Leidos Holdings Inc (LDOS) 2010 Q4 法說會逐字稿

Good day, and welcome to the fourth quarter fiscal year 2010 earnings conference call.

(Operator Instructions).

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

Laura Luke, Vice President Media Relations.

Please proceed.

Thank you, Shamika, 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 it's future financial and operating performance.

These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made represent our views as of today.

We anticipate that subsequent events and developments will cause our views to change.

We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

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

Thank you, Laura, and good afternoon, everyone.

You can see from our press release that we turned in solid performance in fiscal 2010.

For the call today, I'll cover the market conditions and provide highlights of recent business activity.

Then Mark will provide the financial details.

I'll finish up with a longer view of our business strategy, which will include our assessment of the market outlook, and how we expect to execute within that market.

First an update on our market conditions.

As you know, SAIC derives a large majority of its revenues from federal customers.

So obviously federal spending is SAIC's most important market driver.

Our assessment of federal budget information typically focuses on discretionary spending for defense and federal information technology.

Different from a quarter ago, we now have the President's proposed government fiscal year 2011 budget.

Our assessment suggests that while federal spending is budgeted to increase several percentage points over the prior year, we expect most of that modest increase will be directed to cover DOD's must pay bills.

Accordingly, we expect only nominal growth in our market for this year.

In addition, we believe the downward pressures, from both the administration and Congress on federal discretionary spending, including defense will persist for the long term.

Another important factor for SAIC is the overall government contracting environment.

In our last earnings call, I characterized this environment as increased oversight with an anti-contractor undercurrent.

This characterization remains valid.

New organizational conflict of interest and personal conflict of interest rules are expected to be issued soon.

As we see things today, we believe we can successfully navigate in this more complex contract environment.

After the rules are defined, and as our customers begin applying them, we will adjust as necessary.

A new definition of what constitutes inherently governmental functions is also being developed and is expected shortly.

This will guide how the government accomplishes in-sourcing, which encompasses it's efforts to reduce overall contractor support, and expand the federal acquisition workforce.

The implementation of these initiatives has introduced uncertainty in the contracting process.

In our view, this uncertainty has delayed the contract award cycle at both the frond end, the initiation of new opportunities or request for proposals, and the back end, contract award decisions.

The intelligence market is a good example of how these market factors are impacting our business.

In FY 10 fourth quarter alone, decision delays and protests in this market delayed nearly $1 billion of planned bookings we had expected to win in the quarter.

Many of the same market factors are also impacting the broader DOD and federal segments.

It is difficult to assess when the log jam will break,whether sooner or later, as there are indicators both ways.

With that market backdrop, let me comment on our fiscal year 2010 performance.

On balance we had a good year, meeting our main financial objectives.

I am impressed with the Company's ability to focus and deliver on tough transformational initiatives, while continue to perform for our customers.

In FY 10, our contract performance was strong, with high customer satisfaction and customer retention.

Our project alignment initiatives continued to deliver planned cost savings, while improving service quality.

We successfully completed the transition of our government service business to our new financial system platform, Deltek, without disrupting contract execution and working capital flows.

The new system is an important enabler for greater control control, flexibility, and efficiency.

On the other hand, bookings fell short of expectations due to the market factors I just mentioned.

With respect to acquisitions, during the fourth quarter of last year and so far in the first quarter of this year, we closed the purchase of two companies, CloudShield Technologies and Science Engineering and Technology Associates.

We also purchased two product lines, and a key intelligence contract.

CloudShield's patented cyber security technology enables customers to inspect, analyze and control traffic on the network in realtime, in order to provide secure and information assurance.

SAIC will use this Deep Packet Inspection technology and our combined cyber security capabilities to provide sophisticated IT network services and security solutions to governments and commercial service providers.

Science Engineering and Technology Associates creates information technologies ranging from video and radar systems, to knowledge discovery systems that find patterns in vast quantities of seemingly unrelated data.

This acquisition enhances SAIC's intelligence surveillance and reconnaissance offerings, including processing of sensor data, advance processing, exploitation and dissemination tools and technology, and realtime information integration.

One noteworthy capable we acquired this this deal is SET's CounterBomber product which is capable of automatically detecting suicide bombers at ranges beyond the last radius of the bomb.

Spectrum San Diego is a high technology security firm specializing in ultra-low-dose x-ray scanning systems.

SAIC acquired Spectrum's CarScan product line which we have renamed VACIS XPL.

This product enables security personnel to scan traffic at vehicle checkpoints for hidden contraband with minimal impact to traffic flow.

VACIS XPL is a new and valuable tool, in SAIC's set of already considerable homeland security product offerings.

We also acquired the online virtual environment product line from Forterra, as well as a key intelligence contract from [Cytor].

The integration of these and earlier acquisitions continue on track, and we are working to leverage their differentiating products, technologies and capabilities across the enterprise.

Moving onto business development.

Bookings in the fourth quarter were $1.6 billion for a net book-to-bill ratio of 0.6.

This ratio reflects lower new awards, coupled with some debookings in the quarter, including a reduction in scope related to unmanned aerial vehicles on the Army Brigade Combat Team Modernization Program, formally known as Future Combat Systems.

We ended the year with $9.5 billion in bookings, a book-to-bill ratio of 0.9, and $15.6 billion in total backlog of which $5.3 billion was funded.

Total backlog decreased by 6% over the previous quarter.

As compared to the end of fiscal year 2009, our total backlog decreased 7%.

Our current book-to-bill ratio and backlog growth numbers reflect the impacts of the market factors mentioned before.

Although our bookings and backlog decreased last year, we maintained our high win rates, and continue to grow our submittals.

We achieved 87% total dollar win rate on all compete business and in FY 10.

We also earned a 60% total dollar win rate on all new business we sought to capture.

These high win rates are consistent with our performance a year ago, despite increasing competition which reflects the value proposition we offer to our customers.

With respect to growth and the value of our submittals, we have accumulated more than $16 billion of submitted proposals awaiting decision at the end of Q4, of which roughly 50% is non-ID/IQ .

This level of proposals awaiting decision exceeds the comparable amount at Q4 last year by over $5 billion, providing a bow wave of potential bookings for SAIC in fiscal year 2011.

Despite negative market trends, we have been successful in growing our pipeline of qualified business opportunities.

We are working diligently on that pipeline, to increase submittals to counteract the impacts of the lengthening federal procurement sales cycle and lower growth in federal spending.

Additionally, the estimated long term revenue value of our wins on ID/IQ contracts grew in FY 10.

This gives us additional contracting capacity to leverage our adeptness at converting new ID/IQ wins into task order wins, that ultimately drive bookings.

Roughly two-thirds of SAIC's revenue is currently generated by task orders we win under ID/IQ contracts.

A focus on winning larger opportunities continues to yield good results.

We won 29 opportunities valued at more than $100 million each in fiscal year 2010, up from 27 wins of this size in fiscal year 2009.

So far in fiscal year 2011, we have won five $100 million plus opportunities.

As of a recent date, we had over 200 $100 million plus opportunities in our pipeline, up about 10% from Q3.

More than half of these large opportunities have an expected award date within the next four months, 31 of these $100 million plus opportunities have already been submitted as proposals.

Mark will now cover the financial details for fiscal 2010, and our financial outlook for fiscal

Thank you, Walt.

We finished fiscal 2010 meeting our main financial goals, and our results were consistent with the outlook we provided last quarter.

Internal revenue growth for the year was 6%, and we added another 2% of growth from acquisitions for a total of 8%.

Internal growth was fueled by increases in systems engineering and systems integration solutions delivered across our US government base, and continued ramp-up and new starts on contracts in our military logistics business area.

We delivered 30 basis points of operating margin improvement over last year to 8%, at the high end of our expectations we set for the year.

This was accomplished by improving our overall contract performance, coupled with economies of scale, and cost containment actions across our overhead and administrative cost base.

Within the SG&A expense area, the G&A portion rose only 2% during the full-year, whereas expense invested in growth, the S portion, bid and proposal and internal resource and development costs collectively rose about 15%.

Our ability to contain administrative costs reflects progress we have made through project alignment and other efforts.

Our higher investment in selling costs reflects our priority for growth oriented actions, coupled with higher business development costs associated with the longer government procurement cycle that Walt discussed a moment ago.

Diluted earnings per share from continuing operations for the year grew 15% to $1.24 per share, right in the middle of our targeted range, primarily driven from revenue growth, margin improvement, and a reduced share count from stock repurchases.

We continue to take significant action on share repurchases when we view our stock as trading below it's intrinsic value per share.

Cash flow from operations and free cash flow finished particularly well, with operating cash flow at $620 million for the year, and free cash flow, defined as operating cash flow minus capital expenditures, finished at about $560 million.

For the fourth quarter, internal revenue growth totaled 4%, and total revenue growth amounted to 7%.

Growth was again attributed to tasking and continued ramp-up of various logistics and military contracts, including our (inaudible) supply chain contract, our systems integration work for the Naval Surface Warfare Center, and our expanded work with the military healthcare information technology program.

Growth was slowed by the lack of new awards in our intelligence area, and ongoing weakness in our commercial markets, including lack of new starts for commercial energy projects.

Revenue mix, by that I mean contract type, labor versus materials, versus subcontractors, et cetera, was largely consistent with prior quarters.

Although we did continue to uptick the percent of our work in the fixed price category, resulting from relatively stronger growth in our logistics and security products business areas, which are essentially all fixed price.

In the fourth quarter, while operating margin was favorably affected by higher security product shipments, we had a few nonrecurring charges or special costs that spiked SG&A to above 6% of revenue.

Among the larger of these charges, pretax, were a $6 million write-down on intangible assets, and a $3 million program write-down from activities within our ICON acquisition, which we made a couple years ago.

And $3 million in severance related to shifting transactional functions to our centralized services centers, part of our ongoing project alignment cost savings initiative.

In addition, bid and proposal costs and internal research and development costs were up roughly 15% quarter-over-quarter, diluting operating margin by about 25 basis points.

Moving on to cash flows and liquidity.

We finished fiscal 2010 with a day sales outstanding metric of 69 days, pretty much on par with last year.

Growth in profits, coupled with a fairly low use of networking capital produced strong operating cash flow of $620 million for the year, while 1.25 times net income from continuing operations.

We exited the year with $860 million of cash on hand, having deployed roughly $250 million on acquisitions, and $475 million in stock repurchases during the year.

Other sources and uses were fairly immaterial.

That sums up my remarks on Q4 and fiscal 2010.

Let me update you now on our outlook for fiscal 2011 that started on February 1st.

As we previously disclosed this guidance continues to exclude special charges of $20 to $30 million, related to our transition out of the Scottish Power IT outsourcing contract.

In last December's call, we indicated that we expect to produce internal revenue growth, and growth in earnings per share from continuing operations at the low end of our long term financial goal ranges of 6% to 9%, and 11% to 18% respectively.

As we indicated then, achieving this required an increase pace of new contract awards in order to fuel internal growth to that level.

As Walt discussed, our increased submittals have led to higher submitted proposals awaiting decision.

But the fact is, our pace of bookings have not increased.

As a result, our expectation for internal revenue growth are being reduced, which also affects diluted earnings per share growth.

In addition, we have increased our planned expenditures on internal research and development, which partially offsets our planned improvements in operating margin.

Here's a little more detail on each of these three key measures.

For revenue growth, our bookings in Q4 and thus far in Q1 do not have high confidence support the recovery we need to see to attain our fiscal 2011 internal growth expectations of 6% or more.

Due to the market factors that Walt discussed, and reflecting the lower amount of recent bookings, we are reducing our internal revenue growth expectation to 3% to 6%.

Further given the outstanding proposals and the transition time from award to revenue, our internal revenue growth is expected to be back-end weighted this year.

For operating margins, we expect to achieve 10 to 20 basis points of improvement over last year.

Margin growth is expected to be driven by continued cost reductions from project alignment actions, economies of scale, and steady fee performance across our contract base, but will be partially offset by higher business development and higher research and development costs.

Specifically, we are now planning to increase our internal research and development investments by roughly $15 million, or 25% over last year.

This increase will be focused on our cyber security products and solutions offerings, the bulk which will be centered on our further development of our Deep Packet Inspection products and capabilities brought to us by the CloudShield acquisition we signed in January of this year.

We believe this level of investment is warranted, given our convictions on the importance of technology differentiators in the cyber area, and particularly their wide potential applicability across our national security, energy and health markets.

For diluted earnings per share from continuing operations, the combination of revenue growth and operating margin improvement is expected to produce EPS growth of between 8% and 14% for the year.

We still have excess cash on the balance sheet, and expect to generate strong free cash flows this year providing substantial capital deployment potential.

While there are always operational upsides and downsides to our outlook, take note that our outlook assumes continuity in the terms and conditions of our contract under the Army's Brigade Combat Team Modernization Program.

This contract is under renegotiation, and is expected to be finalized later this year.

One other quick note for fiscal 2011 P&L.

As a result of the simplifications we have made in defining and allocating indirect costs, and consistent with our recent filings with our government customer, we will be reclassifying how certain costs are categorized on the face of our income statement starting this year.

With this change, SG&A expense will decrease by approximately 1% of revenue, and cost of revenues will increase by the same amount.

No net effect to operating margins or the bottom line.

Our expectations for cash flow from operations are unchanged.

We expect to equal projected net income plus depreciation and amortization.

Finally, as a result of the uncertainties in our market, which Walt will describe here in a moment, we no longer believe the long-term financial goals we have used since our IPO are appropriate.

With that, I'll turn it back to Walt for finishing up on our forward strategy.

Thanks, Mark.

And before I get into our strategy, let me just correct a statement I made with respect to our pipeline.

As of a recent date we had over 200 $100 million plus opportunities in our pipeline, up about 10% from third quarter.

More than half of these large opportunities have an expected award date within the next four quarters, as opposed to four months.

And 31 of these $100 million plus opportunities have already been submitted in the form of proposals.

With that, let's talk about strategy.

A key reason I came to SAIC was my belief that no company in this market space would have more upside potential than SAIC, particularly if we are able to leverage the various technical strengths in a more integrated fashion.

For the last several months, the senior team has been on a strategic thinking journey to recast our strategy for the future.

As part of this journey, I visited our customers, our shareholders, our business leaders, scientists, engineers, and front line employees to get a first-hand sense of the culture and expectations of, and the attitudes towards our Company.

The breadth of domain expertise and scientifice engineering technology applications capability is remarkable.

We have a strong affinity for our customers and their mission, and we are trusted to deliver on our commitments.

We have convictions about the future of the federal market we serve, and we must be thoughtful and realistic about it's outlook.

Our market is becoming more challenging, characterized by flat to declining federal budgets, a more regulated contracting environment, and increased competition.

The government is clearly signaling future reductions to defense spending, and the nation's overall fiscal outlook strongly suggests federal discretionary spending will be constrained or contracted to accommodate nondiscretionary spending and deficit control.

Yet within this market, there are segments that offer growth opportunities over the long term.

It is prudent to give full weight to that outlook in our strategy today, and choose a course that out performs the overall market.

This will require greater focus and investment in fewer areas.

Our current business is composed of two main parts, high growth areas, and what we refer to as core, each representing about 50% of our current revenues.

For our core traditional service market, we expect the market to be flat or modestly declining.

It is still a large market where SAIC today has a relatively small share, so there is room for growth via market share capture.

However, the industry can no longer rely on a rising tide to lift all boats.

The other 50% of the current business is in higher growth areas.

These growth markets are subsets of our national security market, and our energy and health markets.

To be more specific, the higher growth areas within national security are C4ISR, logistics and cyber security.

Cyber security is of particular importance, as it has a critical role to play as a differentiator and/or enabler across all our market areas.

Securing our networks and communications and national security, securing control and management of electric transmission and distribution grids in the energy market, and protecting privacy of records in the health market.

Within energy.

we are focused on energy efficiency, renewables and Smart Grid.

In health, we believe that the health records exchange and inter-operability will become a key thread that connects medical systems within the government, and between the government and private sectors.

Our assessment is these segments of the market will grow up to 15% per year.

These growth areas are also attractive, because they are characterized by a favorable customer demand outlook, rapid technology innovation, multi-technology solutions, and a strong link to the central elements of the missions of our customers, be it fighting and winning our nation's conflicts, protecting the homeland, enabling more affordable healthcare, or producing and delivering energy.

Importantly, they also represent the opportunity to leverage our technical and scientific strengths, our domain expertise, and our strong customer affinity.

That view of the market and our capabilities have resulted in the strategy centered on organic growth characterized by the following tenants.

Delivering high performance in all aspects of our business, deploying new business resources to higher growth areas, accelerating growth in those higher growth areas, through what I characterize as bolt-on acquisitions, and delivering strong cash flow and deploying it to further increase shareholder value.

Delivering high performance in all aspect of our business means flawless execution on contracts for our customers, better leveraging our differentiators across the Company, expanding project alignment for additional business process improvement opportunities, and monetizing our real estate portfolio.

Deploying new business resources on higher growth areas of our market means that we will focus our discretionary resources, including selling cost and technical talent over the next several years, and improve our ability to leverage those investments.

By zeroing in on these growth areas, and by integrating that outstanding talent and technology we have across this Company, we can improve our relative organic growth.

A good example of this is the increased investment we'll be making in our cyber product and solution offerings, that give us technology differentiators in the cyber area, and particularly it's wide potential applicability across our national security and health markets.

Being specific about my expectations for the roles of organic versus acquisitive growth, we believe that organic growth offers the highest return to our shareholders, and we tend to emphasize it by doing a better job selling the best SAIC has to offer to each of our customers.

I believe aggressive cross selling and development of integrated offerings can expand our market share, and drive organic growth.

At the same time, we will consider acquisitions that can accelerate our growth in our high growth areas, by bringing key differentiating capabilities or expanding market access.

When we engaged in M&A, essential to this strategy is doing a better job driving revenue synergies across SAIC, from each acquisition.

We are looking to grow, not only the target traditional business, but use the target's capability to grow other parts of SAIC and vice versa.

This will require greater discipline and effectiveness of integration, but frankly it's critical to value creation.

We believe that our strategy will deliver solid financial performance, specifically even in a tough market ahead, we believe we will produce organic growth ahead of our competition.

Further, we believe we can continue to improve operating margin.

However the pace of improvement is expected to mode rate as a result of tougher market conditions, increasing selling and servicing costs, and greater investments in internal research and development.

With the combination of organic growth, and improved operating margins, and continued sound working capital management, we believe we will continue to grow free cash flow on a per share basis.

We'll carefully evaluate how we use that cash flow to drive long term shareholder value, weighing the alternatives of investing into growth via M&A and/or returning the cash to shareholder.

For M&A, we have appropriate thresholds which compensate for the higher risk and longer term production of returns inherent in those investments.

For returning cash to shareholder, our preferred method today is via share repurchases.

In summary, we have solid performance in fiscal year 2010.

We have a team of highly motivated and dedicated colleagues, and a leadership team committed to deliver on our 2011 objectives.

Our new strategy positioned us to succeed over the long term in this challenging environment.

I remain very enthusiastic about our Company, and I am confident that we will continue to deliver strong performance and value to our shareholders in fiscal year 2011 and beyond.

Now we will take your questions.

Thank you.

(Operator Instructions).

Your first question comes from the line of Bill Loomis of Stifel Nicolaus & Company.

Please proceed.

Hi, thank you.

First, Walt, can you be clear on the amount you have submitted awaiting decision?

Did I hear $16 billion?

Is that directly comparable to the $7.9 billion you gave in October?

Is that apples-to-apples?

The $16 billion is correct, but it's not apples-to-apples when we compare it to the previous numbers.

The $7.9 billion, Bill, was the contract awards which we distinguish from ID/IQ .

So ID/IQ is a separate category.

So it's a standard awards, if you will, which is the 7.9.

ID/IQ is a different category, but the $16 billion is a combination of the two at the

Any idea what that October number would have been with the combination?

Yes.

The aggregate of the two, is about the same as the standard awards, and the two together was $15.5 billion.

So looking at that much outstanding in your win rate, and that $16 billion I assume has some recompetes in it as well.

So your win rate, the change between 60% and 87%, somewhere in between there, I mean that suggests you won $9 billion in the last fiscal year.

I mean in theory, you don't have to submit any more bids, and you can win as much business as you did last year.

What's the -- and your obviously going to submit a lot more, given your pipeline and what you are spending on B&P.

Is that a realistic assessment or is there something else going on that we should, is it realistic to think that in fiscal 2011 you could have substantially more awards than in fiscal 2010?

Well, I think it is likely that we could have substantially more awards in fiscal 2011 than we did in fiscal 10.

But that assumes that the rate of awards picks up from what we saw in fiscal 2010, and what Mark was saying earlier, is we haven't seen evidence of that so far in fiscal, in our fiscal 2011.

Alright?

And so, we are not making any assumptions that that's going to pick up.

And so for us we have to increase the numbers -- number of submits.

Okay, so 3% to 6% internal growth guidance you have higher, maybe another way to ask is, how much of the three -- of the reduction in the organic growth outlook for fiscal 2011 is due to say, the Future Combat or the Brigade Combat Team Modernization Reductions, or reduction of other programs, how much is headwinds that you are facing?

Is there any way to quantify that?

Bill, this is Mark.

I can tell you that the project for year-over-year BCTM formerly known as FCS is down 20% to 30% in terms of our outlook fiscal 2011 versus fiscal 2010.

Okay.

Thank you.

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

Please proceed.

Hi guys.

Good afternoon.

I was wondering if we can get more color on how VACIS did in the quarter, and what the outlook is for that line of business in terms of growth potential in 2011?

Joe, it's Mark.

The VACIS area performed on plan for fiscal 2010, including the fourth quarter of fiscal 2010, and it is expected to grow north of 10% in fiscal 2011, and it's expected to have an uptick a little bit in profitability.

So that area continues to perform very well for us.

Okay.

And then just, if an uptick in profitability would be kind of -- I mean if I recall that line of business, is well above the overall corporate average in terms of EBIT margins,right?

It's well above the average, and we are expecting just a moderate uptick going forward.

Okay.

And then I know you kind of talked about, Mark, just some of the -- what was previously defined as Future Combat System business that overall, that you kind of brought that outlook down.

But just kind of in terms of book-to-bill in the quarter, that kind of debooking, how much did that affect the book-to-bill ratio in the quarter?

In the fourth quarter the debooking amounted to about, was it 21%.

So instead of 0.60, it would of been 0.7.

Okay, great.

And then, we kind of -- when you came on board, we were -- it sounded like you were clearly sharpening the M&A pencil.

I know you have done a couple of small things I was wondering if you can give us an update on your outlook, relative to the relatively large amount of balance sheet capacity you have to deploy in the business.

Should we still be potentially expecting to see a single, or maybe two larger acquisitions relative to what the Company has done historically, or should we continue to expect more small tuck-in type acquisitions?

That's a good question, Joe.

Let me comment by saying, when I think about bolt-on acquisitions, I don't think of them necessarily in the context of size.

And that what we are going to be looking at most importantly, is on the strategic capabilities, primarily technology companies, whose technology can serve us is across the broader SAIC, whether they are large or small.

I would -- so -- rather than think about it in the context of size, think about it in the context of the relevance to growing those important areas we just discussed, C4ISR, logistics and cyber on the national security side, health and energy on -- in the other two domains.

Okay.

Thank you very much.

Your next question comes from the line of Edward Caso of Wells Fargo.

Please proceed.

Hi.

Good evening.

I was wondering if you could just clarify here, that the 3 to 6, are those just the guidance for F 11, and if things get back to normal, whatever that is, could we have -- see higher numbers, maybe not the 6 to 9, but sort of higher than the 3 to 6?

The answer to your question first part of your question is yes.

Those reflect our guidance for FY 2011.

And as we think about the uncertainty of the market, and as that uncertainty either increases or decreases over time, we'll be -- out in the fall, we'll be looking at what is appropriate set of guidance for the future.

But the only guidance we are giving today, is guidance on fiscal year 2011.

Okay.

Just to clarify you broke your business in two core -- high growth, core being flat to slightly up.

High growth cyber energy and health, up 15%, or as much as 15%.

Did I hear that correctly?

Well, the growth part, yes.

But let me correct you on one point, if you don't mind.

As we see our core federal services business, which is about half, we see that market actually flat to declining -- to modest declining as opposed to any growth at all.

And it is in the context of those other high growth areas that have up to 15%.

Not each one of them has 15%, but within that group that we mentioned there, that we could see up to 15%.

Last question.

Tax rate assumption in the F 11 guidance?

Tax rate assumption, Ed, is 38.5%.

Thank you.

Welcome.

You have a question from the line of Joseph Nadol of JPMorgan.

Please proceed.

Thanks, good afternoon.

First question is just again on the M&A front, Walt.

You suggested in the past that products were going to be a bigger, maybe more of a target than services, and looking at the M&A stream, how would you update us on that?

Well, again I won't characterize our M&A strategy to be weighted either products or services.

I would simply say this, that the nature of this Company and it's future growth is going to be based on widely leveraging our technology.

And so first and foremost, we are going to be looking for opportunities that give us technology discriminators that are leveragable.

And so that may manifest itself in acquisitions that have a product- centric nature to them, and it may manifest itself in acquisitions or companies that are less product.

Okay.

Is there a view, a specific view as to the optimal balance sheet of SAIC, not that you are going to get to an optimal place in a month or even a year, but are you going to use some kind of internal guideline as to, in order to maximize returns on equity, how are you are going to think about that?

Joe, we do not have a view of optimal balance sheet.

We like having strategic flexibility through our balance sheet.

We like having an investment grade credit rating, and that's about it at this time.

We would consider additional leverage for the right opportunities, but no specific targeted balance sheet set of numbers at this time.

Okay.

And then just finally, Walt, I think you suggested that the FY 11 budget maybe was a little bit surprising in some areas, or was disappointing relative to maybe what you were thinking about three or four months ago.

I was wondering if you can give any more specificity on that?

Well, three or four months was the uncertainty that we didn't have a budget.

Right?

So there was a lot of questions as to what that first Obama administration budget would look like.

And what we saw as you know is some upticks in defense, in some discretionary accounts including defense.

But when you peel back the budget, and you look at the nature of the things that I refer to as must pay bills, some of that associated with the 30,000 additional troops that are going in harm's way, the healthcare cost, and a variety of things, they really don't have -- they are not adding a lot of discretion or a lot of budget in the areas that we serve.

So from my perspective, it was a big surprise to me in that it didn't go down.

And so I think that's the only color I would add, Joe.

Okay.

Thank you.

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

Please proceed.

Yes.

Thanks a lot.

So it looks like your acquisition growth was a little over 2.5% in the quarter, and you've done a couple of these.

Can you give us a rough sense, how much you expect the acquisitions to add to revenues in fiscal 2011?

Cai, thanks for the question.

I think -- I don't think we can predict that, frankly, because if we are talking about future M&A, a lot of that is --

No.

Not future M&A, but the companies you've already purchased.

You have given us the organic growth, but how much do the companies -- the recent acquisitions you've made including Beck, how much do you expect them to add to revenues in fiscal 2011?

It's in a range from $150 million to $200 million, Cai.

Okay.

You mentioned of your $16 billion I think, about half of it was ID/IQ .

Should we take the non-ID/IQ's, or $8 million up from 7.9 going back to the first question you

Yes.

And then, you haven't changed your longer term goals of 6% to 9%,, but your tone sounds very cautious in terms of the outlook for lots of reasons.

So is it realistic to have a goal of 6% to 9%, if in fact the market is changing, and if in fact it sounds like things are going to be tougher going forward?

Let's be crystal clear.

We are disavowing the 6% to 9% long term goal.

Okay.

So is there a long-term goal?

No.

There is not a long-term goal.

Okay.

Regarding either revenues or operating margins?

That's correct.

And, okay, then you mentioned, I guess I didn't quite catch it.

The cash flow from ops would equal net income plus depreciation?

Our general model as we consistently apply, Cai, is that it would be net income plus depreciation and amortization.

And we stick to that unless we see any specific reasons to depart from that.

And so operating cash flow.

Operating cash flow.

And how should we think about CapEx, because it looked a little light last year?

CapEx will generally be equivalent to our depreciation and amortization level, at least it has been for a number of years.

So it's $60 million, $70 million, $80 million of amortization and depreciation, and that has been our CapEx rate pretty steady.

Okay then lastly, Walt, did I catch you saying that you expected to have consistent growth in cash flow per share?

The remark was that we are going to strive to improve free cash flow per share.

Strive to improve it.

Okay.

Great.

Thanks so much.

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

Please proceed.

Yes.

Hi, guys.

Just a couple of housekeeping first.

Mark, how should we think about amortization next year, instead of running through the model?

Hi, (inaudible) Erik -- I'm sorry.

I'm flattered.

No.

It's okay.

(Laughter).

I'll get back to you.

Why don't you ask your other housekeeping questions.

Sure, on previous calls you have talked about the intelligence business being a particular source of frustration, a lot of what I'll call, constipation in the market.

I know that on the last call you were waiting for two big cyber security awards.

Are you also seeing that translate into cyber security, that general sort of stuckness, if you will, in Intel?

Well, we have several awards waiting or several proposals awaiting awards because most of our good bit of our cyber work is with the government, that it probably has some of the same characteristics, Eric, that we think about it in the broader Intel world.

Okay.

And one of the things that you guys have mentioned previously, is potential taking a look at the commercial marketplace in areas where it makes sense, possibly Smart Grid, energy.

Can you give us an update of where you are thinking there?

So has it changed, is that still a direction you want to go in?

So do you have more granularity for us?

I don't think we have more granularity, as we said before where those adjacent commercial markets behave like our federal market we'll consider them.

But our focus is predominantly still driven by our federal business.

Understood.

Thanks guys.

Eric, I'll have to get back to you, the range for the amortization next year -- or fiscal 2011 is $35 million to $40 million.

$35 million to $40 million.

Thank you very much.

You have a question from the line of Michael Lewis from BB&T Capital Markets.

Please proceed.

Thank you so much for taking my question here, Walt.

Just a quick question in regards to the core business here If it is indeed flat to modestly declining, based on a 50% total revenue, have you assessed any possible divestitures from these businesses?

I think that would be a way to help up lifting the longer term internal growth rates here.

Michael, thanks for the question.

We are, as we always do, we periodically look at our portfolio.

It would be both premature and inappropriate for me to comment on any specific divestiture, and it would be frankly very premature at this point.

Okay.

And then with regard to the recompete that we witnessed in the, let's say last, six to nine months that have come in, and some of the new competitions that you've won, what I'm really interested in hearing about, have you noticed that there's been an increase in scale in scope of the new contracts versus the predecessor contractors?

Or are they somewhat in line with the prior recompeted actions, or did they fall in the plan of what you were expecting on new competitions?

I think they are pretty much in line, Michael.

I would just add a bit of color.

The sweet spot for our Company, frankly, is in the $50 million to $100 million.

And we are also very good at $100 million plus.

But I think some, we are eager to somehow some of the new rules on the acquisition side of the government may change how they think about these large contracts.

As you know, we have seen some of these large omnibus contracts broken up in the last 12 months, to create actually opportunities for small business and other areas of competition.

So there's not a trend there that I can point to, but we are seeing instances of that happening.

Okay.

That's helpful.

One quick question for Mark here.

Mark, what are your -- what should we assume here for repurchase expectations for fiscal year 2011?

We've been running at north of $400 million per year for the last two fiscal years.

Should we take in there $400 million to $500 million this year?

It's, as Walt responded to an earlier question, it's hard to predict that.

We do, for planning purposes, assume that we will conduct a moderate amount to offset our creep, but we don't buy back for that purpose.

We just use that as a base assumption, and that is a moderate amount of repurchases.

We carefully evaluate the trade offs we have between M&A opportunities that may exist in a given quarter, and what our view of the intrinsic value of the stock price is, and we make decisions accordingly.

So it's not appropriate to project, without precisely being -- we just evaluate it each quarter and we report what we do.

And I think you can see a track record in our previous actions, but I wouldn't necessarily project that that's going to be the case in the future.

Alright.

Thank you so much.

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

Please proceed.

Thanks.

Good afternoon, guys.

So we basically have got a 3-point delta here, in terms of the old organic revenue guidance for fiscal 2011 versus the new guidance there.

And I wanted to get a sense of how much of that 3-point delta is really due to the weakness on the Intel front?

Because it seems like on the high growth areas, you guys seem to be as bullish now as you have been in the past.

Intel is one area that you seem to be highlighting as seeing some worsening trends.

So how much of that 3 points is really weakness in Intel, and what would the balance be, if you can get a little more specific in terms of which service lines within your quote, unquote, core that you are seeing worsening trends?

Certainly the Intel market is one we just highlighted as having -- we saw some shifts in the Intel market from last quarter.

And I gave you an example of a $1 billion dollars in bookings that we had forecasted and planned for the fourth quarter that has moved into this fiscal year.

We don't -- haven't seen that breaking, what we call log jam breaking on the Intel side yet, but as I characterized before, there is similar sluggishness in other parts of the market.

Mark, do you have any other color to add to that?

No, sir.

So mostly Intel, it sounds like what you are saying.

Well, no.

I'd say it's broadly across the business.

I think Intel is probably maybe the most dramatic for us.

Okay.

What kind of book-to-bill ratio is embedded into the fiscal 2011 guidance?

Jason, we are targeting to do between 1 and 1.1, to make the numbers we are talking about here.

Okay.

We would love to do better than that, and have a pipeline that allows us to do better than that as a potential.

But we need to be between 1 and 1.1 to deliver what we are talking about here.

On the Scottish Power rebid, I know you outlined the potential hit of $20 million to $30 million.

So, now did that contract go to a competitor?

I know it was coming up for expiration.

So did you have the actual rebid outcome known at this point?

Yes.

It did go to a competitor, and it was awarded in the winter time.

But it was finally contracted just before we released our 8-K about a month ago.

Okay.

So we'll see that charge in Q1?

As we disclosed, due to the specific requirements of this sort of transition, which involves folks that have pension benefits, the charge is tied to their physical movement to the successor contractor.

And we disclosed that we expect it to be done mostly in the first half.

There's a possibility it could leak beyond, that but our expectation is the bulk in the first half.

Okay.

And one last quick one for me.

When you look at those high growth areas like energy and healthcare that you talked about, when you think longer term about what the mix of your business should look like, in terms of national security versus non-national security if you will, I guess we thought about that in the past, is that maybe being kind of a 70/30 sort of ratio?

I mean where would you like to see that go over time based on the new strategy for SAIC that you've outlined?

I wouldn't characterize it as a percentage basis.

But what will drive how we end up in the balance of our business, will be driven by the markets themselves.

As opposed to us trying to, we are certainly going to put more emphasis in those markets specifically around organic growth.

But whether or not that ends up being a 70/30 split will depend upon the -- what is now pretty uncertain about the continued emphasis that the government and our customers put on.

Okay.

Understood.

Thank you.

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

Please proceed.

Hi, guys.

Can you talk about employee attrition rates in the fourth quarter?

Were they roughly in line with where they've been historically?

Jeff, Mark is not here.

Our attrition rate was just below 10% for the year.

Okay.

How about the voluntary part of that?

Sorry, that's what I meant.

The voluntary attrition was 10% for the year, and it was also below 10% for the fourth quarter, voluntary.

Okay.

One last question.

Regarding the two major upcoming recompetes, are they likely to get pushed back as well?

Interestingly, we -- if one of those two you are referring to is the formerly known as the gig, the DGS contract, the Defense Global Solutions, we were informed that that would likely be extended for one year just the other day.

Okay.

So we were planning on a recompete at the end of fiscal 2011.

That looks like at the end of fiscal 2012 based on that information.

The other is NASA UNITeS, and that is continuing on the same course that we've discussed before.

Alright.

That's it for me.

Thank you.

This conclude disease Q&A portion of today's conference.

I would now turn the call over to Ms.

Laura Luke.

Thank you.

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 for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.