By Calvin Biesecker
SAIC [SAI] on Tuesday reported strong profit growth in its third quarter that was relatively in line with expectations, but its new chief executive warned that he believes future discretionary defense spending will be “flat to slightly negative” even if the next budget contains an increase over inflation.
Any increase in the FY ’11 Pentagon budget will mainly be for “must pay” expenses such as personnel, healthcare and operations and maintenance, Walt Havenstein, SAIC’s CEO, said during an earnings call with analysts.
The company expects to meet its FY ’10 financial targets in general but warned that its organic growth the following year will be at the low end of its 6 to 9 percent goal range, which in turn means earnings will all be at the low range of 11 to 18 percent growth.
Havenstein said he is in the midst of a broad strategic review with SAIC’s board of directors that will help determine if adjustments need to be made to the company’s long-term financial goals.
A variety of factors are contributing to the expected slowdown in business in FY ’11, including more drawn out contract award decisions due to protests and increased scrutiny by contracting officials to avoid protests, as well as efforts to avoid organizational conflicts of interest and whether to insource certain work, SAIC officials said. Delays in planned procurement actions and numerous award protests have been particularly acute in the company’s business with the intelligence community, Havenstein said.
Over $2 billion in SAIC’s bid pipeline had been expected to be decided in 2009 but has slipped into 2010 for award decisions, Havenstein said. Nonetheless, the company’s overall business opportunity pipeline has grown by 42 percent to nearly $100 billion with logistics, cyber security, health care and C4ISR all being promising areas, he said.
Given an expected slowdown in business, J.P. Morgan defense analyst Joseph Nadol said in a note to clients yesterday that SAIC may get more aggressive with acquisitions. With $600 million in free cash flow, another $1 billion of cash on hand, and access to the credit markets, the company has the capacity for a large deal or a number of smaller ones, he said.
SAIC’s FY ’11 guidance will also be affected by the outcome of a contract with electricity distributor Scottish Power in the United Kingdom Scotland that the company currently manages but is being recompeted. Whether SAIC wins or loses the award, obligations will result in charges between $10 million and $30 million, Mark Sopp, SAIC’s chief financial officer, said.
Overall, net income increased 13 percent to $135 million, 34 cents earnings per share (EPS), from $120 million (29 cents EPS) a year ago, edging consensus estimates by a penny. Per share earnings were actually up 17 percent as the share count was reduced due to stock repurchases.
Operating margins increased 60 basis points to 8.4 percent due to the receipt of higher contract fees across the company’s contracts, improved efficiencies, sales of higher margin products and a $4 million real estate gain, Sopp said.
Sales in the quarter were up 5 percent to $2.8 billion from $2.6 billion a year ago, with only one percent of the gain organic. Total backlog at the end of the quarter was $16.6 billion and funded backlog was $5.5 billion, both down 3 percent from a year ago.
Havenstein said that the delays that have blocked up the contract award process with the start of Obama administration have begun to loosen up. He said the change in administration created about a “60-day deferral” in business and that most of the decisions industry has been waiting on, such as the country’s plans for Afghanistan, have been made.