Business Context and Reporting Period
This Form 8-K, dated March 14, 2012, is filed by SAIC, Inc. (Science Applications International Corporation). The filing reports the entry into a material definitive agreement regarding a settlement with the U.S. Attorney's Office for the Southern District of New York and the City of New York concerning the CityTime automated time and attendance system.
Key Financial Metrics
The settlement involves a total payment of approximately $500.4 million to the United States, consisting of $370.4 million in restitution to the City and a $130 million penalty. Additionally, the Company will forgo collecting a $40 million receivable from the City.
The aggregate loss provision recorded for the settlement is $540.4 million, allocated as follows:
- Third Quarter Ended October 31, 2011: $232 million loss provision.
- Fourth Quarter Ended January 31, 2012: $308.4 million loss provision.
Accounting treatment for the aggregate $540.4 million loss:
- Revenue Reduction: $410.4 million (comprising the $370.4 million restitution and $40 million receivable write-off).
- SG&A Expense Increase: $130.0 million (the penalty).
The payment of $500.4 million is scheduled for the first quarter ending April 30, 2012.
Material Changes Versus Prior Period
The filing details the specific financial impact of the settlement on the Company's results for the third and fourth quarters of fiscal year 2012 compared to prior periods without the settlement:
| Financial Metric | Q3 2011 Impact | Q4 2012 Impact | Fiscal Year 2012 Total Impact |
|---|---|---|---|
| Decrease in Revenues | $(52.0) million | $(358.4) million | $(410.4) million |
| Increase in SG&A Expenses | $180.0 million | $(50.0) million | $130.0 million |
| Decrease in Operating Income | $(232.0) million | $(308.4) million | $(540.4) million |
| Decrease in Income from Continuing Operations | $(209.0) million | $(267.4) million | $(476.4) million |
Note: The table reflects the negative impact of the loss provision on the reported figures for those periods.
Guidance, Outlook, Risks, and Contingencies
Deferred Prosecution Agreement (DPA): The Company entered a DPA effective March 14, 2012. Prosecution of a single criminal count alleging overpayment for the CityTime system is deferred for three years. If the Company complies with terms, the charge will be dismissed.
Independent Monitor: The Company must retain an independent monitor selected by the U.S. Attorney's Office for a three-year period to oversee policies and practices.
Government Contracting Risks: The Company is in discussions with U.S. Government customers regarding the settlement. While the Company does not expect termination of existing contracts or preclusion from new bids, no assurances are given regarding the timing or outcome of these discussions.
Tax Contingency: The estimated tax benefit assumes $163 million of the loss provision is deductible. The actual deductible amount is subject to IRS review, with an agreement expected within 12 to 18 months.
Investor Verification Checklist
- Verify the exact timing of the $500.4 million cash outflow in Q1 2012.
- Monitor the outcome of discussions with U.S. Government customers regarding contract status.
- Track the IRS determination on the tax deductibility of the $540.4 million loss provision.
- Review the scope and findings of the independent monitor's reports over the three-year DPA period.
- Confirm the final dismissal of the criminal count upon successful completion of the DPA terms.