SAIC CEO: 'still investing in' training, cyber areas as Marine vehicle programs advance

At first glance, Science Applications International Corp.’s first quarter financial results suggest the government services contractor is off to a slow start for its 2018 fiscal year that began in February.

McLean, Va.-based SAIC reported a first quarter revenue decline of 1.8 percent to $1.1 billion, which would have shown a 9-percent fall when including an added week in the prior year period. Wall Street analysts expected sales to hit $1.3 billion.

Nearly $25 million in revenue losses stemmed from from a Homeland Security Department IT recompete loss in its fiscal 2017 and what CEO Tony Moraco described in a conference call with investors Monday as “other net declines across the portfolio due to customer budget constraints.”

There is also the fact that SAIC’s margins fell from the prior fiscal year’s quarter as the company increased its investments into two Marine Corps land vehicle integration programs: Amphibious Assault Vehicle and Amphibious Combat Vehicle. Those investments sought to get SAIC “well ahead of the production requirements that are there,” Moraco told analysts on the call.

Shares in SAIC traded down 7.7 percent Wednesday as investors appear spooked by those first quarter figures that followed the company’s FY 2017 report in March of a 2-percent organic sales decline. The stock has traded down 12.4 percent since the March 30 statement of FY 2017 results, well off its all-time record close on Feb. 27 at $88.86.

Despite revenue and profitability headwinds, Moraco told analysts on the first quarter earnings call those investments are part of a larger “step function” in the platform integration programs to get “processes and tools to move from a prototype environment into production.”

SAIC is “still investing in other areas” such as training and simulation and cybersecurity, Moraco said. He added both include “modest” research-and-development spend and “reliance on strategic alliance partners as we bring technology from commercial markets into the federal space.”

“So it's spread around. We're trying to be very diligent in the utility of it but confident that we're aligned,” Moraco said.

Both the Marine Corps AAV and ACV programs are intended to complement SAIC’s long-standing identity as an engineering and technical services provider for federal agencies. Both are currently in the engineering, manufacturing and development phase and have milestones that required the upfront investment, Moraco told investors.

Both SAIC and BAE are contracted to deliver 16 prototype ACV vehicles to the Marines for a one-year test phase followed by a contract award. SAIC”s ACV investments sought to get its vehicle “in place in advance of the Marine Corps test schedule and ensure that it is still a competitive bid for our program,” Moraco said.

For AAV, SAIC conducted more tests for the engineering phase and is awaiting a so-called “Milestone C” decision from the Marine Corps due in the late summer to advance to production that would start in the fall, Moraco said. SAIC is performing survivability upgrades on 16 AAV vehicles.

First quarter adjusted earnings before interest, tax, depreciation and amortization came in at 7.1 percent versus the 6.6 percent in the prior year period on the platform integration investments.

Moraco backed both programs’ potential to add both onto SAIC’s sales figures and margins and “further differentiate our solutions from the original equipment manufacturers and government services peer companies.”

Long-term, Moraco reiterated to investors SAIC’s financial targets of low-single digit sales growth after a forecasted flat FY 2018 and margin improvement of 10-20 basis points from the 2017 figure of 6.1 percent.

Moraco also gave investors one piece of positive news for SAIC as the company was confirmed as the winner of the Army’s “Virtual Systems Engineering Services” task order awarded through the General Services Administration’s OASIS professional services contracting vehicle.

General Dynamics Information Technology’s protest of the VSES award was denied and SAIC will proceed on the potential five-year, $402.2 million order.

VSES is one of three large task orders transitioning to OASIS out of the Army’s AMCOM Express contract, the largest in SAIC’s portfolio.

Separately, Moraco said SAIC is reviewing the award of the Strategic Systems Engineering Services task order to Raytheon announced late last week. SSES is worth up to $575 million over three years.

The potential three-year, $1 billion Battlefield Systems Engineering Services task order is due for award in August, Moraco told investors.

First quarter earnings of $1.08 per share topped analyst expectations of $1.04 EPS.

Earnings figures included an added $0.35 per share benefit from the adoption of a new accounting standard.