By Calvin Biesecker
SAIC [SAI] on Tuesday reported strong earnings and sales for its second quarter and maintained its outlook for the fiscal year but is still awaiting key policy decisions from the Obama administration on government insourcing and conflicts of interest in contracting that will have a significant impact on the company and its competitors.
The insourcing initiative “promises a headwind for the entire contracting base,” Ken Dahlberg, SAIC’s chairman and CEO, said on an earnings call. Guidance from the White House Office of Management and Budget (OMB) issued at the end of July calls for agencies to cut their contract spending by 7 percent over the next two years and to “accelerate their insourcing of inherently governmental work,” he said. The guidance also calls for agencies “to share contractor performance reviews with other agencies,” he added.
Later this month, OMB is expected to issue further guidance that provides definition to inherently governmental work, work that can be outsourced, and when different types of contracts can be used, Dahlberg said. There is some insourcing already taking place but that “no clear trends” are evident yet, he said. In the second quarter, SAIC lost about 200 employees to the government yet made 1,700 new hires, he said.
Despite the fact that shifting certain work away from contractors and into the government will mean a loss of some business, Dahlberg said there are “positives” from this. One is that OMB is focused on the front end of the acquisition process, he said. Another is OMB’s call for cutting spending on cost base contracts by 10 percent in 2010. As this occurs and contracts shift from cost-reimbursement to fixed-price and costs become clear, Dahlberg expects this to create the “right incentives for both the government and contractors and could lead to better profitability if we could manage work more efficiently.”
Dahlberg also said that allowing agencies to share information on how well contractors have performed on past work “should reward contractors that perform best.”
As for Organizational Conflicts of Interest (OCOI), where a company may be involved in the front end of the acquisition process helping to establish requirements, and then competing for development and production work later, the Defense Department is expected to issue guidance shortly. Dahlberg expects some companies to divest business that conflicts with their strategic direction.
“Depending on how the guidance is written, there could be a substantial reshaping of the competitive landscape as most large contractors have a mix of development and advisory work with the attendant firewalls and OCOI mitigation plans,” Dahlberg said.
Still, it’s too early to tell what will happen until the DoD guidance is released, Dahlberg said. However, he believes the net result will be a “net positive” for SAIC because the company is “platform independent.”
Net income in the quarter increased 13 percent to $123 million, 31 cents earnings per share (EPS), from $109 million (27 cents EPS) a year ago. Operating margins improved 60 basis points to 8 percent. SAIC attributed the margin growth to improved cost efficiency and program performance. EPS growth of 19 percent outpaced the increase in net income as the number of stock shares outstanding declined due to stock repurchases by SAIC.
Sales increased 8 percent to $2.8 billion from $2.6 billion, with 7 percent of the gain organic, driven by a logistics contract and better than expected work under the Army’s Future Combat Systems program.
Bookings in the quarter lagged sales, but the company expects this to reverse in the second half of the year. Dahlberg said bookings were down mainly due to the lack of senior administration positions being filled. Other factors are delays due to additional scrutiny of contractors for potential conflicts of interest and more agency reviews to mitigate against contract protests, he said.
Dahlberg also said that the hefty backlog of opportunities contained in the economics stimulus package are starting to move into the acquisition cycle, which should help on the bookings front this fiscal year and next.
Total backlog was up 2 percent to $16.3 billion while funded backlog was up 4 percent to $5.6 billion from a year ago.