Science Applications International Corporation — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2016, ended October 30, 2015; comparable periods ended October 31, 2014. Amounts are in millions except per-share data.
Business context and performance
SAIC provides technical, engineering and enterprise IT services primarily to the U.S. government. It reports as one operating segment. On May 4, 2015, the company acquired Scitor, a provider of technical services primarily to the intelligence community. Scitor contributed $148 of third-quarter revenue and $295 for the nine-month period.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Total revenue | $1,136 | $1,004 | $3,244 | $2,933 |
| Operating income | $64 | $63 | $173 | $181 |
| Operating margin | 5.7% | 6.3% | 5.4% | 6.3% |
| Net income | $34 | $37 | $89 | $105 |
| Diluted EPS | $0.72 | $0.77 | $1.87 | $2.15 |
| Operating cash flow | $68 | $82 | $118 | $181 |
Financial position and cash flows
- At October 30, cash and equivalents were $184, current assets $983, and current liabilities $704. Long-term debt was $1,112 net of issuance costs ($67 current and $1,045 long-term); equity was $392.
- Nine-month investing cash outflow was $791, including $764 paid for Scitor net of cash acquired. Financing provided $556, including $670 of borrowing proceeds and $41 of dividends paid. Cash declined by $117 from the fiscal-year start.
- Debt comprised Term Loan A and Term Loan B, with principal of $563 and $567, respectively. The $200 revolving facility was undrawn. The debt is secured, bears variable rates, and is partly hedged with interest-rate swaps; the company reported compliance with credit-facility covenants.
- Dividends declared and paid were $0.31 per share in Q3 and $0.90 per share for the nine months.
Material changes and management commentary
- Reported revenue increased 13% in Q3 and 11% year to date, primarily due to Scitor. On a pro forma basis including Scitor in the prior-year comparison, internal revenue contracted 1.9% in Q3 and grew 0.3% year to date. Management attributed Scitor contraction to competition, work shifting to small-business set-asides, and delayed awards.
- Despite higher revenue, operating margin declined. Year-to-date operating income fell 4%, partly reflecting $16 of acquisition and integration costs and acquired-intangible amortization. Net income also declined, with higher acquisition-related interest expense a principal factor.
- Operating cash flow fell $63 year over year for the nine-month period. Management cited prior-year tax-payment timing, $16 of current-year acquisition and integration payments, and a working-capital investment in the Assault Amphibious Vehicle contract, partly offset by collections and Scitor cash generation.
- Backlog was $7,414 at October 30, up from $6,172 at January 30, including $1,100 obtained with Scitor. Net bookings were $1,400 for Q3 and $3,400 year to date.
- Management’s long-term targets are low-single-digit internal revenue growth, annual operating-margin expansion of 10–20 basis points, and returning capital in excess of operating needs. The company targets an average minimum cash balance of $150 and said it expects available cash, operating cash flow, and financing access to meet needs for at least the next year.
Risks, contingencies, and unusual items
- More than 90% of fiscal 2015 revenue came from U.S. government contracts and more than 70% from DoD contracts. Management cited budget and discretionary-spending uncertainty, competitive bidding, and pricing pressure as risks.
- The Scitor purchase-price allocation remains preliminary; review of historical government accounting practices and final intangible valuations could result in adjustments, including additional liabilities and a goodwill adjustment.
- Government contract audits remain open for fiscal 2011 and later years. SAIC recorded a $24 liability for estimated customer refunds tied to potential contract-cost audit adjustments; adverse findings could result in additional costs, penalties, or restrictions on government contracting.
- Routine claims and lawsuits were not expected by management to materially affect the company. The filing also describes a pending formal contract modification related to the terminated BCTM program; approximately $2 remained receivable. Letters of credit were $6 and surety-bond obligations $14.
- Management reported no material change in risk factors from its latest Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Scitor’s contract wins, retention, and integration deliver the expected growth and cost benefits, given negative Q3 internal growth and the preliminary purchase accounting.
- Debt repayment capacity and covenant headroom after the acquisition, including variable-rate exposure, excess-cash-flow prepayments, and the planned $150 minimum cash balance.
- Cash conversion and working-capital trends, particularly receivables and performance on the Assault Amphibious Vehicle contract.
- Government budget and procurement developments, contract-audit outcomes, and any changes to the $24 audit reserve or BCTM receivable.
- Progress toward management’s margin and internal-growth targets; the filing provides targets but no specific near-term quarterly or annual earnings guidance.