Science Applications International Corp. [SAIC] last Thursday posted a slight dip on both sales and net income in its second quarter as revenue declined on contract completions, a contract loss, and reduced work on some contracts.

Net income in the quarter was down 3 percent to $36 million, 80 cents earnings per share (EPS), from $37 million (81 cents EPS) a year ago, and fell short of consensus estimates by a dime. Operating margin slipped 90 basis points to 5.5 percent.

Sales were $1.1 billion, down 2 percent from a year ago. With rounding, sales a year ago were also $1.1 billion. Organic sales were 1 percent.

SAIC CEO Tony Moraco
SAIC CEO Tony Moraco

Tony Moraco, SAIC’s CEO, said on Thursday evening’s earnings call that the company doesn’t have any “execution” issues on its contracts but that some federal civilian customers are holding back on upgrading technology and modernizing information technology due to uncertainty heading into the government’s fiscal year 2018 that begins Oct. 1. The reductions in government spend rates, contract mix and “discrete corporate expenses resulted in lower profitability in the quarter,” he said.

Looking to the new fiscal year, Moraco said “there is an expectation of a modest increase to the fiscal year 2018 defense budget, thus providing opportunities for growth in the largest portion of our customer base.” He added that customers in the defense and intelligent community are awarding contracts and are “looking to increase funding in areas of emphasis such as military readiness, IT modernization, cyber operations, and training and simulation.”

Jefferies analyst Sheila Kahyaoglu, who has a hold rating on SAIC, said in a note to clients Thursday evening that she expects the company’s sales this year to be down a percent.

Bookings in the quarter were very strong, $2.1 billion, and total backlog stood at $9.2 billion, up from $8 billion since the start of the company’s fiscal year. Funded backlog was $1.8 billion, the same as at the start of the fiscal year.

Moraco said the company is facing a recompete for the Battlefield Systems task order with an award decision due in November. The contract is potentially worth $1 billion over three years, he said.

Free cash flow in the quarter was a $38 million outflow.