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.

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.

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…

Thank you, Walt. As discussed, we saw a 7% internal contraction in revenues in the second quarter, 2 percentage points of which were attributable to the VirnetX royalty payment we received last year, which of course did not recur this year. Revenue contraction was driven by foreseen lower product deliveries and anticipated reductions in programs like the Brigade Combat Team Modernization, BCTM, and also finishing up our installation of CityTime. We also saw reduced demand for materials under existing programs, lower ramp-ups on recently awarded contracts and slippage on new award decisions. These 3 elements are indicative of the ongoing stressed business conditions in the government acquisition process, which in our view did not materially improve since the passage of the government's fiscal '11 defense budget in April. On the positive side, the revenue decline did not have much of an impact on operating profitability, where performance and relatively stable labor-based revenues enabled margins above 8%. Consistent with our strategy and our conviction that some of these conditions are temporary, we continued year-over-year and sequential spending increases in business development, in internal R&D to produce business prospects for the long term. Revenue contraction was concentrated outside of our target strategic growth areas, particularly in systems engineering and technical assistance, SETA, and lower-end contracted services categories. We did see growth in some areas. Our energy business grew about 11% and our health business grew about 4%. Our operating margins were 8.1% for the quarter, reflecting strong program performance across the enterprise, a relatively light mix of higher-margin product deliveries and as I said, increased business development and internal R&D costs. As mentioned in the earnings release, we did execute the planned sale of a property in Northern Virginia, resulting in a $21 million operating gain. On the other hand, we reached…

Thanks, Mark. I would like to conclude my written remarks by thanking the more than 41,000 employees who remain focused and dedicated to solving our clients' most difficult requirements. Their dedication and commitments provides the foundation for our continued success. With that, we'll turn it over for questions. Tamica, we are now ready to take questions.

[Operator Instructions] And your first question comes from the line of Mike Lewis with Lazard Capital Markets.

It's actually Mike Smith in for Mike Lewis. A quick question, regarding the guidance. Is there one particular segment that's experiencing more of an impact than the others? Could you talk a little bit about that? And also, finally, on Ground Combat Vehicle, can you potentially quantify any impact to the guidance that you may have?

Mark Sopp here. The industry conditions are affecting all of the segments to varying degrees. I would not say it is greatly impacting one compared to the others. In a large sense, I will say the fed civ market is probably the weakest. And another weak area we are seeing and hopefully we're clear in my remarks are where we have materials on a broad-scale contracts, which exist across our segments. We're seeing particular weakness there from our customers. But that's really the only area I'd focus on the fed civ areas and then the contracted services segments, like SETA as I mentioned in my remarks, with respect to Ground Combat Vehicle, we have excluded revenues from previously planned revenues from that program in this guidance. So it is excluded entirely. It doesn't necessarily mean that we're out of the running, but that's obviously the correct position at this time.

Your next question comes from Mr. Edward Caso with Wells Fargo.

A couple of guidance clarifications. The Vitalize acquisition that closed after the quarter, is that in guidance? And if so, what's the impact?

It is included in guidance, and its impact is less than $100 million.

Okay. And the guidance on operating margin, what would that be now?

We do not provide, as you know, official guidance on operating margin. But consistent with the remarks at the beginning of the year, we don't expect to be materially off of the 8% range. So we're fairly consistent with that from the beginning of the year. Consistent with my remarks, much of the revenue shortfall, both year-to-date and the risk we have in the second half is materials at lower fee. So we don't see a dynamic range in operating profitability compared to the range you see in the revenue guidance.

Great. Organic growth, I think, before was 0% to 4% positive. What's the implied organic growth now, please?

The guidance range is minus 1% to minus 4% internal growth, or I should say minus 4% to minus 1% depending on where you start.

Previously on the DSOs, you talked about a normal level of about 70 days. There's obviously been a big -- it's been trending up but a big shift year-over-year. Could this be a new permanently higher level given the audits and things like that? Or do you sense it moving back down toward 70 days?

Our expectation that is to be around 70 days, and the current conditions are temporary. It's just a question of how long.

Your next question comes from the line of Mr. Cai Von Rumohr with Cowen and Company.

So you said you're not out of the running on GCV. Have you protested and so that's still pending? Or kind of what did you mean by that?

Yes, we have protested, and that's still pending.

Okay. And then so you've taken the revenue guidance down. But kind of as I look at the numbers, if I used the midpoint of your guidance, it looks like if margins hold at where they were in the second quarter, that you'll come in at around $1.38 at the upper end of your estimate. And yet you said security sales should be higher in the second half. You also said that one of the areas of weakness is material, i.e., pass-throughs which are lower-margin business. So it kind of looks like the margins are more disappointing than they should be for the level of revenues you're getting to. Can you give us some help in understanding that?

Sure, Cai. I would say that our margin view in the second half, as we wind up the year in this environment, within the guidance is conservatively stated. But that said, there are a couple of elements you should understand. First we do expect to increase indirect spending in the areas of business development and internal research and development in the second half at a pretty good increased pace. Secondly, we do have some program starting up that are new and large and long term that historically have lower margins at the beginning side of the equation, like Vanguard and others. And we're also winding down some programs that have had very attractive margins over the history, BCTM being one of them but others as well. And so that reflects a little bit of a headwind there. Other than that, the security products will indeed help us in the second half as we earlier said. But there are these other factors that we have to consider giving us the more cautious view. Hopefully, we'll outperform and beat it.

Okay. And then last one on CityTime, can you give us some sense as to where you are in negotiations with the city and kind of the District Attorney? And kind of what's the timeframe over which we should expect this might get resolved? And kind of what are the things we should look for, to give us some comfort that it's getting out of the way?

Cai, I could simply say that we continue to work with the ongoing investigation in the U.S. attorney in New York. It would be still premature for us to comment as to when or what that final stake will look like, frankly because the process would probably take a little longer than we originally thought that. But by the same token, we want to make sure it is thorough and that our views get properly considered. And frankly at this point, it's probably too difficult to handicap either the time or outcome.

Can you give us sort of range? Are we talking 3 to 6 months or 2 -- I mean sometimes with claims, things go on for years and years, and this is after 12 months?

No.

Your next question comes from the line of Mr. Robert Spingarn with Crédit Suisse. Robert Spingarn - Crédit Suisse AG: You've seen declining growth across the board here. Walt, maybe you can talk about the growth lanes a little bit more. You touched on this in the monologue. But even here, we're seeing pressure. Is there any growth anywhere?

No. Well, we are seeing growth as we commented in our health IT segment and in our energy segment. We think notwithstanding a onetime situation from last year in the second quarter, a material element, M&S element, our ISR business would have been growing. So we still think that the areas that we have identified as higher growth areas will continue to be higher growth. What I think we didn't fully account for is that I think the uncertainty in the business environment really impacted our fed civ sector. It was down significantly, and as we've experienced declines in our seat of business over the last 18 months, we saw a decline there that was probably more significant than we would have anticipated. So the areas that we've identified frankly 2 years ago is areas that would, we believe would be enduring and have higher growth potential, continue to be the ones that we've pointed out: health IT, energy, national security in the form of C4ISR and our logistics readiness state. And of course, we continue to see progress in our cybersecurity area. Robert Spingarn - Crédit Suisse AG: So just a couple of follow-up questions on all of that. Should we think about the minus 1% to minus 4% that Mark talked about before? How do we put that into context then on a longer-term basis, given that you've got these big headwinds in some of the larger core legacy businesses against the growth in the areas you just spoke off? How do you think about the long-term growth compared to those numbers for this year?

Rob, Mark here. We do believe, although it's hard to quantify, some element of what we're experiencing is temporary due to the uncertain unstable funding situation. And hopefully with Congressional actions here in the fall and beyond, we'll have, albeit flat line or nominally decreasing, a more stable environment. And in that scenario, we do expect that this area that we've called core in the past -- in our dialogue with the investor community, will contract and it will contract in the single-digit arena. Where within that space, hard to tell. But to Walt's remarks, we think that ISR, and even C4ISR, as well as the energy, health, and cyber areas can see positive but probably single-digit growth, probably mid-, low- to mid-single-digit growth, although we think that health and energy could exceed that. And so collectively, we view outside of the temporary conditions to still have reasonable expectations for single-digit positive growth for the enterprise once we are in a more stable condition. Robert Spingarn - Crédit Suisse AG: Okay. And then how should we think about, based on all of that, what can you say with expectations on book to bill for the rest of this year? And to what extent might that be influenced by another CR?

Well, I think -- we think the CR is inevitable. We think even at the agreed debt deal, even if you had an Appropriations Bill, it would be essentially at the same level in the defense side as we're seeing in FY '11. With regard to book to bill, we still believe even under a continuing resolution, which by the way, we described back in the last quarter and at the beginning of fiscal year we thought was probably going to be upon us. We still see our book to bill to be 1.0 to 1.1 for the year. Robert Spingarn - Crédit Suisse AG: Okay. And then last as I just finish here, what's your forward M&A and share repurchase strategy? Any update there?

No update there. We will continue to look for economically attractive and strategically consistent bolt-on acquisitions in those higher-growth areas. And we will use capital to deploy there in a mix with share repurchases, based upon the opportunistic nature of M&A.

And your final question comes from the line of Mr. Jason Kupferberg from Jefferies. Jason Kupferberg - Jefferies & Company, Inc.: So I just wanted to talk a little bit more about the guidance for fiscal '12 in the revenue side. If my math is right, at the midpoint of the new guidance range, I think you need to average about 4% sequential revenue growth in each of the last 2 quarters of fiscal '12. Usually, historically at least, your Q4, the January quarter, is a down quarter from a sequential basis. So is there reason to believe that, that trend will reverse this year, based on perhaps product shipments or some other trends you see in the business? I just want to test some of the conservatism, if you will, around the midpoint of the new guidance in the context of sequential growth rates that we're used to seeing historically.

Yes. Jason Kupferberg - Jefferies & Company, Inc.: It's product-related?

As we started the beginning of the year, we explained that our products-oriented business was going to be more back-end weighted. And even though we aren't quite where we wanted to be in the first half, we still expect to see that, those product shipments come in at the end of the year. Jason Kupferberg - Jefferies & Company, Inc.: Okay. And is Vanguard meeting your expectations so far in terms of ramp? And any update on when it will it will be at a full run rate there?

Yes. Jason Kupferberg - Jefferies & Company, Inc.: When do you expect it to be at full run rate?

Let me think about that for a second. Probably by the second quarter of next year. Jason Kupferberg - Jefferies & Company, Inc.: Of fiscal '13?

For fiscal '13, right.

Okay, got it. And then just the last one here, to build on your previous comments around M&A, which sound like they're basically the same thing you guys have been saying for a while, opportunistic, more bolt-on type stuff. I mean what's the biggest inhibitor to you guys doing a larger acquisition? Is it more because of OCI concerns, valuation, other factors? I'm just wondering because it feels like with the fundamentals getting a bit tougher here, there might be a little bit more pressure, if you will, from some elements of the investment community to get a bit more aggressive with the balance sheet in some way, shape or form, obviously while remaining prudent. But just wanted to get a sense of what would hold you guys back from doing a larger acquisition that could help revive your top line.

Valuation for the most part, and that we still see some extraordinary prices being paid for properties. We're looking for things in the same area that other people are looking for things. And frankly, you have to convince yourself that even in the high-growth areas, there is sufficient synergy to pay the premiums that are necessary in an acquisition in a takeover kind of take -- control takeover kind of situation. That's predominantly the thing that frankly limits our taking on bigger things. And having said that, those things that, large or small, that we think have strategic long-term implications for growth for the company, I can assure you, they are getting considered and we will be appropriately aggressive to bring those properties to SAIC.

You have a question from the line of Mr. George Price with BB&T Capital Markets. George Price - BB&T Capital Markets: Many of my questions have been answered, but I did still have a few. First of all, I just wanted to ask a little bit more on the DSOs. You mentioned some holdbacks related to a DCAA audit activity. Can you give any more color on that? Is that anything that has any future applications? Or is that something more standard?

I can't comment if it's a long-term condition. We don't expect it to be. But we and the others in the industry are undergoing, as you know, rigorous and lengthy audit programs. And every audit we are under is taking much longer and is, for the most part, unresolved at this time, just because it takes longer. And in some cases, we have agreed to withholds to allow for the overall billing processes to continue with a minor hit to us on the cash flow side, which gives the government a little bit of protection in light of not having reached conclusion in some of the audit areas. So a deal was struck. We think it's in the best interest of both parties to do that so business can continue. And hopefully they will wrap up their audits in a more expedient manner so that we can get back to normal. But that is not to mean in any way that our relationship is negative. In fact, these were open discussions that, I think, reached a good conclusion to allow us to proceed with the bigger the dollars. George Price - BB&T Capital Markets: Okay, okay, fair enough. And I apologize if I missed it, but can you comment at all maybe on for the third fiscal quarter. Given the environment, what kind of typical seasonal trend do you expect, in terms of quarter-over-quarter revenue?

Quarter-over-quarter, while we still expect the third quarter to be, as history has shown, our highest quarter of the year in revenues. Although as Walt remarked earlier, we think that will largely be sustained in the fourth quarter, sequentially. I think the year-over-year numbers are consistent with the guidance we've discussed earlier. Still the range implies we think we'd probably be in the negative territory in terms of organic growth, but nonetheless better than Q2. George Price - BB&T Capital Markets: Okay. And then just kind of lastly may be explain a little bit more the environment that you're seeing in the short term this quarter and next. I guess could you talk a little bit about your award and funding activity assumptions? How you think things are going to flow through the remainder of GFY '11 and then to the early parts of GFY '12? You did mention that you assume we'll start off with a CR. I don't know if you have any thoughts on how long that situation will progress. But if you could talk about that, talk about maybe again to the end of GFY '11, seems like the spigot's open but not all the way, does everything get obligated, that sort of thing.

Yes, we're seeing some areas where we're starting to see a slight pickup. Other areas continue to be flat. I think for budgeting purposes, I think the budget that the government will have is going to be pretty well understood especially under a CR. It's going to be essentially what we have in FY '11. I think that the -- and we expect that decisions will start to increase. When we look at the amount of decisions that were made in the first half of the year on big programs, and there were about 30 programs in the first half of the year that got decided, which we did very, very well on even though they may not have ramped up as quickly as we would have liked, we see a significant higher number of pending decisions, almost 2:1 in the second half of the year. Now again, we expect those decisions get made. But if the ramping up doesn't, if that condition doesn't change and what we've assumed here that there is no change in that condition, that is what's kind of predicating how we think about revenue in the second half. So we think it's not just a case of the budget and the funding. It is a case of both the willingness and ability of converting those wins into revenue and having active contracting and the government's willingness to let that funding go. And so we've got a lot of good indicators. But we've tried to say, "Hey, if nothing changes on the funding of existing programs and new programs from what we saw in the second quarter, then that has shaped our thinking around guidance.

And we have a question from the line of Mr. William Loomis with Stifel, Nicolaus. William Loomis - Stifel, Nicolaus & Co., Inc.: Just to follow up on George's line of questioning, so just -- I guess I'm still not quite clear what gives you confidence. Because in fiscal '12 in terms of the back half of your year, because we'll start fiscal '12 with a continuing resolution. We're kind of in this fiscal '11 continuing resolution. But you're still going to have the same uncertainties in fiscal '12 in terms of probably being a series of short-term continuing resolutions. We're going into the elections next year, so that's going to carry some uncertainty. And we have, of course, have the November 23 date and what's going to come of that. If the government's not willing to fund on fiscal '11 money that was already passed in mid-April, why believe they will on fiscal '12 money?

Bill, good question. The fact of the matter is we've not assumed that they are going to be more effective or less uncertainty in that regard for the balance of this -- of our fiscal year. We have said that if the conditions that we saw in our Q2 don't change, all right, that we've expected that. And that's what we use as the basis for our guidance. Having said that, we kind of said last quarter that we expect that even under a CR, things will start to stabilize. But that will take to the balance of this year. And our expectation is that by the end of the first quarter of this fiscal year, those issues related to November 23 and the subsequent establishment of priorities around those decisions will kind of be behind us. And even if we end up for all of FY 2012 under a CR, all right, that CR will be essentially at the levels we are now. And we think that in and of itself will start to stabilize things come to the end of the first quarter of FY '12, government FY '12. William Loomis - Stifel, Nicolaus & Co., Inc.: Okay. And then just looking at fiscal '11, that budget, I mean from a numbers standpoint to fiscal '11 under CR still had good numbers attached to it. Where is the money going, if it's not getting -- if you're not seeing programs funded? Is the customers giving those funds back? Or where are you seeing the money actually go? Is it just extensions on existing work?

There are some extensions on existing work. But from what we can tell, there are some dollars that aren't not getting obligated. And frankly we would hope, I hate to use that word here in this town. We would hope that funding would flow here in the back half of the government fiscal year. We just didn't see that over the last 3 months. And that's -- and to assume that it will, I think, is imprudent. And so that's kind of shaped how we think about our guidance for the balance of this year.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Paul Levi, Senior Vice President of Investor Relations.

Thank you, Tam. On behalf of the SAIC team, we want to thank you for your participation today on the call and your interest in the company. That concludes our call for today. Thank you.

Thank you Mr. Levi. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect, and have a great day.