Saic First Final Draft Submission.cope.Edits

7/29/2019 Saic First Final Draft Submission.cope.Edits

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Defense$ 4,191M

40%

Intelligence &cybersecurity

$ 3,540M33%

Health,energy & civil

solutions$ 2,858M

27%

SAIC: AT A GLANCE

I. Recommendations

II. Company BackgrounduScience Applications International Corporation (SAIC), headquartered in McLean,Virginia is a publicly traded Fortune 500 company that provides information technologyservices to promote security and overall safety worldwide. SAIC delivers scientific andtechnological products and services in the computer integrated-systems design sector.Total SAIC personnel consists of 41,100 employees worldwide (Hoovers, 2012).

SAIC secures over 90% of its revenues from the U.S. government, primarily serving theDepartment of Defense, the Department of Homeland Security, the U.S. Army, and theU.S. Navy. (Hoovers 2012).

Exhibit 1: 2012 Sales Revenue Generated by SAIC's Defense Business Sector:40% of Total Sales

Sources: Mergent Online; SAICs 2012 Annual Report.

The SAIC Leadership Team Consists of Five Key Executives:

Chairman of the Board, A. Thomas Young (Chairman since 1995); President & CEO, John Jumper (USAF-Ret); Executive Vice President & CFO, Mark Sopp; Executive Vice President and General Counsel, Douglas Scott; Executive Vice President for Government Affairs, Communications, and

Support Operations, Arnold Punaro

SAIC Operates in 5 Major Applications:

- Cyber Security

- Energy and Environment

- Health

- Intelligence, Surveillance, and

Reconnaissance

- Logistics, Readiness, and

Sustainment


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Industry Overview

The US Security and Exchange Commission classifies SAIC as a computer-integratedsystem design company (SIC 7373). Additional classifications include:

Engineering Services (SIC 8711) Commercial Physical Research (SIC 8731) Computer Programming Services (SIC7371) Holding Companies (SIC 6719).

The IT industry requires technical expertise and constant innovation, and is largelydependent on annual government budgeting and spending. The industry anticipatescontinued growth throughout the year and into 2013 with very limited budget cuts.

SAIC competes with three major companies: CACI International, SRA International, andManTech. CACI International is the main benchmark competitor. Despite CACIs strongperformance over the last year and an abundance of secure contracts, we estimate that

SAIC will have very little problem maintaining its dominance in FY 2013.Major Developments and Important Events

On March 14, 2012, SAIC agreed to a $540M settlement with U.S. Attorney for theSouthern District of New York and the City of New York concerning at automatedworkforce management system. As a result, SAIC has reviewed process and controlimprovements. The effects of this litigation on financial performance will be detailedthroughout the remainder of this report.

In August of this year, SAIC announced it will divide into two separate businesses by theend of 2013. The first is to be a $4B company that will focus on providing governmenttechnical services and IT businesses; the other will deliver science and technology

solutions, which the company says will generate $7B a year in revenue. This divisionwill prevent the conflict of interest of having a government contractor responsible forbuilding systems as well as testing them. (Converge, 2012)

In 2012 alone, SAIC acquired two new businesses: Vitalize Consulting Solutions, whichprovides clinical businesses and IT service for healthcare, and Patrick Energy Services,which provides performance based transmission and distribution of power systemssolutions. SAIC also received 40 new contract awards in the past fiscal year totaling over$100M.

Auditors and Auditing Reports

Deloitte and Touche LLP is SAICs independent auditor. In the Report of Independent

Registered Public Accounting Firm for the fiscal year 2012, Deloitte gives unqualifiedopinion about SAICs financial reports and other ongoing activities.

The report from Deloitte details the division of responsibilities between the auditor andthe management. According to it, the duties of SAICs management include themaintenance of the effective internal financial control. Deloitte did not assist SAICsmanagement in the preparation of the financial statements, and their responsibility is toexpress an opinion over SAICs internal control systems.


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Managements Report and Management Discussion and Analysis of

FinancialConditionsl

In the management report and management discussion (Part II, item 7 of the financialreport) SAIC executives summarize financial conditions and results from operations of

the previous year. Key financial events summarize changes in the revenue, operatingincome, cash, and net booking value. Overall, SAIC reports a decrease in revenue andoperating income for the 2012 fiscal year due to the City Time project legal case that wasmentioned previously. During the implementation of that project, former SAICexecutives were accused of corruption and fraud.

Additionally, SAIC presents key environmental trends and financial results. Theessentials of Managements Report part are presented above, and are detailed throughoutthe remainder of this report.

III. FINANCIAL ANALYSIS AND BASIC RATIOS

Profitability AnalysissTable 1: Summary of Profitability Ratios in 2011, 2012 Fiscal Years

SAIC CACIIndustryAnalysis

1/31/2012 1/31/2011 6/30/2012 6/30/2011 08/2012Gross Profit

Margin.0927 .1323 N/A N/A .1838

Net Profit

Margin.0056 .0567 .0445 .0406 .0603

Return on

Assets.0268 .1212 .0812 .0734 .0594

Return on

Equity.0253 .2588 .1356 .1350 .2206

Industry Average, Source: Hoovers 2012

Profitability AnalysisGross Profit Margin is a measure of how well a company can control the costs ofinventory/manufacturing, and subsequently pass those costs on to its customers. Here,

SAIC is primarily a service company but because its balance sheets show inventory, itinsinuated that they do have some product offerings, which are likely integrated withtheir service packages. CACI is also a service company which likely has some productofferings. However, their Income Statement reported on "direct" and "indirect" costs asexpense categories. Where there is no indication of what costs are associated with anygoods sold, there is no comparable ratio for gross profit margin between the twocompanies. This ratio is only slightly helpful in understanding SAIC's profitability astheir primary offering is in the service industry and the gross profit margin is largely a


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measure relevant for companies with large inventories of product. Given that businessreality, the fact that SAIC is being significantly outpaced by the industry average inGross Profit Margin is not a major indicator of business health, where product sales arenot a center part of its business.

The Net Profit Margin shows how much of each sales dollar ends up in Net Incomeafter all expenses (including taxes, interest and depreciation) have been accounted for.The difference between SAIC's profit margin in 2012 (.56%) and 2011 (5.6%) issignificant and may be attributed to resolution of a single litigation issue. As notedabove, on March 14, 2012, the Company entered into a $540 million settlementagreement with the U.S. Attorney's Office for the Southern District of New York. TheCompany recorded a $540 million loss provision in FY 2012 in its Defense Solutionsbusiness segment, anticipating this loss. The $540 million loss provision in FY 2012does not fully account for the $648 million decrease in Operating income from FY 2011.Hoovers (2012) notes that, In 2012, the company's sales dipped 3%. Meanwhile, its netincome dropped by more than half a billion dollars due to decreased operating income

and increased interest expense resulting from 2010 debt issuance; this was partially offsetby a decrease in the provision for income taxes.However, when the non-recurring $540loss provision is taken out, the Net Profit Margin for FY 2012 is 8.03%, well above the5.6% margin in FY 2011 and nearly doubling the performance of its competitor, CACI.This upward trend in the Net Profit Margin puts SAIC in a position outpacing theindustry average.

The Return on Assets measures the efficiency with which the company is managing itsinvestment in assets and converting those assets into profits. Again, where SAIC isprimarily a service company, this ratio is less useful as an indicator of overallprofitability where assets (which for product companies include a substantial amount of

inventory) do not represent a primary revenue outlay. Here, SAIC's 2012 Return onAssets is affected substantially by the $540 million loss provision described above.However, when the $540 million non-recurring loss is added back into the operatingincome, the ROA for FY 2012 changes from 2.68% to 8.03%. While 8.03% stillrepresents a significant decrease from FY 2011 (12.12%), it is on par with CACI's ROAin both FY 2012 and FY 2011. Further, 8.03% still puts SAIC above the industryaverage of 5.94%.

Return on Equity is the profits produced on the money contributed by investors.Though the ROE for SAIC is similarly affected in FY 2012 by the settlement loss, whenthe loss is taken out, the ROE for FY 2012 is 25.64% which is comparable to the ROE forFY 2011 (25.88%) and both are almost double the return on equity seen by CACIinvestors over the same period. Additionally, this steady rate of Return on Equity putsSAIC safely above the industry average of 22.06%.


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Liquidity Analysis

Table 2: Summary of Liquidity Ratios in 2011, 2012 fiscal years

SAIC CACI IndustryAverage

1/31/2012 1/31/2011 6/30/2012 6/30/2011 08/2012

Current Ratio 1.39 2.21 1.42 1.79 1.68Quick Ratio 1.25 1.99 1.36 1.72 1.39Operating Cash Flowto Current DebtRatio

.26 .41 .55 .52 N/A

Industry Average, Source: Hoovers 2012

Liquidity Ratios

As displayed in Table 2 above, the average Current Ratio for the Computer IntegratedSystems industry is 1.68. In 2012, SAIC had a current ratio of 1.39. This suggests that

SAIC may not be well placed to pay current debts compared to their competitors. In2011, SAIC had a considerably higher current ratio at 2.21. Similarly, CACI has arelatively lower current ratio at 1.42 in 2012, down from 1.79 in 2011. Both fall under theindustry average for 2012, but both have greater current assets than current liabilities.

SAIC had a Quick Ratio of 1.25 in 2012, and 1.99 in 2011, as show in Table 2. CACIhad a quick ratio of 1.36 in 2012, and 1.72 in 2011. Again, both are below the industryaverage of 1.39. However, both companies have a quick ratio higher than one which is ahealthy sign of liquidity.

Both CACI and SAIC have Operating Cash Flow to Current Debt ratios that are less

than one. This indicates that neither of the companies is generating enough cash to payoff short term debts.

While it appears that SAIC has generated a substantially larger amount of cash fromoperating activities in 2012 compared to CACI, there are stark differences in the cashflow generating patterns. When viewing SAICs cash flow reports, it is startling to seethat net income dropped $560M from 2011 to 2012, though ultimately they report ahigher, positive cash flow of $772M from operating activities in 2012. (Note priorlitigation issue.) This can be attributed to the fact that SAIC has $757M in accountspayable and accrued liabilities on their 2012 cash flow statement, which accounts for98% of total cash flows from operating activities in 2012. Historically, this is not a

typical cash flow generating pattern for SAIC. SAIC also shows a $67M reduction on thestatement as a result of income from the gain on disposal of assets, which is significantlyhigher than they have reported in previous years. In reference to investing activities, in2012, SAIC had a negative cash flow as a result of acquisitions of businesses at ($218M).Additionally, they had ($65M) in expenditures on property, plant, and equipment. LikeSAIC, CACI had negative cash flow from investing activities of ($204K) in 2012 as aresult of capital expenditures and acquisitions. This has been a typical investing cashflow generating pattern for both companies in recent years. Cash flows from financing


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activities were considerably less in 2012 than in 2011. SAIC had a negative cash flow at($449M). This seems to be a typical pattern for SAIC, though they did have a bit of ananomaly in 2011, as they increased cash that year by an additional $742M as a result ofissuance of long term debt. CACI had a negative cash flow from financing as a result ofpayments made under bank credit facilities and repurchases of common stock, which has

been typical in recent years. Additionally, SAIC traditionally has positive cash flowfrom discontinued operations. In general, CACI shows more consistency year overyear in typical cash flow generating patterns.

Overall, both SAIC and CACI have relatively sufficient amounts of assets to pay offcurrent liabilities. SAIC is significantly below industry average and competition forcurrent ratio, quick ratio, and operating cash flow to debt ratio, which may be worrisome.However, both companies have positive cash flow from continuing operations, and haveinvested in assets year over year. Both have repurchased common stock traditionally toincrease equity as well. However, CACI has borrowed a significant amount in recentyears from bank credit facilities, which may indicate an issue in the future if the cost of

borrowing exceeds the benefits. After assessing these details, it appears that both CACIand SAIC are relatively liquid, though may want to focus on improving liquidity ratios toensure more favorable assessments from analysts.

Activity & Efficiency AnalysisTables 4 below summarizes important activity and efficiency ratios for SAIC, CACI andthe industry in general. Though SAICs Accounts Receivable Turnoverratiodecreased, the amount was slight and closely mirrored the decrease that SAICsbenchmark competitor faced during the same period. Since both primarily work with theUS government and agencies thereof, the decrease may be reflective of the USGovernment payment terms.

SAIC appears to be lagging behind CACI's ability to effectively utilize inventory andprepaid expenses as exhibited by being outpaced by CACI Inventory Turnover ratiogrowth and the significant decrease in SAIC's own ratio.

SAIC appears to address the lag time the firm experiences by decreasing the amount oftimes accounts payable are paid yearly, a strategy that its competitor has also utilized.Since each company merges prepaid expenses and other current assets in this category,perhaps each firm has also chosen to decrease the amount of prepaid expenses forcontracts awarded in order to more easily manage cash on hand. SAIC appears to use thismore aggressively due to the firm's inability to turnover inventory quickly.

SAIC's cash gap, 18.33 days is 20 days less than its competitor and has improved bynearly 7 days from SAIC's results last year, 27.23 days. This out-performance andimprovement is misleading because normally such may be a positive indicator that SAIChas either found ways to decrease either turnover time of inventory or collections periodfrom customers. However, SAIC in this year actually has extended the timeline for whenpaying cash for outstanding accounts payable. However, if SAIC's inventory is examinedwithout inclusion of prepaid expenses and other current assets (which was done toadequately benchmark against CACI) SAIC's cash gap has actually decreased by nearly 9


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days indicating that SAIC ability to extend accounts payable terms has led to better cashflow management.

Table 3: Summary of Turnover Ratios in 2011, 2012 Fiscal YearsSAIC CACI Industry

average1/31/2012 1/31/2011 6/30/2012 6/30/2011 Aug-2012

AccountsReceivableTurnover

4.99 5.31 6.28 6.48 5.7

Days in AccountsReceivable

73.14 68.73 58.11 56.32 64

Inventory Turnover 67.65 78.64 98.81 71.56 x 16.59Days in Inventory 5.4 4.64 3.69 5.1 22Accounts PayableTurnover

6.06 7.91 20.92 25.63 n/a

Days in accountspayable

60.21 46.14 17.45 14.24 n/a

Fixed AssetsTurnover Ratio

29.95 29.2 57.98 58.93 n/a

Industry Average, Source: Hoovers, 2012

Revenue Recognition Methods

Both SAIC and CACI use similar methods of revenue recognition. Those methodsdepend on a type of a contract parties sign and whether a client is the federal government,one of the government agencies or a private firm.

Methods of Revenue Recognition for SAIC and CACI: Cost-Plus-Fixed-Fee Contracts:Costs incurred + Estimate of applicable fees earned (after a contract has beensigned and a reimbursement agreement achieved). Fixed fees are earned inproportion to the allowable costs incurred in performance of the contract.

Time-And-Materials Contracts: Percentage-of-completion methodHours of Performance x Billing Rates + Billing Rate of any Allowable Material +Subcontract Costs + Out-of-pocket Expenses.

Methods Specific for SAIC:

Cost-Plus-Award-Fee or Cost-Plus-Incentive Fee Contracts (an award fee isadded):

Percentage-of-completion method, based on the Cost-to-Cost method. All costs

incurred to date are divided by estimated project cost, which derives thepercentage of completion.

Revenues From Services and Maintenance Contracts:Such revenues are recognized as transactions are processed based on objectivemeasures of output. Revenues from the sale of manufactured products arerecorded upon passage of title and risk of loss to the customer, which is generallyupon delivery, provided that all other requirements for revenue recognition havebeen met.


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Additional Methods: Efforts-Expended Method of Percentage-of-Completion Using TechniquesSuch As: labor dollars for measuring progress toward completion in situations in

which this approach is more representative of the progress on the contract.

Efforts-Expended Methodis utilized when there are significant amounts ofmaterials or hardware procured for the contract that is not representative ofprogress on the contract.

Units-of-Delivery Methodunder percentage-of-completion is used withcontracts where separate units of output are produced. Revenue is recognizedwhen the units are delivered to the customer, provided that all other requirementsfor revenue recognition have been met.

Methods Specific for CACI, Revenue Recognition for Fixed-Price Contracts: Fixed Unit Price:Units delivered based on the specified price per unit.

Fixed Price-Level of Effort:Number of units of labor actually delivered x Rate for each unit of labor. Fixed Price-License (for international operations):Contract accounting guidance of ASC 605-35. For agreements to deliver dataunder license and related services, revenue is recognized as the data is deliveredand services are performed.

Inventory and Depreciation Policies

SAIC values its inventories at the lower of cost or estimated net realizable value,whichever is lower. Raw material inventory is valued using the average cost or FIFOmethods. Work-in-process inventory includes raw material costs plus labor costs,

including fringe benefits, and allocable overhead costs. Finished goods inventory consistsprimarily of purchased finished goods for resale to customers, such as tires, lubricantsand first responder equipment, in addition to manufactured border, port and mobilesecurity products and baggage scanning equipment. The Company evaluates inventoryagainst historical and planned usage to determine appropriate provisions for obsoleteinventory.

In its financial statement, CACI provides less elaborate explanation of inventory policiesthan SAIC. Inventories are stated at the lower of cost or market value using the specificidentification cost method, and are recorded within prepaid expenses and other currentassets on the accompanying consolidated balance sheets. CACI does not specify whether

it uses weighted average, FIFO or LIFO methods.In the financial statement documents, both SAIC and CACI note that for their equipment,buildings, leaseholds improvements and other non-current assets they use straight-linemethod or its variations such as declining balance and useful life of improvement.

Doubtful Accounts and Uncollectibles

In the notes to the financial statement, SAIC does not describe its policy on formingprovision and defining time frames to write-off uncollectible accounts.


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CACI, in contrast, states that accounts receivable are written off when all the methods ofdebt collection has been exhausted. The company assumes that since its main client is theU.S. government, bad debt expense should not be of a significant amount and affect thecompanys revenues. Management establishes bad debt reserves against certain billed

receivables based upon the latest information available to determine whether invoices areultimately collectible.

Table 4: Dynamics of Allowance for doubtful account changes, in $ millions

2012 2011 2010SAIC 6 9 10CACI 3.738 3.212 3.501

Since SAICs size and revenues are greater, its provision for doubtful accounts almost 2

or 3 times greater than that of CACI. In addition, over the course of three years SAIC

reduced its allowance for doubtful accounts, which may indicate better receivablesmanagement or be due to separation into two companies, which is expected to be

completed in 2013.

Solvency Analysis:

97% of leases at SAIC are operating leases, with $178M currently categorized asoperating, and $6M recorded as capital leases. These operating leases requiremaintenance and include expenses such as taxes, insurance, and utilities. CACI notes thatnearly 100% of their leases are operating. An analyst would recommend that SAIC andCACI take a more conservative approach and disclose expenses associated with the lease.

In a joint FASB and IASB update on December 15, 2010, a proposal was announced thatwould improve financial reporting of lease contracts. If passed, most leases will betreated as capital leases and should recognize assets and liabilities on the balance sheet.Therefore, an analyst would recommend recording all leases as capital, and recognizingassets and liabilities associated with the lease. Additionally, following the conceptof conservatism, interest and depreciation expenses should be recorded on the incomestatement. As IASB and FASB are moving towards this update, it is worthwhile to adjustaccounting procedure at the present to ensure proper lease contract reporting in the future.

On March 22, 2012, SAIC was given an A3 debt rating from Moodys. This reflects agood market position and solid operating performance stability with adequate financial

leverage, and only a 2.32% default rate. CACIs debt rating has been withdrawn. In 2010,they entered five year senior secured bank facility that is unrated. As a result, Standardand Poors also no longer offers a debt rating. However, the last rating given in July 2010gave CACI a moderate leverage rating.

In the 2012 notes of the financial statements, SAIC records that they have a maximumcontingent lease liability of $30M as a result of a 2004 contract with the GreekGovernment that requires them to lease certain equipment from a subcontractor for a


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period of ten years. However, the terms of the agreement note that if the GreekGovernment does not pay SAIC for services rendered, SAIC will not owe the remaining$30M for the remaining two years of the contract. This is not recorded officially in the2012 financial statements as a result of the terms of the agreement. Currently, there is noindication that SAIC will not owe the remaining $30M, and the amount is significant

enough that it should be recorded in future minimum lease payments and consideredwhen evaluating SAIC financial statements.

SAIC had $4.9M in deferred acquisition and contingent consideration as of June 30,2012. This is related to recent acquisitions that the company made in 2011 and 2012. Thisis due to the fact that the company acquired four businesses, two being under therequirement that they achieve specified earnings results in the first two years ofoperations. The company has used very conservative valuation methods based on fairmarket value, and at the end of each reporting period, the fair market valuation isremeasured. This has currently resulted in a $10M decrease in liabilityrecorded. Contingent liabilities are minimal when evaluating CACI financial statements

and the company has traditionally been conservative when reporting and disclosingcontingent liabilities.

There is a challenging distinction between on and off-balance sheet financialarrangements. SAIC has a relatively large Research and Development sector, which mayprovide opportunity for off-balance sheet financing. In 2012, SAIC funded an R&Dexpense of $93M, composed of systems research and development geared towards majorgovernment contracts. (That is up from $55M in 2011.) However, it is difficult to classifythis as off-balance sheet financing as there is very little detail included in footnotes.Additionally, SAIC and CACI both have joint ventures. Neither has blatantly abused thecapitalization of assets, and footnotes define the distinction between betterments andmaintenance expenses. Both companies are under a tremendous amount of scrutiny andauditing from the U.S. Government, as they guarantee contract awards. As a result, it isunlikely that there are significant off-balance sheet arrangements, and none are discussedin financial statement footnotes.

Table 5: Summary of Solvency Ratios

SAIC CACI Industry Avg2012

(Jan '11- Jan'12)

2011(Jan '10- Jan

'11)

2011(Jun'11-Jun'12)

2010(Jun'10 -Jun'11)

Updated as ofMarch 2013

Long Term Debt toTotal Assets 0.19 0.28 0.22 0.17 N/A

Debt To Equity 2.06 1.5 1.05 0.77 1.52Times InterestEarned 3.4 12.81 12.41 10.82 N/AOperating CashFlow Coverage 0.42 0.39 0.49 0.55 N/A

As noted in Table 5 above, in 2012, SAIC had a Long-Term Debt to Total Assets Ratioof .19 compared to .28 from the previous year. This is promising as long term debt in


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comparison to assets decreased. (However, current debt increased significantly in 2012.)CACIs ratio increased from .17 in 2011 to .22 in 2012, insinuating that they have takenon more long term debt.

The Debt to Equity Ratio displayed in Table 5 for SAIC in 2012 was 2.06, compared to

1.05 for CACI. This indicates that SAIC was more aggressive in financing growth withdebt, and is high compared to the industry average at 1.52. Both companies ratiosincreased from 2011 to 2012. While earnings may increase, it is essential to monitor thecost of debt as the cost and interest expense may outweigh the return.

The Times Interest Earned Ratio for SAIC was 3.40, a significant decrease from 12.81in 2011 as seen in the table above. The 2012 ratio is quite low due to the fact that netincome greatly decreased while interest expense grew, and for every dollar of interestexpense, SAIC has $3.40 to cover it. SAIC had significantly decreased net income in2012 as a result of the noted City Time litigation. CACI had a high and improved ratio,with 12.41 in 2012 up from 10.82 in 2011.

In 2012, CACI had a larger Operating Cash Flow Coverage Ratio at .49 compared toSAIC at .42. However, SAIC was able to increase this ratio from 2011 to 2012, whichimplies that they are working to attain more operating cash flow to meet obligations. Incontrast, CACIs ratio decreased by .06.

In 2012, SAIC was more aggressive than CACI in financing growth with debt. Whileoperating cash flow coverage is promising, current liabilities increased by $550M, whichis not taken into account into long term debt to total assets ratio. Net income suffered in2012 as well as a result of the CityTime litigation. SAIC anticipates that fiscal year 2013will have higher net income as they will no longer owe significant litigation payments.Additionally, SAIC has not reported $30M in rental obligations, and also does not recordlease expenses as they retain operating leases. Despite a healthy debt rating, SAIC ismoderately solvent. However, long-term survival as given in the long term debt to totalassets ratio is promising. In comparison, CACI analysis of solvency is healthier and muchmore consistent over time.

General Dynamics of the Cash FlowsTable 5 represents and compares net income, operating, investing and financing cashflows of SAIC and CACI in FY 2012 and FY 2011, and provides dynamics of thoseitems. Both SAIC and CACI have operating cash flows greater than values of their netincome, which defines the latter as of highquality.

Table 5: Cash Flows Summary and Dynamics (in $ millions)

SAIC CACI Dynamics1/31/2012 1/31/2011 6/30/2012 6/30/2011 2012 vs.2011

Net Income $59.00 $619.00 $167.45 $144.22 -0.90 0.16Total cash flowsprovided by operatingactivities ofcontinuing operations 772.00 725.00 266.69 225.96 0.06 0.18


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Total cash outflowsused in investingactivities ofcontinuing operations (203.00) (445.00) (204.37) (149.24) 0.54 0.37Total cash flowsprovided by (used in)

financing activities ofcontinuing operations (449.00) 187.00 (210.95) (167.68) (3.40) (0.26)

In FY 2012 SAICs net income dropped by 90% ($ 560 million) primarily due to 30%increase in selling and administrative expenses, 44% increase in interest expense and76% decline in non-operating income. In contrast, CACI had a 16% growth of net incomein FY 2012 due to an overall smooth structure of revenues and expenses.

Operating cash flows of both companies increased. However, CACI demonstrated abetter inflow growth than SAIC (18% versus 6%).

In FY 2012, SAIC reduced its investing cash outflow by 54%, whereas CACI increasedits outflow by 37%. The reduction in investing cash outflow may be indicative ofdecreased investments or increased returns on investments, while increase of an outflowmay show the opposite.

Also, in FY 2012 SAIC reported a cash outflow from financial activities. However, thesources of financial cash flow have not changed significantly. The FY 2011 inflow wascaused by $742 million issuance of a long-term debt. In FY 2012, CACI used 26% morecash for its financing activities. Such an increase occurred due to a high volume of debtpayments and also due to CACIs repurchase of common stock.

Operating Cash Flows and Debt Coverage

In FY 2013 SAIC will have to pay a total of $553 million in principal to cover itsobligations (Table 6). Assuming that in 2013 operating cash inflow will have the same6% growth rate, the companys operating cash flow will be $818.32 million. In otherwords, SAICs debt will make up 67.5% of its operating cash flow. Although the amountof cash will be sufficient to cover the maturity of long-term debt in 2013, the remainder $46.32 million might be inadequate to meet other cash requirements.

In 2014 and 2015, SAIC will have to pay only 2 million each year. The company shouldnot have any difficulties to cover those debts.

Table 6. Maturities of Long-term Debt (in $)

SAIC(year ending Jan, 31)

CACI(year ending June, 30)

2013 553,000,000 7,500

2014 2,000,000 307,500

2015 2,000,000 7,500

2016 1,000,000 13,125

2017 2,000,000 228,125


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2018 and thereafter 1,300,000,000 n/a

Total Principal payments 1,860,000,000 563,750

Less unamortized discount (8,000,000) (24,289)

Total Long term debt 1,852,000,000 539,461

In 2013 CACI will be paying $7,500 to cover its debt. That figure is only a small fractionof CACIs predicted operating cash flow.

Cash Flows Statements SummaryThe following table provides a summary of the sources and uses of cash at SAIC andCACI accumulated at the end of FY 2012.

Table 7. Summaries of the Most Important Cash Inflows and Outflows (in $millions)

Cash Inflows Cash Outflows

SAIC CACI SAIC CACI

OperatingActivities $757 accounts

payable

$41.879accountspayable

$93inventory &

prepaid expenses

$33.919accounts receivable

InvestingActivities

$85proceeds from

assets saleNo inflow

$218business

acquisition

$185.926 businessacquisition

FinancingActivities

$27sale of stock

$1,093.751borrowingfrom banks

$471repurchase of

stock

$977.5payment to bank

While the most significant operating cash inflows for both companies come fromaccounts payable, operating cash outflow at SAIC was caused by the purchase ofinventory and accrued prepaid expenses. In contrast, accounts receivable causedoperating cash outflow at CACI. Both companies spent significant amounts of cash toacquire new businesses. In 2012 CACI paid $977.5 million to banks and borrowed$1,093.751 million.

Value AnalysisTable 8 represents basic ratios that help understand market positions of SAIC and itsbenchmark company. Price/ Earnings ratio of SAIC in 2011 was less than that of CACI,which means investors could expect CACI to show a higher growth in future than SAIC.However, in FY 2012 the situation changed completely. SAICs price/earnings ratio

became much higher than that of CACI: 71.44 versus 13.25, which made SAIC moreattractive for investors.

In FYs 2011 and 2012 SAICs market to book value of equity ratio was greater than thatof CACI. This fact can tell about a greater market demand for SAICs stock. The ratioalso estimates value the companys management created for its shareholders.

Table 8. Value Analysis


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SAIC CACI

2012 2011 2012 2011

Price/ Earnings Ratio 71.44 10.04 8.90 13.25

Market to book value

of equity ratio (pershare)

1.932 2.495 1.280 1.4595

Dividend Payout 0 0 0 0

Market price per share(NYSE: close, on thelast day of FY)

$12.86 $16.57 $55.02 $63.08

Earnings per Share 0.18 1.65 6.18 4.76

Book Value per share(SE / shares

outstanding)

6.653 6.639 42.974 43.22

Shares outstanding(NI/EPS) 327,777,777.7 375,151,515.2 27,096,116.5 30,297,899.16

Neither SAIC, nor CACI have ever paid any dividends. Although in March 2012 (FY2013) SAICs board of directors decided to pay quarterly dividends of $0.12 per share.The difference between the book and market value of SAICs shares is the evidence ofmarket demand. It reflects positive expectations of the investors.

IV. OTHER ASSESSMENT - EARNINGS QUALITY EVALUATION

Earnings quality refers to the reasonableness of reported earning in respect to thereliability, predictability, variability, sustainability of those earnings, in addition to theextent to which reported earnings correspond to economic income of a firm. In order toevaluate a firms earning quality, the managements choice of accounting policies arebenchmarked against peers in the firms industry

Earnings Management

Calculated as net operating cash flow less net income, accruals are estimates by company

management of non-cash expenses, assets and liabilities that are recognized before they

are paid. The annual trend suggests that SAICs accruals to revenue ratio is at its highest

over the previous four years and compares to a low of -0.8% in 2009. The increase in its

accruals to revenue ratio to 6.7% from 2.0% (in 2011) contrasts CACIs stable 2.7%

average over the same period. However the increase is similar to the increase in the

industry group during this period to 4.1% from 1.7%. Relative to the industry, accruals to

revenue ratio rose 2.3 percentage points.

Earnings Variability


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SAICs reported relatively weak net income margins year over year and compared to

CACI, however as previously discussed SAICs 3% dip in overall revenue and also the

payment of the $540 Million Dollar settlement significant impacts the net income

margins reported. When adjusted for the settlement value, SAICs net income margins

closely mirror FY 2011 levels. Again, as earlier discussed SAICs net income margin

may take another significant charge due to payment of the maturity of the firms $553Million long term debt obligation, assuming the low interest environment does not

prompt management to rollover bond principal into a new lower finance charge cost

bond.

Accounting Methods: Revenue Recognition, Depreciation & InventoryMethod ChoicesSAICs contract revenue recognition, straight line depreciation method, and inventorymethod choices are the same as the benchmark CACI and also similar to primarilyservices contractors of its industry. SAICs use of the FIFO method for raw materialsinventory management is aggressive however it is balanced by utilizing the lower of cost

or realizable net value for other inventory. Considering the lack of insight within CACIsearnings regarding its own inventory policy SAICs detailed comment is notable. Off-Balance Sheet Financing & Capitalized LeasesSAICs primary use of operating leases is for the use of the facilities wherein the firmconducts business. This treatment is similar to that of CACI and the industry overall.SAICs use of operating leases would not be considered aggressive because the use of theoperating lease is not to finance asset acquisition.Accounting PoliciesSAICs accounting policies overall are neutral leaning. The determination whether afirms policies are neutral, aggressive or conservative is evaluated relative to its industrypeers. SAIC in this case, relative to CACI and the industry, utilizes no more conservative

or aggressive policies than its peers.

V. OUTSIDE ASSESSMENTS

Earnings per Share estimates are a key indicator of the estimated future health of acompany, and for investors it is critical to estimate the amount of return on theirinvestment in the coming year. EPS estimations are often given both by external analystsas well as internal management projections. In the case of SAIC, internal managementdo not offer direct EPS estimates but do offer strong words of support for investors forthe company in the coming year. Independent analysts offer more direct projections for

the coming year. On average, FY 2013 is expected to end with an EPS of $1.34 and FY2014 is currently estimated to end with an EPS of $1.33.

Internal Management Estimates

Internal Management estimates for the coming year are not available but excerpts fromthe quarterly earnings call with stockholders suggest that management have high hopesfor earnings in the coming year, given certain key acquisitions in FY 13, as well as with aplanned separation in FY 14. On the Q2 quarterly earnings conference call on August 30,


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2012, SAICs Chief Financial Officer and Executive Vice President, Mark Sopp statedOn the EPS side, guidance remains unchanged at $1.26 to $13.6 for the year, whichreflects amortization and integration cost related to MaxIT, and new expenses related tothe separation process weve been discussing here. Internal management estimatesshould not be relied upon as the sole estimates of a companys future earnings because

management have incentives to boost earnings estimates to meet their contractualcompensation requirements, which are often tied to company earnings.

Independent Analyst Estimates

Overall, analysts have issued a recommendation to investors to hold SAIC stock. Theconsensus report on Bloomberg has an estimate EPS for the next three quarters risingfrom .319 in the final quarter of FY 2013 to .334 in Q2 of FY 2014. On aggregate,Standard & Poors projects that the EPS for FY 2013 will be $1.34. S&P furtherestimates that the EPS for FY 2014 will decline by .7% in to $1.33.S&P and Thomson Reuters offer markedly different analysis for their projections. Theirreports offer seemingly different criteria for their assessments of SAIC with S&P takinginto account recent acquisitions to boost projections while Thomson Reuters seems to

take a more conservative approach and focuses its analysis only on the overall revenueand expenses trends.Further, individual analysts, overall, seem to recommend that SAIC stock is currentlyundervalued and S&P recently upgraded its recommendation from neutral to hold forSAIC stock. As seen in Figure xx.xx, individual analysts do not report an estimated EPSfor FY 2013 or 2014 on Bloomberg, only their targeted price for the stock, and theiroverall recommendation.

Figure xx.xx-Schedule of Analyst Recommendations for SAIC InvestorsName of Analyst Affiliation Forecast of EPS

(Target Price)Recommendation

William R Loomis Stifel Nicolaus HoldMichael S Lewis Lazard Capital Markets Neutral (Hold)James E Friedman Susquehanna Financial

Group$11 Neutral (Hold)

Edward S Caso Wells Fargo Securities Underperform (Sell)Jason Kupferberg Jefferies $16 BuyCai Von Rumohr Cowen and Company Outperform (Buy)Rama Bondada RBC Capital Markets $14 Sector Perform (Hold)Robert M Spingarn(5th)

Credit Suisse $11 Underperform (Sell)

Joseph B Nadol III (3rd) JPMorgan $13 Overweight (Buy)Brian Gesuale (#1) Raymond James Market Perform (down)

(Hold)

Alex P Hamilton Early Bird Capital Inc HoldTimothy J Quillen Stephens Inc $13 Equal Weight (Hold)Timothy J McHugh William Blair & Co. Market Perform (Hold)George A Price BB&T Capital Markets HoldDylan Cathers S&P Capital IQ $13 HoldTeam Coverage EVA Dimensions Buy

I agree with S&Ps projections to hold SAIC stock because it projections increasedearnings in the coming year based on two factors: recent key acquisitions, and the


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upcoming separation within the company. The separation will likely eliminate currentconflicts of interests and allow the government contractor to bid for more lucrativegovernment contracts. Current stock price reflects the companys current ability to bidand obtain new contracts, as well as a likely hesitancy after the companys poorperformance in the last quarter of FY 2012 due to the CityTime litigation settlement.

Those anomalies aside, it is likely that SAIC is opening up new opportunities and its EPSwill likely rise in the coming year.

VI. CONCLUSION

Notwithstanding a significant non-recurring loss in FY 2012, SAIC is generallyoutpacing its competitors in profitability. When the loss realized for the settlement isremoved from the profitability analysis, however, the Net Profit Margin and Return onEquity are on pace with previous years indicating that the underlying business is stillstrong, despite the one time loss. SAIC is below industry averages for liquidity ratios,and, therefore, are considered only relatively liquid. However, overall SAIC and CACI

both have enough assets to pay off current liabilities. Further,SAICs accountsreceivable turnover ratio is slightly lower (4.99) than the average in the industry (5.7).That is, SAIC collects its receivables 5 times a year, and pays off its short-term debt 6times a year (CACI 21 times). The company's revenue recognition principles are basedon types of contracts it signs. During the course of 2010-2012 FYs SAIC reduced itsallowance for doubtful accounts from $10 to $6. Those amounts are larger than CACIsallowances due to a significant difference in size.

REFERENCES

Business Monitor International (2012, September 4). United States Defense and Security


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Report (Quarterly). Business Monitor International Database.

Cella, J. (2012). SAIC, Inc. Retrieved on 4 September 2012 from Hoover's Company

Records database.

Lockheed Martin. (2011).Market OverviewUnites StatesQ4 2011. Retrieved from

Business Monitor International United States Defense & Security.

Mergent. SAIC Inc (NYS: SAI). Retrieved on 4 September 2012 from Mergent Online

database.

SAIC. (2012). Annual Report. Retrieved from http://www.saic.com

SAIC. (2012). Edgar Search Report. Retrieved from www.sec.gov.

SAIC.(2012). Investing: Annual Financials for SAIC Inc. Retrieved from

www.marketwatch.com.

APPENDIX: SAIC AND CACI FINANCIAL STATEMENTS

SAIC. Consolidated Balance Sheets (USD $) In Millions, unless otherwisespecified
http://www.saic.com/http://www.sec.gov/http://www.marketwatch.com/http://www.marketwatch.com/http://www.sec.gov/http://www.saic.com/


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1/31/2012 1/31/2011 1/31/2010

ASSETS

Cash and cash equivalents 1,592 1,367 861

Receivables, net 2,174 2,069 2,044

Inventory, prepaid expenses and other

current assets

439 382 288

Assets of discontinued operations 49

Total current assets 4,205 3,867 3,193

Property, plant and equipment, net 348 359 389

Intangible assets, net 176 211 106

Goodwill 1,826 1,664 1,434

Deferred income taxes 37 51 103

Other assets 75 71 70

TOTAL ASSETS 6,667 6,223 5,295

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities 1964 1205 1191

Accrued payroll and employee benefits 508 511 512

Notes payable and long-term debt,current portion

553 3 3

Liabilities of discontinued operations 29

Total current liabilities 3025 1748 1706

Notes payable and long-term debt, netof current portion

1299 1849 1103

Other long-term liabilities 162 135 195Commitments and contingencies

STOCKHOLDERS' EQUITY

Common stock

Additional paid-in capital 2028 2090 2096

Retained earnings 164 408 239

Accumulated other comprehensive loss -11 -7 44

Total stockholders' equity 2181 2491 2291

TOTAL LIABILITIES &


6,667 6,223 5,295

CACI. Consolidated Balance Sheets (USD $) In Thousands, unless otherwisespecified

6/30/2012 6/30/2011 6/30/2010

ASSETS

Cash and cash equivalents 15,740 164,817 254,543


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Accounts receivable, net 628,842 573,042 531,033

Deferred income taxes 16,747 16,080 12,641

Prepaid expenses and other current assets 24,463 28,139 42,529

Total current assets 685792 782078 840746

Goodwill 1,406,953 1,266,285 1,161,861

Intangible assets, net 114,816 108,102 108,298Property and equipment, net 67,449 62,755 58,666

Supplemental retirement savings planassets

77,371 66,880 51,736

Accounts receivable, long-term 9,942 8,657 9,291

Other long-term assets 30,553 25,374 14,168

TOTAL ASSETS 2,392,876 2,320,131 2,244,766

LIABILITIES AND SHAREHOLDERS'EQUITYCurrent portion of long-term debt 7,500 7,500 278,653

Accounts payable 149,549 98,893 98,421Accrued compensation and benefits 180,871 173,586 152,790

Other accrued expenses and currentliabilities

147,009 157,242 128,559

Total current liabilities 484,929 437,221 658,423

Long-term debt, net of current portion 531,961 402,437 252,451

Supplemental retirement savings planobligations, net of current portion

73,176 64,868 50,384

Deferred income taxes 86,414 68,123 42,990

Other long-term liabilities 51,951 37,866 67,363

TOTAL LIABILITIES 1,228,431 1,010,515 1,071,611

Commitments and contingencies


Common stock $0.10 par value, 80,000shares authorized, 40,626 and 40,273shares issued, respectively

4,062 4,027 3,937

Additional paid-in capital 525,121 504,156 468,959

Retained earnings 1,105,949 938,495 794,277

Accumulated other comprehensive loss -7,834 -3,115 (9807)

Treasury stock, at cost (15,988 and 10,077shares, respectively)

-465,303 -136,631 (86653)

Total CACI shareholders' equity 1,161,995 1,306,932 1,173,155Noncontrolling interest in joint venture 2,450 2,684

Total shareholders' equity 1,164,445 1,309,616

TOTAL LIABILITIES & STOCKHOLDERS'EQUITY

2,392,876 2,320,131 2,244,766


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SAIC. Consolidated Statements Of Income (USD $)In Millions, except Per Sharedata, unless otherwise specified

1/31/2012 1/31/2011 1/31/2010

REVENUES $10,587 $10,921 $10,580COSTS AND EXPENSES

Cost of revenues 9606 9476 9151

Selling, general and administrative expenses 670 498 593

Operating income 311 947 836

Non-operating income (expense):

Interest income 5 2 2

Interest expense -114 -79 -76

Other income, net 5 2 6

Income from continuing operations before

income taxes

207 872 768

Provision for income taxes -215 -314 -289

Income (loss) from continuing operations -8 558 479

Discontinued operations (Note 16):

Income from discontinued operations beforeincome taxes

117 89 24

Provision for income taxes -50 -28 -7

Income from discontinued operations 67 61 17

NET INCOME 59 619 496

Basic:

Income (loss) from continuing operations ($0.02) $1.48 $1.20Income from discontinued operations $0.20 $0.17 $0.05

Total basic earnings per share $0.18 $1.65 $1.25

Diluted:

Income (loss) from continuing operations ($0.02) $1.48 $1.19

Income from discontinued operations $0.20 $0.16 $0.04

Total diluted earnings per share $0.18 $1.64 $1.23

CACI. Consolidated Statements Of Operations (USD $). In Thousands, exceptPer Share data, unless otherwise specified

6/30/2012 6/30/2011 6/30/2010

REVENUE 3,774,473 3,577,780 $3,149,131


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COSTS OF REVENUE:

Direct costs 2,598,890 2,528,660 2,207,574

Indirect costs and selling expenses 819,772 741,652 693,736

Depreciation and amortization 55,962 56,067 53,039

Total costs of revenue 3,474,624 3,326,379 2,954,349

Income from operations 299,849 251,401 194,782Interest expense and other, net 24,101 23,144 26,353

Income before income taxes 275,748 228,257 168,429

Income taxes 107,537 83,105 61,171

Net income including portion attributable tononcontrolling interest in earnings of jointventure

168,211 145,152 107,258

Noncontrolling interest in earnings of jointventure

-757 -934 -743

Net income attributable to CACI 167,454 144,218 106,515Basic earnings per share 6 5 4

Diluted earnings per share 6 5 3

Weighted-average basic shares outstanding 27,077 30,281 30,138

Weighted-average diluted sharesoutstanding

28,111 31,300 30,676

Saic First Final Draft Submission.cope.Edits

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