Leidos Holdings, Inc. (LDOS) Q3 2012 Earnings Report, Transcript and Summary

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

Thank you, Stacy, and good afternoon. I would like to welcome you to our Third Quarter Fiscal Year 2012 Earnings Conference Call. Joining me today are Walt Havenstein, our CEO; and Mark Sopp, our CFO; and other members of our leadership team. During this call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks. In addition, the statements represent our views as of today. We anticipate that subsequent events and developments could cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I would like to turn the call over to Walt Havenstein, our CEO.

Thank you, Paul, and good afternoon, everyone. For the call today, I'll cover market conditions, speak to the ongoing CityTime investigation, highlight recent business development results, review acquisitions and share several special recognitions, then Mark will provide the financial details and then we will take your questions. While uncertainty in the markets continue to present challenges to our financial performance this quarter, I am encouraged by our business development results, including our increasing pipeline of new opportunities, record level of submitted proposals awaiting decision, increasing number of large wins, uptick in awards and targeted strategic growth areas and improvement in book-to-bill performance. I am also very proud of our employees who continue to deliver outstanding value to our customers. One of the great strengths of SAIC is our culture of focusing on customer success. Our culture is one of strong customer affinity for more than 40 years and an unparalleled understanding of customer mission. The overall federal government acquisition process continues to be negatively impacted by the uncertainty caused by the government budget situation. As a result, revenues remained flat in the quarter. Looking ahead, our expectation for the year are for revenues to meet the outlook we shared with you during last quarter's earnings call. I would next like to update you on CityTime, the workforce management system that is currently being used by more than 65 New York City municipal agencies. As we've disclosed previously, the U.S. Attorney's office is conducting a criminal investigation relating to the CityTime program. Two former SAIC employees, along with other contractors on this program, have been charged with conspiring to defraud the City of New York for their own profit by taking kickbacks and increasing the cost of the program. The 2 former SAIC employees have also been charged with defrauding SAIC by depriving it of their honest services. One of these former SAIC employees has pleaded guilty to multiple charges, including taking millions of dollars in kickbacks from an SAIC subcontractor. The company is continuing to cooperate with the U.S. Attorney's investigation, but cannot predict its outcome. After a comprehensive review of the CityTime program, including a review of management performance, a group president, a deputy group president and a business unit general manager responsible for management and oversight of the CityTime program were removed and are no longer with the company. The company is not aware of any evidence that these individuals had any personal involvement in the CityTime fraud. In addition to taking these personnel actions, the company engaged an outside law firm to assist company leadership in conducting a comprehensive review of key policies and practices and to recommend enhancement to strengthen the company's culture of ethics, accountability and compliance. As a result of this systemic review, the implementation of process improvements and control enhancements by the company is now underway. In addition, a special committee of the Board of Directors that is overseeing the company's response to CityTime has engaged an independent company, Guidepost Solutions, and specifically its chairman, Bart Schwartz, to undertake its own review and monitor the efforts the company is making in response to this matter. Based on developments related to the CityTime matter since our last quarterly filing, the company now estimates that its loss relating to the CityTime program will be at least $232 million. Accordingly, we have taken a loss provision for that amount this quarter. An updated description of the CityTime matter will be included in the 10-Q, which we will file this week. Turning to market conditions. While there has been a large volume of rhetoric and speculation regarding the federal budgeting process, the overall government solutions and services market outlook remains unchanged since we spoke with you last. Our customers are being told to do more with less or at a minimum to hold the line. As a result, we expect spending to be flat at best for the next couple of years, with low single-digit spending declines in the following out years. We continue to believe there will be areas of nominal growth such as intelligence, surveillance and reconnaissance; cybersecurity; logistics, readiness and sustainment; energy; and health IT. We have and will continue to invest in these areas to provide our customers with the solutions they require. Moving on to our business development results. Bookings totaled $3.8 billion in the third quarter and produced a net book-to-bill ratio of 1.3. Combined with the book-to-bill ratio we achieved in the first 2 quarters, we have produced a solid year-to-date book-to-bill ratio of 1.2, which reflect the strength of our strategy and people. We ended the quarter with $18 billion in total backlog. $6.3 billion was funded, up nearly $1 billion or 19% from the second quarter. And as compared with the third quarter of fiscal 2011, total backlog increased by 16%. I am very encouraged that we have achieved the 63% total dollar win rate on business opportunities pursued and awarded through the third quarter. Our high win rate is attributable to strong program execution and well-targeted investments and business development. This win rate is consistent with last year's, reflecting positive results of these targeted investments considering the increased amount of bids submitted and increasing competition. Additionally, submitted proposals awaiting decision continued to increase and now stand at a new peak of $30.6 billion, consisting of $21.7 billion in ID/IQ bids and $8.9 billion in definite delivery bids. This is $7.6 billion higher than Q3 a year ago, which we expect will produce growth when these procurements are decided. Our focus on winning larger opportunities continues to yield positive results. We won 13 opportunities valued at more than $100 million in the third quarter of FY '12. When added to the 18 opportunities of this size we won in the first half of the year, this represents a 55% increase compared with the first 3 quarters of last year. Recently, we won 4 additional large programs following the end of the third quarter, which brings the total of greater than $100 million wins for the fiscal year to 35 compared to 26 for all of last year, a record for us. There were many significant awards this quarter. Let me take a moment to highlight 2 of these wins, each of which has an expected value to SAIC of greater than $100 million. These are just 2 examples of SAIC's continuing to bring the best solution at the best value to our customer. First, SAIC was awarded the Tire Successor Initiative contract by the Defense Logistics Agency. This competitively won single award ID/IQ has an estimated value of $1.1 billion over 7 years. Under this contract, SAIC will provide end-to-end supply chain management for all U.S. Military land vehicle and aircraft tires. Previously, SAIC had been a subcontractor to Michelin for only land vehicle tires. With this win, SAIC has significantly enhanced its position as a leading logistics contractor for the Defense Logistics Agency. Also during the third quarter, SAIC was awarded 2 task order contracts totaling nearly $600 million for ongoing sustainment of Mine-Resistant-Ambush-Protected or MRAP vehicles in both Kuwait and Afghanistan. Like the Tire Successor Initiative contract, this win on the MRAP joint logistics integrator contract demonstrates the kind of progress SAIC is making toward realizing the exceptional results we have targeted in our strategic growth area of logistics, readiness and sustainment. I would now like to take a few moments to highlight an exciting development in SAIC's approach for driving growth in cybersecurity, namely our recently announced strategic partnering alliance with McAfee, the world's largest dedicated security technology company. This strategic alliance will enable SAIC and McAfee to offer a new combination of cybersecurity solutions to meet the sophisticated threats faced by large, complex enterprises around the world. Cyber threats are outpacing the traditional hardware-based defense and depth models by an alarming margin at a time when critical data more commonly moves beyond the enterprise network to mobile endpoints. McAfee technology, combined with SAIC solution-based deployment approach, and our CloudShield CS-4000 security solution, will offer advanced security across the network by using reprogrammable hardware platforms that intelligently adapt to anticipate, detect, remediate cyber threats in sophisticated network infrastructures. This more agile capability allows enterprises to select virtualized services and applications based on their unique threats and desired security posture, an alternative approach that is long overdue. Corporate leaders and governments understand cyber security is an enterprise risk that continues to evolve, and their companies need solutions that can adapt to this changing environment. The same is true of enterprises who must adapt to protect national security. Financial institutions led by share [ph] robust capabilities in order to guard billions of dollars in transactions. The health industry, which is moving toward digital health record; energy companies adapting smart grid technology; and telecommunications companies that must ensure quality of service while also shielding millions of customers from fraudulent activities. The coupling of McAfee's industry-leading security products with SAIC's CloudShield security products provides both companies with greatly expanded access to new markets and overall stronger combined solutions. Moving on to acquisitions. We completed in the quarter the acquisition of Vitalize Consulting Services (sic) [Solutions], a leading provider of clinical business and information technology services for health enterprises. The deal enables SAIC to expand in the commercial health provider market and leverage its information integration and data analytics expertise with VCS's healthcare IT and clinical workforce optimization capabilities to further grow as commercial and federal health markets converge. Approximately 600 VCS employees joined SAIC. Before I turn the discussion over to Mark, I want to share several special recognitions. The first accomplishment I would like to recognize is the successful launch of SAIC's Commercially Hosted Infrared Payload or CHIRP sensor into space. The CHIRP sensor was integrated onto a commercial telecommunications satellite, the first time a national security payload has been hosted on a commercial satellite. The CHIRP sensor uses an electro-optical telescope to persistently view a quarter of the earth from geosynchronous orbit. It's wide-field-of-view infrared sensor is used to sense bright spots on the surface of the earth that aid in the early warning of missile launches and to support other military missions. The sensor is remotely commanded and monitored from the SAIC-developed CHIRP Mission Analysis Center or CMAC in Seal Beach, California. This program is an example how the government can achieve significant savings by taking advantage of commercially hosted payloads based upon a more agile development environment and allows us to plan and implement space missions on shorter schedules compared to the time it takes to procure an entire satellite in as short as 24 months. CHIRP was successfully powered on, on October 23 and is currently undergoing orbit testing. First successful collections occurred on October 24. As recently reported in Aviation Week & Space Technology, the Air Force is impressed with the results so far. Second, I'm happy to recognize that in November, a team from SAIC won NASA's prestigious Space Flight Awareness Award for our design in building a high-technology fiber acoustic test facility that will support development of NASA's New Orion space system. Third and also in cybersecurity, SAIC founded the Maryland Cybersecurity Challenge and Conference in October, with 312 challengers split into 52 teams across professionals, colleges and high schools. Maryland Governor Martin O'Malley helped launch the event, and 3 weeks ago, NSA Director, General Keith Alexander, and University of Maryland, Baltimore County President, Freeman Hrabowski, recognized the awardees at a dinner in their honor on November 18. Fourth, I would like to recognize that SAIC is a proud founding partner and continuing supporter of Cyber Patriot, the nation's largest and fastest-growing high school cybersecurity challenge competition, which is building the next generation of cybersecurity professionals. This year's competition got underway on October with over 1,000 teams, representing all 50 states and will conclude in March 2012. Fifth, I'm glad to recognize that SAIC has been ranked one of the top 100 military employers by G.I. Jobs Magazine in recognition of our long-term commitment to hiring former military members and our progressive policies for reserve and guard members called to active duty. SAIC presently employs over 8,000 former military members, including over 2,300 disabled veterans. Finally, I would like to point out that SAIC has recognized again this year on Newsweek's Annual Green Rankings, rising to 44 among the greenest 500 companies in the United States, up from 192 last year. SAIC recently announced its goal to reduce operational greenhouse emissions 25% by 2020, reinforcing its commitment to sustainable business practices and other corporate responsibility initiatives. Also, I'd like to update you on the CEO succession process. The Board of Directors has established a special committee to identify and assess both internal and external candidates for the CEO position. Their work is well underway, with the expectation that a new CEO will be in place not later than my planned retirement date of June 15, 2012. We should note that since my retirement announcement and through my last day at SAIC, I continue to remain fully engaged and committed to executing my role as CEO, ensuring we focus on creating enduring shareholder value. In closing, I would like to emphasize once again that SAIC prides itself on its history of ethics and integrity. While some aspects of our third quarter performance were overshadowed by CityTime, we performed well in new business development and cash flow, while continuing to provide strong execution on programs of national significance, demonstrating the underlying strength of SAIC and its employees. Mark will now cover the financial details for the third quarter of fiscal 2012.

Thank you, Walt. As mentioned in today's release, our results for the third quarter were pretty much as expected before considering the effects of the loss provision concerning CityTime. The CityTime loss provision was recorded as a $52 million reduction to revenue and $180 million charge to SG&A expense, aggregating to a $230 million pretax loss. We reflected a large portion of the charge to SG&A as nondeductible for tax purposes, which is why the effective tax rate was well above normal for the quarter. Consequently, the loss provision had a material impact from the financial results for the third quarter and for the full fiscal year 2012 expected results. We have provided a pro forma set of statements in today's earnings release to show our results with and without this item. As Walt discussed, total revenues were flat in the quarter, comprised of 2% growth from acquisitions, offset by 2% internal revenue contraction. All of the internal revenue contraction was attributable to the $52 million revenue reduction related to the CityTime loss provision. We continue to generate growth in select areas of the business that are more attractive in today's market. However, that growth was offset by wind downs of a few larger programs completed earlier this year and brought our contraction primarily in certain defense and federal civilian areas. Overall, the 5 parts of the business we call our strategic growth areas: cyber; ISR; energy, logistics, readiness and sustainment; and health rose internally in revenues 6% over last year, with ISR and cyber being the most significant favorable drivers. We recorded an operating loss of $17 million for the quarter, driven by the $232 million pretax CityTime loss provision. Operating income excluding the loss provision was $215 million or 7.5% of revenue. Within that, we also took a $19 million impairment asset charge related to certain technologies from our CloudShield acquisition made in 2010. That accounted for about 70 basis points of operating margin. Margin excluding both the CityTime loss provision and the impairment charge exceeded 8% in the third quarter, a level consistent with profitability in the first and second quarter. Within that, it's important to note we concurrently and significantly increased research and development investments all year, which we believe will offer margin enhancement opportunities in future years. Diluted earnings per share from continuing operations resulted in a loss of $0.27 per share this quarter, with the CityTime loss provision having a $0.62 per share impact. Ex-CityTime, earnings per share was $0.35. Operating cash flow for the third quarter came in at $423 million, bringing year-to-date operating cash flow to well above $600 million. Much of this stemmed from a 3-day sequential improvement in days sales outstanding during the quarter, which finished at 71 days. The areas of capital deployment, we acquired about 3 million shares in the beginning of the quarter under our ongoing buyback program and completed the Vitalize Consulting acquisition, together totaling about $240 million in funds used in the period. Now let me cover our operating results for our 4 segments. Revenues for the Defense Solutions segment decreased by 8% in the third quarter compared with last year. More than half of the revenue decline was from the revenue portion of the loss provision related to CityTime, the effects of which were entirely reflected in this segment, the Defense Solutions segment. Remainder of the revenue contraction was from the wind down of the U.S. Army Brigade Combat Team Modernization Contract, BCTM, which ended in the third quarter and other reduced activity on an infrastructure support services program. Offsetting these declines, we continue to ramp up in our Department of State Vanguard enterprise network IT program, and now continue to drive growth on our AMCOM systems and software maintenance program for the U.S. Army. We also experienced solid growth in our logistics business, driven by a material resupply purchases and additional work on combat vehicle integration and maintenance activities. The Defense Solutions segment had an operating loss of $133 million, reflecting the CityTime loss provision. Excluding CityTime, the segment had operating income of $99 million or 8.5% of revenues. Revenue for our Health, Energy and Civil Solutions segment increased 6% during the third quarter compared to a year ago, driven mainly by revenue from the acquisition of Vitalize Consulting. Internal revenues grew 1%, which reflects increases in several areas: delivery of nonintrusive inspection systems; DesignBuild activities related to geothermal power plant construction; healthcare IT consulting services; and increased disaster recovery support services. These were offset by declines in various federal civilian programs, including those supporting NASA. Operating margin for the Health, Energy and Civil Solutions segment improved to 10.6% in the third quarter, reflecting increased deliveries of nonintrusive inspection systems and higher healthcare IT consulting services. That's primarily from the Vitalize acquisition. Both of those have higher profitability relative to other business areas in the segment. The Intelligence and Cybersecurity Solutions segment total and internal revenues increased 5% compared with last year. This increase was primarily driven by increased activity on our airborne surveillance programs, increased materials deliveries under an existing processing, exploitation and dissemination contract and increased cybersecurity program activities as well. These increases were partially offset by a decline in activity on a variety of programs, particularly with DoD customers in the areas of intelligence analysis and maritime ISR. Operating margin for the Intelligence and Cybersecurity Solutions segment was 5.6%, down significantly from previous quarters. The decline in operating margin was entirely driven by the $19 million impairment charge on the purchased intangibles related to CloudShield and also increased investment in R&D and bid and proposal expenses. This was partially offset by revenue growth and increased sales of higher margin proprietary products in the ISR arena. The impairment charge was primarily associated with lower-than-expected sales of certain CloudShield products. We, however, remain optimistic and committed to the future prospects of CloudShield. In particular, we recently completed next-generation deep packet inspection technology embodied in the CS-4000 system or the foundation of that confidence. We believe our recently announced strategic partnering alliance with McAfee is a catalyst for increased sales across both the commercial clients and our installed government business space. The Corporate and Other segment had unallocated corporate costs of $16 million in the quarter, arising from recurring costs like stock options and other unallowable expenses. That covers my remarks on the third quarter. I'll now finish up with our forward guidance for the remainder of fiscal '12. That, of course, ends on January 31, 2012. As you'll see in our third quarter 10-Q filing, we have fully disclosed the lists associated with the CityTime contract. While there's risk of possible additional losses, fiscal '12 guidance does not include any charges beyond the $232 million CityTime loss provision we took during the third quarter. Also given the difficulty of determining the timing of any payments with respect to the CityTime matter, our cash flow guidance excludes any payment assumption this fiscal year. Finally, we are continuing to provide guidance on a GAAP basis consistent with past practice, which includes the impact of CityTime. However, given the nature and magnitude of this item, we provided guidance on a pro forma basis without CityTime to show expected results of more normalized business activities. Given that our fiscal '12 GAAP guidance for revenue and cash flow are unchanged from last quarter, whereas earnings per share is reduced $0.60 for the full year effect of the CityTime loss provision taken this quarter. That is the only change to fiscal '12 guidance at this time. Accordingly, we expect full year fiscal '12 revenues to come in between $10.6 billion and $11 billion and operating cash flow at $600 million or above. GAAP diluted earnings per share from continuing operations is being adjusted $0.60 downward to $0.70 to $0.80 per share full year guidance. Guidance for EPS on a pro forma basis, which excludes CityTime remains at the same, $1.30 to $1.40 range that we provided in our last Q2 earnings call. As for fiscal 2013, we have historically provided initial guidance at this point in time during our third quarter earnings release. Going forward, we are changing our cadence to initiate guidance for our next new fiscal year to our fourth quarter earnings release where we'll have the benefit of having completed the previous fiscal year and will provide more time to evaluate developments in the federal budget cycle. Accordingly, we are not providing fiscal '13 guidance today, but we'll plan to do so in March. To summarize my remarks, we had some special nonrecurring charges this quarter, which will likely capture the headlines. However, performance across our broader business space showed both improvement and strength. Excluding the 2 special items, CityTime and the impairment, internal revenue growth was flat quarter-over-quarter, reversing course from contraction in the first half of the year. On that same basis, operating profits have stayed above 8% all year, while we have increased IR&D investments by well over 50% year-over-year. This reflects our view that building capabilities in differentiated technology will be increasingly important in this market. We improved days sales outstanding by 3 days during the third quarter and have delivered almost $600 million in free cash flow so far this year. Finally, our focus on strategic growth areas and larger contracts has yielded record wins in the $100 million-plus category and a new peak in the value of bids outstanding as Walt mentioned earlier. These are the performance metrics that better reflect the commitment and focus of the people of SAIC, which will continue to be the basis of our confidence and sound financial execution going forward. With that, I'll now turn it back to Walt.

Thanks, Mark. I would like to conclude by thanking the more than 41,000 employees who remain focused and dedicated to solving our customer's and country's most difficult problem. Their dedication and commitment provides the foundation of growing our enterprise. With that, we'll turn it over for questions. Stacy, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Edward Caso with Wells Fargo.

It's actually Rick Eskelsen on for Ed. Just the first question, nice job on the bookings in the quarter. I was wondering if you could talk about the pace of bookings and the client decision making once we start the government's new fiscal year, if you see the change between this fiscal versus F Q4 of last year?

Well, we saw certainly at the end of Q4 of the government's last fiscal year some upticks right at the end. And that continued a bit apace, but we saw, just like we'd expect to see at the beginning of this fiscal year, which represented 2 periods of our fiscal Q3, a little slowing of the pace more normal to what we saw last year. And if you recall, we were disappointed in the pace of award decisions at the latter half of the government's fiscal year. And frankly, that was the basis for our reduced guidance going into the balance of our fiscal year. But I'd say the pace is pretty much normalized to where we saw it during the end of -- in the end of the last 2 quarters of the government fiscal year.

Okay. And then just real quick, I was wondering if you could give some thoughts on the super committee, and now that they've come back and said they're not going to fund the savings, did -- first, did clients see an impact or did you see an impact to your clients on decision making? And has there been a change now that they came out and said, "we're not going to fund the savings?"

Well, I think, first of all, in the context of their inability to reach a decision on the -- with regard to that committee, although it's disappointing, frankly, I don't think it's having a damaging impact to our business simply because the pace is based upon the FY '12 continuing resolution, and that's frankly what we expected to see for this quarter. And I think we're -- I'm reasonably bullish that they'll actually get to an omnibus before the end of this quarter. And as we kind of said 2 quarters ago, we thought by the end of this calendar year, we'd see things normalize within the government. And I think, frankly, that's regardless of the results of the super committee.

And just to clarify on the omnibus, were you talking about the government's fiscal quarter or your fiscal quarter?

I'm talking about the government's omnibus for the balance of government fiscal '12.

So you think a decision could happen as early as by the end of December on the omnibus or by the end of January?

Yes. They have to either do that or come up with some continuing resolution, and I think there's a -- if they can get some of the policy issues resolved, I think there's a fairly good chance that they'll come up with an omnibus bill for the balance of the -- for the budgets for FY '12.

Your next question comes from the line of Cai Von Rumohr with Cowen and Company.

You gave us a number of the loss of at least $230 million on the CityTime contract. Could you maybe give us some clue in terms of what's in the 10-Q? And I know that Mayor Bloomberg has asked for a $600-odd million, but kind of how did you come to these numbers and how should we think about what's the upside left on this?

I know you appreciate the difficulty we have in describing in any more detail, frankly, beyond what we've just discussed with you today given that the U.S. attorney investigation is an ongoing investigation and we still have areas to resolve. So frankly, I think it'd be inappropriate for us to give you any more color on that at this point. I wish we could, but it just would be inappropriate.

Okay. And then the second one, I know you didn't provide guidance for next year, but L-3 today provided guidance for their services business to be down 19% next year. And Lockheed at a recent conference talked about their services business being down next year. Can you give us any general color in terms of is there any chance of a flat year or is it more likely to be down? And L-3 talked about the OCO as a particular area of weakness. What are you seeing in your Iraq- and Afghanistan-related work?

Cai, I think first of all, we won't give guidance up or down right now for the next fiscal year simply because I still think there's some priority shifting that's ongoing for the balance of fiscal '12. I think the best indicator we have is our win rate and our increasing backlog. And frankly, the fact that we have such a large number of proposals that are in the submit stage awaiting award. And I think that's all I'd like to say about it, but I'm bullish on the performance we've seen in the third quarter as an indicator of what next year should look like.

Okay. And just the last one. You'd mentioned that there was some slowdown early in this government fiscal year. You're about halfway through your quarter. Can you give us any color in terms of have bookings been slow for you so far in the fourth quarter or any kind of just general color at all?

Yes. I think what we saw, we saw in the last few weeks of September an uptick in orders, which represented the first part of our Q3. And then we saw the first couple of periods of our -- the next couple of periods of our Q3, which represented the first 1.5 months or so of the current fiscal year return to the normalcy we saw during the early parts of the summer and late spring. So I would say the normalcy we saw for most of 2012 is pretty much continuing. We are seeing more RFPs right now and in some of our areas like cybersecurity, and we are, most recently, we've seen at least in our case a couple of nice $100 million wins in the last few weeks. So we're -- I think it will be more comparable to what we saw in our second quarter as opposed to the end of our third quarter.

Your next question comes from the line of George Price with BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: First, Mark, just on gross margin, just looking at it, if I'm looking at it right, kind of below what I expected down materially year-over-year. What was the drivers for that? Was there anything onetime in there or just if you could give a little color?

I don't spend a lot of time looking at gross margin to be honest with you, George. We look at profit rates and I was pretty careful to separate out the nonrecurring items. So in my book, we've had strong profitability other than the special items all year. We've had strong award fee scores. We did have quite a bit of material shipments in the third quarter from our nonintrusive inspection business, but we also had some pass-throughs as well that might have some impact on what you're looking at. We had one material order for $30 million alone, that was no fee for example. So that said, I think we've had pretty consistent profitability to include the gross margin coupled with the pretty efficient absorption of our SG&A all year and strong performance on the fixed price and award fee areas to keep us above that 8% that I referred to. George A. Price - BB&T Capital Markets, Research Division: Okay, all right. Fair enough. Second question is notwithstanding some of the press about how people are going about trying to possibly make changes in the budget control legislation that's out there, how is SAI or are you and how are you planning for the potential impact of sequestration?

I would tell you I don't know that we think about it strictly as a result of sequestration. We do and have been planning for the last couple of years that the budgets will flatten and tip in the 2012 and 2013 time frame, that's exactly what's happening. And the way we've dealt with that is we have put more and more emphasis, especially on our investments, on areas within our markets that we believe will be enduring and offer higher growth opportunities in the market as a whole, and those are the ones that we covered earlier. Those are within national security, ISR, logistics, readiness and sustainment, cybersecurity and then our health IT business and our energy business, and I think that's how we're dealing with the inevitable budget reductions. And that's very consistent with what we've said for the last 24 months. And frankly, I think we're starting to see that pay off. The additional IR&D that we've used this year and BNP that we've used this year and the allocation of our SG&A has been focused on those higher -- potentially higher growth areas, and we believe those growth areas, notwithstanding the budget downturn, will continue to have an enduring nature, and so that's how we are dealing with, from a strategic standpoint, dealing with the inevitable downturn in the budget. At the same time, we have continued to take cost out of our infrastructure and starting with our project alignment activities several years ago and that continues. So becoming more cost efficient, targeting our investments to the potentially higher growth areas within a declining budget is exactly how we're approaching that condition. George A. Price - BB&T Capital Markets, Research Division: Okay. A couple quick housekeeping items for Mark. Mark, if you missed it, I apologize. But did you give -- could you give the VCS revenue in the quarter? And what was the share count for the EPS excluding the charges?

Well, the share count is unchanged by the charges and it's right on the face of the income statement. If I'm understanding your question, George, the 329, the share... George A. Price - BB&T Capital Markets, Research Division: I thought there might have been some exclusions given that it was a loss. I can circle back with you.

That's miniscule to clarify that. That's very tiny, okay. With respect to Vitalize, I'll just say this, that on a full year basis, it's north of $100 million. And so, it's between $100 million and $200 million and that's about all I want to say. One quarter is, I think, a little too much in this context.

Your next question comes from the line of Jason Kupferberg with Jefferies & Company. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Mark, I was hoping you could just clarify some of the comments you made around the cash component on CityTime. Obviously, we know the size of the charge to the P&L, but I think you mentioned that the cash flow guidance does not assume any outflows related to CityTime. Can you just clarify how we should potentially think about cash versus noncash components here and what will ultimately dictate the amount of cash outflow? And are you, in effect, saying that there will be some amount of cash outflow in Q4 but you just can't quantify it? Wanted to make sure that we have that framed properly.

The bulk of the provision we took would represent our best estimate of the resolution at this time. But as Walt said, this is an ongoing matter and there could be changes to that as we hopefully reach a resolution. There's some outstanding receivable that would be baked into the process, so it doesn't exactly agree to the provision in our books. But for orders of magnitude, the provision is a reasonable proxy of the cash flow other than the receivable we have which is $40 million. And what we're saying in the guidance is while it's certainly possible that a resolution happens this fiscal year, we would not call that likely, and that the sort of resolution and eventual payments and cash outflows would be next fiscal year. And so as a result of that, we decided not to put it in this year's cash flow guidance, but we were clear to state that assumption just in case a faster resolution does occur. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay, okay, that makes sense. And can you guys just talk a little bit about the primary criteria that the board is looking for in the context of the CEO search? By the way, Walt, congrats on your retirement.

Well, they certainly have to be articulate. No, I think it'd probably be inappropriate for me to talk about the specifics of the search. Frankly, it's at the discretion of the board. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay, okay, I understand. And then just finally, I know you talked a little bit about Vitalize as far as near term. But on a full run rate basis in fiscal '13, how should we be thinking about the revenue run rate because, Mark, I think you said $100 million to $200 million, but that wasn't clear, is that an annualized number?

Yes, that would be on annualized number. I gave you a pretty wide range, but I'll tell you that the business is performing very well and is growing well in the double-digit pace, and we expect that to continue. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay. And sorry, just one quick one. Vanguard, do you still expect that to get the full run rate in Q2 fiscal '13?

Yes, we still expect that to happen.

Your next question comes from the line of Bill Loomis with Stifel, Nicolaus. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Just let's see, just focusing on the intelligence and cyber group. If I look sequentially, it looks like they didn't have as much awards as some of the other areas. Where do you -- why do you think that is? That's clearly one of your fastest growing segments. It is your fastest growing segment. Why didn't we see more actual award activity in the last quarter? And what do you think that changes here in the January quarter?

Well, if you remember, we had some very, very strong bookings at the end of last year and the beginning of this year that funded -- that has been funding and we'll continue to fund the growth within the cyberspace. And so the cyberspace will slow in this quarter simply because they had such a big second quarter, as did ISR, right? I shouldn't say cyber had a big ED in the last year and early beginning of this year, ISR had a big second quarter. And so that's really the difference. And yes, we've seen a significant uptick in proposal activity in our third quarter and now going into our fourth quarter, so we expect that to normalize with the rest of the business. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then on the 2 contracts, the DLA tire contract and then the JLI contract, just first on the DLA contract. It's a $1.1 billion value. What's the revenue run rate going to be versus the prior? And then also now that you're a prime, how does that impact the margin outlook?

That's a good question. About -- we expect to see a run rate over that 7 years of nominally $100 million a year. And the margin will be a little lower, all right. And that is how we bid it and that's what we expect, but it's a magnificent contract for us, and I think will be generating EPS for us for a long time to come. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Can you share with us, I'm just trying to get the relative magnitude between the prior one and what the new one is going to deliver in terms of kind of operating income contribution. Is it going to be higher in terms of operating income dollars, actual dollars, not margin?

Yes, yes. When you compare it to just the sub work we were doing under Michelin. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then on the JLI contract, how does the revenue run rates change there? And what's the outlook over the next year with the MRAP type of work interior?

It's going to go up. But frankly, I don't have it in the tip of my fingers, the exact amount that it will, percentage-wise that it will go up, but it will go up slightly. I'd tell you this. This past period, this last month, is the highest in-country content of SAIC employees in the AOR since the action began in Afghanistan. And notwithstanding the flatlining and in some cases declining of local funding, the nature of the things that we do -- we're doing, we expect to see continue for the foreseeable future. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: And actually growth from what you just said, right?

Yes. In a couple of areas, we'll see it grow. We're not doing base maintenance over there.

Your next question comes from the line of Michael Lewis with Lazard Capital Markets.

Walt, just a follow-up on Bill's question. There is a large countermine contract that will be awarded here in the next few months, and with regard to your bid on that, how important do you think it is with regard to your logistics expertise in winning a position on that contract?

Mike, I'm not going to talk about a future competitive contract, all right? Frankly, I'm not even sure we have a position -- established position on our bidding on that contract yet. So I'm going -- I'll just -- I'll tell you this when we [indiscernible]

That's fair. That's fair, that's fair. If I may just shift here to Mark for a second. Mark, can you help me understand the costs of the litigation and the consultants that you've hired, now is that already incorporated into the reserve that you've taken or is that an additional cost to the P&L? Can you help me understand how that works through?

Sure. You cannot reserve for costs of that nature, lawyers, consultants, et cetera so you expense those as they are incurred so they're not part of our loss provision. However, our guidance does reflect our estimate of our ongoing legal costs and other costs related to this matter so we covered that base.

Okay. Can you define what that expectation is on the costs?

If it's significant, we'll talk about it in the context of our fiscal '13 discussion. But in the context of our overall SG&A, it's still not significant today. And again, it's fully covered in the guidance and not impactful to our overall results.

Okay. And then just one final question. Can you remind me of the duration of how you define your funded backlog? Is it a 12-month period, 9 months, 15 months? Can you help me out here real quickly?

It's whatever the funding period is from the contracting officer. So it can be a year, it can be more.

Okay. Well then, what's the average duration of your funded backlog right now?

Well, let's say it is notionally somewhere between 4 and 6 months.

Our final question comes from the line of Erik Olbeter with Pacific Crest Securities.

Really quickly, Mark, if I back out the $232 million CityTime charge, it appears that SG&A came down pretty dramatically, both year-over-year and quarter-over-quarter. Can you tell us, was there anything else in there that we should be thinking about that -- or is that sort of really sort of normalizing right around $100 million now?

Well, I will say that the R&D expenses are going up pretty significantly year-over-year. As I mentioned, up 50% this year over last year, so that is climbing and that is fully in the SG&A, but we have offset it to a significant degree in other G&A-related costs. You want to make sure you redo the revenue numbers for CityTime as well when you're doing your calculations because there weren't any other major SG&A hits or credits in the quarter that I can think of other than ongoing increases in the R&D and reductions in G&A pursuant to our various initiatives in place.

Okay, that's helpful. I'll look the numbers again. And for the fourth quarter, I know there's a lot of moving parts at least from looking into D.C. budgets and trying to figure out the omnibus passes. The guidance for the full year sort of has a pretty big window there of around $400 million. What's -- can you give us a sense of sort of what brings you sort of closer to the bottom end of that guidance and what brings you to closer the top end of revenue?

We don't want to give point estimates within the range. But actually, based on the experience we're seeing in the market and the comments Walt made earlier, the historical projection we've had in the past or historical distribution of revenues from Q3 to Q4, that general pattern, we expect to be the case, so we expect Q4 will be a downtick from Q3 by some measure. That's in part due to a lesser number of productive workdays and holidays. But on the other hand, we have, as Walt said, we've got some good opening backlog and some good momentum and some areas ramping up. So expect a downtick, but not too different than historical trends.

And at this time, I'd like to turn the presentation back over to Mr. Levi for closing remarks.

Thank you, Stacy. On behalf of the SAIC team, I want to thank you on the call, everyone on the call for their participation and interest in the company. Have a good evening. This concludes our call.

Ladies and gentlemen, you may now disconnect and have a great day.