Leidos Holdings, Inc. (LDOS) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to SAIC's Fourth Quarter Fiscal Year 2012 Earnings Conference Call. My name is Stacey, and I will be your conference facilitator for today. [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, Stacey, and good afternoon. I would like to welcome you to our Fourth Quarter Fiscal Year 2012 Earnings Conference Call. Joining me today are John Jumper, our President and CEO; Stu Shea, our COO; 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 will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I would now like to turn the call over to John Jumper, our President and CEO.

Thank you, Paul, and good afternoon, everyone. During the call today, I'd like to tell you what I believe about the SAIC as I get started in the CEO position, I'll introduce a dividend plan that's going to benefit our stockholders and I'll discuss company leadership positions. Following that, our new Chief Operating officer, Stu Shea, will talk about business development results and our strategic growth areas. Stu will be followed by Mark Sopp, who will discuss financial results, and I'll conclude with an update on strategy and areas of focus, then we'll open the lines to your questions. Let me start by saying how proud I am to be a part of the SAIC team. I couldn't be more pleased to be serving with Stu Shea as the company's COO. Stu, along with our group presidents Joe Craver and Tom Baybrook enjoy not only my confidence, but also the full support of our Board of Directors as we move forward. During much of my career in the Air Force, our nation's military has been deployed to one battlefield or another around the world. This has given me the opportunity to see SAIC, its products and its people as a customer in the field. Especially in the years since 9/11, the technical miracles produced by our company's fantastic scientific minds were turning to quick-reaction capabilities, delivered to people in the field and, in many cases, have been publicly credited by the nation's highest military leaders as instant solutions to critical problems. Some of these products have been saving lives from their very first days on the battlefield. We believe this is the most kind of -- noble kind of work, made possible by a team with a profound understanding of their customers' missions and who are dedicated to solving the most difficult problems facing those in the most extreme need. It makes us all very proud. If we believe that mounting pressure on defense budgets will result in fewer big, new program starts as well as fewer costly, single-function platforms, it follows that the next significant step in military capabilities will depend on more and better integration of programs and platforms our military already has. This is the heart and soul of SAIC's solution business. My 5 years experience on the SAIC Board of Directors has only increased my admiration for the company and its broader portfolio of technical solutions. The expanding portfolio makes us increasingly competitive in the markets of energy and environment, health, logistics and cyber, both federal and commercial. As we grow our capabilities to expand our solutions into adjacent markets following our strategy, we are leveraging the science already developed in the federal solutions space back into the strategic growth areas. We understand that being recognized in adjacent markets is more than just science. Our strategy also calls for us to build enough mass and momentum to earn enhanced market recognition, along with the right incentives within the company to share solutions across the enterprise. Our strategy is to expand our solutions DNA to include health IT and energy. I believe the asymmetrical advantage of our nation is our ability to rapidly develop and deploy technical solutions. This is also SAIC's advantage. Our renewed enthusiasm to accelerate the execution of our strategy is enabled by the resolution of the CityTime issue. All of us at SAIC are appalled by the fraudulent behavior that led to CityTime. Our company has accepted full responsibility and accountability for the actions of those responsible. Let me say a few words about our company's leadership. As Stu Shea has agreed to move to the COO position, Tony Moraco has agreed to move into the position of group president for Intelligence, Surveillance and Reconnaissance. Tony has compiled a rich history of leadership in the ISR business and will find immediate credibility among our customers. Over the past 18 months, Tony has filled a critical position of executive vice president for operations and performance excellence. In that role, he streamlined our facilities portfolio, our security systems, our information technology and our program execution processes. Tom Baybrook has agreed to continue as acting group president for Defense Solutions Group. We are grateful to Tom for taking on this demanding role. Tom has the support and credibility to fully execute the demands of his position, while allowing us time to conduct a search with the diligence this critical position deserves. I'm also -- as contained -- you saw it earlier in the earnings release. I'm very pleased to announce that the SAIC Board of Directors has approved the initiation of a quarterly dividend and declared a dividend of $0.12 per share payable on 30 April 2012 to stockholders of record as of 15 April 2012. This reflects our confidence in SAIC's financial strength and our commitment to deploying capital to maximize shareholder value for the long term. The dividend will augment our capital deployment strategy, and this will be discussed more by Mark when he gets to his part of the remarks. With that, I will conclude, and I'm pleased to turn -- to introduce Stu Shea, our Chief Operating Officer.

Thanks, John. First, let me say how excited I am to become the Chief Operating Officer of SAIC. John, Mark and I are blessed to be working with such an exceptional leadership team, and this team is prepared to execute fully on our growth strategy. Although one aspect of my role going forward will be to focus on operational efficiencies, a great deal of my time will be spent on leveraging the breadth of SAIC's capabilities and implementing that strategy across our diverse markets. Despite some budget uncertainty in those markets, I'm encouraged by our business development results. We have seen an increased pipeline of new opportunities, a record level of submitted proposals awaiting decision, an increasing number of large wins, a strong win rate and an uptick in awards in our targeted strategic growth areas. Now turning to market conditions. The outlook for the overall government solutions and services market remains consistent with what we said the last time we spoke with you. To reiterate, our customers are being told to do more with less or, at a minimum, to hold the line on both spend and performance. As a result, we expect overall government discretionary spending to be flat at best for the next couple of years, with modest growth in the out-years. We continue to believe there will be areas of growth in the Intelligence, Surveillance and Reconnaissance, cybersecurity, logistics, readiness and sustainment, health IT and energy markets. We have and will continue to invest in these areas to differentiate ourselves and deliver solutions our customers require. For the commercial market, we are seeing strong demand in the area of health IT, cybersecurity and energy. And moving on to our business development results. Bookings totaled $2.1 billion in the fourth quarter and produced a net book-to-bill ratio of 0.7. This resulted in a solid full year book-to-bill ratio of 1.1, which reflects the strength of our strategy and our ability to win business. We ended the quarter with $18 billion in total backlog, $5.5 billion of which was funded backlog. This represents increases of 5% and 3%, respectively, over Q4 of last year. I'm also encouraged that we have achieved a 63% total dollar win rate on business opportunities pursued and awarded through the fourth quarter. Our high win rate is a result of a solid track record of strong program performance and execution as well as targeted investments in business development. Additionally, our submitted proposals awaiting decision continue to increase and now stand at a new peak of $31.9 billion. That represents $22.5 billion in ID/IQ bids and $9.4 billion in definite delivery bids. This is $12.5 billion or 64% higher than Q4 just a year ago. Coupled with our strong win rate, we expect that this will produce growth when these procurements are ultimately decided. Our focus on winning larger opportunities continues to yield positive results as well. We won 9 opportunities valued at more than $100 million in Q4 of FY '12, bringing the total to 40 $100 million wins in the fiscal year. This is a 54% increase over last year. Many of these large wins were a result of increased collaboration across the enterprise, leveraging expertise from different parts of the company to offer differentiated solutions. And this is a process that we will continue to emphasize going forward. And our focus on developing business in selected strategic growth areas is also showing promising results. The value of our wins with definite delivery contracts in the energy market was up 49% year-over-year. Similar wins in the health area increased by 32%, wins in logistics, readiness and sustainment rose 13% and our wins in the intelligence, surveillance and reconnaissance market grew by 11%. In terms of specific contract wins, there were many significant awards we had this quarter. In the interest of time since we're covering so many other important topics during today's call, let me refer you to the summaries of key wins in the earnings press release. These strong business development results have continued into the new fiscal year. Washington Technology recently published an article on the top 10 wins in February, and SAIC was involved in 5 of the top 10 wins, more than any other company. During fiscal year 2012, we increased our investment in company-funded research and development by 70% over last year. This growth was associated with an increased emphasis on product development. We invested significantly in our security products, particularly the Reveal and VACIS derivatives, and we completed and launched our CloudShield CS-4000 product line last fall. In addition, we continued the development of several of our software product offerings in the ISR market and stepped up our investments in secure cloud computing in a trusted environment. We intend to continue investing in our R&D across the portfolio and intend to sustain our investment to build both products and competitive discriminators. Let me now highlight a few key accomplishments in one of our strategic growth areas, energy. We continue to successfully execute our energy strategy to develop and build key energy infrastructure projects. The most recent example is SAIC's participation in the Plainfield Renewable Energy project. The Plainfield project involves design, construction and financing a 37.5-megawatt biomass fuel power plant in Plainfield, Connecticut. This project will be a leading green project in the Northeast, in addition to being an economic boost for the region. SAIC and the Carlyle Energy Mezzanine Opportunities Group are providing financing for the project. The Plainfield project was recently announced as the winner of the North American Mezzanine Deal of the Year by Project Finance magazine. As part of our energy strategy, SAIC is pursuing a number of opportunities related to shale gas energy support, one of the fastest-growing parts of our energy business. SAIC has been assisting our nation's safe development of shale energy through both environmental and engineering support. Thus far, we have conducted pre-drilling baseline motor sampling and related projects at over 500 well pad sites that support shale operations across 6 states. We have also opened offices in Pennsylvania, West Virginia and Louisiana, and we'll soon open operating offices in Ohio and North Dakota later this year. Another aspect of our energy strategy is our focus on smart grid. SAIC is the leader in the energy market in the area of smart grid, and SAIC was one of the first to offer operational capabilities in Smart Grid as a Service. This offering brings smart grid benefits to small utilities that cannot afford to invest in full technology solutions. This, in turn, provides our clients greater efficiency and operational control without major investments in hardware and software. Now before I turn the discussion over to Mark, I wanted to share 2 special recognitions with you. First, I'd like to recognize a recent accomplishment by Reveal Imaging, our airport baggage screening business which we acquired in 2010. Reveal successfully passed laboratory testing and met the requirements set by the European Civil Aviation Conference for screening and detecting liquids in personal computers contained inside passenger baggage. The test was conducted using the Reveal dual-energy scanner, which at the checkpoint is capable of screening 500 to 600 bags per hour. We believe this accomplishment has the potential to change the landscape of airport baggage screening for years to come and provides an entrée into the European airport market. This was a major growth objective coming out of the Reveal acquisition. Second, SAIC's acquisition of Vitalize Consulting Solutions continues to support strong, double-digit growth in the commercial health IT arena. The company was recently ranked third in overall services firmed rankings in the 2011 Best in KLAS Awards: Software and Services Report. Published annually by the KLAS research firm, the report ranks the best-performing health IT vendors in more than 100 market segments based on ratings from over 18,000 interviews with healthcare providers. The recognitions for Reveal and Vitalize are just 2 examples of awards and accolades that we receive each and every day at SAIC. With that, Mark will now cover the financial details for the fourth quarter of fiscal 2012 as well as guidance for FY '13.

Great. Thank you, Stu. Thank you, John, as well. As you hopefully saw in last week's 8-K filing and also in today's earnings release, we have scheduled out the effects of the CityTime settlement to allow investors to see how it was recorded on the books and to also see our results before giving effect to the settlement. While the deal was reached just last week, the P&L effects of the settlement itself were appropriately recorded in the fiscal year ended January 31, 2012, our fiscal '12. These P&L effects in fiscal '12 were in Q3 and Q4 only, where Q3 then reflected our best estimates at the time and Q4 reflecting a true-up to the final settlement reached. On the cash side, we made the settlement payment last week, so that will impact fiscal '13 operating cash flows. With all of that provided, for today's call I want to keep it simple and focus on our fiscal '12 results, excluding the effects of the settlement itself, as those figures better reflect the underlying performance of the business on a recurring basis and also serve as a more appropriate baseline against which to measure our future performance. With that, let me share the financial highlights of our fiscal '12. For the top line revenues, total revenues increased slightly year-over-year, while on an internal basis, we saw a 1% revenue contraction. While internal revenues contracted in the low single digits over the first 3 quarters, we did see a nice rebound in Q4 with positive 3% internal growth. The most significant growth drivers for the quarter included increases in our mission-critical airborne ISR work in-theater, the ongoing ramp-up of the Department of State Vanguard program, systems engineering work for the Army in Huntsville, scope expansion of our MRAP logistics support contract and increased demand for commercial solutions, including electronic health record and implementation services of our Vitalize Consulting business and DesignBuild and other projects in our energy business area. With respect to profitability, operating margin for the year on an ex-CityTime basis finished at 7.7%, down 100 basis points from fiscal '11. The bulk of this reduction was driven by a couple of special items. First, we had, as you might recall, a $55 million pickup in the prior year, fiscal '11, from a royalty payment we received from VirnetX. We did not receive any royalty payments in fiscal '12, but we still have rights to receive royalties in the future as VirnetX continues to pursue additional infringement cases against top-tier technology firms. Second, we had about $35 million in unplanned intangible impairments and legal-related costs in fiscal '12. Together, those 2 categories accounted for 90 basis points of margin reduction year-over-year. For the fourth quarter, operating margin was 6.9%, below recent quarters but consistent with our expectations from last quarter's guidance. First, R&D and product development expenses that Stu referenced had a peak for the year at $30 million for the fourth quarter, almost double the level in Q4 of last year. We also took a $10 million charge related to a data privacy litigation matter and had higher legal expenses primarily associated with seeking resolution of the CityTime matter. Moving on. Diluted earnings per share from continuing operations for fiscal '12, ex-CityTime, totaled $1.34. That's down 9% from last year on the lower operating margins, but it's also consistent with our most recent guidance. Operating cash flow finished fiscal '12 at a record high of $770 million, up 6% over fiscal '11. This translated into excellent free cash flow as well, exceeding $700 million for the year. Cash deployments totaled about the same amount, with a little over $200 million going to M&A and the remainder going to share repurchases. Finally, as Stu covered earlier, business development results were consistently strong all year. We continued to invest more in the business life cycle, demonstrated by the considerable increase in the value of bids submitted this year over last year, which was up about 25%. This increase generated positive results as demonstrated by the 1.1 book-to-bill and the $32 billion record value of outstanding proposals, which should be beneficial to longer-term growth prospects. Let me now summarize our segment results for Q4 only which, for the same reasons, will exclude the effects of the CityTime settlement, which only pertains to the Defense Solutions Group. Defense Solutions' Q4 revenues were $1.2 billion, up 3% on a total and internal basis from the fourth quarter of fiscal '11. We saw growth from our systems integration and logistics programs for tactical and MRAP vehicles, the ramp-up on the Department of State Vanguard program and higher activity for systems and software maintenance for the Department of Defense. As expected, we saw reductions from the completion of the Army Brigade Combat Team Modernization contract, BCTM, and other small programs. Q4 growth would have been 7% without the BCTM reduction alone. Defense Solutions' operating margin for the quarter was 7.6%, down slightly from 7.7% in Q4 of last year primarily due to the conclusion of the BCTM program at higher profit levels. For the Health, Energy and Civil Solutions segment, revenues for the quarter increased 10% year-over-year. Internal revenues increased 4% due to growth in energy-related DesignBuild programs, increased demand for technology services in our health IT business area and increased deliveries of our nonintrusive cargo inspection systems. I do want to point that our recent Vitalize acquisition is performing very well with revenues growing at a pace of about 50% since we closed the acquisition. Health, Energy and Civil Solutions' operating margin for the quarter was 8%, down from 9.9% in Q4 of last year. This decline was driven by the $10 million loss provision related to the data privacy litigation matter and also increased investment in R&D primarily related to the development of new home and security product offerings and also the smart grid technologies that Stu referenced earlier. Normalized operating margin for this segment should run in the 8.5% to 9% range. For the Intelligence and Cybersecurity Solutions segment, revenues for the quarter increased 2% year-over-year, all of which was internal growth. Growth was primarily attributable to increased demand for our airborne ISR programs and increases in cybersecurity work. Intelligence and Cybersecurity Solutions' operating margin for the quarter was 7.3%, down from 9.2% in the prior year fourth quarter. The decline in operating margin was primarily attributable to program write-ups in the prior year, coupled with a significant increase in R&D spend in the current year. Normal margins for this segment are in the 8% to 9% range. That sums up my remarks I want to make on fiscal '12 results. As John discussed earlier, we are pleased to announce the initiation of a quarterly cash dividend, the first of which will be $0.12 per share and paid on April 30. This translates to $0.48 per share on an annual basis, aggregating to approximately $165 million in cash dividends this fiscal year, subject, of course, to board approval in the out-quarters. This dividend level allocates a significant percentage of our normative free cash flow, roughly 25% to 30%, as a return of cash to our shareholders while preserving our capital flexibility for acquisitions, share repurchases or other purposes. To retain flexibility with respect to share repurchases, our Board has also approved the replenishment of our 40 million share purchase or share repurchase authorization, as we have periodically done since the IPO. With that, let me finish up with fiscal '13 forward guidance, which we provided in today's release. As a reminder, our guidance only covers our forward view on results from continuing operations. Our revenue expectation for fiscal '13 is in the range of $10.7 billion to $11.2 billion. For diluted earnings per share from continuing operations, our range estimate is $1.26 to $1.36. And for operating cash flows, we expect at least $150 million in fiscal '13. Again, this reflects the CityTime settlement payment, which already took place in Q1, amounting to about $430 million on an after-tax basis. CapEx is expected to be consistent with historical experience. No major changes there. Given our balance sheet and expected cash flows, our strategy is to deploy our cash for the payment of dividends, acquisitions and/or share repurchases, the latter 2 being subject, of course, to meeting our long-term strategic and economic criteria. With this deployment strategy, we intend to manage our capital structure such that we remain an A- credit rating. Wrapping it up, fiscal '12 did indeed have its challenges for us. However, we continued our strategy of driving greater cost efficiencies from our business support functions, enabled by leveraging our shared services functions, business process reengineering and driving more automation through our IT modernization efforts that have been underway for several years. As envisioned, we have reinvested most of the savings toward growth-oriented activities, primarily in product and technology development and increased efforts in business development. We have done this while simultaneously passing on overall cost reductions to our customers, clearly important in winning work in this environment. By reallocating efforts towards growth yet reducing overall costs, we were able to keep our margins relatively attractive on an apples-to-apples basis, yet have significantly improved our overall pipeline and the value of our outstanding proposals over the last 12 months. So with new leadership in place, a CityTime settlement reached, a more aggressive capital deployment plan, a strong book of business and record outstanding bids awaiting decision, the team is indeed energized and optimistic towards the future. With that, I'll now turn it back to John for final thoughts.

Thank you, Mark. As we move forward, SAIC is proud of its heritage as a technical solutions company. As such, we continue to be called upon by our customers for solutions to their most important and complex problems. Our people take their own talents for granted, but those of us who have been customers truly understand the asymmetrical advantage of focused scientific endeavor and have the deepest respect for those at SAIC who make it happen. We will be true to our DNA. We will keep our entrepreneurial spirit alive and will cling steadfastly to our core competencies: focused solutions, understanding the mission and knowing the customer. This new leadership team begins its journey with a comprehensive strategy and a 90-day schedule to develop a plan of execution. The strategy emphasizes national security, energy and environment, health and cybersecurity, with the agility to adjust to market realities, including the realities of budget and competitive pressures in the federal sector, while taking advantage of growing demand in energy, health, ISR and cybersecurity. Our execution will focus on accelerating work already underway and to leverage our most effective solutions across the enterprise, developing specific steps to expand our solutions' DNA into adjacent higher-growth markets and to do it in ways that are recognizable and competitive and finally, to continue work on ensuring that our cost structure is aligned with the imperatives of more intense competition. In closing, I'd like to emphasize once again that SAIC remains committed to the high standards of ethical behavior. While we move forward from the resolution of the CityTime matter and its effect on our fourth quarter results, the underlying performance of our company showed good results in a demanding market with strong execution on our most challenging programs. Finally, to the 41,000 employees of SAIC, I couldn't be more proud of all of you who have stayed focused during challenging times for our company. We now stand at the threshold of a bright future, facing a world that needs your solutions more than ever before. Thank you. With that, we'll turn it back over for questions.

Stacey, we're now ready to take questions.

[Operator Instructions] Your first question comes from the line of Michael Lewis with Lazard Capital Markets.

First, I wanted to question Mark on the guidance. If you look at the EPS range, what type of margins are you assuming, Mark? And can you help us understand the moving parts?

Sure. The margins are fairly simple, Mike. We expect relatively static margins, excluding the special items that I articulated. So this is in the range of 7.5% to 8%, broadly. And I think our relative success in the product area will largely dictate where we fall in that range. So not a lot of change from fiscal '12 and even fiscal '11 on an apples-to-apples basis, as I said earlier. The interest in the -- interest income, interest expense is pretty static, and that's -- no major change there. Tax rate is about 38.5% assumed for fiscal '13. That does not assume that Congress will pass the R&D tax credit. If they do, we'll probably pick up 75 basis points on the good side if that does occur. And those are the main pieces.

Okay, that's helpful. And then just a follow-up on the procurement remarks. Within the Defense, one of the drivers of the upside was a software upgrade on a U.S. Army program. I think that's the program you talked about down in Huntsville. I was wondering, what specifically is that program? What's the name of that program?

Name of the program is AMCOM EXPRESS...

Okay, it's AMCOM...

And it represents our largest program in terms of revenues.

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

And a big change, obviously, with the dividend, one of the more aggressive. If I work through your numbers, if you have cash flow of -- for cash flow operations of $150 million, I assume, what, CapEx is $75 million, so you're $75 million to $100 million in free cash flow. And that's pretty much consumed by the proposed dividend. So what's your thinking in terms of share repurchase? You have an authorization of 40 million. Are you going to be tactical, strategic? How much debt -- how -- where would you allow the cash to drift down to, to buy back stock?

Thanks, Cai. Couple of thoughts there. We still believe that our minimum cash level needs to be around $500 million. And so as you well understand, we exited fiscal '12 with quite a bit of excess cash on that basis. We do want to think about possibly refinancing a lesser amount than the $550 million that comes due in July. But even when you consider a middle-of-the-road approach there, we would build cash to $1.2 billion, $1.3 billion in the year considering the dividend and the starting position coming in. And so that still means significant excess cash to be used for M&A and/or share repurchases as opportunities present themselves. And we're going to make those decisions, as we always have, on a quarterly basis based on what's in front of us in terms of visible M&A and what our view is with respect to the stock price vis-a-vis its intrinsic value.

Terrific. And one for Mr. Jumper. You -- I think your predecessor talked of roughly 52% of your business being in faster swim lanes, and I think you're defining it more or less the same. Do you have any thoughts, as you look forward, in terms of maybe restructuring, divesting, spinning out any parts? Is that something you would consider? Or do you feel all of the elements are really necessary to achieve your ends?

Well, I think as we look at -- look to the future, our emphasis is going to be how to build recognition and enough mass to be recognized in these adjacent markets. And I think we're going to start off that way as we put the plan together. With the benefit of 14 days on the job, that's about as far as I'm willing to go right now. But I do know that if we're going to be a factor in these adjacent markets, we do have to have the products and we have to have the size and the scope to be recognized, and that's what we're going to work on.

Okay, terrific. And then just a quick tactical one. Could you give us any color on the first quarter or the quarterly pattern for the year? Any thoughts?

Cai, Mark here. We, sitting here today, expect the quarterly progression of revenues and margins to be largely consistent with our historical norms, which is to say revenues would build and peak over the course of Q1 and Q2, peak in Q3 and probably fall off a little bit in Q4. And margins would tend to follow the same trend in terms of starting lower, peaking in Q3 and maybe a downtick in Q4. And so that's the best estimate we would have at this time.

Your next question comes from the line of Ed Caso with Wells Fargo Securities.

Can you talk -- so can you let me know what the DSO was in the quarter and also why they -- it's sort of the down year-over-year operating cash flow guidance?

Sure, Ed. The DSO at fiscal '12 year end was 69 days and was pretty much on par with the DSO of the prior year. In terms of the guidance for fiscal '13, we had a very good year in fiscal '12. We had some advance payments that doesn't really reflect in the DSO number, but we had advance payments of $75 million to $100 million in fiscal '12. That will tend to reverse course in fiscal '13. We want to build, and as we always do [ph] at this early stage, a little bit of hedge on days sales outstanding just due to the risk of timeliness of payment at year end. And so we'll consider modifying that as time goes on, but we start the year with conservative cash flow guidance, the main delta being the success on advance collections for work yet performed in fiscal '12, which will reverse course in fiscal '13.

Right. And I was wondering, finally, if Stu could talk a little bit about pricing. I heard several times the comment of giving back to the client. I assume that's another way of saying intensified pricing. If you could talk a little bit about where that -- the pricing is right now, particularly in the context of lower -- low-cost technically acceptable?

Yes, thanks. First of all, the LPTA bids are not a new phenomenon and -- as we understand it -- we look at it. It really is a small percentage of our overarching business. If you think about maybe 30% of our core business is in what we call core as opposed to the high-growth areas, and a very, very small part of that is actually in LPTA kinds of bids. But the cost competitiveness goes on all the time. We continue to focus on our cost efficiencies to deal with the low price competitive bids. But through that, we've maintained our win rate. So although there is margin pressure, we've been able to offset it through differentiated offerings, more products, more solutions and continued cost efficiencies.

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 question I wanted to ask was just around the revenue growth guidance. It looks like, on an adjusted basis, around down 2.7% to plus 1.8%. Can you talk maybe about your assumptions for the top and the bottom line of the guidance range, maybe around what you're seeing and what you're expecting in the environment, timing of award flow, funding, et cetera?

Certainly, George. I'll get that one started at least. We certainly are expecting the ongoing challenging procurement environment we're seeing out of the government, so we're not expecting a turnaround there by any stretch. And we are cautious about what can happen toward the end of our fiscal year as the flood of sequestration enters into the equation. And so we have built in some conservatism in the guidance to reflect that point of view, at least at this stage. We have some revenue growth drivers for fiscal '12. I mentioned, with respect to Q4 but ongoing in fiscal '13, the Vanguard programs ramping up. We won the tires program, which is significantly expanded scope in fiscal '13. Stu and team, now Tony's team, won some ISR programs that are continuing to ramp up. Vitalize is doing great, as I said. And we are -- we have started some DesignBuild programs. So those are kind of the growth drivers as we look at fiscal '13. We also have some scheduled reductions. We have the finishing touches of the BCTM. That's about a $50 million headwind in the year. We have the BGS [ph] re-compete, which will be called GSM. And the timing of that could affect our revenues because that is a scope reduction. Part of that is going to go to small business, I believe. And we need to plan on reductions in some of the theater support, particularly the MRAP program. Those things all might offset each other. And so I think what will largely dictate our success in terms of the top side of the range will be winning new work. And that will include product orders in that area that I mentioned before but also how the $32 billion of outstanding awards is adjudicated. We're optimistic we can maintain a strong win rate. And how that gets awarded, when it gets awarded and its actual funding, I think, will largely dictate where we finish.

Yes, George, this is Stu. If I could just add to that. If you look at our hundred $100 million opportunities that are included in that $32 million in outstanding submitted proposals, we have 55 different opportunities. 15 of those are definitely delivery contract awards, and 40 of them are ID/IQs with a total value of a little over $22 billion. So we have a lot of opportunity that's inside the pipeline right now that's already in submit, awaiting award. George A. Price - BB&T Capital Markets, Research Division: Okay. As a -- to follow up on that, the -- so it's definitely an impressive number on the pending proposals. Is the embedded assumption in guidance, do these kind of proceed on the time line that the government set? Or are you -- have you put in any buffer that things slide right given the environment?

I think we are experiencing continued delays. Every time we book a 6-month delay, we move it back to the right 3 months. Nothing ever moves to the left, but everything moves to the right. But I think we continue to see delays. I think we're very conservative in the view of when things will pop out. But even on top of that, we still think there's going to be delays beyond that. George A. Price - BB&T Capital Markets, Research Division: Okay. And just, Mark, going back to the prior question around margins and EPS. So margin's in that 7.5% to 8% range. What -- I guess you have a couple of things going on. I mean, obviously, there's some pricing competition. And you're -- the -- certainly, you're spending more on R&D as well. And I assume that's going to continue based on the comments. How are you kind of offsetting those things? I mean, what are the key offsets? And maybe you can give a little bit more color around the operational efficiency that you mentioned earlier.

Yes, one remark, George, is that while we saw a significant increase in R&D for fiscal '12 over fiscal '11, we do expect that to flatten out in fiscal '13. And that's largely related to the timing of the development cycle for some of the products that Stu mentioned. So that won't be headwind from a spending perspective. We do expect to continue our ongoing cost savings initiatives across-the-board. I mentioned a few of them. We also have facilities consolidation that will continue. And so hopefully, that will provide some lift either in the margin category or in the need to increase investments as opportunities present themselves. The pricing pressure is there, and we see that as we enter into certain new contracts and certain new re-competes. The major offset for us which distinguishes us from at least our services peers is the products portfolio. And so those run at higher margins, as you all know, and we're optimistic we'll be successful there. I think Reveal has a very visible increase in their business volume this coming year. That gives us pretty steady state. And CloudShield, we'll have to see how time goes on. We'll keep you posted on that. But I think the major offset that we have with pricing pressure versus the peers is the product portfolio.

Your next question comes from the line of Jason Kupferberg with Jefferies & Company. Jason Kupferberg - Jefferies & Company, Inc., Research Division: I just wanted to ask a couple more questions on the fiscal '13 outlook. Specifically, to what extent do you have buybacks modeled into that EPS guidance? And then just secondly, the book-to-bill expectation embedded in the fiscal '13 outlook.

Okay. The buyback assumption is very nominal. We just use an assumption that we buy back an amount that's equal to the share creep, even though that is not our philosophy nor our criteria for making buybacks, but that's just keeps it simple. And we have significantly exceeded that in each of our post-IPO years in terms of repurchases. So it's a nominal amount, less than $100 million. That is baked in, in the guidance. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay. And the book-to-bill?

Book-to-bill is -- we finished last year at 1.1. We're projecting between 1.1 and 1.2. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay, that's helpful. And John, I think you had mentioned at the end of your prepared remarks something about a -- some 90-day strategic reviews, and I was just hoping you could clarify that a little bit. Is that going on at the individual business unit levels? By the business unit head? And what sort of outputs and deliverables are you looking for out of that? And do you think that there'll be something incremental along those lines that you'll be in a position to discuss with us by the time of the next earnings call? Or would it be a little bit further out than that?

Jason, we're -- as you can imagine, we've been playing defense here for the month of March. And so we're just getting underway with this. We -- we're going to put together an execution plan, and we're going to work it, of course, with our Board of Directors. But this is work -- some of this work is already underway with regard to things that Mark and Stu have already mentioned. But we would -- there'll be more energy put in -- putting -- put into the things I also discussed with regard to adjacent markets. And this -- we don't have anything we can tell you now. Hopefully at the next call, we'll be able to put a little bit more color to it, but these are things that we're going to be working intensely here starting 1 April. Jason Kupferberg - Jefferies & Company, Inc., Research Division: That's -- I was going to -- Mark, just one last one on the margins. Just if we're looking out beyond fiscal '13 conceptually, I mean, I know there was a point in time historically when there was a thought process that SAIC maybe could get margins into the north of 8% range, possibly even as high as 9%. Obviously, we're in a tough end market, though, right now. So should we be thinking about this 7% to 8% corridor as kind of the right general range in the out-years as well, recognizing that there's always going to be some ins and outs between your level of R&D spend and pricing pressure and mix of security products and all those variables?

Well, I'll say that the guidance that I talked about in fiscal '12 is not an unreasonable position to take for the out-years at this time, but I'll tell you we're going to strive to hit that 8% to 9% range that we targeted. And we intend to do that through doubling down on technology and products and having that more than offset the pricing pressure we're seeing on the service side.

Your next question comes from the line of Brian Gesuale with Raymond James. Brian Gesuale - Raymond James & Associates, Inc., Research Division: I'm wondering if you can maybe talk about M&A. It seemed like the predecessor CEO was interested in transformational acquisitions. If I'm hearing you correctly, I think your inference is maybe some tuck-in acquisitions of smaller size but really broadening the capital deployment. Is that a correct read?

One of the challenges we have is that we have such a broad portfolio to try to pick the right decision in M&A across that full portfolio, of course, is a challenge. We don't want to overpay. We want to do something that is both economically right and strategically right. And I think that the focus will be on whatever properties meet those objectives. Whether they be small, tiny, tuck-in appliqués or something larger, I think we'll look at it in the context of where we're going with the strategy, what makes economic sense and what is the current economic situation in terms of our capital position. Brian Gesuale - Raymond James & Associates, Inc., Research Division: Great, that's helpful. And Mark, maybe one for you, if you look at a couple of things. How much visibility do you have in that revenue line maybe coming from an existing backlog? And then that $30-plus billion that's out there and submitted, how much of that is new versus renewal business?

Couple of comments there, Brian. When we started the planning process back in the late fall, we typically have visibility out of backlog, which is important to understand how we define backlog when you understand this remark. But it -- normally, about 55% of our forward revenue is in backlog when we are in the planning stage, and that tends to bump up to maybe 65%, maybe even 70% when we start the fiscal year. So in essence, sitting here today, that's about how much visibility we have on our backlog definition, which you know excludes ID/IQ vehicles that -- for which we have not yet received specific task orders under, so we have a lot of capacity under there, under ID/IQs and tasking to fulfill the remainder. In terms of re-compete sort of business, sitting here today, we have about 7% of this year's revenues at stake for successful re-competes. And we are going to assume that we will win the lion's share of those. And so that translates to roughly $700 million to $800 million of revenue that we're counting on in a post-re-compete win scenario as part of fiscal '13 plan.

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

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

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.