Science Applications International Corporation (SAIC) — Q1 FY2015 Form 10-Q
Reporting period: Three months ended May 2, 2014. SAIC provides technical, engineering, and enterprise IT services, primarily to the U.S. government. It became an independent public company in September 2013 following its spin-off from Leidos. The comparable prior-year period reflects a combined business before separation, so results are not fully comparable with stand-alone operations.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $977 million | $1,139 million |
| Operating income | $59 million | $52 million |
| Operating margin | 6.0% | 4.6% |
| Net income | $34 million | $33 million |
| Diluted EPS | $0.69 | $0.67 |
| Operating cash flow | $34 million | $(15) million |
- Revenue declined 14%. Key causes included the loss of the DISN Global Solutions program ($42 million), lower logistics activity ($29 million), reduced material and subcontract revenue ($27 million), completion of an Army Reserve and National Guard support program ($22 million), and one fewer productive day ($15 million). The remaining decline reflected slower government contract ordering.
- Operating income rose $7 million despite lower revenue. The absence of prior-year separation and restructuring expense ($16 million) and favorable contract estimate changes helped; lower volume and completion of higher-margin contracts partly offset the gains. No separation or restructuring expense was recorded this quarter. Current-period contract estimate changes increased operating income by $3 million and diluted EPS by $0.04.
- Operating cash flow improved by $49 million year over year, which management attributed mainly to stronger customer collections and reduced prepaid expenses. Investing cash outflow was $7 million, primarily for headquarters improvements. Financing cash outflow was $44 million, mainly reflecting dividends and share repurchases.
- Cash was $237 million at quarter-end, down from $254 million at January 31, 2014. Debt and capital lease obligations totaled $502 million, including a $500 million term loan; $482 million was classified as long-term. A $200 million revolving facility was undrawn. The company reported compliance with debt covenants.
- The term loan is floating-rate debt; interest-rate swaps cover the same notional amount and tenor, with the company paying a fixed 1.41% rate under the swaps. Management said it expected cash, operating cash flow, and available financing to cover liquidity needs over the next 12 months.
Other material changes and operating indicators
- Total backlog was $6.587 billion at May 2, down from $6.651 billion at January 31: funded backlog was $1.596 billion and negotiated unfunded backlog was $4.991 billion. Net bookings were an estimated $0.9 billion for the quarter. Backlog includes future work performed by the former parent and may be affected by funding, awards, scope changes, or cancellations.
- Revenue mix shifted toward labor-related work: labor-related revenue was 46% of revenue versus 42% a year earlier; subcontractor-related revenue was 33% versus 38%. Contract-type mix was 38% cost reimbursement, 29% time-and-materials/fixed-price level-of-effort, and 33% firm-fixed-price.
- SAIC declared and paid a $0.28-per-share quarterly dividend and announced another $0.28 dividend for payment in July 2014. It repurchased approximately 0.7 million shares under its public program during the quarter; approximately 4.0 million authorized shares remained available at May 2.
Outlook, risks, and contingencies
- The filing gives no numerical revenue or earnings guidance. Management cited government budget and defense-spending pressure, sequestration, possible shutdowns and debt-ceiling issues, and intense competition and pricing pressure in government bidding. It also said SAIC believed its customer relationships, technical capabilities, cost structure, and reduced organizational-conflict restrictions could support growth.
- More than 90% of fiscal 2014 revenue came from U.S. government contracts and approximately 70% from Department of Defense contracts, including subcontracts. The company noted that U.S. government customers may change or cancel work; future financing availability is also subject to market and company-specific factors.
- Government audits and reviews may result in cost disallowances, refunds, penalties, or restrictions on contracting. SAIC recorded an $18 million liability for estimated net refunds related to indirect-cost and cost-accounting reviews for fiscal 2006–2014. The company also described ongoing monitoring and compliance obligations associated with the former parent’s CityTime-related agreements.
- The company reported routine legal matters not expected by management to materially affect its financial position, results, or cash flows. A formal modification remained outstanding for the terminated Army Brigade Combat Team Modernization program; the related receivable was approximately $2 million. Letters of credit and surety-bond obligations were $7 million and $11 million, respectively.
- SAIC had not determined the effect of the newly issued revenue-recognition standard, which was scheduled to become effective for the company in fiscal 2018. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether revenue declines and slower government ordering persist, particularly after the DGS loss and other program transitions.
- The conversion, funding, and cancellation exposure within the $6.587 billion backlog, including the unfunded portion.
- Cash generation and working-capital trends, alongside dividends, repurchases, and debt-service needs.
- Outcomes of government audits, the adequacy of the $18 million estimated refund liability, and progress on contract novations from the former parent.
- Comparability of prior-year results with the post-spin-off cost base, including the effect of stand-alone operating costs and prior corporate expense allocations.