Science Applications International Corp. [SAIC] on Thursday posted higher sales and net income with the results driven by the company’s acquisition of Engility in January and improved performance across its portfolio.
Sales were up 37 percent to $1.6 billion from nearly $1.2 billion a year ago, with all of the growth coming from Engility as organic revenue declined 3 percent. The first quarter was the only one this fiscal year that organic growth is expected to contract and will be stronger in the second half of the year, Charlie Mathis, SAIC’s chief financial officer, said on the company’s earnings call.
Organic sales were down due to a tough comparison with the first quarter a year ago when sales benefited from support for humanitarian relief missions in Puerto Rico and revenue dis-synergies related to the Engility deal that are expected to total $100 million this fiscal year. Mathis said the dis-synergies are the elimination of prime and subcontractor duplicate sales and lower revenue on cost-plus contracts due to the achievement of cost synergies with the integration of Engility into SAIC.
Net income in the quarter rose a strong 12 percent to $55 million, 92 cents earnings per share (EPS), from $49 million ($1.13 EPS) a year ago, topping consensus estimates by 9 cents per share. The decrease in per share earnings in the quarter is due to a spike in the number of shares outstanding as SAIC issued about 17 million new shares as part of the deal.
Operating margin in the quarter was 7.8 percent, up 130 basis points from a year ago, and adjusting for acquisition and integration costs, margins were 8.3 percent. Mathis said the company remains on track to reach its 9 percent target within three years.
SAIC recorded $1.4 billion in orders in the quarter, amounting to 90 percent of sales. Nazzic Keene, SAIC’s CEO-elect, said on the call that with fully appropriated budgets, the company’s customers are spending with “confidence,” creating favorable market conditions for accelerated growth.
There has been no slowdown in SAIC’s business development activities despite the ongoing integration of Engility, Keene said, adding that 70 percent of the first quarter bookings represented new business. Overall, the company has an estimated $13 billion in submitted bid proposals awaiting award, which is the same as at the end of the fourth quarter, and expects to submit bids in the second quarter worth about $6 billion, she said.
About 70 percent of the outstanding bids are for new business, which Keene said is a further indicator of a positive market environment and provides the opportunity to accelerate growth.
Total backlog at the end of the first quarter stood at $13.6 billion, down from $13.8 billion at the end of the fourth quarter, with funded backlog at $3 billion, up 8 percent from the end of the fourth quarter.
Free cash flow in the quarter was $169 million.
SAIC left its guidance intact for the year.
Keene said that SAIC has already met its $38 million target of cost savings synergies this year related to the Engility integration and is targeting another $38 million next year.
Prior to becoming CEO-elect, Keene was SAIC’s chief operating officer, a position she used to help define the company’s business strategy. The strategy remains intact but, under the “new lens” as incoming CEO, Keene said she may adjust priorities in a few areas “to accelerate sustained profitable revenue growth given our newly acquired capabilities, talent and customer access.”
As for additional mergers and acquisitions, Keene said SAIC’s strategy isn’t geared toward frequent deals, although the company will continue to monitor the market in case a “compelling” opportunity comes along.