Science Applications International Corporation (SAIC) — Form 10-K
Reporting period: Fiscal year ended February 1, 2019 (fiscal 2019, 52 weeks). The filing also reports fourth-quarter results. Amounts are in U.S. dollars.
Business context
SAIC provides technical, engineering, systems integration, and enterprise IT services, primarily to the U.S. government. More than 95% of annual revenue came from U.S. government prime contracts or subcontracts; the Army contributed 29% and the Navy 13% of revenue.
SAIC acquired Engility on January 14, 2019, expanding its reach and capabilities in defense, federal civilian, intelligence, and space markets. Engility’s results were included from the acquisition date.
Financial results and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $4.659 billion | $4.454 billion |
| Operating income / margin | $220 million / 4.7% | $256 million / 5.7% |
| Net income | $137 million | $179 million |
| Diluted EPS | $3.11 | $4.02 |
| Cash from operations | $184 million | $217 million |
| Adjusted EBITDA / margin (non-GAAP) | $353 million / 7.6% | $313 million / 7.0% |
Revenue increased 5%. Excluding acquired revenue and the partial government-shutdown impact, management reported growth of 2.6%. Operating income included $86 million of Engility acquisition and integration costs. Adjusted EBITDA excludes acquisition/integration and restructuring costs; it is a non-GAAP measure.
Fiscal 2019 operating cash flow declined $33 million, primarily reflecting acquisition and integration expenses and the partial shutdown, partly offset by higher margins and collections. Investing cash outflow was $1.028 billion, including $1.001 billion paid for Engility. Financing cash inflow was $938 million, mainly reflecting new borrowings. Cash, cash equivalents, and restricted cash totaled $246 million at year-end; balance-sheet cash and cash equivalents were $237 million.
Total assets were $4.563 billion. Long-term debt, including the current portion, was $2.089 billion net of issuance costs ($2.115 billion principal); the prior-year net balance was $1.024 billion. The $400 million revolving facility had no borrowings outstanding. SAIC reported compliance with its credit covenants. Current assets were $1.433 billion and current liabilities were $897 million.
Material changes and unusual items
- Engility was acquired for a reported purchase price of $2.160 billion, funded with SAIC shares and borrowings. The acquisition added $98 million of revenue and a $19 million net loss in the period, including integration costs. Purchase-price allocation was preliminary.
- Year-end backlog rose to $13.801 billion from $10.227 billion, including $3.6 billion of backlog acquired with Engility. Funded backlog was $2.753 billion. Net bookings were $4.6 billion, versus $6.7 billion in fiscal 2018.
- Cost of revenue fell to 90.0% of revenue from 90.8%, reflecting improved contract performance, favorable estimate changes, and restructuring efficiencies; a $36 million increase in inventory and deferred-contract-cost provisions partly offset these gains. Fiscal 2019 contract-estimate changes increased operating income by a net $17 million.
- The fourth quarter reported $1.192 billion of revenue, $7 million of operating income, and a $9 million net loss, compared with $1.128 billion, $62 million, and $51 million of net income, respectively, in the prior-year quarter. The filing does not provide a clear quarter-specific reconciliation of the year-over-year earnings decline.
- A Marine Corps Assault Amphibious Vehicle program was terminated for convenience after a stop-work order. SAIC recorded an inventory provision for long-lead materials and was negotiating recovery of termination costs.
Outlook, risks, and contingencies
Management’s long-term financial targets are low-single-digit annual revenue growth excluding acquisitions, adjusted EBITDA margin expansion of 10–20 basis points annually, and returning capital in excess of operating needs. These are targets, not fiscal 2020 guidance. Management cited the Engility combination as an opportunity for greater customer access, growth, margins, and cash generation, while noting integration and synergy realization risks.
Management warned of uncertainty around federal spending after government fiscal 2019, including possible budget caps, continuing resolutions, shutdowns, delayed awards, and shifting priorities. Other key risks include intense competition and pricing pressure, dependence on government contracts, contract cost-estimation risk, workforce and security-clearance constraints, cybersecurity threats, and government audits or investigations. DCAA indirect-cost audits remained open for fiscal 2010 and later years; SAIC recorded a $63 million liability for estimated customer refunds related to audits and cost-accounting compliance. Adverse audit outcomes could require additional refunds or affect contract eligibility.
Engility added defined-benefit pension and retiree-health obligations; the plans’ reported unfunded status was $34 million at year-end. SAIC also reported $211 million of future operating lease commitments and $479 million of estimated future interest payments on debt. The company stated that its cash, expected operating cash flows, and financing access should support its near- and long-term needs.
Important facts for investors to verify
- Engility integration progress, realized synergies, final purchase accounting, and the acquired business’s contribution to ongoing earnings and cash flow.
- Debt reduction, variable-rate exposure, covenant headroom, and the effect of the subsequent $150 million voluntary Term Loan A prepayment.
- Whether backlog converts to funded work and revenue, given that much of total backlog is negotiated but unfunded and government customers may reduce or cancel work.
- Resolution of the AAV termination-cost recovery and adequacy of inventory and contract-cost provisions.
- Outcomes of open government audits and investigations, including whether potential refunds exceed recorded reserves.
- Fourth-quarter earnings drivers and the sustainability of reported adjusted EBITDA margin improvement.