OREANDA-NEWS. Science Applications International Corporation (NYSE: SAIC), a leading technology integrator providing full life cycle services and solutions in the technical, engineering, intelligence, and enterprise information technology markets, today announced financial results for the second quarter ended August 5, 2016.

“SAIC delivered another quarter of solid financial performance along with a robust second quarter bookings of $1.3 billion resulting in a book-to-bill of 1.2,” said Tony Moraco, Chief Executive Officer of SAIC. “Our company continues to focus on strong program execution with a continuing commitment to our customers as well as executing our shareholder value creation strategy.”

Second Quarter Fiscal Year 2017: Summary Operating Results

    Three Months Ended   Six Months Ended
    August 5,

2016

     Percent

change

   July 31,

2015

     August 5,

2016

     Percent

change

   July 31,

2015

  
    (in millions, except per share amounts)  
Revenues   $ 1,095       0 %   $ 1,099     $ 2,310       10 %   $ 2,108  
Operating income     70       35 %     52       136       25 %     109  
Operating income as a percentage of revenues     6.4 %     170 bps     4.7 %     5.9 %     70 bps     5.2 %
Adjusted operating income(1)     73       14 %     64       146       18 %     124  
Adjusted operating income as a percentage of revenues     6.7 %     90 bps     5.8 %     6.3 %     40 bps     5.9 %
EBITDA(1)     82       17 %     70       163       23 %     132  
EBITDA as a percentage of revenues     7.5 %     110 bps     6.4 %     7.1 %     80 bps     6.3 %
Adjusted EBITDA(1)     85       4 %     82       171       16 %     147  
Adjusted EBITDA as a percentage of revenues     7.8 %     30 bps     7.5 %     7.4 %     40 bps     7.0 %
Net income     37       68 %     22       70       27 %     55  
Diluted earnings per share   $ 0.81       76 %   $ 0.46     $ 1.52       32 %   $ 1.15  
Adjusted diluted earnings per share(1)   $ 0.85       29 %   $ 0.66     $ 1.65       19 %   $ 1.39  
Cash flows provided by operating activities   $ 23       10 %   $ 21     $ 58       16 %   $ 50  
Free cash flow(1)   $ 19       19 %   $ 16     $ 50       14 %   $ 44  

(1)

  

Adjusted operating income, EBITDA, adjusted EBITDA, adjusted diluted earnings per share and free cash flow are non-GAAP financial measures. See Schedule 5 for reconciliation to the most directly comparable GAAP financial measures.
     

Revenues for the second quarter were $1,095 million compared to $1,099 million during the prior year quarter, which represents a decrease of $4 million. Newly awarded programs, including the Amphibious Combat Vehicle, Federal Aviation Administration Controller Training Contract and GSA Enterprise Operations programs, generated revenues of $64 million during the current quarter. This increase was offset by decreased supply chain material volume as a result of a contract loss ($17 million), the expected decline in activity on the Assault Amphibious Vehicle (AAV) program as we near the completion of the prototyping phase ($13 million) and various other decreases across our contract portfolio due to programs that have ended or have experienced lower activity.

Operating income for the quarter was $70 million, or 6.4% of revenues, up from 4.7% for the prior year quarter. The increase was due primarily to lower acquisition and integration costs ($9 million), decreased amortization of acquired intangible assets ($5 million) and lower severance and employee-related expenses ($4 million).

Adjusted EBITDA (which excludes acquisition and integration costs) was $85 million for the quarter, or 7.8% of revenues, compared to 7.5% in the comparable prior year quarter. The increase was due to lower severance and other employee-related expenses.

Net income for the quarter increased $15 million from the comparable prior year period primarily due to increased operating income ($11 million, net of tax) and a lower effective tax rate ($4 million).

Diluted earnings per share was $0.81 for the quarter and adjusted diluted earnings per share (which excludes the estimated after-tax effects of $3 million of acquisition and integration costs) was $0.85. The weighted-average diluted shares outstanding during the quarter was 46.0 million shares.

Cash Generation and Capital Deployment

Total cash flows provided by operating activities for the quarter were $23 million, an increase of $2 million over the prior year operating cash flows of $21 million. Operating cash flows increased over the prior year quarter due to strong customer collections in the current period and a reduction of payments for acquisition and integration costs. These drivers were offset by an extra payroll payment in the current quarter.

During the quarter SAIC deployed $65 million of capital, consisting of $13 million in cash dividends, $11 million of scheduled debt repayments and $41 million in plan share repurchases (721 thousand shares) under SAIC’s previously announced share repurchase program.

New Business Awards

Net bookings for the quarter were approximately $1.3 billion, which reflects a book-to-bill ratio of approximately 1.2. SAIC’s estimated backlog of signed business orders at the end of the quarter was approximately $7.5 billion of which $2.0 billion was funded.

SAIC was awarded the following notable contracts during the quarter:

NASA – Enterprise Applications Service Technologies (EAST) 2: SAIC was awarded NASA’s EAST 2 contract to continue to provide services to operate, maintain, and enhance key business and mission-supporting platforms, applications, and infrastructure at the NASA Enterprise Applications Competency Center. EAST 2 is a cost-plus performance-fee contract spanning eight years with a potential value of $485 million if all options are exercised. The contract has a two-year base period of performance, one two-year option, and three one-year award term options. SAIC was initially awarded this contract in January and, following a protest decision, was re-awarded the work in June.

U.S. Air Force: SAIC was awarded a Strategic Plans and Policy Support Services task order by the Air Force and the General Services Administration Federal Systems Integration Management Center. Under the task order, SAIC will continue to provide technical, analytical, operational, and planning subject matter expertise to the Air Force Deputy Chief of Staff for Strategic Deterrence and Nuclear Integration and Air Force Major Commands. The single-award task order has a one year base period of performance, four one-year options, and a total contract value of more than $86 million if all options are exercised.

U.S. Army Aviation and Missile Command (AMCOM): SAIC was awarded multiple task orders and task order increases worth approximately $221 million to continue to provide professional and engineering support services to the Army Aviation and Missile Research Development and Engineering Center. These new task orders or increases to existing task orders were awarded under the AMCOM Expedited Professional and Engineering Support Services (EXPRESS) contract vehicle.

U.S. Defense Logistics Agency (DLA): SAIC was awarded multiple task orders valued at approximately $130 million by DLA. Awarded under current indefinite delivery, indefinite quantity contract vehicles, SAIC will continue to provide DLA with tailored logistics support and supply chain management services.

U.S. Intelligence Community: SAIC was awarded contracts and task orders valued at approximately $115 million, if all options are exercised, by U.S. national security and Intelligence Community customers. Although these customers and the specific nature of these contracts are classified, they all encompass strategic, end-to-end services that help bolster national security.

Notable Developments

During the quarter, SAIC launched Cloud Migration Edge TM , a comprehensive, five-phase solution that securely and effectively migrates customers’ current IT applications and systems to a cloud environment. As a cloud services integrator, SAIC works with customers to analyze their requirements, develop the appropriate architecture, design the migration approach, and implement transition plans. SAIC also establishes a new operations and maintenance model to deliver cloud management and continuous service improvement. As part of SAIC’s total solution, Cloud Migration EdgeTM uses leading capabilities from across the cloud computing industry.

About SAIC

SAIC is a premier technology integrator providing full life cycle services and solutions in the technical, engineering, intelligence, and enterprise information technology markets. SAIC is Redefining Ingenuity through its deep customer and domain knowledge to enable the delivery of systems engineering and integration offerings for large, complex projects. SAIC’s approximately 15,000 employees are driven by integrity and mission focus to serve customers in the U.S. federal government. Headquartered in McLean, Virginia, SAIC has annual revenues of approximately $4.3 billion.

             
Schedule 1:
 
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
             
    Three Months Ended   Six Months Ended
    August 5,

2016

   July 31,

2015

   August 5,

2016

   July 31,

2015
(in millions, except per share amounts)
Revenues   $ 1,095     $ 1,099     $ 2,310     $ 2,108  
Cost of revenues     986       986       2,084       1,909  
Selling, general and administrative expenses     36       49       80       75  
Acquisition and integration costs     3       12       10       15  
Operating income     70       52       136       109  
Interest expense     12       13       26       17  
Income before income taxes     58       39       110       92  
Provision for income taxes     (21 )     (17 )     (40 )     (37 )
Net income   $ 37     $ 22     $ 70     $ 55  
Weighted-average number of shares outstanding:                                
Basic     44.7       46.0       44.9       45.9  
Diluted     46.0       47.6       46.2       47.6  
Earnings per share:                                
Basic   $ 0.83     $ 0.48     $ 1.56     $ 1.20  
Diluted   $ 0.81     $ 0.46     $ 1.52     $ 1.15  
Cash dividends declared and paid per share   $ 0.31     $ 0.31     $ 0.62     $ 0.59  
             
Schedule 2:  
   
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
         
    August 5,

2016

   January 29,

2016
    (in millions)
ASSETS                
Current assets:                
Cash and cash equivalents   $ 115     $ 195  
Receivables, net     655       635  
Inventory, prepaid expenses and other current assets     144       122  
Total current assets     914       952  
Goodwill     863       860  
Intangible assets, net     210       224  
Property, plant and equipment, net     65       71  
Other assets     15       15  
Total assets   $ 2,067     $ 2,122  
                 
LIABILITIES AND EQUITY                
Current liabilities:                
Accounts payable and accrued liabilities   $ 440     $ 447  
Accrued payroll and employee benefits     180       184  
Long-term debt, current portion     61       57  
Total current liabilities     681       688  
Long-term debt, net of current portion     984       1,013  
Other long-term liabilities     39       41  
Total equity     363       380  
Total liabilities and equity   $ 2,067     $ 2,122  
             
Schedule 3:
 
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
             
    Three Months Ended   Six Months Ended
    August 5,

2016

   July 31,

2015

   August 5,

2016

   July 31,

2015
    (in millions)  
Cash flows from operating activities:                                
Net income   $ 37     $ 22     $ 70     $ 55  
Adjustments to reconcile net income to net cash provided by operating activities:                                
Depreciation and amortization     12       19       28       24  
Stock-based compensation expense     8       8       18       17  
Excess tax benefits from stock-based compensation     (5 )     (5 )     (9 )     (8 )
Increase (decrease) resulting from changes in operating assets and liabilities net of the effect of the acquisition:                                
Receivables     41       (19 )     (20 )     (36 )
Inventory, prepaid expenses and other current assets     (17 )     (6 )     (19 )     (3 )
Other assets     (1 )     -       (1 )     1  
Accounts payable and accrued liabilities     (17 )     (13 )     (7 )     (2 )
Income taxes payable     (14 )     (14 )     2       -  
Accrued payroll and employee benefits     (21 )     30       (4 )     1  
Other long-term liabilities     -       (1 )     -       1  
Total cash flows provided by operating activities     23       21       58       50  
Cash flows from investing activities:                                
Change in restricted cash     2       (17 )     3       (17 )
Expenditures for property, plant, and equipment     (4 )     (5 )     (8 )     (6 )
Cash paid for acquisition, net of cash acquired     -       (764 )     -       (764 )
Total cash flows used in investing activities     (2 )     (786 )     (5 )     (787 )
Cash flows from financing activities:                                
Dividend payments to stockholders     (13 )     (15 )     (27 )     (28 )
Principal payments on borrowings     (11 )     (9 )     (26 )     (16 )
Issuances of stock     1       1       2       2  
Stock repurchased and retired or withheld for taxes on equity awards     (41 )     (1 )     (88 )     (18 )
Excess tax benefits from stock-based compensation     5       5       9       8  
Disbursements for obligations assumed from Scitor acquisition     (1 )     (2 )     (3 )     (2 )
Proceeds from borrowings     -       670       -       670  
Deferred financing costs     -       (16 )     -       (17 )
Total cash flows (used in) provided by financing activities     (60 )     633       (133 )     599  
Total decrease in cash and cash equivalents     (39 )     (132 )     (80 )     (138 )
Cash and cash equivalents at beginning of period     154       295       195       301  
Cash and cash equivalents at end of period   $ 115     $ 163     $ 115     $ 163  
                   
Schedule 4:    
     
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
BACKLOG
(Unaudited)
     

The estimated value of our total backlog as of the dates presented was:

    
                   
    August 5,

2016

   May 6,

2016

   January 29,

2016
    (in millions)  
Funded backlog   $ 2,011     $ 2,096     $ 1,879  
Negotiated unfunded backlog     5,460       5,139       5,319  
Total backlog   $ 7,471     $ 7,235     $ 7,198  
                         

 

             
Schedule 5:
 
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NON-GAAP FINANCIAL MEASURES
(Unaudited)
             
   

Three Months
Ended

  

Six Months
Ended
    August 5,

2016
Internal revenue growth   (in millions)          
Prior year period's revenues, as reported   $ 1,099     $ 2,108  
Prior year period's revenues performed by former Parent     (10 )     (21 )
Revenues of acquired business for the pre-acquisition prior year period     -       154  
Prior year period's revenues, as adjusted     1,089       2,241  
Current year revenues, as reported     1,095       2,310  
Revenues performed by former Parent     (2 )     (6 )
Estimated impact of 53rd week     -       (88 )
Current year period's revenues, as adjusted     1,093       2,216  
Internal revenue growth (contraction)(1),(2)   $ 4     $ (25 )
Internal revenue growth (contraction) percentage     0.4 %     (1.1 %)
             
    Three Months Ended   Six Months Ended
    August 5,

2016

   July 31,

2015

   August 5,

2016

   July 31,

2015
    (in millions)  
Operating income   $ 70     $ 52     $ 136     $ 109  
Operating income as a percentage of revenues     6.4 %     4.7 %     5.9 %     5.2 %
Acquisition and integration costs     3       12       10       15  
Adjusted operating income(2)   $ 73     $ 64     $ 146     $ 124  
Adjusted operating income as a percentage of revenues     6.7 %     5.8 %     6.3 %     5.9 %
                                 
Net income   $ 37     $ 22     $ 70     $ 55  
Interest expense     12       13       26       17  
Provision for income taxes     21       17       40       37  
Depreciation and amortization     12       18       27       23  
EBITDA(2)     82       70       163       132  
EBITDA as a percentage of revenues     7.5 %     6.4 %     7.1 %     6.3 %
Acquisition and integration costs     3       12       10       15  
Depreciation included in acquisition and integration costs     -       -       (2 )     -  
Adjusted EBITDA(2)   $ 85     $ 82     $ 171     $ 147  
Adjusted EBITDA as a percentage of revenues     7.8 %     7.5 %     7.4 %     7.0 %
     

(1)

  

Internal revenue growth, or internal revenue contraction if negative, is a non-GAAP financial measure that management believes provides an indicator of how successful SAIC has been in growing revenues as we develop our base business and access new markets and capabilities provided by acquisitions like Scitor. We calculate our internal revenue growth percentage by comparing our reported revenues for the current year to the reported revenues for the prior year comparable period adjusted to include any pre-acquisition historical revenues of acquired businesses. We have adjusted current and prior year revenue to exclude the impact of revenue performed by our former parent company, Leidos Holdings, Inc (“former Parent”) since revenues on pre-separation joint work are expected to decline over time. For fiscal 2017, we have also adjusted current year revenue to exclude the estimated impact of the additional week in order to facilitate comparison to the prior year period. We estimate the revenue impact of the additional week by dividing the current year’s revenues for the first quarter by the number of days in the first quarter and multiplying that amount by the number of additional days in the first quarter. We believe that adjusting current year revenues to reflect the impact of the additional week improves comparability between the periods since differences in the number of days generally have a direct impact on the amount of revenues earned during the respective periods.

(2)

  

Internal revenue growth, adjusted operating income, EBITDA and adjusted EBITDA are non-GAAP financial measures that are reconciled in this schedule to the most directly comparable GAAP financial measures. These non-GAAP financial measures provide investors with greater visibility into the financial performance of our Company (including revenues, operating income and net income) but they are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with SAIC's consolidated and combined financial statements prepared in accordance with GAAP. The methods used to calculate these non-GAAP financial measures may differ from the methods used by other companies and so similarly titled non-GAAP financial measures presented by other companies may not be comparable to those provided in this schedule.
             
Schedule 5 (continued):
 
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NON-GAAP FINANCIAL MEASURES (continued)
(Unaudited)
             
    Three Months Ended   Six Months Ended
    August 5,

2016

   July 31,

2015

   August 5,

2016

   July 31,

2015
    (in millions, except per share amounts)
Diluted earnings per share   $ 0.81     $ 0.46     $ 1.52     $ 1.15  
Acquisition and integration costs, net of tax benefit, divided by diluted weighted-average number of shares outstanding   $ 0.04     $ 0.20       0.13       0.24  
Adjusted diluted earnings per share(1),(2)   $ 0.85     $ 0.66     $ 1.65     $ 1.39  
                                 
                                 
Cash flows provided by operating activities   $ 23     $ 21     $ 58     $ 50  
Expenditures for property, plant, and equipment     (4 )     (5 )     (8 )     (6 )
Free cash flow(1)   $ 19     $ 16     $ 50     $ 44  
     

(1)

  

Adjusted diluted earnings per share and free cash flow are non-GAAP financial measures that are reconciled in this schedule to the most directly comparable GAAP financial measures. These non-GAAP financial measures provide investors with greater visibility into diluted earnings per share and cash flows provided by operating activities, but they are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with SAIC's consolidated and combined financial statements prepared in accordance with GAAP. The methods used to calculate these non-GAAP financial measures may differ from the methods used by other companies and so similarly titled non-GAAP financial measures presented by other companies may not be comparable to those provided in this schedule.

(2)

  

Adjusted diluted earnings per share is calculated excluding acquisition and integration costs of $3 million and $10 million for the three and six months ended August 5, 2016, and $12 million and $15 million for the three and six months ended July 31, 2015, and uses SAIC’s effective income tax rates for each period reported without the negative effect of the non-deductible acquisition costs that are included in reported net income.