Science Applications International Corporation (SAIC) — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended November 1, 2019. Dollar amounts are in millions, except per-share data. SAIC provides technical, engineering and IT services primarily to U.S. government customers. Results include Engility, acquired January 14, 2019; the prior-year comparison does not include Engility’s results.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Revenue | $1,630 | $1,177 | $4,839 | $3,467 |
| Operating income | $94 | $73 | $282 | $213 |
| Operating margin | 5.8% | 6.2% | 5.8% | 6.1% |
| Net income attributable to common stockholders | $55 | $48 | $167 | $146 |
| Diluted EPS | $0.94 | $1.11 | $2.82 | $3.37 |
| Operating cash flow | $116 | $86 | $389 | $162 |
Q3 revenue grew 38.5% and nine-month revenue grew 39.6%, primarily from Engility. Excluding acquired revenue, management reported revenue contractions of 1.5% for the quarter and 1.4% year to date, citing acquisition-related dis-synergies and, year to date, the completion of Marine Corps contracts. Operating income increased, but margins declined: Q3 cost of revenue was 89.3% of sales versus 89.0%; nine-month cost of revenue was 88.9% versus 90.1%. Management attributed margin pressure to higher intangible amortization, acquisition/integration costs and lower Q3 contract profit write-ups, partly offset by synergies and higher labor content.
Common-stockholder net income rose 15% in Q3 and 14% year to date, while diluted EPS fell, reflecting a substantially higher weighted-average share count following the Engility stock issuance. Higher interest expense and, in the quarter, a higher effective tax rate also partly offset operating-income gains. The nine-month effective tax rate was 22.3%, versus 17.4%.
Cash, debt and liquidity
- Nine-month operating cash flow was $389, up $227 year over year. Management cited Engility cash generation, strong customer collections and collections following the prior-year federal shutdown. Investing used $40; financing used $419; cash, cash equivalents and restricted cash ended at $176, down $70 from the start of the period.
- At November 1, cash and cash equivalents were $162; current assets were $1,424 and current liabilities $1,191. Receivables were $1,118.
- Debt principal was $1,957 ($1,936 net of issuance costs), comprising $918 of Term Loan A and $1,039 of Term Loan B. Net debt declined from $2,089 at February 1. The $400 revolving facility had no balance outstanding at quarter-end; SAIC reported compliance with credit-facility covenants.
- SAIC paid $65 in dividends and used $196 for stock repurchases and shares withheld for taxes during the first nine months; it also made $150 of voluntary Term Loan A prepayments.
Business trends, outlook and notable items
- Remaining performance obligations were $4.4 billion; SAIC expected to recognize approximately 80% within 12 months and 95% within 24 months. Total backlog was $14.506 billion at November 1, up from $13.801 billion at February 1, including $2.868 billion funded and $11.638 billion negotiated unfunded. Net bookings were $2.2 billion for Q3 and $5.5 billion for nine months. Management cited large awards, including classified intelligence-community and NASA work, and increased funding on existing contracts.
- No specific updated full-year financial guidance is stated in the supplied filing text. Management said the company expected existing cash, future operating cash flow and access to bank financing and capital markets to meet short- and long-term needs.
- Federal spending is a key exposure: continuing resolutions funded the government through December 20, 2019, and the filing noted possible shutdown risk. Other risks include budget changes, competitive bidding and pricing pressure, and government contract audits and compliance reviews.
- Government indirect-cost and Cost Accounting Standards matters carried a recorded liability of $51. Management warned that adverse audit adjustments exceeding reserves could materially affect profitability. SAIC also continued to negotiate recovery of costs after the Marine Corps terminated the Assault Amphibious Vehicle program for convenience; the filing gives no clear expected recovery amount.
- Engility purchase-price allocation remained preliminary. Q3 measurement-period adjustments increased goodwill by $14; the company expected to resolve outstanding valuation matters by Q4 FY2020. Q3 acquisition and integration costs were $12; nine-month costs were $30.
- Adoption of lease accounting added $169 of right-of-use assets and $184 of lease liabilities at transition. At November 1, operating lease liabilities totaled $201. SAIC reported no material changes to risk factors and effective disclosure controls.
Important facts for investors to verify
- How much of the reported growth and margin improvement is sustainable after separating Engility’s contribution, integration costs, dis-synergies and synergies.
- Whether backlog and remaining performance obligations convert to funded work and revenue on the expected timetable, particularly under continuing resolutions and competitive contract awards.
- Progress in reducing debt while funding dividends, repurchases and integration needs, and the effect of floating-rate debt and interest-rate hedges.
- Outcomes of government audits and the AAV termination-cost recovery negotiations, including whether recorded reserves remain adequate.
- Final Engility purchase accounting and any resulting adjustments to goodwill, intangible assets, liabilities or future amortization.