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SAIC (SAI)

Q2 2014 Earnings Call

September 04, 2013 8:00 am ET

Executives

Paul E. Levi - Senior Vice President of Investor Relations

John P. Jumper - Chairman, Chief Executive Officer, President, Member of Classified Business Oversight Committee and Member of Ethics & Corporate Responsibility Committee

K. Stuart Shea - Chief Operating Officer

Mark W. Sopp - Former Chief Financial Officer and Executive Vice President

Analysts

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Benjamin E. Owens - Stifel, Nicolaus & Co., Inc., Research Division

George A. Price - BB&T Capital Markets, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Jason Kupferberg - Jefferies LLC, Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Presentation

Operator

Ladies and gentlemen, and thank you for standing by. Welcome to the SAIC Fiscal Year 2014 Q2 Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, September 4, 2013.

I would now like to turn the conference over to Paul Levi. Please go ahead, sir.

Paul E. Levi

Thank you, George. And good morning. I would like to welcome you to our Second Quarter Fiscal Year 2014 Earnings Conference Call. Joining me today are John Jumper, our Chairman and CEO; Stu Shea, our COO; and Mark Sopp, our CFO; and other members of our leadership team.

During this call, we will make forward-looking statements to assist you in understanding the company and our expectations about its future financial and operating performance. These statements are subject to a number of risks that could cause actual events to differ materially, and I refer you to our SEC filings for a discussion of these risks. In addition, the statements represent our views as of today. We anticipate that subsequent events and developments will cause our views to change. We may elect to update the forward-looking statements at some point in the future, but we specifically disclaim any obligation to do so.

I would now like to turn the call over to John Jumper, our Chairman and CEO.

John P. Jumper

Thank you, Paul. And welcome, everyone.

In the second quarter, our performance was impacted by a number of discrete items. These included costs related to the planned separation of SAIC into 2 companies, 4 underperforming programs, 2 fixed-price foreign development contracts, a biomass plant construction contract and an IT services contract with a state and local customer; and a noncash intangible impairment of Reveal Imaging Technologies, a provider of threat-detection products and services that we acquired in August 2010.

Looking at the results for the quarter. Revenues were $2.5 billion, down 15% year-over-year on an internal basis. This was in line with our expectations given previously announced contract reductions. The anticipated drawdown of Joint Logistics Integration, or JLI, reduced revenues by $64 million. As you know, JLI is directly related to the U.S. Military draw -- withdrawal from Southwest Asia. Revenue was further reduced by the loss of that DISN Global Solutions or DGS contract a year ago, an $85 million impact. Together, these 2 items account for almost half of the internal year-over-year decline.

The remainder of the revenue decline was primarily driven by the impact of sequestration, which reduced the testing levels on current contracts, lowering the levels of award, resulting in delayed decisions and imposing significant caution throughout the contracting process.

Operating income was lower than the prior year, significantly impacted by the cost of the separation and the discrete items discussed above.

Despite all of this, our operating cash flow was strong for the quarter at $217 million, in line with our expectations and demonstrating the underlying resiliency of our company, even in difficult times.

While we used all of the available information to factor in the full impact of sequestration in our earlier guidance this year, we need to be even more cautious based on our current outlook for the second half. Recent wins are in protests. Award decisions are being increasingly delayed. And the spillover effects of government spending cuts to our commercial health business, though we believe temporary, has been factored into our updated expectations. As a result and in light of our first half performance, we're reducing our fiscal 2014 guidance today. Mark will outline the details later in his remarks.

I should note that, after the quarter closed, the company has had some notable wins of new business opportunities. Specifically, we were the only contractor awarded the NASA Human Health and Performance contract, an ID/IQ single-award value of $1.8 billion. We also won a new engineering program with LSB Industries for over $100 million, with a potential of additional business for this client. These contract wins indicate that our pipeline remains strong and we continue to win in the marketplace.

We're excited about moving closer to accomplishing our separation. I'd like to point out that the separation gave us an opportunity to redesign the cost and rate structure of both companies, the benefit of which will be more visible as we complete this split and shed the burden of our separation and transition costs this year.

Now I'd like to turn the microphone over to our COO, Stu Shea.

K. Stuart Shea

Thanks, John. And good morning, everyone. For the next few minutes, I'd like to share with you how we are dealing with several operational matters that affected our performance this past quarter, discuss a little bit about the lessons we learned and highlight to you how we are going to better mitigate similar risks like this into the future.

With roughly 9,000 contracts in SAIC today, we have an excellent track record of strong program performance. One of the many benefits of the separation of SAIC and Leidos is that we got an opportunity to take a deep look at where every one of these programs were being executed within the company. In preparation for the separation, every contract was repositioned to where it best fit in the new structure, not necessarily leaving them in the part of the company that won or were executing the contract. To that end, the movement of the contracts to their new locations drew additional focus to ensure that we have the right solutions and execution teams involved to deliver on our commitments. As part of that additional focus, there were 2 programs that required additional technical effort. These 2 programs are on our watch list. And as we continue to develop and testing during the second quarter, we identified performance issues that required technical redesign and an associated schedule slip.

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