Business Context and Reporting Period
Company: SAIC, Inc. (formerly Science Applications International Corporation)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended July 31, 2007
Business Overview: SAIC provides scientific, engineering, systems integration, and technical services to U.S. military branches, Department of Defense agencies, the intelligence community, and commercial markets. The company operates through three segments: Government, Commercial, and Corporate and Other.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended July 31, 2007 |
3 Months Ended July 31, 2006 |
6 Months Ended July 31, 2007 |
6 Months Ended July 31, 2006 |
|---|---|---|---|---|
| Revenues | $2,222 | $1,994 | $4,233 | $3,891 |
| Operating Income | $173 | $151 | $309 | $289 |
| Operating Margin | 7.8% | 7.6% | 7.3% | 7.4% |
| Net Income | $131 | $103 | $211 | $209 |
| Diluted EPS | $0.31 | $0.30 | $0.50 | $0.61 |
| Cash from Operations (6mo) | $128 | $287 | ||
| Cash and Equivalents | $1,131 (as of July 31, 2007) | |||
| Total Debt | $1,229 (Notes payable and long-term debt) | |||
| Backlog (Total Negotiated) | $14.1 billion (as of July 31, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 11% for the quarter and 9% for the six-month period compared to the prior year. This was driven by 8% internal growth (non-acquisition) and 3% acquisition-related growth. The Government segment grew 12% (quarter) and 10% (six months), while the Commercial segment declined slightly.
- Operating Income: Operating income rose 15% for the quarter and 7% for the six months. Improvements were driven by better management of indirect cost overruns on cost-reimbursable contracts ($12M benefit) and increased profitability in border/port security product shipments. These gains were partially offset by $8 million in data security remediation costs.
- Interest Income Decline: Interest income dropped significantly ($19M for the quarter, $34M for six months) due to lower cash balances following a $2.45 billion special dividend paid in November 2006.
- Discontinued Operations: The company recorded a preliminary pre-tax gain of $31 million from the reorganization and disposition of its 55% interest in AMSEC LLC. This contributed significantly to the increase in Net Income despite a slight decline in income from continuing operations.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management expects to recognize a substantial portion of the $4.5 billion funded backlog within the next 12 months. No specific forward-looking financial guidance was provided in this filing.
- Greek Contract Contingency: A significant risk involves a firm-fixed-price contract with the Greek Government. The company has recorded $123 million in losses to date. While a contract modification in March 2007 established a payment schedule and reduced bond requirements, uncertainties remain regarding final acceptance and potential additional losses. The company is using the completed-contract method for the development portion, meaning no revenue is recognized until completion.
- Telkom South Africa Arbitration: The company is in the second phase of arbitration seeking damages exceeding $200 million plus interest. A $9 million payment was received for uncontested damages, but the final outcome is not determinable.
- Stock Repurchases: The company repurchased 3.8 million shares under its authorized program during the quarter, with approximately $31.3 million of value remaining available for purchase.
- Liquidity: The company maintains a $750 million revolving credit facility, with $745 million available as of July 31, 2007. Management believes cash flows and borrowing capacity are sufficient for the next 12 months.
Investor Verification Checklist
- Greek Contract Resolution: Verify the status of the remaining subsystem acceptances and the negotiation regarding the $2 million price adjustment excess over the agreed limit.
- Discontinued Operations Gain: Confirm the finalization of the tangible net book value adjustment and resolution of contingencies related to the AMSEC LLC reorganization to validate the $31 million gain.
- Backlog Composition: Review the distinction between funded backlog ($4.5B) and negotiated unfunded backlog ($9.6B), noting that unfunded amounts are subject to future government appropriations.
- Security Remediation Costs: Monitor for any additional costs related to the data security lapses that incurred $8 million in expenses during the quarter.
- Interest Rate Exposure: Assess the impact of the company's fixed-rate debt structure versus the declining interest income from cash reserves.