

So I wanted to clarify that.

Revenue on those two was pretty low as we're starting the ramp up, but that's just a good example of getting new task orders on previously won IDIQ contracts in the first half of the year.

Okay terrific.

My second question is on Project Alignment.

Would you expect $100 million to come ratably over the four phases or is it more back end loaded because that's when you get the IT savings, and then could you give a little bit more details on what Phase I is about?

It will be definitely more back end loaded in terms of the larger savings.

There are four increments of 6 to 9 months.

Remember our commitment is that 20 to 30 basis points improvement each and every year and we become more reliant on the improvements of Project Alignment in the latter two stages, so just looking for incremental improvement as we come out of the gate, looking for some improvements around process mapping, improving work flow and maybe some facility consolidation.

Okay, and then, finally, just on the cargo products, you mentioned this has breakout potential which seems very, very true, when do you think that might happen?

Could this happen in the next 12 months or the breakup potential beyond that in your best judgment?

So what I was pointing to was the market potential, that we're only touching about 2% of that addressable market.

It's first driven by government deciding to make that financial commitment and then hopefully, we won't see the catalyst of another attack on the United States, but that would accelerate it.

So it's nothing visible--you just think--you have, a very small piece of the potential but there's no visible catalyst yet for that breakout?

The Safe Ports Initiative would be a tremendous catalyst for the business, but quite frankly, that has a longer term tail, getting the administration to approve such a thing and then getting that into a POM budget and exercising those.

We're looking longer probably 12 to 18 months out before we start releasing a big impact there.

Okay, thank you.

You're welcome.

Aaron, I think we have time for one more question

We have a follow-up question from Cai von Rumohr with Cowen and Company.

Thank you very much.

Following the great bookings in the quarter, what does the level of outstanding bids look like at the end of October and how many--how much in terms of bids do you expect to submit in the final quarter?

We have, I mentioned, Cai, the 104 opportunities over $100 million, 16 of those are awaiting award, four of them are recompetes.

The break down, we have got about four of that 16 are multiple award IDIQ, four single, but eight are non-IDIQ, so do the math.

16 times that $100 million, that's just in terms of those large pursuits.

Okay, but I think you gave a number in the last couple of quarters in dollars, I think it was 15.7 in April, 15 billion in July, what's that number look like at the end of October?

Because normally it comes down when you get these good bookings?

Yes, in the capture area it's just north of $16 billion right now, our submitted number is about $9 billion.

I guess I'm a little--

Just to clarify on that Cai, the $9 billion excludes the Alliant which we have put in at a notional $3 billion value.

That's certainly a large piece of the coming down in terms of the submitted--the pendings.

So you went from 15 to 12, apples to apples?

Is that--or--

We went to 15 to above 9, but part of that--half of that is from, is from one big bid that's come out and it really should be--should be back in now.

Yes, with the protest, right.

Cai, if you need more color on that, we'll give that to you separately.

Okay?

Excellent, excellent, and the last one, we mentioned the profitability of the security products that they were up in the third quarter, expected to be down in the January quarter.

Could you give us any quantification, how much?

Were they up sequentially in the October quarter, about how much would they come down in the January quarter?

I don't think that's really what we said.

I think we said the security products because there was a lot more volume in the third quarter that contributed to the profitability of the entire enterprise and we're going to have less deliveries in the fourth quarter which would tend to drive the overall margin for the Company slightly down.

No, that's to my point, so what were the--how much were the deliveries up in the third quarter from the second and given you're going have fewer in the fourth quarter, is that down versus the third or down versus the fourth?

How much is that going to be down in the fourth?

I'll have to take a look at the actual numbers, but probably by a factor of almost two.

Okay, great.

Thanks so much.

Thank you.

Okay, Aaron, that's all the time that we have today.

On behalf of the team I want to thank you for your interest in SAIC.

I apologize for some of the technical glitches that we had.

Rest assured that those that we weren't able to get to, we'll follow-up this evening.

And that concludes the call from our end.

This concludes today's presentation.

You may now disconnect.