Leidos Holdings, Inc. (LDOS) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by. Welcome to the SAIC Fiscal Year 2013 Third Quarter Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, December 5, 2012. I would now like to turn the conference over to Mr. Paul Levi, SAIC's Senior VP of Investor Relations. Please go ahead, sir.

Thank you, Camille, and good afternoon. I would like to welcome you to our third quarter fiscal year 2013 earnings conference call. Joining me today are John Jumper, our Chairman 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 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 Chairman and CEO.

Thank you, Paul, and good afternoon, everyone. During the call today, we'll start with a look at our quarterly performance, discuss the market conditions, update you on a recent acquisition and discuss the recently announced leadership teams of our 2 companies that will emerge from the planned separation we announced last quarter. Following that, our COO, Stu Shea, will update you on separation planning, provide details about our performance and will conclude with business development results. Stu will be followed by our CFO, Mark Sopp, who will go into details on the financial results, and then we'll open the lines to your questions. Our dedicated team of 40,000 employees delivered solid results in the third quarter even in the face of strong market headwinds and while addressing significant changes within the company. As shown in today's press release, our revenue growth, accompanied by strong bookings, demonstrate that SAIC is performing for our customers and delivering for our shareholders. In the quarter, we grew revenue by a positive 3%, fueled by the addition of maxIT with internal growth relatively flat. We are also pleased to see some momentum in the market by recording future business at a book-to-bill ratio of 1.7. While headwinds in the industry remain strong, we're proud of our performance and we continue to take actions to shape our future. As we continue to accelerate toward the fiscal cliff, from our perspective, the fog is getting thicker. In several sessions with high-ranking officials in the executive branch, we in the industry have had ample opportunity to make our opinions known. I must say that our senior defense officials do understand the industry's concern and have applied ample energy to encourage a legislative compromise we know must prevail in the end. While those of us who are engaged in this dialogue hope that the most onerous scenario of mindless slashing will be avoided, there's little doubt that any scenario will -- in the future will include additional cuts to the federal budget, hopefully decided through reason, debate and compromise. We anxiously await progress on this ongoing political debate. Since the seasoned management team began our journey together in March, we have emphasized the steady pace of preparation for the budget pressures that surround us now. In previous calls, Stu Shea has reminded us of actions that date back more than 2 years to consolidate activities and realign functions to achieve a more competitive posture. In the last call, we announced Project Gemini, the planned separation of SAIC into 2 great companies, more focused and more differentiated, free of debilitating conflicts of interest and designed from the start to be fiercely competitive. Stu will say more about Gemini later. But there are near-term actions that are also required. Some of these are process and structural actions that we announced earlier in the week. It is still necessary to reduce our workforce by about 700 people as part of the initial steps to get to a more competitive posture required to achieve meaningful growth through the depressed budget cycle and to emerge as a powerful competitor on the other side of this downturn. The reductions we announced were primarily indirect overhead functions affecting both the corporate and line operation support staff and designed to accommodate a leaner organization with larger business units, increased back office efficiency and increasingly effective customer interface. The more efficient structure will provide focus for more timely decisions on research priorities, repeatable capabilities, business development and acquisitions. We've also eliminated or downsized functions no longer deemed necessary to our success. We believe these actions will remove approximately $100 million of annual indirect cost in the next fiscal year and will add to savings from prior years as a result of project alignment, IT modernization and other actions we have explained. The cost to execute the current reductions is expected to be about $15 million comprised primarily of severance paid to affected staff and will be incurred in our fourth quarter. As we make progress with organizational design, we're taking full advantage of structural and process efficiencies to relieve administrative burdens from our customer-engaged workforce and to minimize reductions in the workforce that deliver to our customers daily. Now let's turn our attention to commercial and government health care IT and our most recent acquisition, maxIT. We're pleased to report that the integration of maxIT is progressing on schedule with 1,600 maxIT professionals now operating as full members of our broader health care services organization. We will continue to leverage our strong maxIT brand with a strong vitalized brand to win new business in the upcoming quarters. The second phase of integration will occur over that same period of time, culminating in a single unified brand operating under the seasoned leadership of a fully capable -- of a team fully capable of leveraging and retaining the best-of-breed skills resident in each organization. With average senior leadership tenure of 25 years in health care IT, we're highly confident in our ability to expand our leadership position in this growing and dynamic area of critical importance to our private and public sector customers. Stu Shea will elaborate on our M&A process with maxIT, but I want to emphasize our strategic objectives that prioritize focused M&A on a path to a long-term growth with appropriate consideration of other actions to manage capital structure. We plan to remain a strategic acquirer going forward, organizing teams with the right scale of mix from inside and outside the company. As demonstrated with Vitalize and maxIT, our diligence in benchmarking will endeavor to return best value to shareholders and apply equal discipline to rejecting deals that cannot demonstrate a clear path to growth. Just as importantly, similarly disciplined teams will closely watch existing lines of business that are not strategic, not performing or create conflict and we'll provide timely advice on appropriate divestitures. I'd now like to discuss the key leadership appointments for the businesses that will be created next year, following the planned separation of 2 independent publicly traded companies. Before I talk about future leadership, let me talk about the current leadership. Any of you who have been through a separation of a company know how difficult it is. Our investors, shareholders and employees in the audience today can take great pride in the enormous effort underway with the goal of shareholder value in the crosshairs. While all of us are in this sprint, Stu Shea has built a team -- built a team and a process and hovers over it like one of his own children as we navigate the course of the finish line. We're all grateful for his passion and energy in this endeavor. Looking forward to the new organizations and conditional and course on the approval of our filings and the final board -- vote of our Board of Directors, the National Security, Health & Engineering Solutions business will be led by myself as CEO and Chairman of the Board. Stu Shea will be elevated to the position of both President and COO, Mark Sopp as CFO, Vince Maffeo as General Counsel and Joe Craver as Sector President for Health and Engineering. We've initiated an executive search for the president of the National Security sector that will include both internal and external candidates. My wingman, Stu Shea and I are honored to be asked to lead this formidable team and will comprise -- that will comprise the future solutions company. With the solid foundation in National Security and largely released from the burdens of organizational conflict of interest, this team will strike deep -- targets deep in the heart of previously conflicted markets. As a team, we are appointed to leverage our best technology into Joe Craver's commercial health and engineering sector as we work to define the next level of cyber-safe health and engineering information technology. For the Government Technical Services & Enterprise IT business, the prospective leadership team consists of Tony Moraco as CEO, Sandy Sanderson as Nonexecutive Chairman of the Board and Tom Baybrook who will become Chief of Administration and Operations. Let me pause for a moment to remind you that Tom has been the acting group president of the Defense Solutions group, who has quietly and selflessly led his team through 3 quarters of high performance, while actively helping with the design of the new company. Continuing with the lineup, John Hartley will shift from his current role as Corporate Controller to CFO. Deborah Lee James will shift from Executive Vice President for Government Relations and Corporate Communications to Sector President for Technical Services, and Nazzic Keen (sic) [Turner] will career -- who's a career IT professional will become Sector President for Enterprise IT. I can't tell you how proud I am of this team. No one in the company is more respected than Tony Moraco. I have often said that Tony is a true student of the game and emerges from his previous leadership positions in the company with a deep understanding of the business and its people. Tony's appointment will assure that the new government service and enterprise IT business can hit the ground running as we emerge from the planned separation. Tony's team will lead a company of seasoned SAIC veterans into a new and boldly restructured company designed from the ground up to compete, to win and to deliver. With all that in mind, let me turn now to COO and -- our COO, Stu Shea, and turn the meeting over to him.

Thanks, John. As you can see from John's introduction, we have a number of important topics to cover today, not the least of which is to highlight our continuing solid performance in the face of difficult market conditions and continued uncertainty in our primary markets. As I mentioned in the last earnings call, this is a testament to the strong disciplined planning that we've done over the past 2 years to prepare for these tougher times. We have worked methodically to tighten our strategic focus, increase our investments and differentiated capabilities, increase our R&D and B&P investments, deploy our capital for a number of key acquisitions and deliver to our shareholders a track record of performance. One of the topics on the forefront of investors' and employees' minds is the status of our plan to split SAIC into 2 publicly traded companies. Some have asked why we named the separation process Gemini. Well, in Greek and Roman mythology, the sons of Zeus were twin brothers, Castor and Pollux. In Latin, these twins were also known as the Gemini. The sign of the Gemini is often associated with the exchange of ideas, communication and trade between 2 different personalities, essentially the yin and yang of twins. We have approached this separation as if SAIC was being separated into twins, 2 unique, dynamic, strong and capable companies trading ideas, working in collaboration and partnership, yet recognizing that the duality of the different business models within SAIC needed to be separated. There was no primary and secondary, retain or divest, or right or wrong. But instead, 2 equals, twins from the same parent, SAIC. As has been noted in our various press releases, one of those twins will be focused on both federal and commercial solutions in the national security, engineering and health markets, and the other will be focused on enterprise IT and government technical services. I am pleased to report that Project Gemini is executing as we envisioned, and our plan remains to complete the split in the latter half of next fiscal year, obviously pending required regulatory approvals from the SEC and IRS and contingent upon final board approval. At the start of Gemini, we created a program management office, reporting directly to me, to manage the planning and day-to-day activities of the separation. This program office is led by senior executives in the company and is utilizing SAIC's systems engineering and program management processes to design these 2 future world-class companies. These processes ensure a systematic approach to managing the thousands of details and decisions that go into such a complex transaction. At this point in our Gemini journey, the team has accomplished a number of key items. First, we have selected and announced the executive management teams for each company, and we continue to advance other personnel decisions to complete the organizations. The talent depth that we have at SAIC is very strong, and we are well positioned to create these 2 exceptional teams. Next, we have also completed the detailed preliminary design of the 2 companies. These designs include organizational structures, operating processes and policies and a range of other details, such as contract vehicle separation and dependencies, technical investment strategies and focus areas for marketing and branding. Third, we have finalized our view of what the future competitive cost structures of both companies would need to be, and we have initiated plans to affect those changes as part of our FY '14 annual operating plan efforts. One goal here was a combination of overhead reductions, both labor and nonlabor, and the streamlining of SAIC in advance of the formal decision to separate. As John mentioned earlier, these decisions generally do not impact our direct revenue-generating employees, but are more focused on infrastructure support and organizational consolidation. Fourth, we have developed an initial set of reengineering actions that reflect the new streamlined business processes for each company, some of which are the near-term actions that John highlighted. We also have number of in-process actions underway in anticipation of the start of our next fiscal year, as well as several that will be executed at the formal separation date. Fifth, we completed initial design of our proposed IT infrastructure, a key consideration in the standup of the 2 companies. This will be facilitated by the investment that we previously made in our industry-leading secure cloud infrastructure that SAIC operates on today. Sixth, we concluded an extensive branding study and are finalizing the decision of the naming of the 2 companies, and we expect to announce that decision to you soon. I know our employees will be happy when this occurs. And finally, we launched an extensive change management program internally within SAIC to provide our employees with a roadmap to navigate the many changes expected from this split. The availability of specific details while embarking on this very deliberate process is frustrating at times, but I can assure our employees that we are focused on communicating everything we possibly can as quickly as we can. As you can see, the Gemini team has been very busy and much work to do to ensure that these companies are ready to be competitive forces in their markets on day 1. With the competitiveness we are seeing in the marketplace today and the threat of an impending fiscal cliff, we are ever more convinced that this split is the right decision for our employees, customers and shareholders. One of the many benefits of the planned separation that we have mentioned previously is the increased growth opportunities resulting from the removal of OCI complex. Let me spend a few minutes and describe to you what we're seeing as specifics in that regard, so let me first talk about the solutions company, which we call internally blueco. As you scan the news every day, it's obvious that we still live in a dangerous world with new threats, new adversaries and new challenges. One area of increasing concern is the rapidly evolving maritime threats in the Asia Pacific region. Threats of piracy and maritime terrorism, proliferation of attack submarines from nation states and a potential for interruption of trade throughout the region threatens the safety of the entire globe. Countering these threats require innovative and robust classes of systems to be our eyes and ears, to collect intelligence, as well as to provide the capabilities for us to eliminate these threats. In the past, SAIC has been blocked from integrating and deploying many of our relevant technologies from our ISR group into these maritime solutions because existing service contracts within our Defense Solutions group included conflict of interest clauses that specifically prohibit us from doing so. With our planned separation, we will now be able to develop and deliver new concepts, technologies and systems to counter the broad range of maritime threats. We estimate this market to be approximately $3 billion of new opportunities over the next 5 years. Blueco will leverage its capabilities to deliver manned and unmanned platforms with advanced payloads, distributed sensing networks, new communication techniques to tie them together and processing and exploitation techniques to turn that data into knowledge. We believe the challenges of the Asia Pacific threat will provide a robust market for the foreseeable future. Separating our conflicted work from our solutions delivery organizations will allow us to capitalize on our many technical discriminators. Some of the key maritime customers that will be de-conflicted in the future include the Navy's Information Dominance Systems Command or the Space and Naval Warfare Systems Command, SPAWAR, as well as several subordinate components of the Naval Sea Systems Command, such as the Naval Surface Warfare Center and the Naval Undersea Warfare Center. We're now looking at a number of maritime opportunities with these customers with funding in government fiscal year '13 and beyond. In addition to maritime domain awareness, one of the many lessons we learned in the conflicts in Iraq and Afghanistan is a critical importance of real-time airborne surveillance and reconnaissance to support security operations. SAIC has captured a significant share of the manned airborne ISR programs in theater today through our Saturn Arch, Blue Devil, Highlighter, Desert Owl and Buckeye platforms. In a world where flare-ups and contingency operations are a continuing reality, we believe that there is a continuing need for both manned and unmanned systems such as those that we build. We estimate that this market area could be approximately $13 billion over the next 5 years. We are ready to leverage our development, technology, operations and integration capabilities to the U.S. defense markets. Specifically, we plan to aggressively pursue the ISR systems and electronic warfare systems that were previously not accessible due to OCI. SAIC's technology and capabilities are well positioned to meet the demands of our customers' missions. Some of the key airborne customers that will now be de-conflicted include the U.S. Army's Communications Electronics Command or CECOM, the Army's Program Executive Office for Intelligence, Electronics, Warfare and Sensors or PEO IEW&S, the Navy's Naval Air Systems Command or NAVAIR, as well as U.S. Special Operations Command or SOCOM. Likewise, there are a number of airborne opportunities that we're reviewing now with funding in fiscal year '13 and beyond. All of these programs can materially benefit from SAIC's relevant technologies, but historically were impacted by OCI, and we were not able to fully flex our muscles. This will no longer be the situation after we complete the separation of the companies. Finally, we've also identified almost $4 billion in ground ISR, $7 billion in the PED market and $11 billion in the space ISR market that had been avoided in the past because of some limited OCI restrictions. Now let's take a look at the services company which we've been calling whiteco. Our initial market analysis indicates a broad new set of white space and previous OCI service opportunities in the Department of Defense and the federal civilian markets over the next 4 years, including around $19 billion in the Department of Defense and an additional $9 billion in targeted components of the Fed civ market. These include competitor re-competes not previously bid, for a variety of reasons, including real or perceived OCI with the ISR Group of SAIC. We are currently actively qualifying these new sets of opportunities, but let me offer some insight again. The initial analysis we've done points to over 150 opportunities for program and financial management, SETA support, acquisition management and other types of program office support in the DoD that we were not able to pursue because of conflicts with the solutions business. All of this $28 billion is potential new work for SAIC and these are typically well funded re-competes of existing work with some of our current competitors. This includes over 100 single award ID/IQs and nearly 20 multiple award ID/IQs. Customers where there are new growth opportunities include the DoD staff, as well as organizations and agencies such as the Defense Threat Reduction Agency or DTRA, which contracts for studies and analysis, program management office support and administrative services. Similarly, there are several engineering and support activities throughout the entire military services and their major commands. This includes, for example, the U.S. Navy's PEO ships, which contracts for management consulting, strategic services, acquisition management and technical and engineering services. We're also targeting a new set of over 40 federal civilian agency opportunities worth approximately $10 billion in total value, and these include opportunities with the Department of Homeland Security, the Federal Aviation Administration and NASA. As the date of our separation gets closer, the clarity of these opportunities in both blueco and whiteco will continue to improve. Next, I'd like to report on some recent activity in our existing businesses, specifically our growing commercial engineering and health businesses. In our engineering business, we continue to successfully deliver on our design build contracts, delivering high-quality and reliable sources of electric power generation. We recently completed a new electric generation plant for U.S. Geothermal. That plant in San Emidio, Nevada is now operational and producing a net annual average of 9 megawatts of electricity. The CEO of U.S. Geothermal recently stated that the plant is exceeding their initial expectations for electrical output and demonstrates a substantial increase in efficiency compared to the older plant being replaced. Geothermal energy is classified as a renewable source of electricity and is considered to be a clean, environmentally friendly, sustainable method of electric power generation. The U.S. market demand for electricity is rising, creating a growing dependency on nonrenewable, nonsustainable resources. SAIC's success in the engineering design build market is providing successful alternatives for this challenge. Our health business is also seeing some great successes. Under the thoughtful leadership of Joe Craver, we have had almost $250 million in key health wins this quarter. We believe that we are in the early stages of the modernization of health care IT as containment of health care delivery cost and improved patient outcomes are of strategic importance to the public and private market clients, both here and abroad. As John mentioned, our Vitalize and maxIT acquisitions are aggressively pursuing new opportunities in the health care IT market. Throughout the initial integration phase, they have remained squarely focused on performance. Through both new account wins and deeper penetration within their existing account base, we expect the combined entity of Vitalize and maxIT to generate over 35% revenue growth in fiscal year '13, well ahead of our acquisition plans. This growth is a testament to our successful integration of the acquired companies. Combined operating margins for the maxIT and Vitalize before amortization were double digit in the quarter. It is this combination of above trend growth and healthy margins that gives us confidence that we're creating shareholder value with our health strategy. As John mentioned earlier, our maxIT and Vitalize acquisitions are -- they're prime examples of how we conduct M&A at SAIC. We stay focused on a strategic fit, the importance of the cultural alignment and are disciplined in our approach to economic return. This approach allowed us to pay a competitive multiple for maxIT near the midrange of the health care IT sector. And while we paid a multiple that is higher than our core defense business, it is important to note that the performance of our health care franchise supports a valuation in line with expected future cash flows, and we view these transactions as accretive to both earnings and on an NPV basis. Moving now to business development results. We have continued to earn excellent win rates on our new business opportunities, achieving over 56% total dollar win rate on opportunities this fiscal year. This consistently high win rate is the result of a solid track record of strong program performance and execution, as well as targeted investments in technology, capture and proposal development. Net bookings totaled $4.8 billion in the third quarter and produced a book-to-bill ratio of 1.7. As we predicted in our last earnings call, a strong quarter. We ended the quarter with $18.6 billion in total backlog, $5.7 billion of which is funded. Total backlog was up 12% from Q2 and funded backlog rose by 4%. Our focus on winning larger opportunities continues to yield positive results. From the start of Q3 through today, we have won 22 opportunities valued at more than $100 million each. Added to the 13 wins of that size that we achieved through the end of Q2, this brings our year-to-date total to 35 $100 million-plus wins. These larger programs continue to be a key area of focus. Finally, the value of our submitted proposals awaiting decision continues to be robust. We currently have $32 billion in submitted bids awaiting award, adding almost $20 billion this quarter alone. We have had $23 billion in decisions this quarter, demonstrating that decisions are in fact being made. Our outstanding bids include $21 billion in ID/IQ programs and $11 billion indefinite delivery bids. This is $1.6 billion or 5% higher than Q3 a year ago. This reflects our added emphasis on pursuing more opportunities in areas where we can offer best value solutions to our customers. Coupled with our strong win rate, we expect that this will produce growth opportunities when these procurements are ultimately decided. Over the quarter, we've also had some excellent contract wins in each of the markets in national security, health, engineering, enterprise IT and government services, so let me offer a couple of examples. Although we cannot give specifics on the names and sources, this quarter we've seen contract wins in our national security programs growth of approximately $1.5 billion in intelligence programs just short of $1 billion in cyber programs, over $600 million in airborne reconnaissance programs and just over $150 million from geospatial intelligence programs. In our enterprise IT business, we were awarded a prime contract to provide enterprise IT support to the U.S. Central Command's Directorate of Command, Control, Communications and Computers. That cost plus award fee task order awarded under the GSA Alliant GWAC as a 1-year base period of performance, 4 1-year options and a total contract value of $433 million, if all options are exercised. Under the task order, SAIC will provide IT services, including command control communications and computer systems support, theater network operations, engineering, cybersecurity, programs and architectures and resource management. In summary, as we committed, the efforts to separate the company have not deflected our focus on performance. We continue to go headfirst into these headwinds with strong business development and execution performance and we continue to tighten the strategic focus of the company. The separation will amplify that focus, but we remain committed to execution throughout the process. Let me now pass the call over to Mark Sopp, who will cover our financial performance for the quarter.

Thanks very much, Stu. As John said, revenues in the quarter came in pretty much as expected with 3% total growth fueled by maxIT and internal revenues essentially flat. The Defense Solutions segment or business produced modest growth that leveled off from recent quarters as we signaled would occur in our last call. Some of the larger programs are approaching their full run rate, like Tires and Vanguard, while others such as joint logistics integration, JLI, and defense global solutions, DGS, has started a decline mode due to changes in those programs. Material buys from the Navy were also down likely from budget constraints. Ongoing long government procurement cycles and the adverse effects of the continuing resolution made capturing new growth vehicles challenging for the inevitable number of contract rotations and completions. We see modest contraction in the fourth quarter as a result in this area. However, we have built, as Stu said, an impressive backlog of outstanding proposals, and we expect to see our overall pipeline in this area further expand in the quarters ahead with the types of new opportunities that Stu mentioned earlier, that are going to be unleashed by our planned separation. The intelligence and cyber business, internal growth was about a push in the quarter, where we saw continued growth in airborne and geospatial programs offset by a large material buy in the third quarter of last year. As Stu covered, bookings were particularly strong here in the third quarter, providing a platform for growth in future quarters. The ISR business will be the other area of major focus for new business expansion as we start to pursue areas previously restricted due to OCI. In health, engineering and civil solutions area, we saw internal contraction of about 4% in the third quarter. While commercial health continues to generate superb growth, we had a greater offset in our federal civilian and federal health areas. We see federal health leveling off with growth prospects next year. And while we see the Fed civ market as a challenge, we have solidified our book of business with recent wins at NASA, FEMA, the SEC and the Department of Interior. Operating margin came in at 6.7% in the third quarter which, as expected, was adversely impacted by nonrecurring costs related to Project Gemini and also our previously announced corporate move. These 2 diluted operating margins in the third quarter by about 50 basis points. In addition, margins in our intelligence and cyber business came in at 7.2% in the third quarter, below historical levels. This reflects a few factors: larger prime contracts, where our subcontractor mix has increased substantially; growth in government-funded R&D programs in the airborne ISR area under cost plus fixed fee contracts; and also our significant investment in high technology proprietary offerings for government and commercial markets. In health and engineering business, margins were above 9% in the third quarter, reflecting good product sales and stability on engineering projects. Nonoperating items were uneventful, and EPS from continuing operations came in where we expected at $0.33. In terms of converting earnings to cash, we had a strong quarter, with operating cash flows of just under $300 million and the all-time low days sales outstanding metric of 61 days. This was driven by good overall execution, top to bottom, coupled with accelerated payments coming from the federal government targeted to boost payments to small business, much of which, of course, flows through us as prime contractor. With that, let me provide a little more color on some recent developments. As our release states, we completed the sale of our operational test and evaluation business in the fourth quarter. About $70 million of revenue and associated profits for the full year's activity will be recategorized to discontinued operations in our fourth quarter report as a result, so you'll see that next quarter. Second, we just recently reached agreement with the IRS on what portion of the $500 million CityTime settlement payment made last March will be tax-deductible. This was an uncertain matter when the settlement was paid back in the first quarter, but this agreement appropriately reflects the entire restitution portion of that settlement to be deductible and that will trigger a $96 million reduction in income tax expense in our fourth quarter. The earnings per share effect of this is $0.28 for the full fiscal year of '13 and accordingly, is triggering our increase in EPS guidance for this year. This will also bump up this year's operating cash flow versus our prior estimate by about $50 million, and we're upping guidance on that front as well. We'll get the cash benefit of the other $50 million related to the agreement in the first half of next fiscal year. Third, we have some new cost which will factor into Q4 which were not in our previous forecast. As John mentioned, we expect to incur $15 million of severance in the fourth quarter, which will in turn enable about $100 million in cost savings next fiscal year and beyond. Also, we completed baselining our program plan for project alignment -- for Project Gemini -- that's an old one -- and we expect to incur $10 million more in cost this year versus our preliminary estimate we made last quarter. This does not change the total program estimate, just more occurring this year versus next year. Finally, we are also modernizing our health benefits plans effective January 1 and will advance fund about $10 million of health spending account employer contributions in January for the calendar 2013 plans. While primarily related to next fiscal year, the timing and structure of this dictates all of it hitting in the fourth quarter of this fiscal year. With all of these elements, our top line is well on track, and we are maintaining our revenue guidance of fiscal '13 of $10.9 billion to $11.4 billion for the year. For diluted earnings per share from continuing operations, we are increasing our estimated range to $1.49 to $1.54. This reflects several new factors that I want to itemize. As mentioned before, the $15 million of severance cost expected in the fourth quarter, the $10 million in accelerated Project Gemini costs versus our last forecast, the $10 million of health spending account contributions and a more cautious forecast on product revenues as certain planned orders have not yet been received. These items collectively reduce our EPS estimate for this fiscal year by about $0.07. And more than offsetting all of these, as I mentioned earlier, the $96 million after-tax gain for the IRS agreement, which by itself will benefit estimated earnings per share this year by $0.28. Those were the various puts and takes with respect to our outlook in EPS for this fiscal year. As for operating cash flow, we now expect at least $200 million for the year, which reflects about a $400 million net cash flow impact from the CityTime settlement paid earlier in the year and the associated cash tax benefits that we've taken throughout the year. Finishing up, we'll report Q4 earnings in March of 2013 next year, and we plan to provide our outlook for fiscal '14 at that time. Now back to John for final remarks.

Thanks, Mark. This has been a longer than usual call, so we could cover the many key areas in the proper depth. We thank you for your patience. I appreciate your attendance, and now we can proceed directly to the Q&A portion of the call.

[Operator Instructions] Our first question is from the line of Bill Loomis with Stifel, Nicolaus. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Let's see, I guess, Mark, just since you just commented on guidance, if you could talk a little more about it just to run through. So the $0.28 and then the $0.07, so we should think of it as it's kind of being relative to your prior guidance of $0.21 net benefit difference?

I mentioned some other factors that I didn't precisely quantify like the more cautious outlook on product revenues and also explicitly about $0.01 of reduction related to the reclassification of the OT&E business into discontinued operations. So those are 2 additional pieces you'd need to consider to reconcile into the new guidance. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then that the 3, I guess the $15 million that you had in the third quarter, which wasn't -- was that in your prior guidance as well or no?

Which $15 million, Bill? William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: The $15 million you had in the third quarter for planned separation and corporate relocation.

That piece was in our previous guidance. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Oh that was in the guidance, okay. And okay. And so just looking at the fourth quarter EPS range, I mean, can you -- just to make sure we're all on the same page, I know it's subtracting the 9 months from the full year but there's a lot of puts and takes. Can you just reiterate just fourth quarter alone what the adjusted for the benefit EPS range would be?

We're not in practice of doing that. I think I provided all of the pieces for you to take your previous estimate and the elements that we see changing from our previous guidance. So I think I prefer for you to make those based on the pieces that I gave you. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just any -- on the product sales, you said that slipped. It sounds like you think they just slipped into the April quarter or -- because you didn't say they went away.

Yes, that's correct. We are concerned with the timing of getting orders in and product out the door by Jan 31, but if that is not meant to convey a permanent view toward those activities. We are still very confident that they will eventually occur and benefit the corporation.

Our next question is from the line of George Price of BB&T Capital Markets. George A. Price - BB&T Capital Markets, Research Division: Just the implied revenue guidance for the fourth quarter is fairly wide at $2.4 billion to $2.9 billion. Can you maybe give us a little color as to what the puts and takes in that are?

Sure. As we have practiced before, George, if our forecast is within the existing guidance stated, we do not change it; we leave it the same. So that is the reason for it staying the same, if you will. But clearly, we have a narrower forecast. If you look at the historical downtick we've seen from Q3 to Q4, which is largely reflecting a fewer number of working days, we do expect to see that historical reduction this year. And in addition to that, we do have some specific items that are coming down year-over-year like BCTM, like JLI and a few others. And so we expect that, that downtick will be a little bit more magnified this year than in the past. And while we have a lot of outstanding awards that may offset that, as you know, these things are developing very slow right now so we can't count on that. So I would just factor in more than the historical amount based on the dialogue we've had on what the run rates were looking like for BCTM and JLI and the other contracts we've talked about over the course of this year. Does that help? George A. Price - BB&T Capital Markets, Research Division: It does, yes. And then on the -- if I could just ask something on the segments. You mentioned health, energy, civilian down 4% due to weakness in federal health as well as federal civilian or I think maybe you called it flattish. Sorry if I don't recall exactly. But I was wondering if you just -- in those areas that you are seeing weakness there, if you could be a little bit more specific on where you saw the weakness in terms of programs, in terms of agencies or contracts?

I think it's fair to say we've seen weakness in all of the Fed civ agencies for the large part over the course of this year, not just this quarter. And we also saw a pause in some of the federal health business that we think is more of a temporary nature. We're more bullish on that outlook, as I said earlier, for next fiscal year based on recent activity we've had. We've had -- some of those delays, some of those are losses we've had for various reasons. And so the civil sector, the health are the drivers for the contraction we've seen in that sector. And that was offset favorably by the strength in the commercial health business and pretty good strength in our security products business this third quarter.

Our next question is from the line of Jason Kupferberg with Jefferies & Company. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Just wanted to ask a question on the indirect cost savings on the downsize. I think you characterized that as $100 million going forward. How much of that is going to drop to the bottom line versus being reinvested?

Jason, we will work through our fiscal '14 planning to determine the answer to that question and provide color on that in our March call. So we did the important part first and how we will allocate to reinvestment toward growth initiatives and the trade-off between that and profit enhancement is something that we need a little more time to develop. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay, fair enough. And I apologize if I missed this. But Stu, when you were going through all the OCIs and the opportunities there, I know in the past you guys had talked about roughly $1 billion in ultimate revenue synergy across the 2 new companies. Is that still an accurate number? And can you just remind us over what time frame you would expect to realize that, and what sort of implied win rate is required to get to that figure?

The synergies between blue and white? Jason Kupferberg - Jefferies & Company, Inc., Research Division: Yes.

Actually, we have more synergies through the separation of blue and white. I mean, we have of launch... Jason Kupferberg - Jefferies & Company, Inc., Research Division: Well, that's right. Yes, sorry, that's what I meant. I mean, just about the...

There's about $37 billion over the -- over -- per year in new opportunities on the blue side, about $4.5 billion to $5 billion in new opportunities on the white side that are addressable to us. We're looking at a much smaller amount in there. Jason Kupferberg - Jefferies & Company, Inc., Research Division: But in terms of -- so -- but if you convert that into actual revenue synergy over time, is $1 billion still the right number? Because I think that's the number that's been mentioned in the past.

Yes. Yes, it's a good number.

Use a historical win rate.

It's a good number. Historically -- and, historically, on a win rate, we also have a pretty solid win rate that's been pretty predictable on our competitive business and our re-competes. And so as we look at that, we think of it as maybe just a reduction because it's a new expansion area for us, so we wouldn't count on the same win rate. So we'll spend a little bit more B&P, we'll have a little bit lower win rate, but we still see about the same synergy as $1 billion. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Okay. And then just a follow-up question on the timing of the split. I know you're continuing to say second half of fiscal '14. Obviously, that's a fairly wide range. Sounds like you guys have accomplished a ton already in the 3 months or so since you announced this. I mean, should we be thinking that Q3 versus Q4 of next fiscal year is more likely or...

Yes, we should be thinking second half of the fiscal year. And the reason there's such a broad opening there is because we've completed a good part of the design, now comes the difficult part of the implementation. So we actually have to now build these 2 companies. And then once we do all the regulatory filings, not much is up to us at that point. We still have to wait for all the appropriate approvals and then seek final board approval. And that process is something that we can't control. So we have embedded in our schedule, obviously, enough of a slop in time for us to have some contingencies on the design, the implementation, the regulatory filings and then the comeback kind of on the end of next year time frame. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Would that be sooner?

Well, we would love it to be sooner because being sooner we get to really attack some of these opportunities that are restricted from OCI. Taking longer is still in the hands of the U.S. government.

Our next question is from the line of Cai Von Rumohr with Cowen and Company.

So I think on your second quarter call, I believe you talked about looking for book to bill of 1.1 for the year. Is that still what you're looking for?

Yes.

Okay. And then, Mark, you said on the second quarter call, you were looking for $25 million of separation cost in the second half. You had $15 million here in this quarter. So that would have left $10 million that would have been in your prior guidance. So you're now saying another $20 million in the fourth quarter. Is that correct?

Correct.

Okay. Okay, very good. And then so cash flow, could you share with us what the proceeds were from the sale of the T&E business?

First of all, let me go back to the prior statement. With respect -- I do want to make this clear. The Gemini Project expenses are third-party expenses. We incur lawyers, bankers, accountants, consultants, et cetera. But it does not include that severance amount, so that is additive. The severance is additive [indiscernible]. Just want to clarify that for the rest of the audience.

No, no, no, I know the severance -- okay. Right, the severance is additive, but you had said $25 million. You did $15 million, so there was $10 million more to go. And now you're saying there's going to be $20 million in the fourth quarter, excluding [indiscernible], okay.

Confirmed. And with respect to the sale of the business, we are not allowed by contract to disclose those proceeds.

Okay. But certainly, you did have proceeds and so you should have reasonable cash flow in the fourth quarter. You're already over your $500 million kind of cash you like to have around. What are you thinking about doing with this cash? Are you looking at M&A? Are you looking at share repurchase? What do you intend on doing with it?

The story's the same as we've consistently said, Cai. We are looking at all opportunities depending on which are most attractive to us. We have a bias for growth, so M&A is something we look very hard at first. But as you've seen, we've been very selective there. And when we don't have M&A properties that fit our stringent criteria, we have bought back stock, we have initiated a dividend, we'll continue to look at all of those 3 areas going forward.

Okay. I think on your last call, you mentioned that you were looking in the solutions business to kind of expand globally and kind of more focused on engineering. Is that still a priority? Or maybe you could kind of review for us what will the M&A priorities be for the solutions business?

Well, Cai, this is John Jumper. I think we're looking across the board to take advantage of opportunities as they arise. And as you know, a lot of times, we don't have control over when these opportunities become available. So we don't have a particular bias. I think you've seen us very active in the -- on the health side, but we're just continuing to look for those opportunities that are going to fit in the strategy and contribute to shareholder value.

Our next question is from the line of Edward Caso with Wells Fargo.

It's actually Rick Eskelsen on for Ed. Just had a question on VirnetX. You in the past had gotten some settlements on that, and we saw that they had recently announced a favorable court settlement in the beginning of November. Wonder if you could comment on expectations maybe for a gain from VirnetX again.

Thanks, Rick. We're really pleased with that development. And as we have disclosed, our rights toward any cash settlement proceeds is essentially 25% after deducting legal fees and other minor issues. But it's substantial, so we're pleased with those developments. We have no precise estimated timing of any such proceeds coming to us. We don't know if Apple will appeal or move down some other paths, so we patiently await. And we, of course, have not factored in any of those proceeds to many of our financial projections.

If it goes longer than expected and it passes over the separation date, which -- would there be a split between the 2 businesses or would it go with one versus the other?

Ed [ph], this is Stu. We don't know yet at this point. We still are in determination of that part of the separation of all legal entities, legal claims, intellectual property, those kinds of things.

Our next question is from the line of Joe Nadol with JPMorgan. Christopher Sands - JP Morgan Chase & Co, Research Division: It's actually Chris Sands on for Joe tonight. A quick question on the margin in health, engineering. Civil, it was up this quarter relative to where it was in the first half. I think, Mark, you said it benefited from product sales and some stability on contracts. Can you just talk about maybe what the trajectory for that is? You had subsequently mentioned that product sales, some of them have been delayed a bit.

Correct, although more of the delays, I would say, are on the ISR side of the house. But I would consider that this segment, as now constructed, to have normative margins in the mid-8% to 9% range. We clearly did above that in the third quarter and it's largely attributable to the strongest quarter of the year in security product shipments for our VACIS and our Reveal product lines. And that will obviously have some volatility quarter-to-quarter. That segment is somewhat diluted today because of the acquisitions we've made in the commercial health area. Stu mentioned in his remarks that we are double digit profit margins before amortization. But net of amortization, it's slightly dilutive. So that's bringing it down a little bit right now. In the nearer term, that will remain the case. But because of how strong it's performing and how well it's growing, we are hopeful that will help contribute toward margin expansion in future years. Christopher Sands - JP Morgan Chase & Co, Research Division: Right. The double digit just pertain to the Vitalize and maxIT pieces though, correct?

That is correct.

Our next question is from the line of Tim McHugh with William Blair & Company.

This is Matt Hill in for Tim McHugh tonight. I had a question about the health care consulting market. Now that we've moved on past the election and accountable care is going to be here to stay, are you hearing any different comments from some of your clients about proceeding with projects that may be they are waiting for a little bit more clarity on? And then just what sort of expectations now that we have that uncertainty out of the way?

Yes, Matt, this is Stu. We're seeing no change at all in expectations.

Yes, I think it's a little too early to gauge a reaction right now.

There are no further questions at this time. I would now like to turn the call back over to Mr. Levi for closing remarks.

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

Ladies and gentlemen, this concludes the SAIC Fiscal Year 2013 Third Quarter Conference Call. You may now disconnect. Thank you for using ACT Conferencing.