Leidos Holdings Inc (LDOS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter FY 2009 earnings teleconference.

At this time, all participants are in a listen-only mode.

We'll facilitate a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr.

Stuart Davis, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you, Amity, and welcome, everyone.

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

Our COO Larry Prior will again join in the Q-and-A portion.

During this 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 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.

With that, I'll turn the call over to Ken.

Thank you, Stuart, and good afternoon, everyone.

In my judgment, our third quarter builds on our foundation of strong performance with solid organic growth, good profitability and efficient cash collections.

We set the stage for further top line and bottom line growth by winning significant new contracts and building our direct workforce.

Mark will discuss guidance in more detail, but we expect the momentum that we demonstrated since the IPO to continue through this year and into Fiscal Year 2010.

Earlier this year, the government acted responsibly to ensure a healthy and stable funding environment during this administration change.

First, the Department of Defense, military construction, and the Department of Veterans Affairs and the Department of Homeland Security received on-time, full-year budgets with good growth.

Second, the rest of the government is operating on a long-term, continuing resolution, which carries spending at last year's levels, through March.

Third, last year's Supplemental Appropriations Bill fully funds wartime expenses into the spring of 2009.

We are encouraged by the appointments that President-elect Obama is making as he forms his cabinet and advisors, especially on national security.

So far, it is a strong, centrist team with knowledgeable and effective people.

Moreover, the key players have demonstrated commitment to areas that we've strived to excel in.

For example, Defense Secretary Gates generally favors quick-response solutions.

And the Homeland Security nominee, Governor Napolitano, is an outspoken advocate for border security.

We still do not know the nominee for Energy Secretary, but regardless of the choice, we do expect the administration will push for a carbon cap-in-trade program, which could help fuel our energy and environment business.

And it does appear the selection process is on track to have the key leadership in place by the January 20 inauguration.

Now.

our view of the future is essentially unchanged from what we have communicated in the past.

That is, we do expect near-term trends to remain fairly stable.

We'll watch closely, progress on the funding for FY '09 for those departments operating under the continuing resolution, the follow-on supplemental and certainly President Obama FY '10 submission.

It appears that there will be a major effort of recreating jobs and re-prioritizing some spending to restart the economy.

We think that will good for us.

We do expect defense spending to flatten in FY '11 and beyond as Iraq winds down and other priorities take precedence.

We believe that services and solution programs will fare relatively better than large platforms.

We do have some exposure on future combat systems, but that program now represents only about 3% of the revenue of the Corporation and is more likely to get reshaped or pushed to the right than eliminated entirely.

Given our views on the market, we are aggressively addressing our cost structure through project alignment, to be prepared for a more competitive environment.

And we're investing now in market segments that we believe will grow, such as our cyber security, energy and environment and federal health initiatives.

We'll also continue to invest in our core defense and intelligence business.

Even if growth flattens, the need is still great.

Events in Georgia and Mumbai suggest that the world remains a dangerous place, and companies that are agile, innovative, and responsive to the government's needs will do well.

Turning to new business, we continued to accelerate our pursuit in capture of new business in this third quarter.

New business bookings were a robust $4 billion for a book- to-bill ratio of 1.5, which puts us well ahead of our target pace for the year.

One of the keys to our business development success has been our dedication to pursue larger opportunities.

We won six definite delivery contracts in the quarter, greater than $100 million each, five of which are new or greatly expanded.

These include the $410 million Army human resource IT contract, the $254 million media exploitation contract, which by the way leverages the capabilities of our newly-acquired SM Consulting Company, and the $226 million Centcom IT contract, all great wins.

With these wins, the backlog at the end of the third quarter was $17.2 billion, up 9% from Q3 of last year.

Funded backlog was $5.7 billion, up 5% year-over-year.

The bookings and backlog figures do not include any value for the ID/IQ master contracts we've won.

In the third quarter, we won ID/IQ vehicles with an expected value of just over $1.6 billion, including our estimated portion of the $6.9 billion FAS 2 contract and a recent single award cyber job estimated to generate $170 million.

Having said that, even with the strong bookings in the quarter, we continue to see good opportunities.

Our fourth quarter is off to a good start.

So far, we unseated a long-term incumbent on a five-year, $450 million contract with a key intelligence customer.

And we recently received an order of inspection systems from the US Army of almost $100 million.

Our submitted proposals awaiting adjudication at the end of the third quarter were $13 billion, including 23 opportunities north of $100 million.

Our pipeline continues to build, as the investments that we've made all year in bid and proposal expense is really paying off.

Overall, our federal business continues to drive our robust growth.

Our commercial business has steadied.

Commercial revenue was flat both year-over-year and sequentially, but margins have improved significantly as we took the necessary steps to reduce costs.

One aspect of the Company that really turned around over the last several years is contract execution.

With thousands of contracts there's always some on our watch list, but we have not had a material write down in quite a long period of time.

The most obvious example of this change is our Greek Olympics contract.

Last month, the customer accepted the system in writing, stating that the system substantially complies with the terms of the contract, with some omissions and deviations.

While we are not completely out of the woods yet, things are looking up.

This has been a tremendous effort by our whole team, I'm really proud of them.

Employee recruiting retention continues to improve as well.

For the fourth straight quarter, involuntary attrition was down and hiring was up from the comparable period last year.

Voluntary attrition was about 12% for the quarter, and now stands at 12.6% for the year-to-date.

The recession is undoubtably helping with retention, but so is our focus on employee engagement.

On the acquisition front, while we did not complete any acquisitions in the period, we remain committed to acquisitions that make strategic and financial sense.

And we are somewhat optimistic that some of the fraught is coming out the market.

Although recently completed deals have been generally high valuations, now many of the books that we're seeing show the seller's expectations are a little more realistic.

During the quarter, we also decided to sell the products business from the AMTI business we acquired in December 2006.

Having said that, the rest of the AMTI business continues to be core to our strategic intent, as we are pursuing large opportunities in ground-based signals intelligence and support to the special warfare community.

The potential sale is immaterial to our results, but we will continually review our portfolio to make sure all of our businesses are fit for future direction.

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

Mark?

Thanks, Ken.

On the financials front, the results were very consistent with what we have been communicating all year -- double-digit internal revenue growth, both from new wins and expansion on existing programs, progressively improving operating margins, healthy operating and free cash flow and earnings per share in line with the range that we set out to achieve at the beginning of the year.

As Ken mentioned earlier, with one quarter remaining, the bottom line is that we expect to meet or exceed our established long-term financial goals for this fiscal year.

Given that our core results are pretty much as we expected, I'm not going to spend much time covering those details in my prepared remarks here.

There are a few unusual items in the non-operating part of the P&L that I do want to cover.

And I'll spend the rest of the time on our views of the forward financial performance, both for the rest of this Fiscal Year 2009 and our initial guidance for next fiscal year, Fiscal '10, which starts on February 1.

To quickly wrap up our core performance, revenues were up 10% internally on strong performance across our defense, intelligence and homeland security base.

We have continued to perform well and winning new contracts across this same set of markets, and particularly contracts that are in excess of $100 million in expected value.

This bodes well for visibility and stability going forward as we set out to do deliberately.

In terms of revenue composition for the quarter, labor versus materials and subcontractors mix was about 59% to 41%, down from a 60/40% mix last quarter.

This can be attributed to heavier material procurements and logistics activity this quarter which was expected.

Contract [type] mix -- cost plus, T&M, fixed price, etcetera was essentially unchanged.

As we set out to do, operating margins improved sequentially from Q2 to 7.8% in Q3.

We attribute this to strong program management that Ken mentioned and execution across our very broad contract base, improved profitability performance from our commercial business and the absence of special charges that have hampered us in previous quarters this fiscal year.

High materials content on pass-through activity on systems integration contracts did hold gross margin back somewhat.

This year, our border, port and security product deliveries are more concentrated on the fourth quarter, which is one of the reasons why we remain confident that we'll drive margins further northward as we finish the year.

Although internal research and development costs continued to rise as planned as we pursue market-making technologies for the future, overall SG&A spending was normal and came in under 6% of revenues.

Now let me address some of the unusual activity below the operating income line in the quarter.

First, as we said back at our recent investor day, we moved all of our US cash holdings to US treasuries for greater security in light of the distressed financial markets.

With effective interest rates of well less than 1% being paid in this category currently, our interest income is about a one-third of what it was in the same quarter last year if you equalize the cash balances.

Second, we recorded $16 million of pretax investment impairments in the quarter, all related to investments that we made a number of years ago when the Company was actively funding technology start-ups.

The impairments are roughly equally split between several venture capital investments and our investment in Danet, a German company involved in the telecom services space.

In essence, these companies experience a combination of revenue declines and liquidity problems concurrently, and some are in fact being pursued, or are pursuing being sold at lesser values in light of the current economic conditions.

The remaining book value of our venture capital investments including Danet, is approximately $21 million.

Third, we concluded the federal tax audit of two fiscal years, '05 and '06, in the quarter, and we favorably settled positions which we had previously established reserves for.

This resulted in $9 million non-recurring pick up in our tax provision this quarter.

Also, Congress recently extended the research tax credit for calendar 2008 and 2009, so we [called out] the year-to-date effectiveness in the third quarter provision, reducing it by another $2 million.

These two items should drive our full-year effective tax rate to just under 38%.

Fourth and finally, we have decided, as Ken mentioned earlier, to sell the products business that was a small part of the AMTI acquisition back in 2006.

This area is now appropriately reflected in discontinued operations.

We recorded about a $9 million impairment loss from the assigned acquisition intangibles and other assets that we do not expect to be realized upon its sale.

The combination of lower interest income, the investment impairments and the favorable tax provision had a net, adverse effect on earnings per share from continuing operations of about $0.01, versus what we otherwise would have expected this quarter.

We still finished with EPS from continuing operations of $0.29 cents, well on track for expectations for the year.

Moving away from the P&L results, we finished the quarter with over $800 million in cash in the bank.

Year-to-date operating cash flow is over $400 million year-to-date, well on pace for our target for the year.

Our credit statistics continue to improve as we grow EBITDA and hold debt steady.

We're also pleased with keeping our day sales outstanding, below 70 days.

This is particularly notable this quarter as we converted about $1.7 billion of business to our new financial information system in early September, meaning our dedicated employees executed billing and collections activities fairly normally through that difficult process.

This gives us further confidence in the remaining conversions we have ahead of us.

Now let me move onto forward expectations.

For Fiscal 2009, we see continued revenue strength and expect to finish the year at the high end or quite possibly above the top end of our 6% to 9% internal revenue growth goal.

As we said on our last call, if our pass-through activity continues at the current pace, and it attributes to higher-than-expected revenue growth, it will make our margin improvement goal our toughest one to achieve.

However, we remain confident in improving the fourth quarter margin to above 8%, which would allow us to achieve at least the 20 basis points of improvement year-over-year in operating margin.

The two main drivers to this are first, as said earlier, we have our heaviest quarter of the year in security product deliveries ahead of us.

And second, we expect to see a net [tick up] as we settle our indirect rate variances in the fourth quarter.

Moving down the income statement, we expect interest income to fall about $3 million in the fourth quarter versus the third quarter, and interest expense, which is based on fixed debt, to remain flat.

The reason for the interest income decline is that we made our shift to US treasuries back in the middle of September, so the third quarter didn't reflect much of the reduced interest rate, but the fourth quarter will fully reflect it.

In terms of other income and expense, we wrote down our investment into net in the third quarter, primarily based on a new valuation of the enterprise and offers received for a potential sale of the business.

A sales transaction is being pursued, and if the sale is completed in the near term, we expect to recognize a foreign currency translation loss in the neighborhood of about $5 million.

That said, given the market conditions, completing a sale will probably be difficult.

And if not done in the near term, any translation, adjustment and thus any loss would be difficult to predict given the volatility of exchange rates.

The tax provision should return to normal in the fourth quarter which, with a research tax credit, should be about 39%.

These non-operational items, the possible [to net] related currency translation charge, lower interest income and a higher tax rate, represent some EPS headwind as we enter the fourth quarter.

But all in, we still expect to be comfortably within our 11% to 18% earnings per share growth goal for the year.

All year we've been tracking well and operating in free cash flow, and we expect to finish this year consistent with the cash expectations we discussed at the outset of the year.

Which is our net income plus depreciation and amortization model, adjusting for special items, including an outflow of $125 million for the extra payroll cycle we've now been talking about for a year, and an inflow of $75 million for reducing our working capital, primarily keeping our day sales outstanding at 70 days or below.

That wraps up our forward view on Fiscal '09.

Now let me address our initial view of Fiscal '10, again starting on February 1.

We've had a strong year generating new business and increasing momentum on existing programs, which certainly positions us well for continued growth in 2010.

As said before, the ramp down on our MRAP Communications integration contract leaves more than $100 million [hole], but ramp-ups in [Pole Cam], AITS and a number of new intelligence contracts, including two very important recent wins in the cyber arena, should allow us to recover and provide for net growth all in.

In addition, as Ken mentioned, the new business pipeline is very healthy, and that also bodes well for continued growth next year.

Our planned internal revenue growth for Fiscal 2010 is in the 6% to 9% range, consistent with our long-term goals.

Within this, our government business is expected to provide all of the growth, whereas we project our commercial business, which is directly or more directly linked to the economic conditions we're seeing, to essentially be flat year-over-year.

At this point we have about 55% of next year's planned revenue in backlog, another 41% in identified opportunities from existing contracts, re-competes and near term decisions in the pipeline, and the final remaining 4% from unidentified new business.

These statistics line up very well with the position we had a year ago coming into this current fiscal year.

While our book of business is healthy and we have a strong base defense and homeland security budgets in place for government Fiscal '09, the funds committed towards economic recovery do create, in our view, some uncertainty on the continuity of spending and national defense.

For this reason, our current operating plan prudently assumes lower revenue growth in Fiscal '10 than we expect to achieve in Fiscal '09.

We'll of course update that as our view changes over time.

For operating profitability, we expect to continue our operating improvement progress at a pace of 20 to 30 basis points next fiscal year, consistent, again with our long-term goals.

The main drivers for expected improvement are continued growth in our higher margin, security products business, improved mix in higher margin services and systems integration areas, largely fueled by some of these large wins, and continuous cost reduction and containment efforts we've had underway for a couple of years now.

Thus, our expected core operating performance, that is our internal revenue growth and our operating margin improvement, supports attaining our long-term earnings per share growth goal of 11% to 18%.

However, achieving this EPS growth goal in Fiscal 2010 will be more challenging because we shifted our domestic funds to US treasuries, we mentioned that earlier, currently earning less than .5% percent of return.

This may dilute earnings per share growth by as much as 2 percentage points if that condition holds true all year.

We'll consider shifting back to higher return instruments only when we're satisfied with acceptable risk that we'll preserve our capital, our number one criteria.

And it's quite honestly hard to tell if and when that will be at this time.

Our normative effective rate taxes will also go up about 1.5% from Fiscal '09, which was unusually low, to about 39%, as I said earlier.

But we also don't expect to see impairment charges that we had in Fiscal '09 recurring, so we're effectively planning on a net push in that category.

As we said in today's earnings release, we expect to generate strong free cash flow, and we intend to deploy our cash wisely to drive earnings per share growth and shareholder value through continued acquisitions and repurchases, assuming prices are attractive to us.

With all of this, we are comfortable we can still achieve our financial goal of 11% to 18% earnings per share growth from continuing operations in Fiscal 2010.

Finishing up the Fiscal '10 outlook, our operating cash flow should line up very well with our model of net income plus depreciation and amortization.

We expect capital expenditures to run on a consistent percentage to sales, as we've historically seen, yielding what should be a meaningfully stronger free cash flow result than what we expect to see in Fiscal '09.

Again, this gives us attractive fire power to invest in growth and shareholder value creation throughout the year ahead.

Standing back from all those details, the big picture is that our core government business is expected to continue to grow at a healthy pace and do so more profitably.

Despite softness in our commercial business, we've taken steps to return its profitability to acceptable levels and with this, the enterprise as a whole, has consistently met the long-term expectations that we set out to achieve in our IPO.

Despite the challenging economic environment that may represent or present some adverse financial consequences to us, our strong balance sheet, our strong business momentum, our excellent visibility and our healthy cash flows allow us to pursue offsets so that we can deliver and continue to deliver strong earnings growth consistent with our long-term model.

Thanks for your patience in all of that, and I'll turn it back to Ken for some closing remarks.

Thank you, Mark.

Well, as I articulated and Mark has further clarified, in summary our business is strong.

In the two years since the IPO, our contract execution has been excellent.

That is leading to good financial results and our ability to win new business and capture market share.

At our recent investor conference, we highlighted three of the primary drivers -- our technology discriminators, our focus on strategic campaigns and our strong management team.

I believe that these factors will be even more important discriminators going forward.

With that Amity, we are ready to take questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Joseph vAFI with Jefferies and Company.

Please proceed.

Hi, gentlemen.

Good afternoon and good results.

I was wondering if we could talk a little bit about the VACIS business, if the current economic environment might be affecting the pipeline there internationally.

And then secondly on VACIS, if you're still looking at the about the same number of units shipped for Fiscal '09 as you had talked about last quarter?

All right.

Thank you for the compliment on the quarter.

I think to the contrary, I don't see the economic conditions being met, closely correlated to VACIS, because this is all about fighting the war on terror.

And we're actually seeing a lot of interest internationally, especially with our higher power capability.

So I feel going forward, especially with the recent win that we got, our opportunities next fiscal year are going to be strong.

And your other question is -- ?

The other one was just basically your planned shipments and sales for Fiscal '09.

Are they tracking to what you had previously stated they would be?

They're close.

We may be off one or two units, but the profit will be strong.

Okay.

And obviously Q4 will be the big quarter, I guess, for the fiscal year there?

I guess so, since it's the only quarter left.

Right, right.

And just maybe one other question on the margins.

I know over the last couple years, you've kind of ramped up your bid and proposal engine a fair bit.

Is it fair to think that there's operating leverage coming off that run rate into next year, or do you think we're still going to invest more in that as revenue grows?

Yes, Joe, is this Larry Prior.

The trend we've seen is it's increasing.

We look for the traditional wall between Thanksgiving and Christmas, haven't experienced it.

So we expect to continue to run hot as we go into Q1.

All right, thank you very much.

You're welcome.

The next question comes from the line of Eric Olbeter with Pacific Crest Securities.

Please proceed.

Hey guys.

Again, good quarter, congratulate you.

As we look at SG&A, there was a significant reduction.

Can you just go over that, whether or not you expect this level at 5.7% to repeat again?

Thanks, Eric.

Mark here.

Recall in the second quarter we had some nonrecurring expenses in the SG&A, G&A in particular.

The litigation case we had, plus some severance, dominated that.

So we had higher SG&A last quarter.

So if you're looking at the sequential decline, that's certainly a big part of the reason.

We also had a record revenue quarter in the third quarter, which absorbed the fixed G&A more efficiently.

So looking forward, we generally expect, although there can be variation from quarter-to-quarter, the SG&A line to be roughly 6% of revenues, give or take one here or there as things are volatile in the IRAD and B&P arena, which they tend to do in any nonrecurring things that happen in the G&A side.

Okay, and just a question on gross margin, [down maybe you said] year over year.

How much of that is related to VACIS and the other things you listed?

Do you have a break down or general sense you can give us?

Don't have a precise break down, Eric.

But clearly I would say it's probably not far from equal parts in lesser security, product shipments, coupled with larger M&S pass-through this quarter.

That's great.

Thanks guys, good quarter.

You bet

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

Please proceed.

Thanks.

Good afternoon, guys.

Good afternoon.

Had a question on cash flow.

Wondering, Mark, have you built in any additional expectations for pension funding requirements there?

I know you have that one pension plan with a single customer, and I know there was some dispute there around obligations and obviously the market has worked against everyone's pension plans.

So just wondering if you've assumed higher cash contributions in the plan for Fiscal '10?

Jason, the one pension plan you're referring to is our single defined benefit pension plan that we have obligations on ,and that is in the UK.

And we are in process of evaluating the updated obligation as well as the assets, given what's going on economically.

We started the fiscal year with an unfunded amount of about $20 million US dollars, I expect that to grow substantially northward when all this shakes out, maybe as much as double.

But it's preliminary.

But the way it works, it would be incrementally funded over the effective remaining lives of the participants and so I don't see it having a material effect on next year or any one year, given the length of spread that you deal with that.

A separate issue is the conversion of the contract or ending of the contract and what happens then.

That's a Fiscal '11 item, and there are some legal issues there.

We disclose those accordingly in the public filings and I'll leave it at that.

Okay.

In essence we don't really have particularly high headwind on cash flow, nor P&L effects from that pension given the spread in duration.

Okay, and then just a two-part question related to the new administration.

The few part is, are you and your competitors bracing for a more challenging procurement environment?

And if so, how will that manifest itself?

And given that the election has now passed, do you have a clear sense of where your M&A priorities may lie over the next a year or so, and any more detail you can share there?

We certainly can't share a lot on M&A, except what I provided a little color in our opening is that we're starting to see books with valuations being down a bit from historic highs, and I think that's good.

Long-term, we continue to an M&A pipeline of opportunities that we're looking at, tied to our strategic intent, where we're trying to take the business.

So that's good.

Your first question, I actually think kudos to the Bush Administration and to President-Elect Obama for really stepping up and working the defense team in particular, as well as the economic team.

We are at war.

I think that both the out outgoing administration and incoming, recognize that this needs to be a seamless transition, and so far things are hopping along quite well.

And as I reflected, I really don't think the Obama Administration really can do much until they submit their FY 2010 budget.

So we're looking for things to continue.

There may be a little bit of fitful starts and stops, but my goodness, we've had that for the last couple years anyway.

Right, right, thank you.

You're welcome.

Your next question comes from the line of Cai von Rumohr, Cowen and Company.

Please proceed.

Yes, thanks an awful lot.

So, don't want to beat a dead horse, but so VACIS shipments were somewhat light in the third quarter.

Can you give us to any sense as to how much higher you expect them to be in the fourth?

It's about [five mark] here.

The pace in the fourth quarter of deliveries is about double that of the third quarter.

All right.

And then you didn't repurchase any stock in the quarter, after having been a little more consistent in the earlier quarters.

How common and how do you think about your deployment of cash going forward?

Cai, the general thesis of cash flow and the $500 million [floor] that we've talked about before holds true, and the pecking order of cash deployment still holds true.

So we talked about that abundantly.

I would say that we made heavy repurchases in the first half of the year.

As you recall, we well more than offset our annual share creep, which is our model, or our assumption of our earnings per share growth goal.

And also we were looking at quite an uncertain financial and economic situation when we set course for the repurchase program during the third quarter.

And given those things, it just led to the decision of very little activity.

And how do you feel now?

Do you think that the credit markets are starting to settle down and that therefore, if things go this way you may not have all of your money in treasuries and may buy back some more shares?

Or what would you need to see to make you feel a little bit more comfortable on that score?

I'd rather ask you that question.

That's really difficult to answer, Cai.

And it's something that we're continually interacting with lots of advisors as well as our board, and I think the time right now to be a bit conservative until we see some churning makes a lot of sense.

Also, to add to Mark,we weren't kidding.

We do think perhaps there may be some more books becoming available of some acquisitions that we'd like to have some fire power, but still stay well above that $500 million of cash required to keep our debt rating.

So I think we're taking a prudent approach in this period of uncertainty.

Okay.

And then If you look at -- your outstanding bids were down a $1 billion from the second quarter versus last year.

Second to third, they were down $2 billion and you really had pretty good bookings in the quarter.

You feeling a little bit better about the momentum you carry into next year?

Or, any -- give us some color on that.

Cai, this is Larry.

We're feeling very good about the momentum going in, especially as we look at H1 of next year.

Ken and Mark are appropriately prudent and conservative when we look at the second half, given that we'll have to see a new FY '10 budget from the administration.

There was some timing issues, and lots of decisions are concurrent with our in-process bids.

But when you look at the build-up of those $100 million bids, we like the momentum.

And every one of our group presidents and business unit general managers are cranking lots of those small proposals, the $10 to [$15] million proposals, just across the enterprise right now.

And we see that as very healthy.

And last one, you mentioned the acceptance by Greece.

When do you expect to be in a position to close that contract out?

And what would you gauge that your odds are of maybe having some favorable adjustments when you do that?

I wish I could tell you.

What we -- we are very delighted in that we executed a contract [mod] and promised we could deliver a system and we did.

And we got the Greeks to accept it.

As you well know, and perhaps you don't, but things go a little bit slower over there.

And our expectation is to build them for what is owed us after we have negotiated the omissions and deviations arena.

And then it gets on Greek time as of when these kinds of issues will get resolved.

I think it's positive that they have accepted the system, and I don't see, at least right now, any reason not to assume we'll come to closure.

The only question is the timing.

I don't know when.

Whether it will be favorable to the Company or not, it could be slightly favorable, don't know yet until we finish the negotiations.

Okay, great.

Thanks again and good quarter.

Thank you.

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

Please proceed.

Thank you, good quarter and good evening.

Thank you.

Looking at -- Mark, can you -- you have $21 million in book left on all your joint venture investments is that, so we could view that as the absolute maximum if things continue to fall, potential write-offs.

Is there any other issues out there, the kind of non-core that are hanging out on the balance sheet?

There is.

When you read the 10-Q which will come out tomorrow, I assume, the total carrying value of such investments is $30 million.

There's $9 million more above that $21million for investments we have largely in joint ventures and LLCs that are mostly program or project related.

Some of which came over from Benham.

I view that risk as less than the venture capital and the Danet category, but nonetheless the risk.

In addition to the $30 million is the $5 million of translation potential loss related to Danet.

So that's not necessarily carrying value, but it's hanging out there as a risk as well.

Currency?

A currency risk, yes.

Currency translation.

The $9 million that you mentioned, of programs, is that within -- still within your core markets, right?

As far as programs and joint ventures?

They are.

On the $450 million win you had, intelligence win, what's the status of that in terms of staffing and protests or anything like that?

We're in the midst of working the transition with both the -- our government customer and in discussions with the outgoing prime and their subs.

It's early.

So stay tuned.

Not seeing any protest filed and we're in discussions with the customer.

It's a significant strategic win for Larry Cox and his team, and we're excited for them.

Very significant.

Based on what you would understand right now, is this something that would be fully ramped up in the fiscal first quarter '10?

Or later or sooner?

You've got to -- it's kind of the standard 60 to 90 days as you make the transition.

You'll, keep a governor on it with a customer, to make sure as you're transitioning subs that you manage that well.

But you should see us entering the first quarter with a substantial amount of this work.

And then finally, just on the border security, particularly on the high-end back of sales like the five that you sold to Abu Dhabi.

You said the economy -- you don't see a lot of impact with the economy.

Would you say, even with the high-end systems, is there increased interest as those systems get delivered?

That people, other countries are coming to look at them?

Or is it kind of stagnant?

How would you characterize that?

I would characterize it as kind of embryonic.

We've broken through with a couple key country sales, and once we get the systems up and operational and the value proposition is recognized, we expect to see more customer interaction.

There's also a forcing function out of the new Obama Administration, that as they increase the emphasis on inspection, any percentage requirement for inspection through ports will just have a ripple effect across that global market.

We don't expect, 100% inspection numbers.

But what we're hoping for, is just the first increment to begin that process.

And on those five, when are they 100% installed and fully operational?

All of them?

I think it's next year.

Okay.

Okay, thank you.

You're welcome.

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

Please proceed.

Good evening.

Great quarter as well.

Any of the uptick in past due revenues this quarter represent a pull forward from maybe what you might have thought you were going to get in your fiscal (inaudible).

In our 2010 fiscal?

You broke up, Ed.

Pull forward from either the January quarter or F10.

Some of that could be occurring.

It's just episodic.

When the customers have the money and they need to acquire the M&S, it's tough to time it.

But it does happen annually.

So the same kind of scenario you could expect next year as well, pulling forward.

Any update you can offer us on your real estate endeavors to right size that?

Yes Ed, we're proceeding ahead with facilities consolidation.

Arnold Panero and his team have done a great job with what we're doing in San Diego.

And we've got several plans underway in northern Virginia.

Remember, there's not a robust market for the sales of those properties, but prudent consolidation as part of project alignment continues on.

I'm starting to hear some more chatter about BRAC.

Can you talk a little bit about your positioning for BRAC and maybe where you could benefit?

Yes, what you've seen is we're strategically positioned in many of the areas where movement of government personnel and work will flow.

So if you think of the large position that we've got in Maryland, both in Aberdeen as well as in the Columbia area, we do very well.

So we've got large organizations near Fort Mead, large near Aberdeen.

We already have a significant presence in northern Virginia, and are well-positioned for the movement to Fort Belvoir.

But also, we see a lot of opportunity in Huntsville, as well as in Dayton where we've got great leadership a part of our SAIC team.

And we're working closely with governments as we think about those transition plans.

But we haven't heard the drums beating any louder recently, just part of the steady planning that we expected.

Great, thank you.

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

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

Please proceed.

Yes, my congratulations on the quarter as well.

Thank you for taking my questions.

You mentioned earlier that the acquisition deals you're seeing, the books that are coming across your desk, the valuations coming down a little bit, can you give us a sense of what the valuations are looking like generally?

And also, can you talk a little bit about the long-term commitment to the commercial business?

And then I have one quick follow-up.

No, I'm not going to talk about valuations.

No, just in general--

In general, they're coming down.

Okay.

I'm not going to share much more than that.

It gets into a competitive kinds of issues, Laura, and the commercial business -- As we said before, one quarter does not change my mind on the strategic value of our commercial business.

We have spent the last quarter or so [dialing] back the infrastructure to support what we think the near-term revenue outlook is, and we are continually striving to do more, what I call noble work as opposed to pure IT outsourcing.

And that continues and the energy, the utility, the pharma space, while they're slowing down, we're well-positioned as that turns.

Larry, you want to add--

I just returned from visits to Houston and then to New Orleans where I met with our team and customers where we support both upstream oil exploration and then the utilities industry.

Both have tremendous potential as you put it in contrast to a couple of large declining contracts.

So they've been able to develop new customers, new capabilities and as we see it, it's still core to SAIC when you think of taking on global problems with science and engineering and technology.

The Obama administration is going to come out of the gates with initiatives around a carbon cap in trade and we're well positioned in both energy and the environment to help the administration do that.

You will see initiatives around healthcare, and our position from both the military and initial work with the Veterans Administration are going to benefit, we think, soldiers, sailors, airmen and Marines.

It shifts to the total population.

So we're optimistic that the Company, that that [whole] unit is doing the right thing tuning up their margins, and we're prepared for the future.

Great, one final question.

You mentioned on the call that the new administrations focus on job growth would potentially help SAIC.

Can you give us a sense of how you see that happening?

What with our acquisition of Benham, which is in the design build arena.

And as Larry mentioned, if there's really efforts going on with regard to a carbon cab in trade, we're well positioned to take on some, hopefully some of those RFPs to bid and win.

And I would expect even in the core, national security business, Congress will be prudent about when and what they do as it affects jobs over the next 18 months.

Clearly with Secretary Gates, national security and effectiveness is job number one.

But we contribute considerably to the exports of the nation, and that will be part of their calculation.

Thank you.

You're welcome.

Your next question comes from the line of Druve Chopra with Morgan Stanley.

Please proceed.

Good evening, gentlemen.

You guys have obviously done a very good job on the bookings, and the pipeline continues to build.

Can you talk about what you're seeing on the competitive landscape?

And if you're seeing any change in pricing behavior, in the event that other providers are also seeing flattening growth environment?

The areas where we've won have been significant in terms of technical offerings and have been part of our plan to improve our margins.

There have been several losses, especially around our re-competes, where we are beat on price.

And Ken Dahlberg and the group presidents have purposely looked at our win rates and have tried to press to be very competitive on our technical offering as what Ken would say the noble work.

And at times we won't play that price shootout game.

In FY '11, it may get a little bit tougher, and that's all the reason why we want to tune up our cost structure and be ready for the environment.

Yes, I think it's safe to say it will get more competitive and that's why we're addressing aggressively our cost effectiveness and efficiencies now, so we can come out of this malaise stronger.

For example, the one win we talked about, the intelligence win where we unseated the long-term incumbent, it was our technical offering that won it for us.

I would point out that was a five-year $450 million contract.

So as we begin to perform in the first quarter, the context is a five year contract.

But it was won by our team, given really strong technical offering and performance that they've earned over the years.

Great and then on AMRAD, is that still running the $55 million to $60 million-ish range a quarter?

Druve, It will slow down by about 25% or so in the fourth quarter and continue.

For just the communications immigration piece, there are two AMRAD contracts, the logistics piece that is [Zochonis] is expected to continue at its existing pace.

It will be re-competed, and if we win, it will continue at its expected pace.

Got it, but wasn't there the potential for some follow-on, additional work on, I think there was lighter MRAP vehicles?

There was[notional] MRAP light vehicles.

It's not clear that that will go through the [stay war] contract.

We're working that.

Excellent, thank you very much.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Joe Nadol with JPMorgan.

Please proceed.

Thanks, good afternoon.

My first question is just kicking Cai's dead horse a little bit more.

Just one more on the VACIS.

You've been out there looking for an Army contract that's a pretty significant size.

Just wondering how that's going?

Has it awarded yet?

When do you expect it?

Yes, we won that.

You did.

Okay.

How many units was that?

I don't remember.

About $100 million.

Okay.

And then finally, secondly, on the cap in trade, I'm just trying to get my arms around a little bit more what your role might be in cap in trade.

Because we talked about it at your investor day, the Obama Administration, or the transition group, has put out a little bit more of an agenda, a five-point agenda in the last week or so on the stimulus.

Can you give a little more color on, I guess, anything specific in there that you think that you can target?

Or what your role might be in cap in trade?

Is it as an advisor to companies, how to to comply with it?

Is it as an advisor to the government, etcetera?

The value proposition extends from front-end consulting to actually designing energy efficient operations, energy management.

What I point to Joe, on our Company website our recent edition of Science to Solution is really dedicated to our green business focused on carbon.

There's a lot of detail on the Company's history, our current performance for Department of Energy and many of the labs.

We do everything from environmental analysis.

We did a lot of the original research that looked at the effects on carbons on the environment.

But Benham will go in and actually improve the energy efficiency of plants.

They'll design plants for bio fuels.

And we have folks advising and supporting the trading markets that are out there today.

It's a very good edition and will give you a broad background in the Company's capabilities and if -- all of our capabilities there.

No, I mean, it sounds like some of the upside might be in the commercial side as opposed to the government side?

It's definitely both.

And as you come out of the gate with change in regulations as you're trying to impact the market, it will begin in the government regulated side.

You will see it flow fairly swiftly as the market takes place.

When you do an energy efficient plant today, you're pencilling them out one plant at a time.

If a carbon cap in trade comes in to create the currency for it, that's a different value prop for many of our customers.

A lot on the commercial side out of our Benham group.

Finally on that, is there a number that you guys have put on this opportunity?

Whether it's market size of which you can capture share?

Or just a financial opportunity for SAIC specifically?

It's a long haul opportunity.

It's going to take a while for the Obama Administration to get their act together, but we clearly see energy in the environment as potentially a strong business [deliverer] for us over the next three- to five-year horizon.

Okay.

All right, thank you.

Amity, it looks like we don't have anymore questions and I think we've run up right against the 6 o'clock hour.

So it looks like the plan came together.

Obviously if there are any other questions, you can contact me or the rest of the Management team and we'll see if we can get to them.

But I want to thank you for your participation and that ends the call.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.