Business Context and Reporting Period
Company: SAIC, Inc. (formerly Science Applications International Corporation)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 31, 2010
Business Overview: SAIC provides scientific, engineering, systems integration, and technical services to U.S. military branches, Department of Defense (DoD) agencies, the intelligence community, Department of Homeland Security (DHS), and select commercial markets. The company operates through three segments: Government (96% of revenue), Commercial (4% of revenue), and Corporate and Other.
Key Corporate Event: In November 2009, the company completed a reclassification converting all Class A preferred stock into common stock on a one-for-one basis.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Fiscal 2008 |
|---|---|---|---|
| Revenues | $10,846 million | $10,070 million | $8,926 million |
| Operating Income | $867 million | $776 million | $673 million |
| Operating Margin | 8.0% | 7.7% | 7.5% |
| Net Income | $497 million | $452 million | $416 million |
| Diluted EPS (Continuing Ops) | $1.24 | $1.08 | $0.92 |
| Cash and Cash Equivalents | $861 million | $936 million | $1,096 million |
| Long-Term Debt | $1,103 million | $1,099 million | $1,098 million |
| Total Backlog | $15.6 billion | $16.8 billion | N/A |
| Funded Backlog | $5.3 billion | $5.6 billion | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8% year-over-year, driven by a 6% internal revenue growth rate. The Government segment grew 8%, while the Commercial segment declined 6% due to foreign currency impacts and reduced consulting volume.
- Profitability: Operating income increased 12% to $867 million. Operating margin expanded 30 basis points to 8.0%, attributed to stronger contract fees, cost efficiencies, and controlled SG&A expenses.
- Backlog Decline: Total backlog decreased by approximately $1.2 billion to $15.6 billion. This reduction was primarily due to lower new contract awards and the partial termination of the Army's Brigade Combat Team Modernization (BCTM) program.
- Cash Flow: Cash and cash equivalents decreased by $75 million. Operating cash flow was $620 million, offset by $306 million in investing activities (including $256 million for six acquisitions) and $398 million in financing activities (primarily $474 million in stock repurchases).
Guidance, Outlook, Risks, and Contingencies
Outlook and Management Commentary
Management anticipates modest increases in overall government spending for Fiscal Year 2011, though growth in mandatory costs and entitlements could impact future DoD spending. The company expects to recognize approximately $270 million in revenues from the restructured BCTM program in Fiscal 2011.
UK Pension Liability: The company expects to recognize pre-tax charges of $20 million to $30 million in Fiscal 2011 related to an underfunded UK pension plan associated with a contract expiring March 31, 2010. Approximately half of these charges are expected to be non-cash.
Material Risks and Contingencies
- Government Contract Dependency: 89% of revenues are derived from U.S. Government contracts. The U.S. Army and U.S. Navy each accounted for over 10% of total revenues (23% and 12%, respectively).
- Legal Proceedings:
- False Claims Act (MSRC): The DOJ filed a complaint alleging unfair advantage in a task order award. Potential exposure is estimated up to $230 million (trebled damages plus penalties), though the company believes the claims lack merit.
- Greek Government Contract: A firm-fixed-price contract for the 2004 Olympics security system has resulted in $124 million in recorded losses. The company is in arbitration seeking over $97 million in damages and release of $26 million in bonds. Outcome remains uncertain.
- NRC Lawsuit: A jury awarded the government $7 million in damages and penalties for alleged False Claims Act violations. The company has recorded a liability for the full amount and is appealing.
- Government Audits: The Defense Contract Audit Agency (DCAA) is re-auditing the company's accounting, billing, and indirect cost systems. The company has recorded a $22 million liability for potential refunds but notes that future adjustments could exceed estimates.
- Contract Termination Risk: The U.S. Government retains the right to cancel contracts at any time. The restructuring of the BCTM program highlights the risk of program modifications affecting revenue volume and profitability.
Investor Verification Checklist
- BCTM Program Resolution: Verify the final terms of the change order for the Army Brigade Combat Team Modernization program and its impact on future revenue and margins.
- Legal Exposure: Monitor the status of the DOJ False Claims Act lawsuit regarding the MSRC task order and the arbitration with the Greek Government, as adverse outcomes could materially impact financial position.
- DCAA Audit Outcomes: Track the results of ongoing DCAA audits of indirect cost systems, as retroactive adjustments could require significant customer refunds.
- UK Pension Charges: Confirm the final amount of the $20-$30 million charge expected in Fiscal 2011 related to the UK pension plan transfer.
- Backlog Realization: Assess the risk that the $10.3 billion in negotiated unfunded backlog may not be realized due to government budget constraints or contract cancellations.