Leidos Holdings Inc (LDOS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SAIC fourth quarter fiscal year 2009 earnings conference call.

I will be your coordinator for today.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Stuart Davis, Senior Vice President for Investor Relations.

Please proceed.

Thank you, Shamika, and welcome everyone.

Here today are Ken Dahlberg, our Chairman and CEO, Mark Sopp, our CFO, and Larry Prior will join us in the Q&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.

Also, on this call, we'll discuss our internal revenue growth percentage.

Beginning this quarter our definition of internal revenue growth and a table showing our calculation of it appear in our press release which you can get from our website.

With that, I will turn the call over to Ken.

Thank you, Stuart.

Good afternoon, everyone.

As has become customary in these calls, I'll provide some introductory remarks, update you on the government services market and business development.

And, then Mark will provide a lot of color on the financial details.

By now, I presume you have read our press release.

And certainly in my view, the fourth quarter was a terrific finish to a great year.

Reaching the $10 billion revenue milestone as we celebrate our 40th anniversary.

Well, it's just icing on the the cake.

I feel that we have really hit our stride as a public Company, and this past fiscal year we executed on all the commitments that we made as part of our initial public offering.

Our major financial results, including revenue, operating margin, earnings per share, and cash flow were strong for the quarter and the year.

And make no mistake, this performance was no accident.

We laid out our approach for transforming the Company, creating more focus in the marketplace, collaborating as one SAIC, making bigger bets on emerging strategic trends, and that approach is paying off.

Since our performance has been steady and predictable, most of the questions that we're getting from investors deal with the federal budget and the federal contracting environment.

There have been major changes to both, but our overall financial outlook is essentially unchanged.

On the budget front, the President signed the $410 billion omnibus that provides an average 8% increase for non-defense agencies, and he signed a $787 billion stimulus package.

Our largest customers and programs are in national security.

But we see potential upside in the stimulus package, especially around our energy efficiency, border and port security, and healthcare IT offerings.

We are taking a measured approach.

We do not want to distract the focus of our core business which is growing nicely, but we also want to be able to participate in opportunities consistent with our strategic intent.

We have been working our campaigns around energy, Homeland Security, and healthcare for some time.

And we believe that the investments we have made position us well for the priorities of this Administration.

We do not expect any serious issues with the second installment in the fiscal year 2009 supplemental appropriation which should provide funding of about $75 billion.

However, over the next couple of years we will likely see a decline in supplementals for three reasons.

The reduced costs of the war, the shift of some items to the base budgets, and the removal of non-war related costs, such as major procurements.

President Obama also outlined a government fiscal year 2010 budget with a 4% increase in core defense spending and a 9% increase for the rest of the government.

As we have been projecting for some time now, the forward projections for defense spending are fairly flat.

The Administration is currently refining its requests and taking a hard look at all large programs, including future combat systems.

Secretary Gates has spoken and written extensively on the need for 75% solutions delivered in months, instead of 99% solutions delivered in years.

Flattening budgets will put some pressure on services, as well as the platforms, but I believe your emphasis on technical innovation and quick response as of opposed to long production cycles should serve us well.

So the money's there or coming, and the budget picture is a little better than we had forecast in the last call.

Having said that, the relationship between the government and the contractor community is a matter of prominent debate.

President Obama's March 4th memorandum on government contracting lays out a number of changes.

In the main, these changes do not create a long-term headwind for SAIC.

In fact, a federal workforce with more clarity around its role that is better staffed and thus better able to define requirements and manage procurements is ultimately a good thing for our industry.

I honestly believe that there is no better Company to navigate the complexity and uncertainty of the Federal Government than our Company.

In an era of increased contractor scrutiny, the steadfast commitment of our employees to our enduring core values is never more important.

There have been a number of constants in our 40-year history, but at the top of the list are our commitment to ethics and customer mission.

I like the fact that we're used to having to compete for our work, that our margins are not excessive, and that we have not pursued work that is beyond our core.

Where we are supporting our customers in Iraq and Afghanistan, we're performing vital tasks that are consistent with our strategy, as opposed to pursuing available revenue.

We have purposely stayed away from work that we viewed as inherently governmental or close to it.

When you compete well, opening more contracts to competition is a benefit.

We are also aggressively targeting larger systems engineering and integration jobs.

We previously talked about the organizational conflicts of interest and how that's becoming an increasing importance.

In the current environment, I like our platform independence and our focus on mission and technical innovation.

So in summary, there are many industry factors and budget realities that will affect us, but I feel our positioning is strong.

Our current addressable market is larger than ever before, but flat-out year budgets and a more negative contractor sentiment make it harder to sustain performance.

But, there is nothing new here.

We've been messaging, and more importantly, preparing our Company for this since at least the time that we went public.

Future Combat System will almost certainly come under pressure at some point.

But we see balancing upside in the stimulus spending and higher growth markets like cyber security, and we're ready to compete in this challenging environment.

Now turning to new business, we had the expected drop-off from the seasonally strong third quarter for our book-to-bill ratio of about 0.9 for the quarter and 1.2 for the year.

So bookings for both the quarter and the year were well above where they were for fiscal year 2008.

We also are well over our awards goal for the year.

And as a result, backlog is up handsomely and now stands at $16.8 billion, up 12% and funded backlog is now at $5.6 billion, up 11%.

We discussed the quarter's two largest contract awards on the last call.

As you recall, that was the five-year, $450 million contract with a key intelligence customer, and the order for inspection systems for the US Army for about $100 million.

The rest of the quarter's wins were evenly spread across the Company in smaller contracts and task order awards.

Again, you'll recall the booking and backlog figures do not include any value for our ID/IQ master contracts.

Indeed in the fourth quarter, we won ID/IQ vehicles with an expected value of about $1 billion including key energy saving performance contracts with the Department of Energy and the Corps of Engineers that could benefit from the stimulus spending.

Even though they were relatively few awards in the fourth quarter, fiscal year 2009 was a banner year for our larger wins.

With 27 awards valued at $100 million or greater, compared to 17 of the same size in fiscal year 2008.

Moreover, compared with FY '08, the average value of each of our contract award wins for the year increased by 20%, reflecting again our focus on and success in winning larger opportunities.

Looking forward, we have relatively few, large [re-]competes expected in fiscal year 2010.

And we have already cleared out three of the largest so far in the first quarter.

We announced large ID/IQs with the Army Program Executive Office for Simulation, Training and Instrumentation and with Strategic Command.

And just late last week, we were informed that we will continue our joint logistics integration contract for MRAP under a competitive BPA award.

We did not make any acquisitions in the quarter but after the quarter's close, we sold the AMTI products business which we acquired in December of 2006.

As we have always said, we will continue to both look for ways to augment our portfolio with acquisitions but also be ready to occasionally trim businesses that do not fit our strategic intent.

On the human resources front, we continued to add people over the quarter, driven by a continued decline in our voluntary attrition rate which was below 10% for the quarter and an outstanding 12% for the year.

Also on the people front, we reconfigured our incentive compensation program for our key top executives.

Previously, long-term compensation was more retention-based.

This new program of options and performance-based grants of stock based on rolling three-year targets tied to earnings per share and margin expansion.

As you can see, this Management Team is committed to growing long-term value for our shareholders.

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

Thank you, Ken.

Our financial performance was indeed strong and balanced for the quarter and also for the year.

I do want to emphasize some of the elements not readily apparent in the Earnings Release today.

Then, I'll of course address our current financial position and our financial expectations going forward.

Let me start with the year as a whole with revenue of $10.1 billion.

Total revenue growth was 13% for the year, and internal revenue growth was 10% which translates to about $1 billion of internal growth.

Operating margin ended the year at 7.7%, up 20 basis points from fiscal '08.

The improvement came from two basic sources.

We contained SG&A expense, that is selling, general and administrative expenses, to a much lower growth rate compared to our revenue growth rate.

And we also had stronger performance from an improved mix of work, including integrated products and systems integration contracts.

For the year, SG&A grew only 6%, less than half the rate of revenue growth.

Within that 6%, growth-oriented bid and proposal and internal research and development costs were collectively up 11%, whereas core general and administrative expenses were up only 4%.

And within that 4% of core G&A expense increase, a substantial portion was project-oriented IT modernization costs which we expect to start tapering off next fiscal year, fiscal year '11.

This balance of spend allowed us to concurrently improve profitability, build a pipeline and backlog for future growth and position our infrastructure for greater efficiency in the years ahead.

All being key drivers for generating shareholder value over the long-term.

Diluted earnings per share from continuing operations was $1.10 for the year, up 17% over last year.

Simply stated, the growth in EPS was essentially fueled by our revenue growth, coupled with our operating margin improvement.

These two elements working together generated about 16% of earnings per share growth over fiscal 2008 results.

Outside of those two core drivers, there were some ups and downs in the non-operating part of the P&L.

Substantially lower interest income, predominantly from lower interest rates, and some pretty significant investment impairment charges wiped out about 5 percentage points of EPS growth.

Conversely, our lower effective tax rate, coupled with the accretive effect of share repurchases, more than offset that 5 percentage points decrease and brought us up to the 17% growth total for the year.

Overall, we are certainly pleased with achieving near the top of our targeted EPS growth range, dominated importantly, by growth in revenues and operating profitability and despite the challenges we had with the externality-driven interest income reductions and investment impairments.

Concurrent with all of this activity, we managed working capital very well, generating operating cash flow of nearly $600 million or about 1.3 times income from continuing operations.

And we put our cash to work, deploying about $450 million on share repurchases, $200 million for acquisitions, and $100 million for debt reduction.

Yet, we still finished the year with well over $900 million of cash on hand and net debt of under $200 million.

So, we finished the year in great shape from a liquidity perspective.

We deleveraged over the course of the year and now have significantly lower debt to EBITDA and debt-to-cap ratios.

We have no debt maturities until fiscal 2013, and we have a fully unfunded, $750 million committed line of credit in place that does not expire until fiscal 2013 as well.

Our cash position and projected cash flows mean we do not need to access credit markets unless we pursue a large acquisition.

Another important accomplishment this year is what I'll call de-risking the enterprise.

The successful exit or reduction of non-core business areas and investments while still hitting our financial goals.

These moves positioned us to reduce drag on current earnings from underperforming areas while removing a substantial portion of potential headwinds for future earnings growth.

In this regard, we successfully exited, as Ken said, AMTI products, we sold our investment in Danet, a German enterprise, and narrowed our offerings in our commercial business to produce a more predictable profitability stream.

Meanwhile, as a result of the difficult economic environment, we saw a number of our long-held venture investments experience financial difficulties, and we accordingly impaired a significant portion of those investments on our books.

In fact, for the full year, we absorbed approximately $29 million of pre-tax investment impairments and write-offs in continuing operations related to these areas.

Putting that into perspective, we entered fiscal 2009 with approximately $45 million of carrying value for our venture capital fund and our Danet investment.

This was reduced to $11 million at year-end and was further reduced to about $5 million when we completed the sale of Danet just a few weeks ago.

These developments obviously de-risk the balance sheet going forward.

With respect to the fourth quarter, revenue and operating income came in pretty much as expected.

Revenue was $2.5 billion, down from the third quarter, primarily from having five fewer working days in the period.

Internal growth year-over-year was a respectable 7%, despite having one fewer working day than the year-ago quarter.

Materials and subcontractors mix was 42% of revenue, up from an average of 40% through the third quarter.

This was expected, given the heavier schedule of security product deliveries we had in the fourth quarter, and significant materials and subcontractor efforts on higher growth systems engineering and logistics contracts.

For the fourth quarter, we delivered operating margins of 8.3%, again, in line with our expectations.

Our security products shipments were made pretty much on schedule, and our rate variance true-up that occurs at the end of our fiscal year had the favorable effect that we had expected.

A significant driver in improving margins in the fourth quarter, as was the case for the full-year, was keeping our G&A expense in check while growing the top line.

In addition, we had consistently good performance on our contracts, and as a result, we really didn't see special charges or pick-ups which distorted margins.

We were pretty clean on this, in this regard all year, in fact.

We had a couple of pick-ups in the tax area, and the tax rate for the quarter came in at about 34%.

Pushing diluted earnings per share from continuing operations to $0.30 for the fourth quarter, which was a little higher than we had expected.

The largest positive development for the quarter's financial performance was in operating cash flows.

We had expected the fourth quarter to be about a push, given the extra payroll that we had to fund on the last day of the year.

While that extra payroll did occur as expected, we had very strong execution in billings and collections, turning in a days sales outstanding statistic of 68 days, and generating about $150 million in cash flow from operations in the quarter.

So as I said up front, we had a good year and a balanced year in financial performance, and we certainly enter fiscal 2010 from a position of strength.

We provided our first financial outlook for fiscal '10 in our third quarter call back in December, and there we established that our expectations for fiscal '10 were consistent with our long-term financial goals.

We affirm that same expectation today.

The Team's performance in business development in fiscal '09 provides strong foundation and momentum for this year's forecast.

Not only do last year's wins set us up well for fiscal '10 revenue growth, but just as importantly, they support our margin improvement goals.

The backlog we've built is comprised of quality contracts, systems engineering and integration, integrated products, cyber security, energy efficiency and others, that we believe will enable the improvement in our operating margins again in fiscal '10.

In other words, we didn't buy ourselves into high revenue, low margin contracts to produce growth.

Our long-term goal for annual internal revenue growth is 6% to 9%.

Since our call last December, there have been the puts and takes that Ken described earlier, higher funding levels from the budget developments, but also incrementally more risk on Future Combat System, for example.

But taking all of that into account, we remain confident of hitting our long-term internal revenue growth range in fiscal '10.

That said, we expect the internal revenue growth for our first quarter to be below our target annual revenue growth range, as we had dramatic growth in our MRAP communications integration contracts in the first quarter of last year, and expect a significant reduction in this year's first quarter.

We do expect to recover on the rate of internal growth in the quarters that follow.

We continue to expect to achieve another 20 to 30 basis points of operating margin improvement in fiscal '10.

This remains a top organizational focus and effort.

Drivers for this year will be continued economies of scale from contained G&A expense, growth in our security products business, and a better mix in our contract base from recent wins.

We also expect to achieve our diluted earnings per share from continuing operations growth target of 11% to 18%.

This will mostly come from our revenue growth, coupled with operating margin improvement, just like we saw in fiscal '09.

We expect some EPS growth contribution from deploying cash, whether in acquisitions and-or in share repurchases.

Lesser interest income and a return to our normative income tax rate will pose as much as 6% of EPS growth headwind, but we don't expect to have anywhere near the investment in impairment losses that diluted earnings growth in fiscal '09.

Achieving the EPS growth range has also been made more difficult since our last call by our stronger than expected performance in the fourth quarter we just announced.

But we are aggressively pursuing incremental earnings growth from G&A cost reduction opportunities, collectively known as project alignment, including ways to accelerate our leveraging of our new shared services center.

Separately, we're making great progress on our Greek contracts and are more optimistic than before that we will be able to reverse some of the prior year losses on this contract this fiscal year.

It's still too early to quantify this effect, but it does indeed represent upside to our plan.

I want to pause here and discuss the effects of the new accounting rule governing Financial Accounting Standard 128, which impacts our earnings per share results starting in fiscal '10 and retroactively as well.

As usual, the rule is much more complicated than any of us really care to see.

But the gist of the new rule is this.

The issuance of restricted shares for compensation purposes must now in essence, and regardless of whether vested or unvested, receive a full allocation of income when granted.

Under the prior rules, only a portion of the restricted stock in essence received an allocation of income.

In other words, unvested restricted shares now immediately and fully diluted earnings as opposed to having this effect over the vesting period, which for us is four years.

The rule requires this treatment both retroactively and prospectively, which effectively negates any year-over-year EPS growth percentage change impact, providing of course the restricted share grant levels remain relatively static.

The effect for us is $0.02 of diluted earnings per share from continuing operations.

To illustrate, when reporting fiscal '09 as a comparable period, diluted earnings per share from continuing operations will be restated as $1.08 instead of $1.10.

Similarly, that $0.02 reduction will apply to fiscal '10 and beyond.

That covers what I wanted to address on revenue, operating margins and EPS.

Hitting cash flows now.

Our model for determining operating cash flow expectations has not changed.

That model is net income, plus depreciation and amortization, plus or minus special items.

Our cash management practices are well disciplined and effective, and we had a particularly strong finish in the year just ended.

With that backdrop, one of the more noticeable changes with the new Administration is increased emphasis and rigor on compliance and oversight by the Defense Contract Audit Agency, the DCAA.

Our involvement with industry groups confirms this is occurring throughout the defense community.

This agency affects the cash collection cycle through its oversight and control over direct billing privileges, system audits, payment approvals and the like, which could potentially slow down our collections process.

We also believe there's risk of a delayed government fiscal 2010 budget, due to the pretty dramatic shifting of policy and priorities that could be the subject of much debate, come next fall.

This could also stress the collections process toward the end of our fiscal year.

For these reasons, and while only a cash timing issue, we think it's appropriate to factor in some slippage in days sales outstanding for fiscal '10.

Finishing up our philosophy on capital structure and liquidity remains unchanged.

Our strong cash position and cash flow generation allows us to simultaneously -- one, preserve our strong credit quality, which we intend to do.

Two, deploy cash to maximize our internal growth prospects.

Three, make economically attractive acquisitions within our sphere of competency.

And four, make share repurchases when we believe prices are attractive.

We believe our conservative and strong financial posture is both a differentiator and a strategic asset, particularly in this period of economic instability.

With that, I'll turn it back over to Ken for final remarks.

Thanks, Mark.

As I think about the Company today, 40 years young, $10 billion in revenue and growing, I want to give credit first to Dr.

Beyster for founding the Company, guiding it through most of its history, and in viewing it with a set of core values and purpose that endure today.

And second, I want to thank the current Management Team and all our employees who have taken the Company to this new level.

I've asked a lot from you this past year, and in every way, you have delivered.

As I look forward, fiscal 2010 should be another strong year for the Company.

We are focused on the financial goals that Mark has described, but I wanted to share with you some of our other priorities for this year.

In terms of our support organizations, we must continue to simplify our business processes, successfully complete the implementation of cost-point Deltek for all of our federal business, and further mature the shared services function.

In terms of our people, we must build on our success with employee engagement, and continue to drive down voluntary turnover, in order to sustain and grow our scientific and technical leadership.

And in terms of business, I'd like us to capture a reasonable amount of the stimulus spending.

Not for the one-time revenue or earnings but to help cement our position and brand us in the growing areas of energy management and healthcare.

We want to remain at the forefront of solving our customers' most important problems.

Shamika, we are now ready to take questions.

Thank you.

(Operator Instructions).

Looks like we have some questions queued up, Shamika?

You have a question from the line of Joseph Vafi of Jefferies & Company.

Please proceed.

Hi, gentlemen.

Good afternoon.

Terrific results here for your -- for the end of your fiscal year.

Was wondering if we could talk a little bit about the products business and the outlook there for VACIS for fiscal '10, an update there.

And, if you could throw out, at this point if there's a forecast for that business this year, that would be helpful.

Joe, I want to point out, this is Larry Prior, a couple of things.

First and foremost, you saw the announcement in Q4 for the military VACIS win that we showed you.

It was stated for $90 million, approximately, and they had the ability to order additional sets.

So think of that as a firm foundation for Alex Preston and his team to really deliver on the promise of the business.

You probably noticed in the last couple of days with Janet Napolitano and the Department of Homeland Security, really expressing a need and a desire for increased security with our southern borders.

You and most of the folks are aware how much business Alex Preston does in Mexico, as well as specifically, a lot of the inspection work we do on rail cargo.

And highlighting that the initiative includes really checking most of the things heading south, as well as what heads north across our own borders.

We expect he'll continue to have double-digit growth on the revenue side and still really provide for us double-digit margins.

What we're all waiting for is how the Administration treats the Secure Freight Initiative, which seems to have great support across the Administration and Congress.

Great.

That's very helpful.

And then, maybe just one other quick one.

I know, Mark, you were talking about cash uses in fiscal '10 -- accretive uses of cash.

Obviously, share buybacks and then also, acquisitions.

Is that -- does that mean that any acquisitions that we would see in 2010, even if they were a little bit larger, would be accretive to earnings?

Is that one of the philosophies in the acquisition program here?

Joe, as we have talked before, it's very difficult to make acquisition accretive in the first year.

So, we are not counting on that with respect to our guidance and our goals.

The share repurchases, if made at attractive prices, are accretive as we've demonstrated.

And so, that said, we have made some acquisitions from time to time that have been accretive out of the gate, and we certainly like to have that benefit us.

As we all know, the new accounting rules provide a little bit of headwind against that with the expensing of the transaction costs, but actually for us, it hasn't been very significant in the past.

We do a lot of that work internally.

So -- .

As I said, Joe, if we really come across a really strategic property, I don't mind the deal being mildly dilutive because long-term -- it's long-term growth for the Company.

So, we're going to do what's prudent for the long-term.

Alright.

That's helpful.

Thanks, gentlemen.

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

Please proceed.

Yes, my congratulations on the quarter as well, and thank you for taking my questions.

One, could you give a sense of the timing and potential magnitude of the stimulus -- when and where?

I'm not quite sure how to frame that.

I know what areas that it would fit, but I don't have a sense of when those monies would potentially start coming to you.

Also, could you give us a little bit of framework on FCS, and you mentioned you expect the funding for that to come under some pressure.

Could you kind of given us a sense of that as well.

Frame it for us.

And third and final question, acquisition pricing.

Have they started to come down now, or are the expectations in general still too high?

And, if you could put some color on that as well.

Thank you.

All right.

Laura, this is Ken.

I'll try and take them in the order you asked.

The timing of the stimulus -- it's still a work in process.

I will say that we have aggressively critiqued the bill.

We understand the opportunities in the energy efficiency and the healthcare IT, and I think we're appropriately positioned to gain some benefit of those stimulus initiatives once the money's deployed.

Obviously, President Obama and the Administration would like to get that moving as quickly as possible.

And I think that helps and benefits a Company like us with a broad range of contract vehicles that we have.

Number two, on Future Combat Systems.

As has been reported, I think Secretary Gates along with the Administration, are doing a tooth-to-tail review of all major weapons systems, programs, and certainly Future Combat Systems comes under their purview.

Nothing official yet.

We've got strong support inside the Army.

Progress has been been demonstrably moved in the right direction over the last year with the entire FCS-1 team.

I'm really proud of the efforts to date.

But, I would expect that there will be some restructuring of the program going forward.

I think the odds of it being canceled are slimmer than it being restructured.

But we're ready and prepared to dialogue with the Army once they're prepared to tell us what the impacts will be.

It's anticipated we would hear it as early as April-May time frame.

Third, acquisitions, are they coming down in price?

Not yet.

We still have a pretty strong, robust acquisition pipeline, but there tend to be more in the smaller revenue base.

Many of them more privately held, as opposed to public companies.

But I would suspect over time, the realities of the economy and the long-enduring recession that we are in and will probably be in, might bring more reality to the prices of businesses.

More to follow.

Thank you.

Your next question comes from the line of William Loomis of Stifel Nicolaus and Company.

Please proceed.

Hi, thank you.

Just looking, Mark, if you could just talk about the revenue guidance.

You mentioned first quarter internal growth would be below your low-end of 6%, and can you just walk us through some of the puts and takes of what, looking to do second, third, fourth.

I know you're not giving quarterly guidance, but just any headwinds or positives that you see outstanding that we could factor into our modeling for the remaining quarters to get a full-year number that's in your guidance range.

Bill, we have -- outside of the first quarter that I've addressed -- we have a pretty static growth profile for the rest of the year.

Other than the seasonality that we typically have.

But, we don't expect as much of a growth during the year or variability.

So, we think we will be in our range for the rest of the year after the first quarter, as far as we can see today.

Okay.

Not as much volatile -- .

Looking to that July quarter, second quarter, the second quarter.

So, that's factoring business you've already won, or does that include some things you're anticipating like the stimulus?

There's always a degree of work to be won but the profile of that coming into the year was very strong in terms of the go-find elements that we typically share.

So, the backlog position coming into this year was slightly stronger than it was last year.

The unidentified business is very small at this point in time.

So, we have very good visibility into those quarters that lie ahead.

And on the stimulus, I didn't hear you mention the opportunities around the border security that was in the stimulus.

Can you talk about that?

Yes, Bill, this is Larry Prior.

Let me break down the stimulus to a certain extent.

Of the total amount, only about $300 billion of it is new appropriations that is directly funding initiatives.

$267 billion of it is for entitlements, about $200 billion of it is for tax relief.

When you start to think of what's addressable by ourselves and by our competitors, it's about a $50 billion funding level.

Now, mind you, we're excited about that.

But, it's a long way from the $700 billion that the President started with.

We've spent a lot of time slicing and dicing the opportunity.

We think directly addressable by our Company is about $20 billion.

We're off to the races on about $5 billion of that.

Some of the monies have begun to flow, and it's very situational by agency and the contracting vehicles and the initiatives they've already identified.

You rightly pointed out the initiatives on the Mexican border.

Some of that is already monies that had been flowing to DHS as well as through the State Department Initiative.

And that most recent example of initiative by Napolitano had actually more to do with current funding than stimulus.

You'll see some more of that as well when you think of the Port Security Initiatives.

So, we're tracking all of those.

We believe some of it will flow in this year's funding, but it will extend for several years to come.

And the $100 million that was in the stimulus specifically for scanners and equipment, what -- how do you see that as playing out?

We're seeing -- you're going to see it play out both there as well as in the core funding where you're seeing both Commerce as well as the Department of Homeland Security working to craft what ports by when.

And in the recent testimony, you've seen some discussion and dialogue between Congress and the Administration over the Secure Freight Initiative.

Not whether or not it should happen, but what numbers and in what magnitude and when.

I think, honestly, we'll have a lot more color on this, probably by the second quarter.

Things are just starting and stand by.

Okay.

Sounds good.

Thank you.

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

Please proceed.

Hi, good evening.

Congratulations.

Mark, can you clarify on the Danet disposition, when was the timing of that?

When did it hit the numbers?

Is that a Q4, Q1 event?

The entire effect, Ed, was in the fourth quarter.

We actually closed the transaction in February, but the numbers you'll see in the 10-K to be filed will fully reflect that transaction through its closing.

That's the $13 million that's referred to, or are there other things in there?

The $13 million?

Well, the remaining book value that I refer to for a combination of VCC venture capital and Danet which is now zero is $5 million sitting here today and exiting the year.

So we're well-positioned there.

The hit on Danet over the course of the year was about $15 million, consumed in our fiscal '09 results.

Ken, can you talk a little bit about the in-sourcing trend, how real is it?

We hear chatter that particularly some of the Intel agencies are moving forward on bringing some people back in that may previously have been gone to contractors?

We hear that also, Ed.

I think it certainly is an initiative that the Administration is trying to take on.

I think is inherently governmental approach.

As I said, we've been pretty purposeful in the business that we pursue, staying clear of that.

So, I think the impact on us will be rather minimal.

Any thoughts on cap and trade here?

How you might benefit?

Is that just a small ticket consulting, or could there be larger opportunities?

I think it will be a bit of both.

We've had a long history of thought leadership in and around energy.

So, we can do the cap and trade consulting, as well as actually provide energy efficiency proposals, as well as deliver design and build production.

So, we really have the full value chain now with the acquisition of Benham.

Thank you.

Congratulations.

Thank you.

You have a question from Joe Nadol of JPMorgan.

Please proceed.

Thanks, good afternoon.

First question is on the margins.

Mark, I think you mentioned two of the three drivers of the margin expansion this year are going to be the security products?

And then, just some of the margins on some of the newer contracts.

You walked through a little bit double-digit top line growth on the security products, but I'm wondering, since it's so important to margins if you could give a sense of what your backlog is?

And, what the timing of the deliveries might be?

Generally, what the profile is going to be over the course of the year?

Is it going to be Q4 heavy again, etcetera.

Maybe just a little flesh around the other, the third category you mentioned of new contracts and margin expansion.

Joe, we cited that we'll have double-digit growth, or we expect to have double-digit growth from our security products business.

The delivery sequencing is similar.

We expect, in fiscal '10 as it was in '09, which means it's back-end loaded.

And, we also expect similar margins in that business than we've seen in the past.

So healthy growth, good margins, little back-end weighted in terms of timing.

The third element that is driving our margin improvement is -- you mentioned security products -- is really G&A absorption.

So, we are working very hard to find any and all cost savings out of our G&A infrastructure through project alignment and everywhere in the enterprise and holding that number as steady as we possibly can.

Finding opportunities to reduce it if we can and growing the top line has delivered for us in fiscal '09 and will contribute quite healthy in fiscal '10 as well.

Mark, you mentioned I think, the first one you mentioned was G&A absorption.

The second one was security products.

What was the third driver again?

There's some element of mix, if you will.

So, as we have moved up the food chain in systems integration, cyber security, energy efficiency, hopefully.

We hope to have a stronger mix of contracts, which should help margins as well.

Okay.

And then on the bookings, you mentioned that this quarter is seasonally lower, and that's why the book-to-bill was below one.

When do you expect, as we look through this year, what are your bookings expectations for the year overall?

If you have a book-to-bill view, and how is the first quarter shaping up?

Joe, this is Larry.

We continue to see that -- we need about a 1.1, 1.2 to maintain the growth rate of the business.

As you saw, we grew backlog year-to-year by about $2 billion.

Pipeline continues to be very strong.

So, we would expect, again, to finish the year around 1.2.

Generally Q2, Q3, are the big quarters for us with seasonality around Q1 and Q4.

Okay.

And then, just one more.

On the MRAP sales for last year ended up in the $200 and something million range, and we're still looking for a $100 million headwind.

Are those about right?

That's about right for the two contracts together, Joe.

Yes, right.

Okay.

Thank you.

You have a question from the line of Cai von Rumohr of Cowen and Company.

Please proceed.

Thank you.

Great quarter.

Could you give us some color on commercial?

Where was the volume for the year, and what do you expect in 2010?

Cai, commercial is down in revenue, year-over-year.

Not by a huge amount, but it was down.

What was the other part of your question?

What are you expecting for 2010?

We're expecting a flat year right now.

Flat to maybe modest decline.

And I'm a little confused on your guidance, because you seem to imply that sales are going to be down sequentially.

And yet, you should by my calculations pick up three working days, two to three working days.

You had a difficult calendar where Christmas and New Year's were, the Inauguration.

And you didn't have particularly heavy M&S ratio.

So, I don't really understand why the first quarter is as light as you seem to be saying it is.

Cai, we're predicting roughly a flat sequential result at this time.

In light of those factors, because normally, the seasonality is against you in the January quarter, particularly this year with the calendar.

Understood.

But, the MRAP effect is significant.

Significant.

Coming down from the fourth quarter to the first, and also we had a very successful M&S, materials, and subs result in the fourth quarter.

Which is timing.

Which is timing, harder to predict.

Got it.

Okay.

And could you tell me how many folks did you -- what were net hires in the fourth quarter, and what's the plan for Q1?

I have got the numbers for the year.

I don't have the Q4 number in front of me in terms of net hires.

When you think for the year, Cai, we added net about 1,600 employees.

As of Monday, we had 45,587.

The mix was we added about 2,000 employees in the line, about 1,400 of them organic growth.

And corporate, we are down about 400 year-to-year, and I'll have to get back to you with a Q4 number.

That's excellent.

And Larry, while I have you, maybe you could update us, first on project alignment.

And secondly, Mark, maybe you could comment on some color on where we are with the Greek contract.

And how much, if any, recovery is in your guidance for fiscal '10?

So first on alignment, we actually, I hope you saw some of the press release, we did the ribbon cutting of the Shared Services Center with James Morgan and his team down in Tennessee.

Ken was there along with a lot of local dignitaries and got to walk the facility.

I think we're pretty much on plan where we expected to be in our goal of getting $100 million a year.

Again, year two of a multi-year plan, and I'll let Ken offer any color from his trip to Tennessee.

Well, it's up and running.

We've got accounts payable.

We've got procurement.

We've got HR data records, and things are moving along well.

In fact, we've asked James and Larry to see what's possible to accelerate and put more into the Shared Service Center this year.

As far as the Greek Olympics -- .

Cai, we do not have expressly in our guidance, in our expectations, any recoveries of the Greek contracts.

That said, we think there's a very good chance that we do see some in the fiscal year, fiscal year '10.

So that does represent upside.

The amount would be very hard to predict at this time, and the timing would be hard.

But, the developments by the team over there led by Don Foley has been really fantastic for us, and we'll hopefully deliver good news on that front here pretty soon.

Terrific.

Thank you very much.

You have a question from the line of Jason Kupferberg of UBS Securities.

Please proceed.

Thanks and good afternoon.

Wanted to ask a question on the competitive landscape and get your view on how you might think that the big defense primes could behave in the IT space given some of the expected pressure on their large weapons programs, which are obviously much bigger part of their revenue streams than it is for you.

Could they end up representing an even more competitive threat for contracts and for M&A targets?

They're obviously always out there on the landscape, but do you look at them now with perhaps even a little more concern?

Well, let's just say that most of the large platform primes have a significant IT services business, as big if not bigger than we.

And we've been competing against them for years.

And our win rates for our total contracts are still greater than 60%, and our re-competes are hovering right around 90%.

So, we know how to compete in this environment and win against the small contractors as well as the large defense primes.

Okay.

So, you haven't seen any signs yet that they might get even more aggressive in the IT arena?

What we've seen -- this is Larry Prior.

We watch and we track closely when we try to take away one of their incumbent positions.

Or, they go after one of ours.

We had one that we lost this year in the logistics realm where we lost on price.

If I look at the five that we had big takeaways in the last 18 months, we took four of them away from big primes.

Each case, it was a technical, superior proposal that won it for us.

So, it's something we're used to doing each and every day, and we'll continue to fight the good fight.

Larry is right.

I think where we're trying to discriminate ourselves is not just price, is through real science and technical innovation.

And having the kind of mission knowledge really helps us in winning and competing against the larger primes.

And if you just look at the playing fields in the future and you think of the current debate within the Department of Defense where secretary gates highlights the MRAP and things like the Predator well think how much work SAIC does around the MRAP and the Predator op centers that we support.

We think we're postured for Secretary Gates' vision of defense for the future, and it's a good playing field for us.

Okay.

That's helpful.

And if we think longer term here, I know you have talked about the quote-unquote long-term guidance on an annual basis to have 6% to 9% organic growth.

How far into the future is that feasible?

Now that you've hit $10 billion in revenue, the law of large numbers starts to catch up to you a little bit.

Is this something you're very comfortable with the next couple years.

and then it's a wait-and-see beyond that?

Wanted to just get a sense of your thinking on that.

We said that the market -- and I don't think it's changed -- is going to grow in the 3% to 5%.

Why we expect to grow 6% to 9% is because we're targeting the more enduring high growth markets in that segment -- cyber, logistics, intelligence.

Now we've put a -- we're doubling down on energy managements and health IT services.

We really think that's going to give us a lot of revenue lift for the foreseeable future.

Your crystal ball and mine gets cloudy after the first year or so, but we feel pretty comfortable with our 6% to 9% projection over the next couple of years.

Okay.

Just last question.

Since the new Administration took over a couple months ago, have you seen any noticeable change in sales cycles, just as new decision makers get into their seats?

Actually, over the last years or so, because of the retiring federal workforce, there's just been a protracting out in time in the whole acquisition process.

We've built that into our time lines, quarter-by-quarter, year-over-year.

One might expect without everybody sitting in the right seats -- you would expect that to see even some additional delays.

Right now, we haven't seen much in that regard.

So, time will tell.

I'm really impressed.

This Administration is ahead of many of the prior ones in filling those key positions.

So, knock on wood.

So far, so good.

Great.

Thanks for the color.

You're welcome.

You have a question from the line of Elan Gore of Picton Mahoney.

Please proceed.

Hello.

Congratulations on another solid quarter.

A quick question.

One of your peers, which is positioned slightly lower on the value chain, recently highlighted on their conference call that they are preparing for a fixed price contract world.

And that they see T&M and pass-throughs as something of a thing of the past.

We were just wondering if could you share your views on the subject.

Do you still see SAIC's business mix as better positioned on the value chain with overarchingly mission critical exposure such that the mix of fixed price and P&M would actually remain pretty stable through the cycle?

We've seen over time a greater mix of fixed price in our business space.

So if you track from '07 to '09, we've seen fixed price increase from about 6% of our mix into about 18% right now.

And it's been at the expense of time and materials.

The government still uses a lot of cost plus when they're pushing R&D and development.

They really will have to do acquisition reform if they're going to shift cost plus to some other contracting vehicle.

Much of it is going to performance-based, where you need earn-value management systems.

SAIC is very good at that.

We like the discipline.

So, if the government's acquisition workforce is capable of really locking down the discipline of requirements and defining the systems, we're comfortable in making that transition.

We do see, however, it's really challenging for them to move away from the flexibility that the government loves around T&M.

Having said that, which is accurate, I believe this Administration, and probably rightfully so, is really going to ensure that even in cost-type contracts.

That we do everything that we can to deliver what we said we were promising with the costs that we estimated.

So, I keep preaching to our employees --many of our cost-type contracts we really should and we do view them as almost fixed price.

And if we continue to do that, that will continue to help us long-term grow our business.

Shamika, I think we have time for one more question.

Thank you.

You have a question from the line of Matt [Bulgaren] of Raymond James.

Please proceed.

Hi, this is Matt speaking in for Brian.

Just a real quick housekeeping question on what the assumption is for the tax rate for fiscal '10.

Thank you.

Matt, the assumed tax rate going forward is 39% flat.

Okay.

Thank you.

You're welcome.

Shamika, I think that's all the time we have for.

I want to thank everyone for joining and your participation on this call on behalf of the whole team.

Good evening.

That concludes the presentation.

Thank you for your participation.

You may now disconnect.

Good day.