Business context and reporting period
Science Applications International Corporation (SAIC) filed this unaudited Form 10-Q for the second quarter of fiscal 2015, covering the three and six months ended August 1, 2014. SAIC provides technical, engineering and enterprise IT services, primarily to the U.S. government; it reports as one operating segment. SAIC began operating as an independent public company after its September 2013 spin-off from Leidos. Comparisons with 2013 include pre-separation combined results and may not represent the costs of a stand-alone company.
Financial results and key metrics
| Metric | Three months ended Aug. 1, 2014 | Six months ended Aug. 1, 2014 |
|---|---|---|
| Total revenues | $952 million, down 8% | $1.929 billion, down 11% |
| Operating income | $59 million; 6.3% margin | $118 million; 6.2% margin |
| Net income | $34 million | $68 million |
| Diluted EPS | $0.70 | $1.38 |
| Operating cash flow | Quarterly value not clearly stated in the financial statements | $99 million, versus $48 million |
Revenue figures include work performed by former Parent at cost: $13 million for the quarter and $28 million for six months. Revenue excluding that work was $939 million and $1.901 billion, respectively. Six-month capital expenditures were $10 million; financing cash outflow was $96 million, including $27 million of dividends and $72 million of share repurchases/withholding. Cash declined $7 million to $247 million.
At August 1, 2014, current assets were $980 million and current liabilities $568 million. Debt and capital lease obligations totaled $502 million, including $26 million current; the term loan was $500 million. SAIC had an undrawn $200 million revolver and reported compliance with debt covenants. A $500 million term loan was hedged with interest-rate swaps; the stated effective rate was 1.94%.
Changes versus the prior comparable periods
- Quarterly revenues fell $82 million and six-month revenues fell $244 million, including the pass-through work performed by former Parent. Drivers included the loss of the DISN Global Solutions program, completed Army Reserve/National Guard technical-support work, reduced DoD materials and subcontract activity, and lower logistics activity associated with in-theater force drawdowns.
- Operating income rose to $59 million for the quarter and $118 million for six months. The prior-year periods included $18 million and $34 million, respectively, of separation and restructuring costs, which were absent in 2014. Higher current-period contract-estimate gains also contributed; lower revenue volume partly offset these benefits.
- Six-month operating cash flow increased to $99 million from $48 million, reflecting higher net income, use of prepaid income taxes, and prior-year separation-related payments.
- Funded backlog increased to $1.751 billion from $1.639 billion at January 31, 2014; negotiated unfunded backlog declined to $4.748 billion from $5.012 billion. Total backlog was $6.499 billion, down from $6.651 billion.
- SAIC paid dividends of $0.56 per share during the six-month period and repurchased approximately 2 million shares under its authorization through August 1.
Outlook, risks and contingencies
Management said existing cash, operating cash generation and available bank financing should provide adequate resources for short- and long-term needs, and it believed financing arrangements would support operations over the next 12 months. The filing provides no numerical revenue or earnings guidance. Management expects to recognize a substantial portion of funded backlog within 12 months, but government customers may reduce scope or cancel contracts.
Key risks include dependence on government spending—over 90% of fiscal 2014 revenue was from U.S. government contracts and approximately 70% from DoD—budget reductions, funding delays, competitive bidding and pricing pressure. The filing highlights bid protests connected to the spin-off and potential loss of access after September 30, 2014 to certain contract vehicles not novated to SAIC. A protested NASA award valued at approximately $1.8 billion was terminated after the GAO sustained a protest; NASA was conducting a new solicitation in which SAIC expected to compete.
SAIC recorded a $19 million liability for estimated customer refunds arising from government indirect-cost and compliance audits. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company remained subject to monitoring and compliance obligations connected with the former Parent’s CityTime-related agreements. A BCTM program fee settlement remained subject to formal contract modification; approximately $2 million was receivable at period-end. Letters of credit and surety-bond obligations were $6 million and $11 million, respectively. Management estimated that $6 million of swap-related unrealized losses would be reclassified into earnings during the following 12 months.
Management identified no material changes to market risks or critical accounting policies, and concluded disclosure controls were effective. The company had not yet determined the effects or selected an adoption method for the new revenue recognition standard, effective for SAIC beginning fiscal 2018.
Most important facts for investors to verify
- Whether contract awards, funding releases and backlog conversion can offset the revenue declines from program losses and reduced activity.
- Progress and outcomes of spin-off-related bid protests, contract novations and access to contract vehicles after September 30, 2014.
- Cash generation and liquidity after dividends, repurchases, capital spending and debt service, including compliance with loan covenants.
- Potential changes to the $19 million audit reserve and the status of the BCTM fee settlement.
- How much of the improvement in operating income reflects recurring performance rather than absence of prior-year separation costs and favorable contract-estimate adjustments.