Paul E. Levi - Senior Vice President of Investor Relations John P.

Jumper - Chairman, Chief Executive Officer, President, Member of Classified Business Oversight Committee and Member of Ethics & Corporate Responsibility Committee K. Stuart Shea - Chief Operating Officer Mark W.

Sopp - Chief Financial Officer and Executive Vice President

Ross Cowley - Crédit Suisse AG, Research Division William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division Jason Kupferberg - Jefferies & Company, Inc., Research Division Cai Von Rumohr - Cowen and Company, LLC, Research Division Joseph B.

Nadol - JP Morgan Chase & Co, Research Division George A. Price - BB&T Capital Markets, Research Division Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Thank you, Vince, and good afternoon. I'd like to welcome you to our first quarter fiscal year 2014 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 as well. 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'll 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 welcome, everyone. The first quarter of 2014 was relatively in line with our expectations with revenues of $2.71 billion for the quarter, down slightly to the prior year quarter.

This represents an internal revenue decline of 4%, primarily due to the loss of the large DGS contract and ramp down on the war-related OCO work on a JLI contract, which together reduced our revenues by more than $100 million. The revenue performance also reflects the impact of sequestration, which is driving delayed decisions and imposing significant fear and caution throughout the contracting process.

Operating income was lower than the prior year, due mainly to $40 million of costs for the separation and preparation of 2 stand-alone companies, and our operating cash flow was negatively impacted by the earlier-than-expected discontinuance of an accelerated payment program by the government. Having said that, our performance was mostly as we expected and our previous guidance anticipated many of the current challenges.

Today, we are reaffirming the guidance that we outlined in our March call. Looking forward, uncertainty over funds -- over funding remains, but there is still little that our customers can tell us about what to expect and over what period of time.

I, along with other CEOs in this space, have been engaged with leadership of the Pentagon who, I must say, have gone out of their way to conduct frequent meetings with industry leadership. Along with others, I have emphasized the need to work the necessary fiscal discipline in a more reasonable way with debate and compromise rather than mindless across-the-board cuts.

At SAIC, we are proactively responding and taking the necessary steps to manage the business in the current difficult environment. Our $350 million cost-reduction plan is progressing well and we continue to adjust our infrastructure to ensure that we have the right-sized business to address our revenue base.

Our strong balance sheet has and will effectively support our ongoing development of the company. We remain thoughtful about how we deploy our capital, as evidenced by the special dividend that will be paid out on June 28.

As always, we approach all of our capital deployment efforts with a view toward maximizing value for our shareholders. Our planned separation is progressing on schedule and will yield 2 cost-conscious, high-performance companies that focus on driving value to our shareholders.

We're still operating as one company and focused on making our plan for the year. However, we are in a transition year and incurring significant cost to prepare for the companies to be successful following separation.

We are pleased to announce a new National Security Solutions leader, Lou Von Thaer, who Stu will discuss in his section. Lou brings a career of experience and talent to that sector, and we are delighted to welcome him.

Also, we have John Sweeney on the call with us today, and he'll be heading up Leidos Investor Relations efforts. The leadership team for both companies is substantially in place.

Now I'll turn this over to our COO, Stu Shea, who will discuss business performance.

Thanks, John. Let me first comment on the appointment of Lou Von Thaer as our new President of the National Security Sector.

Lou has the benefit of coming into an organization that has been expertly led by acting President John Thomas. Over the past 6 months, John has done an exceptional job shaping, streamlining and focusing that sector for the future.

This includes the establishment of a much improved sharing of key-enabling technologies such as Big Data analytics and cybersecurity across our full portfolio, with specific focus on bringing these solutions to the Health and Engineering Sector. This is a key building block in the future success of Leidos.

In addition, John's energy at market positioning and core strategic focus areas of maritime ISR and cybersecurity lay the groundwork for Lou's day 1 efforts. Lou brings to legacy SAIC and future Leidos, a strong background in both these key areas.

As an example, Lou served as a cochair of the recent Defense Science Board Task Force on Resilient Military Systems and the Advanced Cyber Threat. Combining his firsthand knowledge of the cyber threat with our existing market leadership in the cyber community will be a powerful combination for our shareholders.

I look forward to Lou's arrival later this week to begin that process. Let me now bring you up to speed on our separation of SAIC.

Some of you may have been tracking our progress this quarter through our initial and updated Form 10 submissions with the SEC. Based upon that dialogue, as well as with other regulatory organizations, we believe there are no significant issues that would affect our planned separation.

From a programmatic perspective, most of the difficult internal decisions have been made on cost efficiencies, capital allocations, staffing, facilities, et cetera, and we are nearing completion of all the various internal agreements to separate into 2 companies. We are right now in the separation part of the program we call soft spin.

Over the past quarter, we reorganized legacy SAIC into the future state of the 2 new companies, so the leadership teams could start working together prior to the formal hard spin date. This will lower operational risk of the separation without impairing current SAIC performance.

When we made the separation announcement last August, we said that we would complete the separation during the second half of the 2013 calendar year. I am pleased to report that the separation could happen as early as August.

Assuming we remain on this schedule, we are planning for investor events and additional activities, such as ringing the bell at the New York Stock Exchange to celebrate the launch of 2 new companies. Before the planned separation, we intend to hold investor conferences for both Leidos and new SAIC, where each management team will present details about their respective companies' current operations and future plans.

These conferences for institutional investors and analysts are planned to be held in New York on July 17 for Leidos and July 18 for future SAIC, and more specifics will be announced soon. This is, of course, all subject to the final regulatory approvals, as well as around readiness reviews and board approval that will be held over the coming weeks.

Moving now to real estate monetization. On May 3, we entered into an agreement for the sale and lease back of our McLean, Virginia headquarters campus, consisting of 4 office buildings of about 900,000 square feet, and the sale of adjacent land, 18 acres in all.

The sale and lease back of our headquarters facility is expected to be completed in July of 2013, with the sale of the adjacent land to be completed over a 6-year period as part of a multiuse development plan to be approved by Fairfax County. The transactions that will be completed under the sale agreement are the result of our long-term real estate monetization strategy put in motion by our Board of Directors several years ago.

Completing the sale of our headquarters facility is also another step that will help us to enable both Leidos and future SAIC to establish operational headquarters that are specific to their business needs. This is consistent with our approach to have successful, independent and world-class firms in the future following our planned separation.

Moving now to our business development results. Net bookings totaled $1.3 billion in the first quarter and produced a book-to-bill ratio of 0.5.

We ended the quarter with $16.5 billion in total backlog, $4.7 billion of which is funded. Compared with Q1 a year ago, this was a $700 million decrease in total backlog.

As we expected, award decisions and the result in pace of bookings from our U.S. government customers slowed considerably in the quarter, reflecting the understandable reaction to the lack of sequestration guidance from government sources.

This has been exacerbated by the inconsistency in how individual government agencies have been implementing that guidance. This is especially problematic in how these cuts are applied to every program, project and activity, or PPA in the budget, when there is significant variability in the size and mission criticality of these PPAs across various budget line items under the authorities, for example, of the Department of Defense, Intelligence Community, State Department and Department of Homeland Security.

As John mentioned earlier, we are tightly integrated into the leadership discussions that are ongoing, and from an operational perspective, we continue to expand our pipeline and demonstrate the relevancy of our offerings. So despite a strong qualified pipeline of opportunities and a steady pace of submits, we did experience the same softness as others in our industry did on the pace of award decisions.

Despite the slowness in awards, by the end of the quarter, we had over $24 billion in outstanding bids. That includes $13 billion in ID/IQ bids and about $11 billion in definite-delivery bids.

As we are not seeing any significant increase in the cancellation of known new starts or outright terminations of contracts, we're optimistic that contract issuance will pick up as we move through the rest of the year. During the first quarter, we won 3 programs valued at more than $100 million each, including a significant modeling and simulation experimentation effort under the AMCOM EXPRESS ID/IQ.

So far during the second quarter, we've added 2 more $100 million programs, including a program with Orange County, California, to provide IT managed services and solutions to agencies and departments within the county and a classified cyber intelligence program critical to our nation's security. Frankly, our performance against this goal was less than what we expected a year ago.

And we attribute the decline to fewer decisions being made on all programs due to sequestration and future budget uncertainty. At this time, we have over 110 opportunities over $100 million in our pipeline, of which, 43 have already been submitted and are awaiting award.

Over the years, as we have continued to expand our markets, we have experienced a very consistent win percentage on proposals. As we eliminate organizational conflict of interest, we will continue to expand our addressable market and fully anticipate our successful win rate will continue.

We have continued to earn excellent win rates in Q1. Our overall total dollar win rate on opportunities was 58% with a 47% total dollar win rate on new business.

When coupled with our very strong win rate on recompete bids, we are in a solid position for our upcoming pipeline. With that, let me now turn it over to Mark.

Great. Thank you, Stu.

I'd first like to call your attention to the supplemental financial information package that we've added to our website this quarter. This package will provide the investment community most of the pertinent highlights of our performance for the quarter in one place.

This is part of our ongoing effort to provide transparency and clarity into the business. In addition, as Stu mentioned, we have reorganized the business to align to what will become new SAIC and Leidos.

Specifically, starting this quarter, the Technical Services and Information Technology reporting segment will comprise the future SAIC, post-separation. And the National Security Solutions and the Health and Engineering reporting segments will together comprise Leidos.

The operating segments now give investors a clearer view of the new SAIC and Leidos. With respect to our Q1 performance, there are 3 main points I want to convey.

First, the consolidated numbers are down year-over-year on the main financial metrics, but there were discrete adverse items in revenue, margins and cash flows, which we believe are either temporary or recoverable and should be considered in the context of future performance. Second, we are in a transition year, as John said, where we are incurring substantial cost now to build 2 great companies, which will be more competitive and will have greater addressable markets in the future years.

And third, notwithstanding the magnitude of dealing with sequestration and our separation preparation activities, we are so far on plan for the year and are reaffirming our guidance. Now let me cover some of the highlights as well as our forward guidance.

With respect to forward guidance, let me first remind you that our guidance, as it did originally, assumes SAIC operates for full fiscal year '14 as one company, the one company as you know it today, but this guidance also include significant costs to prepare for and execute the separation transaction. So that's the baseline of our guidance.

On top line, performance for the quarter, our government business contracted in Q1 but was partially offset by solid growth in our Health and Engineering business, which had significant commercial revenues that are not directly affected by reductions in government spending. As our plan and guidance contemplated, revenue contraction was significantly attributed to the ramp down of the DGS and JLI programs in our government sectors.

The DGS program was assigned to the future SAIC business and is therefore reflected in the Technical Services and IT segment, whereas the JLI program was assigned to Leidos and is in the National Security Solutions segment. Both companies will, therefore, have to overcome contraction from these 2 programs over the next year.

The tech services and IT segment had revenue contraction in Q1 of about 5%, virtually all of which was attributable to the ramp down of the DGS program. The National Security Solutions segment had revenue contraction of 9%, about 6% of which was attributed to the JLI program, with the remainder mostly being scope reductions related to the Middle East drawdown and various budget reductions that we have planned.

And with respect to our increasingly important business outside of the government sector, our Health and Engineering business posted 9% growth, fueled, this quarter, by energy projects and security product revenues and ongoing growth in our electronic health records, consulting business. While we did see delays and uncertainties in new awards and in funding levels through the first quarter, we did not see any major unplanned impacts to existing programs associated with sequestration.

What we do see is ongoing confidence that the mission-critical programs that we serve throughout the national security space must continue to operate and with our assistance. Given our experience in Q1, we are reaffirming our existing revenue guidance of $10.0 billion to $10.7 billion for the full year, which reflects all the signals we are getting from our customers plus some room for unknowns that we may confront.

With respect to timing, we expect a meaningful falloff in revenue pace from Q1 to Q2, resulting from 2 less productive days and seeing the full impact of the ramp down of DGS and JLI. We then expect sequential growth in Q3 for more productive days, ramp up from recent and anticipated wins and continuing growth in our commercial area.

Operating margin for Q1 was 5.2%, reflective of the transition year we are now in. Separation expenses diluted margins by roughly 120 basis points.

In addition, profitability was adversely impacted by about $7 million in cost to build the infrastructures for the 2 companies. We still expect to incur, as announced last quarter, $140 million of nonrecurring expenses related to the separation, facilities' exit costs and the corporate move; no change to that.

These expenses are expected to peak in Q2 as we near separation, and therefore expected to have a material impact to margin in Q2. Assuming the separation occurs when planned, these costs should ramp down quickly in Q3.

In the first quarter, we also had net program write-downs, a couple of charges related to legal matters and government audits, few asset impairments and cost to integrate our 2 commercial electronic health records consulting businesses: Vitalize and maxIT. Our plan contemplates that these go away after this quarter.

Earnings per share from continuing operations was $0.23 for Q1. This included a tax rate which was about 4 percentage points higher than what we project for the full year due to discrete nondeductible items.

Our estimated tax rate for the full fiscal '14 is 32%, which is about 1.5% higher than our original expectation, or about $0.03 EPS impact for the year. This was due to the nondeductible items in Q1 and some slippage of planned favorable items to next year.

With guidance for revenues remaining unchanged and the expectation of significantly improved operating margins in the second half, we are maintaining our EPS guidance for the year at $1.16 to $1.33 per share. For operating cash flow, as John mentioned, the first quarter was weaker than expected as the government ended an accelerated payment initiative, whereas this was originally planned to occur in Q3.

This does not change our view for the full year and our guidance remains at, at least $450 million. Finally, let me just cover a few capital structure items.

First, we amended our $750 million credit facility this quarter to address elements needed for the separation transaction, and while we were at it, we are incorporated several other favorable terms and also extended the maturity to 2017. Second, we successfully launched a capital-raising activity for new SAIC, where we plan to establish a conservative capital structure to include a $500 million, 5-year term loan and a $200 million 5-year revolving credit facility.

We expect to close those arrangements in June and plan to fund the term loan just prior to separation. And third, as previously disclosed, we will be paying $1 per share special dividend on June 28 for shareholders of record, June 14.

All 3 of these actions underscore the cash flow and liquidity strengths of the company, which will enable strategic flexibility and future capital deployments with a focus on creating value for our shareholders. Now back to John for his final remarks.

Thanks, Mark. Let me sum up by saying that we remain confident in our plan, we understand and we're dealing with a combined turbulence of sequestration and the dynamics of separating our company and we have 40,000 remarkable employees dedicated to the future success of these 2 great companies.

I'll now turn it back over to Paul to take your questions.

Thanks, John. Operator, we'll take questions.

This is actually Ross Cowley in for Rob. I have 2 quick questions.

On the first one, specifically looking at Health and Engineering, you had nice growth of around 25% there and the margin came down. Now I know you said in the 8-K that some of this was because of intangible asset amortization expenses.

But is it possible to break out how much of the pressure is related to the spin and how much is related to things such as greater competition, et cetera?

Well, Ross, this is Mark here. I did mention in my prepared remarks that the health businesses, we did make some steps to integrate the previous Vitalize acquisition, as well as the recent maxIT acquisition.

And so that was pretty meaningful in the quarter and nonetheless, the right thing to do. On the engineering side, we had strong performance overall, I would say, and good energy or engineering products going out the door as well and also including -- give Joe a lot of credit, a healthy maintenance business was part of that, which has been very profitable for us.

So a little bit of investment, very bullish on the long-term prospects of both growth and prosperity in that area.

Okay, great. That's very helpful.

And just one more, is it possible to quantify the mix of cost plus versus fixed price contracts in each of the 2 new businesses, in Leidos and SAIC?

Mark here. Give us a check into -- check that out.

Yes, why don't we come back to that question in a moment? We have it for the consolidated business, of course, in the sectors.

But we like to redo it for Leidos and new SAIC for your question.

By just staying on the engineering and health care side, Mark, can you give us kind of what the breakout is between the engineering and health care because if engineering was strong, organic growth 9% because I know the health care was growing at like 20% or so, but it seems like it might have slowed down in the quarter. Am I reading that right?

The both -- both of our businesses were fairly equal in terms of growth rates this quarter. The commercial health was just south of 10% and engineering was similarly strong, obviously.

So that's how it shook out this particular quarter. I still think we're seeing in some pause in the marketplace on the commercial health side as a result of the extension of the ICD 10 and Meaningful Use regulations that went from August 2013 to August 2014, and also the 2% haircut to Medicare reimbursements via sequestration might also be attributing to some of the pause.

But nonetheless, the regulations are in place. We think the industry is compelled to invest in modernizing its IT and its EHR implementations accordingly.

So it might be a short-term pause but nonetheless, very bullish on the outcome for this year and beyond.

And then just in that, on the national [ph] , can you tell us since you put the MRAP business in that, which will be in Leidos, how much of that segment now would be either -- would be both Army and then specifically OCO work, so we understand when it goes to Leidos what it would be for that firm?

Bill, we'll have to work on that one. We don't have that on our fingertips.

When we have our Investor Days in July, I think we'll provide plenty of color on the composition and revenue stratifications of the businesses, so I think it's best to hold off until then.

So just on the book-to-bill, obviously, not surprising to see sequestration taking its toll on everyone in the industry. But just give us a sense of what your latest expectations would be for full-year fiscal '14 on book-to-bill based on what you're seeing in the pipeline here?

Jason, this is Stu. As you know, book-to-bill ratio varies considerably on timing of new orders and it can fluctuate meaningfully quarter-by-quarter.

As you mentioned, we're seeing the same thing everybody else is in terms of customer change, in terms of their buying habits. Our goal is always to get towards 1 and above 1.0.

It's a tough uphill battle this year right now. What we're seeing, though, is a little bit of a change in how customers are funding activities.

They're funding shorter increments and smaller funding levels, which of course, will have less of a predictive nature on how that converts to revenues in the future. So we're taking a hard look at that, trying to really understand the nature because we're seeing a pretty significant change in that funding style.

Right, right. Okay, understood.

And just thinking about the full-year EPS guidance, the reiterations there, can completely appreciate that and the second half margins should be meaningfully better because as you described the transition expenses should bleed off pretty quickly. But based on where you're at right now, I mean, should we be thinking about the lower end being more likely?

Jason, I don't want to comment on the point in the range where we will be. We're in the range, we're reaffirming that.

I would point out that we see in quarters 2 through 4, a few things improving for us. We have made a number of cost reductions this quarter and last quarter.

The full impact of those cost reductions will benefit the P&L in Q2 and beyond in the core of the business and in the overheads. We do expect that our fee performance across the business on a number of dimensions and actually improve the rate recovery from some of the cost we had in Q1, helping out.

So we do expect margins to improve, not only from the going away of the separation expenses, but fundamentally in the business throughout that will drive much of the performance you see and implicit in our guidance assumptions. And on the EPS side, I'll also point out as I tried to in my remarks, that the tax rate was 36% of the first quarter.

It's going to be more toward 30% flat for the remaining 3 quarters, and that will have quite a bit of benefit to the EPS in Q2 through 4 as well.

Okay, makes sense. And then just last for me.

Any change in your projected revenue or cost synergies from the split?

None at all.

So given that we have a new lineup of businesses that you have now defined, could you give us some numbers in terms of how these 3 businesses sorted out in terms of revenues and operating profits in fiscal '13, since that's behind us?

Cai, we will be providing that not at this time, but either in conjunction with our investor conference that we mentioned in July, possibly after that. But we're going to shoot for July to provide those numbers, not only for the Q1 of last year but, of course, if you want you're probably asking for Q2, 3 and 4 of last year and well, we just completed that.

Well, just give us the full year. I mean, just the problem is Health looks quite a bit smaller than I would've guessed.

I don't know where other people were but -- so if we have a rough sense in terms of where the revenues were, we can have a rough sense of how last year modeled out and basically with some intelligence, hopefully, can kind of look forward. But if we don't have any idea of the size of the 3 businesses or just a fairly vague idea, it's a lot more difficult.

Understand the difficulty. We have expended a lot of effort to do the carveouts, expended a lot of effort to restructure the business and we'll be prepared to provide the full prior year numbers in the July timeframe, possibly slip into August.

There's just a lot of stuff to do in preparation of the separation and we just don't have those other quarters at this time, Cai.

Okay. And then a second one, as you look at the -- you mentioned, Mark, lot of things in addition to those -- the $9 million you called out.

You mentioned other kind of adjustments, higher intangibles. Maybe you could walk us through the major other items that have not already been laid out in the quarter?

I trust you are -- when you say "other" you mean, in addition to what we posted on the website?

Correct, correct.

Right, well, I mentioned we did make some investments in our commercial health area.

And so when you say investments, like how big and...

We haven't quantified them there. There is a few million of integration expenses to prepare our Commercial business for the long term.

We also have started incurring the synergy costs in our -- in the building of our 2 businesses that will be more than offset by cost reductions that we have already made decisions on, but won't really start paying off until Q2 through Q4. And we had some program write-downs that were disclosed in the -- will be disclosed in the Q and the earnings release that are not itemized in the supplemental materials.

It's about a year-over-year $8 million swing that had a pretty meaningful impact on Q1 as well.

Okay, great. And the last one, your -- while your book-to-bill was light as everyone else's was, your funding to sales actually held up a little bit better.

Stu, could you hazard a guess in terms of where the funding to sales for the year might be?

Well, let me think about that for a second, Cai.

I think it's reasonable to expect, Cai, that our funded backlog will remain 5 months, maybe 6 months of forward revenue in the environment we see at each quarter end, which has previously been higher than that, 6, 7, even 8 sometimes, but in this environment, as was mentioned, it's coming out in smaller pieces. So we expect a lower number but nonetheless, indicative of the environment and at this point, not changing our view with respect to the ultimate revenue outcome.

Mark, just to sort of -- to make sure I'm on the same page, the $9 million of net items that you delineated on Slide 6, that's all in the corporate line? Or is it embedded [ph] ...

No, that is not -- the impairments are in the appropriate segments. Everything else is in the corporate line.

So NSS is the $4 million and the other $3 million are in corporate?

That's correct.

Okay. And then so -- and then just to make sure I understand what you said, you said $140 million refers to the $33 million of the separation transaction cost in the quarter.

So that will be $140 million in total, $33 million was Q1 and the peak number is in Q2?

Correct.

Okay. And then on the segment margins, I mean, it's -- given a number of investments that here, there were a number of investments that you delineated earlier that are one-off, just when you take a step back and you look at the margin profile for the company, I mean have things weakened over the last 12 months or is this just all noise?

It's really tough to get a great sense of that.

It is and we'll work on making that more apparent to you. But I would say that there is margin erosion from a pure percentage perspective related to the tightening pricing environment.

And it's a meaningful number of basis points. I don't think it's a full percentage, but I think it's a meaningful number of basis points, Joe, for tighter bids, as well as just the replacement of programs that previously were at attractive margins for us, BCTM worked itself out, JLI and DGS were pretty good programs from a profitability perspective.

And they're either going away or replaced by other programs that don't quite have the margin profile. So the lion's share are the investments and costs we're incurring to prepare for separation.

The way out of this in terms of long-term plan is, of course, complete Gemini successfully and focus on driving organic growth on the core business, but also the -- tapping into the incremental addressable market, freed up from separation and a much less stressful OCI situation for us. We've got to continue to grow our Commercial business and also improve our overall product profitability, so those are high priority items.

And of course, execute the cost reductions that we've mentioned, which will benefit all 3 sectors. So that's where we're at as a roadmap and we'll provide more color on that in July.

Okay. Just one more on corporate, if I might.

Not to dwell on that too much, but -- so if -- it's $5 million of items in there, net, plus the $33 million of separations, that's $38 million. You were at $46 million of total expense, so $8 million besides those items.

Is that -- what's the run rate of that line item x the items?

Well, there's stock option expense in there. There are the unallowable cost of the enterprise outside of the sectors.

You can probably imagine what those are. So those are in there and we have our corporate move is in there, which will be for one more quarter.

Those are the major elements there.

Okay, and then one more and I'll move on. I'll turn it over.

The interest in your EPS guidance, are there any positive one-time items that you're contemplating or is it just -- is there anything else in there that we haven't really discussed that's going to enable you to get to your range?

Good question, the answer is no. We don't have any buybacks, we don't have real estate gains.

It's all pure operations improvement. The phaseout of the separation expenses and the improvement in the tax rate that I mentioned earlier.

A number of them have already been asked thus far, but a couple on, I guess, the broader environment. First, I just wanted to be clear, have you seen any change, I guess, even though in the past couple of months in terms of the pace of award decisions, given sequestration?

I mean, some have talked about, actually on the other side of the CR and the appropriations where we got them, and the fact that we finally saw the sequester date come and go that the activity had actually started to pick up a little bit. I guess, the tone of how you characterize the environment struck me as maybe a little bit of a step-back possibly.

Am I reading too much into that? Have you seen any dramatic changes, I guess, over the last couple of months?

George, this is Stu. I guess the biggest thing we're seeing is a slowness in the award decisions.

That's what I try to convey in my part of the dialogue. We're just seeing a lot of indecision.

We're not seeing any dramatic shift in terms of program terminations, cancellations, reductions, but we are seeing an absolute slowness in the award decisions. One of the things we talked about last quarter was this idea of LPTA and the impact on the business.

Again, we're not seeing any dramatic across-the-board cuts on pricing and movement in a significant way into LPTA kind of awards, but we are seeing customers shifting their decision towards more low price. And of course, as we mentioned in the past, being able to define technically acceptable is always a challenge.

So there's always broad kind of activities happening, slowness in decisions, more towards low price, but nothing that stands out as significant in terms of dramatic shifts over what's really been happening in an evolutionary fashion over the last couple of quarters.

Okay, okay. And then one sort of one on the commercial market side, piggybacking onto an earlier question.

In terms of health care and energy, I was wondering what kind of growth you expect to see from those areas in fiscal '14? I think you mentioned there both year-over-year in the quarter we're running at about 10%.

Is that about what you expect going forward? Do the comps come down a little bit more?

Anything you'd offer there would be great.

The organic growth that we have slated for the HE segment, Health and Engineering segment, is in the low-single digits for fiscal '14. Commercial health being well above that, but we've got environmental business in there and the products business that has nice profit characteristics, but I'm not seeing the growth there this year.

Just the first one is going back to the awards expectations. Do you think that there will be the normal seasonal flush in the government's fiscal fourth quarter?

And is it possible that it could be even higher than normal? And do you get the sense that clients held back maybe more than I should have ahead of the sequestration?

I think that's wishful thinking. And we all have discussed it.

I think you're going to see a clearly end of fiscal year flush probably not dissimilar from what you've seen in previous years. But there's a lot of pent-up dollars that are not being expended, and you could see a dramatic change.

We're not counting on it. We're counting on a very traditional year-end flush of funding.

That's very helpful. Then just the next one is you talked about some higher margin programs running off with pricing getting tighter and maybe an evolutionary shift towards LPTA.

I mean, any sense for where we are in the pendulum swing of moving away from best value towards LPTA and when you might see that kind of mindset reverse in your government clients?

Let me -- this is John. Let me start with that and Stu can chime in.

We've been through these cycles before. And as Stu pointed out, there's really not a lot of formal LPTA.

We talk a lot about LPTA, but there's not that many formally defined as LPTA. We're just seeing the behavior more reflect price than you would expect.

But these cycles have changed because, again, it all comes down to what's technically acceptable and the more that you get some contractors that are having more difficulty performing, the more you see the pendulum swing back the other way. So there's so much other uncertainty out there right now, it's hard to predict what that cycle might be, but we have seen this before.

Yes, if you go back a couple of weeks ago and you think about the big shift from cost reimbursable contracts to fixed-price contracts, it was the way to go because they -- you could set a limit and move in that direction. We saw a big shift in some parts of our business.

We're now, in some parts of our business, in just the opposite. We're going from big fix-priced programs that were very successful to cost reimbursable contracts.

And of course, the margin on the cost reimbursable contracts, if you execute the fix-priced version very well, are not as favorable on the cost reimbursable ones. So that's one of the changes we're seeing as well.

We have -- thank you very much. I'd like to thank you all for your interest in SAIC and participating in the call today.

I wish everybody a good evening. Thank you.