Business Context and Reporting Period
Company: SAIC, Inc. (Note: The filing text identifies the registrant as SAIC, Inc., despite the request metadata referencing Leidos Holdings, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2010
Business Overview: SAIC provides scientific, engineering, systems integration, and technical services to U.S. military branches, Department of Defense agencies, the intelligence community, and commercial customers. The company operates through Government, Commercial, and Corporate and Other segments.
Key Financial Metrics
| Metric (in millions) | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenues | $2,685 | $2,649 |
| Operating Income | $207 | $204 |
| Operating Margin | 7.7% | 7.7% |
| Net Income | $125 | $116 |
| Diluted EPS (Continuing Ops) | $0.32 | $0.29 |
| Cash and Cash Equivalents | $568 | $898 |
| Long-Term Debt | $1,103 | $1,103 |
| Operating Cash Flow | $138 | $163 |
Liquidity: The company held $568 million in cash and cash equivalents as of April 30, 2010, with an additional $750 million available under a revolving credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1% ($36 million) year-over-year. However, internal revenue growth was negative 1%, driven by fewer new contract starts in the Government segment and lower demand for materials.
- Profitability: Net income increased 8% ($9 million), primarily due to an $8 million decrease in the provision for income taxes (effective tax rate dropped from 38.1% to 33.9%) and a reduction in diluted shares outstanding.
- Segment Performance:
- Government Segment: Revenues increased 2% and operating income increased 2% ($5 million), aided by higher profitability in border/port security products.
- Commercial Segment: Revenues decreased 6% and operating income plummeted 86% ($6 million) due to contract expirations and reduced consulting volume.
- Cash Position: Cash and cash equivalents decreased by $293 million, primarily due to $291 million in stock repurchases and $140 million used for the acquisition of Cloudshield Technologies, Inc.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Backlog: Total backlog increased to $16.1 billion (from $15.6 billion), with net bookings of approximately $3.2 billion for the quarter.
- Future Combat Systems: The Department of Defense is restructuring this major program (renamed Army Brigade Combat Team Modernization). The company is performing under a reduced provisional billing rate pending change order negotiations.
- Accounting Change: Effective February 1, 2010, the company changed its revenue recognition method for cost-plus-fixed-fee, time-and-materials, and fixed-price-level-of-effort contracts. Management stated the change was immaterial to consolidated results.
Risks and Contingencies:
- Legal Proceedings (False Claims Act): A lawsuit regarding the National Center for Critical Information Processing and Storage contract seeks approximately $116 million in damages plus trebling and penalties. The company estimates a reasonable possibility of additional exposure up to $230 million.
- Greek Government Contract: Significant uncertainties exist regarding a firm-fixed-price contract for the Athens Olympics security system. The company has recorded $124 million in losses. In May 2010, the Greek government drew $23 million on standby letters of credit; the company is seeking recovery via arbitration.
- Pension Obligations: Following the expiration of a UK subsidiary contract, the company expects to recognize additional non-cash charges of $20 million to $30 million in fiscal 2011 related to underfunded pension obligations.
- Government Audits: Ongoing audits by the Defense Contract Audit Agency (DCAA) could result in retroactive adjustments and customer refunds. A liability of $23 million has been recorded for estimated net refunds.
Investor Verification Checklist
- Legal Exposure: Verify the status of the False Claims Act lawsuit (potential $230M exposure) and the Greek contract arbitration (potential loss reversal or additional costs).
- Future Combat Systems: Monitor the outcome of the restructuring negotiations with the Department of Defense, as this impacts future volume and profitability.
- Pension Charges: Confirm the final amount of the expected $20M-$30M pension charges in fiscal 2011.
- Revenue Recognition: Assess the long-term impact of the new revenue recognition methodology adopted in Q1 2010 on future earnings volatility.
- Capital Allocation: Review the remaining $15 million share authorization for the stock repurchase program and the company's strategy for future acquisitions.