Business Context and Reporting Period
Company: SAIC, Inc. (formerly Science Applications International Corporation)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended October 31, 2007
Business Overview: SAIC provides scientific, engineering, systems integration, and technical services to U.S. military branches, Department of Defense agencies, the intelligence community, Department of Homeland Security, and commercial markets. The company operates through three segments: Government, Commercial, and Corporate and Other.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Oct 31, 2007 | 3 Months Ended Oct 31, 2006 | 9 Months Ended Oct 31, 2007 | 9 Months Ended Oct 31, 2006 |
|---|---|---|---|---|
| Revenues | $2,365 | $2,081 | $6,598 | $5,972 |
| Operating Income | $186 | $141 | $495 | $430 |
| Operating Margin | 7.9% | 6.8% | 7.5% | 7.2% |
| Net Income | $105 | $98 | $316 | $307 |
| Diluted EPS | $0.25 | $0.28 | $0.76 | $0.89 |
| Cash and Equivalents (Oct 31, 2007) | $1,011 | |||
| Total Debt (Oct 31, 2007) | $1,238 (Includes $139 current portion) | |||
| Backlog (Oct 31, 2007) | $15.8 billion |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 14% for the quarter and 10% for the nine-month period compared to the prior year. This was driven by 8% internal growth (intelligence, defense solutions, homeland security) and 6% acquisition-related growth.
- Operating Income: Operating income rose 32% for the quarter and 15% for the nine-month period. Improvements were attributed to reduced management infrastructure costs, better contract labor utilization, and higher fee rates on large programs.
- Interest Income: Interest income decreased significantly ($21 million for the quarter, $55 million for nine months) due to lower cash balances following a $2.45 billion special dividend paid in November 2006.
- Discontinued Operations: The company recorded a pre-tax gain of $33 million in discontinued operations for the nine months ended October 31, 2007, related to the reorganization and partial sale of AMSEC LLC. This contrasts with a $19 million gain in the prior year period related to the sale of ANX.
- Stock Repurchases: The company repurchased 10.7 million shares of common stock during the nine months ended October 31, 2007, totaling approximately $270 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Backlog: Total backlog increased to $15.8 billion, a $1.7 billion increase from the prior quarter, reflecting improved funding and award activity.
- Acquisitions: Two businesses were acquired for $173 million in cash during the period, adding capabilities in energy services and hydrocarbon exploration.
- ERP Implementation: The company began a phased implementation of a new enterprise resource planning (ERP) system, with corporate operations migrated in the quarter. This is expected to impact internal controls and costs in the short term.
Risks and Contingencies
- Greek Government Contract: A firm-fixed-price contract for a C4I system for the Greek government has recorded losses of $123 million as of October 31, 2007. While a contract modification was executed in March 2007 to resolve disputes and reduce bond requirements, significant uncertainties remain regarding the final outcome, acceptance of subsystems, and potential additional losses. The company is using the completed-contract method for the development portion.
- Telkom South Africa Arbitration: The company is pursuing damages exceeding $200 million plus interest from Telkom South Africa. A final hearing is scheduled for June 2008. The ultimate recovery amount is not determinable.
- Tax Matters: The company is under audit by the IRS for fiscal years 2005 and 2006. Additionally, a state government issued a proposed excise tax assessment of $27 million, which the company is contesting.
- Security Lapses: The company incurred $8 million in costs during the nine months ended October 31, 2007, to remediate data security lapses on customer contracts.
Investor Verification Checklist
- Verify the status of the Greek Government contract modification and the likelihood of reversing the $123 million recorded loss.
- Monitor the outcome of the Telkom South Africa arbitration scheduled for June 2008.
- Review the impact of the new ERP system implementation on operating costs and internal controls in upcoming quarters.
- Assess the sustainability of the 8% internal revenue growth rate in the Government segment.
- Confirm the resolution of the $27 million state excise tax assessment.