Science Applications International Corp. [SAIC] on Thursday reported strong earnings in its fourth quarter despite a modest decline in sales.
Net income jumped 29 percent to $36 million, 79 cents earnings per share (EPS), from $28 million (60 cents EPS) a year ago, topping consensus estimates by a penny. Earnings benefited from lower expenses in acquisition and integration, taxes and interest.
Sales fell 4 percent to just over $1 billion from just under $1.1 billion a year ago. The company attributed the sales decline to several factors, including one less working day in the quarter, lower subcontracting activity on an engineering support services contract with the Army Aviation and Missile Command, customer-related delays on an information technology (IT) services program for the Marine Corps, a re-compete loss of an IT integration program with the Department of Homeland Security (DHS), and other contract decreases.
Tony Moraco, SAIC’s CEO, said on an earnings call that whatever the federal government decides to do with the current FY ’17 budget, the impact on the company’s financial results this year will be minimal. The government is currently operating on a continuing resolution that limits funding to FY ’16 levels, although if Congress passes appropriations bills that become law, that would allow agencies to begin spending funds at FY ’17 levels.
The resolution is set to expire on April 28. The Trump administration has proposed supplemental funding requests that would add funds for the Defense Department and DHS in FY ’17.
Moraco any budget changes will be minimal for SAIC because of the time it takes to get “additional funds on contract.”
Overall in 2016 SAIC’s net income was $148 million ($3.22 EPS), up 26 percent from $117 million ($2.47 EPS) reported in 2015. Sales increased 3 percent to $4.5 billion from $4.3 billion a year ago due to the acquisition of Scitor in May 2015. Organic revenue was down 2 percent for the year mainly due to reductions in the company’s supply chain business.
SAIC doesn’t provide specific guidance but Moraco said the outlook for sales is basically flat in 2017. The company will have to overcome about $40 million to $50 million in lost annual revenue from the DHS IT contract.
Longer term, SAIC still expects annual organic revenue growth in the low-single digits with operating margins up 10 to 20 basis points annually.
Orders in the quarter were $800 million and for the year were a robust $5.3 billion. Backlog at the end of the year stood at $8 billion, $1.8 billion of which was funded, versus $8.2 billion in backlog at the end of the third quarter, $2 billion of which was funded.
Free cash flow in the quarter was $58 million and for the year $258 million. Cash flow in 2016 was about $20 million above expectations due to timing issues. In 2017 cash flow is expected to be around $220 million, down $20 million from earlier expectations due to the unexpected benefit last year.