Leidos Holdings Inc (LDOS) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the SAIC fourth quarter fiscal year 2013 earnings conference call.

During today's presentation, all participants will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Tuesday, March 26, 2013.

At this time, I would like to turn the conference over to Paul Levi, SAIC's Senior VP of Investor Relations.

Please go ahead, sir.

Thank you, Vince, and good afternoon.

I would like to welcome you to our fourth quarter fiscal year 2013 earnings conference call.

Joining me today are John Jumper, our Chairman and CEO; Stu Shea, our COO; 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.

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 for our audience to please note that our management will speak of our Q4 and year-to-date results as compared to adjusted prior-year periods, the adjustments that are on the CityTime charges incurred last fiscal year.

A GAAP reconciliation of these adjustments is provided in our earnings release issued today.

I would now like to turn the call over to John Jumper, our Chairman and CEO.

Thank you, Paul, and good afternoon, everyone.

During the call today, I will be discussing four key items.

I'll start with our quarterly performance followed by a discussion of our journey to achieve greater cost efficiencies; and third, I will talk about market conditions; and finally, our capital allocation decisions and plans.

After my comments, Stu Shea will update you on the progress of our planned separation, our actions to expand our pipeline of opportunities and review new business development results.

Mark Sopp will then follow with details on the financial results, guidance for FY 2014, and then we will answer your questions.

First, our Q4 performance -- during the quarter, our revenue growth trended down and our full year ended with just modest growth, but within our expectations.

Our margins were lower than our normal run rates and were largely impacted by nonrecurring costs, including those required to achieve the planned separation and a few legal and program adjustments.

Stu will provide the details in a few moments and discuss our continuing actions to improve margins.

Many of the actions needed to provide sustainable margin improvement have been or are being implemented and further actions being taken early this fiscal year will deliver benefits to both companies after separation.

The second item is cost efficiency.

Today, through Project Gemini, we are focused on ensuring the cost structures of two companies being created are appropriate for the markets they will serve.

Since our IPO in 2006, various efforts to control costs allowed us to improve margins and invest more in technology and business development.

However, the markets have become more competitive and stressed, requiring us to raise the bar on cost efficiency considerably more.

As we have prepared for our planned separation, our goal is much higher with plans to reduce our indirect costs by at least $350 million annually in order to maintain competitiveness and profitability.

For example, we have undertaken a careful review of our facility footprint and have identified ways to reduce our facilities by over 30%, saving about $70 million per year.

We will implement these reductions in the coming months.

Our intent is to achieve top-quartile competitiveness in our industry to address the market uncertainty we now face.

Let me move to my third key point and update you on the current conditions we are facing in our government market and a brief look at our commercial business market.

Of course, we have now transitioned from the threat of sequestration to the realities of sequestration in our government markets.

Sequestration, combined with a drawdown in overseas operations, provides significant headwinds for FY 2014.

Mark will provide additional color in his remarks on our guidance, but we believe we have realistically addressed the range of impacts embedded in sequestration.

We have and will continue to work closely with our customers in these difficult financial circumstances to ensure critical operations are supported as effectively as possible with decisions that respect our obligation to shareholder value.

Whatever the impact of sequestration, the restructuring and cost efficiencies embedded in Project Gemini are essential to the long-term competitiveness and financial success of the two companies.

Turning to our commercial business, which is growing nicely, we continue to be the largest third-party electronic healthcare record implementation provider in the US, and this market continues to grow.

Although sequestration and the fiscal cliff created some short-term uncertainty in our federal health clients, we expect this overall segment of our business to grow significantly over the next few years and beyond.

In addition, large clinical system implementation opportunities in Canada will provide additional growth opportunities for the Company.

Let me conclude with my fourth and final key message, capital allocation.

In addition to a continuing substantial regular dividend -- the substantial regular dividend that we started one year ago -- I'm pleased to announce that our Board of Directors has approved a special dividend payment of $1 per share to our shareholders this June.

The action demonstrates our commitment to return capital, when appropriate, to our shareholders and help lock in their returns on investment.

This action, combined with the capital structures planned for the two separated companies, still allows both companies to have the flexibility needed to achieve future value creation and shareholder returns.

Since my joining SAIC as the CEO a year ago, we have accomplished a number of critical actions to position ourselves to execute well in these dynamic markets into the future.

We have a strong and dedicated leadership team of 40,000 highly talented employees who will make the next stage of our journey a success.

For that, I am very thankful.

I will turn it over now to Stu.

Thanks, John.

Good afternoon, everyone.

I want to cover three topical areas during my comments.

First, I will give you a current status on our primary strategic action of separation, Project Gemini.

I will skip the topic of sequestration, other than to say that we feel we are well-positioned to persevere through this period of uncertainty in the market.

Second, I will talk a little bit about our quarterly business development performance; and finally, I will close by amplifying on John's dialogue about our continual journey to improve operational efficiencies and share with you our goals for overhead and G&A reductions as part of the Gemini program.

So let's start with Project Gemini.

I'm pleased to report that we have met several critical milestones this quarter, all on schedule and on cost.

Subject to regulatory approvals, we are still scheduled to complete the separation later this fiscal year.

First, we completed a comprehensive three-month process to name the two companies.

Despite our strong 44-year heritage as a science and technology R&D company, the marketplace more strongly identified SAIC as a leading provider of technical services and enterprise IT.

As such, we decided to leverage that strong brand identification and assign the name SAIC to the Whiteco Services Company.

With that decision behind us, we then undertook a process to name the Blueco Solutions Company.

Picking a name was an exhausting process, one laden with lots of passion and differing viewpoints.

Coupled with the logistical review of domain name availability, potential for trademark infringements and linguistic sensitivities, we chose Leidos.

We believe Leidos is a very strong name, but recognize that a name alone does not make a company.

Instead, a company makes a name.

But, we have an important head start.

We are building upon 44 years of excellence cultivated since the creation of SAI by Dr. Bob Beyster, and we will ensure that Leidos is synonymous with solving the most complex problems our world faces today through its entrepreneurial, science and engineering-based culture.

On March 7, we also announced that we reached a significant milestone in our separation plan.

An initial Form 10 registration statement was filed with the SEC.

As you know, the Form 10 provides comprehensive information about the financial performance, history and governance of future SAIC's technical and engineering and enterprise IT business.

We expect to update that initial submission several times over the coming months and provide more details on the financials, future capital structure and the Board of Directors.

When we initially announced the planned separation of the Company last August, we provided a preliminary estimate of our FY 2013 revenues for each company.

Now that we have completed the allocation of all existing contracts and completed FY 2013, we are updating the revenue breakdown between the two companies.

The new SAIC company would have FY 2013 revenues of about $4.7 billion and Leidos would have revenues of approximately $6.5 billion.

Moving onto my second topic is Q4 performance, specifically our business development results.

Our Q4 net bookings totaled $2 billion in the fourth quarter and produced a net book-to-bill ratio of 0.7.

This was clearly down from our expectations earlier in the year, but it does reflect the overall market stagnation and award decisions associated with the earlier threats of sequestration.

We ended the quarter with $17.9 billion in total backlog, $5.4 billion of which is funded.

Compared with Q4 a year ago, despite the threat of sequestration, we experienced no change in total backlog.

For the full fiscal year, our net bookings totaled $11.1 billion and produced year-end book-to-bill ratio of 1.0.

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

During Q4, we won eight opportunities valued at more than $100 million each, bringing our full-year total to 42, a record high for SAIC.

These larger programs have been a key area of business development focus for the past three years and will continue to be going forward for both companies.

As you know, many of our contracts are classified efforts that support the intelligence community, so you won't often see announcements of these contract wins in the open literature.

Q4 was no different.

SAIC was awarded over $1 billion in classified programs, including a major new program that combined the efforts previously performed by many of our competitors.

Although the specific nature of these contracts are classified, I can tell you that they all encompass mission-critical solutions and services that help to counter global threats and strengthen our national security.

We also have continued to earn outstanding win rates.

In FY 2013, our overall total dollar win rate on all opportunities was 61%.

Our consistently high win rates are the result of a solid track record of strong program performance and execution as well as targeted investments in technology, research and development, capture efforts and proposal development.

Finally, our business development engine continues.

The value of our submitted proposals awaiting decision continues to be strong.

We currently have over $24 billion in submitted bids awaiting award.

That includes over $13 billion in IDIQ bids and just under $11 billion in definite delivery bids.

For my third topic, let me talk a little bit about our journey to reduce our cost and aggressively position current SAIC and the two future companies for better cost competitiveness and improved financial performance.

Last quarter, I discussed that we were utilizing a process to not merely split SAIC, but rather to purposely design both companies from the ground up to be competitive day one to serve the unique needs of their markets.

Although not a cost-cutting exercise in and of itself, Project Gemini has allowed us to look critically at the needs for all overhead and G&A costs in meeting those company designs.

In the aggregate, our current plan is to achieve at a minimum $350 million in annual run rate cost savings through the separation.

Let me provide some color on the composition of this $350 million target.

First, as John mentioned, facilities -- we have identified about $70 million in run rate facility cost savings.

We are working to reduce our existing facility footprint by approximately 30% and seek better utilization of existing facilities.

The cost to accelerate lease terminations of our existing facilities to realize much of this savings is expected to cost about $70 million.

We're also expanding the opportunity for our employees to use flex work opportunities through employee hotelling and increased telecommuting.

A second area of savings is procurement.

We are accelerating an ongoing reengineering of our entire corporate-wide procurement function by leveraging our supplier base and improved operational efficiency.

As a result, we expect to save approximately $30 million in run rate cost.

A third area of savings is our overhead structure.

By far, the largest part of our plan savings is coming from organizational simplification, indirect labor reductions and other discretionary cost reductions.

About $220 million of the plan savings will come from these cost efficiency actions.

Since the announcement of Gemini in August 2012, we have reduced our indirect staff by almost 800 people.

As we move closer to separation we will continue to reduce our indirect labor costs as well as seek greater efficiencies in our direct labor force as new organizational structures, automated processes and cultural changes take effect.

As you can see, we are being both methodical and aggressive in these cost savings and we are already seeing benefits of the separation today in terms of improved cost competitiveness and greater efficiency.

As you would expect in a separation transaction such as ours, these cost savings will be partially offset by incremental costs associated with establishing two corporate infrastructures, which we estimate will not exceed $50 million.

Additionally, incremental investments will be required to pursue and win opportunities associated with the new addressable market pipeline created by OCI elimination in the separation.

However, you should expect that a significant portion of these savings will flow to margin improvement in earnings.

About $150 million of the $350 million amount will be realized in FY 2014 and the remainder of the full $350 million will be realized in FY 2015 on a run rate basis.

As we progress over the coming months, we have specific actions underway to fully realize the remainder of these cost savings and position both Leidos and future SAIC for the competitive markets we anticipate.

Now I will turn the call over to Mark.

Great, thanks, Stu.

I will cover the financial highlights for Q4 and also for full fiscal 2013, and then address forward guidance for fiscal 2014, which started back on February 1.

On the top line, total revenues were down 4% for Q4 but grew 2% for the full fiscal year.

Corresponding internal revenue was down 6% in the fourth quarter but was also up, in this case 1% for the full year.

The midyear acquisition of maxIT accounted for 1% of full-year growth.

As expected, the most significant drivers for contraction in the fourth quarter were the declines in two large programs, the MRAP Joint Logistics Integration Program, JLI; and the Defense Global Solutions program that is otherwise known as GIG-BE and/or GSM, both of those being in the Defense Solutions segment.

In addition to the drag on Q4, these two programs do pose significant headwind in fiscal 2014 that we have incorporated into our guidance, more of which I will cover later on.

In terms of contributors to internal growth for the year, which was again positive 1%, three programs in the Defense Solutions segment, Vanguard, [TIRES] and AMCOM EXPRESS, were the most notable drivers.

Also, the Intelligence and Cybersecurity segment produced 3% internal growth for the full year, driven by a variety of ISR and cybersecurity programs.

And finally, Commercial Health was consistently among the best internal growth rates in the Company, in fact, the best over the course of the full year.

The major offsets in growth have been reductions in our fed/civ and fed/health business areas and overall softness in the defense market, which clearly reflect reduced government spending trends.

In terms of profitability, fourth-quarter operating margin was 5.3%.

This is abnormally low for us and was impacted by several items, many of which were expected but not all were expected.

First, Project Gemini, or separation costs, ran $23 million in the fourth quarter, largely comprised of fees paid to third parties related to the milestones that Stu mentioned earlier, and also employee severance costs related to the cost reduction actions.

This diluted operating margin by 70 basis points in the quarter.

Second, we also took a $14 million charge for provisions on legal matters and an $11 million charge related to impairments of purchased intangibles associated with previous acquisitions.

These two items accounted for 90 basis points of margin erosion in the quarter.

Third, we had program write-downs in the Defense Solutions group or segment and the Health and Engineering (sic - Energy) and Civil Solutions segment that diluted operating margins by 20 basis points.

Fourth, we incurred costs related to our corporate headquarter move which diluted Q4 margins by an additional 10 basis points.

So all those items together, cost and charges as aforementioned, eroded operating margins by almost 190 basis points for the fourth quarter.

With respect to future quarters, we expect Project Gemini, the headquarter move and severance expenses to continue through the second quarter of our new fiscal year, 2014, and as you will see in a moment are fully included in our fiscal 2014 guidance.

Operating margin for the full year finished at 6.6%.

Separation costs and the headquarter move diluted full-year margins by 40 basis points.

Legal provisions and impairments diluted margins by 30 basis points.

While these separation and move costs will continue for the next couple of quarters, as John said and Stu also said, restoring attractive margins is the top priority for us, and we expect to do so when investments to position the two companies for separation have been completed.

Given the magnitude of cost reductions that Stu discussed, which will be time-phased in during fiscal 2014, and the completion of cost to finish the separation and to right-size our cost structure, we will target considerable lift in margins for both Leidos and new SAIC, in fiscal 2015 and beyond.

More on that as we get closer to the separation itself in the coming -- rest of fiscal 2014.

Moving on to earnings per share from continuing operations, fourth quarter was $0.54, in line with our expectations.

As we mentioned in our last call in December, EPS uplift was realized from a favorable agreement reached with the IRS in the fourth quarter.

For the full fiscal 2013, EPS totaled $1.54, benefiting $0.28 from the IRS agreement and adversely impacted by the special cost and charges that I just discussed.

Operating cash flow finished particularly strong at over $200 million for the fourth quarter with the full year coming in at $345 million.

The $345 million, as a reminder, is net of the CityTime settlement paid earlier in fiscal 2013 which, tax-effected, was $385 million for the year.

Cash flow excluding CityTime was therefore $730 million.

We estimate full-year cash flows benefited about $100 million from the midyear government policy change to accelerate payments to government contractors.

The policy change was recently rescinded in February, in fact, and should negatively impact our fiscal 2014 cash flow by the same amount.

More on this in a bit.

Reflecting back on full fiscal 2013, despite significant outflows stemming from CityTime, $550 million of long-term debt reduction we made in the middle of the year and roughly $500 million on the acquisition of maxIT, we completed fiscal 2013 with a cash balance of over $700 million, which paves the way for the special dividend John mentioned upfront that we will pay our shareholders in June.

That sums up my remarks for fiscal 2013 results.

Now I'll hit fiscal 2014 forward guidance.

While the separation is expected to occur during fiscal 2014, for apples-and-apples purposes, we are providing guidance based on SAIC operating the full fiscal year as one Company.

Our revenue expectations for fiscal 2014 on this basis is $10.0 billion to $10.7 billion.

Now that we have a defense budget for government fiscal 2013, our guidance reflects our estimate of the effect of the $42.5 billion defense spending reductions under this budget, which ends on September 30.

For the government fiscal year 2014, which starts on October 1, we assume defense spending is flat from the government fiscal 2013 level, which is consistent with the Budget Control Act.

In other words, our guidance reflects our expectations under full sequestration.

Our revenue guidance range is wider than normal, which reflects our view of the range of possible outcomes given there is still lack of clarity on how the spending reductions will be carried out; also, how much offset there will be from outlays carried over from prior years; which programs will be prioritized to avoid cuts; and finally, what the government fiscal 2014 defense budget actually shapes up to be.

In addition to the anticipated effects from the government spending reductions, as I said earlier, the completion of the MRAP, JLI and DGS programs have a large year-over-year impact.

These two programs alone are projected to produce a $650 million revenue reduction from full-year fiscal 2013 to full-year fiscal 2014.

New recent wins are expected to produce an offset to those reductions, but only partially.

For profitability, as mentioned, we are planning significant expenses in the carrying out of the separation transaction and to better position the cost structure of the two businesses moving forward.

Highlighting the major elements, our EPS guidance for fiscal 2014 reflects the following items -- $55 million in separation costs, which includes banker fees, lawyer fees, accounting fees, consulting fees and also severance to carry out the cost reduction actions Stu mentioned; $65 million in costs to exit facilities which primarily relates to removing excess capacity associated with indirect workforce reductions, increased density and teleworking initiatives that Stu earlier mentioned; and finally, $20 million of cost to complete the headquarter move.

Together, these items aggregate to $140 million of costs, which will adversely impact margins and EPS, primarily in the first half of fiscal 2014.

We will expect to see the benefits of those reductions in the second half.

Net of these items, we expect to see operating margins in the mid-7% range for the full year below this, of course, in the first half, when we incur most of those nonrecurring expenses, and above it in the second half.

We expect to see improvement in fiscal 2015 when a full-year's impact of those benefits will work through the P&L.

For diluted earnings per share from continuing operations and reflecting the nonrecurring costs just mentioned, our range estimate is $1.16 to $1.33 per share.

This includes a $0.06 benefit in our tax provision resulting from the special dividend announced today.

We have not factored in any changes to our debt levels as the planned offering related to new SAIC in conjunction with the separation will only occur immediately prior to the spin-off transaction, at which time we expect to provide separate guidance policies at that time.

As property and cash flows for fiscal 2014, we expect at least $450 million for the year, which again reflects the reversal of the $100 million benefit we saw in fiscal 2013 from the accelerated payment program from the US government.

Capital expenditures are expected to be consistent with historical experience, less than 1% of revenues.

Finally, a remark on the special dividend that we announced today -- the dividend is a testament to the financial strength of the Company and our commitment in providing returns to our shareholders.

The special dividend route was chosen over other options due to the certain return it provides in otherwise uncertain times in the government marketplace.

More clarity on government fiscal 2014 government spending and beyond may make other options more attractive.

That finishes up my remarks.

I will turn it back over to John for final thoughts.

Thank you, Stu and Mark.

For the past month and for the next few weeks, we are all visiting more than 30 SAIC sites to meet with our employees and to talk with them about the future of SAIC and Leidos.

Our employees are bearing a significant burden during the separation, but they are demonstrating the courage to commit to these changes and the excitement of forming two companies configured to compete on day one of the separation and with real opportunities for growth.

Many of them are listening today, and I thank them.

Now I'll turn it back over to Paul for our question-and-answer session.

Thank you.

Vince, we will now take the first questions.

(Operator Instructions) Joe Nadol, JPMorgan.

It's actually Chris Sands on for Joe.

Mark, I was wondering if you could help us out with revenue guidance by segment, particularly in Health, Energy and Civil.

John mentioned it is expected to be a growth engine over the next several years, but obviously it lagged, particularly last year.

When does that start to pick up and what are the big moving pieces there?

Chris, we have decided not to issue guidance for our segments at this time.

That's something we may do later, so I'm going to refrain from doing that.

But I will say -- and as you probably expect, our commercial health business is expected to continue to be a growth engine for the Company.

I think the fed/civ area -- I think you mentioned that in your question -- will continue to be stressed.

And I think our Intelligence and Cyber business will continue to be a relative strength across the business, particularly in the government space.

That's about all the color I think we should provide in terms of segments at this time when we are preparing for the separation and get into a separate roadshows for the two parties closer to the transaction itself.

I think you will expect to see more color there.

Okay, can you provide any color on the M&A pipeline and the environment there, just given all the uncertainty?

Obviously, you are very focused on the spend, so has that changed your behavior in that aspect at all?

This is John, and I think, as we said before, each quarter the Board considers all the opportunities, and as M&A opportunities are in fact opportunistic, you have got to take them when they come.

So we are still sticking with our strategy that M&A is what we're looking for in our growth areas and we will stick with that, but those opportunities just have to be at the right place and the right time.

In terms of volume of opportunities, are you seeing more or less now than you were, say, 12 to 18 months ago?

Probably less, just because of the environment.

Okay, and then, Mark, one last one -- is there any share repurchase factored into the guidance?

There is not, Chris.

We have a pretty small amount of creep; it's about 5 million shares, so it's not really moving the needle, but we have not factored in an assumed buyback for fiscal 2014.

Okay, great.

Thanks, guys.

Cai von Rumohr, Cowen and Company.

Am I correct this $140 million of expenses/costs are included in your guidance?

Yes, sir, Cai, that's correct.

Okay, which basically is saying you expect to have 8.5% to 9% margins, sort of is the rough math, on a go-forward basis in fiscal 2015.

Is that correct?

Well, we might have some issues in the tax rates and other matters, Cai, because it's not that high.

I mentioned in my remarks that, absent those items, we expect to be in the mid-7% range.

Okay.

You mean, absent those items, because basically if those items are in there and you hit your number, you are in the 7% range with those items.

So that's the confusion I think I've got.

We can perhaps work with you on the side, but we are quite convinced the $140 million -- assuming it is incurred, of course -- and net of those will -- well, pro forma for those, if you add them back, if you will, will produce mid-7% range.

There are some dynamics in the allow-ability of the $140 million, so some of that piece is allowable; other parts are not, and so there is some recovery on part of the $140 million that could be part of the dynamics here.

Got it.

So what sort of a tax rate -- you said $0.06, but just what sort of a tax rate are we looking at for the year?

Our normative tax rate is 36%.

We have a slightly lower rate projected for 2014, due to the planned discrete item we have from settling some prior-year items.

But that is just about 2 percentage points.

So if you are really looking at longer-term, think 36%.

Short-term, we got about a 2% pickup in fiscal 2014.

Terrific.

And the last one -- if you could tell us, the commercial health care, the maxIT, the Vitalize -- what sort of growth did that commercial business have in the fourth quarter; and what are you assuming for fiscal 2014?

Cai, we were well into the double digits for all quarters of fiscal 2013.

It was a little stronger in the third quarter.

There was a little bit of slowdown from some of the -- I think confusion around some of the meaningful use regulations.

But we are actually seeing a restoration of momentum there already.

So we view that as temporary.

Thank you very much.

Jason Kupferberg, Jefferies & Company.

This is actually Amit Singh for Jason Kupferberg.

Just coming back to the margins again, what kind of margins are you expecting to generate in the two different companies, the solution services company?

How much different do you expect the margins to be between the two companies?

We will provide more color on that as time progresses.

As we previously discussed, there is a spread.

It's greater than 1%.

It's in the 1% to 2% range, and we will line up more precision to that as we complete the designs of the two companies and the forward expectations and revenue volumes of the two, closer to the separation.

But that's a ballpark range of the spread in the current business construct.

Perfect.

And can you provide any sort of free cash flow projections?

Do you still expect, long-term, it to be above 90% of net income?

Yes.

We expect to have no change in the cash flow conversion, if you will, of our profitability, no material change in our capital expenditure profile and capital intensity.

So the historical experience you have seen for SAIC you can expect to apply to Leidos and new SAIC.

Perfect, thank you very much.

Robert Spingarn, Credit Suisse.

Mark, if I could just clarify a couple of things -- first on the margin, going back to the last couple of questions, the guidance that you provided for 2014 assumes the cost structure -- it is given as a single Company guidance, but it assumes the cost structure, including the two corporate cost structures of the post-transaction companies.

Is that correct?

I was distracted with some side work here.

Would you mind repeating that?

I apologize.

Well, so when you talk about your guidance and you talk about your margins, you are talking about having two distinctly separate corporate overheads for the period of time that you will have them in 2014, etc.

In other words, this guidance doesn't decline once you transact and we see two separate companies.

I think this answers your question.

We are actually incurring some of the dis-synergies today to prepare for the separation, and we have fully incorporated those into our fiscal 2014 guidance.

During the course of the year we will conduct, as Stu mentioned, more cost reductions, and we expect the aggregate of those dis-synergies not to exceed $50 million for the two companies.

And far exceeding that are the cost reductions that we mentioned (multiple speakers) does include -- sorry, go ahead.

I was just going to say, so you have accounted for the increased costs.

You are going to have some increase in certain costs when you have two separate entities, and that is reflected here.

Yes, sir, absolutely.

Okay.

So sticking with that, I think you have said that ex-costs, you would be in the mid-7's in 2014.

What are the margins, as expected, in 2014 with those costs?

Take the midpoint (multiple speakers)

They are in the -- the GAAP margin is expected to be in the mid-6% range --

Okay.

-- inclusive of the costs.

Okay, and about 100 basis points of costs, if we exclude --

Yes, you got it, yes.

Okay.

Now, briefly switching to what I think you already talked about but I want to clarify, you have embedded full sequestration here, in your revenue decline from the mid-11's down to somewhere in the low 10's?

That's right, for what we know of full sequestration, we have made every attempt to cover the best scenario and worst scenario, as I described in my remarks.

Okay, so that is already reflected here.

And what are the swing factors between $10 billion and $10.7 billion?

I think I mentioned them.

First and foremost, the number of wins we have during the course of the year, starting now.

Second, I think as I mentioned the bow wave of outlays from prior government fiscal appropriations should factor in and should dampen the effect of the $42.5 billion defense reductions by some degree.

Hard to tell which programs precisely and so forth.

A big factor is what the assumption is for government fiscal 2014, so the last four months of our fiscal year will be governed by government fiscal 2014.

We have assumed a flat rate from 2013 to 2014 on the government side, which is the line we see in the Budget Control Act.

Where that shakes out, we will see, but we thought that was a reasonable assumption.

In addition to that, as you know, $10 billion was added to the O&M accounts pretty late in the game, and we are a pretty big O&M player.

So we hope to have our fair share of benefits from those.

So how those things stack up, I think, will dictate where we fall in the range.

Okay.

And then just lastly, you had some write-downs in the quarter.

You talked about -- I think it was about $25 million in the quarter, some asset impairments, etc.

When you think about the normal course of this type of activity, what is reflected in the 2014 guidance, let's say, relative to 2013 in terms of asset write-downs, etc.?

We are expecting no more impairments.

We are expecting no more major litigation-related provisions, and we expect a balance, a historical balance of program write-ups and write-downs.

We happen to have an imbalance of write-downs in our fourth-quarter fiscal 2013.

We do not plan nor expect to repeat that.

Okay, thank you very much.

Ed Caso, Wells Fargo.

My first question is on pricing.

If you could talk a little bit about what you are seeing in the market, particularly around your need to have take-away.

So how much of your forward guidance is a function of take-aways, and what are you seeing as incumbents protect those positions?

This is Stu.

I think we are seeing some silliness in the market in terms of people getting desperate on the pricing, and a lot of that results around the low price technically acceptable.

And as we have said many times, I would love for somebody to come out and describe what technically acceptable means.

We are actually not seeing what I would consider to be an across-the-board impact on pricing.

We are seeing, obviously, a tightening of it.

We are seeing people being much more aggressive because it's about defending their existing business.

But often, when we go after a take-away, we take away something that we believe that we could win because we have a better answer, a better solution, a better product.

We are not low-balling the prices and trying to just sweep in underneath folks; that's not our style.

We are looking at winning it because we are going to be the best answer and solution for what the customer needs.

Can you address at all the expectation for financial leverage for the new SAIC at this time?

I'll cover that one, Ed.

So we are still sticking to the framework that we discussed all the way back to August.

We still expect to have the range that we provided in August, which was $500 million to $700 million.

That is our direction right now for leveraging the new SAIC prior to the separation.

Because that will happen just prior to the separation and only when that is deemed imminent, we did not put the costs related to that in our guidance at this time.

But that is the path we are on, and that allows us to achieve balance between the two companies in terms of their capital structure and their leverage, as we laid out back in August.

So you obviously provided a special dividend here, getting you down to that $500 million, $600 million comfort range that you have historically had.

Does this dividend provide an opportunity for another special dividend, or are you working to reduce the net debt level of Leidos?

We are just seeking to deploy excess capital for the benefit of our shareholders in light of our view that that was the best use of the funds at this time, given what is in front of us.

So we would like to keep and will remain to keep all other options available to us as opportunities present themselves, as General Jumper said, in the case of M&A, or under the right conditions, buybacks and so forth.

But, as you have seen, over our history, we have tried to achieve a balanced deployment as conditions change, and that was expressed here with our special dividend right now.

Great, last question -- timing of the 10-K and the updated F-10?

Tomorrow morning for the 10-K.

In terms of the modification, or next round of modifications to the Form 10, we expect that to be in mid April.

Thank you very much.

Ladies and gentlemen, that does conclude our question-and-answer session.

At this time, I would like to turn the conference back over to management for any closing remarks.

Thank you, Vince.

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

Have a good evening.

Thank you, sir.

Ladies and gentlemen, that does conclude our conference for today.

Thank you very much for your participation and for using ACT Teleconference.

You may now disconnect.