Science Applications International Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended May 3, 2019, compared with the three months ended May 4, 2018. SAIC provides technical, engineering, and IT services primarily to U.S. government customers. The results include Engility, acquired January 14, 2019; the prior-year comparison does not.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Revenue | $1.615 billion | $1.175 billion |
| Operating income / margin | $93 million / 5.8% | $66 million / 5.6% |
| Net income attributable to common stockholders | $55 million | $49 million |
| Diluted EPS | $0.92 | $1.13 |
| Operating cash flow | $178 million | $88 million |
| Cash, cash equivalents and restricted cash, period end | $160 million | $160 million |
- Cost of revenues was 88.9% of revenue, versus 91.4% a year earlier. Adjusted EBITDA was $134 million, or 8.3% of revenue, compared with $76 million, or 6.5%.
- Cash used in investing activities was $30 million; cash used in financing activities was $234 million. Cash, cash equivalents and restricted cash declined $86 million during the quarter.
- At May 3, 2019, current assets were $1.317 billion and current liabilities were $1.010 billion. Debt was $1.962 billion principal, or $1.939 billion net of issuance costs; the $400 million revolving facility was undrawn. The company made $150 million in voluntary term-loan prepayments and reported compliance with debt covenants.
Changes and business developments
- Revenue rose 37.4%, primarily due to Engility. Excluding acquired revenue, revenue declined 2.8%, attributed to prior-year humanitarian-relief materials and acquisition-related revenue dis-synergies.
- Management cited Engility-related cost synergies and improved contract performance as drivers of the higher operating and adjusted EBITDA margins. Net income growth was partly offset by higher interest expense and a higher effective tax rate. Diluted EPS declined as the weighted-average share count increased following the acquisition.
- Revenue mix shifted toward cost-reimbursement contracts (57% versus 45%); labor-related costs rose to 55% of cost of revenues from 46%. The company reported $4.1 billion in remaining performance obligations, expecting to recognize about 80% within 12 months and 90% within 24 months. Total backlog was $13.569 billion and quarterly net bookings were an estimated $1.4 billion.
- Operating cash flow increased mainly due to collections following the prior-quarter federal government partial shutdown, strong program collections, and Engility operations.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management said existing cash, expected operating cash flow, and access to bank and capital markets should support liquidity needs for at least the next year, while noting financing availability depends on market and company factors.
- Management highlighted uncertainty over federal discretionary spending after government fiscal 2019, potential sequestration or shutdowns, and the debt ceiling. The filing noted the debt ceiling had been reached in March 2019 and Treasury extraordinary measures were expected to be exhausted around October 2019. Competitive bidding and pricing pressure are also risks.
- Federal contract audits and reviews remain a key contingency. A $64 million liability was recorded for estimated customer refunds related to contract-cost audits and compliance; adverse findings beyond reserves could affect results. The filing says DCAA indirect-cost audits remain open for fiscal 2011 and later years.
- The Marine Corps terminated the Assault Amphibious Vehicle program for convenience after a stop-work order. SAIC recorded an inventory provision for long-lead materials and continued negotiating recovery of termination costs.
- Engility purchase-price allocation remained preliminary, including valuations of assets, liabilities, and goodwill. The company expected to resolve open items by Q4 FY2020; adjustments could change acquired balances and goodwill. Q1 included $10 million in integration costs.
- SAIC adopted the new lease standard in Q1, recording $166 million of operating lease right-of-use assets and $183 million of lease liabilities at May 3, 2019. Adoption did not materially affect earnings or cash flows.
- Contract-estimate changes increased operating income by $8 million in the quarter; revenue included $9 million recognized for performance obligations satisfied in prior periods. The effective tax rate was 19.8%, versus 10.3% a year earlier.
Important facts to verify
- How much of the revenue and margin improvement is sustainable after separating Engility’s contribution, integration costs, synergies, and contract-estimate effects?
- Whether cash conversion and collections remain strong, and how debt repayment, dividends, and share repurchases affect liquidity and leverage.
- Progress on Engility integration and final purchase accounting, including any changes to goodwill or acquired liabilities.
- Outcomes of government contract audits, the $64 million reserve adequacy, and recovery of costs from the terminated AAV program.
- Federal budget and debt-ceiling developments, and their effects on contract funding, awards, and backlog conversion.