Science Applications International Corporation (SAIC) — Form 10-Q Summary
Business context and reporting period
SAIC provides technical, engineering and enterprise IT services, primarily to U.S. government customers. The company reports one aggregated segment. This quarterly report covers the 13 weeks ended November 4, 2016, and also presents results for the nine months ended that date. Comparisons are with the periods ended October 30, 2015; fiscal 2017 year-to-date includes an additional week.
Key financial metrics
| Metric | Three months ended Nov. 4, 2016 | Nine months ended Nov. 4, 2016 |
|---|---|---|
| Revenue | $1.114 billion, down 2% | $3.424 billion, up 6% |
| Operating income / margin | $74 million / 6.6%; prior-year margin 5.6% | $210 million / 6.1%; prior-year margin 5.3% |
| Net income | $42 million, up 24% | $112 million, up 26% |
| Diluted EPS | $0.91, versus $0.72 | $2.43, versus $1.87 |
| Operating cash flow | $153 million, versus $68 million | $211 million, versus $118 million |
For the nine months, cash used in investing activities was $9 million and cash used in financing activities was $194 million; cash increased $8 million to $203 million. Capital expenditures were $11 million. Dividends paid were $41 million, and stock repurchases and shares withheld for taxes totaled $137 million in cash flows.
At November 4, 2016, cash was $203 million, current assets were $970 million and current liabilities were $676 million. Debt principal was $1.060 billion, or $1.046 billion net of issuance costs; net long-term debt was $1.038 billion. The company had an undrawn $200 million revolving facility and reported compliance with credit covenants. The credit agreement requires a senior secured leverage ratio no higher than 3.75-to-1.00.
Material changes versus prior comparable periods
- Third-quarter revenue declined $22 million, primarily reflecting lower materials volume and reduced activity on programs nearing completion, partly offset by $47 million from newly awarded programs. Nine-month reported revenue rose $180 million, reflecting Scitor, the extra fiscal week and new awards; SAIC’s adjusted internal revenue contracted 1.5% for the quarter and 1.2% year to date.
- Operating income increased $10 million in the quarter and $37 million year to date. Drivers included favorable contract estimate revisions, lower acquired-intangible amortization and Scitor contribution; increased research and development and bid-and-proposal spending partly offset gains.
- Operating cash flow increased $93 million year to date, mainly due to lower working-capital investment, lower employee-benefit and integration payments, and Scitor cash flows. Current-year investing outflows were far below the prior period, which included the $764 million Scitor acquisition payment.
- SAIC amended its credit facility in August 2016, extending the Term Loan A and revolver to August 2021, moving $132 million of Term Loan B principal to Term Loan A, and changing margins and repayment terms. The amendment generated $5 million of expense.
Outlook, management commentary, risks and contingencies
- Management’s long-term targets are low-single-digit annual internal revenue growth, annual margin expansion of 10–20 basis points and returning capital in excess of operating needs. These are targets, not specific quarterly or annual guidance. Management says it expects available cash, future operating cash flow and financing access to meet liquidity needs, but does not assure future financing availability.
- Backlog was $8.233 billion at November 4, 2016, including $2.044 billion funded and $6.189 billion negotiated unfunded; net bookings were an estimated $1.9 billion for the quarter and $4.5 billion year to date. Backlog includes contract estimates and unfunded awards, excludes prospective task orders under IDIQ vehicles, and may be reduced by customer cancellations or scope changes.
- Government budget decisions, competitive bidding and pricing pressure are key business risks. In fiscal 2016, more than 95% of revenue was from U.S. government contracts and more than 60% from DoD contracts.
- Contract estimate changes increased operating income by $5 million in the quarter and $18 million year to date, versus $1 million and $9 million in the prior-year periods. Such revisions are estimates and may change as contracts progress.
- Government indirect-cost audits remained open for fiscal 2011 and subsequent years. SAIC recorded a $38 million liability for estimated customer refunds related to contract-cost audits and Cost Accounting Standards. Adverse audit outcomes could exceed reserves. The filing also notes a $5 million Scitor-related liability for potential questioned costs, with related deferred tax assets.
- The BCTM program termination proposal remained under negotiation; SAIC expected acceptance in the first half of fiscal 2018 and reported an approximately $2 million receivable. Management did not expect the described routine legal claims to have a material adverse effect.
- Scitor-related goodwill was approximately $482 million in its reporting unit. The latest annual impairment test showed only about 4%, or $30 million, of fair-value headroom; lower results or higher market cost of capital could lead to impairment. The filing reports no material changes to previously disclosed risk factors or market risks.
Most important facts for investors to verify
- Whether backlog awards—particularly unfunded amounts and IDIQ opportunities—convert into funded work and revenue on expected schedules.
- Whether revenue and margin trends persist after adjusting for Scitor, the extra fiscal week, materials mix and contract estimate revisions.
- Results of open government audits, adequacy of the $38 million reserve and resolution of Scitor questioned-cost exposure.
- Debt repayment, covenant headroom, variable-rate exposure and the effect of the credit amendment; the filing reports $6 million of hedge losses expected to be reclassified to earnings in the next 12 months.
- Performance and valuation assumptions supporting the Scitor-related goodwill, given its limited impairment-test headroom.