SAIC Q2 Earnings Nosedive Y/Y

Zacks

SAIC, Inc’s (SAI) second quarter fiscal 2014 net income of $42 million or 12 cents per share slumped from $108 million or 32 cents per share reported in the year-earlier quarter. The year-over-year decline was primarily due to reductions in operating income associated with the corporate decision to split into two separate publicly traded companies. The quarterly earnings also missed the Zacks Consensus Estimate of 20 cents.

Revenues in second quarter fiscal 2014 dropped to $2.47 billion from $2.83 billion in the second quarter of fiscal 2013. The quarterly revenues missed the Zacks Consensus Estimate of $2.55 billion. The decrease was driven by ramp down of certain contracts, drawdown of overseas U.S. military forces and reduction of the U.S. Government budget, partially offset by growth in the Health and Engineering segment.

Segment Details

Effective Feb 1, 2013, SAIC redefined its reportable segments as a preparation for planned separation. Technical Services and Information Technology segment will operate as an independent namesake company, while the Health and Engineering and National Security Solutions segments will operate as a separate independent under the name Leidos Holdings, Inc.

Segment Performance

Health and Engineering delivered sales of approximately $451 million in the second quarter, up 8% year over year. The year-over-year increase was driven by the acquisition of maxIT Healthcare Holdings, Inc - a provider of healthcare IT consulting services to commercial client.

National Security Solutions revenues stood at $1,022 million in second quarter 2014, down 15% year over year. The decrease in segment revenues was driven by ramp down of the Joint Logistics Integration JLI program for tactical mine resistant ambush protected vehicles and the completion of several intelligence programs.

Technical Services and Information Technology revenues stood at $1,009 million, down 16% year over year. The revenue contraction was driven by the ramp down of DISN Global Solutions DGS  program with the Defense Information Systems Agency and the completion of a network operational management program for the U.S. Forces in Afghanistan.

Margins

Operating income for the quarter was $75 million, down from $189 million in the year-ago period. The reduction in operating income was primarily due to separation transaction expenses, intangible asset impairment charges, increase in the net unfavorable changes in contract cost and contraction in revenues.

Balance Sheet, Cash Flows and Backlog

At quarter-end, cash and cash equivalents aggregated $462 million. Long-term debt stood at $1.3 billion. During the reported quarter, the company paid a cash dividend of $1.12 per share, which included a special cash dividend of $1.00 paid in Jun 2013.

Cash flow provided by continuing operations for the quarter was $217 million versus $200 million in the year-ago period.

Net business bookings stood at $1.86 billion in the reported quarter, representing a book-to-bill ratio of 0.75.

The company's backlog of signed business orders at the end of the second quarter fiscal 2014 was $15.88 billion, of which $4.56 billion was funded. Total order backlog decreased 4% year over year and funded backlog decreased 17% year over year.

Outlook

For fiscal 2014, management expects revenues to be in the range of $9.7 billion to $10.2 billion.  Earnings per share from continuing operations are expected to be in the range of 95 cents to $1.03 and cash flow from continuing operations is projected to be around $450 million.

SAIC has a large pipeline of new projects and continues to win deals at regular intervals. The contract wins are key catalysts that are likely to augment the company’s revenues. The company is looking forward to the planned separation to remain competitive in the market.

SAIC currently has a Zacks Rank #2 (Buy). Other stocks that look promising and are worth considering now include Booz Allen Hamilton Holding Corporation (BAH) with Zacks Rank #1 (Strong Buy), and Providence Service Corp (PRSC) and ICF International Inc (ICFI), both carrying a Zacks Rank #2 (Buy).
 

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