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SAIC, Inc. (SAI)

F1Q10 Earnings Call

June 3, 2009 5:00 pm ET


Stuart Davis - Senior Vice President for Investor Relations

Kenneth C. Dahlberg - Chairman of the Board, Chief Executive Officer

Mark W. Sopp - Chief Financial Officer, Executive Vice President

Lawrence B. Prior III - Chief Operating Officer


Joseph A. Vafi - Jefferies & Company

Jason A. Kupferberg - UBS

James E. Friedman - Susquehanna Financial Group

Laura J. Lederman - William Blair

William R. Loomis - Stifel, Nicolaus & Company

Cai von Rumohr - Cowen and Company

Joseph B. Nadol III - JPMorgan

Erik R. Olbeter - Pacific Crest Securities

Edward S. Caso - Wachovia Securities



Good day, ladies and gentlemen, and welcome to the first quarter fiscal year 2010 earnings conference call. My name is [Shamika] and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Stuart Davis, Senior Vice President for Investor Relations. Please proceed.

Stuart Davis

Thank you, Shamika, and welcome, everyone. Here today with prepared remarks are Ken Dahlberg, our Chairman and CEO; Mark Sopp, our CFO; and our COO, Larry Prior, will join us in the Q&A portion.

During this call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially and I refer you to our SEC filings for a discussion of these risks.

In addition, the statements made 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.

With that, I will turn the call over to Ken.

Kenneth C. Dahlberg

Thanks, Stuart and good afternoon, everyone. By now I presume you have read our press release and you can see that we started out fiscal year 2010 superbly. We had better-than-expect revenue, op margin, earnings per share, and cash flow. What was especially rewarding to me was that all of our groups and virtually all of our business units met or exceeded their operating plans. But we are seeing broad-based success throughout the organization and Mark will provide additional color on the financial details in a minute.

The last three months have certainly been eventful ones for the government services market, so let me run through my assessment of what’s happening in our primary market segment. First, the FY09 supplemental was in conference to reconcile the House and Senate versions of the $90 billion plus bill. And despite the rhetoric surrounding Guantanamo Bay, we do expect this bill to pass likely this month and it will provide sufficient funding for the war efforts, including key programs for us in [MRAP] and ISR.

Second, President Obama recently signed a weapons systems acquisition reforms act. The DOD still needs to define specific language around conflict of interest and other matters but we view it as a positive step for platform independent services providers with a focus on program mission execution like us.

Third, the administration’s proposed fiscal year 2010 budget is now out and it calls for some dramatic changes, especially for the DOD. The headlines focus on the high profile weapons systems cuts but frankly the overall defense budget and the ops and maintenance component are both up about 4%, so we should have solid funding through at least September 2010.

Details on out-year budgets are still pending the results of the ongoing quadrennial defense review but we expect the growth will in future defense budgets.

For our company, the big FY10 budget items are the cancellation of the man-ground vehicles portion of future combat systems and the push by the government to transition contractor positions to government employees. Given that the budget has top line growth, there are potential upsides that balance all the cuts.

For example, the proposed defense budget increases funding for ISR and military healthcare, which are good markets for our company. However, in this environment, investors are focused on the headwinds but let me address FCS and in-sourcing in a little bit more detail.

There’s been a lot said and written about canceling future combat systems. We are still awaiting the acquisition decision memorandum from OSB about the FCS restructuring plan. We’ll have to get used to new terminology -- as we understand it, future combat systems will now become army brigade combat team modernization and the lead systems integrator construct will become a prime contract. But we expect a good portion of the program will remain intact.

Let me talk more about that. We think that the program will be split into three parts -- network and system of systems engineering, spin-outs of new technology, and man-ground vehicles.

We expect both our company and Boeing to retain the network and system of system engineer piece likely under a modification to the current contract. We also expect to participate in a new contract for the spin-outs, the first phase of which is already in contract negotiation with $300 million plus included in the President’s fiscal year 2010 budget.

And lastly we expect that the man-ground vehicle component will be a new contract likely several years out and we do not know what if any role we would play in it.

Let me emphasize the arm is committed to leveraging its sizable investment in FSC. Despite the concerns raised by GAO and others, the program’s performed quite well. In May, the team successfully completed its system of systems preliminary design review, the most comprehensive review of the program to date. The review validated that the designs for all FSC systems and subsystems, including the network, sensors, weapons, manned and unmanned vehicles, met current requirements and will function as an integrated system of systems.

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