Science Applications International Corp. [SAIC] on Tuesday posted a slight increase in net income in its first quarter despite a double-digit percent dip in sales, but the company is seeing an increase in federal procurement activity.
Net income rose 3 percent to $34 million, 69 cents earnings per share (EPS), from $33 million (67 cents EPS), topping consensus estimates by two pennies. Earnings in the quarter suffered from about $1 million in severance expense and a year ago were hampered more so from separation expenses related from the split of old SAIC into Leidos [LDOS] and new SAIC.
Operating margin in the quarter was 6.1 percent and the company sees room for improvement, with a goal of attaining 10 to 20 basis points improvement annually until it reaches levels consistent with its markets, John Hartley, SAIC’s chief financial officer, said on the analyst call.
Sales fell 14 percent to $977 million from $1.1 billion while orders were a tad light at $910 million. Sales were negatively impacted in part from delays in funding related to a recent Army contract that had been protested but ultimately awarded to SAIC.
SAIC’s customers are obligating funds are obligating their funds “for shorter periods of time to maintain financial flexibility,” Tony Moraco, SAIC’s CEO, said on the call. He expects bookings to increase over the next two quarters inline with historical patterns.
In the past few months there hasn’t been any “significant change in the market environment,” Moraco said, adding that there has been a “modest increase in procurement activities” that are expected to accelerate through the rest of the company’s fiscal year. He also said there has been a pick-up of procurement activity with its federal civilian customers, the largest of which are NASA and the Department of Homeland Security, as they’ve adjusted to earlier budget pressures and “are now more confident,” maybe more so than the Defense Department.
Moraco said the company’s DoD customers are “still trying to assess their short and long-term priorities as they try and lay out this year’s budget” while keeping in mind the potential return of a budget sequestration.
The company expects sales in the second half of its fiscal year to be stable with last year’s results and than begin low single-digit growth in line with its long-term expectations, Hartley said.
Backlog at the end of the quarter stood at $6.6 billion, $1.6 billion of which is funded, down slightly from total backlog of $6.7 billion at the end of the fourth quarter, $1.6 billion of which was funded. Free cash flow in the quarter was $27 million.