Leidos Holdings Inc (LDOS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter fiscal 2010 conference call.

I will be your coordinator today.

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mrs Laura Luke, Vice President Media Relations.

Please proceed.

Thank you, Shameeka, and welcome, everyone.

Here on today's call are Walt Havenstein, our CEO, Mark Sopp, our CFO and other members of our team.

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 may 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 will turn the call over to Walt.

Thank you, Laura, and good afternoon, everyone.

I am glad to be joining you today in my first earnings call as SAIC's new Chief Executive Officer.

I'm delighted to have been given the opportunity to lead this exciting Company and look forward to discussing our third quarter results and the current business environment.

You can see from our press release that we turned in a solid performance this quarter, including an upturn in bookings and contract vehicle wins to provide for growth capacity going forward.

We are on a steady course and accomplishing our objectives.

Mark will provide color on the financial details in a few minutes, after I describe the market dynamics and our key business drivers.

Federal spending is SAIC's most important market driver, therefore we pay close attention to the federal government's fiscal year 2010 budget, which covers the last quarter of our FY 2010 and the first three quarters of next year.

Spending consists of 12 separate appropriation bills and supplementals.

Five of these bills have been enacted, leaving seven bills in the legislative process, and the effected agencies operating under a continued resolution that is set to expire on December 18.

The defense appropriations bill is in conference and most observers expect a free-standing defense bill before the Christmas recess.

The spending levels in all of the bills represents a modest increase in overall discretionary spending over the prior fiscal year in the range of 2 -- 4% to 6%.

Delays in passing the remaining spending bills have resulted from extended debates on domestic programs, particularly healthcare.

As work on the remaining bills continues and the healthcare debate progresses, it is possible that some of the remaining appropriations bills will become part of a many Omnibus resolution that extends current year funding levels.

We do not believe an Omnibus covering the unenacted bills will have a positive or negative impact on SAIC.

There is, however, increased concern about deficit spending, which will place pressure on FY 2011 discretionary spending, the largest part of which is defense spending.

Consequently, most believe the future direction of defense spending growth will be flat to slightly negative, even if the defense budget receives a modest increase over inflation for FY 2011, we expect most of that increase will cover must-pay personnel, healthcare and O&M bills.

The intelligence community marketplace has softened this year as a result in delays in planned procurement actions and numerous contract award protests.

Over $2 billion in SAIC's business opportunity pipeline that was initially to be decided in calendar year 2009 has since slipped into calendar year 2010.

In most cases, the intelligence community has compensated for program delays by extending current contracts for up to one year.

In cases where SAIC was the incumbent, we maintained our position.

Where SAIC sought to replace an incumbent, however, or to enter a newly emerging intelligence market segment, our plans have often been delayed.

Nevertheless, we are actively pursuing several areas of high growth in the intelligence market, including the national and Homeland Security components of the cyber market and manned and unmanned airborne intelligence, surveillance, and reconnaissance systems that support the forces in Iraq and Afghanistan.

The next most important market driver for SAIC is the overall government contracting environment, which can be characterized as increased oversight with an anti contractor under current.

We are seeing government delays and releasing new definitions and rules for federal acquisition, stricter limits on contractor interactions with government officials, new provisions for organizational conflict of interest or OCI, and an expansion of actual and planned government insourcing, including growth in the government's acquisition work force.

The focus on the government's contracting practices aims to reduce high risk contracts and save $40 billion from overall contracted spending levels.

Regarding OCI, we are tracking the issue closely, particularly as it pertains to our DoD business and we will be well prepared and flexible in our approach and options.

McCain Levin legislation requires updated rules to be issued by February 16, 2010.

We are actively working with our industry associations and partners.

The scope of the pending OCI rules will ultimately determine our course of action.

Overall, we expect clear language to be a net positive for SAIC as a platform-independent services and solutions provider.

On the topic of insourcing, we would like to reiterate what we said at our last earnings call.

Insourcing provides headwind to the entire contractor base, but there are some positives in the government's approach.

OMB is focused on the front end of the procurement process and has called on agencies to cut spending on cost-based contracts by 10% in 2010, transitioning cost reimbursable contracts to fixed price contracts will provide the right incentives for both government and contractors and should lead to better profitability.

Finally, the insistence on agencies properly reporting and checking contractors past performance will reward those contractors who perform best, like SAIC.

Now let me move on to business development.

Bookings in the third quarter were $3 billion, for a book to bill ratio of 1.1, which is higher than both our first and second quarters this year, but lower than our third quarter last year.

We ended the quarter with $16.6 billion in total backlog and $5.5 billion in funded backlog.

Total backlog increased by 2% over the previous quarter as compared to the end of the third quarter of fiscal year 2009, our total backlog decreased 3%.

Our current book to bill ratio and backlog growth numbers reflect both the positive impacts of our current recent business development efforts and the negative impacts of several factors, including the bookings clause, a normal part of the first year of a new administration, acquisition policy and insourcing changes, which were mentioned previously, and the lengthening of the federal procurement decision cycle caused by, among other things, added scrutiny on potential OCI, and more reviews to protect against protests.

The overall point I want to emphasize is that the government is changing its process for making acquisition decisions.

This, more than any other factor, has been the cause of delays and procurement activities.

As government delays in making contract awards have grown this year, SAIC has accumulated a mounting backlog of submitted proposals awaiting decision.

At the end of Q3, we were awaiting decisions on potential bookings valued at $7.9 billion, up sharply from $5.1 billion at this time last year, an increase of 55%.

Once the government begins to clear this log jam of pending contract decisions, we should see an immediate improvement in new business awards.

Our outlook on new business opportunities in FY 2011 is mixed, but promising.

Despite negative trends, we have been successful in growing our business opportunity pipeline to $95 billion, from $67 billion a year ago, an increase of 42%.

Working proactively to counteract the potential impacts of less defense spending, SAIC has expanded its pipeline in selected market areas that have especially promising growth potential, including C4ISR, logistics, energy, cyber, and health.

We have also structured strategic campaigns around these areas and are investing heavily in them.

Additionally, our wins on IDIQ contracts have been running far ahead of last year's pace, earning us a strong starting position to win many more task orders contracts next year.

SAIC has already proven it is very adept at converting new IDIQ wins into the task order wins that ultimately drive bookings and backlog hire.

Over 60% of SAIC's revenue is generated by task orders we win under IDIQ contracts.

We continue to achieve noteworthy win rates on both recompetes and new business.

We have achieved an 88% total dollar win rate on all recompeted business.

We have also earned a 61% total dollar win rate on all new business we sought to capture.

These high win rates are similar to our performance a year ago, reflect the value proposition we offer to our customers, and persist, despite the increasing competition we face.

Our focus on winning larger opportunities continues to yield excellent results.

We won 13 opportunities valued at more than $100 million each in the third quarter, up from six wins of this size in Q2.

Through the first of December, we had earned 27 $100 million plus wins in FY 2010.

The same number is in all of FY 2009.

Decisions on 25 $100 million-plus opportunities are anticipated to occur by the end of FY 2010.

We now have 182 $100 million plus opportunities in our business opportunity pipeline, up from 166 in Q2.

Moreover, approximately 130 of those 182 large opportunities have an expected award date within the next four quarters.

Moving on to acquisitions.

During the third quarter, we disclosed the purchase of RW Beck Group, Inc, a leading provider of business and technical consulting services in energy, engineering, and infrastructure.

We made this business move because Beck's capabilities complement two of our strategic campaigns.

This purchase builds on our 2007 acquisition of the Benham companies for our energy business and enhances our Homeland Security offerings.

This acquisition also includes Beck Subsidiary, Beck Disaster Recovery, a premier emergency management consultant see.

We believe this was perfect time to expand SAIC's capabilities in these areas.

Our nation is recognizing the need to rehabilitate our energy and water infrastructure and limit greenhouse gas emissions.

We also continue to face natural disasters and must prepare for ongoing threats to Homeland Security.

SAIC also recently announced a strategic alliance with BPL Global Limited, a smart grid technology company that develops and deploy solutions to improve the efficiency and reliability of the electric power grid.

As part of this alliance, SAIC acquired a minority stake in BPLG.

The alliance in investments are an important part of our strategy to provide lifecycle capabilities to the rapidly evolving power industry.

We continue to dialogue with several candidate companies in order to leverage our strong balance sheet.

As we said last quarter, we see energy and cyber as examples of fruitful areas and we will consider acquisitions and divestitures driven by OCI concerns.

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

Thank you, Walt.

Overall results for the quarter were consistent with our expectations to deliver on our financial goals for the full year.

Earnings per share growth was 17% year-over-year, a much improved operating margins, but a slower pace of internal revenue growth.

Revenues totaled about $2.8 billion for the quarter, reflecting total growth of 5%, and internal growth of 1%.

Internal growth slowed from three primary causes.

First, the effects of the RW Beck acquisition, which was dilutive to internal growth by three percentage points.

Their revenues declined year-over-year in the third quarter, due to much lower revenues on hurricane disaster relief this year.

We set this expectation during our last earnings call.

Second, we had one less working day this quarter, which adversely impacted our internal revenue growth by 1.5%.

That one-day reduction applies to the full year as well.

Internal growth year-over-year on an apples to apples basis from what we've been reporting all year long, excluding these two effects, was 5.5%.

This was lower than we've seen in recent quarters due to the third reason, the bookings clause and longer federal procurement cycle, which Walt mentioned earlier.

This has resulted in lower new awards all year and a corresponding lack of new program starts to fuel revenue growth, most accentuated in our intelligence business area.

Revenues actually contracted in our intelligence area during the third quarter, but our view is much of this is timing.

We are optimistic about renewed growth prospects, particularly in cyber security, ISR, that's intelligence, surveillance and reconnaissance, and theater support operations.

We'll continue to invest in business development, bid on proposal, and internal research and development to drive growth in these areas.

We generated strong growth in our logistics and defense solutions areas in the third quarter, with the highest contributor being the continued ramp-up of our POLCHEM logistics contract for the Department of Defense.

Tasking on our work at the naval surface warfare center and at the army space and missile command, the software engineering [dictorite] in particular continued to grow, reflecting demand for our high end systems engineering and integration solutions.

Revenues under the brigade and combat team modernization program, formerly SCS, are stable.

While our tactical vehicles, communications, integration work slowed down a bit, as we transition to the lower throughput MATV integration program.

Revenues from our Homeland Security and government health business areas picked up pace over last year, reflecting new wins in the DHS IT infrastructure support space and market share capture from other contractors in the health arena, particularly with the military health systems.

Finally, we posted reduced revenues in our commercial business area year-over-year in difficult market conditions, but it is more focused and consistently more profitable after cost reductions taken in the last 12 months.

Although bookings are tracking behind where we would like to be given the level of bidding over the last few quarters, we do see signs of improvement.

As expected, bookings did pick up pace in the third quarter, and included some important recompete wins and we also had some important IDIQ wins, which should manifest into bookings in future quarters.

And as Walt mentioned earlier, given the value of outstanding proposals we have awaiting decision, once the log jam of pending contract decisions begins to clear, we should see improvement in new business awards.

For profitability, operating margin was 8.4% for the quarter, well above last year's third quarter of 7.8%.

We had higher contract fees across the board, reflecting consistently good program performance and customer delivery and satisfaction.

In addition, profitability was fueled by a few other factors, efficiency and SG&A costs at only 5.6% of revenues, increased volume of our high margin product deliveries, and a real estate gain of $4 million in the quarter.

Within the SG&A category, bid and proposal and internal research and development costs were collectively up about 15% year-over-year, reflecting continued investment to grow the top line over the long-term, coupled with higher levels of marketing needed to produce revenue in the longer sales cycle environment we're now experiencing.

Below the operating margin line, interest, taxes, and other income expense items were uneventful and as expected in the third quarter.

Diluted earnings per share from continuing operations totaled $0.34, up 17% over the third quarter of last year.

The 5% revenue growth, coupled with 60 basis points of margin improvement, fueled EPS growth by roughly 14% and a reduced share count from share repurchases over the past year out of the other 3 percentage points of earnings per share growth.

Operating cash flow was particularly strong in the third quarter at roughly $250 million.

Higher profitability, sound receivable management, favorable timing of payrolls, and reductions to inventory and prepaids accounted for much of this.

Day sales outstanding was 70 days, essentially flat from the same period last year.

We deployed approximately $210 million in cash this quarter, with $160 million towards our acquisition of RW Beck and our strategic investment in BPL Global, Inc.

The remaining $50 million was used for ongoing share repurchase program in the quarter.

That covers the financial results for the third quarter.

Here's our financial outlook going forward.

Up front with Walt's recent arrival, we wanted to establish that we intend to retain our focus on generating shareholder value through earnings per share growth over the long-term and our target is still to produce 15% growth per year.

We recognize there may be years where this is not achievable, either due to market conditions and/or due to investments needed to make that goal more achievable in the longer run.

We intend to continue to be transparent and open with our views towards future growth.

For fiscal 2010, the current fiscal year, we are well on our way to completing another year where we expect to achieve all of our targeted financial goals.

While lower bookings will likely slow the pace of revenue growth moderately from our earlier expectations, we still expect to achieve our targeted internal revenue growth goal of 6% to 9%.

In addition, we expect operating margin improvement of 20 to 30 basis points, and diluted earnings per share from continuing operations growth over last year of 11% to 18%.

Operating cash flow is also on track to finish consistent with our goal, which is equal to the sum of net income plus depreciation and amortization.

For fiscal 2011, which will start on February 1, 2010, we want to be slightly more cautious in our business outlook, at least at this stage, and we are also isolating a special charge related to our ScottishPower outsourcing contract, which we excluded from our guidance.

We do believe we will achieve our targeted internal revenue growth range, but it is appropriate to set initial expectations at the low end of the targeted 6% to 9% range.

As Walt said, we faced more difficult market conditions, a longer and more uncertain cycle time of federal procurements, increased pressure on federal discretionary spending due to concerns about the deficit, particularly looking out to the government fiscal year 2011, which starts next October, an ongoing weakness we see in the commercial markets.

As the fourth quarter and the new year develops, we'll need to see new award levels pick up to establish confidence in setting any higher expectations.

On the operating profitability front, we are comfortable in delivering another 20 to 30 basis points of margin improvement excluding the special charge related to ScottishPower, which I'll cover in a moment.

While the pricing environment is expected to be tougher, we have good visibility on net fees across our business base, and in particular, our security products business, where we expect to see increasing contribution.

Also, we expect to continue making G&A cost reductions under project alignment here in fiscal 2011, making our cost structure more efficient.

The effective tax rate will be dependent on whether the R&D tax credit is extended in calendar 2010 by congress, which today we generally believe will occur.

The credit is worth about 75 basis points in our effective tax rate.

Net interest expense is projected in the low $70 million range, with very little interest income assumed on cash holdings.

Diluted earnings per share from continuing operations also excluding the ScottishPower charge is expected to grow at the low end of our targeted 11% to 18% growth range, which is driven by the lower revenue growth expectation.

Given our $1 million cash position and the level of our free cash flows, our capital deployment actions can have a meaningful impact on our earnings share growth performance.

There are three major dynamics at play here.

First, we have forecasted negligible earnings off of our $1 billion in cash holdings.

Given that our debt rates are fixed, we have earnings upside from interest income should interest rates rise.

Second, our cash deployment strategy will continue to be focused on long-term shareholder value creation.

Capital deployed through acquisitions will be targeted for long-term earnings per share growth, but sometimes those acquisitions are EPS-neutral or modestly dilutive in the first year.

Third, share repurchases are accretive, and their magnitude will largely depend on the level of acquisitions we make and the price of our stock.

Our earnings guidance does not contemplate future acquisitions, but does assume a relatively low level of share repurchases to offset the effect of share [creek] from our equity compensation plans.

This amounts to about $100 million use of cash for this purpose.

Now, I mentioned up front we are excluding a nonrecurring special item from our operating margins and our earnings outlook related to the ScottishPower contract.

We have isolated these charges from our setting of financial expectations to provide a more meaningful year-over-year comparison of recurring business results.

As we have now disclosed for sometime, our IT outsourcing contract with ScottishPower expires on March 31, 2010 next fiscal year.

We have bid to continue that work in the follow-on contract, but we don't yet know the outcome of that.

This contract and its associated defined benefit pension plan for its employees was acquired by SAIC in the year 2000.

As of the end of last fiscal year, this defying benefit pension obligation had an unfunded pension obligation of $35 million.

If we win the recompete, we expect nonrecurring charges of approximately $10 million to $12 million in our first half of fiscal 2011.

This would primarily relate to reductions in personnel and infrastructure expected to be required under the terms of the new contract.

That's, again, if we win.

Conversely, if we do not win the recompete, we expect to incur charges of $25 million to $30 million in the first half, primarily from recognition of losses related to the amount of unfunded pension obligations associated with employees that would transfer to the successor contractor.

Because both scenarios are losses to different degrees, investors should anticipate an earnings dip in our first half related to this matter.

On another matter we've been disclosing, our arbitration process continues with the Greek government regarding the Athens Olympics security contract.

Meanwhile, our system continues to serve daily vital public safety functions for the city.

A favorable resolution of the arbitration would have a positive impact to our financial performance, but it is not factored into our forward expectations.

Moving on to cash flows, we expect to continue generating strong operating cash flows equal to net income plus depreciation and amortization as a general model.

Capital expenditures should continue to run under 1% of revenues.

We don't expect any major changes to working capital uses in fiscal 2011.

The resulting free cash flows, coupled with the existing cash of $1 billion and access to credit markets provides amplifier power to pursue a number of strategic alternatives to generate shareholder value, and that's what we're focused on doing.

I'll turn it back to Walt for his final remarks.

Thanks, Mark.

Before turning to your questions, I just wanted to say I'm honored to have the opportunity to lead SAIC and build upon the Company's legacy of excellence.

Since joining the Company in September, I have visited our customers and employees across the country.

I've gotten a first hand look at how the science and technology solutions we are delivering to our customers are helping to solve the nation's toughest problems.

Our Company represents a very strong platform for growth and innovation across the markets we serve.

As Mark pointed out in his remarks, we're pleased with the progress of our recent results.

We have dedicated more resources to key growth areas, and we're optimistic that these measures will pay off.

The market place is likely to remain challenging for the near future, but we're confident in our ability to deliver results going forward.

Shameeka, we are now ready to take questions.

Thank you.

(Operator Instructions).

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

Please proceed.

Thanks.

Good evening, gentlemen.

Just a couple questions.

Wanted to start kind of on the M&A front and just get an update on your current thinking in terms of the sizable M&A as a potential strategic focus here.

Just given the strength of the balance sheet, obviously a little bit of a softer organic revenue growth environment, and maybe as part of that commentary, if you could talk about what the larger side of the M&A pipeline looks like.

And also just help frame for investors what kind of a largest size acquisition you would be comfortable doing based on your current balance sheet capacity and appetite for leverage.

Jason, thank you for the question.

We are continuing to look at two areas of M&A growth.

Those that support accelerating our organic growth within our current business model, and the current emphasis across the business, and so most of those acquisitions have been consistent with the size of acquisitions we've made in the past.

It's probably premature, in fact, it is premature for me to be specific about other acquisition targets that we're going to consider, because as I told you back in the investors conference, I'm going through a fairly detailed strategic review to include with the board, and it will probably be a couple more months before I can share with you any more detail around what the options that we are considering.

Okay, okay, understood.

And question on the macro environment for your sector.

Is it possible that the sector might experience any material amount of a crowding out effect as you release the federal IT spending, just given that the planned troop surge into Afghanistan, and if so, has any of that dynamic factored into your fiscal 2011 guidance?

Is that a net negative for the industry and for SAIC specifically, or are there some silver linings there potentially for your Company?

Yes, I would, I would say that I don't see -- at some point, there will be some crowding out, that's for sure.

But I think what, what actually serves to our advantage is the work we've done over the last couple years in capturing positions on the larger IDIQs.

And in particular, as, as you think about the surge in Afghanistan, those opportunities are going to have to be met with existing vehicles, not only physical vehicles, I mean contract vehicles if we're going to get the surge effect, both in-country and in the support structure here back in the United States.

I think that serves, that actually serves us well.

And, although time may tell because of the budget constraints whether there will be a clouding -- a crowding out in the overall IT world, I think where we are positioned, we're more likely to see upside to that rather than downside.

Okay, and just one last one, if I could, any update on the DOJ whistle blower lawsuit or any way to frame the potential downside or worst case scenarios there?

Jason, we're at the beginning of what could be a long legal process.

There has not been sufficient process or progress to give you any noter color other than what we have disclosed at this time.

Okay, great.

Thanks.

Your next question comes from the line of Robert Spingarn of Credit Suisse.

Please proceed.

Good afternoon.

Hi, Robert.

Hi, Robert.

Question on the log jam.

About how long would that have to continue before it would impact your fiscal 2010 guidance?

Do you mean fiscal 2011 guidance?

Excuse me, yes.

I think the way I would characterize that, Robert, is the -- we're actually seeing the logjam starting to loosen up.

If you look at the aggregate from the time the new administration went in, we've seen probably the net effect of about maybe a 60-day, what I'll call, what I'll call deferral, as the priorities of the administration were being set, as decision-makers got in position.

Most of that, especially as pertains the key strategic decisions around the war in Afghanistan, have now been made.

And so we don't expect that log jam to be enduring.

However, that, that delay did have an impact on orders that impact some aspect of our most, most recent revenues.

So it's going to have -- that impact will be with us for the next 60 days or so.

But I, I'm fully confident that based on what we're seeing here already in the last few weeks, that we're going to start seeing that log jam kind of break up.

Walt, could you talk a little bit about the specific contract vehicles that would see more business from the Afghan surge?

Well, yes, I can give you, I can give you one in particular.

We know there are going to be some acceleration of MRAP ATV and probably other vehicles, tactical vehicles that are going to be used in that environment.

So in order to accommodate the ramp-up of 30,000 people, we know that they are going to be needing both people in-country, as well as work -- when I say in-country, I mean in the theater, and as well as people to continue the integration work that we're doing in Charleston.

So I think that would be the first, the first thing.

Number two, there are a variety of what I'll characterize in general as intelligence contracts, specifically as supports operational intelligence.

By the way, the operational intelligence work is not just that which we do in-country around ISR, but also that which we support back here in CONUS.

So we -- I would expect to see some of those operational intelligence contracts pick up and frankly we know they are going to pick up.

And we've also gotten some indicators for additional, what I'll call infrastructure work in the theater in preparation for having upwards of 30,000 additional troops in Afghanistan.

And frankly, whether it's a shift from Iraq to Afghanistan or a buildup, which we currently are looking at in Afghanistan, that all requires infrastructure and we saw a very similar ramp-up, if you will recall, back in 2004 and 2005, as we ramped up in Afghanistan.

So, so if you look at those, those three dimensions in particular, when I say infrastructure, I'm primarily talking about the telecommunications infrastructure that we provide a lot of installation support on.

Those are the kind of things that I think you can expect to see some upside potential for us.

Okay.

Does that help?

It does, it does help.

But you're not saying, in fact, that you see between Afghanistan and Iraq that the total business related to the two operations over there, whether it be there or here.

That business doesn't rise over time with the withdrawal, or does it?

I think it does.

Well, first of all, you have to, you have to bound the time.

I think near-term it will, all right.

And I think your guess is as good as mine if you're watching the talking heads on Sunday.

Your guess is as good as mine as what withdrawal means, right?

So, so whether it's a real withdrawal or whether it's a ramp down, that's barely recognizable starting in June, July of 2011.

My sense is the kind of things that we are going to be doing are going to be needed for a long, long time.

Let me just give you an example.

We provide, we provide the supply chain management for tires in one of our contracts.

They are going to be grinding out a lot of tires over the next three years.

And frankly, it doesn't matter whether they are grinding them out in the sand in Iraq or the hills of Afghanistan.

They are going to be -- the fact is they are going to be more tires.

And so those of us who provide the supply line, or manage the supply line in those consumables, which we do, are going to be, are going to have more business.

There's no way of getting around it.

And because the overall emphasis has gone up.

Walt, thank you for the additional color.

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

Please proceed.

Thanks, good afternoon.

Hi, Joe.

Walt and Mark.

First question is just on the revenue growth, or organic growth outlook.

Just looking beyond FY 2011, Walt, some of the things you walk through at the beginning of your initial comments were short-term, like the log jam and some of them were longer run like your take on the defense budget, which is obviously the biggest driver you have.

Or the biggest end market you have.

Is 6% to 9% still the right long-term growth number for the Company?

Well, let me put it this way, Joe.

I think it's hard to predict exactly where the defense budget's going to look like for government fiscal 2011.

What we do know, we do know that the nature of the things that are going to get more emphasis are going to be around the current fight, all right.

And so that -- at the expense, frankly, of future capabilities investment, that would mean for a company like SAIC, we should be in a pretty strong position to be in the area of more emphasis through our service offerings and the nature of the things that we're currently doing.

But I think it -- what it represents mostly from a challenge perspective for SAIC is that others are going to recognize that, too, and so the nature of the competition in that market is going to get stiffer.

And we have seen that in this, in this fiscal year, in our fiscal 2010, in that the investments we're having to make, notwithstanding the pause in acquisitions, and contract awards, but the -- and the extending nature of contract awards, but, but we just see more competitors and the cost for winning the same amount of booked business is going up for us.

All right.

So that's, that's -- I'm more concerned about the effect, the overall effect on other competitors, all right, entering the marketplace because their traditional business, which tends to be the long term investment programs, are going to come under pressure as we continue, as this administration continues to emphasize the current fight versus the future fight.

I hope that helps.

In the meantime, we are looking for areas for, what I call, fast tree marriage, that are going to grow relatively well compared to the overall DoD market and markets that are adjacent, like in energy, health and medical that are going to grow relatively well within the government spending compared to the Department of Defense.

So that -- I tried to be as broad as I could because I don't want to be tremendously specific, frankly, trying to bet on what the government fiscal year 2011 budget's going to look like.

But I think you just got my convictions around what I think is going to get emphasis versus less emphasis.

I understand that, and that all makes sense.

I'm just trying to get my arms around, this 6% to 9% long-term growth was set by a different management team to some degree and in a different era, and now we have budget growth changing and you're of course trying to pursue stronger avenues of growth within the budget and other areas and we see that.

But I'm just not sure that I'm getting -- I guess could you say yes or no, we're going to keep this 6% to 9% target long run?

Joe, I'm going to ask for your forbearance here and let me get through a broader strategic dialogue with the board, which I told you a couple months ago we were going to go through a fairly disciplined process, before I give you any change to our current guidance, okay?

Okay.

That's, that's fair.

My other question is just on the M&A and I heard what you said about being in dialogue and what you're looking at and heard the word "dilutive" and you were very clear to say long-term accretive.

I think, Mark, you made this comment, but could be dilutive to neutral in the short-term.

And I'm wondering if you could give any better sense of how dilutive an acquisition in the short-term you're willing to accept to get that longer-term growth opportunity.

Well, Joe, that really depends on the long-term strategic merits of the acquisition.

We have generally seen smaller acquisitions in SAIC in the past.

They have been negligible in terms of dilutive effect.

Should that change that situation could change, we certainly just don't want to rule out something that's even more dilutive than our past experience for sake of what the generally accepted accounting principles require, knowing that the economic prospects may make very good sense for us.

So until we get through the strategic dialogue that Walt referred to and give you better indication of acquisitions and size and stuff like that, it will be depend on a case by case basis, but we're going to be focused on the long term economics and cash flows, not so much, or at least to a lesser extent, on GAAP dilution on a short term basis.

Okay.

One more quick one on numbers, Mark.

On the MRAP overall program, including the ATVs and the work you have been doing in the past and on FCS, could you give us a sense of what's embedded in your forecast for FY 2011?

Relative to FY 2010?

The FCS, if you will, albeit a new name now, is still under much discussion and debate, whilst we are having very stable revenues, foreseeably, and it's too early to say how that might change pending those discussions.

We've baked in a modest decline in revenues for 2011.

I would say a little bit less than what I previously had indicated, which was about $50 million reduction.

I think we'll get a little better than that.

And a modest fee decline in light of discussions there, but we really don't have any better information with respect to that program today.

On the MRAP/MATV tactical vehicles integration, that team has done a wonderful job expanding that area beyond MRAPs not only to MATVs, but to other tactical vehicles.

And while they saw a little bit of slip as expected here in the third quarter, there is a robust pipeline of work with MATVs, 5000-unit ballpark for fiscal 2011, and that will keep the year-over-year revenues in that area slightly down, but not, not as noticeable as we once thought prior to, of course, landing that order on the MATVs.

Okay, very good.

Thanks to both of you.

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

Please proceed.

Yes, thank you, gentlemen.

What was the -- could you give us what the direct labor billings were in the third quarter?

Direct labor billings.

Hi, Cai, it's Mark.

Direct labor was 58% of revenues.

Is that answer your question?

Yes, that's another way of answering it.

Okay.

And then you had mentioned that you did I think $2,700,000,000 plus contracts through December.

How many of those are so far in the fourth quarter and could you give us color on the 13 that you won in the third and whatever you won here so far in terms of what percent of those are IDIQs?

Cai, it's Mark.

The 13 north of $100 million wins were in the third quarter.

So far in the fourth quarter we have won two, building up to the 27-year debate.

In terms of the mix, roughly 50/50.

In terms of IDIQ versus standard contracts on a year-to-date basis.

Okay, and then where do we stand with the Greek contract in terms of the negotiation there?

As I mentioned, Cai, it is in arbitration.

We continue to serve our mission there, in our opinion very well.

The status of the negotiations is ongoing.

We continue to expect at some point a favorable resolution.

However, determining the timeframe for that is too uncertain for us and that's the reason why we did not bake any of that resolution into our guidance for fiscal 2011.

Okay, and if we look at the final quarter, you had mentioned that you -- year-over-year, you had 65 days versus 60, so that really took a point and a half, so kind of equal days, you would have been about 5%.

What should we think about if you're saying the log jam is starting to break?

Fourth quarter, does it look like the organic growth should be 6% or better?

Excluding, kind of taking out the acquisitions from last year, which is -- just look at the businesses you had last year, excluding acquisitions versus what those businesses expect to generate this year.

Excluding the effects of the acquisition, we think we are in the low to mid single digits given the booking experience we have had year to date.

For the fourth quarter.

Okay, terrific.

And at one point I think you were looking for, as recently as your analyst day in October, you were looking for, for higher book to bill and so these numbers seem like something of a decline since then and yet you say that you're starting to see a break in the log jam.

Do those two changes don't seem to be quite in sync.

Could you help us understand what seems to be a conflict between those two situations?

Cai, we expect, as we said in our prepared remarks, that the bookings and book to bill should improve as the log jam has lifted, and we are just comfortable with the visibility we have in the fourth to generate the numbers equivalent to the guidance.

We had -- if you look at the pace of bookings during the third quarter, they were somewhat back end weighted, which gives us, gives us the confidence that we'll make the mark here.

Okay, and just the last one, you mentioned bids awaiting decision were $7.9 billion.

The notes I took around the second quarter were you exited at $8.5 billion, suggesting they actually went down in this quarter.

Is that true?

And if so, why?

We had a slight difference in timing when we reported that.

For the analyst day, we reported a number through the August period, whereas in Walt's earlier remarks, we are just looking at the quarter end as reported, which takes you back to July.

So there's a little bit of difference there.

We apologize for that.

What I'm saying is if you go back to July it was $8.5 billion, and so now it's $7.9 billion, so, the book to bill was greater than one, but the bids awaiting decision kind of went down, which would suggest you're kind of submitting -- you're not submitting that many bids.

Or is that just the fact that of the bids you're winning, the bigger ones are IDIQs and therefore these metrics don't really reflect the ongoing business potential?

Clearly that's true.

The IDIQs are affecting the bookings numbers.

However, go back.

The $8.5 billion was an end of August number, not an end of Q2 number that was used in the analyst day.

So the appropriate Q2 number was the $7.9 billion -- sorry, 6.6.

6.6.

6.6 at the end of the second quarter.

So we had a big August.

In terms of submissions .

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

Please proceed.

Hi, good evening.

Mark, for guidance for fiscal 2011, does that include some of this kind of weakness we're seeing in RW Beck as we move forward?

Is that part of the guidance for fiscal 2011?

It assumes the lower level of revenues we are experiencing this fiscal year.

We're effectively assuming a moderate growth from fiscal 2010 to 2011, but not anything like the episodic revenues that were present in fiscal 2009, which is now apart of our baseline.

Okay, and then if we look at some of the bookings pauses we've talked about here, is there any delta between DoD and some of the civilian agencies in terms of the pauses?

Is one place more severe than the other, or is that kind of across the board with administration change, et cetera?

My sense is that it's been a little bit more severe in DoD in the Intel community, simply driven by the delay in the decision-making, or the policy decision regarding the ramp in Afghanistan.

That, that really hasn't effected a lot of other people, but that clearly effected -- frankly people were keeping their powder dry until, their procurement powder dry, until some of those decisions were made.

And, and we started seeing that break loose as that decision became more and more evident.

So we actually saw some indicators of just by the what-if questions we were asked on some of our existing contracts starting about four or five weeks ago.

Okay.

That's helpful.

Then just finally, if we kind of look at what you've seen happen in terms of the pipeline and things in the very recent past here the last few weeks, would you say that this pause, or that some of the constipation in the system has kind of troughed and we're starting to see better activity at this point kind of reemerge or do you think that the kind of pause could actually get worse from here?

I don't think the pause will get worse.

I think -- your description of constipation.

You want to think of this as kind of a rat moving through a snake.

It's still, it still has some, some time to go before all the things associated with acquisition reform and the change in the acquisition climate fully effects us, but I think what we have attempted to do in looking at 2011 is to accommodate that in our plan.

So we've essentially adjusted the acquisition cycle time in our plans and we think that now is reflected in our 2011 plan.

Okay, so if we did see actual -- some of this submitted pending award, if that actually accelerated, then we could kind of potentially see a little upside relative to the plan that you're laying out here then?

Yes, I think so.

I think that's possibly true, but I think my guess is that, that we've reached more of a steady state in terms of the overall acquisition time, or that process, right, as opposed to it speeding up.

I don't think the process itself will get faster.

I just think we're farther through the process than we were, say, a quarter ago.

Thank you for the help.

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

Please proceed.

Thank you.

Walt, when you talked about the intelligence revenues declining, or maybe as Mark said it, were you talking about the whole intelligence security and technology group overall, or any particular groups under that?

I would rather not talk about anything below that in any event, but yes, I think that's true across the board.

Is that true across -- the whole group, you saw revenues decline in that whole group?

Yes.

Yes.

Is there any recompete losses driving that or complications or anything like that?

No.

Frankly, it was more an expectation of what we thought was going to happen, got delayed.

And, and frankly, you need to also keep in mind that as, and this is typical of new administrations, especially in the defense world, and especially given the strategic decision around Afghanistan, we -- the execution on some of the contracts that we've won has been, has been what I'll call delayed and in that the scope that we expected at the time we won the contract has either been modified because they want to keep their powder dry or has been delayed until they got this strategic decision worked out.

Similarly, what we're seeing is things that we're -- RFPs that were based upon a year ago's thinking, the past administration thinking, those things are being delayed, or at least got delayed in this, in this budget cycle.

So my sense is there's still a built-up demand and I would be, I would be disappointed if we didn't see that built up demand start to manifest itself in new work here over the next six months.

Okay.

And on the securities sales, you mentioned that they were good in the quarter and that helped, Mark said that was one of the factors in the improved margins.

How do you see that in the January quarter in terms of -- was there some that got pulled forward from the October quarter to January?

Because I know you previously thought it would be more in the January quarter on the bigger security system sales?

Bill, they did moderately better in the third quarter than expected.

I honestly don't know if some of that was acceleration, but we have -- the fourth quarter outlook's pretty much consistent with what we had been discussing before.

Your next question comes from the line of Jeff Houston of William Blair.

Please proceed.

Hi.

Could you talk a little bit about any sizable upcoming recompetes for the rest of fiscal 2011 and into fiscal 2012?

The answer is yes, but give me a second.

We have our largest contract, in essence, comes up for recompete during fiscal 2011, however, at the back end of fiscal 2011, that's the defense global solutions contract, previously known as the GIG and that's what dips up.

So that's north of $300 million in annual revenues, but that's a late fiscal 2011 event, but that clearly will have an impact in fiscal 2012.

So we'll just be discussing that amount a year or now in terms of its status.

And then, Bob, the NASA Marshall Space Flight Center that had been under a very large Omnibus contract, has actually been broken up and some of those contracts get awarded out over the next -- in our fiscal 2011.

That will have an impact for us in fiscal 2012.

Frankly, we're pretty confident about that.

How about with the defense solutions, global solutions contract, are you -- do you feel fairly confident about that one as well?

Yes, we feel fairly confident about it, but that's why we have $90-some billion in our pipeline, because you never can tell these days.

Okay, thank you.

Jeff, we're just about to run out of time here.

I want to go back and correct the record for one of the previous responses that Cai von Rumohr asked, which was the mix of IDIQ contracts and standard contracts in the north of $100 million category.

That mix year to date is about a third standard contracts and two-thirds IDIQ contracts for the record.

We're past the 5:00 hour, so we're going to end the call.

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

Thank you, Shameeka.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.