Science Applications International Corporation — Q3 FY2018 Form 10-Q
Reporting period: 13-week quarter ended November 3, 2017; nine months ended November 3, 2017. Comparatives are the periods ended November 4, 2016. SAIC provides technical, engineering and enterprise IT services, primarily to U.S. government customers; the company reported that more than 95% of FY2017 revenue came from U.S. government contracts.
Financial performance
| Metric ($ millions, except per-share data and percentages) | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | 1,145 | 1,114 | 3,326 | 3,424 |
| Operating income | 72 | 74 | 194 | 210 |
| Operating margin | 6.3% | 6.6% | 5.8% | 6.1% |
| Net income | 43 | 42 | 128 | 112 |
| Diluted EPS | $0.98 | $0.91 | $2.86 | $2.43 |
| Operating cash flow | 80 | 153 | 133 | 211 |
Q3 revenue rose 3%, while nine-month revenue declined 3%; the prior-year nine-month period included an extra fiscal week, estimated by SAIC to contribute $88 million. Q3 revenue growth reflected new NASA, U.S. Army and EPA work, partly offset by contract completions and the loss of a DHS IT integration contract. Nine-month operating margin weakened as favorable contract-estimate changes were lower and cost-reimbursable work and materials represented a less profitable mix. Adjusted EBITDA margin was 7.4% for Q3 versus 7.7%, and 6.9% for nine months versus 7.5%.
Net income increased 14% for nine months, principally reflecting a $22 million tax benefit from employee share-based compensation accounting and lower interest expense, partly offset by lower operating income. The nine-month effective tax rate was 21.5%, compared with 33.6% a year earlier. The $22 million benefit is a notable non-recurring comparison factor.
Cash, debt and liquidity
At November 3, 2017, cash and cash equivalents were $125 million, with $8 million of restricted cash; total cash, cash equivalents and restricted cash were $133 million. Current assets were $976 million and current liabilities $730 million. Net debt carrying value was $1.031 billion, including $37 million current and $994 million long-term; principal debt was $1.043 billion. The $200 million revolving facility had no balance outstanding at quarter-end, and SAIC reported compliance with its debt covenants.
Nine-month operating cash flow fell $78 million year over year, chiefly because of $116 million of delayed customer collections; the filing also cites $22 million of current-period excess tax benefits as a partial offset. Capital expenditures were $15 million. Financing outflows were $203 million, including $40 million of dividends and substantial share repurchases. The company’s stated average minimum cash target is $150 million, above quarter-end cash and cash equivalents.
Backlog, outlook and notable items
- Total backlog was $10.744 billion at November 3, 2017, up from $8.020 billion at February 3, 2017; funded backlog was $2.609 billion and negotiated unfunded backlog $8.135 billion. Net bookings were approximately $2.6 billion in Q3 and $6.1 billion for nine months. SAIC attributed backlog growth to large U.S. Army, EPA and U.S. Central Command awards.
- Long-term management targets are low-single-digit annual internal revenue growth, annual adjusted EBITDA margin expansion of 10–20 basis points, and return of capital beyond operating needs. These are targets, not a specific quarterly or full-year forecast; the filing does not provide clear numerical FY2018 revenue or earnings guidance.
- Restructuring is expected to cost approximately $13 million, including $6 million severance and $7 million lease-exit costs, and to be completed in Q4 FY2018. Management expects annual gross savings of about $20 million, or net savings of about $11 million given the current contract mix.
- The final settlement of the terminated Army Brigade Combat Team Modernization program was ratified in September 2017, producing approximately $2 million of additional Q3 revenue and profit.
- SAIC had a remaining approximately $30 million commitment for long-lead materials for the Marine Corps Assault Amphibious Vehicle low-rate initial production phase, which was not yet fully awarded. If the award is not received, some costs may not be recoverable.
Risks and contingencies
SAIC cited exposure to U.S. government budget and spending changes, competitive bidding and pricing pressure, and customer contract cancellations or scope changes. Government audits for FY2012 and later remained open; the company recorded a $39 million liability for potential contract-cost audit refunds and cautioned that adverse audit outcomes beyond reserves could affect profitability. It also reported routine legal matters not expected by management to materially affect results, $11 million of letters of credit and $17 million of surety-bond obligations. Management said there were no material changes to previously disclosed risk factors or market risks. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether delayed customer collections normalize and operating cash flow recovers.
- Whether margin pressure from contract mix, materials, and contract estimate changes persists.
- Progress on backlog conversion, particularly the large unfunded portion, and the timing and funding of awards.
- Whether the Marine Corps production-phase award is received and the related material commitment is recoverable.
- Actual restructuring costs, completion timing, and delivery of the projected net savings.
- Potential outcomes of open government audits relative to the $39 million reserve, and the impact of the $22 million share-based compensation tax benefit on year-over-year earnings comparisons.