Leidos Holdings Inc (LDOS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the is SAIC fourth quarter fiscal year 2008 earnings conference call.

My name is Shawn, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS) I'd now like to turn the presentation over to your host for today's call, Mr.

Stuart Davis, Senior Vice President for Investor and Employee Owner Relations.

Please proceed.

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

Here today are Ken Dahlberg, our Chairman and CEO, and Mark Sopp, our CFO.

Larry Prior, our COO, will join us 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 the 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.

Thank you, Stuart, and good afternoon, everyone.

In my judgment, the fourth quarter marked a strong finish to a terrific year.

For the quarter and the year, we accelerated organic growth and expanded operating margin ahead of our internal plan while building a strong foundation for continued growth.

The operating model that we laid out at the IPO is working well.

We have doubled our organic growth rate and significantly grown our profitability since going public.

Consistent with our strategy, we won and are building out large systems integration and engineering work.

During the year, we won 17 $100 million plus contracts, including IDIQ vehicles with an expected value above $8 billion.

Moreover, based on the current funding environment, we expect that our fiscal year 2009 to be a good year for our company.

Turning to the market.

Whenever we're talking with investors, the first questions were inevitably asked are what's going on with the federal budget and what will happen with a new administration?

The short answer to both questions in my opinion is funding for our type of work is solid and we expect it to remain so regardless of who is in the White House next February.

This is because since our last call we had a 70 billion war time supplemental and appropriations for all non-defense agencies approved and President Bush has submitted a fiscal year 2009 budget request that shows growth in our core markets.

There will undoubtedly be continued drama, but we expect reasonable funding when it is needed, including the remaining supplemental funding for this year.

Moreover, the next president will be in office about two weeks before the fiscal year 2010 budget is submitted so we would not expect significant changes to the budget that is being prepared now, especially for defense.

Thereafter, the next president will change some priorities.

For example, even if some combat brigades in Iraq come home, contractor support for key activities such as intelligence will likely increase, not decrease.

With the world still being a dangerous place, we think that the next president will continue to call for strong funding for defense and intelligence.

And in addition, our core non-defense markets, Homeland Security, energy management, and health care effectiveness remain critically important to this country and should offer good growth opportunities for the foreseeable future.

New business bookings showed expected drop off from the seasonal strong third quarter for book-to-bill ratio of about 0.7 for the quarter and 1.0 for the year.

Backlog is now over $15 billion of which 5.1 billion was funded, both up year-over-year.

Unfortunately, there is not a whole lot I can say about our fourth quarter wins.

Nine of our largest 10 have a client publicity restriction, but what I can say is that these wins give us increasing confidence in our fiscal year 2009 projections.

The one new large job that I can talk about is the joint logistics integrator contract for mine resistance ambush protected or MRAP vehicles.

In addition to the command control and communications integration work for (inaudible), we are now providing in theatre logistics and systems engineering support for the many different configurations of these vehicles.

What I like about this award is that it highlights the best of the old and new SAIC.

The award would never have happened without the entrepreneurial spirit and customer intimacy that we've been known for since our inception, but it also required disciplined collaboration across groups and business units to both win and execute the work.

On the acquisition front, in recent weeks we have signed definitive agreements to acquire Icon Systems and SM Consulting.

Although relatively small, both acquisitions double our presence in key growth markets for our core customers.

We are currently awaiting Hart-Scott-Rodino approval on both deals.

Icon Systems designs, develops and produces state-of-the-art laser based systems and products for military training and testing.

This acquisition represents a significant step toward our goal of creating an integrated set of auth earnings in live, virtual and constructive training.

We were relatively strong in virtual and constructive training, but weak in live training which is a billion plus dollar market.

The acquisition is also consistent with our desire to introduce more products into our business mix.

Turning to SM Consulting.

SM Consulting provides us with mission focus, language services credentials that extends our presence in language enabled intelligence analyst and training and positions us for one of the most critical areas in the intelligence community right now.

The transnational form of terrorism requires an analytic workforce in multiple languages.

SM Consulting expands our presence with key customers like the FBI, DIA, and DOD's counter intelligence field activity.

They are also a leading provider on the general services administration, language services schedule, which is not held by a CIC.

When you think about our customers, linguistics services are critical to mission but unlikely to ever be insourced.

With this acquisition, we are not focused on the low end document translation business but are strategically focused towards sophisticated, high end analytic translations that compliment our strengths in intelligence training and analytic offerings.

Consistent with this focus, most SM Consulting employees have security clearances.

Taken together, these two acquisitions will add about 500 people and trailing revenue of about 110 million.

These companies will be great additions to our capability set, position us well for emerging procurements and make good financial sense for shareholders.

In terms of people, the fourth quarter continued our positive momentum.

Attrition ticked down slightly and we were able to recruit the people we need to meet the business demand.

This quarter we added another 500 to 600 net hires, which was a large driver of our growth this quarter and provides an even better platform entering fiscal 2009.

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

Mark.

Thanks, Ken.

On the financial front, we continued our momentum and finished fiscal year '08 with excellent performance in revenue, operating profit, and earnings per share.

As Ken said, in these areas we accelerated ahead of the pace we set out to achieve, coming out of last year's IPO and into this fiscal year.

Our revenue and profit performance is a testament to the enterprise getting quickly aligned on our long-term strategy and delivering consistent execution and financial performance across our entire business base throughout the year.

An element of this execution was an aggressive business development and technology development campaign which brought substantial new work to our portfolio during the year and retained our existing contract base through a number of recompetes.

This performance not only helped drive improving internal revenue growth as the year progressed but provides solid foundation and visibility for continued revenue growth in fiscal '09 and beyond.

Despite our success on these fronts, an area where our results did not meet expectations was our operating cash flow performance, so I'd like to hit this right up front.

As we said during our third quarter earnings conference call last December, collection of receivables from one intelligence customer continued to be substantially behind through our year end stemming from their systems conversion.

In addition, we experienced billing problems of our own related to our systems conversion which I'll discuss a little bit more later on.

More positively, revenue accelerated above our expectations and this also caused a temporary net use of cash in the quarter.

These factors were the main contributors to ending the year at 73 days of sales outstanding above our expectations and four days ahead or above where we finished last fiscal year.

That said, we finished the with year about 1.1 billion of cash on hand.

During the year we deployed about 300 million in cash for stock repurchases, resulting in a slight reduction in share count from the end of last year.

With our strong ending cash position, solid growth and operating profits and no change to debt during the fiscal year, we have comfortably maintained our A minus credit rating.

This gives us both a healthy financial condition today and the ability to make larger acquisitions should opportunities present themselves.

Now let me get into the actual financial results themselves.

Revenue for the fourth quarter was 2.34 billion, that's up 12% on a total growth basis over last year and that's up 9% on an internal growth basis.

For the full fiscal year, revenues were 8.94 billion, up a total of 11% over last fiscal year and up 7% on internal growth basis.

While our contract base is widely distributed and growth comes from a large number of sources, the new contracts that contributed most significantly to this year's internal growth includes our integration work of communications equipment for the MRAP program that Ken was talking about, ramp up of our new Air Force global positioning satellite contract and shipment of mobile security systems to the U.S.

Military.

Revenue mix from SAIC labor sources decreased from 63% last year to 61% this year, with the remaining 39% from materials and subcontractors.

While this is usually an unfavorable trend from a margin perspective, the shift was mostly caused by winning larger systems integration contracts consistent with our initiative to do so to drive revenue growth and more volume under our border report and mobile security products business.

This trend was not adverse to our operating margins as our reported results demonstrate.

Also consistent with this fact pattern are contract type mix migrated just slightly more towards fixed price with total mix at 47% cost reimbursable, 35% time and material, and 18% fixed price.

With respect to profitability, in our last earnings call we guided to lower expected operating profit margins sequentially from the third quarter to the fourth quarter and lower product deliveries, and also due to planned restructuring costs.

Those things did occur as expected.

We, however, picked up more profit than expected on stronger contract fees across the business and on lower bonus expense than target due to missing our cash flow goal for the year.

We finished the year with operating margins of 7.5%, that's 40 basis points above last year's operating margin.

Net-net we certainly are pleased with the performance of our employees and managers for their focus and execution on margin improvements in this first full year of our margin improvement campaign.

The margin contributors to margin expansion during the year included growth in our higher margin border port and mobile security business, a significant turnaround in profitability in our city time contract with the City of New York, improved management and recovering our indirect costs, including good performance and containing corporate costs, and most importantly again, most importantly solid execution and financial performance across thousands of contracts by our program managers and their teams.

Importantly, within operating profit we invested in a number of areas which we expect will contribute to out year growth and margin improvement.

Notably, we spent almost 50 million on internal research and development this year, up over 40% over fiscal '07 results.

We expect this level of investment will lead to high technology service and/or product contracts at attractive margins in the future.

Our top areas of R&D investment this year were further development of our Next Generation border port and security systems and development of low cost guidance and control systems to apply to gun launch precision munitions opportunities.

We also continued our internal IT systems upgrade at a cost of roughly 30 million for the year, the benefits of which we expect to see starting in fiscal 2010 next year.

Even more importantly, we are investing more time in personnel development and retention matters such as training, career development, and redeployment.

Our goal here is to improve employee engagement, improve retention, and lower dependence on recruiting, all of which are aimed at improving operational effectiveness going forward.

Non-operating items were relatively insignificant for the quarter.

For the year, as expected, interest income was down substantially due to lower cash balances throughout due to our large special dividend we paid in the fourth quarter of last fiscal year.

Diluted earnings per share from continuing operations came in at $0.25 for the fourth quarter fueled by strong revenue growth and stronger than expected operating margins.

For the year, diluted earnings per share for continuing operations was $0.93.

Cash flow from operations totaled roughly 120 million for the quarter and we finished the year at about 350 million.

The collection difficulties we were having with an intelligence customer undergoing a systems conversion did not improve in the fourth quarter, as I mentioned before.

At this time, we just don't have the ability to determine when that situation will resolve itself.

This issue and some other isolated receivable issues drove DSO up by about two days at year-end versus our target, and our own shop one of the two business units that made the conversion to our new financial system experienced billing difficulties for its first two months post-conversion.

While that situation is now remediated this caused an increase in DSO by about a day at year end.

In addition to these items, our operating cash flow is unfavorably a affected by two non-recurring developments this year.

About 50 million for build up of inventory related to our two large new systems or logistics contracts and also our security products business, and also about 15 million related to the Benham acquisition.

On an overall basis, Benham manages working capital very well.

They generate significant advance payments from their large design build jobs.

From a timing perspective, however, we acquired them at a point in their cycle where they just received some advanced payments and they had a net use of cash from that point to the end of our fiscal year.

In terms of financing, cash out flows we used about 40 million and 300 million in cash for share repurchases in the fourth quarter and in the fiscal year respectively.

That covers what I want to discuss concerning the fourth quarter and full-year results.

Let me now address our forward-looking view.

Our long-term goals as cited in the earnings release today remain the same, to grow revenue internally by 6 to 9% per year, continue to make strategic and economically attractive acquisitions, improve margins 20 to 30 basis point the per year until we reach a sustainable level of between 8 and 9% and grow diluted earnings per share from continuing operations by 11to 18% annually.

The current government funding environment in our markets is healthy and we expect our fiscal '09 revenue and operating margin to be within these ranges.

However, with the credit market condition over the last few months, and the corresponding decrease significantly in the federal funds rate, we expect that interest income will fall by about 25 million pre-tax versus our projections last December.

This equates to about a $0.03 to $0.04 downward impact on earnings per share.

Another externality we have to now consider is the apparent lapsing of the research tax credit.

If the credit lapses, which is our current assumption, our effective tax rate should be about a point higher in fiscal '09 compared to fiscal '08.

And as a result, that would have a negative impact to earnings per share in fiscal '09 of about a penny.

These factors, despite our expectations for strong core operations performance, places our current forecast of EPS growth below 11%.

Importantly, however, our forecast specifically assumes no future share repurchases or acquisitions.

While we do expect to make additional share repurchases, our practice is to exclude them from our forecast given their uncertainty.

We recently completed our quarterly review of our capital structure.

Given the status of the credit markets, we find our current financial condition and credit rating as attractive.

We have roughly 500 million of excess cash on the balance sheet, which we believe can be deployed without effect to our credit rating and overall financial strength.

We generally intend to deploy this cash through internal growth initiatives, acquisitions and share repurchases the strategic and economic trade offs which we continuously monitor.

Since the adoption of our share repurchase program announced in December of 2006, we've used roughly half of the 40 million share authorization to date.

Accordingly, our board of directors just approved replenishing the authorization back up to the original 40 million share maximum for use in future repurchases.

As for cash flow going forward, our basic model of operating cash flow is to be roughly equal to net income plus depreciation and amortization plus or minus non-recurring items.

In this model, we conservatively think non-cash compensation in fiscal '09 should offset working capital consumed by growth in the business.

With capital expenditures roughly equal to depreciation and amortization, free cash flow, which is operating cash flow minus capital expenditures, should approximate net income.

We expect fiscal year '09 to follow this basic pattern with two adjustments.

First, the timing of our fiscal year end results in an additional payroll cycle to be paid on the last day of the year which will adversely affect cash flow from operations by 125 million in fiscal '09.

Second, we expect to drive our DSOs down by at least three days and each day we save we'll add about 25 million to operating cash flow for the year.

Thus, that's 125 million of non-recurring outflow and 75 million of non-recurring inflow, if you will, pertaining to these non-recurring elements for fiscal '09.

That wraps up my financial report.

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

Thanks, Mark.

Before turning to your questions, I want to offer some of my goals for the enterprise this year over and above the financial objectives that Mark just laid out.

This year, I want us to improve our employee communications and on boarding programs with a goal towards building employee engagement and driving down the voluntary attrition rate.

If we are successful here, we will of course lower recruiting expenses but more importantly we'll be able to maintain and grow our scientific and technical leadership and provide more value to our customers.

This year, I want us to create significant business in our strategic areas of of cyber security, space superiority, energy, and health.

All four areas offer substantial challenges and represent significant business opportunities going forward.

We want to remain at the forefront of solving our customers most important problems, and finally this year, I want us to finish laying the ground work for creating more nimble and efficient back office organizations and processes.

If we meet our financial commitments and accomplish these goals, and I think we can, fiscal year 2009 will be another strong one for our company.

Shawn, with that, we are now ready to take questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Joe Nadol with J.P.

Morgan.

Please proceed.

Hi, good afternoon.

It's actually Seth in for Joe today.

Just wanted to ask a couple of questions.

On the [Deltech] implementation you talked about the problem that seemed like it was only lasting two months and it had passed.

Is that the case and is the rest of the implementation on schedule which was to do another six to ten business units this year and the remainder in the following fiscal year?

Yes, I'll have our chief operating officer responsible for that part of the project talk to you.

Larry?

So from IOC we've implemented successfully with with a couple of our business units as well as corporate.

We're in the process of what were our lessons learned from that, how does it affect our financial concept of ops, and what lessons were learned across the rest of the enterprise.

We'll be doing another wave of somewhere around six of our operating entities this next fiscal year and then we'll finish off the rest of the core company the year after that.

So we're on plan.

We learned a lot from IOC, and it has the fairly classic symptoms of any large ERP implementation and we're happy with it.

That's great.

Just wondering about the margin guidance for next year.

You talked about higher R&D spending.

If there was anything that was going to be sort of a head wind to meeting the 20 to 30 basis points that you expect for margin guidance next year, what would it be?

Would it be higher R&D spending?

Would it be costs associated with either the [Deltech] implementation or other efforts to take out G&A expenses?

What's sort of the biggest risk on the margin front?

Mark Sopp here.

I don't see any particular risk with respect to R&D or the systems implementation.

Those are very controllable costs that we constantly monitor.

I think we're right on track with what we set out to do in our IPO at the 20 to 30 basis points per year.

We did a little bit better in the last fiscal year '08 for a few reasons, but all of the elements of that program are intact.

We're counting on, with respect to contribution in those margin improvements, some migration to better mix in the business which translates to higher contract fees across the board.

Number one is always program execution.

We did a great job on that in fiscal '08.

We need to continue that and not have any surprise writedowns.

We've managed our internal rate structure extremely well, and we're pretty much in parity on that.

There's not a whole lot of upside there in the out years but we do see contribution from better fee performance, economies of scale in absorbing our fixed cost in the business and again continued strong execution on each and every contract.

And then obviously, this is Ken, as we continue to grow and if we keep our G&A and indirect costs fixed there's incremental lift across the entire spectrum of our contracts.

Thanks and just really last quick clarification for Mark, the amount of cash you said you had on the balance sheet that you thought you could deploy this year without impacting your credit rating or anything like that, was that 500 million?

Amount of cash you could deploy without impacting credit rating.

He's breaking up a bit.

I think the question pertains to what is the definition of excess cash, if you will, and so finishing the year at 1.1 billion, we think we have comfortably 500 million of excess deployable cash that would not have any impact to our credit rating as we now understand today's credit markets, which are constantly changing.

Excellent.

Thanks very much, guys.

Your next question comes from the line of Joseph Vafi with Jefferies & Company.

Please proceed.

Hi, guys.

Good afternoon, good quarter.

I was wondering if we could talk a little bit on the security products business, the outlook for that in fiscal '09.

I know that's a good higher margin business for you.

And then secondly on the margin front, any real change there in how we should be looking at some of the drivers for margin improvement in fiscal '09?

This is Ken.

I'll talk a little bit about security products.

Mark, if you want to pitch in on margin improvement.

We had a solid year not only in development of our high energy but we shipped some 40 units this year of various configurations and our forecast is to be up 20 to 25% a above that.

We think we are in the order of 50 units that we'll be shipping this year.

Margin improvement, Mark, do you want to?

Not a whole lot to add from my last point, Joe.

We're just focusing on contract execution, growing the business, and achieving economies of scale.

We do expect some mix affects that are favorable to margins which are contributors to the 20 to 30 basis points.

We're picking up a little bit in more efficient absorption of the unallowable expenses as a contributor this year, and then as we get beyond this year we're thinking more on the G&A side about taking in some benefit from some of the operational improvements that we've talked about whether it's the financial systems conversion or other efficiencies that we're working on.

Okay.

That's helpful.

And then I know a lot of the new business activity in fiscal '08 was what we were focused on in a single award IDIQ business, so I was wondering if that kind of level of award activity there has been consistent just so we can kind of of relate that to the bookings numbers that you posted here this afternoon.

Larry.

Yes, when you look at the overall book-to-bill of the 1.0 or a little bit better and you look at how we built our backlog, not included within that 15 billion of backlog that Ken referenced was either the single award IDIQs or the multiple award IDIQs.

So if you added those two up there would be another 6.8, almost 7 billion of room for us to compete and win business to really meet the 6 to 9% revenue growth that our group presidents are very confident in achieving.

So that shift IDIQ is still significant in the marketplace and that's where we really put our size and capability to work in bidding, in winning the task orders under those, and our group presidents, like Deb Alderson, are just the best at the marketplace at doing that.

Having said that, our pipeline for a hundred million plus opportunities is north of 130 and 45% of those are non-IDIQ, so we're seeing a better balance going forward of IDIQ work and non-IDIQ.

Okay, that's very helpful.

Thank you very much.

Your next question comes from the line of Jason Kupferberg with UBS.

Please proceed.

Thanks.

Good afternoon, guys.

I wanted to ask a little bit about the cash flow and just to start with the clarification, Mark, if you could.

The extra payroll in fiscal '09, you had made reference to that last call and if I recall at the time we thought it would be 75 million, if I'm not mistaken, and I think you just mentioned 125.

Can can you just clarify that?

Sure, Jason.

We had expected the need for funding a payroll tax payment of roughly 35 or so on the last day in fiscal '08.

We later determined it was not necessary so that's now into fiscal '09 so that adding to the previous 75 plus growth in the business gets you to the 125 that's going to be out in '09, so we got to pick up, if you will, in '08 from that but we offset that with growth in the business in particularly fourth quarter revenues being ahead of plan which was a net cash outflow of a similar number in terms of offsetting that benefit and then the rest was all DSO driven, the three days up where we want it to be which was unfavorable on a temporary basis for the fourth quarter.

Okay, and so just building off that just so we're clear, you laid out some of the parameters around free cash flow for fiscal '09 and I think the way it nets out, correct me if I'm wrong, all else being equal free cash flow should approximate net income but the two things that aren't equal, if you will, in fiscal '09 are the 125 of extra payroll outflow and then the $75 million pick up from a three day improvement in DSO, so net-net you're talking roughly $50 million below net income, if I've got the pieces right?

Yes.

Okay.

That's helpful.

And on our recent trip to D.C., some folks kind of looking out at the fiscal '09 budget process obviously given the elections were potentially concerned the Defense Department could end up possibly without a base budget getting approved at all and maybe just being funded via supplementals for all of fiscal '09.

Obviously we're still six months away from the start of the government's fiscal '09 but as you look ahead is that something that has you guys worried at all?

Well you always, I guess we naturally worry, but we're pretty comfortable that there will be another supplemental in the May/June time frame and there will be another request in October probably for an additional 70 billion that I believe both sides of the House will approve.

Certainly, there's every opportunity that there will be continuing resolution with the fact that we'll probably have a new administration in place, but as we stated before, that has a potential impact in our FY 2010, but very little modest, if any, in 2009.

That's why we feel the funding environment is pretty solid for our fiscal 2009.

If I could just sneak one more quick one in.

Is there a bookings target or a range that you might point us to for fiscal '09 in the context of achieving let's say the mid point of the organic growth target for fiscal '09?

This is Larry Prior.

When you look at the nature of our business and how much of it is tied, for example, to the logistics work that has such a quick turn to it, whenever we're doing better than one, we're growing the business.

To get the kind of organic growth we want to see, we want to start seeing a 1.1, 1.2, but the 1.1 will get us to where we need to be.

1.1, I'm sorry?

Yes, 1.1 will get us to where we need to be.

Okay, fair enough.

Thanks, guys.

Yes.

Your next question comes from the line of George Shapiro with Citigroup.

Please proceed.

Good afternoon, how are you doing, Ken?

It's been awhile?

I'm doing fine, George, how are you?

Good.

I wanted to ask a couple of things.

Organic growth at 9% in the quarter.

What slows in this fiscal year that you keep in the range of 6 to 9 rather than just moving it up towards the higher end?

I think to a degree a bit of conservatism.

As we just talked about, we think the funding is reasonably solid but being a bit conservative we feel like we should stay within that 6 to 9% range based on the second half, I wouldn't say uncertainty but just cautious and perhaps as we migrate through the year, George, if the funding environment becomes much, much more robust and understood, we might change that expectation, so I think it's just a degree of conservatism just based on the unknown unknowns.

Okay, and then is there any of your revenues that get booked on a percentage of completion basis or is it all just straight as you book the revenues?

Mark?

George, virtually all of the revenue is booked on percentage of completion.

We do have some areas on what we call a service contract basis which is more tied to the billings in the particular period but, generally speaking, it's percentage of completion.

Okay, and then one more, Mark.

You mentioned just mentioned you had a $35 million less cash impact in '08 because of this deferral, this payroll tax so if you can go through again why you missed the cash flow because it seems like I would have missed this $35 million in your prior explanation.

If you look at the full year, you've got roughly 100 million of where we wanted to be versus where we ended up, and you got three days of DSO, that's about 75 million, and inventory grew by about 25 million more than we were projecting.

That's basically the hundred.

The pick up we got from the payroll tax deferral is offset by higher growth in the business.

That was about a push.

Okay.

That's the simplest way to look at it in my mind.

Okay.

And just maybe one last one.

Can you just mention the growth in the intelligence business and potential awards this year that you might be able to talk about?

We don't break down growth by the various areas, but when we look at the budget and we looked at what Bush submitted for FY 2010, the intelligence area was double digit, low double digit, and we do have some very interesting awards that we just announced in Q1 and we have some pending significant intelligence bids yet outstanding that need to be adjudicated, so given our win rates, George, of 60 to 70% overall for the business, we're pretty bullish about our intelligence business going forward.

Okay, and maybe let me jump one last simple one.

The 25 million lower interest income you talked about, was that net of the little lower interest expense that you'll have because of the payment of the $100 million in debt, down payment of the debt?

Just talking about interest income.

So interest expense is a separate item, and that's down about 10 million year-over-year in large part due to that pay down on February 1.

Okay.

Thank you very much, George.

Thanks very much.

Your next question comes from the line of Laura Lederman with William Blair.

Please proceed.

Just a few quick questions.

One, following up on the [Deltech] implementation.

What are your thoughts on whether or not you'd end up with potential DSO problems in those units?

In other words, is what happened in the units that went up and running avoidable in terms of rolling it out throughout the organization.

And separately, could you talk a little bit about the acquisition environment out there, how are prices looking, how is your pipeline looking within the business and then I have one follow-up, thank you.

Yes, so first on the [Deltech] implementation that was a key lesson learned for us as we did the two business units and it was understanding the mix of complexity of a business unit that had benefited from some movement reorganization within the company.

Had won a new contract that had some added complexity to it and, frankly, had a lot of customized processes so as we think about taking this enterprise wide, that was our key and one of our toughest pilots.

We did it on purpose to learn and we do not believe we'll replicate that stress to our DSO as we go down with the other business units.

Yes.

I would just actually compliment the team.

We picked a couple of the most complex business units and IOC means Initial Operating Capability and we meant it to be a beta test.

Probably the only thing we could have done better was probably accelerate IOC, so we weren't at the year-end crush because we quickly solved the billings problem in the following quarter.

As for acquisitions, we announced the two just recently here and our pipeline continues to be relatively strong in the mid range acquisition value, read that 100-200 million revenues.

The larger ones we continue to look for and dialogue about, but yet we have no one that's really interested yet in selling at what I think is a reasonable price.

So we're continuing to find terrific opportunities in our modeling and simulation, intelligence, logistics, now we have thrust in energy, health, cyber, so I believe that you'll see the company continue to deploy capital to make strong significant acquisitions in those spaces.

Final question for me and that is the trade off between share buybacks and acquisitions.

Can you share a little bit of your thinking on that front?

Thank you.

It's in three priorities, which we've always said.

We want to fund our internal growth because that's frankly the easiest way to grow top line, bottom line and earnings per share, and then use our capital for augmenting with acquisitions and then to do share repurchase and, as Mark said, we think we have ample cash reserves frankly to do all three and we've shown that in the past that we've done all three and when we don't have acquisitions that are in the pipeline and our price of our stock is we think under valued, we'll be aggressive in share repurchasing.

Thank you.

Your next question comes from the line of Edward Caso with Wachovia Securities.

Please proceed.

Hi, thank you.

Just a clarification.

You mentioned sort of 500 million in excess cash.

Now is that before or after the 100 million debt pay down?

That's after, Ed.

Okay, thank you.

Can you talk a little bit about what visibility you have in the forward year and maybe reference it to say a year ago percent in your backlog, percent you have to obtain from new business and so fourth?

I think this year we've had better visibility in our backlog and to go effort than we've had in the ensuing years I've been here.

Mark, do you want to add a little color?

Sure, one of the metrics we look at is the amount of unidentified revenue as we enter a year.

Last year coming into the year, we had about 10% of our planned revenue unidentified to specific opportunities and you see we exceeded our expectations on revenue performance in fiscal '08 with that number coming in.

In this year's plan we have 4 to 5% of identified that is consistent with that previous number, so that gives us better visibility, better confidence at this point in the year.

That said, we're just at the start of the year.

Any significant recompetes this year or I know you have no large contracts really, but is this a bigger recompete year or a softer recompete year?

Larry can can answer that.

Yes, I wouldn't characterize it as a bigger recompete year.

We over fulfilled the plan last year with that and did well.

This year look to Guardian as a recompete.

It's roughly 250 million around our chem biowork and we're very comfortable with our position there.

National Cancer Institute work that we do, that would be something that should be on our radar screen.

PEO Stride and all the great work we do on simulation and training is on our list this year.

I think those are the highlights as well as maybe customs and enforcement, looking at the I-test recompete, so I think those are our top four.

Thank you.

And our recompete win rate still is way north of 90 plus percent.

Your next question comes from the line of Bill Loomis with Stifel Nicolaus.

Please proceed.

Hi, thank you.

Just looking at, Mark, just on the quarterly guidance on the operating margin for fiscal '09 are we kind of looking at the same pattern this year as last where the first quarter will be kind of the lowest and then your higher in second and third I guess in the eight or low eights and that dips down a little bit in the fourth quarter?

Actually, that's generally the case due to economies of scale.

I don't expect it to be as drastic on the high and the low.

Expect it a little flatter slope in fiscal '09 but still generally starting lower and ending higher with fourth quarter being somewhat conditioned on the amount of M&S which can come through from the government in that quarter but, generally speaking, same trends, flatter slope.

Okay.

And then, Ken, when you talked about going from 40 to 50 units, were you just focusing on the all-terrain mobile (inaudible) to the military or was that also system sales, back of sales to ports?

That's our total mix of products.

It's going from 40 to 50 and actually the mix is moving more towards some of our higher energy products.

We still don't have much in the way of understanding how the secure freights initiative is really going to roll out.

That's certainly not an FY 2009 event.

We're hoping it will be a 2010.

Okay, thank you.

Thank you.

Your next question comes from the line of James Kissane with Bear Stearns.

Please proceed.

Thanks.

Mark, can you provide a little more color on the intelligence customer conversion issues and maybe when that will be resolved?

This is Larry Prior.

Hi, Larry.

This is probably the second agency we've gone through this with.

They're several months into it.

They're telling us it's a month away.

We think the system conversion is going okay but there's always a training human side to any one of these conversions.

They're paying us interest on the money that they owe us an we're hoping to see some resolution in Q1, but this is one of those times where we're glad we have a very strong balance sheet as well as a great relationship with our customer and part of the reason it's challenging to us is we have so much great business with this customer but we look for Q1 resolution.

Is it an execution issue on your side or is it --

No, negative.

This one is pretty much all customer side.

Got it.

And provide a little insight into the commercial business maybe revenue performance, margin performance, thanks.

It's down from what we previously have experienced.

We've seen a softening in our U.K.

markets, actually a strengthening in our energy business, so they're in a transformational mode right now.

We're seeing traditional IT services business waning and we're moving more into consulting and higher mobile work in our commercial business.

There has been several good recent wins with the a Association of Courts in the State of California.

We're negotiating with LA Unified School District and then some energy wins with New Mexico Power, so when you think of the kind of the downturn in some of the U.K.

business, we're seeing some upturn in some of the state and local and they're in a transitory phase.

One last question.

At the analyst day back in October you talked a little bit more about state and local opportunities.

Is that something to think about from an M&A perspective?

It's not as high on our strategic areas as the ones that I talked about in cyber and space and so on, but having said that, energy is a big part and health, we see transitioning and transcending both government and commercial and thats areas that Charles and his business unit executives actually shine and do very well in.

Great.

Thank you very much.

Your next question comes from the line of Tim Quillin with Stephens Corporation.

Please proceed.

Good afternoon.

Good afternoon.

Three questions.

One question, what interest rate are you getting on cash right now and do you have any auction rate securities?

We're in the low 2% range idle cash and we do not have auction rate securities.

Congratulations on that.

We've been very conservative in our investment that shows in our rate, but we're preserving our principal.

Okay.

Second question is where would the share count go as you model it if you didn't do buy backs in the fiscal year?

Let me try it this way, Tim.

Our annual creed we've said before with respect to equity comp programs is roughly 3% shares outstanding but we've actually taken some actions that we expect will reduce that pace somewhat towards two but not quite all the way down to two.

We made some repurchases at the end of the fiscal year '08 which will get full benefit of in the share count in fiscal '09 and so when you look at share count creat if you will excluding repurchases it's lower than you might expect.

It's on the order of three, four, five million from where we ended '08 and then the repurchases may offset those if they are made from this point forward.

That's helpful and the last question is now that you've gone through a careful process, can you give us some sense of the breakdown of your back office personnel by business unit, group, and corporate and how that, at least in broad terms, compares to the overall workforce?

Thank you.

No, we can't.

All we can say is as I've said on other conference calls is that we think there's 100 million plus of opportunity for us to save in those type of business functions and processes, much of which we want to use to reinvest in our business.

Thank you.

Thank you.

Your next question comes from the line of Cai von Rumohr with Cowen & Co.

Please proceed.

Yes, thanks a lot.

Could you give us some sense in terms of the bids or the outstanding bids you have going into the fiscal year and given the pick up in wins early in the year, do you expect to be at the 1.1 plus book-to-bill rate in the first quarter ?

So when you are looking at the $100 million bids, there's 25 that are submitted as we speak, and when you look at what we've done in period one, we've already won, Cai, close to a billion dollars in increase to our top line, so coming out, generally Q3 and Q2 are very strong for us.

Usually there's a downturn in Q4 and then Q1.

It looks like we're having a healthy Q1 out of the gate so we'll have to see where it goes but I'd expect we would be towards that 1.0.

Okay, and would you expect that the M&S ratio stays about 39% in terms of your guidance for the year?

Yes, we would, Cai.

It's too early to come off of that.

It's ranged from 36 to 40 over the last several years so that's kind of the range we continue to see ourselves in.

If you kind of look at your comments about concern about the second part of the year, we're looking at normally the April quarter has some more days than the January quarter and if the M&S ratio is 39%, kind of on paper, it looks like the revenue growth should be again kind of 12% and 10% organic, so is it possible that you're over this?

Is there something wrong in that logic?

You also hired 500 to 600 people in the fourth quarter so you're kind of net hiring momentum looks like it's pretty good going into the year.

Well, again, you're diligently going through your detailed analysis.

We just said that we feel comfortable we're in the 6 to 9% range and due to some of the uncertainties in the second half, we're just being cautious.

But if everything went well, certainly we would be more in line with where you think we're heading.

Just too early to tell, Cai.

Were there any kind of, you mentioned in the third quarter call there were going to be I think the Vista moving from 3 to 1 facilities and layoffs in the U.K.

How much were those kind quasi non-recurring items in the fourth quarter and is there any kind of path going into the year?

Mark can answer that.

Cai, the effect in the fourth quarter, it hit part of our, mostly our commercial segment actually so when you look at commercial margins, back to James Kissane's question, part of the answer is the fourth quarter we had a hit in the commercial segment for consolidating those three areas in our security products business into one that did occur on schedule.

That coupled with some severance in the U.K.

was about 5 million of effect to operating profit in the fourth quarter, and we have no continuance of those items that we foresee in fiscal '09.

Okay, and the last one, given your inventory buildup, should we assume we come out of the gate with some pretty good product shipments in the first quarter?

I don't believe, it's not substantially strong, no.

Quarters two and three are the bigger product shipments, as we see the pace right now, the delivery schedules can always change.

Excellent.

Thank you very much.

Thank you, Cai.

Shawn, this is Stuart.

I think we have time for one more question.

Your final question comes from the line of of Greg Wowkun with Banc of America Securities.

Please proceed.

Good afternoon, gentlemen.

Thanks so much for the final question here.

Any updates on the AITS contract?

No.

I mean, other than we heard that there's going to be an amended RFP that will be coming out in the next couple of weeks.

Other than that, we've heard nothing.

Thank you.

Shawn?

That's all the time we have for today.

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.