SAIC sales tumble in face of slower government spending

September 4, 2011

Washington’s budgetary woes are taking their toll on government contractors.

McLean-based Science Applications International Corp. reported last week that its second-quarter profit dropped about 6 percent, citing the government’s reduced spending on existing programs and caution in awarding new contracts.

SAIC’s experience echoes that of other contractors that have reported more uncertain and guarded federal spending. Like many of these companies, SAIC is looking to acquisitions in areas still expected to grow, such as health information technology and energy.

The company reported profits of $178 million (50 cents per share) in the three-month period that ended July 31, down from $190 million (50 cents) in the same period a year earlier. Quarterly revenue dropped nearly 6 percent, to $2.6 billion.

Chief executive Walter P. Havenstein said during a call with investors that the company is reducing its expectations for the year because of the uncertainty of the government’s budget. The company has up to about $30 billion worth of submitted proposals awaiting decision, which Havenstein said represents a new peak and a more than $10 billion increase from the same quarter a year ago.

“We expect those decisions to get made,” Havenstein said. But that partly depends on “having active contracting and the government’s willingness to let that funding through.”

Many contractors have reported similar concerns. Ted Davies, who heads Unisys’s Reston-based federal systems business, said that agencies are often extending existing contracts rather than launching new efforts, while Wes Bush, chairman, chief executive and president of Falls Church-based Northrop Grumman, said earlier this year that agencies are spending more conservatively.

As a result, companies are starting to downgrade their forecasts for the year, said Michael S. Lewis, director of equity research at Lazard Capital Markets.

“The management teams were caught off guard . . . that the slowdowns were more significant than what they were projecting,” he said.

SAIC officials said they still expect spending to grow in key areas. The company, which has promised a bolder approach to acquisitions, recently announced that it is buying Vitalize Consulting Solutions, which primarily focuses on helping commercial hospitals implement electronic health record systems.

Havenstein said the acquisition will expand SAIC’s health solutions portfolio, which includes both commercial and federal markets.

Earlier this year, SAIC purchased the transmission and distribution engineering capabilities of Lisle, Ill.-based Patrick Energy Services, which it said will improve its energy and smart-grid service offerings.

Havenstein said last week that high prices have prevented the company from taking on larger buys.

“We still see some extraordinary prices being paid,” he said. “Frankly, you have to convince yourself that even in the high-growth areas, there’s sufficient synergy to pay the premiums that are necessary.”

William Loomis, managing director at the financial services firm Stifel Nicolaus, which has a business relationship with SAIC, said he anticipates that as prices come down, SAIC “will probably get more active on buying.”

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