Fewer new contract starts slow SAIC quarterly revenue growth

Science Applications International Corp. reported first-quarter fiscal 2011 revenues of $2.69 billion, up 1 percent from $2.65 billion in the same quarter a year ago. Internal revenue growth fell 1 percentage point for the quarter, the company reported at the close of business June 3.

Internal revenue growth for the quarter, which ended April 30, was adversely affected by fewer new contract starts from lower recent bookings and lower demand for materials on a number of programs, SAIC said.

Operating income for the quarter was $207 million (7.7 percent of revenue), up 1 percent from $204 million (7.7 percent of revenue) in the first quarter of fiscal 2010.

“We won several significant contracts during the quarter in national priority areas such as cybersecurity and logistics,” said Walt Havenstein, SAIC's CEO, in the statement. “These awards reflect the strong alignment between our strategic capabilities and our customers’ missions. We improved our book-to-bill ratio considerably to 1.2, and our outlook for fiscal year 2011 remains unchanged.”

Operating income for the quarter included a $3 million severance charge in connection with the expiration of the Scottish Power IT outsourcing contract.

Income from continuing operations for the quarter was $125 million, up 7 percent from $117 million in the first quarter of fiscal 2010. The growth in income from continuing operations was primarily driven by a lower effective tax rate as a result of the resolution of income tax uncertainties, the company said.

Diluted earnings per share (EPS) from continuing operations for the quarter were 32 cents, up 10 percent from 29 cents in the first quarter of fiscal 2010, driven by the income increase from continuing operations and a lower share count compared to the same quarter a year ago.

Cash flow provided by operations for the quarter was $138 million (or 1.1 times income from continuing operations), down 15 percent from $163 million in the first quarter of fiscal 2010.

During the quarter, the company used $140 million to fund the acquisition of CloudShield Technologies, a cybersecurity and management solutions provider.

Also, SAIC spent $291 million to repurchase approximately 16.1 million shares, including 14.6 million under the company’s stock repurchase program and the remainder in recurring repurchases from employees in settlement of withholding taxes associated with stock option exercises and vesting events.

As of April 30, the company had $568 million in cash and cash equivalents and $1.1 billion in long-term debt.

“We continued to manage working capital well and deployed a significant amount of cash this quarter, particularly toward share repurchases,” said Mark Sopp, SAIC chief financial officer, in the statement. “We expect these actions will contribute to earnings growth in future quarters, while we have retained ample capacity for investment opportunities ahead.”

Net new business bookings totaled $3.2 billion in the first quarter, representing a book-to-bill ratio of 1.2.

During the quarter, the company won several large, competitive definite-delivery contracts including:

• A five-year, $351 million follow-on task order from the Naval Surface Warfare Center Crane Division.
• A four-and-one-half year, $128 million contract from the Army Sustainment Command.
• A five-year, $108 million contract from the Space and Naval Warfare Systems Command.

In addition, SAIC also won several indefinite-delivery, indefinite-quantity contracts that are not included in net bookings.

SAIC’s year-to-year revenue growth trailed that of Lockheed Martin IS&GS, Northrop Grumman IT, and Raytheon IT, according to TBR, a market research and industry advisory firm.

Only General Dynamics IS&T trailed SAIC in terms of growth during the first quarter 2010, posting 0.7 percent for the period, the company said.

“SAIC forged ahead with its plans to extract growth from the five target markets of C4ISR, cybersecurity, health, energy, and logistics,” TBR said.

TBR said it believes the transition to deriving greater revenue from the higher growth areas “helped to a certain degree but failed to substantially overcome the impact of lengthened decision cycles and reduced program funding and the accompanying drag on revenues during" the first quarter of fiscal 2010.

“We expect SAIC’s aggressive push into expanding its offering portfolio, underlined by its vibrant acquisition activity in the last year, will begin to pay dividends in [the second quarter of fiscal 2010], with growth velocity increasing to 1.9 percent, regaining some positive momentum,” it added.