SAIC [SAI] last Thursday reported lower first quarter net income, although the company managed to grow its sales in the face of a contracting government services market.
Net income fell nearly 11 percent to $117 million, 35 cents earnings per share, from $131 million (36 cents EPS) a year ago. Per share earnings were barely down due to share repurchase activity. The results topped consensus estimates by two cents.
Higher indirect spending, particularly on bid and proposal costs, an $8 million reduction expected contract profits, and a difficult comparison from a year ago when SAIC received $6 million on a real estate sale led to the profit decline.
Sales increased 3 percent to $2.8 billion from $2.7 billion, with 2 percent of the gain organic, a solid showing amid a constrained federal spending environment. SAIC’s overall performance in the quarter “reflects the dynamics of the marketplace” but the organic growth is a “positive sign” the company is focusing in the right strategic growth areas, John Jumper, SAIC’s president and CEO, said on the earnings call.
JP Morgan aerospace and defense analyst Joseph Nadol said on Friday in a note to clients that SAIC’s first quarter was “solid” and that the 2 percent organic growth was “good,” noting that none of the company’s peers that are covered by the investment bank had organic growth in the latest quarter.
Jumper said that SAIC’s business in intelligence, surveillance and reconnaissance, cyber security, energy, environment and infrastructure, and logistics, readiness and sustainment, all strategic focus areas for the company, increased 7 percent organically in the quarter. The rest of SAIC’s business contracted 3 percent, he said.
SAIC is putting the finishing touches on the execution plan for its new business strategy and will deliver the plan to its board of directors for review later this month. Jumper said the company will have more to say about the strategy later but he offered a glimpse of some of its elements, including putting a focus on the ability to integrate capabilities onto existing platforms and to do so in shorter cycles.
Another part of the strategy is expanding business in the high growth markets, Jumper said. The company’s acquisition last August of Vitalize Consulting Solutions, a provider of business and information technology (IT) solutions for healthcare enterprises, is an example of this.
Stuart Shea, SAIC’s chief operating officer, said to expect more acquisitions by SAIC in the healthcare IT space.
SAIC is also increasing its emphasis in going after larger contracts, those that are worth more than $100 million. Two years ago the company had 29 contracts worth over $100 million and last year it had 49 of these awards. In the first quarter, the company won only seven contracts valued at more than $100 million but expects decisions by the end of its current fiscal year on 90 such contracts that it is gunning for, Shea said.
SAIC broke out its sales and operating income at the segment level, with higher organic revenues from its Defense Solutions, and Intelligence and Cybersecurity Solutions groups outweighing a decline in organic sales in the Health, Energy and Civil Solutions segment. Declines in operating income at the Health, Energy and Civil Solutions, and Intelligence and Cybersecurity Solutions segments more than offset a gain in Defense Solutions.
Bookings in the quarter were light, $2.1 billion representing a book-to-bill ratio of 0.8. However, Shea said that the company received $600 million in classified cyber security contracts during the quarter that will be booked in the second quarter.
Backlog at the end of the quarter stood at $17.4 billion, down 4 percent from a year ago, although funded backlog of $5.7 billion was up 14 percent from a year ago.
SAIC kept its guidance for the fiscal year intact, with sales expected to be between $10.7 billion and $11.2 billion with earnings between $1.26 to $1.36 EPS.