Leidos Holdings, Inc. (LDOS) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Diana, and I will be your conference facilitator today. Welcome to SAIC's First Quarter Fiscal Year 2012 Earnings Conference Call [Operator Instructions] And as a reminder, today's conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Paul Levi, Senior Vice President of Investor Relations. Please proceed.

Thank you, Diana, and welcome, everyone. Here on today's call are Walt Havenstein, our CEO; Mark Sopp, our CFO; and other members of our leadership team. During this call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks. In addition, these statements represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. You will also note from our press release that we have made a change in our segment disclosures to reflect our more focused strategy and business portfolio. Beginning with this quarter's results, we will now expand our reporting to include separate segments for Defense Solutions; Health, Energy and Civil Solutions; Intelligence and Cybersecurity Solutions; and Corporate and Other. This change should result in more insight and transparency into the components of the company. I would now like to turn the call over to Walt Havenstein, our CEO.

Thank you, Paul, and good afternoon, everyone. You can see from our press release that we turned in solid performance in the first quarter of fiscal 2012. This performance reflects SAIC's focus on growth in the most attractive and profitable elements of our portfolio and commitment to build our pipeline for future growth. During the quarter, we delivered double-digit growth in operating income and earnings per share. Despite market challenges, we expanded our pipeline of opportunities, and we continued to grow the value of submitted proposals and contract backlog, each increasing at double-digit rates compared with the same quarter a year ago. For the call today, I'll cover market conditions, highlight recent business development results, talk about acquisitions and divestitures, discuss our CityTime contract, touch upon our community outreach program and share a special recognition we received. Then Mark will provide the financial details. As we have discussed with you before, the government solutions and services market witnessed a lengthening of the acquisition cycle in government fiscal 2010. And as we expected, this longer cycle persists in government fiscal 2011. We are encouraged by the passage of the federal FY '11 budget and expect that will improve the funding environment on a short-term basis. However, we also expect the longer acquisition cycle to continue into government fiscal 2012. It is also important to note that announced changes in the Pentagon leadership will likely lead to some changes in spending priorities. These market conditions continue to make the timing of new awards difficult to predict, but we have responded to these conditions by increasingly focusing resources on aggressively pursuing new business. Regarding our contract awards, bookings totaled $3.6 billion in the first quarter and produced a net book-to-bill ratio of 1.3. This ratio reflects our key win on the 10-year NASA Integrated Communications Services contract, which added $1.2 billion to our bookings. This is an important win for maintaining our base activity in supporting this critical mission for our NASA customers. We ended the quarter with $18 billion in total backlog, of which $5 billion was funded. As compared with the first quarter of fiscal 2011, total backlog increased by 14%. This marks the fifth consecutive quarter of achieving a book-to-bill ratio at or above 1.0, validating our strategy to be more aggressive in our business development area. A central factor to growing our bookings and backlog was maintaining high win rates. In Q1, we achieved a 72% total dollar win rate on business opportunities pursued and awarded. This win rate is higher than a year ago despite a more aggressive pace of bids submitted and increasing competition. Additionally, we continued our trend of increasing submitted proposals awaiting decision, now at a new peak of $29 billion, including nearly $20 billion in ID/IQ bids and the remainder in definite-delivery bids. This is over $9 billion higher than Q4 and over $11 billion higher than Q1 a year ago, which provides a strong basis for continued growth in backlog in fiscal year 12. Our focus on winning larger opportunities continues to yield excellent results. We won 12 opportunities valued at more than $100 million each in the first quarter of FY '12. This is a 100% increase compared with Q1 of FY '11, when we won just 6 opportunities valued at more than $100 million. As presented in our press release today, there were many significant awards this quarter. At this point, let me make -- take a moment to highlight some specific business development achievements. The NASA Integrated Communications Services contract provides managerial and technical expertise in support of the Office of the Chief Information Officer for corporate admission communications needs at NASA, including local area network management at all NASA centers. This is the first time that NASA has awarded a follow-on contract for this award for this work to the incumbent contractor. The competition for this very large contract was intense, and yet it was awarded to SAIC without protest by any other competitors, a clear indication of the exceptional value proposed in SAIC's offer. Also during this quarter, SAIC continued to generate significant awards from our differentiated offerings and established year-over-year revenue growth in our Intelligence, Surveillance and Reconnaissance business. Our delivery of quick-reaction capabilities in providing persistent surveillance, processing, exploitation and dissemination solutions in a very demanding military and intelligence environment is generating increased demand. As examples, during this past quarter, we were awarded $76 million of additional ceiling on the grid's ID/IQ contract with the Army Geospatial Center, primarily focused on the BuckEye collection system. Also during this quarter, we were selected to receive a $279 million non-ID/IQ airborne ISR award by the U.S. Army Engineer Research and Development Center. This award is in final negotiations for work to be completed by September 2012. In addition to our NASA and ISR wins, we are seeing good progress in our other high-growth areas. Examples of this progress include our Gradient geothermal win, which is our second recent contract award in the renewable energy design build projects. Our Health business' capture of the TRICARE Military Health System electronic health record IT support contract that provides more momentum to our growing electronic medical health records area. And our capture of the Space and Naval Warfare System Center Pacific cyberspace operations support ID/IQ contract, which provides a large vehicle to deliver a variety of cybersecurity solutions. We also reached 2 important milestones that enable future growth. First, our Reveal baggage inspection system passed the required 75% threat mass test at TSA, positioning Reveal for equipment reset and upgrade orders. Second, this quarter we are launching our new cybersecurity platform, the CloudShield CS-4000 product. As we all know, Internet Protocol-enabled devices are exploding, and the adoption of cloud computing is on the rise. This creates tremendous opportunities for innovative solutions in many markets, including telemedicine for health care, smart grid for energy and delivery of essential government services. At the same time, the cybersecurity threat is evolving at a high rate. Consequently, critical infrastructures and business have to be able to defend their networks from a wide range of persistent threats. To this end, we are launching our latest CloudShield platform, the CS-4000, which will enable government-grade security across the agencies and into the commercial markets. Unlike proprietary hardware platforms, the CloudShield platform allows partners to build and deploy applications to counter unique and often emerging threats, capabilities desperately needed in this dynamic market. We expect these 2 developments to be an important part of our growth in the coming years. Moving on to acquisitions and divestitures. During the first quarter, we continued to pursue an active and disciplined M&A program to identify strategic growth opportunities for our company. Shortly after the end of the first quarter, we announced that we acquired the power transmission and distribution engineering business of Patrick Engineering Service. The acquisition will enhance SAIC's energy and smart grid services portfolio, adding additional T&D engineering services to the company's existing capabilities in a growing market. Patrick Energy Services is also currently working on smart grid projects for transmission infrastructure owners. The acquisition will enable SAIC to better serve customers, including investor-owned utilities, public power providers and transmission operators. On the divestiture side, as I mentioned at our last earnings call, we previously signed an agreement to sell our operations that are primarily focused on providing specialized IT services to international oil and gas companies as well as a few related international subsidiaries. These operations were historically included in our Commercial segment and do not align well with our current strategy. We expect to complete the sale of these operations in the second quarter of this fiscal year. Now I will turn to the topic of our CityTime contract with the City of New York. SAIC is the prime contractor under the CityTime program to provide a custom, fully-automated workforce management system. The system is now essentially complete supporting more than 163,000 city employees in nearly 7 departments and agencies -- excuse me, 70 departments and agencies. As you may have seen in news reports, SAIC's former program manager for the CityTime program has been charged by the U.S. Attorney for the Southern District of New York with conspiring to defraud the city and SAIC by receiving illegal kickbacks from the program for his own personal gain. We provided a description on the status of the CityTime situation as an exhibit to the 8-K we filed today with our earnings release. We obviously are taking this matter very seriously. The individual who is subject of the charges had been on mandatory administrative leave from SAIC since December when it was announced that certain non-SAIC individuals working on the CityTime program were arrested and the U.S. Attorney's investigation was made public. Since then, the company has discovered that it could not validate all the time recorded to the contract by this CityTime program manager, and SAIC terminated his employment as of May 23. We have offered to voluntarily refund the city approximately $2.5 million, representing all this employee's time that was directly billed to the city. Shortly thereafter, the charges against the former program manager were filed. We had not been aware of these charges prior to that time. The U.S. Attorney's investigation is ongoing, and we are cooperating with that investigation. The City of New York is also conducting an investigation regarding the contract. At this time the company does not know the full extent or scope of these investigations and cannot predict their outcomes. The city has stated that it intends to pursue the recovery of any CityTime-related costs that were improperly charged to the city, but has not yet filed any claims against the company or requested reimbursement of payments previously made to the company. The alleged behavior of our former employee is counter to everything we stand for and work to achieve every day. We will continue to cooperate in these investigations and act appropriately with the city in connection with this matter. We understand your interest in this situation, and for that reason, we have included a detailed statement in our 8-K filing along with our press release. But there's really nothing else we can add at this point given the fact that the investigations are still ongoing. So we ask you to respect the fact that we cannot say any more on this subject at this time. Before I turn the discussion over to Mark, I want to close by sharing 2 other items, one on our work in the community and another on a special recognition we received. SAIC is committed to being a strong partner in our communities, and we have a special focus on helping motivate kids in K-12 to be interested in science, technology, engineering and mathematics, STEM. Renewing the interest in science and technology with our youth is vital to our country and also to SAIC's future. I'm especially proud of the impact our employees are making with organizations like FIRST. FIRST is a not-for-profit public charity that motivates young people to pursue education and career opportunities in science while building self-confidence and life skills. During this year's FIRST Robotics Competition season, our employees worked with over 90 teams from across the country to build robots that competed in what I like to call the varsity sport of the mind. SAIC also sponsored 8 regional championships as well as the international championship in St. Louis, which I attended personally. Let me tell you, these are impressive events and impressive young people. What you see at these events are thousands of kids, parents, teachers and mentors all focused on getting their robots to compete in a very challenging environment. What you don't see at these events are the many, many hours of effort that each participant has invested to get to the competition itself. That's where we get the impact, and that's why I'm so proud of SAIC's employees for supporting this endeavor with thousands of volunteer hours. Second, SAIC recently received the 2011 Dwight D. Eisenhower Award for Excellence from the Small Business Administration. The award is given in recognition of exemplary commitment to using small businesses as subcontractors and suppliers. SAIC received the award in the research and development category. During government fiscal year 2010, SAIC subcontracted more than $2.2 billion in work to small businesses, accounting for approximately 20% of SAIC's total revenue for the same period. The company's commitment to small business has resulted in nearly an 80% increase in the amount of dollars subcontracted by SAIC to small business over the past 4 years. Mark will now cover the financial details for the first quarter of fiscal 2011 (sic) [2012].

Thank you, Walt, and good afternoon. I'm going to first discuss our consolidated top line and operating margin results for the first quarter, then I'll break that down into our new redefined operating segments. After that, I'll move on to the earnings per share and cash flow and then finish up with guidance for this fiscal year. As Walt discussed, in our first quarter, we grew our revenue by a modest amount and delivered strong performance on the other key financial metrics: operating margin, earnings per share growth, operating cash flow and new business awards. I'll say it's encouraging to achieve these results in a market that has continued to be unpredictable and fiscally challenged, most particularly, how we rebalanced our resources to focus on building long-term growth enablers while at the same time delivering balanced financial results. Our consolidated revenues for the first quarter of fiscal '12 grew 2%, with internal growth at 1%. Operating margins were strong at 8.6% for the quarter, up 80 basis points over the same period last year. Diluted earnings per share from continuing operations grew 13% to $0.36. This reflected top line growth, improved profitability and EPS lift from share repurchases, partially offset by a higher but normalized tax rate and higher interest expense. Finally, operating cash flow came in at about $155 million, up 18% over the same period last year and well exceeding income from continuing operations. A little more color on the top line revenues. In the first quarter, we saw accelerated growth in our ISR business area; that's Intelligence, Surveillance and Reconnaissance, particularly from quick-reaction capabilities we are delivering in support of airborne ISR missions. Our Health Information Technology business has picked up its revenue growth pace, and our C4 area, primarily in various systems engineering and integration programs, continued to contribute strongly to growth. We saw a contraction offsetting this growth in our logistics, readiness and sustainment area, most significantly from reductions in the BCTM program; that's Brigade Combat Team Modernization. We also saw a contraction across the fed civ [federal civilian] space, particularly in IT services. Security products were down year-over-year on a late shipment schedule, which is expected to reverse course in the coming three quarters. We also had 1 less business day in the quarter compared to last year, which accounts for about a 2% revenue contraction compared to last year's first quarter. As Walt indicated, total backlog at the end of the quarter was $18 billion, up nicely. Funded backlog, however, came in at $5 billion, down about 8% from last year due to a slowdown in the process for funding specific accounts and programs following the April passage of the government fiscal '11 federal budget. We expect that condition to improve with time. Operating margin improved by 80 basis points over last year as a result of several factors. This included 20 basis points from improvement arising from the sale of real estate as we continue to monetize certain elements of our real estate holdings. However, the most significant impact to margins came from contract performance across the board. This performance reflects cost reductions we have made, coupled with successful delivery of completed programs or milestones, enabling higher profits and/or award fee scores. Importantly, our cost reductions were primarily in business support functions, allowing us to concurrently increase investment in revenue-producing activities such as business development and internal research and development, while delivering improved profitability year-over-year. I'll now cover the segment operating results for our recently defined 4 operating segments. As a reminder, as Paul said upfront, these are the Defense Solutions segment; the Health, Energy and Civil Solutions segment; Intelligence and Cybersecurity Solutions segment; and the Corporate segment. Revenues for the Defense Solutions segment grew 2% during Q1 over a year ago, all of which was from internal growth. We accomplished this growth through a number of existing contracts, which include a large system and software upgrade and maintenance program for the Army based in Huntsville, and a systems engineering solutions program for the U.S. Navy. Growth in these areas was offset by about a 25% reduction in revenues for the BCTM program that I mentioned earlier and a scheduled contract wind down for the contract we have with the City of New York. The Defense Solutions segment operating margin was 7.9% in Q1, an improvement of 30 basis points over Q1 of last year. The increase is largely due to effective cost management and certain program performance. Our focus for this segment is to protect our base, leverage our strong portfolio of ID/IQ contracts and expand our market presence, such as our efforts to capture a role on the Ground Combat Vehicle program, which we expect will be decided quite soon. Our Health, Energy and Civil Solutions segment revenues decreased 4% during Q1 compared to a year ago. Internal revenues contracted 8%, went down 8%. The primary drivers of the revenue contraction for the quarter were on the civil solutions side. Timing of deliveries of our nonintrusive inspection systems for both cargo and baggage screening applications are more heavily weighted towards the second half of this fiscal year compared to last year. Additionally, we saw reduced revenues as expected in certain fed civ programs such as with NASA. Our Energy business was essentially flat but is showing signs of improvement with recent awards for design-build projects in the renewable energy area and the growing pipeline of new opportunities as well. On a positive side, our Health Information Technology area, as I mentioned upfront, primarily focused on the federal sector, currently produced internal revenue growth approaching 10%. Operating margin for the Health, Energy and Civil Solutions segment was 8.4% in Q1, 100 basis points lower than a year ago. This decline in operating margin was mainly driven by the timing-related reduction in deliveries of our higher margin nonintrusive inspection systems and also increased amortization expense due to the Reveal acquisition we made and also increased internal research and development investment related to the development of new homeland security products. The Intelligence and Cybersecurity Solutions segment revenues increased 7% during Q1 over last year, all of which was from internal growth. This growth was associated with increased activity on new and existing programs in areas of mission-critical intelligence analysis; manned and unmanned airborne surveillance; and processing, exploitation and dissemination programs. Our contributions to programs of high national security priority have countered some of the effects of systemic program delays, in-sourcing and other growth inhibitors we've experienced over the last year or 2. Standard business development investments over the past year and our agile and responsive solutions were essential to reintroduce growth back into this area. Cybersecurity for the quarter was essentially flat on continued delays in ramping up new or existing contracts and also on lower material buys. Operating margin for the Intelligence and Cybersecurity Solutions segment was 9.5%, an improvement of 200 basis points compared to a year ago. This increase was attributable primarily to strong program performance, increased sales of proprietary products and cost savings from internal streamlining actions. The Corporate and Other segment operating loss decreased by $5 million compared to Q1 of last year, primarily from a $6 million gain on the sale of real estate that I mentioned up front. That completes the view of the segments. For other P&L items, we had a high tax rate this quarter as expected, higher than last year. That's more reflective of our normative rate of about 37.5%. We also had a higher interest expense as planned from the $750 million bond offering completed near the end of fiscal '11 back in December. Earnings per share from continuing operations grew 13% over the prior year quarter, which was comprised of 13% increase in operating income and 8% increase from the lower share count attributed to share repurchases and offset by about 5% for higher taxes and 3% primarily from higher interest expense. Cash flow from operations and free cash flow was healthy this quarter, with operating cash flow at about $155 million and free cash flow at about $145 million. Days sales outstanding increased by 2 days year-over-year to 72. We continued cash deployments in the form of share repurchases, which totaled about $250 million in the quarter, representing a buyback of about 14.5 million shares. These repurchases, coupled with those made last December and January, completed our goal to repurchase $300 million of shares to offset the dilution from the recent $750 million bond offering. This negates any adverse earnings per share impact from the offering for fiscal '12, yet provides a net $450 million of new capital for application to growth or other shareholder value-creation opportunities that are available to us. That covers Q1 performance. Now let me finish up with forward guidance. Last quarter, we revised our revenue and cash flow expectations for this fiscal year to reflect the recently announced divestiture. In that, we kept our earnings per share expectations unchanged and raised our operating cash flow expectations. We have no changes to those expectations today. As disclosed in today's release, our expectations for fiscal '12 revenues are $11.0 billion to $11.5 billion, diluted earnings per share from continuing operations of $1.35 to $1.46 and cash flows from continuing operations at or above $600 million. Please also note that our normal seasonal increase in revenues from Q1 to Q2 is not expected to occur as significantly this year as we have in the past due to program reductions and wind downs during Q2 as well as some continued impact from the continuing resolution and recent budget challenges in Congress. Our expectation is that the second half of this year will deliver the bulk of our internal revenue growth for the year as ramp-up occurs on some recently awarded contracts and given the expected timing of product sales. With that, I'll turn it back to Walt.

Thanks, Mark. I would like to conclude my comments by reminding everyone that SAIC will hold its Annual Meeting of Stockholders at 9 a.m. Eastern Time on June 17, 2011, at the SAIC Conference Center in McLean, Virginia. With that, we'll turn it over for questions. Diana, we are now ready to take questions.

[Operator Instructions] And the first question will come from the line of Cai Von Rumohr, Cowen and Company.

Your funded backlog is down $500 million. Obviously, that's the impact of the CR. Could you tell us, are you seeing a pickup now that the FY '11 budget has been passed? Are things starting to flow? And what kind of impact would that have on the upcoming quarter's sales?

It's Mark. Thanks for the question. We are seeing a slow but improving impact to the funded backlog situation. As we have said for some time, we see that funding comes in smaller increments even on larger programs. And so that not only impacted us just recently, but that's been a trend for some time. We're optimistic that this will turn around in the second quarter. And we don't think that, that alone will have a huge impact on the Q2 revenues by themselves. We have a pretty strong visibility into those already. And as I said, we do have some scheduled ramp-downs that represent some headwind, but also some ramp-ups that we believe are already sufficiently funded. So that's where we stand with Q2 at this time.

Could you give us some color on the scheduled ramp-ups and ramp-downs just qualitative?

Qualitative, so we are ramping up on the Vanguard program that Deb [Alderson] and her team won earlier this year, so that's going along well. We have some classified programs in the ISR arena that Stu's [Shea] team brought in that are contributing. We have a pretty large renewable energy design-build program in Joe's [Craver] area that is well under way. And some of the existing programs, like the work here down in Huntsville for the Army that I mentioned in my prepared remarks, continues to perform well and grow. And security products will start to pick up pace here starting in the second quarter and more so in the second half.

And the downers?

For the downers, most significant being the BCTM program. That's significant on a full year basis. It's down 50% fiscal '11 to '12. That's well over $100 million. CityTime is a scheduled downer, and other ones that are pretty small, but those are the biggest single 2 drivers.

And the next question will come from the line of Edward Caso, Wells Fargo Securities.

Thanks for taking my call. Thank you for the disclosure as well. In prior quarters, you mentioned VirnetX, there may be other opportunities. Is there any update you can offer on that front?

There do remain opportunities as we've disclosed. So we have an interest in a couple of cases that are under way, but we do not have an update in terms of how those are progressing or any specific timing. So we remain interested.

On the real estate, I assume, in prior years, there was chatter of opportunity in the hundreds of millions of dollars. Is that still the case, especially given the forward progress on the subway?

It's still the case in an overall sense, Ed, and we made those remarks in the context of a 3- to 5-year period back in our October Investor Day. And so we're still tracking towards that magnitude. The nearer term is not of that magnitude. The biggest single piece is the development and either a full or partial monetization of the McLean property, and that's beyond 2 years from now, I would say. But meanwhile, we have smaller properties that will trickle in and contribute toward that total between now and then.

Last question. On the CityTime, $2.5 million, what's the other side of the liability? Is it something in the P&L?

Could you clarify that question, Ed?

I guess my question is, did that $2.5 million show up in the P&L in F Q1?

Yes, it's in the revenues.

In the revenues.

And the next question will come from the line of George Price, BB&T Capital Markets. George Price - BB&T Capital Markets: Thanks very much for taking my question. First question is, I just wanted to drill down a little bit into a couple of the segments. On the Health and Civilian Solutions, the revenue weakness, you talked about some of the civilian areas. You mentioned NASA. Was there -- could you talk about maybe some of the areas beyond NASA and civilian that might have been weak, if they were significant? Or was it mainly impact from NASA?

I would say NASA was the most significant because that program was broken into 4 parts. We didn't win 1 of the 4 parts, and 1 remains outstanding. We did have some slowdown in some IT services across a range of fed civ providers. And as I said in my remarks, the products, security products that we call Civil Solutions that includes sales to the U.S. Military, to foreign governments and other customers, are down pretty considerably Q1-over-Q1. We do expect that to reverse course in the latter half of the year, as I mentioned. George Price - BB&T Capital Markets: Okay. And then in the Intel and Cyber segment, the margin increase there. I was wondering if you could talk a little bit about the product sales there, maybe the timing of that? And then how sustainable is the margin from the lower D&T and R&D work? Is that more of a timing issue? Should we expect that margin to come down as those expenses ramp back up?

The product sales in this area are of software nature in military applications, and those tend to be somewhat episodic. We would generally have meaningful amounts in a year, but the quarters somewhat jump around and we had a pretty good first quarter for those software sales. With respect to D&T and R&D, we do expect Stu and his team to ramp that up over the course of the year, and that could have an impact to his margins. I think the answer to that will largely depend on his revenue projection. So there's a lot of pipeline outstanding in bids. And if we perform well on the revenue front, it may not have an adverse effect to the margins. If there are ongoing delays or funding issues in that area, we probably will decide to continue that level of investment and that could have an adverse effect to the margins, but all within the plan we have for the year and the guidance we've given. George Price - BB&T Capital Markets: Okay. And one last question if I could, just on Patrick, 200 employees. Did you discuss how much revenue do you expect from that this year? Or could you...

Didn't provide that, but it's on the order of $20 million per year.

And the next question will come from the line of Joe Nadol, JPMorgan. Joseph Nadol - JP Morgan Chase & Co: And I just wanted to note that the new segments data is very, very welcome and I think it's terrific. Mark -- and I know it was a lot of work, so we really appreciate it. On the backlog, the divergence between funded and unfunded, is there a better way of thinking about this? What's going on here, and when we're -- just thinking forward several quarters and what this means to revenue? Do we expect unfunded to be as sustainable? And so when funded comes up, the whole thing is going to grow? Or are both of these -- is this divergence going to reverse at some point and funded comes back up, but some of the unfunded converts into funded? How should we be thinking about this?

Complicated. There's a lot of different things going on in backlog with lots of contracts, Joe. Thanks for the comments on the segments, by the way. Clearly, we expect a meaningful chunk of the unfunded to convert to funded, accentuated by what I said with respect to the CR. It's also important to note that a good chunk of the growth in unfunded was from long-term recent wins. NASA is a 10-year program, Vanguard is a 10-year program. So there's big chunk of growth there that will stay there and not convert to funded in the short term because they're long programs. I'm not sure what else there is to add to that. Joseph Nadol - JP Morgan Chase & Co: Okay. Can you give some color where you think the funded might bounce to by next quarter? Because it's the lowest it's been in 3 years, or 3-plus years, and I know you had the CR situation. That was a major reason for, but I'm wondering if maybe you can help quantify that.

Well, I get worried when funded backlog drops to 3 or 4 months of forward revenue. And right now, it stands at 5 to 6. So that's still within, I think, a reasonably healthy zone, although we'd like to see it grow of course. But I wouldn't expect it to gyrate a whole lot above that given the piecemeal basis at which things are coming out now. So you should expect to see in any given quarter 5, 6, 7 months of forward revenue and staying within that band. And if it gets outside of that, I think we'll have to talk about that and provide more color. Joseph Nadol - JP Morgan Chase & Co: Okay. Just changing subjects here, in the Health, Energy and Civil Solutions segment, just looking at the margins. This is a business that includes the scanners, and my understanding was that at least a couple of years ago, the margins were pretty darn high. And so I'm wondering if you could help put any context around the sort of the 8%, the 9% you did a year ago. Is there a real mix of margins that kind of average out to a normal-type, company-type margin, but in reality you have a lot of different pieces, some are in perhaps investments, money losers, offset by some very high margins elsewhere? Or are the security margins, the scanner margin is a lot lower than they used to be.

Well, there are 2 elements now. So there used to be the VACIS product line solely, and now we have the Reveal product line in that category. And there's been stability in our VACIS margins, and those are healthy margins and the team has done a great job engineering it to that state. With Reveal, you've got a lot of amortization going on, and you have investment in IR&D, as I mentioned upfront, for the next generation products that we hope to sell internationally. And so when you look at the 2 combined, they are lower right now from those latter 2 elements, the amortization and some of the investment. And at its peak, I think the Reveal would be somewhat less than the VACIS line, but still very healthy. And so we expect to improve those over time as we get the volume up and get through the amortization. And obviously, we expect the R&D investments to pay off. So we're not worried about that. It's actually stable and just need some time for the Reveal margins to develop. Joseph Nadol - JP Morgan Chase & Co: Okay, okay. But are there -- is there a significant chunk of revenue in there that's negative margin?

No. Joseph Nadol - JP Morgan Chase & Co: Okay, okay. And then finally in the Intel segment, you mentioned proprietary software. I wasn't sure if that meant proprietary meaning classified or proprietary meaning proprietary to SAIC. If you could give a little more detail. That seems to have been a real margin driver, and I'm wondering maybe how much -- if you could help out with how much more opportunities are might be there or is this kind of a blip in the quarter.

As I said, the amounts that hit a particular quarter can go up and down. It's not a huge number, Joe, in the grand scheme of things. This is, I believe, not a classified program, but it is proprietary software in the kind of video application arena proprietary to SAIC. Joseph Nadol - JP Morgan Chase & Co: Okay, okay. Very good.

Your next question will come from the line of Joseph Vafi, Jefferies & Company. Joseph Vafi - Jefferies & Company, Inc.: On that contract, sounds like there was no protest. Should we at all take that as a function that the margins on that business or the re-compete price was lower and that may have caused a lot of protesting?

Joe, no. The margins are essentially the same from the old program to the new. Joseph Vafi - Jefferies & Company, Inc.: Okay. And just generally on margins in the quarter. Obviously, there was some cost reductions, which I guess will continue, and obviously, some award fees as well. Was the award fee level higher than normal in the quarter, or should we kind of look at the current margin in the quarter as somewhat sustainable here?

First, I would say you've got the 20 basis points from the real estate sales. So that's not sustainable at least in a given quarter. We did have strong award fee scores, which I think are possibly sustainable. We, in a given quarter, have fixed price write-ups and write-downs. They were perhaps a little bit more favorable this quarter than the average. So part of that, although not a huge part of that, is not sustainable. And the spending was up, but not dramatically up, on the business development and IR&D front and we do have intentions to increase that pace. So to some degree, depending again, as I said earlier, on the revenue production, that will mostly dictate where the margins fall out at the end of the year.

Let me just -- this is Walt Havenstein. Let me make a comment back on the NASA mix program. We clearly submitted a good proposal, but I got to give credit to NASA too because they had a bulletproof acquisition process. And I think that is as much a contributor to low number of protestors as responsive bids. So I don't want to not say anything about NASA's excellent solicitation. Joseph Vafi - Jefferies & Company, Inc.: Okay. That's helpful, Walt. And then finally, could you just remind us again on -- actually, probably 2 questions on revenue. One, could you remind us again when we should see that kind of more material ramp on Vanguard? And then secondly, if the products business overall is going to be seasonally stronger in the second half versus the kind of headwind now, is that big enough delta between now and the end of the fiscal year to provide a couple points of organic revenue?

The bigger part of the ramp for Vanguard is in Q3, and so that's when we expect to kick in and have a pretty meaningful contribution to the organic growth. With respect to the product ramp, clearly, in Joe's segment, it will have a material impact on the organic growth rate and will contribute another number in front of me. But it will be an important contributor to, as in the product category in the larger sense, not just Joe's area, but CloudShield and CounterBomber in Stu's area. So all of those will contribute to the higher growth we expect in the second half.

And the next question will come from the line of Michael Lewis, Lazard Capital Markets.

Mark, I was wondering if I could follow up on Cai's question earlier when you were talking about programs that would be expected to be down as you roll through this year. What about POL-Chem? And what's the year-over-year revenue decline that you're expecting there?

Not expecting a decline there, Mike. It's relatively flat.

Okay. That's flat.

That’s plateaued off you can say.

Okay. Now CityTime, can you quantify what that year-over-year decline will look like?

CityTime is going to be down year-over-year full year basis about $75 million.

Okay. Now shifting gears. If we look at Vanguard, is it safe to estimate $65 million to maybe $100 million per year sustainable revenue rates on that contract as we look out after it's fully ramped, or is that too aggressive?

I think your range is fair for the first year, but we hope and expect to be north of that in the full year ramp-up case. I'm not sure about the fiscal '13, might be fiscal '14, but we expect to be north of $100 million.

Okay. And then just one clarification. I think Joe was asking about loss positions on programs. And I wonder, are there any programs within the Health, Energy and Civilian segment that are currently in a loss position?

There are not.

There are not. Okay.

The next question will come from the line of Tim McHugh, William Blair & Company. Timothy McHugh - William Blair & Company L.L.C.: Yes, I want to follow-up on one of the earlier questions that was asking about margins, and you talked a little bit about plans to maybe spend a little more later this year on business development and some of those other factors. I guess I want to ask, in terms of the other side of the equation, the cost containment that you've been able to drive through during the last year or 2. Where do you feel you're at with that? Is there more room to go? And if so, how far along are you in trying to bring down cost to give you room to invest in those other things?

I'd go back to the comments we made in the October Investor Conference. We made great progress with our IT modernization, our shared services and our regionalized shared services, if you will, in our 3 groups and that's been a significant enabler to everything I talked about before. But we're not yet done, and what I said back in October remains that we see in the next few years a further cost infrastructure reduction in the neighborhood of $75 million to $100 million. Not all in one year, but it's a journey for the next couple, 2, 3 years. And we intend to reinvest that as we've done for the past couple of years, mostly in revenue-producing initiatives and also to remain competitive on the pricing side. Timothy McHugh - William Blair & Company L.L.C.: Okay. And my other question was, you mentioned, I think, healthcare IT up 10%. Was that overall healthcare or just the IT portion of your healthcare business -- or Health business, I'm sorry.

It's the overall Health business. So that's a business that's $400 million ballpark in size, and they do a lot of IT-based work, but also some science-based work and that figure was for that entire chunk.

And the next question will come from the line of Bill Loomis, Stifel, Nicolas. William Loomis - Stifel, Nicolaus & Co., Inc.: Just a question on, first, on the NASA contract or the 2 major ones you've won versus the prior work. What should we be looking at on a run rate basis? In other words, is the run rate you have on the new NASA business going to be the same in the second quarter than it was in the first quarter sequentially?

The first program that went to small business was about $30 million of reduction per year. So that's gone. Outside of that, I think the rest is pretty steady state to the pieces that were re-competed, if you will, and the 2 that we brought in. So we see those steady, margins relatively steady. And again, you have to factor in the piece that went to small business about $30 million upfront, and then the final piece remains outstanding, I believe, yes. William Loomis - Stifel, Nicolaus & Co., Inc.: And the $30 million, was that reflected in the first quarter results, the loss?

It did contribute to some of the decline in the first quarter, yes. William Loomis - Stifel, Nicolaus & Co., Inc.: And then looking at the second quarter, I mean, it sounds like from future comp or BCTM being down 25%, but you expect 50% for the year. When is the -- I mean, obviously, at some point, it's going to have a much -- a pretty sharp drop-off? When are you expecting that, starting in the second quarter or second half?

It's actually a pretty big drop-off scheduled for the second quarter and, to a lesser extent, in the third but actually continuing in the fourth. And that's based on what we know today. There are some renegotiations to continue which could change that, but that's our current view. And it's down 50% from Q1 to Q2 and then maybe another 20% in the next quarter and so on. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. And then just to be clear on the second quarter, when you talk about some of these headwinds. Shall we be expecting sequentially down revenue and margins going in from first to second quarter?

I think that all I said was we don't expect to see as significant of growth that we've historically seen in the first quarter to the second, and I'll leave it at that. A little bit of growth hopefully, but nothing like we've seen in the past due to the scheduled ramp-downs. And then we see pretty high confidence pick up in the third quarter from some of the previous remarks like the Vanguard ramp-up and so forth. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. And then just finally, on the Cyber being flat. You mentioned delays and some start-ups not starting up quite in the first quarter yet. Do you expect to see that picking up in the second quarter? I mean, is that a reflection of some industry issues, or is that just timing?

Too hard to predict if they will pick up in the second quarter. Right now, we are awaiting decision on a few programs, some of which have been outstanding for a long time. And so if they're decided in the second quarter, there will be some time to get those going. The CloudShield revenues are expected in the second half consistent with my remarks on the product sales in general.

There are no more questions at this time. I'd now like to turn the call back to Mr. Paul Levi for closing remarks. Please proceed, sir.

Thank you, Diana. On behalf of the SAIC team, we want to thank you everyone on the call for their participation and their interest in the company. Have a good evening, all.

And once again, ladies and gentlemen, this does conclude the presentation. You may now disconnect, and have a great day.