SAIC FY2016 Form 10-K Summary
Reporting period: Fiscal year ended January 29, 2016. SAIC provides technical, engineering, intelligence and enterprise IT services primarily to the U.S. government. The company reported one segment. Results include Scitor from its May 4, 2015 acquisition; prior-year comparisons are therefore affected by the acquisition. Fiscal 2014 also included pre-spin-off combined results.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $4.315 billion | $3.885 billion | Up 11% |
| Operating income | $227 million | $240 million | Down 5% |
| Operating margin | 5.3% | 6.3% | Down 1.0 percentage point |
| Net income | $117 million | $141 million | Down 17% |
| Diluted EPS | $2.47 | $2.91 | Down 15% |
| Operating cash flow | $226 million | $277 million | Down 18% |
- Scitor contributed $428 million of revenue and $7 million of net income in the period. Excluding acquired revenue from the prior-year comparison, internal revenue contracted 0.1%: Scitor’s revenue declined $24 million, largely from award delays and work shifting to small-business set-asides, offset by growth elsewhere.
- Adjusted EBITDA was $309 million, or 7.2% of revenue, versus $260 million, or 6.8%, in FY2015. The company defines this non-GAAP measure to exclude specified acquisition and integration costs.
- Acquisition and integration costs were $26 million. Acquired-asset amortization and increased interest expense also weighed on reported earnings. Interest expense was $44 million, compared with $17 million.
- Operating cash flow declined partly because of prior-year tax-payment timing, acquisition-related payments, working-capital investment on the Assault Amphibious Vehicle contract, and higher interest payments.
Liquidity, debt and capital
- Cash and cash equivalents were $195 million at year-end, down from $301 million. Total assets were $2.122 billion and equity was $380 million.
- Debt principal was $1.087 billion ($1.070 billion net of debt issuance costs), compared with $489 million principal a year earlier. The increase primarily financed Scitor. The facilities are secured by substantially all company and subsidiary assets.
- SAIC had a $200 million revolving facility with no amounts drawn. The credit agreement includes leverage covenants, mandatory cash-flow-based prepayment provisions and restrictions on dividends and repurchases at specified leverage levels. SAIC reported covenant compliance at year-end.
- Management targets an average minimum cash balance of $150 million and said available cash, expected operating cash flow and bank financing should meet near- and long-term needs. Variable-rate debt exposure is partly hedged with interest-rate swaps.
- FY2016 dividends were $1.21 per share; the quarterly dividend was raised to $0.31 during the year. The company repurchased approximately 1.1 million shares for $50 million under its program.
Material changes and business developments
- Scitor was acquired for $764 million net of cash acquired, expanding SAIC’s access to intelligence-community customers and classified work. Acquisition-related goodwill was approximately $481 million; year-end total goodwill was $860 million.
- Fiscal year-end backlog was $7.198 billion, up from $6.172 billion: $1.879 billion funded and $5.319 billion negotiated unfunded. FY2016 net bookings were an estimated $4.3 billion, versus $3.4 billion. Backlog includes estimates and is not guaranteed revenue.
- U.S. government customers accounted for 97% of revenue. The Army represented 29%, the Navy 16%, other DoD 21%, and other federal agencies 31%.
- Contract mix shifted toward cost-reimbursement work: 39% of revenue versus 37% in FY2015; time-and-materials remained 29%, while fixed-price fell to 32% from 34%. Fixed-price work can expose SAIC to cost overruns.
Outlook, risks and unusual items
- Management’s long-term targets are low-single-digit internal revenue growth, annual operating-margin expansion of 10–20 basis points, and return of capital in excess of operating needs. These are targets, not specific FY2017 guidance; the filing provides no clear numerical near-term revenue or earnings forecast.
- Management cited federal budget uncertainty, potential sequestration, continuing resolutions, shutdowns and delayed awards, alongside intense competition and pricing pressure. The Bipartisan Budget Act raised sequestration caps for FY2016 and FY2017; the filing warned that sequestration could resume in FY2018 absent a new agreement.
- DCAA indirect-cost audits remain open for FY2011 and later years. SAIC recorded a $28 million liability for estimated customer refunds and audit adjustments; additional adverse adjustments could affect earnings and cash flow. Government audits can also lead to penalties, payment restrictions or suspension/debarment.
- The new Scitor reporting unit had only about a 4% goodwill impairment cushion, approximately $30 million, at the annual test. Lower-than-expected results or higher market-participant capital costs could reduce the cushion or lead to impairment. Purchase-price accounting remained preliminary, including review of Scitor’s historical government accounting practices.
- A prior BCTM program change order has not yet received a formal contract modification; the related receivable was approximately $2 million. Management stated that routine legal claims were not expected to have a material adverse effect.
- The former Parent’s CityTime deferred prosecution and Army administrative agreements had ended; SAIC said it had no further obligations under the Army agreement. The company nevertheless disclosed possible reputational risk from continued association with the matter.
- SAIC reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions. Scitor, representing about 9% of year-end assets and 10% of revenue, was excluded from the internal-control assessment.
Investor verification priorities
- Track organic performance and Scitor integration, including award delays, contract transitions, and the acquired unit’s profitability.
- Review debt reduction, interest expense, cash conversion, leverage-covenant headroom and any restrictions on dividends or repurchases.
- Monitor DCAA audit outcomes and whether the $28 million reserve is adequate, as well as the unresolved BCTM contract modification.
- Assess backlog quality, especially the unfunded portion, task-order awards and renewal rates; backlog may be canceled, reduced or never funded.
- Watch the Scitor reporting unit’s results and goodwill cushion, and confirm final purchase accounting and any additional liabilities.
- Consider the company’s high U.S. government concentration, federal budget and procurement risks, and the impact of competitive pricing and contract mix.