Leidos Holdings Inc (LDOS) 2011 Q3 法說會逐字稿

Good afternoon, my name is Regina and I will be your conference facilitator today.

Welcome to SAIC's third quarter fiscal year 2011 earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions) Today's conference is being recorded for replay purposes.

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

Please proceed, sir.

Thank you, Regina and welcome everyone.

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

I would like now to turn the call over to Walt Havenstein, our CEO.

Thank you, Paul and good afternoon, everyone.

During our third quarter, we continued to make progress in implementing our strategy.

As you will recall, our strategy anticipated ever-increasing headwinds in our government market, and considering that, our belief of the importance of expanding our business development efforts.

These efforts are succeeding.

We continue to expand our pipeline of new opportunities and the volume of our submitted proposals and wins have increased at double-digit growth rates over a year ago.

That said, the market environment in terms of generating revenues has proved more difficult than anticipated.

That environment continues to be challenging and is manifesting itself in unexpected delays and a longer cycle for the conversion of awards to revenues which has led to growth below my expectations.

For the call today, I'll provide highlights of our recent business development results, cover market conditions, and ongoing efforts to implement our strategy and close with acquisitions and recognitions.

Then Mark Sopp will provide a recap of our overall financial performance and outlook.

Regarding our overall business development results, bookings totaled $3.1 billion in the third quarter, with a book-to-bill of 1.1.

On a year-to-date basis, bookings are up 14% over the first three quarters of last fiscal year and book-to-bill is 1.1.

We ended Q3 with $16.3 billion in total backlog of which $6.3 billion is funded backlog, an increase of $500 million during the quarter.

As I mentioned in my opening remarks, we are continuing to expand the volume of submitted proposals.

Year-to-date submittals for definitive delivery contracts are up $5.4 billion or 28% compared with the same period a year ago, reflecting our more aggressive business development objectives.

We began the third quarter with $18.8 billion in outstanding submittals for delivery -- for defined delivery and IDIQ contracts combined.

During the third quarter, we added $16.5 billion in new submittals, leaving us with $23.1 billion in submitted proposals awaiting decisions at the end of the quarter.

That's up $4.3 billion from last quarter and up 48% compared with a year ago.

Over 50% of the $23.1 billion is for non-IDIQ opportunities.

In addition, on a year-over-year basis, our pipeline is up about 30%.

The combination of increases in outstanding proposals and new business pipeline are the engines for future growth in this challenging environment.

In terms of key wins in third quarter, SAIC won the NASA Information Technology Infrastructure Integration Program.

This is a follow-on for enterprise applications work performed by SAIC under the Unified NASA Information Technology Services or UNITeS contract on which SAIC has been the prime contractor since January of 2004.

Under the I3P EAST contract which we've just won, we will provide all the services necessary to operate and maintain NASA's set of integrated enterprise applications systems supporting all ten NASA field centers, NASA headquarters in Washington, DC, and the NASA shared service center in Bay St.

Louis, Mississippi.

This potential $321 million recompete win underlines our competitive strength in a challenging procurement environment and illustrates the high quality of our past work and ongoing relationship with NASA, a key long-term customer who we look forward to serving in this and other significant capacities for many years to come.

To put our business development performance in context, I think it's important to share with you that we have achieved the third quarter book-to-bill of 1.1 despite market headwinds that are buffeting our fast-growing pipeline of $100 million plus opportunities.

Many of those on the call today joined us for the Investor Conference we held in early October.

At that time, we said we had won 21 $100 million plus opportunities in FY 2011, through 7 October.

And we expected decisions on 41 more by the end of the year.

Since then, two of those 21 wins are in the stalled status, one due to a subsequent competitor protest which still remains unresolved and the other simply due to a lengthy and ongoing delay in getting a signed contract in place.

Of the 41 decisions we expected in the remainder of the fiscal year, so far only four have actually occurred.

We won two and we lost two.

Of the remaining 37, 60% of those or 22 are now expected to be postponed into our fiscal year 2012.

Those dynamics are contributing to the revenue outlook that Mark will address later.

However, even with the market headwinds our business development performance for the first three quarters of fiscal year 2011 was significantly improved over the first three quarters of fiscal 2010.

Year-to-date dollar win rate on definitive delivery contracts is running at a healthy pace of 62%.

This performance reflects our efforts to invest and capitalize on the many competitive discriminators we possess at SAIC.

I'll now take a few moments to share my views on current conditions in the government solutions and services market.

The government market environment we are facing is what SAIC envisioned and with that foresight, we set our strategy to emphasize solutions and services in the few large enduring market areas that we believe will fare better than the broader government market itself.

Uncertainty over near term funding and delays in converting wins to revenue has been exacerbated by the ongoing continuing resolution.

This is impacting our government customers' ability to make procurement decisions and improve new starts which is one of several reasons behind the increase in submitted undecided proposals.

Another equally important but also transitory reason for ongoing delays in federal procurement decision making is the additional workload imposed by the new federal procurement regulations and an increasing number of protests.

However, to reiterate what I said in all my previous earning calls, despite procurement delays and flattening growth in this market, it is a very large market and there remain several substantial areas of opportunity for SAIC.

The Federal Government is expected to procure improvements to its information technology in order to become more efficient and to do more with less total funding.

Improved cybersecurity is viewed as an additional must pay requirement that is expected to expand with double-digit growth.

Enduring critical needs for federal investments in health and energy programs are anticipated to make these areas sources of future growth.

Homeland Security concerns are also on the rise, given the recent incidents involving bombs hidden on airline passengers and in air cargo.

Increased spending on preventative measures including border security is expected.

SAIC is a market leader in all of these growth areas.

Thus, we expect that federal funding for cost effective gap-filling, what we refer to as 85% solutions, will endure.

And that SAIC's talent and breadth, agility and customer affinity will enable us to prosper by filling critical, time-sensitive national security needs that must be funded and delivered.

Now let me discuss our ongoing efforts to implement our previously outlined strategy.

In our third quarter, SAIC continued to invest in strategic growth markets through emphasis on excellent account management, cross-selling, differentiated offerings, enterprise solutions, and a focus on winning larger, more complex pursuits.

In addition, our efficiency and effectiveness initiatives continue to produce overhead cost reductions that are enabling us to enhance competitive pricing and expand discretionary investment in strategic growth areas.

As we shared at our October Investors Conference, our efforts have been rewarded with higher performance in our strategic growth areas, which we expect to continue.

We recently opened a Cyber Innovation Center in Columbia, Maryland that better enables us to help government and commercial enterprises prepare for, protect against and respond to a wide variety of cybersecurity threats.

This center will design comprehensive cyber-risk management programs to identify and neutralize cyber attacks, integrate and manage information security services to predict -- protect mission critical data and perform certification and accreditation testing of information technology systems.

In addition to cybersecurity, we are also seeing success in the energy market.

This success is evidenced by our recent geothermal energy solution wins.

One example is the award of a contract from Terra Gen Sierra Holdings, a renewable energy company focused on geothermal, wind and solar generation.

Our role will be to engineer and construct a binary geothermal power plant in Nevada.

Our near term pipeline for similar energy projects has increased significantly during the fiscal year.

We expect future design build opportunities within the energy market to result from the breadth of our solution offerings as well as leveraging our balance sheet to provide financing to appropriate projects.

Turning now to acquisitions.

During the third quarter we closed the acquisition of Reveal Imaging Technologies Incorporated, a leading threat detection products and services Company headquartered in Bedford, Massachusetts.

Reveal supports the effort of the Transportation Security Administration and other customers in the airport and transportation safety industries, as a supplier of inspection systems that assists in checking baggage for explosives.

The acquisition enhances SAIC's Homeland Security solutions portfolio, adding TSA-approved baggage screening systems to SAIC's existing capabilities which include a successful VACIS passenger and cargo inspection systems.

This enhanced offering is especially timely, given the recent escalation threats faced by air carriers.

Shortly after the close of the third quarter, SAIC acquired Human Language Technology, an intellectual property asset from AppTek Partners and its affiliates.

As part of the deal, SAIC acquired a complete suite of products for text and speech processing, including machine translation, knowledge management, and automated speech recognition tools for more than 30 languages.

Federal government and commercial customers use these tools to automatically translate and transcribe large volumes of data and significantly reduce the amount of time needed to edit and finalize translated output.

The massive growth of translation requirements for documents and media has outpaced the capability of human translators and has created demand for automated translation tools that increase the efficiency of human translation while preserving the quality.

The acquired technology and assets will help further establish SAIC as a leader in delivering language services to the intelligence, defense and law enforcement communities.

Before I turn the discussion over to Mark, I want to close by sharing two special recognitions that SAIC received during the quarter.

SAIC was recognized as a Leader In Sustainable Engineering by the independent analysis firm, Verdantix.

They compared 19 of the largest US engineering firms on 45 criteria covering utility scale, renewable energy, on-site renewable, green buildings, water management, waste, hydrogen transport, smart grid and electric vehicles.

They found SAIC to be one of six firms leading the market for sustainable engineering because of its strong track record across a spectrum of projects, willingness to innovate and mature organizational approach to sustainability.

SAIC's wholly owned subsidiary, Benham, won a National Design Build Institute of America 2010 National Excellence Award for its construction of a production and distribution center in Victorville, California for a major soft drink company.

The facility included 280,000 square-foot production building, a 588,000 square-foot warehouse facility, a 26,000 square-foot administration building and several others.

SAIC completed the 57-acre bottling plant on time and under budget, enabling the soft drink company to begin production just one year after the purchase of the property.

We believe this expertise and ability to deliver for demanding blue chip customers will increasingly differentiate our offerings in the energy and environmental market in the future.

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

Thank you, Walt and good afternoon everyone as well.

Our third quarter continued to demonstrate many of the business conditions that have made this a difficult year to predict.

As we approach the end of the government fiscal year in September, procurement decisions picked up and accordingly our bookings improved considerably at that time.

This was demonstrated by winning eight contracts over $100 million between the end of July and the end of September.

The pick-up in award decisions did not, however, continue in October when we experienced a stall in new procurement decisions being made and reduced customer confidence in incrementally funding existing programs.

With this, in our third quarter, we were able to pick up the pace in revenues from the first half of this fiscal year, but as Walt said it was nonetheless short of our expectations.

Total revenues were about $2.9 billion for the quarter, up 4%.

Our operating margins in the third quarter conversely were quite strong at 9%, up from the prior year, due to an effective program execution and cost efficiencies implementation.

More on this in a bit.

Diluted earnings per share from continuing operations were up 21% on the high operating margin, and a reduced share count.

Working capital metrics were solid with operating cash flow of about $300 million.

With that overview, I will now hit the major components in a little more detail.

Total revenue growth of 4% this quarter was equally divided between internal and acquisition-related growth.

Our strategic growth areas, that is, ISR, cyber, energy, logistics readiness and sustainment and health continued to outpace aggregate growth, with an internal growth rate of 6% for the quarter in these areas.

However, revenue ramp-up from new contracts across the board was lower than forecast.

We see a number of customers hesitating to staff programs at the expected level, which we attribute to concerns over future funding levels.

In addition, we had two large intelligence programs previously awarded that remain delayed or in protest mode which we had expected to clear by now.

Finally, we did not secure an alternative contract vehicle to provide equipment to the armed forces which we had factored into our expectations.

These same dynamics which apply to more cases than those just mentioned are the reasons for the reduced revenue guidance for the year which I'll cover a little later.

Profits conversely showed continued improvement with the operating margin registering at 9%, a 60 basis point rise over fiscal 2010 third quarter.

These results reflect a strong program performance, client satisfaction, and effective cost management.

Within this, our Q3 operating margins benefited from a favorable milestone fee recognition event.

We recognized the benefit of increased cost recoveries on cost reimbursable contracts and we had a pick-up from a favorable result on our appeal in the Nuclear Regulatory Commission case.

Diluted earnings per share from continuing operations rose 21% driven by growth in operating margin, net income, and coupled with a reduced share count from repurchases primarily made earlier this year.

Operating cash flow was a healthy $300 million in the quarter, reflecting our higher profitability and a slightly reduced days sales outstanding metric of 69 days.

Other working capital accounts were net favorable as well.

For investing activities, we used about $220 million of net cash for completion of the Reveal acquisition to further expand our security products offerings.

That covers the third quarter.

Now I'll discuss our financial outlook for the future.

During our last earnings call, and during our Investors Conference in October, I conveyed that our ability to achieve our fiscal 2011 revenue guidance was dependent upon timely conversion of awards to revenues.

As mentioned a moment ago by Walt, that conversion has not occurred to the level expected.

For the remainder of fiscal 2011 we expect these conditions to persist.

While we have substantially increased our submissions of bids for new work, as demonstrated by our growth in outstanding proposals, it is appropriate to be cautious in forecasting the pace of converting bids and the ultimate awards that result to revenues.

Accordingly, we are revising our forecast for fiscal 2011 internal revenue growth to be between zero and 2% for the full year compared to fiscal 2010, down from our prior guidance of 3% to 6%.

Conversely, in light of our strong Q3 profitability, we are increasing our year-over-year margin improvement guidance to 30 to 50 basis points, up from our prior guidance of 20 to 40 basis points.

Within this forecast, we are continuing to make the incremental investments for long-term growth as discussed in our investor conference.

There is no change to our conviction this is the right thing to do.

Earnings per share, the revenue reduction and the margin increase largely offset one another, thus we are retaining our previous EPS growth range guidance of 14% to 18% year-over-year.

Similarly, our cash flow expectations are unchanged as well.

For fiscal 2012 which begins on February 1, 2011, we are simplifying our guidance practice going forward.

We will now provide dollar range estimates for total revenue and for diluted earnings per share from continuing operations.

We will also provide an expected dollar floor for cash flow from operations.

As we've done in the past, we will provide this guidance on an annual basis as we're doing today and guidance will only reflect completed acquisitions.

You'll recall for fiscal 2011, we specifically excluded from guidance an estimated $20 million to $30 million primarily non-cash special pension charge related to the termination of our Scottish Power contract.

Those charges are triggered when pension assets and obligations of our former employees on the contract transfer to the successor contractor and the transferred employees and today that process remains delayed.

We believe the charge will eventually occur but the timing is difficult to predict.

Accordingly, we are continuing to specifically exclude this element from forward guidance.

That said, looking at fiscal 2012, our top line initial total revenue estimate is $11.2 billion, to $11.7 billion.

While we have indeed improved the quantity and quality of our new business pipeline, and have seen continued growth in our large backlog of outstanding proposals, this range reflects a cautious outlook given the market conditions and specifically the challenges of converting contract awards to revenue.

For diluted earnings per share from continuing operations, our range estimate is $1.35 to $1.46.

This EPS range reflects estimated operating margins in the low 8% range, nominal share repurchases and a tax rate of 38.5%.

That tax rate assumes no R&D tax credit for calendar 2011 currently being debated in Congress.

If the R&D tax credit is ultimately enacted for 2011, we estimate our EPS for fiscal 2012 will be favorably impacted by about a $0.01.

For operating cash flows we expect to conservatively obtain or exceed $500 million for the year, with no major shifts in our cash flow model expected.

Given our strong balance sheet and expected cash flows, our intention is to deploy all or most of our excess cash toward acquisitions and/or additional share repurchases, subject of course to meeting our long-term strategic and economic interests.

Our EPS guidance appropriately does not yet reflect the earnings effect from those activities as they are not yet sufficiently predictable.

In summary, we expect the overall defense market to continue to be challenging for fiscal 2012 and that view is reflected in our fiscal 2012 guidance.

However, we believe the best strategy is to continue to invest in our pipeline and other growth-oriented initiatives, which we believe will have long-term payoffs.

Much of this investment is sourced from our ongoing G&A reduction activities which we expect will provide for continuity of or improvement in operating margins on a normalized basis.

With this, our discipline in generating cash should continue to produce quite attractive yields from which we expect to continue a cash deployment strategy focused on value creation for shareholders.

Thank you.

I'll now turn it back over to Walt.

In closing our prepared remarks today, I would say that of course I'm not satisfied that we did not meet our growth expectations.

I would like to emphasize, however, that we saw improvement in our internal revenue growth and that we delivered our third consecutive quarter of healthy new bookings.

Despite headwinds in our market, during Q3, consistent program execution and favorable returns on fixed price contracts contributed to improved operating profit and double-digit earnings per share growth over the same period last year.

We have a growing pipeline of new business opportunities and a backlog of submitted proposals awaiting decision, a solid financial position, and a track record for generating cash flow.

In the fourth quarter and in FY 2012 and beyond, we will leverage these and other strengths to pursue strategic growth efforts that should increase shareholder value on a long-term basis.

Thank you.

Regina, we are now ready to take questions.

(Operator Instructions) Your first question comes from the line of Jeremy Devaney with BB&T Capital Markets.

Good evening, gentlemen.

Nice work on the bookings in the quarter, seeing some growth there.

I was wondering if we could talk a little bit about your contract mix?

What in fact was the contract mix in the quarter, fixed price, cost plus?

Jeremy, it's Mark Sopp.

The contract mix was similar to what you've seen in recent quarters.

You'll see fixed price in our 10-Q filed tomorrow at 23%, same number as last quarter and the rest of the numbers are similar as well.

All right.

Are you seeing any drift in the awards going into backlog, any indication that cost plus is increasing in the business mix?

I wouldn't call it a trend.

We may see a little of that but I certainly wouldn't call it a trend at this point.

And lastly, if you'll allow me one more before I hop back in queue, looking at the continuing resolution, if we wind up seeing a full year continuation of the CR, what impact would you expect to have on your overall business?

Well, I think from our perspective, the continuing -- having a decision made, whether it's a full year continuing resolution or whether it's an omnibus appropriations or what have you, I think is a good sign for everybody because it allows our customers to be a little more precise in knowing what they're going to be able to do.

So getting a decision made, no matter what the bill says, is going to be fundamental.

I think in the context of continuing resolutions, we don't have a significant number of new starts and by the way, the continuing resolutions should be able to accommodate, depending on how the Congress writes the continuing resolutions, could accommodate new starts as well.

So from my perspective, I think assuming the continued resolution is at or near the budget requested, I don't see a significant impact in the forecast that we've just given you.

Great.

Thank you for the response.

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

Hey, thanks, guys.

Just wanted to start with a couple of questions on the margins in the quarter.

Clearly better than we and I'm assuming others were expecting at 9%.

I think Mark, you called out some of the factors there but was hoping to just get a sense from you in terms of which of those factors would you characterize as more one-offish or one-timish in nature?

And if we can quantify some of those pieces, just so people can get a sense of where the normalized margins should be because obviously as we go into fiscal 2012 like you said you're going to be down closer to 8% for the full year?

Any color there would be helpful.

Certainly, Jason.

I wouldn't consider any of these one-time in particular, but the elements are there.

So we had about 60 basis points of contribution from recovery of costs, cost reimbursable contracts, arguably some of that is catch-up from prior quarters which you typically see contractors do in the second half of the year, once they have a clearer view of how they'll finish the year.

The NRC matter was relatively minor, I'll call it 10 basis points, but we're certainly pleased to see a favorable outcome as we believed all along on that front.

The milestone fee was considerable but it was also offset by some line-ups we had in the prior years.

That's a push.

So you're talking 60 basis points, 70 basis points of things of that nature but the base was strong as you can see, as well, with strong performance across our program base.

Okay.

And just as an extension to that, I think at the Analyst Meeting when we had talked in general terms about long-term margin potential in the business, I think there was some suggestion that maybe on a long-term basis the business could get to 9%.

I just wanted to check in on that, see if that's still how you guys feel?

It sounded like during some of the prepared remarks you were talking qualitatively at least about stability to modest improvement over time.

So not to try and split hairs on the language but just wanted to take your temperature on longer term margin potential of the business.

Well, Jason, I think with the diverse contract base we have, any shifts we see tend to happen slowly and that's the source of the comment moderate, but we are investing quite a bit in the long-term growth and in particular some of the product areas, Reveal, VACIS, CloudShield, et cetera, that is taking on some investment in the SG&A area on the short-term but can have very favorable impacts to the margin if those areas are successful.

And if they are, I think that activity on the products front plus overall increasing mix in our strategic growth areas which as we described have higher margins than the rest of the base, if very successful there I think the 9% is in the realm of possibility.

Okay.

And just last one from me on cash deployment, obviously you made some comments on that as far as your near term priorities, with the M&A and perhaps some additional buybacks.

I mean, it seems like you've been pretty consistent in saying that you would prefer to find some good size M&A and deploy your excess cash but I think at the same time at the Analyst Meeting you had said, if the M&A opportunities don't materialize for whatever reason you would be and the Board would be more willing to consider alternate forms of cash deployment whether that's a dividend or much bigger buyback.

What I wanted to get a sense of is from an investor's point of view, how long should folks feel like they need to wait before you guys make that call in terms of whether some sizable deals will shake out of the M&A pipeline or if it's time to consider alternate balance sheet strategies?

I think we've been pretty consistent in that regard.

And I think the -- in that we will take a balanced approach and where we see opportunities on the acquisition front, and they come and go, I would tell you right now, that if there's opportunities on the acquisition front that will allow us to buy a bolt-on acquisition, to build a technology or capability gap or allow us to expand a market access that will accelerate organic growth, then we're going to take advantage of it.

We'll take advantage of that in the context that it is a good investment relative to other investments for that capital and so -- and I think if you look at our track record over the last 12 months -- 12, 14 months, we've had a fairly balanced view of that.

And that if we're not going to deploy it in acquisitions, and we prefer to use that capital to buy back stock and I don't think that's -- we would say anything differently from that today.

Okay.

Fair enough.

Thanks, guys.

Thank you.

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

Yes, thanks so much.

So $23.1 billion in bids out and more than 50% are non-IDIQ, so is that number like $12 billion versus $10 billion in the prior quarter?

Is that essentially what we're looking at?

I think you've got the $12 billion right.

I'm trying to think about in the context of the prior quarter.

The prior quarter was $10 billion.

So $12 billion is the number.

So you're up 20%.

And yet also I look here, your funded backlog which really is the determinant of revenue, is up $500 million.

Your months of funded backlog are 6.6, up from 6 going into the year.

You have a bolus of bids awaiting decision that presumably at some time are going to be decided.

Are you assuming in your revenue guide for next year that those bids awaiting decision on the non-IDIQ variety stay at the $12 billion level?

Because most of your competitors saw some of that log jam start to break in the quarter.

Are you assuming it stays up at that level?

I think it's pretty hard to predict, first of all, Cai.

I think we're still bidding an awful lot of acquisitions right now.

So my guess is we're going to continue to grow that.

We're going to continue to work to grow that submittal undecided bids until we see -- we have clear evidence that, that backlog is actually breaking and, frankly, our -- I've got to tell you the only thing that gives me some degree of optimism and I am a pretty optimistic guy is the fact that if we hadn't done this a year ago, if we hadn't had made those conscious decisions to continue to invest, we would be in a lot different position now.

Okay.

One thing I've got to mention to you, I have a certain concern about the backlog getting reduced over time, not just by revenue generation, but by the fact that things get de-scoped and we've seen some evidence of that over the last 12 months.

And so we have taken a relatively conservative position about what could happen with regard to what I'll call debookings, that comes from de-scoping and I think if someone were to say that they can tell exactly how the government's going to respond over the next six to 12 months with respect to priorities, well, good on them.

That's one little crystal ball that's been cloudy for me for the last 12 months, frankly and I think it probably will be for a while.

Okay.

And then on the margin front you mentioned these investments in cyber as well as ground combat vehicle team and yet your SG&A is really down sequentially and your guidance seems to imply a big decline in margins sequentially in the fourth quarter to a little over 7% a month.

Should we expect the SG&A to ramp in the fourth quarter and were any of these recoveries you had in the third pull-forwards?

Not sure I follow the last part of that, Cai, but we could see a little pick-up in SG&A in the fourth quarter.

I would point out that much of the investments we're making are actually in the overhead category which is in the gross margin.

So it's not entirely in SG&A.

So that's important to understand.

But we are being cautious in the fourth quarter.

Some of the things that did occur in the third will not reoccur in the fourth given the timing of those items.

Okay.

And my last one is the normally you get a lift in the fourth quarter from product sales.

Did you pick it up in the third or should we still get that lift in the fourth quarter?

We will not -- we're not expecting a pick-up in the fourth quarter due to the timing of the shipments.

So we're flat to down in the fourth quarter from the third sequentially, Cai.

Got it.

Thank you very much.

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

Hi.

Thanks for taking my question.

This is actually Rica Mendoza in for Joe Nadol.

Good afternoon.

I just wanted to ask a similar question on book-to-bill and what your expectations are for Q4 and obviously it's a leading indicator for the following year.

What book-to-bill level do you expect in 2012 and how do you see your pipeline?

We expect to end the year this fiscal year with a book-to-bill of 1.1.

And it's probably a little too early to give you specifics around how we see book-to-bill for the next fiscal year, but as we finish this fiscal year we'll make sure the next call we give you a snapshot of that.

Okay.

Great.

Thanks.

I also wanted to ask you about what sizable recompetes do you see next year as well?

Rica, Mark here.

The big three for us, we're not very concentrated in terms of singular program lift, but we do have our large recompete, new name is GSM, old name is DGS and before that GIG-BE.

We talked about that in each of the calls recently.

That's our largest program in terms of annual revenues but still not in excess of 3% of revenues.

The last piece of the NASA UNITeS recompete, if you will which is broken into four parts, is expected next year.

That's call NICS, N-I-C-S and DHS EAGLE which is an IDIQ contract is also scheduled for recompete.

Those are the biggest three although there are numerous others.

Overall, the revenue on which we're counting that is subject to recompete is not abnormal to our previous years.

Okay.

Great.

Thanks.

And then lastly, I wanted to ask for your thoughts on more broadly on overall competitive environment and what you've been seeing in terms of trends that DoD is looking for more -- looking more at price in contract negotiations.

And I was wondering if you could talk about are you seeing pricing becoming more of an issue and are your competitors getting more aggressive?

The answer is yes and yes and I would simply say that we similarly are being more aggressive in the context of reducing costs so that we can be more cost competitive across the board.

And I think the proof is in the pudding in that our competitive win rate is still above 60% and if we can maintain that, which we have every intention of doing, it will reflect that we've taken a proper action on our cost to enable us to be price competitive and continue to invest in the differentiators that where cost is not the primary concern but the specific solution is, then we think we'll continue to be successful.

Okay.

Great.

Thank you very much.

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

Good evening.

A couple of quick questions here.

Could you update us on your real estate situation both in Tysons and San Diego?

Sure, Ed.

We have two meaningful sized properties that are in negotiation at this time.

They're certainly not closed, but they are on track to have a reasonably good chance of closing in the near term.

One is on the east coast, one's on the west coast.

And hopefully we'll get those done.

The larger project on the McLean campus which concerns redevelopment associated with the Metro and so forth is a few years out.

But nonetheless, getting a lot of attention including the appropriate zoning to make the property more valuable for that purpose.

Should we assume that -- given you've owned these properties for awhile, that there will be a fairly sizable gain involved and will that be turned around and put back into some investments?

The guidance I provided at the Analyst Day still holds, so the answer is yes, though property's cost basis is substantially below the fair market value and we'll want to be flexible with how we use the gains should they occur with respect to reinvestments or other purposes.

The tax rate for the coming quarter of Q4?

Let me just stick to the full year for fiscal 2011, should be right around 37%, flat.

And you mentioned an acquisition closing in this F Q4, can you give us financial framework?

The acquisition we're talking about, the assets and intellectual property, I wouldn't consider it in the context of a normal acquisition, so I'm not going to -- we've disclosed that the investment we made there.

You want to put more color on that, Mark?

We'll disclose the investment in our 10-K, not a huge amount, and the revenue contribution next year is nominal.

Great.

Thank you.

Thanks.

Your next question comes from the line of -- I apologize.

We just had somebody drop off the line.

Your next line -- I'm sorry, your next call comes from the line of James Friedman with SIG.

Operator?

I apologize.

He may have dropped off as well.

Your next question comes from the line of Tim Quillin with Stephens, Incorporated.

The last man standing, I guess.

I wanted the to follow on a little bit on Cai's extrapolation of the fourth quarter guidance and by the way, thank you for giving explicit guidance for next year.

I just want to make sure that I'm reading this correctly, that the proper EPS number that you're growing off of for fiscal 2010 is $1.24.

You're growing that 14% to 18%.

You've done $1.15 so far in continuing EPS and so we're looking at implied EPS guidance for 4Q or $0.26 to $0.31.

Is that right?

Actually, at the top end at $0.32, so we're off a $0.01 on that front.

Okay.

So rounding difference.

But it's correct, your base of $1.24 for the prior year is accurate.

Right.

And so that, the midpoint we're talking about a negative growth, a decline in EPS, and as Cai noted I guess the margins would be around 7% which is down a lot from the previous quarter and down a lot year-to-year?

And can you just go through the reasons for that, the investments in overhead that you had discussed that might bring that margin down that much?

Thanks.

Sure, Tim.

The broad overview, some of this is repeated from Cai's question, lack of repeat of some of the favorable items in the third quarter.

We do have some product revenue fall-off in the fourth quarter and we do expect an uptick on SG&A, particularly R&D, in the fourth quarter.

Not huge amounts but some negative effects there.

And as always, you have holidays and vacations that affect labor utilization and so we want to be cautious there.

We certainly think it's possible to do better than the implied range on the margin but I think it's prudent to be cautious at this point and hopefully we'll finish strong.

Okay.

And then also on your guidance for cash flow from operations for fiscal 2012, and again, it may be that you're trying to be cautious and I know that's an at least number, but $500 million would be below net income and I just wondered what the puts and takes might be there in terms of cash generation and why that wouldn't be north of $600 million?

Thanks.

I was explicit in saying we don't expect any major shifts in our cash flow model, i.e., working capital sources or uses.

So you should generally expect our historical experience once you derive your income statement model.

When you're providing a floor, you want to be conservative, so that's what I did.

As you might have heard, the government is increasingly interested in giving contractors in the form of withholds and they have increasingly passed regulation to do so.

So I'm cautious on that regard, but hopefully we will successfully navigate through that and continue the strong cash flow experience we've had.

Got it.

Thanks much.

Thank you.

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

Hi, guys, thanks for taking my question.

This is actually in Eric [Lippert] in for Erik Olbeter today.

Just getting back to the SG&A line, looks like it's down about $24 million year-over-year and I think I heard you mention that your bids submitted was up 28% this year.

Was just hoping to get a little bit of extra clarity around what's going on with that SG&A line, where you're seeing efficiencies and how you see that panning out really as we look towards fiscal 2012?

Eric, let me go back a couple of phone calls, I probably should have reminded everyone this time but starting in fiscal 2011, the year we're now in, we made a reclassification of some categories of costs which are affecting the year-over-year comparison.

And if you'll recall from that, about -- the SG&A is down about a full percentage point to revenues as a result of that, so it used to be 5.7%, 5.8% of revenues is now you're seeing 4.7%, 4.8% so that's the biggest reason for the delta that you're seeing.

We are not too different year-over-year in B&P cost and IR&D cost compared to fiscal 2010 on an apples-to-apples basis.

However, a lot of the incremental investments that we talked about at the Investor Day are in the overhead category to the earlier question.

Okay.

That's helpful.

Yes, I had forgotten about the reclassification there.

So those investments are obviously playing out well, starting this quarter, is that what I'm hearing?

Because if your bid and proposal was flat you've got almost 30% more bids going out.

It seems to imply, you're starting to realize some of the return on those investments, is that how I should be thinking about this.

I think you should be thinking about it in that context but keep in mind, the acquisition cycle time is longer and so we aren't yet seeing the full benefit of those investments.

And the fact that our funded -- or excuse me, our submitted bids has increased so much is the only evidence of that investment, our expectation is we're going to win our fair share and our fair share is north of 60%.

And so we'll expect to see those awards at some point but we've been continually disappointed in the government's ability to get those contracts awarded.

And I've got to tell you, we've also put an awful lot of effort in over the year to make the overall bid process in the enterprise much more efficient and effective, focusing much more deliberately on -- and frankly, earlier on these acquisitions and so you're seeing some of the results of that.

So how much we bid versus how much we submit and how much we spend to submit it is getting better year-over-year.

And Erik, I would just point out in addition to Walt's points which are appropriate, is we are spending more effort in a longer lead time for bids to occur in the future, capture process is starting earlier to improve our probability of win and those costs are not captured in the B&P category until the actual bid is out on the street.

So the B&P doesn't necessarily track with the level of investment to grow our pipeline.

Okay.

Thank you.

That's helpful.

Your next question comes from the line of James Friedman with SIG.

Mr.

Friedman?

We lost him again.

He is not there.

I apologize.

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

Thanks.

Mark, I know I'm beating a dead horse here on the fourth quarter guidance, but you talked about the one-time items being 60 or 70 basis points.

If we take that off the third quarter, sequentially, that still brings it down to 8.3%.

The fourth quarter guidance implies 7% or even lower operating margins.

That's a huge gap there.

Is there some large one-time item, because the gap's in the range of $60 million or so.

It's pretty significant.

I really don't have anything more to add from my earlier response, Bill.

So I'll leave that as it was.

And on the -- that obviously assumes no share buybacks in this fourth quarter?

That is the -- that is how we provide guidance.

So we don't have our future earning -- well, it doesn't affect the margin question to begin with, right?

On EPS it does.

But the answer is no, we're not counting on big repurchases in the fourth quarter.

Those are not reflected in the guidance.

Okay.

And then looking out to the fiscal 2012 guidance, the EPS range for fiscal 2012 implies a nice pick-up sequentially from what your guidance is in the fourth quarter.

I guess the counter to asking the fourth quarter question is why is that going to change fairly quickly into fiscal 2012, some of the headwinds you see right now?

In general, we expect the margin progression to generally track in fiscal 2012 as it has historically, although there is some years where there have been exceptions but we do expect to grow sequentially for the most part during fiscal 2012 and we do expect to improve margins sequentially in accordance with that.

Product shipments should generally be more back end weighted, although not a huge shift for next fiscal year, so we do intend to migrate northward on the margin front, consistent with the guidance.

Fairly equally weighted in terms of a bell curve on the margin front for next fiscal year, quarter-to-quarter.

Okay.

Thank you.

Thank you, Regina.

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

This concludes our call for today.

Thank you everyone.

Thanks Paul.