Earnings Recap: Science Applications International Corporation (NYSE:SAIC)

Science Applications International Corporation (NYSE:SAIC) reported earnings for the three months ended April 2016 on June 13, 2016. The company earned $0.8 per share on revenue of $1.22B. Analysts had been modeling earning per share of $0.74 with $1.15B in revenue.

Science Applications International Corporation (NYSE:SAIC) announced financial results for the first quarter ended May 6, 2016.

Revenues for the first quarter were $1,215 million compared to $1,009 million during the prior year quarter, which represents an increase of $206 million. Our fiscal year 2017 is a 53-week year and contains an extra week compared to the prior fiscal year. The extra week occurred during the first quarter of fiscal 2017. Of the $206 million increase in revenue in the current quarter, an estimated $88 million of the increase was due to the additional week in the first quarter. The remaining revenue growth was primarily due to the acquisition of Scitor, which occurred during the second quarter of the prior fiscal year and revenue from newly awarded programs ($42 million). These increases were partially offset by lower current quarter supply chain material volume ($41 million) as a result of a recompete contract loss last year.

The Company’s internal revenue contraction for the first quarter was 3.1%. As is shown in Schedule 5, to calculate internal revenue growth or contraction, revenues from the prior year quarter were adjusted to include Scitor’s historical revenues as if the acquisition had occurred at the beginning of the comparable prior year period. Also, this calculation adjusted first quarter fiscal 2017 revenues to exclude the estimated impact of the additional week in order to provide a more equitable comparison to fiscal 2016. Revenues contracted primarily due to the supply chain contract loss and a decrease in revenues generated by the legacy Scitor business caused by delays in contract awards, and transition of work to small business set aside contracts. These decreases were partially offset by revenues on newly awarded programs.

Operating income for the quarter was $66 million, or 5.4% of revenues, down from 5.6% in the prior year quarter. The decrease was primarily due to increased current year selling, general and administrative expense (SG&A) as well as acquisition and integration costs related to lease exit costs. SG&A for the quarter includes the amortization of acquired Scitor intangible assets ($7 million) and executive severance expense ($2 million). These decreases to operating income were partially offset by higher net favorable changes in contract profit estimates compared to the prior year period ($5 million) and reduced volume on supply chain contracts that generate lower operating margins.

Adjusted EBITDA (which excludes acquisition and integration costs) was $86 million for the first quarter, or 7.1% of revenues, compared to 6.4% in the comparable prior year quarter. The increase was due to strong contract performance and the inclusion of Scitor which has a relatively higher EBITDA margin percentage than our historical business, along with reduced supply chain contract volume.

Net income for the quarter was consistent with the prior year quarter, primarily due to increased operating income ($6 million, net of tax), offset by increased interest expense on incremental term loan borrowings related to the Scitor acquisition ($6 million, net of tax).

Diluted earnings per share was $0.71 for the quarter and adjusted diluted earnings per share was $0.80 (which excludes the estimated after-tax effects of $7 million of acquisition and integration costs). The weighted-average diluted shares outstanding during the quarter was 46.5 million shares.

Cash Generation and Capital Deployment

Total cash flows provided by operating activities for the quarter were $35 million, an increase of $6 million from the comparable prior year quarter. The increase in operating cash flows over the prior year quarter was primarily due to lower income tax payments ($3 million) and cash flows provided by the operating activities of Scitor. These increases were partially offset by a current period investment of working capital for the Assault Amphibious Vehicle contract ($7 million) and higher interest payments in the current period as a result of additional borrowings ($9 million).

Science Applications International Corporation earnings per share showed a decreasing trend of -15.1% for the current fiscal year. The company’s expected EPS growth rate for next fiscal year is 348%.Analysts project EPS growth over the next 5 years at 5%. It has EPS annual decline over the past 5 fiscal years of -10.3% when sales declined -2.4. It reported 20.4% sales growth, and 2.4% EPS growth in the last quarter.

The stock is trading at $58.49, up 51.95% from 52-week low of $39.28. The stock trades down -5.55% from its peak of $61.93 and % below the consensus price target of $64.17. Its volume clocked up at 0.36 million shares which is higher than the average volume of 0.29 million shares. Its market capitalization currently stands at $2.59B.

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