Science Applications International Corp (SAIC Quick QuoteSAIC - Free Report) reported fourth-quarter fiscal 2017 adjusted earnings of 79 cents per share, which increased 6.8% from the year-ago quarter but missed the Zacks Consensus Estimate by a penny.

Revenues decreased 4.2% from the year-ago quarter to $1.03 billion, which also missed the Zacks Consensus Estimate of $1.09 billion.

Shares of SAIC decreased almost 13% following the results on Mar 30. Shares dipped further by 0.8% to close at $74.40 on Mar 31, 2017.

We note that SAIC has massively underperformed the Zacks IT Services industry on a year-to-date basis. While the stock lost 12.3%, the industry gained 5.8%.

Quarter in Details

Per management, revenues declined due to lower subcontractor activity within the AMCOM contract portfolio ($12 million), the “re-compete loss” of an IT integration program for the Department of Homeland Security ($8 million), customer driven delays on a Marine Corp IT services program ($12 million), various other decreases across contract portfolio and one less productive day in the quarter ($17 million).
 

However, higher revenues on newly awarded programs like the Amphibious Combat Vehicle (ACV) and GSA Enterprise Operations programs ($47 million) partially offset the decline.

Net bookings were approximately $0.8 billion, which reflects a book-to-bill ratio of approximately 0.8 in the quarter. During the quarter, the company won contracts from the U.S. Army – Human Resources Command (HRC), U.S. Navy – Space and Naval Warfare Systems Center (SSC) Pacific and Defense Logistics Agency (DLA).

The estimated value of proposals submitted by SAIC awaiting award is approximately $15.5 billion, up from $14 billion in the previous quarter.

Adjusted EBITDA declined 8.8% year over year to $73 million. EBITDA margin contracted 40 basis points (bps) on a year-over-year basis to 7.1%.

Adjusted operating income margin contracted 10 bps to 5.9% in the reported quarter. However, including acquisition and integration costs in the year-ago quarter, reported operating margin expanded 90 bps, reflecting benefits from cost savings initiatives.
 

Fiscal 2017 Details

In fiscal 2017, SAIC reported adjusted earnings of $3.35 per share, which increased 17.5% over fiscal 2015. Revenues grew 3.1% over the previous year but internal revenue contracted 2%, which was below the company’s long-term target of annual low-single digit internal revenue growth.

SAIC’s book-to-bill ratio was 1.2 in fiscal year 2017. We note that overall competitive win rate was more than 65%. Total contract backlog was approximately $8 billion and funded contract backlog was $1.8 billion at the end of fiscal 2017.

Balance Sheet & Cash Flow

SAIC ended fiscal 2017 with cash and cash equivalents of $210 million, well above its average cash balance target of $150 million.

Total debt was over $1 billion, which equates to a leverage ratio of approximately three times debt-to-adjusted EBITDA at the end of the reported quarter.

In fourth-quarter fiscal 2017, operating cash flow was $62 million and free cash flow was $58 million. The company spent $51 million in cash dividends and buying back shares.

In 2017, SAIC paid $203 million to shareholders, consisting dividends of $54 million and share repurchases worth $149 million.

Outlook

Management expect low-single digit internal revenue growth on average and over time. It also remains confident in its annual target of 10–20 bps profitability improvement over the long term.

SAIC expects fiscal 2018 revenue run rate to be almost in line with fiscal 2017.

Due to the timing of accelerated receivable payments in fiscal 2017, the company expects to generate approximately $220 million of annual free cash flow (for 2018).

SAIC expects to pay dividends worth $55 million and make total debt repayments of approximately $25 million. Remainder of cash in excess of $150 million will be used to buy back shares and for deployment in acquisitions.

Zacks Rank & Other Key Picks

Currently, SAIC has a Zacks Rank #2 (Buy). Acxiom , Dassault Systemes (DASTY Quick QuoteDASTY - Free Report) and DST Systems , sporting a Zacks Rank #1 (Strong Buy) are other favourably placed stocks in the broader sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Acxiom, Dassault and DST is currently pegged at 15%, 12.3% and 10%, respectively.

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