Science Applications International Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended February 2, 2018 (52 weeks). Fiscal 2017 ended February 3, 2017 and included 53 weeks; comparisons are affected by that extra week. SAIC provides technical, engineering, systems integration and enterprise IT services, primarily to the U.S. government. Government customers accounted for 98% of FY2018 revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.454 billion | $4.442 billion |
| Operating income / margin | $256 million / 5.7% | $263 million / 5.9% |
| Net income | $179 million | $143 million |
| Diluted EPS | $4.02 | $3.12 |
| Cash from operating activities | $217 million | $273 million |
| Cash and cash equivalents at year-end | $144 million | $210 million |
| Long-term debt, net of issuance costs | $1.024 billion | $1.047 billion |
Reported revenue was nearly flat year over year; adjusted for the prior-year extra week and other comparability items, internal revenue growth was 2.5%. Adjusted EBITDA was $313 million, or 7.0% of revenue, versus $322 million, or 7.2%, in FY2017. Capital expenditures were $22 million. The $200 million revolving credit facility had no balance outstanding at year-end; SAIC reported compliance with credit covenants. The company had $1.484 billion of disclosed contractual obligations, including debt, interest and leases.
Changes, capital allocation and unusual items
- Net income increased 25%, principally because income tax expense fell to $35 million from $69 million. FY2018 included a $22 million excess tax benefit related to share-based compensation and a provisional $17 million tax benefit from the Tax Cuts and Jobs Act; these items are not measures of underlying operating growth. The effective tax rate was 16.5%, compared with 32.7%.
- Operating income declined 3% and operating margin decreased 0.2 percentage points. Management cited less favorable contract estimate adjustments, restructuring costs and a less profitable cost mix, partly offset by lower SG&A.
- Operating cash flow fell $56 million, primarily due to timing of customer collections. Receivables rose to $674 million from $539 million.
- SAIC recorded $13 million of restructuring costs: $6 million severance and $7 million lease exit costs. Management expects approximately $20 million in annual gross savings, or $11 million net based on the current contract mix.
- FY2017 was restated after SAIC determined $8 million of revenue on a contract with multiple funding sources had not been contractually earned. The correction reduced FY2017 operating income by $8 million, net income by $5 million and diluted EPS by $0.10; cash flows were unaffected. The company described the historical misstatement as immaterial.
Outlook, risks and contingencies
Management’s long-term targets are low-single-digit annual internal revenue growth, adjusted EBITDA margin expansion of 10–20 basis points annually, and returning capital in excess of operating needs. These are targets, not specific FY2019 guidance. Total backlog grew to $10.227 billion from $8.020 billion, including $2.012 billion funded; net bookings were an estimated $6.7 billion. Backlog includes negotiated unfunded work and is not guaranteed revenue. Major awards included work for the U.S. Army, EPA and U.S. Central Command.
Management cited increased U.S. government spending for GFY2018 and a budget agreement extending higher spending levels into GFY2019, while warning of uncertainty beyond that period, potential spending reductions, continuing resolutions, shutdowns and delayed awards. Competition and price pressure, contract cancellations, cost overruns on fixed-price work, workforce availability, cybersecurity, government audits and the company’s dependence on federal customers are significant risks.
- Material control weakness: Management and the auditor concluded internal control over financial reporting was ineffective at February 2, 2018. Deficiencies concerned training and controls for contract requirements involving multiple funding sources, including program-control and timesheet reviews. Management said remediation was in progress and expected completion in the first half of FY2019. Deloitte issued an adverse opinion on internal control, while expressing an unqualified opinion on the financial statements.
- Government audits: DCAA indirect-cost audits remain open for FY2012 and subsequent years. SAIC recorded a $39 million liability for estimated customer refunds and related audit adjustments; additional unfavorable findings could affect profitability and cash flow.
- Contingency: SAIC committed to $29 million of FY2019 long-lead materials for the Assault Amphibious Vehicle low-rate initial production phase, which had not yet been fully awarded at year-end. The company considered an award probable but warned that it might not recover all costs if it did not receive the award.
- Management said existing litigation was not expected, based on current information, to have a material adverse effect. Tax accounting for certain effects of the Tax Act remained provisional at year-end.
Important facts for investors to verify
- Whether the multi-customer funding control weakness was remediated on schedule and whether subsequent filings report any recurrence or restatement.
- How much of reported backlog, particularly negotiated unfunded backlog, converts into funded task orders and recognized revenue.
- Whether operating cash flow recovers from the collection-related decline and whether receivables and contract assets remain elevated.
- Progress toward the stated margin and cost-savings targets, excluding restructuring and tax-related benefits.
- Final outcomes of open government audits, the $39 million reserve, and the unawarded vehicle-production materials commitment.
- Debt repayment, interest-rate exposure and capital returns: FY2018 dividends were $1.24 per share and share repurchases totaled approximately $150 million.