By Calvin Biesecker
SAIC [SAI] is taking a more aggressive approach to acquisitions as market growth concentrates in certain areas and other companies divest assets to reshape their businesses, creating opportunities for the company to become a consolidator, Walt Havenstein, SAIC’s CEO, said this week.
Look for SAIC to become “a bit bolder” in its acquisition strategy, particularly in going after companies and assets that are larger than the “bolt-on” deals that previously defined its acquisitions, Havenstein said during SAIC’s fourth quarter earnings call on Wednesday.
As budgets for the federal government become increasingly constrained, SAIC has been focusing in five key areas it believes will sustain growth, including intelligence, surveillance and reconnaissance, cyber security, logistics, readiness and sustainment, and energy and healthcare information technology. Havenstein expects acquisition opportunities in these areas to be larger and said that SAIC will be a consolidator here.
“This approach to acquisitions may necessarily cause us to reshape and improve our portfolio of offerings in the high growth areas we are emphasizing,” he said.
In the past, SAIC has looked at public companies for acquisition targets but has been wary of getting caught up in bidding wars, Havenstein said. Going forward, the business fit and economics of a deal will remain key criteria but Havenstein believes that as public companies begin divesting assets in response to changing market dynamics, some of these business operations will be “attractive” to SAIC. The company will be “thoughtful” about deals for public companies and their assets, he said.
SAIC did announce that it is divesting its commercial information technology (IT) services business that serve the oil and gas industry, saying it will remain focused in serving domestic utilities and other state and local agencies in areas such as smart grids and renewable energy.
In the fourth quarter, SAIC posed a 7 percent increase in its net income to $132 million, 36 cents earnings per share (EPS) from $123 million (31 cents EPS) a year ago, driven by higher operating margins due to improved performance and a lower tax rate. Earnings per share growth also benefited from SAIC’s stock repurchases, which lowered the overall share count. Consensus estimates were for EPS of 29 cents.
Sales in the quarter increased 3 percent to $2.8 billion from $2.7 billion with a scant 1 percent of the gain organic. SAIC said organic growth was drive by increased business on certain command, control and communications, and intelligence and cyber security contracts.
SAIC’s win rate and bookings were strong during its fiscal year 2010, but the constrained budget environment combined with an ongoing Continuing Resolution for FY ’11 that is maintaining federal funding at FY ’10 levels or below has made it difficult to convert program wins into sales, Havenstein said. The market is headed to a “new normal” that will “contract,” he said.
Still, SAIC touted increased investments in its business development for contributing to strong bookings, which were $3.8 billion in the quarter and $12.8 billion for the fiscal year, for book to bill rations of 1.4 and 1.2, respectively. Moreover, Havenstein said that SAIC’s pipeline of business opportunities grew at double-digit rates in the fiscal year.
Total backlog at the end of the fiscal year was $17.3 billion, up 11 percent. Funded backlog stood at $5.5 billion, up 6 percent during the year.
For the year, SAIC’s net income increased 24 percent to $618 million ($1.51 EPS) versus $497 million ($1.26 EPS), due to a handsome $56 million royalty payment earlier in the year, strong operating performance and a lower tax rate due to the retroactive extension of the federal research and development tax credit. Free cash flow topped $600 million.
Sales for the year were up 2 percent to $11.1 billion from $10.8 billion driven by acquisitions as organic growth was flat.
SAIC left its earnings guidance for fiscal year 2012 intact at between $1.35 to $1.46 EPS, although it reduced sales guidance by $200 million to between $11 billion and $11.5 billion to account for the planned divestiture of portions of its commercial IT business.