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SAIC, Inc. (SAI)

Leidos and SAIC Analyst Meeting

September 11, 2013 8:30 am ET

Executives

Paul E. Levi - Senior Vice President of Investor Relations

Anthony J. Moraco - Group President of Government Solutions

Nazzic S. Keene - President of Enterprise Information Technology Sector

John R. Hartley - Chief Financial Officer and Senior Vice President

John P. Jumper - Chairman, Chief Executive Officer, President, Member of Classified Business Oversight Committee and Member of Ethics & Corporate Responsibility Committee

Analysts

George A. Price - BB&T Capital Markets, Research Division

Presentation

Unknown Executive

Director of Investor Relations.

Paul E. Levi

Welcome, and thank you for joining us today for what will be an informative and enlightening afternoon. Here in the room, it's nice to see many familiar faces and new ones as well. I would also like to welcome those viewing this event through our webcast. Many of you were in attendance this morning for the Leidos presentation, SAIC parent, but that's only half the story. This afternoon, we'll present the strategy and vision for SAIC or what we euphemistically call new SAIC.

If you look at Page 2 of your books, please read our forward-looking statement and related disclosures that apply to today's presentation and materials. The plan for the next 3 hours this afternoon is to provide insight to SAIC's business, operating model and share our value proposition. Speakers today will be Tony Moraco, our Chief Executive Officer; Nazzic Keene, Sector President; and John Hartley, our Chief Financial Officer.

I'd like review the elements of our time line of our separation transaction with you quickly. SAIC, Inc., presently traded on the New York Stock Exchange as SAI, will be changing their name to Leidos and will be trading under the symbol LDOS. They will be distributing 1 share of New York Stock Exchange-listed SAIC for every 7 shares owned of SAI. The distribution record date will be September 19, and the distribution date will be September 27. When-issued trading in SAIC will begin on September 16, with regular way trading on September 30. There will be about 49 million shares of SAIC outstanding, as a result of the 1:7 distribution ratio. SAIC intends to pay a quarterly dividend, subject to board approval, of $0.28 per share, which is adjusted for the distribution ratio. At the time of the separation, we'll have $500 million in debt and $226 million in cash. We'll also have access to a $200 million revolving line of credit.

Again, thank you for attending a rather monumentous [ph] day for the company. I would now like to invite our Chief Executive Officer, Tony Moraco, to the stage.

[Presentation]

Unknown Executive

Ladies and gentlemen, Tony Moraco, CEO.

Anthony J. Moraco

Well, good afternoon. It's good to be back here. Thanks for coming back after lunch. And those who have heard the story this morning, it's been a fantastic year of change and challenges. But as you heard from the Leidos team this morning, we are ready to go, eager for the separation to really explore the value add of both companies, so I appreciate John Jumper's comments this morning to recognize the significance of 11th of September, but also the significance of the day.

To current SAIC, it is still an integrated management team, and you'll see in our descriptions of the new SAIC, those things that are still the same and enduring, and those things will point and highlight that are, in fact, different. So as one $11 billion successful company and a 40-year history, we have a lot going forward but also, at the same time, a lot of legacy that both parties are very proud of. And you'll see that. I we'll try and make sure that you understand the distinction between the 2, principally on the solutions side of Leidos and the services model the new SAIC represent. And we'll give you some sense of that strategy going forward.

So new SAIC, leading technology integrator is how we're going to market, specializing in 2 broad lines of business: our capabilities and mission in technical services and engineering and our enterprise IT capabilities, each about $2 billion, and Nazzic will give you some additional insights later. A long-term proud history of customer affinity; the 44 [ph] history that Dr. Beyster started; the culture of entrepreneurial aspects, innovation are all brought to bear on the new SAIC going forward. So I'm proud of that heritage, and we'll continue to move forward. The value creation, one of the fundamentals of the design, was around scale and diversity of portfolios. We had strong alignment. The business over the last few years operated better as an enterprise, but yes, we saw a divergence of a couple of the business models translated to solutions in the services side. Combine that with the competitive aspects of the market and the organizational conflict of interest in the acquisition community, drove us to looking at the spin as the highest opportunity to create value for the shareholders in both companies going forward. We're proud of that fact that at $4 billion at scale, with some principal lines of business and a 40-year history of great customer engagement in mission capability, we're well positioned to move forward. We bring with us 14,000 employees of the current 40,000 or so of SAIC. As you heard Leidos talk about as SAIC has delivered to date, very strong, predictable cash flows in the services model and a leadership team that is ready to go and part of the design from the -- from day 1, and we'll move forward as an enterprise into the future.

You've heard us talk about the addressable markets. So right out front, you look at new SAIC principally in the largest -- the large Federal market space. Our government space, as it exists today, principally in the defense sector that you see there, but also Federal Civilian, with some state and local business as well to complement that. Our opportunity to address a broader market is in the $25 billion range in the markets that we serve today. Principally, Federal government, it's a business we've been in, it's a business we're going to continue to stay in, with principally an organic growth story around expanding our opportunities of selling capabilities that we have today to customers we know very well. Okay? So it's associated with the defense sector, the Federal government, Federal Civilian, and we'll give you a number of examples throughout the afternoon to show you where we're going, where we're positioned and how this is going to convert into value add to the shareholders.

The addressable space, again, prompted in part by the spin and our access to organizational conflict of interest markets and pipeline, business development opportunities that we self-selected out of in the past few years, as we're affiliated with the national security sector, Lou gave you insights to that. Certain customers have taken a hard line on once was a mitigation strategy of organizational separation, but this takes it to a new level, and then hence, you see the spin and separate the companies going forward.

Our Army portfolio, as we represented in the Form 10, represents 26% for our current contract revenue base; the Navy at 20%, so we have a large presence in 2 of the fundamental defense services. Underserved in Air Force in part. You saw what Lou briefed earlier in the airborne programs. Some of that, again, self-selection based on OCI, and that we did not move into the services sector in some of the Air Force programs in airborne, and the SAIC had a strong position in ISR and payloads in airborne platforms, as Lou discussed earlier today. So at $4 billion, still a lot of headroom for our organization of that scale to grow in a $185 billion addressable market space. We're very excited about it and the opportunities to move forward.

Within this transformation that both John and Stu referenced at this morning as well, this last year has been a year of design, transformation and implementation to get us to a better, optimized business model for new SAIC. It's in part leveraging some of the continuing themes, our ethical culture that's sustained in both companies, our customer affinity with the 40-year history that we have in our mission areas and our world-class program performance and delivery across the board, whether it be solutions or services. But at the same time, those who understand and studied Beyster's history of an organization that grew up a bit at par as a federation, if you will, of operating divisions, each creating huge relationships, value-add relationships with our customers and then expanding that business, well, as you did that organically over the first 30 years, you started seeing overlap come to bear on our markets and our touch with our customers. In some cases, we mitigated that fairly well; in others, if customer was trying to trade and, in fact, had multiple SAIC service providers. In this transformation, just as Leidos did, we took a step back and looked at how can we optimize our current portfolio, our go-to-market in the context of our price sensitivities and our efficiencies and effectiveness as an enterprise.

In the upper right, you see a matrix structure that we began implementing 1st of February, when we organized the company. We've moved about $0.5 billion of business between what is now Leidos and new SAIC from prior organizations represented on the left in FY '13. But now we have a focus on 6 vertical customers, a single leadership team aligned specifically to those customers, with full insight to that pipeline for those customers, as opposed to having 4 or 5 independent organizations with independent strategies and independent investment profiles approaching that same customer set.

In turn, on the horizontal axis, we have more details on our service lines but fundamentally delivering 2 major lines of business, our traditional technical and engineering services and our enabling enterprise IT capabilities, each at about $2 billion. And we've broken those down into 8 service lines, and I'll give you some additional details on that, as well as Nazzic later.

We will continue to service our customers with a pride of mission. This has been fundamental to our enterprise. And it is again about transformation but optimization. And we're looking for incremental improvements on what is already a great company to make it better. So you'll continue to hear us talk about marginal movements in our time sold, our utilization of resources, our operating margins themselves and our growth. And it's stimulated by optimizing the model that we have today.

Sustaining our enterprise entrepreneurship, continue the innovation, the subject matter expertise, the business acumen that is present at the heart of SAIC today and move that across the enterprise and partner more collaboratively between our customer groups and our service lines to make sure we are delivering full value of the enterprise. Since the IPO and the prior CEOs, SAIC's strategy has continued to converge on an enterprise model. And as John mentioned earlier, our ability to spin today, whether it be through shared services or infrastructure, have been facilitated by that evolution since the IPO, taking an enterprise view and taking a strategic approach going forward. So we believe that going into this next fiscal year, as this model gets put in place over the next 2 quarters for the service lines in particular, we can have our customer portfolios, the customer groups, be pulling on that market opportunity, giving us the insights to the pipeline of the future, whether it be on the service lines we're related to, the market space that we have, the organizational alignment in technical and engineering and enterprise services, this corporate center Mark discussed earlier, our corporate capabilities, we centralized much more so at the corporate center, with a focus on running the company at corporate and running the business on the customer side and the services side. That gives us better market segmentation, better resource utilization, focus on investments and pooled resources. Now we're moving away from the division with a small set of assets, making incremental changes in technology to a much more enterprise view across the 8 service lines, who invest in differentiated offerings on an annual basis and on a recurring basis going forward. The fundamental value proposition will be to increase our ability to sell enterprise capabilities to the customers we know and have serviced for the last few decades.

So I'm going to highlight 6 areas of investment highlights. They're documented in your briefing books. I'm going to go through them in sequence.

Enduring customer relationships and mission orientation. Both companies highlighted this. We're going to continue in that. And again it's tied to subject matter expertise, deep mission domain knowledge based on the employees that have either operated in those environments on the mission side or on the IT side, and hear us talk about how we believe that customer affinity continues going forward. Strategic alignment with those enduring missions, I'll touch on later examples of those programs that we operate today that are, in essence, not optional for most of our customers. It is not necessarily discretionary spending, as we're running the global networks into the future or servicing the weapon systems that provide the defense for our Armed Forces. Long-term relationships with key customers across decades of contract delivery.

Full lifecycle of offerings. End to end, SAIC provides services from the mission-seated domain all the way through logistics training and sustainment. End to end, single provider at scale, provides our ability to work closely with our customers to solve their challenges, particularly in this budget environment, that is really a convergence now of end-state mission of an agency or a defense service and their IT infrastructure. The back-office demands and the mission capability are converging. We're seeing mission commanders spending time with their CIOs. Once separate stealth pipe business models are now much more integrated and converging on their business plans going forward. It's a must do. Each operate somewhat independently but are very intertwined, and that's why we see on our mission domain the enabling enterprise IT capabilities that will drive cost efficiencies to afford our customers to execute the missions that are most important to them. It covers the gambit from engineering front end, design, development, integration, training and sustainment. And we have a leadership position in those areas to sustain those assets that are either in theater or fall back through the operations back here in the United States. So as we talked OCO funding, we have surely provided forward-operating support, force protection services, logistics support, supply chain support in theater, and we're following some of those assets back as the government does reset modernization, took a further readiness and sustainment of the forces.

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