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Executives

Laura Luke – Vice President Media Relations

Walter P. Havenstein – Chief Executive Officer & Director

Mark W. Sopp – Chief Financial Officer & Executive Vice President

Analysts

Jason A. Kupferberg – UBS Securities, LLC.

Robert Spingarn – Credit Suisse

Joseph B. Nadol, III – JPMorgan

Cai von Rumohr – Cowen & Company, LLC

Joseph A. Vafi – Jefferies & Company, Inc.

William R. Loomis – Stifel Nicolaus & Company, Inc.

Jeff Houston – William Blair & Company

SAIC, Inc. (SAI) F3Q10 Earnings Call December 8, 2008 5:00 PM ET

Operator

Welcome to the third quarter fiscal year 2010 earnings conference call. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Ms. Laura Luke, Vice President Media Relations.

Laura Luke

Here on today’s call are Walt Havenstein, our CEO; Mark Sopp, our CFO; and other members of our team. During this call we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements may represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future but we specifically disclaim any obligation to do so. With that, I will turn the call over to Walt.

Walter P. Havenstein

I am glad to be joining you today in my first earnings call as SAIC’s new Chief Executive Officer. I’m delighted to have been given the opportunity to lead this exciting company and look forward to discuss on third quarter results in the current business environment. You can see form our press release that we turned in a solid performance this quarter including an upturn in bookings and contract vehicle wins to provide for growth capacity going forward. We are on a steady course and accomplishing our objectives.

Mark will provide color on the financial details in a few minutes after I describe the market dynamics and our key business drivers. Federal spending is SAIC’s most important market driver, therefore we pay close attention to the federal government’s fiscal year ’10 budget which covers the last quarter of our FY ’10 and the first three quarters of next year. Spending consists of 12 separate appropriation bills and supplemental. Five of these bills have been enacted leaving seven bills in the legislative process and the affected agencies are operating under a continuing resolution that is set to expire on December 18th.

The defense appropriation bill is in conference and most observers expect a free standing defense bill before the Christmas recess. The spending levels in all of the bills represent a modest increase in overall discretionary spending over the prior fiscal year in the range of 4% to 6%. Delays in passing the remaining spend and bills have resulted from extended debates on domestic programs particularly healthcare. As work on the remaining bills continues and the healthcare debate progresses, it is possible that some of the remaining appropriation bills will become part of a mini omnibus resolution that extends current year funding levels.

We do not believe an omnibus covering the unenacted bills will have a positive or negative impact on SAIC. There is however, increased concern about deficit spending which will place pressure on FY ’11 discretionary spending, the largest part of which is defense spending. Consequently, most believe the future direction of defense spending growth will be flat to slightly negative. Even if the defense budget receives a modest increase over inflation for FY ’11 we expect most of that increase will cover must pay personnel care and O&M bills.

The intelligence community marketplace has softened this year as a result of delays in planned procurement actions and numerous contract award protests. Over $2 billion in SAIC’s business opportunity pipeline that was initially to be decided in calendar year 2009 has since slipped in to calendar year 2010. In most cases the intelligence community has compensated for program delays by extending current contracts for up to one year.

In cases where SAIC was the incumbent, we maintained our position. Where SAIC sought to replace an incumbent however or to enter a newly emerging intelligence market segment, our plans have often been delayed. Nevertheless we are actively pursuing several areas of high growth in the intelligence market including the national and homeland security components of the cyber market and manned and unmanned air born intelligence, surveillance and reconnaissance systems that support the forces in Iraq and Afghanistan.

The next most important market driver for SAIC is the overall government contracting environment which can be characterized as increased oversight with an anti contractor undercurrent. We are seeing government delays in releasing new definitions and rules for federal acquisitions, stricter limits on contractor interactions with government officials, new provisions for organizational conflict of interest or OCI and an expansion of actual planned government insourcing including growth in the government acquisition work force. The focus on the government’s contracting practices aims to reduce high risk contracts and save $40 billion from overall contracted spending levels.

Regarding OCI, we are tracking the issue closely particularly as it pertains to our DOD business and we will be well prepared and flexible in our approach and options. McCain Levin legislation requires updated rules to be issued by February 16, 2010. We are actively working with our industry associations and partners. The scope of the pending OCI rules will ultimately determine our course of action. Overall, we expect clearer language to be a net positive for SAIC as a platform independent services and solutions provider.

On the topic of insourcing, we would like to reiterate what we said on our last earnings call. Insourcing provides headwind to the entire contractor base but there are some positives in the government’s approach. OMB has focused on the front end of the procurement process and has called on agencies to cut spending on cost based contracts by 10% in 2010. Transitioning cost reimbursable contracts to fixed price contracts will provide the right incentives for both government and contractors and should lead to better profitability. Finally, the instance on agencies properly reporting and checking contractor’s past performance will reward those contractors who performed best like SAIC.

Now, let me move on to business developments. Bookings in the third quarter were $3 billion for a book-to-bill ratio of 1.1 which is higher than both our first and second quarters this year but lower than our third quarter last year. We ended the quarter with $16.6 billion in total backlog and $5.5 billion in funded backlog. Total backlog increased by 2% over the previous quarter as compared to the end of the third quarter of fiscal year 2009, our total backlog decreased 3%.

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

The overall point I want to emphasis is that the government is changing its process for making acquisition decisions. This more than any other factor has been the cause of delays in procurement activities. As government delays in making contract awards have grown this year, SAIC has accumulated amounting backlog of submitted proposals awaiting decision. At the end of Q3 we were awaiting decisions on potential bookings valued at $7.9 billion, up sharply from $5.1 billion at this time last year, an increase of 55%.

Once the government begins to clear this log jam of pending contract decisions, we should see an immediate improvement in new business awards. Our outlook on new business opportunities in FY ’11 is mixed but promising. Despite negative trends we have been successful in growing our business opportunity bite line to $95 billion from $67 billion a year ago, an increase of 42%. Working proactively to counteract the potential impacts of less defense spending, SAIC has expended its pipeline in selected market areas that have especially promising growth potential including C4ISR, logistics, energy, cyber and health.

We have also structured strategic campaigns around these areas and are investing heavily in them. Additionally, our wins on IDIQ contracts have been running far ahead of last year’s pace earning us a strong starting position to win many more task order contracts next year. SAIC has already proven it is very adept at converting new IDIQ wins in to the task order wins that ultimately drive bookings and backlog hire. Over 60% of SAIC’s revenues is generated by the task orders we win under IDIQ contracts.

We continue to achieve noteworthy win rates on both recompetes and new business. We have achieved an 88% total dollar win rate on all recompeted business. We have also earned a 61% total dollar win rate on all new business we sought to capture. These high win rates are similar to our performance a year ago, reflect the value proposition we offer to our customers and persists despite the increasing competition we face.

Our focus on winning larger opportunities continues to yield excellent results. We won 13 opportunities valued at more than $100 million each in the third quarter, up from six wins of this size in Q2. Through the first of December we had earned 27 $100 million plus wins in FY ’10. The same number is in all of FY ’09. Decisions on 25 $100 million plus opportunities are anticipated to occur by the end of FY ’10. We now have 182 $100 million plus opportunities in our business opportunity pipeline up from 166 in Q2. Moreover, approximately 130 of those 182 large opportunities have an expected award date within the next four quarters.

Moving on to acquisitions, during the third quarter we disclosed the purchase of R.W. Beck Group Incorporated, a leading provider in business and technical consulting services in energy, engineering and infrastructure. We made this business move because Beck’s capabilities complement two of our strategic campaigns. This purchase builds on our 2007 acquisition of the Benham Companies for our energy business and enhances our homeland security operation. This acquisition also includes Beck’s subsidiary Beck Disaster Recovery a premier emergency management consultancy.

We believe this was the perfect time to expand SAIC’s capabilities in these areas. Our nation is recognizing the need to rehabilitate our energy and water infrastructure and limit greenhouse gas emissions. We also continue to face natural disasters and must prepare for ongoing threats to homeland security.

SAIC also recently announced a strategic alliance with BPL Global Limited, a smart grid technology company that develops and deploys solutions to improve the efficiency and reliability of the electric power grid. As part of this alliance, SAIC acquired a minority stake in BPLG. The alliance and investment are an important part of our strategy to provide life cycle capabilities to the rapidly evolving power industry.

We continue to dialog with several candidate companies in order to leverage our strong balance sheet. As we said last quarter we see energy and cyber as examples of fruitful areas and we will consider acquisitions and divestitures driven by OCI concerns. With that, I’ll turn it over to Mark for the financial details.

Mark W. Sopp

Overall results for the quarter were consistent with our expectation to deliver on our financial goals for the full year. Earnings per share growth was 17% year-over-year on much improved operating margins but a slower pace of internal revenue growth. Revenues totaled about $2.8 billion for the quarter reflecting total growth of 5% and internal growth of 1%. Internal growth slowed from three primary causes. First, the effects of the RW Beck acquisition which dilutive to internal growth by three percentage points. Their revenues declined year-over-year in the third quarter due to much lower revenues on hurricane disaster relief this year. We set this expectation during our last earnings call.

Second, we had one less working day this quarter which adversely impacted our internal revenue growth by 1.5%. That one day reduction applies to the full year as well. Internal growth year-over-year on an apples-to-apples basis from what we’ve been reporting all year excluding these two effects was 5.5%. This was lower than we’ve seen in recent quarters due to the third reason, the bookings pause and longer federal procurement cycle which Walt mentioned earlier. This has resulted in lower new awards all year and a corresponding lack of new program starts to fuel revenue growth most accentuated in our intelligence business area.

Revenues actually contracted in our intelligence area during the third quarter but our view is much of this is timing. We are optimistic about renewed growth prospects particularly in cyber security, ISR, that’s intelligence, surveillance and reconnaissance and theater support operations. We’ll continue to invest in business development, bid on proposal and internal research and development to drive growth in these areas.

We generated strong growth in our logistics and defense solutions areas in the third quarter with the highest contributor being the continued ramp up of our [poll] count logistics contract for the department of defense. Tasking on our working at the Naval Surface Warfare Center and at the Army Space & Missile Command, the software engineering [inaudible] in particular continued to grow reflecting demand for our high end systems engineering and integration solutions.

Revenues under the brigade combat team modernization program formerly SCS is stable while our tactical vehicles, communication integration work slowed down a bit as we transition to the lower throughput MATV integration program. Revenues from our homeland security and government health business areas ticked up pace over last year reflecting new wins in the DHS IT infrastructure support space and market share capture from other contractors in the health arena particularly with the military health systems.

Finally, we posted reduced revenues in our commercial business area year-over-year in difficult market conditions but it is more focused and consistently more profitable after cost reductions taken over the last 12 months. Although bookings are tracking behind where we’d like to be given the level of bidding over the last few quarters, we do see signs of improvement. As expected, bookings did pick up pace in the third quarter and included some important recompete wins and we also had some important IDIQ wins which should manifest in to bookings in future quarters. And, as Walt mentioned earlier, given the value of outstanding proposals we have awaiting decisions, once the log jam of pending contract decisions begins to clear we should see improvement in new business awards.

The profitability operating margin was 8.4% for the quarter, well above last year’s third quarter of 7.8%. We had higher contract fees across the board reflecting consistently good program performance in customer deliver and satisfaction. In addition, profitability was fueled by a few other factors, efficiency in SG&A costs at only 5.6% of revenues, increased volume of our high margin product deliveries and a real estate gain of $4 million in the quarter.

Within the SG&A category bid on proposal and internal research and development costs were collectively up about 15% year-over-year reflecting continued investment to grow the top line over the long term coupled with higher levels of marketing needed to produce revenue and the longer sales cycle environment we’re now experiencing. Below the operating margin line interest, taxes and other income expense items were uneventful and as expected in the third quarter.

Diluted earnings per share from continuing operations totaled $0.34, up 17% over the third quarter of last year. The 5% revenue growth coupled with 60 basis points of margin improvement fueled EPS growth by roughly 14% and a reduced share count from share repurchases over the past year added the other three percentage points of earnings per share of growth.

Operating cash flow as particularly strong in the third quarter at roughly $250 million. Higher profitability, sound receivable management, favorable timing of payrolls and reductions to inventory and prepared accounted for much of this. Days sales outstanding was 70 days essentially flat from the same period last year. We deployed approximately $210 million in cash this quarter with $160 million towards our acquisition of RW Beck and our strategic investment in BPL Global, Inc. The remaining $50 million was used for our ongoing share repurchase program in the quarter.

That covers the financial results for the third quarter, here’s our financial outlook going forward. Upfront with Walt’s recent arrival, we want to establish that we intend to retain our focus on generating shareholder value, further earnings per share growth over the long term and our target is still to produce 15% growth per year. We recognize there may be years where this is not achievable either due to market conditions and/or due to investments needed to make that goal more achievable in the longer run. We intend to continue to be transparent and open with our views towards future growth.

For fiscal 2010, that’s the current fiscal year we are well on our way to completing another year where we expect to achieve all of our targeted financial goals. While lower bookings will likely slow the pace of revenue growth moderately from our earlier expectations, we still expect to achieve our targeted internal revenue growth goal of 6% to 9%. In addition, we expect operating margin improvement of 20 to 30 basis points and diluted earnings per share from continuing operations growth over last year of 11% to 18%. Operating cash flow is also on track to finish consistent with our goal which is equal to the summer of net income plus depreciation and amortization.

For fiscal 2011 which will start on February 1, 2010 we want to be slightly more cautious in our business outlook, at least at this stage and we are also isolating a special charge related to our Scottish Power outsourcing contract which we’ve excluded from our guidance. We do believe we will achieve our targeted internal revenue growth range but it is appropriate to set initial expectations at the low end of the targeted 6% to 9% range.

As Walt said, we face more difficult market conditions, a longer and more uncertain cycle time on federal procurements, increased pressure on federal discretionary spending due to concerns about the deficit particularly looking out to the government fiscal year 2011 which starts next October and ongoing weakness we see in the commercial markets. As the fourth quarter and the new year develops, we’ll need to see new award levels pick up to establish confidence in setting any higher expectations.

On the operating profitability front, we are comfortable in delivering another 20 to 30 basis points of margin improvement excluding the special charge related to Scottish Power which I’ll cover in a moment. While the pricing environment is expected to be tougher we have god visibility on net fees across our business base and in particular our securities product business where we expect to see increasing contribution. Also, we expect to continue making G&A cost reductions under project alignment during fiscal 2011 making our cost structure more efficient.

The effective tax rate will be dependent on whether the R&D tax credit is extended in calendar year 2010 by Congress which today we generally believe will occur. The credit is worth about 75 basis points in our effective tax rate. Net interest expense is projected in the low $70 million range with very little interest income assumed on cash holdings. Diluted earnings per share from continuing operations also excluding the Scottish Power charge is expected to grow at the low end of our targeted 11% to 18% growth range which is driven by the lower revenue growth expectation.

Given our $1 billion cash position and the level of our free cash flows, our capital deployment actions can have a meaningful impact on our earnings per share growth performance. There are three major dynamics at play here. First, we have forecasted negligible earnings off of our $1 billion in cash holdings. Given that our debt rates are fixed, we have earnings upside from interest income should interest rates rise. Second, our cash deployment strategy will continue to be focused on long term shareholder value creation. Capital deployed for acquisitions will be targeted for long term earnings per share growth but sometimes those acquisitions are EPS neutral or modestly dilutive in the first year. Third, share repurchases are accretive and their magnitude will largely depend on the level of acquisitions we make and the price of our stock.

Our earnings guidance does not contemplate future acquisitions but does assume a relatively low level of share repurchases to offset the effect of share creep from our equity compensation plans. This amounts to about 4100 million use of cash for this purpose.

Now, I mentioned up front that we are excluding a non-recurring special item from our operating margins and our earnings outlook related to the Scottish Power contract. We’d like to relay that these charges are from our setting of a financial expectation to provide a more meaningful year-over-year comparison of recurring business results. As we’ve now disclosed for some time, our IT outsourcing contract with Scottish Power expires on March 31, 2010 next fiscal year. We had bid to continue that work on the follow on contract but we don’t yet know the outcome of that. This contract and its associated defined benefit pension plan for its employees was acquired by SAIC in the year 2010. By the end of last fiscal year this defined benefit pension obligation had an unfunded pension obligation of $35 million. If we win the recompete we expect non-recurring charges of approximately $10 to $12 million in our first half of fiscal 2011. This would primarily relate to reductions in personnel and infrastructure expected to be required under the terms of the new contract. That’s again, if we win.

Conversely, if we do not win the recompete, we expect to incur charges of $25 to $30 million in the first half primarily from recognition of losses related to the amount of unfunded pension obligation associated with employees that would transfer to the successor contractor. Because both scenarios are losses to different degrees, investors should anticipate an earnings dip in our first half related to this matter.

On another matter that we’ve been disclosing, our arbitration process continues with the Greek government regarding the Athens Olympics security contract. Meanwhile, our system continues to serve daily, vital, public safety functions for the city. A favorable resolution of the arbitration would have a positive impact to our financial performance but it is not factored in to our forward expectations.

Moving on to cash flows, we expect to continue generating strong operating cash flows equal to net income plus depreciation and amortization as a general model. Capital expenditures should continue to run under 1% of revenues. We don’t expect any major changes to working capital uses in fiscal 2011. The resulting free cash flows coupled with the existing cash of $1 billion and access to credit markets provides ample fire power to pursue a number of strategic alternatives to generate shareholder value and that’s what we’re focused on doing.

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

Walter P. Havenstein

Before turning to your questions I just wanted to say I’m honored to have the opportunity to lead SAIC and build upon the company’s legacy of excellence. Since joining the company in September, I have visited our customers and employees across the country. I’ve gotten a firsthand look at how the science and technology solutions we are delivering to our customers are helping to solve the nations’ toughest problems.

Our company represents a very strong platform for growth and innovation across the markets we serve. As mark pointed out in his remarks, we’re pleased with the progress of our recent results. We’ve dedicated more resources to key growth areas and we’re optimistic that these measures will pay off. The marketplace is likely to remain challenging for the near future but we’re confident in our ability to deliver results going forward.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jason A. Kupferberg – UBS Securities, LLC.

Jason A. Kupferberg – UBS Securities, LLC.

Just a couple of questions, I wanted to start kind of on the M&A front and just get an update on your current thinking in terms of sizeable M&A as a potential strategic focus here just given the strength of the balance sheet and obviously a little bit of a softer organic revenue environment? And, maybe as part of that commentary if you can talk about what the larger side of the M&A pipeline looks like? Also, just frame for investors what kind of a larger size acquisition you’d be comfortable doing based on your current balance sheet capacity and appetite for leverage.

Walter P. Havenstein

We are continuing to look at two areas of M&A growth. Those that support accelerating our organic growth within our current business model and the current emphasis across the business. So, most of those acquisitions have been consistent with the size of the acquisitions that we’ve made in the past. It’s probably premature, in fact, it is premature for me to be specific about other acquisition targets that we’re going to consider because as I told you back in the investor’s conference, I’m going through a fairly detailed strategic revenue to include with the board and it will probably be a couple more months before I can share with you any more detail around what the options are that we’re considering.

Jason A. Kupferberg – UBS Securities, LLC.

A question on the macro environment for your sector, is it possible that the sector might experience any material amount of a crowding out effect as it relates to federal IT spending just given the planned troop surge in to Afghanistan? And if so, has any of that dynamic been in fact factored in to your fiscal ’11 guidance? Is that a net negative to the industry and for SAIC specifically or are there some silver linings potentially there for your company?

Walter P. Havenstein

I would say that at some point there will be some crowding out, that’s for sure. But, I think what actually serves to our advantage is the work we’ve done over the last couple of years in capturing positions on the larger IDIQs. In particular, as you think about the surge in Afghanistan, those opportunities are going to have to be met with existing vehicles, and I don’t mean physical vehicles I mean contract vehicles if we’re going to get the surge effect both in country and in the support infrastructure here back in the United States. I think that actually serves us well and although time may tell because of the budget constraints whether there will be a crowding out in the overall IT world, I think where we are positioned we’re more likely to see upside to that rather than downside.

Jason A. Kupferberg – UBS Securities, LLC.

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

Mark W. Sopp

Jason, we’re at the beginning of what could be a long legal process. There has not been sufficient process or progress to give you any further color other than what we’ve disclosed at this time.

Operator

Your next question comes from Robert Spingarn – Credit Suisse.

Robert Spingarn – Credit Suisse

A question on the log jam, about how long would that have to continue before it would impact your fiscal ’11 guidance?

Walter P. Havenstein

The way I would characterize that Robert is we’re actually seeing the log jam starting to loosen up. If you look at the aggregate from the time the new administration went in we’ve seen probably the net effect of about maybe a 60 day what I’ll call deferral as the priorities of the administration were being set, as decision makers got in position. Most of that, especially as it pertains to the key decisions around the war in Afghanistan have now been made.

So, we don’t expect that log jam to be enduring. However, that delay did have an impact on orders that impact some aspect of our most recent revenues. So, that impact will be with us for the next 60 days or so. But, I’m fully confident that based on what we’re seeing already in the last few weeks that we’re going to start seeing that log jam kind of break up.

Robert Spingarn – Credit Suisse

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

Walter P. Havenstein

Well, yes I can give you one in particular. We know there are going to be some acceleration of MRAP ATV and probably other vehicles, tactical vehicles that are going to be used in that environment. So, in order to accommodate the ramp up of 30,000 people we know that they’re going to be needing both people in country as well as work – when I say in country I mean in the theater as well as people to continue the integration work that we’re doing in Charleston so I think that would be the first thing.

Number two, there are a variety of what I’ll characterize in general as intelligence contracts specifically that support operational intelligence. By the way, the operational intelligence work is not just that which we do in country around ISR but also that which we support back here in [Konas]. I would expect to see some of those operational intelligence contracts pickup, and frankly, we know that they’re going to pickup. And, we’ve also gotten some indicators for additional what I’ll call infrastructure work in the theater in preparation of having upwards of 30,000 additional troops in Afghanistan.

Frankly, whether it’s a shift from Iraq to Afghanistan or a buildup which we’re currently looking at in Afghanistan, that all requires infrastructure. We saw a very similar ramp up if you recall back in 2004 and 2005 as we ramped up in Afghanistan. If you look at those three dimensions in particular and when I say infrastructure I’m primarily talking about the telecommunications infrastructure that we provide a lot of installation and support on. Those are the kinds of things that I think you can expect to see some upside potential for.

Robert Spingarn – Credit Suisse

But you’re not saying in fact that you see between Afghanistan and in Iraq that the total business related to the two operations over there whether it be there or here, that business doesn’t rise over time with the withdrawal, or does it?

Walter P. Havenstein

I think it does. First of all, you have to bind the time. I think near term it will and I think your guess is as good as mine, if you’re watching the talking heads on Sunday, your guess is as good as mine as to what withdrawal means. Whether it’s a real withdrawal or whether it’s a ramp down that’s barely recognizable starting in June/July of 2011. My sense is the kinds of things we’re going to be doing are going to be needed for a long, long time.

Let me just give you an example, we provide the supply chain management for tires in one of our contracts. They’re going to be grinding out a lot of tires over the next three years and frankly it doesn’t matter whether they’re grinding them out in the sand of Iraq or the hills of Afghanistan, the fact is there are going to be more tires. So, those of us who provide supply line or manage supply lines in those consumables which we do are going to have more business there’s just no way of getting around it because the overall emphasis has gone up.

Operator

Your next question comes from Joseph B. Nadol, III – JPMorgan.

Joseph B. Nadol, III – JPMorgan

First question is just on the revenue organic growth outlook, just looking beyond FY ’11 Walt some of the things that you walked through at the beginning of your initial comments were short term like the log jam and some of them were longer run like your take on the defense budget which is obviously the biggest driver or the biggest end market you have. Is 6% to 9% still the right long term growth number for the company?

Walter P. Havenstein

Well, let me put it this way Joe, I think it’s hard to predict exactly where the defense budget is going to look like for government fiscal ’11. But, we do know, we do know that the nature of the things that are going to get more emphasis are going to be around the current fight. So, at the expense frankly of future capabilities investment. That would mean for a company like SAIC, we should be in a pretty strong position to be in the area of more emphasis through our service offerings and the nature of the things that we’re currently doing.

I think what it represents mostly from a challenge perspective for SAIC is that others are going to recognize that too and so the nature of the competition in that market is going to get stiffer. We have seen that in this fiscal year, in our fiscal 2010 in that the investments we’re having to make notwithstanding the pause in contract awards and the extending nature of contract awards but we just see more competitors and the costs for winning the same amount of book business is going up for us.

I’m more concerned about the overall effect on other competitors entering the marketplace because their traditional business which tends to be the long term investment programs are going to come under pressure as this administration continues to emphasize the current fight versus the future fight. I hope that helps. In the meantime, we’re looking for areas for what I’ll call [inaudible] that are going to grow relatively well compared to the overall DOD market and markets that are adjacent, like an energy, health and medical that are going to grow relatively well within the government spending compared to the Department of Defense.

I tried to be as broad as I could because I don’t want to be tremendously specifically frankly trying to be on what the government fiscal year 2011 budgets is going to look like. But, I think you just got my convictions around what I think is going to get emphasis versus less emphasis.

Joseph B. Nadol, III – JPMorgan

I understand that and that all makes sense, I’m just trying to get my arms around this 6% to 9% long term growth was set by a different management team to some degree and in a different era and now we have budget growth changing and you’re of course trying to pursue stronger avenues of growth within the budget and in other areas and we see that. But, I guess could you say yes or no we’re going to keep the 6% to 9% target long run.

Joseph B. Nadol, III – JPMorgan

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

Joseph B. Nadol, III – JPMorgan

My other question is just on the M&A and I heard what you guys said about being in dialog and what you’re looking at and heard the word dilutive and you were very clear to say long term accretive, I think Mark you made this comment but could be dilutive to neutral in a short term. I’m wondering if you could give any better sense of how dilutive an acquisition in the short term you’re willing to accept to get that longer term growth opportunity?

Mark W. Sopp

Well Joe, that really depends on the long term strategic merits of the acquisition. We have generally seen smaller acquisitions at SAIC in the past, they have been negligible in terms of dilutive effect. Should that change, that situation could change we certainly just don’t want to rule out something that’s even more dilutive than our past experience for sake of what the generally accepted accounting principles require knowing that the economic prospects may make very good sense for us. So, until we get through this strategic dialog that Walt referred to and give you a better indication of acquisition and size and stuff like that, it will depend on a case-by-case basis. But, we’re going to be focused on the long term economics and cash flows not so much, or at least to a lesser extent on GAAP dilution on a short term basis.

Joseph B. Nadol, III – JPMorgan

Just one more quick one on numbers Mark, on the MRAP overall program including the ATVs and the work you’ve been doing in the past and on SCF could you give us a sense of what’s embedded in your forecast for FY ’11 relative to FY ’10?

Mark W. Sopp

The SCF if you will, albeit a new name now is still under much discussion and debate. While we are having very stable revenues foreseeable and it’s too early to say how that might change pending those discussions. We baked in a modest decline in revenues for 2011, I’d say a little less than what I previously had indicated which was about a $50 million reduction, I think we’ll be a little bit better than that and a modest fee decline in light of discussions there. But, we really don’t have any better information with respect to that program today.

On the MRAP/ATV tactical vehicles integration, that team has done a wonderful job expanding that area beyond MRAP not only to MATVs but to other tactical vehicles. While they saw a little bit of slip as expected here in the third quarter, there is a robust pipeline of work with MATVs, 5,000 unit ballpark for fiscal ’11 and that will keep the year-over-year revenues in that area slightly down but not as noticeable as we once though prior to of course landing that order on the MATVs.

Operator

Your next question comes from Cai von Rumohr – Cowen & Company, LLC.

Cai von Rumohr – Cowen & Company, LLC

Could you give us what the direct labor billings were in the third quarter?

Mark W. Sopp

The direct labor was 58% of revenues.

Cai von Rumohr – Cowen & Company, LLC

Then you’d mentioned that you did I think 27 $100 million plus contracts through December, how many of those are so far in the fourth quarter? And, could you give us color around the 13 that you won in the third and whatever you’ve won here so far in terms of what percentage of those are IDIQs?

Mark W. Sopp

The 13 north of $100 million wins were in the third quarter. So far in the fourth quarter we’ve won two building up to the 27 year-to-date. In terms of the mix, roughly 50/50 in terms of IDIQ versus standard contracts on a year-to-date basis.

Cai von Rumohr – Cowen & Company, LLC

Where do we stand with the Greek contract in terms of the negotiation there?

Mark W. Sopp

As I mentioned Cai it is in arbitration. We continue to serve our mission there in our opinion very well. The status of the negotiations is ongoing. We continue to expect at some point a favorable resolution however determining the time frame for that is too uncertain for us and that’s the reason why we did not bake any of that resolution in to our guidance for fiscal ’11.

Cai von Rumohr – Cowen & Company, LLC

If we look at the final quarter, you mentioned that you kind of year-over-year had 65 days versus 60 so that really took 1.5% so kind of if it was equal days you would have been about 5%, what should we think about if you’re saying the log jam is starting to break? Fourth quarter does it look like the organic growth should be 6% or better excluding kind of taking out the acquisitions from last year? If you just look at the businesses you had last year excluding acquisitions versus what those businesses expect to generate this year?

Mark W. Sopp

Excluding the effects of the acquisition we think we’re in the low to mid single digits give the bookings experience we’ve had year-to-date for the fourth quarter.

Cai von Rumohr – Cowen & Company, LLC

At one point I think you were looking for – I mean as recently as your analyst day in October you were looking for a higher book-to-bill and so these numbers seem like something of a decline since then and yet you say you’re starting to see a break in the log jam, those two changes don’t seem to be quite in synch. Can you help us understand what seems to be in conflict between those two situations?

Mark W. Sopp

Cai, we expect, as we said in our prepared remarks that the bookings and book-to-bill should improve as the log jam has lifted and we’re just comfortable with the visibility that we have in the fourth to generate the numbers equivalent to the guidance. If you look at the pace of bookings during the third quarter they were somewhat back end weighted which gives us the confidence that we’ll make the mark here.

Cai von Rumohr – Cowen & Company, LLC

Just the last one you mentioned bids awaiting decision were $7.9 billion, the notes I took on the second quarter were you exited at $8.5 billion suggesting they actually went down in this quarter. Is that true, and if so why?

Mark W. Sopp

We had a slight difference in timing when we reported that. For the analyst day we reported a number through the August period whereas in Walt’s earlier remarks we are just looking at the quarter end as reported which takes you back to July so there’s a little bit of difference there, we apologize for that.

Cai von Rumohr – Cowen & Company, LLC

No, but I’m saying if you go back to July it was $8.5 and now it’s $7.9 so the book-to-bill was greater than one but the bids awaiting decision kind of went down which would suggest you’re not submitting that many bids. Or, is that just the fact of the bids your winning the bigger ones are IDIQs and therefore these metrics don’t really reflect the ongoing business potential?

Mark W. Sopp

Well clearly that’s true the IDIQs are affecting the bookings numbers however, I’ll go back the $8.5 billion was an end of August number not an end of Q2 number that was used in the analyst day. So, the appropriate Q2 number was the $6.6 for the end of the second quarter so we had a big August in terms of submissions.

Operator

The next question comes from Joseph A. Vafi – Jefferies & Company, Inc.

Joseph A. Vafi – Jefferies & Company, Inc.

For guidance for fiscal ’11 does that include some of this kind of weakness we’re seeing in RW Beck as we move forward? Is that part of the guidance for fiscal ’11?

Mark W. Sopp

It assumes the lower level of revenues we’re experiencing this fiscal year, we’re effectively assuming a moderate growth from fiscal ’10 to ’11 but not anything like the episodic revenues that were present in fiscal ’09 which is now part of our baseline.

Joseph A. Vafi – Jefferies & Company, Inc.

Then if we look at some of the bookings pauses we’ve talked about here is there any delta between DOD and some of the civilian agencies in terms of the pauses? Is one place more severe than others or is that kind of across the board with administration changes etc.?

Walter P. Havenstein

My sense is it’s been a little more severe in DOD and the Intel community simply driven by the delay in the decision making or the policy decision regarding the ramp in Afghanistan. That really hasn’t affected a lot of other people but that clearly affected – frankly, people were keeping their procurement powder dry until some of those decisions made. We started seeing that break lose as that decision became more and more evident. We actually saw some indicators just by the what if questions we were asked on some of our existing contracts starting about four or five weeks ago.

Joseph A. Vafi – Jefferies & Company, Inc.

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

Walter P. Havenstein

I don’t think the pause will get worse. Your description of constipation, I think you want to think of this kind of as a rat moving through a snake, it still has some time to go before all the things associated with acquisition reform and the change in the change in the acquisition climate fully affects us. But, I think what we’ve attempted to do in looking at 2011 is to accommodate that in our plan. So, we’ve essentially adjusted the acquisitions cycle time in our plans and we think that now is reflected in our 2011 plan.

Joseph A. Vafi – Jefferies & Company, Inc.

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

Walter P. Havenstein

Yes, I think so. I think that’s possibly true but I think my guess is that we’ve reached more of a steady state in terms of the overall acquisition time, or that process as opposed to it speeding up, I don’t think the process itself will get faster I just think we’re farther through the process that we were say a quarter ago.

Operator

Your next question comes from William R. Loomis – Stifel Nicolaus & Company, Inc.

William R. Loomis – Stifel Nicolaus & Company, Inc.

When you talked about the intelligence revenues declining or I think maybe Mark said it, where you talking about the whole intelligence security technology group overall or any particular groups under that?

Mark W. Sopp

I’d rather not talk about anything below that in any event but yes, I think it’s true across the board there.

William R. Loomis – Stifel Nicolaus & Company, Inc.

So that whole group, you saw revenues decline in that whole group?

Mark W. Sopp

Yes.

William R. Loomis – Stifel Nicolaus & Company, Inc.

Was there any recomplete losses or anything driving that or terminations or anything like that?

Walter P. Havenstein

No, frankly it was more an expectation of what we thought was going to happen got delayed. Frankly, you need to also keep in mind, and as is typical of new administrations especially in the defense world and especially given the strategic decision around Afghanistan, the execution on some of the contracts that we’ve won had been what I’ll called delayed in that the scope that was expected at the time we won the contract has either been modified because they want to keep their powder dry or has been delayed until they got this strategic decision worked out.

Similarly, what we’re seeing is things that were RFPs that were based upon a year ago thinking, the past administration thinking, those things are being delayed or at least got delayed in this budget cycle. So, my sense is there is still built up demand and I’d be disappointed if we didn’t see that build up demand start to manifest itself in new work here over the next six months.

William R. Loomis – Stifel Nicolaus & Company, Inc.

Then on the security sales, you mentioned that they were good in the quarter and that helped. Mark said that was one of the factors of improved margins, how do you see that in the January quarter in terms of was there some that got pulled kind of forward in to the October quarter from January? Because I know you previously thought it would be more in the January quarter on the bigger security systems deals.

Mark W. Sopp

Bill, they did moderately better in the third quarter than expected. I honestly don’t know if some of that was acceleration but we have the fourth quarter outlook pretty much consistent with what we had been discussing before.

Operator

Your next question comes from Jeff Houston – William Blair & Company.

Jeff Houston – William Blair & Company

Could you talk about any sizeable upcoming recompetes for the rest of fiscal ’11 and in to fiscal ’12?

Walter P. Havenstein

We have our largest contract in essence comes up for recompete during fiscal ’11 however, it’s at the back end of fiscal ’11. That’s the [Sense Global Solutions] Contract previously known as the GIG and that’s with [Ditsa] so that’s north of $300 million in annual revenues. But again, that’s a late fiscal ’11 event but that clearly will have an impact in fiscal ’12 so we’ll just be discussing that about a year from now in terms of its status.

Mark W. Sopp

Bob, the NASA Space Flight Center work that had been under a very large omnibus contract has actually been broken up and some of those contracts get awarded out in our fiscal ’11. That will have an impact for us in fiscal ’12. But, frankly we’re pretty confident about that.

Jeff Houston – William Blair & Company

How about with the Global Solutions contract, do you feel fairly confident about that one as well?

Walter P. Havenstein

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

Mark W. Sopp

I want to go back and correct the record for one of the previous responses that Cai von Rumohr asked which was the mix of IDIQ contracts and standard contracts in the north of $100 million category. That mix year-to-date is about a third standard contracts and two thirds IDIQ contracts for the record.

Laura Luke

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

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: SAIC, Inc. F3Q10 (Qtr End 10/31/09) Earnings Call Transcript
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