Science Applications International Corp. [SAIC] on Wednesday posted higher sales due to its May acquisition of Scitor but net income fell on higher interest expense related to its borrowings to fund the Scitor deal.
Net Income slipped 8 percent to $34 million, 72 cents earnings per share (EPS), from $37 million (77 cents EPS) a year ago. Excluding acquisition and integration costs related to Scitor, adjusted earnings were 73 cents EPS, topping consensus estimates by 8 cents per share, and adjusted operating margin was 5.8 percent, down a half-percent from a year ago.
SAIC said the decline in net income stemmed from increased interest expense on incremental term loan borrowings related to the Scitor acquisition, offset somewhat by a lower tax rate and a slight increase in operating income. The higher operating income was due to business from Scitor.
Sales in the quarter increased 13 percent to $1.1 billion from $1 billion with Scitor contributing $148 million while organic revenue was down 2 percent related to lower material volume due to the loss of a supply chain contract. Scitor’s sales in the quarter were down $10 million from a year ago, a disappointment, SAIC CEO Tony Moraco said on the company’s earnings call.
SAIC sees additional costs related to completing the integration of Scitor into the company eating between $3 million and $4 million from its bottom line in the fourth quarter, John Hartley, SAIC’s chief financial officer, said on the call. He also said that based on a review of Scitor’s facility needs, SAIC plans to consolidate Scitor’s real estate at a cost of $10 million over the next few quarters with the end result being about $6 million in annual cost savings.
SAIC is looking into accelerating the facilities consolidation so that as much as half the estimated cost of doing so could hit in the fourth quarter, Hartley said.
The reasons for the contraction in Scitor’s sales has to do with overall budget reductions that have affected the fiscal environment the past few years, increasing competition where the government is looking for better pricing, and some business going toward small business set asides, Moraco said. There will continue to be “modest headwinds” affecting Scitor in the next few quarters, but SAIC also expects to take advantage of market access it gained by acquiring Scitor for its services, he said.
SAIC recorded $1.4 billion in orders in the quarter for a 1.2 book-to-bill ratio. Scitor’s book-to-bill ratio was lower than SAIC’s order rate overall, Hartley said, adding that Scitor’s intelligence business is typically “volatile” when it comes to order flow.
Total backlog at the end of the quarter stood at $7.4 billion with $2.1 billion funded. At the end of SAIC’s previous fiscal year, total backlog stood at $6.2 billion with $1.7 billion funded. Scitor added $1.1 billion to SAIC’s backlog this year.
Moraco said the two-year budget deal Congress and the Obama administration agreed on this fall has improved the federal fiscal environment, adding that it should give contracting officials more confidence in making awards. He also said the company has more than $13 billion in submitted proposals awaiting award decisions.
SAIC said its long-term financial targets are unchanged with annual organic growth still projected to be in the low single digits and operating margins improving 10 to 20 basis points yearly. For the current fiscal year, SAIC still expects relatively flat sales, Hartley said.
Free cash flow in the quarter was $63 million.