Leidos Holdings, Inc. (LDOS) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Deanna, and I'll be the conference facilitator today. Welcome to the SAIC's First Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Paul Levi, Senior Vice President of Investor Relations. Please proceed.

Thank you, Deana, and good afternoon. I would like to welcome you to our First Quarter Fiscal Year 2013 Earnings Conference Call. Joining me today are John Jumper, our CEO; Stu Shea, our COO; and Mark Sopp, our CFO, along with 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 discussion of these risks. In addition, these statements represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I would now like to turn the call over to John Jumper, our CEO.

Thank you, Paul, and good afternoon, everyone. During today's call, I'll start by covering some of our quarterly performance, discuss market conditions, make some comments about my first 90 days in the seat. After that, I'll turn it over to our COO, Stu Shea, who will talk about business development results and project progress in our strategic growth areas, and he'll be followed by Mark Sopp who'll go into the financial details. As reflected in our earnings release today, our performance reflects the dynamics of our marketplace, plus the impact of steps we are taking to prepare for the future. Even with market pressures, we are able to report revenue growth of 3%, of which 2% is internal growth. As we get deeper into these challenging times, our ability to leverage our strategic growth areas, while optimizing the performance and stress segments of our portfolio to generate internal growth, is a positive sign, especially when compared with our peer group. Our team's ability to leverage our wide range of technical capabilities across more and more of our client base is paying off. Our strategic growth areas of intelligence, surveillance reconnaissance, cybersecurity, energy, environment and infrastructure, logistics, readiness and sustainment and health grew internally by 7% in aggregate, with the remainder of our business contracting about 3%. In these last few years, we've become adept at managing market uncertainties. We have a wide-ranging access to many contract -- wide-ranging business and access to many contract vehicles in a large and diverse customer base. We believe we can react to market pressures with greater agility than our competition, especially those with ties to specific platforms. As we face government fiscal year '13 and the looming potential of some form of sequestration, we'll be prepared to take timely and appropriate action to deal with the situation. With regard to sequestration, it's my personal view that it’s hard to imagine that our government will allow an automatic trigger to impose policy decisions deserving of the most profound public debate. In my discussions with many officials in the executive and legislative branches, they have all expressed the need to avoid sequestration, yet it's not clear how this is to be done. Despite the budget decisions ahead, there will remain a large National Security marketplace available to SAIC to compete, and we expect to be in good position to do so. Since we spoke last on 20th of March, I visited our people in the field, our key customers, Capitol Hill representatives, the Pentagon and members of the financial community. With the help of Stu Shea, our leadership team has been able to establish the right battle rhythm to balance the daily demands of running the company with the work of planning for the future. This is a tribute to solid leadership, the focus of our group presidents and the ability of Stu, Mark Sopp and others in the leadership team and corporate staff to build momentum in the right direction. I'm convinced that we have the right strategy, the right leadership and the right people. As I have said, we just need to continue to execute. I also told you last quarter we were preparing an execution plan to accelerate implementation of our strategy. This plan will be briefed to the Board of Directors next month, and I expect we'll continue discussion with the board in the months that follow with a goal of charting our path for company growth into the future. In the defense market, I remain convinced that the next level of military capability will emerge from our ability to integrate platforms and programs that our customers already have rather than on depending on new large, new-start, single-function platforms that have been the traditional next steps in military capability. We believe that mission capability integration is a differentiator for SAIC, and we think about that as a competitive advantage. We are also encouraged that our customers value our ability to work in short cycles, rapidly developing and deploying solutions. There's more work to be done here, but being able to convert the demonstrated success of shorter-cycle development into programs of record will be an important part of dealing with budget realities. Another critical part of executing our strategy is expansion on our high-growth markets. Just as you saw with our Vitalize acquisition, our strategy calls for adding highly competent capabilities into our growth portfolios, filling gaps and building muscle mass required to make a difference in the health and energy markets. This also includes the ability to support our federal and commercial customers in both domestic and international locations. After our presentation to the Board of Directors next month and their deliberations of the execution plan, we'll be prepared to discuss appropriate elements of the plan with you. So with that, I'm now happy to turn this over to Stu Shea who's going to cover our strategic growth areas and our business development results.

Thanks, John. One of the questions I get asked most often in my new role is to describe what I'm focused on each day. And my answer has consistently been "Everything that matters." As John Jumper and I have transitioned into our new roles over these past few months, he and I have focused a huge amount of our collective energy on a number of key items related to increasing shareholder value. Although some of that energy has been focused around gaining overhead efficiencies and improving program execution, first and foremost, it has been for us to confirm and then accelerate the implementation of our strategy and to drive SAIC through these budgetary headwinds. I can tell you that we are ever more convinced that our strategic focus on our high-growth markets of health, energy, environment and infrastructure, ISR, cybersecurity and logistics, readiness and sustainment is working. Under difficult market conditions this quarter, we've been able to deliver just short of double-digit growth rates in these strategic areas. Our strategic focus is the right one and gaining momentum. Likewise, our emphasis on pursuing and winning larger, $100 million-and-above programs is also working. We've seen a significant increase in the numbers of these large contract wins over the last couple of years, going from just 29 2 years ago to 40 last fiscal year. We currently have over 50 proposals in excess of $100 million that have been submitted and are awaiting award this year. Our ability to bid and win these programs has been the result of our multiyear efforts to leverage the enterprise and trim overhead. The redeployment of reduced overhead and G&A has allowed us to accommodate a 12% year-over-year increase in IR&D and B&P while generally maintaining our profit margins. Finally, our emphasis on the strategic growth areas of health and energy has had the additional impact of yielding a higher percentage of content in both commercial and higher-margin, proprietary products business. We now have almost $1 billion in commercial and non-federal government business, excluding state and local, with approximately 35% of that related to products and associated business. Bottom line, since we began implementation of our strategic focus a little over 2 years ago, we've been able to achieve a series of interlinked accomplishments each quarter that continues to position us for long-term shareholder growth. This quarter is no different with many successes that reinforce our beliefs. To that end, let me share a few observations. First, a view of the market and it an impact on our ISR and cybersecurity business, and then a quick status on our health and energy businesses. Now as our nation evaluates the worldwide threats, an emerging China, a nuclear Iran, insurgencies fought by surrogates, threats on our own southern border, disputes over natural resources and a continuing transnational cyber threat are all driving a growing need for agile, diverse sets of ISR and cybersecurity capabilities. While major platform acquisition spending has been flat and will continue to decline over the coming years, the need for special operations and agile mission requirements has continued to increase, albeit in this challenging budgetary environment. The use of -- or the increased use of commodity platforms integrated with highly specialized equipment for multiple missions is at the heart of SAIC's ISR mission capability integrator strategy. In our ISR business, we have focused on institutionalizing the design, integration and development of quick response, or QRC systems, in all operational regimes of air, land, maritime and space and then migrating these QRC systems to programs of record and eventually to major defense acquisition programs. Our airborne ISR programs have seen steady growth over the past year resulting from outstanding performance. So far this year, in this quarter, we received $100 million of incremental funding on our Saturn Arch Counter-IED system, delivered our first BuckEye LIDAR platform in Africa, added 3 more BuckEye systems to the contract, increasing that contract to over $60 million annually and it expanded our Blue Devil insurgent targeting program as a result of continued operational successes in theater, with incremental funding of approximately $50 million in the first quarter. In total, we've seen over $75 million in airborne ISR business added to our backlog in the past quarter despite the anticipated decline of overseas operations. And notwithstanding this decline, the airborne ISR market is growing. Unmanned Aerial Vehicles, or UAVs, are becoming increasingly important for militaries worldwide and have proven critical to intelligence gathering, targeting and situational awareness. The global UAV market is expected to grow from $6.6 billion to $11.4 billion annually over the next 10 years. And one of the key IR&D investments that we're making is to migrate our very successful airborne ISR sensors to unmanned platforms. This is a future growth opportunity for SAIC. Moving now to cybersecurity, last quarter we announced our strategic partnership with McAfee, a world leader in cybersecurity technology. That relationship has resulted in a recent key product release. The sensor-based McAfee Network Threat Response, or NTR solution, is now available with our CloudShield CS-4000 platform, a combination that offers improved network protection against advanced, persistent threats for telecommunications, financial, health care, government and military applications. The unique combination of the CS-4000 and NTR can discover hidden fragments of malware that have infiltrated the network and help security analysts in forensic discovery to isolate, reveal and mitigate these threats. In addition to our cybersecurity product offerings, we also have several classified cybersecurity programs that had been awarded across the intelligence community. In Q1, we've been notified of over $600 million in classified cybersecurity awards. These contract wins have built upon SAIC's ever-increasing leadership in cybersecurity and will be booked in Q2. Moving to our Health business, we continue to invest and best position ourselves to play an important role over the next several years in assisting the veterans administration and the Military Health System transition to a joint electronic health record, or EHR, system. We look to leverage our commercial health footprint through our recent acquisition of Vitalize Consulting Solutions with targeted investments in research and development and future acquisitions to support EHR implementation and optimization in data analytics. Vitalize continues to perform well above plan, delivering over 20% growth in our commercial health business quarter. Although we have observed some delay in our federal health business this quarter, significant new business opportunities have materialized in medical logistics, behavioral health and life sciences. We are especially proud of the research and support we provide for our men and women returning from overseas challenged with traumatic brain injuries or post-traumatic stress syndrome. We are also pleased to report that we were recently awarded the National Institute of Health's Chief Information Officer-Solution and Partnership contract, enabling us to continue to provide technical solutions and services throughout the Department of Health and Human Services and other federal agencies. This multiple award, ID/IQ contract has a 10-year period of performance and a total contract value of approximately $20 billion for all awardees. Our energy, environment and infrastructure business continues to be a foundation for SAIC's global security strategy. Demand for energy, water and critical infrastructure will continue to grow. We remain focused on the enduring and interrelated energy market segments of smart grid, transmission and distribution, energy IT, energy infrastructure and energy management services. Our DesignBuild business has been a real catalyst for growth and has expanded at an annual growth rate of over 11% this quarter. Waste-to-energy infrastructure is key to that growth, and we believe demand will continue. In addition, we are focusing on an emerging micro grid market, which integrates a variety of energy sources on a campus-size grid for energy security and efficiency. SAIC's credentials are strong for these opportunities. On the environmental side, our fastest-growing business is in support of U.S. shale energy development and water resource management. We expect continued strengthening of environmental demands on shale energy, driven by both oil and gas industry best practices and regulation. The energy market remains dynamic. As the Federal Government continues to increase their energy focus, the Department of Defense is evaluating new ways to procure and save energy. We remain well positioned to address these needs. One more strategic item I want to share with you is our performance in proprietary products. In fiscal year 2011, we told you that we were investing quite a bit in some of our product areas, including Reveal, VACIS, CloudShield, CounterBomber and other software products. Our proprietary products and related services business at the end of FY '12 was over $350 million at a double-digit profit. This quarter, we saw an accelerated delivery of VACIS ATVs, sold licenses of our next-generation motion imagery exploitation tool, as well as several licenses for our GeoRover geospatial product. Finally, moving now to business development results. Bookings totaled $2.1 billion in the first quarter and produced a book-to-bill ratio of 0.8. We ended this quarter with $17.4 billion in total backlog, $5.7 billion of which is funded. Now this represents a decrease of 4% in total backlog compared with Q1 of last year, but an increase of 40% in funded backlog. We have also continued an outstanding win rate on new business opportunities and achieved 65% total dollar win rate on opportunities awarded in the first quarter. This high win rate is the 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 equals $31 billion, and that includes $20 billion on ID/IQ bids and approximately $10 billion definite delivery bids. This is $2.6 billion or roughly 9% higher than Q1 a year ago. Coupled with our strong win rate, we expect that this will produce growth when these procurements are ultimately decided. Finally, focusing our -- on winning our larger opportunities continues to yield positive results as we've won 7 opportunities valued at more than $100 million in the first quarter of FY '13. In addition to the 50 $100 million proposals that I mentioned before, we intend to bid an additional 90 of these $100 million or larger programs that are in our pipeline and should be decided in this fiscal year.We're encouraged by our continuing success here. As an example, we're currently waiting on the results of a number of several large outstanding bids, including the Global Information Grid Services Management-Operations, or GSM-O, effort at DISA and the OMDAC, Operations, Maintenance and Defense of the Army Communications -- Southwest Asia and Central ASIA, or OMDAC-SWACA program, as well as a few, large, classified programs that we cannot specifically identify. And with that, let me pass the call over to Mark Sopp who will cover the detailed financials.

Great. Thanks, Stu. Building on what John and Stu discussed, positive internal revenue growth paved the way for delivering overall financial performance that was in line with our expectations for the first quarter. I’d say it's particularly encouraging to see our strategy delivering internal growth at a time when the government market overall has been contracting. As Stu said, we attribute our growth to actions we started taking a couple of years ago in light of the difficulties we saw emerging in the federal services space. Investments we have made in products, high-technology solutions and commercial market access in the energy, engineering and health information technology market areas have expanded our overall portfolio concentration in these more attractive business areas. Having multi-hundred million dollar businesses in these attractive markets allows us to compete at scale, and that's moving the needle on consolidated growth. This differentiates us from those purely focused on federal services where recent peer results suggest growth is difficult to achieve. Revenues grew 3% during the first quarter with internal growth, as John said, at 2%. Our high-growth areas led the way and mostly -- most significantly in our ISR solutions, energy engineering, logistics and commercial health technology consulting services. In terms of specific programs driving growth, the ongoing ramp-up of the Vanguard program with the Department of State, several mission-oriented airborne ISR and cybersecurity programs with the intelligence community and our joint logistics integration and military tires logistics programs were all key revenue growth contributors. Also of note, our commercial health information technology business with Vitalize as the centerpiece is growing organically, as Stu said, over 20%. And the overall energy, environment and infrastructure business is growing in excess of 5%. As expected, we saw revenue contraction in our pure services-oriented defense and fed sales [ph] business areas. Operating margin came in at 7.5% in Q1, down 110 basis points from a particularly strong Q1 of last year. The decrease in year-over-year margins largely stems from a real estate gain we had last year, coupled with fewer favorable program adjustments this year and higher SG&A expenses in this year, some of that being timing related. In particular, bid and proposal costs were up about 20% quarter-over-quarter, reflecting a high level of proposal activity with nearly $10.5 billion in new proposals submitted this first quarter. We also had about $5 million of nonrecurring legal, leadership transition and strategic project expenses this quarter. Diluted earnings per share from continuing operations was $0.35. The effective tax rate for the quarter decreased about 2 percentage points due to a $4 million pickup in connection with favorable settlements of certain tax contingencies. As expected, we had net cash outflows this quarter of about $360 million, reflecting the $500 million settlement we paid regarding the CityTime matter. Excluding this item, cash flow from operations was a normative $140 million, roughly, or about 1.2x net income. Days sales outstanding, DSOs, improved by 2 days to 70 days from 72 days a year ago. Now let me move on to the results of our operating segments. For the Defense Solutions segment, revenues increased by 3% in the first quarter, all of which was internal revenue growth. Growth was mainly from the ramp-up of 3 large, new programs: the Vanguard program, which operates and maintains the enterprise network IT infrastructure, an infrastructure for the U.S. Department of State; the joint logistics program, where we've been able to increase our scope in serving tactical and Mine-Resistant-Ambush-protected vehicles in theater; and the ramp-up on our new tires logistics contract for the Defense Logistics Agency to provide supply chain management of military land and aircraft tires worldwide. These increases were partially offset by reduced revenue from the U.S. Army Brigade Combat Team Modernization contract, BCTM, which ended in the second half of last year. Defense Solutions' operating profitability was a strong 8.6%, aided by cost-reduction measures taken over the last year and also particularly strong program performance on higher revenues. The Health, Energy and Civil Solutions segment revenues increased 3% in the first quarter primarily due to the August 2011 acquisition of our commercial health technology platform, Vitalize Consulting. Internal revenue contracted 3%, where declines in various federal health and federal civilian programs more than offset growth we saw in security products, commercial health and energy engineering services. Operating profitability for the Health, Energy and Civil Solutions segment was just under 7%. That's well below normative levels. This was attributed to relatively higher levels of investment in marketing as we expand our health and energy practices, increased amortization costs associated with the Vitalize and Patrick Energy acquisitions we made last year and we had some contracts write-downs this quarter as well. For the Intelligence and Cybersecurity Solutions segment, revenues increased 4% in Q1, all of which was internal growth. Internal revenue growth was primarily attributable to increased activity on existing cybersecurity contracts and on our airborne surveillance programs, both of which are serving the intelligence community, as Stu said earlier. These increases were partially offset by a decline in revenues on intelligence analysis programs primarily due to planned overseas military presence reductions. Intelligence and Cyber Solutions' operating profitability was 7.1% for Q1, below normative levels and down from a particularly strong 9.6% last year. The decrease year-over-year was primarily attributable to higher levels of indirect spending this quarter, including increased bid and proposal costs and IR&D expenses, we had less contract write-ups this quarter than we did in the year-ago quarter and we also had particularly strong sales in our higher-margin proprietary products in the prior year quarter. Again, some of this is timing related, which we expect to improve later in the year. Now that covers the remarks on Q1 financial performance. I do want to share my finishing remarks on looking forward. So far, things are progressing consistent with our expectations for fiscal '13. While the pace of new procurements coming out of the federal government is still slow, we have won all of our key recompetes, we've kept our overall win rate strong and we have maintained a large pipeline of submitted bids. As stated, our commercial business area is performing well, and that is expected to continue. We are investing in some areas and incurring higher expenses, all of which are intended to build a better company in the future and for the long haul. One notable item in this category is the move of the remaining corporate staff currently in San Diego to McLean, Virginia. We project costs of about $50 million this fiscal year toward that end. With all that said, we continue to expect to finish the year within the guidance ranges we set back in March. Therefore, there are no changes to guidance at this time. One more quick update. We have a $550 million debt maturity that comes due on July 1 of this year. While our longer-term capital structure goals would suggest that at least some of that debt would be refinanced, right now, our plan is to pay off all of that with cash on hand. As John said earlier, we are evaluating our strategy with the board. When that process is complete, we expect to lay out our attendant capital structure plans at that time. I'll now turn it back to John for finishing remarks.

I'd like to conclude my comments by reminding everyone that SAIC will hold its annual meeting of stockholders at 9:00 a.m. Eastern Time on June 15, 2012, at the SAIC Conference Center, 1710 SAIC Drive, McLean, Virginia. Also, as announced last quarter, SAIC paid a $0.12 per share dividend on April 30, 2012. The Board of Directors will meet on June 15, at which time they will address the next quarterly dividend payment. With that said, we'll turn it back over to Deanna for questions.

[Operator Instructions] The first question will come from the line of George Price, BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: Wanted to ask you just a couple of questions, if I could, on -- just on backlog in bookings. Funded backlog was a little bit better than expected. Bookings also, given the environment, were definitely solid. I was wondering if you could maybe talk about the funding trends you've seen over the past few months. And had -- did you see contract award activity pick up materially in April? Because certainly, competitors generally reported pretty weak bookings in general for the March quarter. And I recognize you pointed out some differentiating factors, but just wondering if maybe we've seen some improvement more recently in the environment.

George, Mark here. Thanks for the question. I would say we have seen a pretty flat level of activity in contracts for our first quarter, which ended April 30. We did not see him a noticeable change in the month of April, at least for us, for all contract activity. But we'd also say, at least compared to last year, the funding environment is more stable. We don't have the continuing resolutions going back and forth this fiscal year. So we're pleased to see that. And we see customers funding the business in a pretty healthy basis and consistent, albeit in shorter and smaller increments than the good, old days. But nonetheless, across our contract base, pretty healthy at this time.

And the next question will come from the line of Tim McHugh, William Blair. Timothy McHugh - William Blair & Company L.L.C., Research Division: Oh, yes. Can you give some numbers about how much of the business would you say now is in those strategic growth areas versus the other ones? And as we think about the margins in general, talk about the margin trends between the kind of more strategic growth areas and the rest of the business.

Well, the mix in the strategic growth areas is 55% to almost 60%. As we finish up this fiscal year, I think we will be closer to that 60% with the higher growth we're seeing in that area. So this is what we would have expected when we started laying out our strategic growth strategy a couple of years ago. And in general, the margins are more attractive in this area for a variety of reasons. There’s some higher technology involved on one hand, but there's also more of our products in the strategic growth areas and also a little bit more fixed price mix as well. So those are all factors that I think are favorable with respect to that part of the business. That said, this is the area where we're investing. IR&D, which you saw go up substantially last year and will continue to be strong this year, and the M&A side as well, that's where you'll see all of our focus. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. And then -- and in terms of the capital structure, you didn't repurchase any stock this quarter and you said you'll pay off the debt when it comes due. Are you awaiting more clarity on the government budget environment to kind of finalize your plans with that? Or is it just the timing of -- you're just not ready yet to make a conclusion on what you want to do?

I think the salient points on our capital structure, capital deployment is we've initiated a very meaningful dividend, and that's our first priority for capital deployment, with roughly 1/3 of our annual free cash flow, if you will. The remaining 2/3 is up for grabs for M&A and repurchases as opportunities are presented to us. And I'd say we have a bias toward growth and, therefore, M&A. But stars have to line up on the M&A front. You have to have strategic fit, you have to have cultural fit and you have to have economic attractiveness, which, sitting here at $10, $11, the hurdle rate from M&A becomes a little bit more challenging, appropriately, vis-à-vis repurchases. So we evaluate that continuously, and a lot depends on what opportunities are available to us in the M&A pipeline and from those things that kind of dictates our overall capital structure.

Your next question comes from the line of Jason Kupferberg, Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: I wanted to talk a little bit about bookings as well. Obviously, the environment is what it is. I think the last quarter, you had suggested that the book-to-bill for the full year fiscal '13 could be in the 1.1 to 1.2 range. Obviously we're starting the year off a little bit lower than that. Are you still comfortable with that 1.1 to 1.2 for the year just given the size of the pipeline?

Yes, Jason, this is Stu. We are comfortable with that. That's our plan going forward. I think we saw some delays in some of the awards, but I think given the pipeline that we have that's under review right now and the pace at which we're submitting and expect decisions, I think we're all comfortable with the 1.1. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay. Okay, that's certainly good to know. And maybe just talk a little bit about your visibility for the last 4 months of the government fiscal year. As you mentioned before, we obviously have appropriations bills and puts, which is a good thing. I guess there's been some talk about despite that, there could be some hesitation in sales cycles just given the uncertainty related to next fiscal year's budget and funding picture. But how do you guys feel about the last 4 months of the fiscal year?

I think we feel pretty good about -- this is John. I think we feel pretty good about it right now. As we head into the end of the year, we've got not only sequestration and continuing resolution, but we got debt ceiling all coming to a head at about the same time. So there's no doubt there's going to be some dynamics associated with this. But so far so good. And of course, one of the outcomes of a continuing resolution is it keeps us going at current rates, although we are, as Stu said, experiencing the attendant delays in decision making, which I think those delays in decision making I expect to accelerate toward the end of the year as people try to obligate the funds that they do have. Jason Kupferberg - Jefferies & Company, Inc., Research Division: So the delays should lessen?

I would think so. I would think so going towards the end of the year, yes.

Your next question comes from the line of Joe Nadol, JPMorgan. Joseph Nadol - JP Morgan Chase & Co, Research Division: Want to dig into the Health, Energy and Civil Solutions segment. The first 2 of those 3 descriptors of the segment are part of your strategic growth areas, and you had the negative organic growth. So I -- could you just maybe speak to how much of that business is part of the strategic growth, what percentage of the -- of that segment specifically? And I guess is federal health really the headwind there? And how big of a deal is that?

Joe, Mark Sopp here. About 1/3 of that segment is not in the strategic or higher-growth areas. And this is our federal civilian business primarily. And we saw some contraction there in the quarter, as I mentioned in my remarks. But the Energy business, the Health business and the security products is clearly the part that we're very excited about in the strategic growth area, and we expect good results on the growth side and, over the long term, the profitability side all of those areas, which has historically been very strong for us. Joseph Nadol - JP Morgan Chase & Co, Research Division: So Mark, logic or math tells me that, that's probably a negative double-digit growth for the part that's not in the strategic growth areas. So is that timing? Is it something that's going to persist there or get better? Or what kind of color can you give on that?

I would say that it was -- it contracted in the minus 5% to minus 10% in the first quarter, and that was largely concentrated by, as I said, in the fed health and in the civil -- fed civ areas. I would say the fed civ, we probably expect to see more of the same foreseeably, whereas on the federal health side, we're more optimistic. We lost a little business, and we've had some delays, but we have a strong pipeline and a strong team that has a lot of activity in the business development phase that we hope will bring, if not lower contraction, perhaps even growth for the longer term for that area of the business. Joseph Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just you had the strategic review going on, and you're going to report to the board, I guess, in the next month or so on that and I -- we'll to wait for all the details. But I was just wondering if you could tell us if there's any significant portfolio changes that are on the table.

Well, we've been through a very thorough review. And of course, we -- we haven’t talked to the board about any of this yet. So there's nothing we can talk to. But we've looked end to end at the whole business, and we'll be rolling it out to the board and we'll be talking to you as soon as we can after the board has a chance to deliberate what we present to them.

The next question comes from the comes from the line of Cai Von Rumohr, Cowen and Company.

So Stu, you mentioned you have book-to-bill target of 1.1. I assume you mean orders to revenues. What's your target for fundings to revenues?

Funded backlog, I guess.

Yes, we're -- can you try that question again, please?

Yes, I mean, it's just...

Yes, no. I mean...

[Indiscernible] all the time.

There are 2 issues you talked about. I think in response to George's question, you indicated that while you did a 0.77 book-to-bill or orders to revenues in the first quarter, your target for the full year was still about 1.1. Well, what's your target, because obviously, fundings -- funded orders -- funded backlog is what they -- is a bigger driver of where the revenue for the federal...

He's asking for funded federal backlog.

Are you comfortable that fundings also can be about 1.1x the revenues?

I would say it needs to be at least in the single-digit growth area. 10% might be strong in this environment, and it's very hard to predict what's going to happen in our fourth quarter and the governments first fiscal next year when a lot of things are happening. So the funding could be interesting in the December, January, February time frame. But we really need to keep pace over a given period of time for -- in the positive territory on funded backlog growth. And it's -- it'll be much to expect more than 5%, but we're certainly going to target to do so.

And there's a strong complement of those programs that are non-ID/IQ, that we expect the standard contracts to be fully funded.

Great. And then just a quick follow-up to Joe's question. Your strategic review, I mean, can you tell us a little bit about what's the date of a board meeting? What's the format in which you'll tell us what review is going to decide? And I guess, Mark, you kind of intimated that you're going to pay off the debt and there are no plans to kind of issue more debt, but you're still focused on growth. So does that mean you're unlikely to ever issue debt to toss out some of the maturing debt or you just haven't decided?

On the first part, the board meeting next month is in the middle of the month. And we'll be laying out an execution plan to the board, and we expect this to be the subject of lively discussions. So it's hard to say. This is a very independent board that we have. It's hard to say how long the deliberation -- their deliberation will take. But we are anxious to get moving. So we'll be to you as soon as we have something we can talk about to you. So I can't give you a date because the board has got to go through their process as we have gone through ours.

Cai, this is Mark on the capital structure question. Let me apologize as my earlier remarks we're not clear. But given what we are discussing with the strategic review, I don't believe it's appropriate to issue public debt until we complete that process. And that is why my current plan is to pay that down on July 1. But that is not to say that we will not have a leverage level that is either consistent with our past or even more -- a bit -- more aggressive than our past in light of what that strategy beholds. And so as I try to say, once we have laid out our strategy, we will remark then on our targeted capital structure to support what that strategy is. And I would expect that will involve putting some of that leverage back on the balance sheet that we're paying off on July 1 to get to leverage levels that you would accept for a company that has a predictable cash flow that we have to undertake.

Your next question comes from the line of Edward Caso, Wells Fargo.

It's actually Rick Eskelsen on for Ed. Just a question on some of the ramp-ups you talked about, that -- the 2 large deals. When is -- are Vanguard and the tires contracts expected to be fully ramped up?

The Vanguard program will ramp up, I think, in each of our 4 quarters this fiscal year and then plateau off at that point in time, whereas tires, I think, will probably ramp in or finish ramping in Q3 and then level off at that point.

Okay. And then just in terms of the margins in the Health, Energy and Civil and the intel segments, Mark, you talked about them being below sort of the normalized level. So I was just wondering if you could give sort of what your expectations are for those margins going forward if you think it's going to be a sort of a snapback. And what -- maybe a little bit of color on what drove that down in the quarter.

Sure. For the Health, Energy and Civil Solutions segment, we expect margins in the 8% to 9% range for a couple of quarter period of time or a full year fiscal basis. The reason why it was down in the first quarter was, I said we are undertaking some investment in our health and energy area, and we did have some write-downs on a few contracts in the first quarter that we don't normally see and I don't expect to recur. So those are the primary reasons there. On the intelligence group, I'd also say the margins would be in the 8% to 9% range, and we were south of that in the first quarter. Very heavy investments in bid and proposal costs and, to a lesser degree, IR&D for the first quarter. And also, they had, as I said, strong product sales in the first quarter of last year. While there were some this quarter, they weren't as high this quarter and in the first quarter. And so that depressed them a little bit on a quarter-to-quarter basis. But we expect that group to be solidly in the 8% to 9% range for a year or several quarters when you add them up.

Your next question comes from the line of Michael Lewis, Lazard.

So if the strategic focus areas are 60% of revenue, Mark, assuming the midpoint of the guidance of about -- of around $11 billion, that's $6.6 billion in positive growth, you’re almost double-digit growth. Now if you look at the non-core areas, we have about $4 billion that's falling under your -- or I guess minus 3% right now. So is that -- is my math right saying this is about a 40% drag to organic growth off these non-core areas?

I would say that the strategic growth areas are more toward the middle range of single digits. So they're collectively doing 5%, 6-ish for the year. And otherwise, I think your math is correct.

Okay. So what would be the rationale to -- you're not investing in these non-core, non-strategic areas. It sounds like you're kind of deemphasizing them. What would be the rationale for the business to be held on to over the long term?

Well, first of all -- this is Stu. We're -- it's not that we're not investing. I think it's an appropriate allocation between the high-growth markets and the slower-growth markets. And I think there's a lot of benefit to those businesses in the context of other -- or as we look at the strategy and the strategic review that John mentioned before, we really have to think about the linkages between those various programs, solutions, services and the nature of the contracting environments and the customer intimacy that we have. And all that kind of comes to a head in the context of the strategy because some things are slow growth. They may be high cash generation, and they may be strong, stable businesses, overhead absorption. There's a range of things that we look at when we think about the benefit to a business.

Okay, that's fair. And then just one follow-up. Mark, if you look at the full year for total consolidated margin, I guess that based on the numbers that you gave for health and energy and IR&C, you're looking at around 8%?

I would say, Mike, that this year, I would expect a little south of that. And the reason for that is what I would call primarily related to some of the investments we're making to improve the business to include the corporate move and some other things we're working on to include the strategic review, and things like that. So I would say that when you look at the pure contribution of the groups, then it would be consistent with your number. And I would think that would be a fair number that we'll use going forward. But this year, in light of the investments we're making, I expect that we'll be south of that. But important to understand that they are nonrecurring in nature in terms of those investments.

Your next question comes from the line of Robert Spingarn, Credit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: I was hoping I could approach this booking question in the more immediate time frame and, just based on Stu's confidence in the book-to-bill for the year, Mark, your comments that funding trends are actually a little bit more orderly and stable than last year. I'd like to ask you how you feel about Q2. Can you get the first half to 1.1, which will be in line with your full year target and last year's first half, in the second quarter, just based on what you've seen so far in May perhaps?

No. The answer is no. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. So this is going to trend up throughout the year, we're just not there yet?

That would be our execution. We're counting on a pretty big Q3. We certainly have the pipeline to do that. And to John Jumper's remarks, hopefully, the government will be in the mode of spending their obligated funds before the fiscal year's done. Robert Spingarn - Crédit Suisse AG, Research Division: So you're looking for a traditional type of budget flush as we go forward here? Actually yes, that would be the end of the year, the first.

Right. Robert Spingarn - Crédit Suisse AG, Research Division: Okay. And then the -- now, just as a follow-on, how would you divvy up the $2.1 billion in orders in Q1, by segment?

Stand by, Robert.

I'm not quite ready for that one. Why don't we take a pass on that one, Robert, and we'll get...

Yes, I'll get back to you again. Robert Spingarn - Crédit Suisse AG, Research Division: Yes.

Robert, I'll come back to you in the morning with that.

[Operator Instructions] Your next question comes from the line of Bill Loomis, Stifel, Nicolaus. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Just looking at -- staying with the Health, Energy and Civil Solutions group with the -- on the cargo side. So can you talk a little bit more about the cargo inspection systems and the Reveal or the baggage inspection systems? How do -- how were they in the quarter? Was that double-digit revenue growth for that group in the quarter? And where do you see that playing out? Kind of if you can talk about the 2 differently or separately, the cargo versus the baggage?

Let me correct first, we did not have double-digit growth in those areas in the first quarter. So that being said, the businesses are still performing well for us. VACIS is more mature, I would say, and is continuing to perform very well, particularly with respect to profitability, and is on track for its plan this fiscal year. And as has often happened, there's more sales in the back half of the year than the front half. So that's not unusual. As for Reveal, we're expecting good things this year. We're expecting growth that's in excess of 20%. And we're expecting to perform well on profitability side there as well. And that part is also back-end loaded but nonetheless quite secure and visible, and we attribute that to our CT-80 modernized fleet that's hitting the market through the Transportation Security Agency and, hopefully, elsewhere in the future. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So on the Reveal, on those TSA contracts, is that funded and actually going through right now? Or is that something over the next couple of quarters?

Well, yes, we're actually good for the rest of this fiscal year on Reveal through TSA, absolutely. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: And then just on the civil side, you had mentioned a couple of write-downs, contract write-downs, and the growth was slower in that segment. What gives you confidence that we're not going to kind of see the same issues crop up on the, say, the defense IT side or continuing in the segments? What's changed to not make this occur again next quarter?

The contract write-downs we had in this segment were focused in the -- in some of our energy projects. And we're at the early stages of some of those projects where we had a few technical issues, some of which were out of our control. I can only say that we have a strong team that is very focused on those issues. And we're confident that they are remediated and will not be recurring in nature. And that's a very specialized area that really has nothing to do with the defense and the IT part of our operations. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: So it’s in the DesignBuild area?

Yes, that's a fair statement. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And those are all fixed-price programs, right?

They are.

There are no more questions at this time.

Thank you, Deanna. On behalf of the SAIC team, we want to thank everyone on the call today for their participation and their interest in the company. We'll speak to you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's presentation. Thank you once again for participating. You may now disconnect, and have a great day.