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SAIC (SAI)

Q2 2012 Earnings Call

August 31, 2011 5:00 pm ET

Executives

Mark Sopp - Chief Financial Officer and Executive Vice President

Paul Levi - Senior Vice President of Investor Relations

Walter Havenstein - Chief Executive Officer, Director, Member of Stock & Acquisition Transactions Committee, Member of Classified Business Oversight Committee and Member of Ethics & Corporate Responsibility Committee

Analysts

James Friedman - Susquehanna Financial Group, LLLP

Cai Von Rumohr - Cowen and Company, LLC

George Price - BB&T Capital Markets

William Loomis - Stifel, Nicolaus & Co., Inc.

Jason Kupferberg - Jefferies & Company, Inc.

Edward Caso - Wells Fargo Securities, LLC

Robert Spingarn - Crédit Suisse AG

Michael Smith - Oppenheimer

Presentation

Operator

Good afternoon. My name is Tam and I will be your conference facilitator today. Welcome to SAIC's Second Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. 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.

Paul Levi

Thank you, Tam. Welcome, everyone. Here on today's call are Walt Havenstein, our CEO; Mark Sopp, our CFO; and other members of our leadership team.

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

In addition, the statements represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so. I would now like to turn the call over to Walt Havenstein, our CEO.

Walter Havenstein

Thank you, Paul, and good afternoon, everyone. For the call today, I'll cover market conditions, highlight recent business development results, talk about acquisitions and divestitures, and share a special recognition that SAIC recently received. And Mark will provide the financial details. And of course, we will take your questions.

At the outset, while continued uncertainty in the markets we serve adversely impacted our performance this quarter, I am encouraged by our contract win rate, our increasing pipeline of new opportunities, our record level of outstanding proposals awaiting decision, and the growth we are seeing in our energy and health market areas. Additionally, we are hopeful that the work of the so-called super committee of Congress will set us on the path of increased budget certainty into the next year.

With that said in the short term, as you can see from our earnings release, we continue to experience challenges in converting new contract awards to revenue. The overall federal government acquisition process and the ability and willingness of our customers to ramp up new programs and provide funding for existing programs continues to be negatively impacted by the uncertainty caused by the government budget situation. As a result, spending levels since April, government fiscal year '11 budget resolutions were enacted, have been below our expectations.

As Mark will cover later, revenues contracted in the quarter, and we are reducing our expectations for the year to reflect the short-term outlook, which is impacted by the current government uncertainty.

The overall government solutions and services market is entering a period where we expect spending to be flat for the next couple of years. Then most likely low single-digit declines and spending for each of the several years afterwards, as our country makes the tough but necessary spending decisions to reduce the federal deficit.

This view broadly reflects the $350 billion in defense reductions over the next 10 years that have been enacted by the government, plus up to another $500 billion over 10 years that is on the high side of expected reductions, with the second tranche to be decided by the Congressional special commission by this December.

These numbers reflect reductions to previous OMB spending estimates, which projected increases in defense spending over the next 10 years. The effect of these cuts, in essence, renews the previously planned growth in the DoD budget and results in a relatively flat to modest decline compared with today's spending levels.

Importantly, short-term instability issues aside, this long-term defense spending outlook is consistent with the view we've previously shared and is consistent with our current strategy in whatever manner the macrobudget challenges are resolved, we continue to believe there will be areas of growth in the markets we serve in order to provide solutions to our country's most critical and pressing missions. We are continuing to invest in those areas to ensure we bring the best solutions to our customers in support of these missions.

Regarding our contract awards, bookings totaled $2.3 billion in the second quarter and produced a net book-to-bill ratio of 0.9. Combined with the 1.3 book to bill we achieved in the first quarter, we have produced a Q2 year-to-date book-to-bill ratio of 1.1, which is respectable and encouraging in this contracting environment. This ratio reflects our key recompete win on the 10-year NASA Integrated Communications Services contract in the first quarter, along with 6 additional wins of large definite delivery contracts, each in excess of $100 million so far this year.

We ended the quarter with $17.7 billion in total backlog, of which $5.3 billion was funded. As compared with the first quarter, funding backlog increased by 5%. As compared with the second quarter of fiscal 2011, total backlog increased by 12%.

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