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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

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

Joseph A. Vafi – Jefferies & Company, Inc.

Edward Caso – Wells Fargo

Joseph B. Nadol, III – JPMorgan

Cai von Rumohr – Cowen & Company, LLC

Eric Olbeter – Pacific Crest Securities

Michael Lewis – BB&T Capital

Jason A. Kupferberg – UBS Securities, LLC.

Jeff Houston – William Blair & Company

SAIC, Inc. (SAI) F4Q10 Earnings Call March 30, 2010 5:00 PM ET

Operator

Welcome to the fourth quarter fiscal year 2010 earnings conference call. (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. Please proceed.

Laura Luke

Thank you and welcome everyone. Here on today’s call are Walt Havenstein, our CEO; Mark Sopp, our CFO; and other members of our team.

During this call we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially and I refer you to our SEC filings for a discussion of these risks.

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

Walter Havenstein

Thank you, Laura. Good afternoon everyone. You can see from our press release that we turned in solid performance in fiscal 2010. For the call today I will cover the market conditions and provide highlights of recent business activity and then Mark will provide the financial details. I will finish up with a longer view of our business strategy which will include our assessment of the market outlook and how we expect to execute within that market.

First, an update on our market conditions. As you know SAIC derives a large majority of its revenues from federal customers so obviously federal spending is SAIC’s most important market driver. Our assessment of federal budget information typically focuses on discretionary spending for Defense and federal information technology. Different from a quarter ago we now have the President’s proposed government fiscal 2011 budget. Our assessment suggests that while federal spending is budgeted to increase several percentage points over the prior year we expect most of that modest increase will be directed to cover DoD’s must pay bills. Accordingly we expect only nominal growth in our market for this year.

In addition, we believe the downward pressures from both the Administration and Congress on federal discretionary spending including Defense will persist for the long-term. Another important factor for SAIC is the overall government contracting environment. In our last earning’s call I characterized this environment as increased oversight with an anti-contractor undercurrent. This characterization remains valid.

New organizational conflict of interest and personal conflict of interest rules are expected to be issued soon. As we see things today we believe we can successfully navigate in this more complex contract environment. After the rules are defined and as our customers begin applying them we can adjust as necessary.

A new definition of what constitutes inherently governmental functions is also being developed and is expected shortly. This will guide how the government accomplishing in-sourcing which encompasses its effort to reduce overall contractors support and expanding the federal acquisition workforce. The implementation of these initiatives has introduced uncertainty in the contracting process. In our view this uncertainty has delayed the contract award cycle at both the front end, the initiation of new opportunities or requests for proposals, and the back end, contract award decisions.

The intelligence market is a good example of how these market factors are impacting our business. In FY10 fourth quarter alone decision delays and protests in this market delayed nearly $1 billion of planned bookings we had expected to win in the quarter. Many of the same market factors are also impacting the broader DoD and federal segments. It is difficult to assess when the log jam will break, whether sooner or later, as there are indicators both ways.

With that market backdrop let me comment on our fiscal year 2010 performance. On balance we had a good year, meeting our main financial objectives. I am impressed with the company’s ability to deliver on tough, transformational initiatives while continuing to perform for our customers. In FY10 our contract performance was strong with high customer satisfaction and customer retention. Our project alignment initiative continued to deliver planned cost savings while improving service quality.

We successfully completed the transition of our government service business to our new financial system platform Deltek without disrupting contract execution and working capital flows. The new system is an important enabler for greater control, flexibility and efficiency. On the other hand, bookings fell short of expectations due to the market factors I just mentioned.

With respect to acquisitions, during the fourth quarter of last year and so far in the first quarter of this year we have closed the purchase of two companies, Cloud Shield Technologies and Science and Engineering Technology Associates. We also purchased two product lines and a key intelligence contract. Cloud Shield’s patented cyber security technology enables customers to inspect, analyze and control traffic on the network in real time in order to provide secure and information assurance. SAIC will use this [deep pack] inspection technology and our combined cyber security capabilities to provide sophisticated IT network services and security solutions to government and commercial service providers.

Science Engineering and Technology Associates creates information technologies ranging from video and radar systems to knowledge discovery systems that find patterns in vast quantities of seemingly unrelated data. SAIC’s intelligence, surveillance and reconnaissance offerings including processing of sensor data, advanced processing exploitation and dissemination tools and technologies and real-time information integration. One noteworthy capability we acquired in this deal is SET’s counter-bomber product which is capable of automatically detecting suicide bombers at ranges beyond the blast radius of the bomb.

Spectrum San Diego is a high technology security firm specializing in ultra low dose x-ray scanning systems. SAIC acquired Spectrum’s CarScan product line which we have renamed Vacis XPL. This product enables security personnel to scan traffic at vehicle checkpoints for hidden contraband with minimal impact to traffic flow. Vacis XPL is a new and valuable tool in SAIC’s already considerable set of homeland security product offerings.

We also acquired the Online virtual environment product line from Forterra as well as a key intelligence contract from [Sitor]. The integration of these and earlier acquisitions continue on track and we are working to leverage their differentiating products, technologies and capabilities across the enterprise.

Moving onto business development, bookings in the fourth quarter were $1.6 billion for a net book to bill ratio of 0.6. This ratio reflects lower new awards, coupled with some de-bookings in the quarter including a reduction in scope related to unmanned aerial vehicles on the Army Brigade Combat Team Modernization program, formerly known as Future Combat Systems. We ended the year with $9.5 billion in bookings, a book to bill ratio of 0.9 and $15.6 billion in total backlog of which $5.3 billion was funded.

Total backlog decreased by 6% over the previous quarter. As compared to the end of fiscal year 2009 our total backlog decreased 7%. Our current book to bill ratio and backlog growth numbers reflect the impact of the market factors mentioned before. Although our bookings and backlog decreased last year we maintained our high win rates and continue to grow our submittals we achieved an 87% total dollar win rate on all re-compete business in FY10. We also earned a 60% total dollar win rate on all new business we sought to capture. These high win rates are consistent with our performance a year ago despite increasing competition which reflects the value proposition we offer to our customers.

With respect to growth in the value of our submittals we have accumulated more than $16 billion of submitted proposals awaiting decision at the end of Q4 of which roughly 50% is non IDIQ. This level of proposals awaiting decision exceeds the comparable amount at Q4 last year by over $5 billion providing a way to potential bookings for SAIC in fiscal year 2011.

Despite negative market trends we have been successful in growing our pipeline of qualified business opportunities. We are working diligently on that pipeline to increase submittals to counteract the impact of the lengthening federal procurement sales cycle and lower growth in federal spending. Additionally, the estimated long-term revenue value of our wins on IDIQ contracts grew in FY10. This gives us additional contracting capacity to leverage our adeptness of converting new IDIQ wins into task order wins that ultimately drive bookings. Roughly 2/3 of SAIC’s revenue is currently generated under task orders we win under IDIQ contracts.

A focus on winning larger opportunities continues to yield good results. We have won 29 opportunities valued at more than $100 million each in fiscal year 2010, up from 27 wins of this size in fiscal year 2009. So far in fiscal year 2011 we have won five $100 million plus opportunities. As of a recent date we had over 200 $100 million plus opportunities in our pipeline, up about 10% from Q3. More than half of these large opportunities have an expected award date within the next four months. 31 of these $100 million plus opportunities have already been submitted as proposals.

Mark will now cover the financial details for fiscal 2010 and our financial outlook for fiscal 2011.

Mark Sopp

Thank you, Walt. We spent fiscal 2010 meeting our financial goals and our results were consistent with the outlook we provided last quarter. Internal revenue growth for the year was 6% and we added another 2% of growth from acquisitions for a total of 8%.

In total growth was fueled by increases in systems engineering and systems integration solutions delivered across our U.S. government base and continued ramp up and new starts on contracts in our military logistics business area. We delivered 30 basis points of operating margin improvement over last year to 8% at the high end of our expectations we set for the year. This was accomplished by improving our overall contract performance coupled with economies of scale and cost containment actions across our overhead and administrative cost base.

Within the SG&A expense area the G&A portion rose only 2% during the full year whereas expense invested in growth, the S portion, bid and proposal and internal research and development costs collectively rose about 15%. Our ability to contain administrative costs reflects progress we have made through project alignment and other efforts. Our higher investment and selling costs reflects our priority for growth oriented actions coupled with higher business development costs associated with the longer government procurement cycle that Walt discussed a moment ago.

Diluted earnings per share from continuing operations for the year grew 15% to $1.24 per share, right in the middle of our targeted range, primarily driven from revenue growth, margin improvement and a reduced share count from stock repurchases. We continue to take significant action on share repurchases when we viewed our stock as trading below its intrinsic value per share.

Cash flow from operations and free cash flow finished particularly well with operating cash flow at $620 million for the year and free cash flow, defined as operating cash flow minus capital expenditures, finished at about $560 million. For the fourth quarter internal revenue growth totaled 4% and total revenue growth amounted to 7%. Growth was again attributed to tasking and continued ramp up of various logistics and military contracts including our POL-Chem supply chain contract, our systems integration work for the Naval Surface Warfare Center and our expanded work with the Military Healthcare Information Technology program. Growth was slowed by the lack of new awards in our intelligence area and ongoing weakness in our commercial markets including lack of new starts for commercial energy projects.

Revenue mix, by that I mean contract type, labor versus materials versus sub-contractors, etc. was largely consistent with prior quarters although we did continue to uptick the percent of our work in the fixed price category resulting from relatively stronger growth in our logistics and security products business areas which are essentially all fixed price.

In the fourth quarter while operating margin was favorably affected by higher security products shipments we had a few nonrecurring charges or special costs that spiked SG&A to above 6% of revenue. Among the larger of these charges, pre-tax, were a $6 million write down on intangible assets and a $3 million program write down from activities within our ICON acquisition which we made a couple of years ago and $3 million in severance relating to shifting transactional functions to our Centralized Services Centers, part of our ongoing project alignment cost savings initiative. In addition, bid and proposal costs and internal research and development costs were up roughly 15% quarter-over-quarter diluting operating margin by about 25 basis points.

Moving onto cash flow and liquidity, we finished fiscal 2010 with day sales outstanding metric of 69 days, pretty much on par with last year. Growth in profits coupled with a fairly low use of net working capital produced strong operating cash flows of $620 million for the year or 1.25 times net income from continuing operations. We exited the year with $860 million of cash on hand having deployed roughly $250 million on acquisitions and $475 million in stock repurchases during the year. Other sources and uses were fairly immaterial.

That sums up my remarks on Q4 and fiscal 2010. Let me update you now on our outlook or fiscal 2011 that started on February 1. As we have previously disclosed this guidance continues to exclude special charges of $20-30 million related to our transition out of the Scottish Power IT outsourcing contract. In last December’s call we indicated we expected to produce internal revenue growth and growth in earnings per share from continuing operations at the low end of our long-term financial goal ranges of 6-9% and 11-18% respectively.

As we indicated then, achieving this required an increased pace of new contract awards in order to fuel internal growth to that level. As Walt discussed our increased submittals have led to higher submitted proposals awaiting decision. The fact is our pace of bookings have not increased. As a result our expectations for internal revenue growth are being reduced which also affects diluted earnings per share growth. In addition we have increased our planned expenditures on internal research and development which partially offsets our planned improvements in operating margin.

Here is a little bit more detail on each of these three key measures. For revenue growth our bookings in Q4 and thus far in Q1 do not in high confidence support the recovery we need to see to retain our fiscal 2011 internal growth expectations of 6% of more. Due to the market factors that Walt discussed and reflecting the lower amount of recent bookings we are reducing our internal revenue growth expectation to 3-6%. Further, given the outstanding proposals and the transition time from award to revenue our internal revenue growth is expected to be back-end weighted this year.

For operating margins we expect to achieve 10-20 basis points of improvement over last year. Margin growth is expected to be driven by continued cost reductions from project alignment actions, economies of scale and steady fee performance across our contract base but will be partially offset by higher business development and higher research and development costs. Specifically we are now planning to increase our internal research and development efforts by roughly $15 million or 25% over last year.

This increase will be focused on our cyber security product and solutions offerings, the bulk of which will be centered on further development of our deep packet inspection products and capabilities brought to us by the Cloud Shield acquisition we signed in January of this year. We believe this level of investment is warranted given our conviction on the importance of technology differentiators in the cyber area and particularly their wide potential applicability across our national security, energy and health markets.

For diluted earnings per share from continuing operations the combination of revenue growth and operating margin improvement is expected to produce EPS growth of between 8-14% for the year. We still have excess cash on the balance sheet and expect to generate strong free cash flows this year providing substantial capital deployment potential. While there are always operational upsides and downsides to our outlook take note that our outlook assumes continuity in the terms and conditions of our contracts under the Army’s Brigade Combat Team Modernization program. This contract is under renegotiation and is expected to be finalized later this year.

One other quick note for fiscal 2011 P&L, as a result of the simplifications we have made in defining and allocating indirect costs and consistent with our recent filings with our government customer we will be reclassifying how certain costs are categorized on the face of our income statement starting this year. With this change SG&A expense will decrease by approximately 1% of revenue and cost of revenues will increase by the same amount. No net effect to operating margins or the bottom line.

Our expectations for cash flow from operations are unchanged. We expect to equal projected net income plus depreciation and amortization. Finally, as a result of the uncertainties in our market which Walt will describe here in a moment we no longer believe the long-term financial goals we have used since our IPO are appropriate.

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

Walter Havenstein

Thanks Mark. Before I get into strategy let me correct a statement I made with respect to our pipeline. As of a recent date we had over 200 $100 million plus opportunities in our pipeline, up about 10% from third quarter. More than half of these large opportunities have an expected award date within the next four quarters as opposed to the next four months and 31 of these $100 million plus opportunities have already been submitted in the form of proposals.

With that, let’s talk about strategy. A key reason I came to SAIC is was my belief that no company in this market space would have more upside potential than SAIC particularly if we are able to leverage the various technical strengths in a more integrated fashion. For the last several months the senior team has been on a strategic thinking journey to recast our strategy for the future.

As part of this journey I visited our customers, shareholders, business leaders, scientists, engineers and front line employees to get a first hand sense of the culture and expectations of and the attitudes towards our company. The breadth of domain expertise and scientific engineering and technology applications capability is remarkable. We have a strong affinity for our customers and their mission and we are trusted to deliver on our commitments.

We have convictions about the future of the federal market we serve and we must be thoughtful and realistic about its outlook. Our market is becoming more challenging, characterized by flat to declining federal budgets, a more regulated contracting environment and increased competition. The government is clearly signaling future reductions to defense spending and the nation’s overall fiscal outlook strongly suggests federal discretionary spending will be constrained or contracted to accommodate non-discretionary spending and deficit control.

Yet within this market there are segments that offer growth opportunities over the long-term. It is prudent to give full weight to that outlook in our strategy today and choose a course that outperforms the overall market. This will require greater focus and investment in fewer areas.

Our current business is composed of two main parts; high growth areas and what we refer to as core. Each represents about 50% of our current revenues. For our core traditional service market we expect the market to be flat or modestly declining. It is still a large market where SAIC today has a relatively small share so there is room for growth via market share capture. However, the industry can no longer rely on a rising tide to lift all boats.

The other 50% of current business is in higher growth areas. These growth markets are sub-sets of our national security market and our energy and health markets. To be more specific, the higher growth areas within national security are C4ISR, logistics and cyber security. Cyber security is of particular importance as it has a critical role to play as a differentiator and/or enabler across all our market areas. Securing our networks and communications in national security, securing control and management of electric transmission and distribution grids in the energy market and protecting privacy of records in the health market.

Within energy we are focused on energy efficiency, renewable and smart grid. In health we believe the health records exchange and interoperability will become a key thread that connects medical systems within the government and between the government and private sectors. Our assessment is these segments of the market will grow up to 15% per year. These growth areas are also attractive because they are characterized by a favorable customer demand outlook, rapid technology innovation, multi-technology solutions and a strong link to the central elements of the missions of our customers be it fighting and winning our nation’s conflicts, protecting the homeland, enabling more affordable healthcare or producing and delivering energy.

Importantly they also represent the opportunity to leverage our technical and scientific strengths, our domain expertise and our strong customer affinity. That view of the market and our capabilities has resulted in a strategy centered on organic growth characterized by the following tenets; delivering high performance in all aspects of our business, deploying new business resources to higher growth areas, accelerating growth in those higher growth areas through what I characterize as bolt-on acquisitions and delivering strong cash flow and deploying it to further increase shareholder value.

Delivering higher performance in all aspect of our business means flawless execution on contracts for our customers, better leveraging our differentiators across the company, expanding project alignment for additional process improvement opportunities and monetizing our real estate portfolio. Deploying new business resources on higher growth areas of our market means we will focus our discretionary resources including selling costs and technical talent over the next several years and improving our ability to leverage those investments. By zeroing in on these growth areas and by integrating that expanding talent and technology we have across this company we can improve our relative organic growth.

A good example of this is the increased investment we will be making in our cyber security product and solution offerings that give us technology differentiators in the cyber area and particularly its wide potential applicability across our national security, energy and health markets. Being specific about my expectation for the roles of organic versus acquisition growth, we believe that organic growth offers the highest return to our shareholders and we intend to emphasize this by doing a better job selling the best SAIC has to offer to each of our customers.

I believe aggressive cross-selling and development of integrated offerings can expand our market share and drive organic growth. At the same time, we will consider acquisitions that can accelerate our growth in our higher growth areas by bringing key differentiating capabilities or expanding market access. When we engage in M&A essential to this strategy is doing a better job driving revenue synergies across SAIC from each acquisition. We are looking to grow not only the target’s traditional business but use the target capabilities to grow other parts of SAIC and vice versa. This will require greater discipline and effectiveness in integration but frankly it is critical to value creation.

We believe that our strategy will deliver solid financial performance. Specifically, even in a tough market ahead we believe we will produce organic growth ahead of our competition. Further, we believe we can continue to improve operating margin. However, the pace of improvement is expected to moderate as a result of tougher market conditions, increasing selling and servicing costs and greater investments in internal research and development.

With the combination of organic growth, improved operating margins and continued sound working capital management we believe we will continue to grow free cash flow on a per share basis. We will carefully evaluate how we use that cash to drive long-term shareholder value, weighing the alternatives of investing into growth via M&A and/or returning the cash to shareholders. For M&A we have appropriate thresholds which compensate for the higher risk and longer term production of returns inherent in those investments. We are returning cash to shareholders our preferred method today is via share repurchases.

In summary, we had solid performance in fiscal year 2010. We have a team of highly motivated and dedicated talent and a leadership team committed to delivering on our 2011 objectives. Our new strategy positions us to succeed over the long-term in this challenging environment. I remain very enthusiastic about our company and I am confident we will continue to deliver strong performance and value to our shareholders in fiscal year 2011 and beyond.

Now we will take your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of William R. Loomis – Stifel Nicolaus & Company, Inc.

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

Can you be clear on the amount you have submitted awaiting decision? Did I hear $16 billion? Is that directly comparable to the $7.9 billion you gave in October? Is that apples-to-apples?

Walter Havenstein

The $16 billion is correct but it is not apples-to-apples when we compare it to the previous number.

Mark Sopp

The $7.9 billion was the contract awards which we distinguish from IDIQ. IDIQ is a separate category. So we have standard awards if you will which is the 729. IDIQ is a different category but the $16 billion is a combination of the two at year-end.

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

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

Mark Sopp

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

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

Looking at that much outstanding in your win rate and that $16 billion I assume had some recompete’s in it as well. So your win rate can change between 60% and 87% somewhere in between there that suggests you won $9 billion in the last fiscal year. In theory you don’t have to submit any more bids and you can win as much business as you did last year. You are obviously going to submit a lot more given your pipeline and what you are spending on B&P. Is that a realistic assessment or is there something else going on we should…is it realistic to think in fiscal 2011 you could have substantially more awards than fiscal 2010?

Walter Havenstein

I think it is likely that we could have substantially more awards in fiscal 2011 than we did in fiscal 2010 but that assumes the rate of awards picks up from what we saw in fiscal 2010 and what Mark was saying earlier is we haven’t seen evidence of that so far in our fiscal 2011. Right? So we are not making any assumptions that is going to pick up and so for us we have to increase the numbers of submits.

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

So 3-6% internal growth guidance. You have higher, another way to ask it is how much of the reduction in the organic growth outlook for fiscal 2011 is due to the future combat or [inaudible] modernization reductions or reductions of other programs. How much is headwinds you are facing versus delayed awards? Is there any way to quantify that?

Mark Sopp

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

Operator

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

Joseph A. Vafi – Jefferies & Company, Inc.

I was wondering if we could get a little bit more color on how Vacis did in the quarter and what the outlook is for that line of business in terms of growth potential in 2011?

Mark Sopp

The Vacis area performed on plan for fiscal 2010 including the fourth quarter of fiscal 2010. It is expected to grow north of 10% in fiscal 2011 and is expected to have an uptick a little bit in profitability so that area continues to perform very well for us.

Joseph A. Vafi – Jefferies & Company, Inc.

An uptick in profitability would be…if I recall that line of business is well above the overall corporate average in terms of EBIT margins right?

Mark Sopp

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

Joseph A. Vafi – Jefferies & Company, Inc.

I know you talked about some of what was previously defined as Future Combat System business that you have brought that outlook down. Just in terms of the book to bill in the quarter that kind of de-booking, how much did that affect the overall book to bill ratio in the quarter?

Mark Sopp

In the fourth quarter the de-bookings amounted to about 21%. So instead of 0.6 it would have been 0.7.

Joseph A. Vafi – Jefferies & Company, Inc.

We kind of when you came onboard it sounded like you were clearly sharpening the M&A pencil. I know you have done a couple of small things. I was wondering if you could give us an update on your outlook relative to the relatively large amount of balance sheet capacity you have to deploy in the business. Should we still be potentially expecting to see a single or maybe two larger acquisitions relative to what the company has done historically or should we continue to expect more small, tuck in type acquisitions?

Walter Havenstein

That is a good question. Let me comment by saying when I think of bolt-on acquisitions I don’t think of them necessarily in the context of size. What we are going to be looking at most importantly is on the strategic capabilities, primarily technology companies whose technologies can serve us across the broader SAIC whether they are large or small. Rather than think about it in the context of size think about it in the context of their relevance to growing those important areas we just discussed; C4ISR, logistics and cyber on the national security side, health and energy and the other two domains.

Operator

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

Edward Caso – Wells Fargo

I was wondering if you could clarify the 3-6. Are those just guidance for F11 and if things get back to normal, whatever that is, could we have higher numbers, maybe not the 6-9 but sort of higher than the 3-6?

Walter Havenstein

The answer to the first part of your question is yes. Those reflect our guidance for FY11. As we think about the uncertainty of the market and as that uncertainty either increases or decreases over time in the fall we will be looking at what is an appropriate set of guidance for the future. The only guidance we are giving today is guidance on fiscal year 2011.

Edward Caso – Wells Fargo

Just to clarify, you broke your business into core and high growth, core being flat to slightly up. High growth, cyber, energy and health, up 15% or as much as 15%. Did I hear that correctly?

Walter Havenstein

The growth part yes. Let me correct you on one point if you don’t mind. As we see our core federal services business which is about half, we see that market actually flat to declining. Modest decline as opposed to any growth at all. It is in the context of those other high growth areas that have up to 15%. Not in each one of them with 15% but within that group that we mentioned we could see up to 15%.

Edward Caso – Wells Fargo

Tax rate assumption in the FY11 guidance?

Mark Sopp

Tax rate [we used] is 38.5%.

Operator

The next question comes from the line of Joseph B. Nadol, III – JPMorgan.

Joseph B. Nadol, III – JPMorgan

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

Walter Havenstein

Again, I won’t characterize our M&A strategy to be weighted to either products or services. I would simply say this. The nature of this company and its future growth is going to be based on widely leveraging our technology and so first and foremost we are going to be looking for opportunities that give us technology discriminators that are leverageable. That may manifest itself in acquisitions that have a product centric nature to them and it may manifest itself in companies that are less product.

Joseph B. Nadol, III – JPMorgan

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

Mark Sopp

We do not have a view of optimal balance sheet. We like having strategic flexibility through our balance sheet. We like having an investment grade credit rating. That is about it at this time. We would consider additional leverage for the right opportunities but no specific targeted balance sheet set of numbers at this time.

Joseph B. Nadol, III – JPMorgan

I think you suggested that the FY11 budget maybe was a little bit surprising in some areas or was disappointing relative to what you may have been thinking about 3-4 months ago. I was wondering if you could give any more specificity on that?

Walter Havenstein

I think 3-4 months ago it was the uncertainty we didn’t have a budget. So there was a lot of questions as to what that first Obama Administration budget would look like. What we saw, as you know, is some upticks in Defense and some discretionary accounts including Defense but when you peel back the budget and you look at the nature of the things that I refer to as “must pay” bills, some of that is associated with the 30,000 additional troops going in harm’s way, the healthcare costs and a variety of things they were really not adding a lot of budget in the areas that we serve. So from my perspective it was a big surprise to me in that it didn’t go down. I think that is the only color I would add.

Operator

The next question comes from the line of Cai von Rumohr – Cowen & Company, LLC.

Cai von Rumohr – Cowen & Company, LLC

It looks like your acquisition growth was a little over 2.5% in the quarter. You have done a couple of these. Could you give us a rough sense how much you expect the acquisitions to add to revenues in fiscal 2011?

Walter Havenstein

Thanks for the question. I don’t think we can predict that frankly because if we are talking about future M&A a lot of that…

Cai von Rumohr – Cowen & Company, LLC

Not future M&A but the companies you have already purchased. You have given us the organic growth but how much of the recent acquisitions you have made including Beck how much do you expect them to add to revenues in fiscal 2011?

Mark Sopp

In a range of $150-200 million.

Cai von Rumohr – Cowen & Company, LLC

You mentioned your $16 billion I think and about half of it was IDIQ. Should we take the non-IDIQ are $8 million up from $7.9 million going back to the first question you got?

Walter Havenstein

Yes.

Cai von Rumohr – Cowen & Company, LLC

You haven’t changed your longer-term goals of 6-9% but your tone sounds very cautious in terms of the outlook for lots of reasons. Is it realistic to have a goal of 6-9% if in fact the market is changing and if in fact it sounds like things are going to be tougher going forward?

Walter Havenstein

Let’s be crystal clear. We are disavowing the 6-9% long-term goal.

Cai von Rumohr – Cowen & Company, LLC

So is there a long-term goal?

Walter Havenstein

No.

Cai von Rumohr – Cowen & Company, LLC

There is not a long-term goal. Okay. Regarding either revenues or operating margins?

Walter Havenstein

That is correct.

Cai von Rumohr – Cowen & Company, LLC

I guess I didn’t catch it, cash flow from ops would equal net income plus depreciation?

Mark Sopp

Our general model which we have consistently applied is it would be net income plus depreciation and amortization and we stick to that unless we see any specific reasons to depart from that. So…operating cash flow.

Cai von Rumohr – Cowen & Company, LLC

Operating cash flow. How should we think about CapEx? It looked a little light last year.

Mark Sopp

CapEx will generally be equivalent to our depreciation and amortization level as it has been for a number of years. So it is $60-80 million of depreciation and amortization and that has been our CapEx rate pretty steady.

Cai von Rumohr – Cowen & Company, LLC

Lastly, did I catch you saying you expect to have consistent growth in cash flow per share?

Walter Havenstein

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

Cai von Rumohr – Cowen & Company, LLC

Strive to improve it. Okay.

Operator

The next question comes from the line of Eric Olbeter – Pacific Crest Securities.

Eric Olbeter – Pacific Crest Securities

How should we think about amortization next year running through the model?

Mark Sopp

I will get back to you. Why don’t you ask your other housekeeping questions.

Eric Olbeter – Pacific Crest Securities

On previous calls you have talked about the intelligence business being a particular source of frustration. A lot of the political constipation in the market. I know that in the last call you were waiting for two big cyber security awards. Are you also seeing that translate into cyber security? That general sort of stuckness if you will in intel?

Walter Havenstein

We have several proposals awaiting awards. A good bit of our cyber security work is with the government it probably has some of the same characteristics we think about in the broader intel role.

Eric Olbeter – Pacific Crest Securities

One of the things you have mentioned previously is potentially sort of taking a more look at the commercial marketplace in areas where it makes sense; smart grid energy. Can you give us an update of where you are thinking there? Is that still the direction you are going? Do you have any more granularity for us?

Walter Havenstein

I don’t think we have more granularity. As we have said before where those adjacent commercial markets behave like our federal market we will consider them. Our focus is predominately still driven by our federal business.

Mark Sopp

The range for amortization next year in fiscal 2011 is $35-40 million.

Operator

The next question comes from the line of Michael Lewis – BB&T Capital.

Michael Lewis – BB&T Capital

A quick question with regard to the core business. If it is indeed flat to modestly declining and it is up to 50% of total revenue have you assessed any possible divestitures from these businesses? I think that would be a way to help in lifting the all internal growth rates here at the company?

Walter Havenstein

Thanks for the question. We are as we always do periodically look at our portfolio. It would be both premature and inappropriate for me to comment on any specific divestiture and it would be frankly very premature at this point.

Michael Lewis – BB&T Capital

With regard to the recomplete we witnessed in the last 6-9 months that have come in and some of the new competition you have won, what I am really interested in hearing about is have you noticed there has been an increase in scale and scope of the new contracts versus the predecessor contracts? Or are they somewhat in line with the prior recompeted actions or did they fall within the plan of what you were expecting on new competition?

Walter Havenstein

I think they are pretty much in line. I would just add a bit of color. The sweet spot for our company frankly is in the $50-100 million and we are also very good at the $100 million plus. I think we are eager to see how some of the new rules on the acquisition side of the government may change how they think about these large contracts. As you know we have seen some of these large omnibus contracts broken up in the last 12 months to create opportunities for small business and other areas of competition. So there is not a trend there I can point to but we are seeing instances of that happening.

Michael Lewis – BB&T Capital

What should we assume here for repurchase expectations for fiscal year 2011? We have been running north of $400 million per year for the last two fiscal years. Should we figure in $400-500 million again this year?

Mark Sopp

As Walt responded to an earlier question it is hard to predict that. We do for planning purposes assume we will conduct a moderate amount to offset our creep but we don’t buy back for that purpose. We just use that as a base assumption and that is a moderate amount of repurchases. We carefully evaluate the tradeoffs we have between M&A opportunities that may exist in a given quarter and what our view of the intrinsic value of the stock price is and we make decisions accordingly. It is not appropriate to project precisely. We evaluate it each quarter and we report what we do and I think you can see our track record in our previous actions but I wouldn’t necessarily project that is going to be the case in the future.

Operator

The next question comes from the line of Jason A. Kupferberg – UBS Securities, LLC.

Jason A. Kupferberg – UBS Securities, LLC.

So we basically got a three point delta here in terms of the old organic revenue guidance for fiscal 2011 versus the new guidance there. I wanted to get a sense of how much of that three point delta is really due to the weakness on the intel front. It seems like on the high growth areas you seem to be as bullish now as you have been in the past. Intel seems to be one area you seem to be highlighting as seeing some worsening trends. How much of that three points is really weakness in intel and what would the balance be if you can get more specific in terms of which service lines within your “core” you are seeing worsening trends?

Walter Havenstein

Certainly the intel market is one we just highlighted as we saw some shifts in the intel market from last quarter. I gave you an example of $1 billion in bookings that we had forecasted and planned for the fourth quarter that has moved into this fiscal year. We haven’t seen that breaking where we call “log jam” breaking on the intel side yet but as I characterized before there is similar sluggishness in other parts of our market. Mark do you have any other color to add to that?

Mark Sopp

No sir.

Jason A. Kupferberg – UBS Securities, LLC.

So mostly intel it sounds like what you are saying.

Walter Havenstein

I would say it is broadly across the business. I think intel is probably the most dramatic for us.

Jason A. Kupferberg – UBS Securities, LLC.

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

Mark Sopp

We are targeting to do between 1-1.1 to make the numbers we are talking about here. We would love to do better than that and have a pipeline that allows us to do better than that as a potential but we need to do between 1-1.1 to deliver what we are talking about here.

Jason A. Kupferberg – UBS Securities, LLC.

On the Scottish Power re-bid I know you outlined a potential hit of $20-30 million. Did that contract go to a competitor? I know it was coming up for expiration. Did you have the actual re-bid outcome known at this point?

Walter Havenstein

It did go to a competitor and it was awarded in the winter time but it was finally contracted just before we released our 8-K about a month ago.

Jason A. Kupferberg – UBS Securities, LLC.

So we will see that charge in Q1?

Walter Havenstein

As we disclosed due to the specific requirements of this sort of transition which involves folks that have pension benefits the charge is tied to their physical movement to the successor contractor. We disclosed we expect it to be done mostly in the first half. There is a possibility it could lead beyond that but our expectation is the bulk in the first half.

Jason A. Kupferberg – UBS Securities, LLC.

When you look at those high growth areas like energy and healthcare you talked about when you think longer term about what the mix of your business should look like in terms of national security versus non-national security if you will I guess we have thought about that in the past as maybe being a 70/30 ratio? Where would you like to see that go over time based on the new strategy for SAIC you have outlined?

Walter Havenstein

I wouldn’t characterize it as a percentage basis. What will drive how we end up in the balance of our business would be driven by the markets themselves as opposed to us trying to…we are certainly going to put more emphasis on those markets specifically around organic growth. But whether or not that ends up being a 70/30 split will depend upon what is not pretty uncertain about the continued emphasis that the government and our customers put on it.

Operator

The next question comes from the line of Jeff Houston – William Blair & Company.

Jeff Houston – William Blair & Company

Could you talk a little bit about employee attrition rates in the fourth quarter? Were they roughly in line with where they have been historically?

Mark Sopp

Attrition rate was just below 10% for the year.

Jeff Houston – William Blair & Company

How about the voluntary part of that?

Mark Sopp

That’s what I meant. The voluntary attrition was below 10% for the year and it was also below 10% for the fourth quarter. Voluntary.

Jeff Houston – William Blair & Company

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

Walter Havenstein

Interestingly if one of those two you are referring to is formerly known as the Gig, we beat the DGS contract. We were informed that will likely be extended for one year just the other day. So we were planning on a recompete at the end of fiscal 2011. That looks to be the end of fiscal 2012 based on that information. The other major one is NASA and that is continuing on the same course we discussed before.

Operator

This concludes the Q&A portion of today’s conference. I will now turn the call over to Ms. Laura Luke. Please proceed.

Laura Luke

Thank you operator. On behalf of the SAIC team we want to thank everyone on the call for their participation and your interest in the company.

Operator

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

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Source: SAIC, Inc. F4Q10 (Qtr End 01/31/2010) Earnings Call Transcript
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