Leidos Holdings Inc (LDOS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter fiscal year 2010 earnings conference call.

I will be your coordinator for today.

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

We will conduct 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.

Thank you.

Good afternoon, everyone.

Here today with prepared remarks are Ken Dahlberg, our Chairman and CEO, Mark Sopp, our CFO, and our COO, 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 to you 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.

Thanks, Stuart, and good afternoon, everyone.

By now I presume you've read our press release and you can see that we started out fiscal year 2010 superbly.

We had better than expected revenue, margin earnings per share and cash flow.

What was especially rewarding to me was that all of our groups and virtually all our business units met or exceeded their operating plans.

We are seeing broad-based success throughout the organization and Mark will provide additional color on the financial details in a minute.

The last three months have certainly been eventful ones for the government services market.

So let me run through my assessment of what's happening in our primary market segment.

First, the FY '09 supplemental is in conference to reconcile the House and Senate versions of the $90 billion-plus bill.

And despite the rhetoric surrounding Guantanamo Bay, we do expect this bill to pass likely this month and it will provide sufficient funding for the war efforts, including key programs for us in MRAP and ISR.

Second, President Obama recently signed a weapons system acquisition reforms act.

The DOD still needs to define specific language around conflict of interest and other matters, but we view it as a positive step for platform-independent services providers with a focus on program mission execution like us.

Third, the administration's proposed fiscal year 2010 budget is now out.

And it calls for some dramatic changes, especially for the DOD.

The headlines focus on the high profile weapons systems cuts, but frankly the overall defense budget and the ops and maintenance component are both up about 4%.

Though we should have solid funding through at least September 2010.

Details on out year budgets are still pending the results of the ongoing quadrennial defense review, but we expect the growth will slow in future defense budgets.

For our Company, the big FY '10 budget items are the cancellation of the manned ground vehicles portion of future combat systems and the push by the government to transition contractor positions to government employees.

Given that the budget has top line growth, there are potential upsides that balance all the cuts.

For example, the proposed defense budget increases funding for ISR and military healthcare, which are good markets for our Company.

However, in this environment, investors are focused on the head winds, but let me address FCS and insourcing in a little bit more detail.

There's been a lot said and written about canceling future combat systems.

We are still awaiting the acquisition decision memorandum from OSD about the FCS restructuring plan.

We'll have to get used to new terminology, as we understand it, future combat systems will now become army brigade combat team modernization and the lead systems integrator construct will become a prime contract, but we expect a good portion of program will remain intact.

Let me talk more about that.

We think the program will be split into three parts; network and system assistance engineering, spinouts of new technology, and manned ground vehicles.

We expect both our oh and Boeing to retain the network and system engineering piece, likely under a modification to the current contract.

We also expect to participate in the new contract for the spinouts, the first phase of which is already in contract negotiation with $300 million plus included in the President's fiscal year 2010 budget.

And lastly, we expect that the manned ground vehicle component will be a new contract likely several years out and we do not know what, if any role we would play in it.

Let me emphasize the Army is committed to leveraging its sizable investment in FCS.

Despite the concerns raised by GAO and others, the program's performed quite well.

In May, the team successfully completed its system of systems preliminary design review, the most comprehensive review of the program to date.

The review validated that the designs for all FCS systems and subsystems including the network, sensors, weapons, manned and unmanned vehicles met current requirements and will function as an integrated system of systems.

The review proved that a family of network systems will provide greater combat capabilities, including survivability, enhanced intelligence, surveillance, and reconnaissance capabilities across the full spectrum of conflict.

Although we will lose some revenue and fee from comanaging the manned ground vehicle component, there are some positives to the restructure program.

The spinouts of new technology would extend Boeing's and SAIC's participation in the program beyond the system design and development phase for the first time.

In addition, broadening the scope of the program to all brigade combat teams should offer new opportunities for us.

Also the clear message from OSD to the Army is to leverage investments in current inventory of vehicles including MRAPS.

On the topic of insourcing, we expect the initial focus will be on the acquisition and procurement support, which is not significant to us.

But there are proposed contractor cuts in other support services as well.

For this initiative, the fiscal year 2010 budget requests outlined -- outlines contractor cuts of about $1.2 billion against a selected set of contracts totaling $20 billion.

So at its most severe, we're talking about a 6% cut.

And in the context of the overall federal addressable market, we estimate that it's about a 0.5%.

We have prevailed through similar times in the past.

For example, starting about two years ago, a major intelligence customer brought down overall contractor support by about 10%, yet we were able to grow our business.

The focus of the reductions was again procurement and policy support and the key mission support work, which is our focus, was generally left alone.

That said, we are seeing some signs of insourcing pressures in our Intel and national security business, but it's awful hard to disentangle from the fairly aggressive hiring that has taken place over the last several years.

As I said at the outset, there's been a lot of activity.

But frankly, our overall view is essentially unchanged.

In fact, on the last call, I said, and I quote again, so in summary, there are many industry factors and budget realities that will affect us, but I feel our positioning as strong.

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

But there's nothing new here.

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

Future combat systems will almost certainly come under pressure at some point, but we see balancing upside and stimulus spending and the higher growth markets like cyber security, and we're ready to compete in the challenging environment.

There's been a lot of drama since then and some unknowns remain.

But I think this statement's still accurately reflects where we are today.

Now moving on to business development, performance in the first quarter was on track with plan.

Bookings were $2.6 billion for a book to bill ratio of 1.0, unchanged from last year and consistent with our normal seasonal pattern.

We expect the bookings will again increase in our second and third quarters before trailing off in the fourth quarter.

Given that book to bill of 1.0, backlog remained essentially unchanged from last quarter.

We ended the quarter with $16.7 billion in total backlog and $5.7 billion in funded backlog.

As compared to the end of first quarter of fiscal year 2009, our total backlog increased 11%, consistent with our growth expectations.

We have already won many of our major recompetes that we had on tap at the start of the year.

In our first quarter, we won nine recompetes greater than $50 million with no comparable losses.

We continue to see benefits from our 1 SAIC approach to winning larger opportunities.

We won six opportunities valued at more than $100 million in the quarter compared to four wins of this size in the first quarter of last year.

And we anticipate this trend to continue.

We now have 161 $100 million-plus opportunities in our pipeline compared to 138 one year ago.

Moreover, 118 of those 161 large opportunities have an expected award date within the next four quarters.

Among those large opportunities, we are seeing an increasing preference for IDIQs, especially multiple award vehicles instead of standard contracts.

Compared to last year, there are also fewer very large opportunities.

Those that I say are of the half a billion dollars or so that are coming out of standard contracts, as some of our customers are separating contracts to encourage competition and frankly simplify procurements.

Despite this trend, we are continuing to increase the average size of our contract awards by pursuing and winning more large contracts.

Other trends that we see based on the quarter's contracts award and pipeline are more fixed price contracts and increased spending among our federal civil customers, consistent with the acquisition reform legislation and changing priorities under the new administration.

The stimulus package also presents large opportunities for the Company, but frankly, we are seeing estimated award dates for many of these slipping to the right, as the government wrestles with how to procure, manage, and report on the large influx of new requirements.

Our calculations are only 6% of the stimulus funding has been obligated to date.

We expect modest stimulus awards in the latter half of this year and several hundreds of millions of dollars of relatively quick turnaround awards next year.

The key areas of opportunity for our Company includes smart grid, energy efficiency, infrastructure, Homeland Security, IT solutions, health, and environmental.

The market opportunities are there and we remain very competitive.

In our first quarter, we won 75% of the value of all opportunities and 65% of funded contract awards for new business and we expect that we will be able to staff an and execute all this new business as our voluntary attrition rate is now about 9%.

Now, wrapping up the rest of the business, the first quarter was quiet on the acquisition front.

Frankly we are in dialogue with several companies and I expect we will be able to augment our strong organic growth with some strategic attractive acquisitions in fiscal year 2010.

Although we look for opportunities across our entire business base, right now we see the most potential in the energy, cyber and intelligence spaces.

We view our strong balance sheet as a strategic asset and we expect to deploy most of our excess cash on our balance sheet this year to grow shareholder value through both strategic actions and share repurchases when we feel there is good value, as we did in the first quarter.

And finally, the Greek government has still not met all of its obligations that were to follow its acceptance of the system.

That's the C 4 I system.

And we intend to file for arbitration soon.

Frankly, this is unfortunate and it may push the resolution and reversal of some of our contract losses beyond this year, but as in the past, we intend to vigorously pursue this issue to closure.

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

Great, thanks, Ken.

We posted another strong quarter financially with double-digit internal revenue growth, improved operating margin, and excellent cash flow.

A well rounded results are particularly encouraging, in light of the new challenges in our marketplace, posed by the new administration and the difficult economic conditions that we're living in.

For the quarter, we posted revenue of $2.65 billion, up 12% in total and 11% internally from the first quarter of last year.

In our last conference call, we cautioned that this quarter's internal growth rate may be below our targeted long-term growth rate range of 6% to 9%.

We were facing a tough year-over-year comparison and we expected that there would be some pause in customer demand for materials with the change in the administration and/or transition of war activities from Iraq to Afghanistan.

Given our vast contract base, there were a number of contributors as to why we exceeded those expectations for the first quarter.

First, growth on existing contracts was strong, particularly on materials requested under some of our systems integration contracts.

The most significant were a few, task orders on our Army, aviation, and missile command express contract vehicle down in Huntsville.

Task orders on our Army I test 2 S contract vehicle.

That's IT work we do for the Army.

And also activities under a number of new intelligence and cyber security contracts.

Second, growth accelerated on several new contracts, most notably our POLCHEM contract, now running at a greater than $100 million annualized revenue run rate.

Our new US SINCOM IT contract, and again, several intelligence and cyber contracts won late last year.

Revenue for the first quarter was composed of 59% from SAIC labor and 41% from materials and subcontractor sources, what we call M and S.

The 41% M and S was more than we expected in light of the heavy amounts in the fourth quarter -- it was more than we had expected in light of the heavy amounts we had in the fourth quarter and notably the 41% in the first quarter included very little security product shipments.

In fact, the schedule indicates revenues and profits associated with our higher margin security products will again be significantly more concentrated in the third and fourth quarters this year, as was the case last year.

Over the last few years, the proportion of cost-plus contracts has essentially remained flat for us at 47% to 48%, but there has been a movement away from time and materials type contracts toward fixed price contracts and in the first quarter, this trend accelerated.

Fixed price contracts have grown from 16% of revenues in fiscal '07 to 18% in fiscal '08, 19% in fiscal '09, and now 21% in the first quarter of fiscal '10.

Over that time, the time and materials category has dropped from 36% to 31%.

This trend specifically reflects growth in our fixed price oriented logistics business, including the ramp up of POLCHEM.

Positively, while the POLCHEM contract is in its early stages, margins on our logistics contracts as a whole have been significantly more favorable than we had expected, an encouraging sign of our capability in a fairly new and growing area.

Property margins overall, we started the year on good footing at 7.7% of revenues in the first quarter.

We had strong contract fees across our base and some favorable award fee results, all pointing to effective program management across the enterprise.

Again, this was despite a low volume of shipments of our security products.

In addition, we continue to benefit from greater efficiencies on the SG&A front, which ran at 5.7% of revenues compared to 6% for the same period last year.

We did this while increasing bid and proposal and internal research and development costs by 13% year-over-year.

On the nonoperating items, we had a $7 million reduction in interest income due to lower rates and a $5 million reduction in other income primarily resulting from the sale of a venture capital investment in the year-ago period.

These reductions were overcome on the EPS line, however, through share repurchases.

Diluted share count moved down to 397 million for the period, as we deployed approximately $225 million to repurchase 12 million shares, including 11 million shares in the open market at prices we deemed attractive.

Diluted earnings per share from continuing operations amounted to $0.29 for the first quarter, up a healthy 16% over the first quarter of last year, driven by the combination of revenue and operating margin growth, coupled with the share count reduction achieved by deploying excess cash.

Moving over to cash and liquidity, we had a particularly strong quarter in operating and free cash flow.

Overall management of working capital was solid, with timely billing and collections keeping day sales outstanding on par from the fiscal '09 year end at 68 days, but five days better than the first quarter last year.

With operating cash flow closely matching cash outflows for share repurchases, our ending cash balance stayed relatively intact at $900 million.

Our cash remains invested in only US treasuries or US government securities money market accounts.

Our capital structure, as Ken said, continues to be strong and our principles and priorities in this area remain unchanged.

With that, I'll switch gears now to our forward expected performance.

While it is indeed early in the year, our first quarter performance and our current outlook put us in a position to affirm that we expect to achieve our long-term financial goals this fiscal year, despite the uncertainties out there such as FCS.

We expect internal revenue growth to be in the 6% to 9% range for the year, operating margin to improve 20 to 30 basis points over last year and expected diluted earnings per share growth in continuing operations over last year to be in the 11% to 18% range.

With respect to FCS, the situation as indicated earlier is fluid and we are in active discussions with the government concerning our future role with the Army's modernization efforts.

It may be a number of months until this is ironed out, but at this point, we are confident that our role will continue on the software development and networking modernization effort, as well as the spinouts under either a restructured or entirely new program or set of contracts.

Other than the manned ground vehicle-related activities, which we expect to be effectively halted, we expect the Army to direct a continuation of the program to the maximum extent affordable under the government fiscal '10 budget.

With this, we have removed $50 million from this year's revenue forecast with the decreased revenue run rate beginning in our second quarter.

With respect to other revenue dynamics, we did benefit, as I said, upfront from material buys on certain programs in the first quarter that we do not think will likely see material buys for those contracts at that level in the immediate future quarters.

In addition, the MRAP communications integration contract has begun to slow and may come to a halt in the second quarter.

There's opportunity to land some new work for MRAP light vehicles in the summer, but that is not certain.

There are also factoring in some potential market softness in the fourth quarter, should the government fiscal '10 budget get delayed past October 1st or if other developments occur that would impact government outlays.

With a strong Q1 behind us, we see internal growth slowing moderately and landing in the 6% to 9% range for the full year.

Property margins, we have good visibility to hit our targeted 20 to 30 basis points of improvement over last year.

For FCS, our forecast assumes that our fees become more incentive based and are moderately reduced going forward.

That said, we see margins ticking up in the second half of the year overall, as more security product shipments are made and we continue to generate economies of scale from fixed overhead costs.

All other items in the P&L are effectively on track with our previous remarks.

As for the share count, the repurchases made in the first quarter, which were weighted toward the latter half of the quarter should have the effect of reducing our fully diluted weighted average share count by 10 million shares for the full year.

Our forecasted revenue growth, margin growth, stability in nonoperating items, and the reduced share count yield expected diluted earnings per share from continuing operations in the 11% to 18% range for the fiscal year.

We also affirm the model we previously disclosed for operating cash flow, which is projected net income plus depreciation and amortization.

However, we still express caution for possible DSO, day sales outstanding increases towards year end, should more rigorous regulatory procedures introduce billing or collection delays and/or possible payment delays, should the government fiscal '10 budget be delayed.

We are, of course, doing everything we possibly can to continue our good cash flow results, should those challenges surface.

In any event, we view our cash flow and overall capital and credit capacity position as very strong, affording us opportunities and flexibilities that are vitally important strategic assets for SAIC.

With that, I will turn it back over to Ken.

Thanks, Mark.

Before I turn it over for questions, let me address the items that are up for vote at our upcoming annual shareholders meeting later this month.

In addition to the standard Board election and accounting firm motions, we submitted a proposal to convert our Class A preferred stock into common stock.

The two classes have the same economic value, but the preferred shares currently have a 10 to 1 voting rights over the common.

We understand this is a tough vote for our preferred shareholders in that we are asking them to give up the extra voting rights, but we believe that the proposal is in every shareholder's best long-term interest.

Our Company strives to be a world class company that observes corporate governance best practices, which we believe are correlated with higher long-term returns to stockholders.

In the past few years, we've implemented one-year terms for our Directors, designated an independent Lead Director, and majority voting requirement for election of Directors.

These actions give our stockholders a stronger voice to hold us accountable.

We now want to build on this foundation of good governance by giving all stockholders one vote per share, which will equally align voting rights with economic risk for all stockholders.

In addition, simplifying our capital structure will reduce the cost complexity and investor confusion frankly associated with our existing dual class structure.

I only ask that all of our shareholders carefully consider the proposal and make their voice heard by voting on this important proposal.

We are now ready to take questions.

(Operator Instructions).

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

Please proceed.

Hi, gentlemen.

Good afternoon.

Good results here.

Maybe you could start on, on the security products business.

Last quarter it sounded like there wasn't a tremendous amount of visibility to the year in terms of security product sales.

I was wondering if you could give us a little update on your visibility to those product sales in the second half of the year and the kind of strength in the products business, say, versus your performance in the last fiscal year.

Mark Sopp here, thanks for the question.

Our visibility is very good for this business area.

The pattern, as I said in my remarks, is very consistent with last -- however, the business is growing roughly 10%.

Profitability is growing as well, and we know it's already quite profitable.

And so we're pleased with the plan we have this year.

I would say there's a little bit of delivery risk in the second half.

We are counting on some inputs in order to get our outputs out the door, but we've managed those problems in the past and done quite well, so we have an optimistic view toward our outlook this year on the revenue and profit side for that business and in addition, a pretty good pipeline for the year after already in place.

I would just add that most of our revenue for this year's already in the backlog.

Now it's just performing to the contracts that we have.

Okay.

That's, that's very helpful.

Thanks.

And then secondly, maybe you could talk a little bit about the supplemental and how that at this point is kind of playing into your outlook.

It seems like supplemental's probably been delayed just a little bit longer than people have been hoping for.

You know, there's -- obviously you have some exposure there.

Is there really -- I guess if the supplemental gets delayed, maybe past being signed before the summer recess, is that something that we should be worried about?

Joe, this is Larry Prior.

As we talked about in the last call, our expectations were the supplemental to not be signed before the Memorial Day recess.

We do expect it will be signed before the July 4th recess.

They are actually making pretty good progress on the Hill.

You'll see a couple of things happening, where they are in conference and it looks like they will have a formal session tomorrow.

Both the House and the Senate are looking to schedule a vote for Friday.

Part of the drama is there's more dollars added to it, so the President asked for an additional $2.2 billion over the last 24 hours.

So now the dynamic range has increased to almost $99 billion.

So it looks fairly positive.

There's a couple of outstanding issues that really don't affect SAIC, so we think they will get resolution.

Again as Ken said this month, and basically catalyses a lot of O and M spending, remember, the supplemental spends out between the end of now and September.

Okay.

Very good.

Thanks.

I'll turn it over.

Good quarter.

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

Please proceed.

Thanks, good afternoon.

A couple of questions.

First of all, on the book to bill front, I know you were at about 1.0 for the quarter and I think in the past, you said to get to the 6% to 9% organic revenue growth, you probably need something a little bit north of that, maybe 1.1, 1.2, somewhere in that neighborhood.

Wanted to get a sense of your comfort level in terms of achieving a book to bill along those lines for the full fiscal year, given some of the challenges that you outlined in your end markets and the fact that more procurement seems to be getting done in IDIQ basis, which I don't believe you guys count in your bookings typically until you get the task orders.

Jason, this is Larry.

Right now, it looks like it's keeping with our historical trends, consistent with last year and with our historical patterns.

We were all happy to see the book to bill of 1.0 this time and noticed the year to year increase in our backlog, which was very positive.

As Ken highlighted, the initiative to just grow the number of hundred million dollar opportunities that are submitted, as well as in the pipeline, is pretty dramatic.

And it's done a great job at shifting the culture at SAIC to one SAIC to collaborate for those large jobs.

So right now we're fairly bullish, but realizing a lot of uncertainty in this marketplace and the dynamic range between the quality of our pipeline and some of the unknowns in the market tends to lead to the conservatism of some of our forecasts.

Okay, all right.

So we'll stay tuned on that front.

And then a follow-up on the projected insourcing trend that you guys described.

Are you seeing any signs of the government more aggressively trying to hire folks from SAIC or from your competitors and if so, is the government doing anything different to make that potential move more attractive to your employees?

The answer is yes.

I mean we're seeing across the board not just our Company, but all companies are getting whatever the right word is, dinged by selectively inducing contractor employees to move over.

Frankly, when we do exit interviews and talk to our people, the main reason is -- it's the economy and they care about security long term and that seems to be the cause.

It's not because we're competitive in wage rates and other benefits, but the uncertain economy, we see certain employees that would rather secure their long-term pay by joining the government.

Having said that, it's still focusing more on the acquisition and policy side, which is not our gig.

We're still in the strong mission support.

So it's affected us, but not to the point where I've got high concerns.

Okay.

Thanks for the comments.

Your next question comes from the line of James Friedman of Susquehanna.

Hi, yes.

Thank you.

I wanted to start with the operating margins, Mark.

You described in some of your commentary that some of the lift of 40 basis points, the 7.7% was decomposed between improvements in the SG&A and the POLCHEM contract and fixed pricing.

I was hoping you could share with us maybe the relative contribution of those.

Basically a fixed price contracts are rising as a percentage of the revenue, what the potential lift to the margins could be?

I don't have a particular number of the contribution from the incremental fixed price going from 19% to 21%.

It's across a very wide contract base.

And POLCHEM is at its infancy and is not a major contributor to improved operating margins, but the overall logistics business back to my comments is better than we had expected when we got into this business a couple of years ago.

But I wouldn't lay a specific number on it.

No, I would -- we have said in times past that cost type contracts with weighted guidelines allow you to get to the 8% to 9% fee.

Fixed price weighted guidelines allow you to get to the 12% to 15%.

So there is a significant fee increase potential if you perform well and negotiate good contract fees.

But, Jamie, this is Stuart.

We definitely had some upside from the fees, but the larger driver for our operating margin enhancement was on the SG&A side.

Mark talked about how it was running at 5.7% of revenue this quarter.

And SG&A absorption will continue to be a margin driver, although in the latter half of the year, it will be more accentuated towards gross margin as we ship our security products businesses, products, deliveries.

Okay.

So maybe that's a good segue into the cyber security subject and what I think is referred to as the national cyber security Initiative.

I think in prior public forums, you've described the end markets for that between military, defense, federal, and private sector.

I guess my question is -- well, for one thing, I think you've also mentioned -- to some extent, you've quantified the opportunities in each of those -- I think specifically what you said publicly is that you were pursuing numerous opportunities in cyber security between I think two contracts at DHS and one at the defense industrial base and maybe if you could update us as to the status of those opportunities and to what extent they may have contributed to the upside and the--

I think what we said last call is that we were pursuing and have actively won several key classified cyber security programs, new contracts for us and that we were focused right now on the military and over time, the initiative would eventually get the ".gov" and ".com" and we gave no expectations as to what the revenues will be for that, although I think they will be huge.

I like our position and where we are in the current ".nill" space and we're continuing to actively pursue RFPs in that venue.

Okay, thank you.

Then the last thing for me, any commentary or observations about the vehicle and container inspection, any progress there with regard to port security?

You're mentioned secure freight initiative, is that what you mean?

Thank you, yes.

We just recently have heard this is becoming more of a hot button in congress, so you know, we're cautiously optimistic that we can transition from, you know, the test demo phase to really exploiting multiple ports.

But, your guess is as good as mine.

Until we see that in writing and it starts the procurement process, but I would say we're, we're a little bit more optimistic about that today than we were last call.

Okay.

Thanks for the color.

Great job.

You have a question from the line of Laura Lederman of William Blair and Company.

Please proceed.

Yes, thank you for taking the questions, and very nice job on executing in the quarter.

Turning a little bit to '11 given the pressures from FCS and also insourcing, would you be difficult or more difficult to be in the 6% to 9% range?

I notice you're not giving guidance for '11, but just to talk about it at a high level.

Thank you.

Laura, Mark Sopp.

I'll let the others chime in.

Of course I'm going to say that we're not in a position to provide financial estimates for fiscal '09, but this Company is resilient and creative and I'm confident that we will build a good book of business over the course of this year, but we're not in a position to place bets on fiscal '11 and hopefully our expectations on FCS will come true and we'll continue to have a strong position there and not have too much of an adverse effect.

I would also just add that all of us recognize that the budget constraints will be tougher going forward.

I just said that in my statement again.

That's why we're focusing on the higher growth submarkets, like cyber, like energy, like health, and I do expect over time a rebound in our commercial business as well.

Laura, this is Larry.

I could give you two numbers that might help.

If you think of the growth of our pipeline, you know, it was at this time last year about $65 billion.

It's about $81 billion this time and there is another large number in track that we're following.

More granular number that Ken pointed to was just the number of $100 million opportunities.

This time last year, it was 138.

Today, it's 161.

So there is a robust pipeline that all of our group presidents and teams are pursuing, but we're all cautious, given how much market uncertainty there is in the marketplace today.

One final question, if you look at the logistics business and poll cam being more profitable than expected, what is it that you're doing that's leading to that better than expected profit?

And I guess a related question on fixed price contracts is -- execute them well, but what are you doing to make sure you don't run into problem projects there?

Thanks.

We put a heavy emphasis ever since I've been here on program execution and I'm just really proud of our team.

We do rigorous risk reviews, ops reviews and I think the proof is the last seven or eight quarters of solid performance.

So I actually welcome more fixed price business, as long as we balance the risk versus reward.

As far as the logistics business, we finished the inventorying of the government's old products.

That caused us a lot of delay and a lot of uncertainty going forward.

We really have got good algorithms to determine the needs and right now we're hitting all cylinders and that's reflected in our results.

We hope it continues.

Thank you so much.

Once again, very nice quarter.

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

Please proceed.

Hi, thanks.

When you talk about the guidance for the year and then you walk through the quarters, Mark, were you trying to tell that was for the second quarter organic growth may be below the 6% to 9% because of the lower pass-throughs and the MRAP business dropping and then being within that range or at the upper end in the back half of the year?

That's possible.

I am not trying to be too specific on one quarter, but overall for the rest of the year, a slowing growth due to the reasons mentioned.

There are known reductions.

MRAP, SCS, et cetera that, I've talked about, the commercial weakness that Kim talked about, overall uncertainties we talked about.

On the other hand, we have some upsides, too, and, you know, we'll call those as we see them.

But on balance, we would say quarters two through four will be moderately less in internal growth than what we saw in the first quarter and that's it.

And then the 11% to 18% EPS goal, if you did no more buybacks and no more acquisitions today, would you still be comfortable with that range?

That is a basis of that estimate.

That assumption.

And then finally on FCS, so just to be clear on the $50 million, so you're saying it's going to go on a run rate basis roughly from $300 million to about $250 million a year, did I understand that correctly?

Got it correct.

That run rate reduction starts in the second quarter.

And then does that imply that the fee on the manned ground vehicle portion was the bulk of that $50 million decline?

A significant portion, yes.

Okay.

Thanks a lot.

Your next question comes from the line of Cai Von Rumohr of Cowen & Company.

Please proceed.

Yes, thank you very much, gentlemen.

Ken, you mentioned, you know, strong bookings in Q2 and Q3 before slowing in Q4.

Are you talking about book to bill over 1.0, and does that kind of expectation include debooking of the remainder of FCS?

We seasonally grow our book to bill from the first quarter to a stronger second and then a stronger third and then seasonally our Q4 is lower.

In order to achieve a 3% to 5%, 6% to 9% organic growth rate, we do have to have a book to bill that's north of 1.0 to 1.1 to 1.2.

We're largely referring in that comment to new business bookings.

That's right.

We would have to honestly say that there could be some volatility once the new FCS contracts let and whatever those look like and however that compares to our existing backlog.

Backlog, that's right.

So that could create -- it's a disturbance of some kind and it's too early to predict what that would be.

You mentioned FCS.

Could you tell us about how much were the revenues in the quarter, and given that about 90% of your work is direct labor, should we assume that under the restructured contract you would have an equivalent profitability opportunity?

The revenue first quarter was in the $75 million range and I think it's too early to tell what the split outs would be in the restructured program to the second part of your question.

Yes, I think the real message is that the government and all would like to see more incentives around the fee structure, without saying they are going to lower it, just put more at risk.

So we probably have an opportunity to get to the, almost the same fee that we're currently getting, but we would have to meet certain performance criteria that we haven't had to to date.

Okay, and given that you should know how big the manned ground vehicles are, how much if you retain the stuff you expect to retain, if we're going from 300 million, what do we go to, about 150 to 200?

Is that the run rate more or less?

Well, for fiscal '10, we're projecting 250.

The run rate after that gets into fiscal '11 and I would just rather wait to see how this shakes out before we start guiding you there, Cai.

And finally, could you give us an update on project alignment and how that's coming?

Sure.

James Morgan and the team have done a phenomenal job.

Last year for FY '09, they achieved a run rate of about $38 million in savings.

They have got a plan to do about $30 million year.

You realize we're finishing cost point Dell tech for the, all of the national security side of the business, which will be a great enabler for us than FY '11.

So the group presidents have taken it to heart and in these economic times, everybody is tuning up their overhead.

We just were lucky enough to have good leadership and a process in place to get out of the gate well.

Terrific.

Thank you.

Your next question comes from the line of Joseph Nadol of JPMorgan.

Please proceed.

Thanks, good afternoon.

And good quarter.

My first question is, Mark, on the material buys, wondering if you could in any shape quantify what you think was I guess excess over your expectations.

We expected a material component of 39% to 40% and we ended up at 41%.

And in dollar terms, absolute dollars.

I can do the math.

$50 million.

Okay.

I'm sorry?

$25 million to $50 million ahead of what we might have expected.

Maybe even north of that.

Okay.

And on Intel, Ken, you mentioned you had seen some signs of insourcing there.

I'm wondering if your Intel sales grew year-over-year and some of your competitors have seen some slowing growth here.

Wondering I guess what you're seeing.

It obviously didn't impact your quarter.

We grew.

I don't know what our competitors did.

Okay.

Any feel -- any more color you can give on what the agencies are doing in terms of the insourcing?

Do you think it's going to pick up pace?

Where are you seeing it?

What types of contracts, et cetera?

Again, I think in the areas where we are mainly focused, which is mission support intelligence, analysts, et cetera, I see that continuing to be strong for our Company.

I think it's on the fringes where you get more into policy and the like that they would be pulling back.

Okay, and then just one last one, you were expecting some MRAP head wind.

Did you talk about that coming a little later in the year.

Wondering if your MRAP was down year-over-year.

Oh, yes.

As we had projected before, and I think we mentioned in our last call.

Our basic MRAP programs that are currently under contract and pretty much by the end of our first half, and we're waiting for potentially a contract award on MRAP light to continue to sustain that.

So year-over-year, we're down probably about $100 million.

For the quarter?

For the full year.

Oh, for the full year.

So for the quarter, this quarter you were down $20 million, something like that?

Something like that.

Something like that.

A little less than that, Joe.

About 10, $10 million to $15 million.

All right, thank you.

Your next question comes from the line of Erik Olbeter of Pacific Crest Securities.

Yes, guys, let me add to the chorus.

Nice quarter.

Just two questions looking forward.

One on sort of M&A.

The firm has been fairly cautious on M&A.

Looking for good properties at a good price.

That's something that the market hasn't afforded many firms over the last year.

How does your strategy on M&A and your metrics change as you go to pursue your M&A strategy this year?

Do they change?

Do they stick to the same thing?

Are you willing to pass up deals now?

Give us a walk through.

Oh, for sure.

I pass up deals almost monthly because they are just in the rare area and we just won't overpay.

But having said that, we have seen a renewed interest in many companies now considering selling, especially when they look at the outlook and it looks flat to moderately declining and in most cases, the companies we're looking at are quite a bit smaller than we.

So they are too small and they need to make a move.

So we're -- I'm kind of excited we're starting to see some honestly good properties at -- I'll never say reasonable price, but good prices.

That's helpful.

And maybe just a question from Mark on bid and proposal.

Looks like -- I think you said it was up 13% year over year -- roughly $40 million in the quarter.

What can we expect?

Looks like you guys are going to bid on a significant amounts of new opportunities this year.

Is that a number that we should sort of expect to sort of continue to increase as we go through 2010 and 2011?

First, Eric, the combined BMT and I R&D was up 13% year-over-year.

So it's not as high on the BMP front as the number you stated.

But it was up consistent with our revenue growth rate and in fact, we are seeing risk, if you will, that D and P costs will grow faster than our revenue growth in light of the unbundling of procurements, if you will, to meet the lower thresholds.

And so we're expecting to have as much as $20 million, $30 million more of D and P costs in aggregate than last year and that would represent a growth rate above what we were expecting on the top line.

Okay.

That's helpful.

Thanks, guys.

Thank you.

(Operator Instructions).

You have a question from the line of Edward Caso of Wachovia Securities.

Please proceed.

Hi, good evening.

Ken, Mark, can you give us a sense of whether the tax rate for the full year will be about what we saw in the first quarter?

First quarter, you saw being 38.1.

The actual rate was about 30 basis points higher than that due to rounding.

So it wasn't as good as it looks.

But that was due to, you know, we start really compiling and preparing our tax return in the first quarter and we compare that to previous estimates and we make our true-ups during first quarter and second until we file it.

So there are some adjustments and that's the reason why it was slightly below in the first quarter.

The bottom line is we still would say 39 is the notional rate or normal rate, but we have a chance at being in the 38 to 39 range when it's all said and done due to those adjustments.

Right.

Can you give us a sense -- I mean you talked about taking money, the 50 million out for FCS.

In the 6% to 9% range and the 11% to 18% range, has your -- have you moved from the middle to the top, the top to the middle to the bottom, any sense for where in that range?

You've done that in the past, where you've given us a sense sort of where of in the range you may have moved to and from.

We would like to just stick to our ranges as stated, Ed.

Okay.

My last question is for Ken.

There's some upcoming deadlines here for your role as CEO.

Can you just sort of remind us what those deadlines are and any update you can offer us?

The deadline for my departure can be no later than June of 2010, the annual meeting.

And so the Board is in the process of going through the CEO's succession process.

That's about all I can say.

Okay.

Thank you.

Great quarter.

Thank you.

There are no further questions in the queue.

I would like to turn the call back over to management for closing remarks.

Thank you.

On behalf of the whole team, want to thank everybody on the call for their participation and their interest in the Company.

And we hope to see you out on the road sometime in the near future.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.