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SAIC, Inc. Business Is Stable in Tough Market; Focus Is on Split Into Two Companies

Steady Results in a Challenging Environment. SAIC on Wednesday night, December 5, reported what we consider roughly in‐line fiscal third‐quarter results. Revenue was slightly better than expected and new bookings activity was seasonally strong, but
margins were below our expectations. Total revenue in the quarter was $2.87 billion, up 3% from the prior‐year period. This result was above our estimate of $2.80 billion and the consensus of $2.86 billion. On an organic basis, revenue was flat with the prior year. While the overall demand environment remains challenging, management said that the company continued to benefit from scope increases and ramp‐ups in work on its Vanguard and logistics program projects, several large surveillance projects, and an uptick in demand for commercial healthcare IT consulting. These increases were offset by decreases in work on various federal civilian programs, project completions with some federal health information technology customers, and lower product sales in the intelligence and cybersecurity segment.

Profit Margins Lower Than Expected. SAIC’s adjusted operating margin decreased 80 basis points from the year‐ago period, to 6.7%. This result was 20 basis points below our estimate. Management attributed the decrease in margin to expenses related to its planned separation transaction. The company did not make share repurchases this quarter, and the large share repurchases in the prior year are now reflected in comparisons, so the diluted share count rose 2% year‐over‐year. Adjusted EPS were thus $0.33, $0.02 below the consensus but $0.01 above our estimate. The company raised the midpoint of its fiscal 2013 guidance by $0.20‐$0.21 as a result of an expected $96 million reduction in income tax expense in the fourth quarter related to its CityTime settlement payment, partly offset by increased expense expectations. The increased expenses include: $15 million in severance costs (the company implemented a restructuring plan to eliminate 700 indirect employees, which management said could drive savings of $100 million next fiscal year), an acceleration in separation‐related costs of $10 million (it now expects about $20 million in the fourth quarter), a $10 million increase in funding for employee health spending accounts as a result of changes in employee health benefits for next year, and a decrease of about $0.01 per share from discontinued operations (about $70 million of revenue).

Management also said that it expects some product sales to be delayed into the next year, but did not quantify the impact. New Business Activity Rebounds. New business bookings totaled $4.78 billion, up 24% from the prior‐year period. Third‐quarter bookings growth is a strong improvement from declines of 44% in the fourth quarter of last year, 41% in the first quarter this year, and 5% last quarter. The company’s book‐to‐bill ratio was very strong at 1.7 times for the fiscal third quarter and 1.0 in the trailing‐12‐month period. Management said it expects a book‐to‐bill ratio of 1.1 times for 2013, which it is on pace for year‐to‐date (1.06 through the third quarter). Management said its pipeline ($32 billion, or $1.6 billion higher than a year ago) and pace of submissions remain robust.

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