Science Applications International Corp. [SAIC] on Tuesday reported lower net income in its second quarter due to costs associated with its recent acquisition of Scitor and higher interest expense related to its borrowings for the acquisition.
Net income slid 35 percent to $22 million, 46 cents earnings per share (EPS), from $34 million (70 cents EPS). Adjusting for the acquisition and integration costs related to the $764 million Scitor deal, per share earnings in the quarter were 66 cents, topping consensus estimates of 60 cents.
Sales in the quarter increased 16 percent to $1.1 billion from $939 million. Excluding revenue from its former parent–SAIC and Leidos [LDOS] separated a year ago–sales increased 15 percent to $1.1 billion from $952 million. Organic sales were down nearly a percent with the overall increase due to the Scitor acquisition, although Scitor sales were also down about 5 percent quarter-over-quarter.
SAIC officials said on Tuesday’s earnings call that they expect organic sales to be flat for the year with a chance for a bump in the second half of the year. They also said and that initially Scitor will also contribute less to the top line than expected this year. Still, longer term, SAIC continues to expect that its annual organic growth will be in the low single digits.
John Hartley, SAIC’s chief financial officer, said on the call that the company expects to incur another $5 million in integration costs related to the Scitor purchase and related amortization around the deal will now be $32 million versus prior expectations of $19 million.
Tony Moraco, SAIC’s CEO, said on the call that he expects the federal government to begin its new fiscal year on Oct. 1 under a continuing budget resolution, although he doesn’t expect this to have a significant impact on the company’s financial results. He also said that even if the government ends up in a budget sequestration, the impact won’t be as great as it was in January 2013 because current operating levels within federal agencies are closer to the budget caps.
Free cash flow in the quarter was $16 million, lower than expected due to acquisition expenses, higher tax payments, and an increase in day sales outstanding. Backlog stood at $7.1 billion with $1.9 billion of the future business funded. Scitor added $1 billion to the total backlog. Orders totaled $1 billion for a book-to-bill ratio of about 90 percent of sales.
Moraco said that there is more proposal activity than in the past two years. He also said that there has been a slight change in customers’ pricing models, with somewhat less reliance on lowest price technically acceptable as a driver for contract awards with more interest in best value. Price sensitivity remains in the market, he added.