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SAIC Earnings Announcement, What Does It Mean?

By

Managing Director, KippsDeSanto & Co.

Posted on March 29th, 2012

Posted under: Government Services, Mergers & Acquisitions

SAIC posted a fourth quarter loss of over $161 million, or $0.49 per share, and initiated a dividend program with the first payment of $0.12.  This announcement highlights two key trends in the government services markets (i) heightened focus on compliance and oversight, and (ii) strategic challenge as how best to deploy capital in a low-to-no growth market environment.

The SAIC earnings loss resulted from $500+ million in restitution and penalties over the NY CityTime payroll system scandal.  While this infraction may be project unique, it still evidences that government contractors are increasingly under the oversight microscope.  Cost overruns, delivering qualified credentialed professionals for given labor categories, and size and status certifications are progressively more top of mind by government customers, especially during diligence in an M&A setting.  Infractions, despite how innocuous, afford easy decision rationales in a hyper competitive procurement to choose someone else or cancel a program, and a quick revenue source for budget strapped agencies.

The second takeaway from the earnings regales was the dividend announcement. This comes on the heels of fellow government services firm ManTech initiating a dividend program in of the summer 2011.  As discussed in our blog post “2011 M&A Outlook” (www.kippsdesanto.com/2011/01/12/2011-ma-outlook), government services businesses are generally cash cows given low capital expenditure and net working capital requirements.

As a result, dividends, stock buy backs and acquisitions are the three primary uses for cash.  Interestingly, in the broader markets dividends have traditionally been associated with slowed growth, mature, yet stable businesses.  Is this dividend program an acknowledgment that given its scale and diversity, SAIC is no longer able to adapt to the dynamic contracting environment and return a growth story?  Only time will tell.

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