SAIC still haunted by CityTime scandal

Third-quarter profitability hurt by a $232 million loss related to the New York City workforce management contract.

Officials and employees of Science Applications International Corp. no doubt are wishing they’d never gotten involved with the corruption-plagued New York City workforce management contract known as CityTime.

In its report on its third-quarter fiscal 2012, which ended Oct. 31, released at close of markets Dec. 6, SAIC said results “were significantly impacted by a $232 million loss provision taken by the company relating to the investigations concerning the CityTime workforce management contract.”

Several former SAIC employees were indicted in the scandal, a husband-and-wife team involved in the project fled the country, and three key executives were fired for alleged failures of proper management because of the kickback scheme.

"Our actions taken in the third quarter in connection with the CityTime situation, including taking the loss provision, were significant and appropriate,” CEO Walt Havenstein said in the statement Dec. 6.

“Excluding this provision, results from operations in the third quarter were consistent with the company's expectation,” he added.

Havenstein, who has announced his retirement next June, added that throughout this period, employees have consistently remained focused on continuing to deliver operational excellence and new capabilities for our customers. “Strong new business bookings, generation of cash flow, and other positive milestones this quarter reflect this focus and teamwork," he said.

Revenues for the third quarter were $2.81 billion with an operating loss of $17 million, or minus 0.6 percent of revenue.

Operating income excluding the CityTime loss provision was $215 million or 7.5 percent of revenue, compared to $252 million, or 8.9 percent of revenue, in the third quarter of fiscal 2011.

SAIC said the decline in operating income, as adjusted, was primarily due to a $19 million impairment of certain intangible assets associated with the acquisition of CloudShield Technologies Inc. completed in 2010, and increased expenditures on internal research and development.

Loss from continuing operations for the quarter was $90 million.

Income from continuing operations excluding the CityTime loss provision was $119 million, compared to $151 million in the third quarter of fiscal 2011.

This decline in income from continuing operations, as adjusted, was attributable to the reduction in operating income described above and additional interest expense from the $750 million of debt issued in December 2010.

The entire CityTime loss provision was recorded within the Defense Solutions business segment, which recorded $1.117 billion in revenues for the quarter.

Defense Solutions revenues excluding the revenue portion of the loss provision were $1.169 billion, and decreased 4 percent from the third quarter of fiscal year 2011.

The decline in revenues, as adjusted, was due to the termination of the Army Brigade Combat Team Modernization contract, the June 2011 completion and delivery of the CityTime system, and reduced activity on an infrastructure support services program for the Defense Department, the company said.

These declines were partially offset by increased activity on a systems and software maintenance/upgrade program for the Army and ramp up of a new program to operate and maintain the enterprise network IT infrastructure for the State Department.

Defense Solutions operating loss for the quarter was $133 million (-11.9 percent of revenue). Defense Solutions operating income excluding the expense portion of the CityTime loss provision was $99 million, or 8.5 percent of revenue, down from 9.3 percent of revenue in the third quarter of fiscal 2011, due to the conclusion of certain contracts having relatively higher profit levels, the company said.

Health, Energy and Civil Solutions sector revenues increased 6 percent from the third quarter of fiscal 2011. Internal revenues increased 1 percent due to increased deliveries of non-intrusive cargo inspection systems, increased health care IT consulting services, design-build projects for geothermal plant construction, and an increase in disaster recovery support services.

These increases were partially offset by reduced activity on certain federal civilian agency programs, including those in support of NASA.

Intelligence and Cybersecurity Solutions operating income for the quarter was 5.6 percent of revenue, down from 8.8 percent in the third quarter of fiscal 2011.

SAIC attributed the decline in operating margin to a $19 million impairment of certain intangible assets associated with the CloudShield Technologies acquisition completed in 2010, and an increase in internal research and development spending.

SAIC, of McLean, Va., ranks No. 6 on Washington Technology’s 2011 Top 100 list of the largest federal government contractors.

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