Science Applications International Corp. [SAIC] on Tuesday posted mixed results to open its new fiscal year as earnings were level in the first quarter despite higher sales.
Net income was $49 million in the quarter, same as a year ago, although earnings per share (EPS) were raised a nickel to $1.13 due to fewer shares of stock outstanding. Sales increased nearly 7 percent to $1.2 billion from $1.1 billion a year ago driven by higher sales on existing supply chain contracts and also by work on new contracts supporting NASA and the Environmental Protection Agency.
Despite the higher sales, earnings were flat due to a lower tax deduction from stock based compensation and lower operating margin. Margin was down on the higher supply gain sales, which carry lower operating margins.
Tony Moraco, SAIC’s CEO, said on the company’s earnings call Tuesday evening that the government’s passage in late March of an omnibus spending bill for fiscal year 2018 raises expectation for the pace of contract awards to pick up as the year progresses. The higher award activity this year will help SAIC in the next fiscal year, he said.
Given the federal budget agreement for fiscal years 2018 and 2019 “and customers looking to modernize their capabilities and operations, we are optimistic for increased demand and quicker contract decisions that will enable our customers to move forward with their mission imperatives,” Moraco said in his scripted remarks at the outset of the earnings call. “Our discussions with government leadership has centered on their desire to adopt existing technologies in order to reduce development costs and risks, while accelerating the delivery of mission capability to the end user.”
Moraco said SAIC has $15 billion in bids outstanding, about the same as at the end of the fourth quarter, adding later that the company has a chance this year to outdo its 2.5 percent sales growth it achieved in fiscal year 2018. Sheila Kahyaoglu, an aerospace and defense analyst with Jefferies, said in a client note on Wednesday that the robust opportunity pipeline suggests mid-single digit revenue growth in SAIC’s fiscal year 2019.
Mergers and acquisition (M&A) activity is picking up along with market consolidation, Moraco said, adding that SAIC will remain disciplined in its approach to acquisitions. The company is primarily looking to broaden its customer base and add new capabilities with any deals, he said.
The brighter outlook for the federal market is likely driving increased M&A, Moraco said.
Free cash flow in the quarter was $82 million and orders were $1 billion. Backlog at the end of the first quarter stood at $10 billion, down $200 million since the end of the fourth quarter.