SAIC FY2017 Form 10-K Summary
Business context and reporting period
Science Applications International Corporation (SAIC) provides technical, engineering, systems integration and enterprise IT services, primarily to U.S. government customers. This 10-K covers the 53-week fiscal year ended February 3, 2017; the prior comparable year was 52 weeks. The filing also reports fourth-quarter results. More than 95% of annual revenue was attributable to U.S. government prime contracts or subcontracts, and the U.S. Army and Navy generated 28% and 13% of revenue, respectively.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $4.450 billion | $4.315 billion |
| Operating income / margin | $271 million / 6.1% | $227 million / 5.3% |
| Net income | $148 million | $117 million |
| Diluted EPS | $3.22 | $2.47 |
| Cash from operating activities | $273 million | $226 million |
| Adjusted EBITDA / margin (non-GAAP) | $330 million / 7.4% | $309 million / 7.2% |
Fourth-quarter FY2017 revenue was $1.026 billion, operating income $61 million, net income $36 million and diluted EPS $0.79; fourth-quarter FY2016 figures were $1.071 billion, $54 million, $28 million and $0.60, respectively.
At year-end, cash and cash equivalents were $210 million, total current assets $901 million and current liabilities $615 million. Debt principal was $1.060 billion ($1.047 billion net of issuance costs), versus $1.087 billion principal a year earlier. The $200 million revolving facility was undrawn. The company reported compliance with credit-facility covenants and held interest-rate swaps covering a substantial portion of variable-rate debt. Operating cash flow exceeded dividends paid ($54 million) and cash used for share repurchases and equity-award withholding ($180 million).
Changes versus the prior comparable period
- Reported revenue increased 3%, but management’s non-GAAP internal revenue measure contracted 1.9% after adjustments for the acquired business, former-parent work and the extra fiscal week. Revenue benefited from Scitor, new awards and the 53rd week; declines in supply-chain and logistics work, an maturing amphibious vehicle program, and completed or lower-activity contracts partially offset those gains.
- Operating margin rose from 5.3% to 6.1%. Management cited lower acquisition and integration costs, favorable contract estimate changes, cost savings, lower intangible amortization and higher volume, partly offset by increased bid costs and lease-exit costs.
- Operating cash flow increased by $47 million, principally reflecting working-capital changes and stronger customer receipts. Investing cash use fell sharply because the prior year included the $764 million Scitor acquisition.
- Total backlog rose to $8.020 billion from $7.198 billion; funded backlog declined to $1.811 billion from $1.879 billion, while negotiated unfunded backlog increased. Net bookings were an estimated $5.3 billion, compared with $4.3 billion.
Outlook, risks and unusual items
- Management’s long-term targets are low-single-digit annual internal revenue growth, annual margin expansion of 10–20 basis points, and return of capital in excess of operating needs. These are targets, not fiscal 2018 guidance. Management stated it believed cash, operating cash generation and financing access would meet near- and longer-term needs.
- The business is highly exposed to U.S. government spending, budget delays, continuing resolutions, shutdowns, sequestration and changing procurement priorities. Competitive bidding and pricing pressure, contract cancellations, performance and cost-estimation risk, and reliance on skilled security-cleared employees are also significant risks.
- DCAA indirect-cost audits remained open for fiscal 2011 and later years. SAIC recorded a $38 million liability for estimated customer refunds related to contract-cost audits and CAS matters; additional audit adjustments could adversely affect results. The filing does not establish the final outcome of these audits.
- The terminated Army Brigade Combat Team Modernization program had an approximately $2 million receivable at year-end; acceptance of the final termination proposal was expected in the second half of FY2018.
- Goodwill was $863 million. The Scitor-related reporting unit had approximately 8% ($51 million) fair-value cushion over carrying value; weaker results or higher market-participant capital costs could reduce that cushion. No goodwill or intangible-asset impairments were reported.
- SAIC completed $149 million of share repurchases during FY2017 and declared $1.24 per share in dividends. Future dividends and repurchases remain subject to board approval, cash needs and credit-agreement restrictions.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Key facts for investors to verify
- Whether revenue trends improve on an internal basis, excluding acquisition effects and the extra fiscal week, and how much of backlog converts to funded work and revenue.
- Results of open government audits, adequacy of the $38 million reserve, and final settlement of the BCTM termination proposal.
- Debt repayment, leverage-covenant headroom, variable-rate exposure and the impact of capital returns on liquidity.
- Scitor integration and performance, including the reporting unit’s limited goodwill impairment cushion.
- Effects of federal budgets, contract awards, recompetes, task-order funding and pricing competition on margins and cash generation.