Science Applications International Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended May 1, 2015; comparisons are with the three months ended May 2, 2014. SAIC provides technical, engineering and enterprise IT services, primarily to U.S. government customers. The company reports as one segment.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $1,009 million | $977 million | Up 3% |
| Revenue excluding work performed by former Parent | $998 million | $962 million | Up 4% |
| Operating income | $57 million | $59 million | Down 3% |
| Operating margin | 5.7% | 6.1% | Down 0.4 percentage points |
| Operating margin excluding acquisition and integration costs | 6.0% | 6.1% | Down 0.1 percentage points |
| Net income | $33 million | $34 million | Down 3% |
| Diluted EPS | $0.69 | $0.69 | Unchanged |
| Cash provided by operating activities | $29 million | $34 million | Down $5 million |
Revenue growth primarily reflected higher supply-chain contract materials volume and higher DoD materials and subcontract revenue. Lower labor-related revenue and other program decreases partly offset these gains. Materials and subcontractor revenue generally carry lower margins than labor-related revenue.
Cash, liquidity and debt
- Cash was $295 million at May 1, 2015, compared with $301 million at January 30, 2015. Net cash decreased $6 million during the quarter.
- Operating cash flow was $29 million; investing activities used $1 million, and financing activities used $34 million. Capital expenditures were $1 million.
- At May 1, debt was $482 million: $35 million current and $447 million long-term. The company also had an undrawn $200 million revolving credit facility.
- SAIC’s target average minimum cash balance is $150 million. Management said existing cash, expected operating cash flow and financing access should support short- and long-term needs, while noting financing availability depends on market and company-specific factors.
Material developments and outlook
- Scitor acquisition: Completed May 4, 2015, after quarter-end, for initial consideration of $790 million plus working-capital adjustments. The purchase included repayment of approximately $195 million of Scitor debt and $43 million placed in escrow. SAIC said the acquisition adds access to intelligence-community customers and approximately 1,500 employees. Pro forma financial information was not included because purchase accounting was incomplete.
- Acquisition financing: On May 4, SAIC obtained $670 million of additional debt and converted existing credit facilities to secured facilities. The resulting term loans comprised a $581 million Term Loan A and a $570 million Term Loan B; the latter matures in May 2022. The agreement imposes secured leverage limits and annual excess-cash-flow prepayments. The company also entered into $350 million of interest-rate swaps after quarter-end.
- Management targets: Long-term targets, expected on average over time, are low-single-digit internal revenue growth, annual operating-margin expansion of 10–20 basis points, and return of capital exceeding operating needs. These are targets, not quarterly guidance.
- Near-term costs: Management expected approximately $15 million of acquisition and integration costs in the first half of FY2016, including $3 million recorded in Q1.
- Bookings and backlog: Net bookings were an estimated $1.0 billion. Total backlog was $6.175 billion at May 1, 2015, nearly unchanged from $6.172 billion at January 30; funded backlog rose to $1.761 billion from $1.659 billion, while negotiated unfunded backlog declined to $4.414 billion from $4.513 billion. Backlog is not guaranteed revenue and excludes anticipated IDIQ task orders until awarded.
Risks, contingencies and unusual items
- More than 90% of FY2015 revenue came from U.S. government contracts and more than 70% from DoD contracts. Federal budget reductions, shutdowns, sequestration, procurement timing and intense competitive bidding and pricing pressure could adversely affect results.
- Government audits and reviews may lead to cost disallowances, penalties or other consequences. SAIC recorded a $20 million liability for estimated potential customer refunds related to indirect-cost and cost-accounting audits.
- Other disclosed matters include an approximately $2 million receivable on the terminated Army BCTM program, for which a formal contract modification remained outstanding, and $8 million of letters of credit and $11 million of surety-bond obligations. Management did not expect the described ordinary-course litigation to materially adversely affect the company.
- Q1 acquisition and integration costs were $3 million; contract-estimate changes increased operating income by $1 million, versus $3 million in the prior-year quarter. Acquisition costs and unfavorable contract-estimate changes contributed to the lower operating margin.
- The board declared a $0.31-per-share dividend on June 3, payable July 30, 2015. The Q1 dividend was $0.28 per share. Credit-agreement covenants can limit dividends and repurchases at specified leverage levels.
Important facts for investors to verify
- Scitor’s completed purchase price, final working-capital adjustment, purchase accounting, integration costs and contribution to future revenue and earnings.
- Post-acquisition debt balances, interest expense, leverage covenant headroom, required cash-flow prepayments and the effect of rate hedges.
- Whether revenue growth converts into improved margins and operating cash flow, given the materials-heavy mix and Q1 decline in both margin and cash generation.
- Funded backlog conversion, task-order awards and renewals, and exposure to government budgets, contract competition and cancellations.
- Potential outcomes of government audits and the BCTM contract settlement; the filing does not provide a clear final resolution for these matters.