Science Applications International Corporation (SAIC) — Form 10-K Summary
Business context and reporting period
SAIC provides technical, engineering, systems integration and enterprise IT services, primarily to the U.S. government. It serves more than 1,500 contracts and task orders and employed approximately 13,000 people. The company began operating independently after its September 27, 2013 spin-off from Leidos Holdings. This report covers the fiscal year ended January 31, 2014; fiscal 2014 results combine the predecessor businesses’ results before the spin-off with SAIC’s consolidated results afterward, so comparisons with prior years are not fully on a stand-alone basis.
Financial and operating metrics
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Total revenue | $4.121 billion | $4.781 billion |
| Operating income | $183 million | $281 million |
| Operating margin | 4.4% | 5.9% |
| Net income | $113 million | $182 million |
| Diluted earnings per share | $2.27 | $3.66 |
| Cash from operating activities | $183 million | $280 million |
| Funded backlog | $1.639 billion | $1.953 billion |
| Total backlog | $6.651 billion | $7.764 billion |
Fiscal 2014 operating margin was 6.0% excluding $58 million of separation and restructuring expenses, a non-GAAP presentation; the comparable fiscal 2013 margin was 6.6% excluding $28 million of such expenses. Fourth-quarter fiscal 2014 revenue was $941 million, operating income $56 million, net income $33 million and diluted EPS $0.66.
Year-end cash and cash equivalents were $254 million, versus $1 million a year earlier. Current assets were $994 million and current liabilities $564 million. Total debt and capital lease obligations were $502 million, including a $500 million term loan; the company also had an undrawn $200 million revolving facility. The term loan’s stated and effective rate was 1.94%; interest-rate swaps fixed the borrowing rate at 1.41%. SAIC reported compliance with debt covenants. Operating cash flow was $183 million; investing activities used $16 million and financing activities provided $86 million.
Material changes versus the prior comparable period
- Revenue fell 14% year over year. Management attributed the decline primarily to the wind-down of the DISN Global Solutions (DGS) program, lower logistics activity amid the in-theater drawdown, reduced material and subcontract revenue on Navy contract vehicles, and completion of an Army technical-support program, along with slower government ordering.
- SAIC was not awarded the DGS successor contract. DGS revenue declined from approximately $425 million in fiscal 2013 to approximately $120 million in fiscal 2014 as work transitioned to the successor contractor.
- Operating income declined 35%; margin fell from 5.9% to 4.4%. Lower revenue, additional separation costs, the loss of relatively higher-margin DGS revenue and unfavorable contract estimate changes contributed.
- Operating cash flow decreased $97 million. Management cited lower net income and a $14 million employee payment following a change to the vacation accrual policy.
- Backlog declined by $1.113 billion. Net bookings were approximately $3.0 billion, down from $3.8 billion; about $250 million of contract awards were under protest and excluded from backlog pending resolution.
- Firm-fixed-price contracts represented 32% of revenue, compared with 33% in fiscal 2013; cost-reimbursement contracts were 37%, and time-and-materials/fixed-price-level-of-effort contracts were 31%.
Outlook, risks, contingencies and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management said it believed SAIC was positioned to protect its business and pursue growth through customer relationships, technical capabilities, cost efficiency and fewer organizational conflict-of-interest restrictions following the spin-off. It also emphasized that federal budget pressure, intense competition, affordability demands and changing procurement priorities could constrain opportunities and margins. The Bipartisan Budget Act increased defense spending limits for government fiscal years 2014 and 2015, but lower limits remained for later years and future sequestration implementation was uncertain.
- Customer and contract concentration: 97% of fiscal 2014 revenue came from the U.S. government; the Army accounted for 29% and the Navy 21%. Government customers can cancel, reduce or delay contracts, and competitive awards and protests can affect revenue.
- Spin-off transition: Contract novations, payment administration and reliance on transitional services from former Parent could affect cash flows or execution. Historical financial statements include predecessor allocations and may not represent stand-alone costs.
- Audit and compliance exposure: The company recorded an $18 million liability for its share of estimated customer refunds related to indirect-cost and Cost Accounting Standards audits for fiscal 2006–2013. Audit outcomes remain uncertain. SAIC also undertook monitoring and compliance obligations connected with former Parent’s CityTime-related agreements; SAIC was not subject to the deferred prosecution criminal count.
- Contract and legal matters: A NASA award associated with a proposed post-spin-off novation, valued at approximately $1.8 billion, was subject to a competitor protest that the GAO sustained; NASA sought reconsideration. Management stated other ordinary-course claims were not expected to have a material adverse effect. A formal modification remained outstanding for the terminated Army Brigade Combat Team Modernization program; the reported outstanding receivable was approximately $2 million as of August 2, 2013.
- Capital allocation and debt: SAIC paid $0.56 per share in dividends after separation and intended quarterly dividends subject to board discretion, cash needs and credit-facility restrictions. Debt covenants can restrict dividends and repurchases at specified leverage levels. Contractual obligations totaled $750 million, including debt, estimated interest, leases and purchase obligations.
- Unusual costs and accounting: Separation and restructuring expense was $58 million, including $20 million for lease termination and facility consolidation. Fiscal 2014 contract estimate changes reduced operating income by a net $4 million. Revenue recognition relies on estimates of costs and fees to complete long-term contracts.
Important facts for investors to verify
- Whether funded backlog converts to revenue as expected, and the outcome of the approximately $250 million of protested awards, including the NASA matter.
- How much revenue and margin are replaced after the DGS transition and other program drawdowns.
- Final government audit and indirect-cost adjustment outcomes relative to the recorded $18 million liability.
- Post-spin-off stand-alone operating costs, contract novations and cash collection arrangements with former Parent.
- Debt repayment, covenant headroom, swap effects and the sustainability of dividends amid lower operating cash flow.
- Whether federal budget changes, competition, staffing needs or contract performance affect future awards and profitability.