UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2008
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-33072
SAIC, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 20-3562868 | |
State or other jurisdiction of incorporation or organization |
I.R.S. Employer Identification No. |
10260 Campus Point Drive, San Diego, California | 92121 | |
Address of principal executive offices | Zip Code |
Registrants telephone number, including area code:
(858) 826-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, Par Value $.0001 Per Share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Class A Preferred Stock, Par Value $.0001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2007, the aggregate market value of the common stock (based upon the closing price of the stock on the New York Stock Exchange) held by non-affiliates of the registrant was $2,030,266,611. The registrants Class A preferred stock is not listed on a national securities exchange or traded in an organized over-the-counter market, but each share of the registrants Class A preferred stock is convertible into one share of the registrants common stock.
As of March 7, 2008, the registrant had 182,596,258 shares of common stock, $.0001 par value per share, issued and outstanding, and 230,028,280 shares of Class A preferred stock, $.0001 par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of SAIC, Inc.s definitive Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K.
SAIC, Inc.
Form 10-K
TABLE OF CONTENTS
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 18 | ||
Item 6. |
21 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||
Item 7A. |
41 | |||
Item 8. |
42 | |||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
42 | ||
Item 9A. |
43 | |||
Item 9B. |
45 | |||
Item 10. |
46 | |||
Item 11. |
46 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 46 | ||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
47 | ||
Item 14. |
47 | |||
Item 15. |
48 | |||
51 | ||||
F-1 |
The Company
We are a provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security (DHS) and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers in selected commercial markets.
Science Applications International Corporation was formed in 1969. In October 2006, in connection with becoming a publicly-traded company, Science Applications International Corporation completed a merger (reorganization merger) in which it became a 100%-owned subsidiary of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of its common stock. We use the terms Company, we, us, and our to refer to SAIC, Inc. and its majority-owned and 100%-owned subsidiaries, including Science Applications International Corporation.
We have three reportable segments: Government, Commercial, and Corporate and Other. Our operating business units are aggregated into the Government or Commercial segments, depending on the nature of the customer, the contractual requirements and the regulatory environment governing the business units services. The Corporate and Other segment includes the operations of our internal real estate management subsidiary, various corporate activities, the elimination of intersegment revenues and costs and certain corporate expense items not allocable to our Government customers referred to as unallowable expenses. Our Corporate and Other segment does not contract with third-parties for the purpose of generating revenues. For additional information regarding our reportable segments and geographic areas, see Note 16 of the notes to consolidated financial statements contained within this Annual Report on Form 10-K.
Government Segment
Our Government segment provides a wide array of technical services and solutions in the following areas, primarily to U.S. federal, state and local government agencies and foreign governments.
| Defense. We develop leading-edge concepts, technologies and systems to solve complex challenges facing the U.S. military and its allies. |
| Intelligence. We develop solutions to help the U.S. defense, intelligence and homeland security communities build an integrated intelligence picture, allowing them to be more agile and dynamic in challenging environments and produce actionable intelligence. |
| Homeland Security. We develop technical solutions and provide systems integration, products, and mission-critical support services to help federal, state, local and foreign governments and private-sector customers protect the United States and allied homelands. |
| Logistics and Product Support. We provide logistics and product support solutions to enhance the readiness and operational capability of U.S. military personnel and weapon and support systems. |
| Systems Engineering and Integration. We provide systems engineering and integration solutions to help our customers design, manage and protect complex information technology (IT) networks and infrastructure. |
| Research and Development. As one of the largest science and technology contractors to the U.S. Government, we conduct leading-edge research and development of new technologies with applications in areas such as national security, intelligence and life sciences. |
Revenues from our Government segment accounted for 94%, 93% and 93% of our total consolidated revenues in fiscal 2008, 2007 and 2006, respectively. Within the Government segment, a significant portion of our revenues are derived from contracts with the U.S. Government. The revenues from contracts with the U.S. Government include contracts where we serve as the prime or lead contractor, as well as contracts where we serve as a subcontractor to other parties who are engaged directly with various U.S. Government agencies as the prime contractor. Some revenues in the Government segment are derived from certain non-government customers for whom we are required to comply with government acquisition and cost allocation regulations.
Commercial Segment
Our Commercial segment primarily targets commercial customers worldwide in selected industry markets, which currently include oil and gas, utilities and life sciences. While the Commercial segment provides an array of information technology (IT) systems integration and advanced technical services, the focused offerings include applications and IT infrastructure management, data lifecycle management, and business transformation services. Our Commercial segment customers often benefit from leveraging our broader governmental experiences, such as geographic information systems, security, and systems engineering. Revenues from our Commercial segment accounted for 6%, 7% and 7% of our total consolidated revenues in fiscal 2008, 2007 and 2006, respectively.
SAIC, Inc. Annual Report 1
PART I
Acquisitions
The acquisition of businesses is part of our growth strategy and we expect that a portion of our growth will come from recent and future acquisitions. During the last five fiscal years, we completed 28 acquisitions, including the following:
| In fiscal 2008, we acquired The Benham Companies LLC, a consulting, engineering, and architectural design company with specific competencies in industrial manufacturing and facilities construction. |
| In fiscal 2007, we acquired Applied Marine Technology, Inc., a provider of training, systems engineering and integration, information systems and communications, and rapid prototyping of technical solutions and products focused on support to intelligence and special warfare operations. |
| In fiscal 2006, we acquired Geo-Centers, Inc. and its subsidiary, EAI Corporation, an engineering and professional services firm, providing research and development for chemical and biological detection, infrastructure assessment and protection, life science research, rapid response equipment and support, and sensor systems and integration. |
| In fiscal 2005, we acquired ProcureNet Holdings, Inc., a provider of electronic procurement, logistics and supply chain management services for the DoD and other federal customers. |
| In fiscal 2004, we acquired Eagan, McAllister Associates, Inc., a provider of IT services focused on aviation and command, control, communications, computers, and intelligence programs supporting the U.S. Navy, Marine Corps, Army, and Special Operations Command and Computer Systems Technology, Inc., a provider of IT, engineering, programmatic, and logistics services to government customers in the United States. |
Discontinued Operations
During the last five fiscal years, we completed the following three divestitures:
| In fiscal 2008, we completed a reorganization transaction involving our 55% interest in AMSEC LLC, a consolidated majority-owned subsidiary, resulting in the disposition of our 55% interest in AMSEC LLC in exchange for our acquisition of certain divisions and subsidiaries of AMSEC LLC. |
| In fiscal 2007, we completed the sale of our majority-owned subsidiary, ANXeBusiness Corp. (ANX). |
| In fiscal 2006, we completed the sale of our subsidiary, Telcordia Technologies, Inc. (Telcordia). |
The operations of AMSEC LLC (other than the divisions and subsidiaries that we acquired in the reorganization transaction), ANX and Telcordia are classified as discontinued operations in the consolidated statements of income and cash flows and the notes to consolidated financial statements. The results of operations of AMSEC LLC (other than the divisions and subsidiaries that we acquired in the reorganization transaction) had been previously reported in the Government segment. ANXs results of operations had been previously reported in the Commercial segment. Telcordias results of operations had been previously reported in a separate reportable segment which was eliminated upon the sale of Telcordia.
Contracts
We generate revenues under the following types of contracts:
| Cost-reimbursement contracts which provide for reimbursement of our direct contract costs and allocable indirect costs, plus a fee. |
| Time-and-materials (T&M) contracts which typically provide for negotiated fixed hourly rates plus reimbursement of other direct costs. |
| Fixed-price-level-of-effort contracts which are substantially similar to T&M contracts except they require a specified level of effort over a stated period of time. |
| Firm-fixed-price (FFP) contracts which provide for a fixed price for specified products, systems and/or services. If actual costs vary from planned costs on a FFP contract, we generate more or less than the planned amount of profit and may even incur a loss. |
Contract Procurement
The U.S. Government technology services procurement environment has evolved due to statutory and regulatory procurement reform initiatives. U.S. Government agencies traditionally have procured technology services and solutions through agency-specific contracts awarded to a single contractor. However, the number of procurement contracting methods available to U.S. Government customers for services procurement has increased substantially. The three predominant contracting methods through which U.S. Government agencies procure technology services are as follows:
| Single Award Contracts. U.S. Government agencies have procured services and solutions through single award contracts which specify the scope of services that will be delivered and identify the contractor that will provide the specified services. When an agency has a requirement, interested contractors are solicited, qualified and then provided with a request for a proposal. The process of qualification, request for proposals and evaluation of bids requires the agency to maintain a large, professional procurement staff and the bidding and selection process can take a year or more to complete. |
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| U.S. General Services Administration (GSA) Schedule Contracts. The GSA maintains listings of approved suppliers of services and products with agreed-upon prices for use throughout the U.S. Government. In order for a company to provide services under a GSA Schedule contract, a company must be pre-qualified and awarded a contract by the GSA. When an agency uses a GSA Schedule contract to meet its requirements, the agency, or the GSA on behalf of the agency, conducts the procurement. The user agency, or the GSA on its behalf, evaluates the user agencys services requirements and initiates a competition limited to GSA Schedule qualified contractors. GSA Schedule contracts are designed to provide the user agency with reduced procurement time and lower procurement costs. |
| Indefinite Delivery/Indefinite Quantity (IDIQ) Contracts. Single-award and multi-award IDIQ contracts are contract forms used to obtain commitments from contractors to provide certain products or services on pre-established terms and conditions. Under IDIQ contracts, the U.S. Government issues task orders for specific products or services it needs and the contractor supplies products or services in accordance with the previously agreed-upon terms in the overall IDIQ contract. While the process to award the initial IDIQ contract may be similar in time and complexity as with single award contracts, the competitive process to obtain task orders is limited to the pre-selected contractor(s) which can compress the process and time required to award task orders. If the IDIQ contract has a single prime contractor, the award of task orders is limited to that party. If the contract has multiple prime contractors, the award of the task order is competitively determined. Multiple-contractor IDIQ contracts that are open for any government agency to use for the procurement of services are commonly referred to as government-wide acquisition contracts, or GWACs. IDIQ contracts often have multi-year terms and unfunded ceiling amounts, therefore enabling but not committing the U.S. Government to purchase substantial amounts of products and services from one or more contractors. |
Backlog
Backlog represents the amount of work under negotiated contracts which has not yet been performed. We segregate our backlog into two categories as follows:
| Funded Backlog. Government segment funded backlog primarily represents contracts for which funding is appropriated less revenues previously recognized on these contracts. Government segment funded backlog does not include the unfunded portion of contracts where funding is incrementally appropriated or authorized on a quarterly or annual basis by the U.S. Government and other customers, even though the contract may call for performance over a number of years. Commercial segment funded backlog represents the full value on firm contracts under which we are obligated to perform, which may cover multiple future years, less revenues previously recognized on these contracts. |
| Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from (1) negotiated contracts for which funding has not been appropriated or otherwise authorized and (2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedule, or other master agreement contract vehicles. |
The estimated value of our total consolidated backlog as of the end of the last two fiscal years was as follows:
January 31 | ||||||
2008 | 2007 | |||||
(in millions) | ||||||
Government segment: |
||||||
Funded backlog |
$ | 4,331 | $ | 3,902 | ||
Negotiated unfunded backlog |
9,763 | 10,185 | ||||
Total backlog |
$ | 14,094 | $ | 14,087 | ||
Commercial segment: |
||||||
Funded backlog |
$ | 749 | $ | 723 | ||
Negotiated unfunded backlog |
196 | 101 | ||||
Total backlog |
$ | 945 | $ | 824 | ||
Total consolidated: |
||||||
Funded backlog |
$ | 5,080 | $ | 4,625 | ||
Negotiated unfunded backlog |
9,959 | 10,286 | ||||
Total backlog |
$ | 15,039 | $ | 14,911 |
Total backlog may fluctuate from period to period depending on the timing of contract awards, renewals, modifications and cancellations.
We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract at any time. In addition, certain contracts in the Commercial segment include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees for work performed.
SAIC, Inc. Annual Report 3
PART I
Key Customers
We generated 87%, 88% and 88% of our total consolidated revenues from contracts with the U.S. Government (including all branches of the U.S. military) in fiscal 2008, 2007 and 2006, respectively. Within the U.S. Government, we generated 10% or more of our consolidated revenues during the last three fiscal years from one or more of the U.S. Army, U.S. Navy and U.S. Air Force. Each of these customers has a number of subsidiary agencies which have separate budgets and procurement functions. Our contracts may be with the highest level or with the subsidiary agencies of these customers.
The percentage of total consolidated revenues attributable to these customers for the last three fiscal years was as follows:
Year Ended January 31 | |||||||||
2008 | 2007 | 2006 | |||||||
U.S. Army |
21 | % | 18 | % | 16 | % | |||
U.S. Navy |
12 | 12 | 12 | ||||||
U.S. Air Force |
8 | 9 | 10 |
Competition
Competition for U.S. Government contracts is intense. We compete against a large number of established multinational corporations which may have greater financial capabilities than we do. We also compete against smaller, more specialized companies that concentrate their resources on particular areas. As a result of the diverse requirements of the U.S. Government and our commercial customers, we frequently team with other companies to compete for large contracts, and bid against these team members in other situations. Because of the current industry trend toward consolidation, we expect changes in the competitive landscape. We believe that our principal competitors include the following companies:
| contractors focused principally on U.S. Government IT and other technical services, such as CACI International Inc., ManTech International Corporation, SRA International, Inc., MTC Technologies, Inc. and SI International, Inc. |
| the engineering and technical services divisions of large defense contractors which provide U.S. Government IT services in addition to other hardware systems and products, including such companies as The Boeing Company, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, BAE Systems, L-3 Communications and Raytheon Company. |
| diversified commercial and U.S. Government IT providers, such as Accenture Ltd, BearingPoint, Inc., Booz Allen Hamilton Inc., Computer Sciences Corporation, Electronic Data Systems Corporation, International Business Machines Corporation and Unisys Corporation. |
We compete on factors including, among others, our technical expertise, our ability to deliver cost-effective solutions in a timely manner, our reputation and standing with customers, pricing and the size and scale of our company.
Patents and Proprietary Information
Our technical services and products are not generally dependent upon patent protection. We claim a proprietary interest in certain of our products, software programs, methodology and know-how. This proprietary information is protected by copyrights, trade secrets, licenses, contracts and other means.
We actively pursue opportunities to license our technologies to third parties and enforce our patent rights. We also evaluate potential spin-offs or other transfers of our technologies.
In connection with the performance of services for customers in the Government segment, the U.S. Government has certain rights to data, software codes and related material that we develop under U.S. Government-funded contracts and subcontracts. Generally, the U.S. Government may disclose such information to third parties, including, in some instances, our competitors. In the case of subcontracts, the prime contractor may also have certain rights to the programs and products that we develop under the subcontract.
Research and Development
We conduct research and development activities under customer-funded contracts and with internal research and development (IR&D) funds. IR&D efforts consist of projects involving basic research, applied research, development, and systems and other concept formulation studies. In fiscal 2008, 2007 and 2006, we spent $49 million, $34 million and $27 million, respectively, on IR&D, which was included in selling, general and administrative expenses.
Seasonality
The U.S. Governments fiscal year ends on September 30 of each year. It is not uncommon for U.S. Government agencies to award extra tasks or complete other contract actions in the timeframe leading up to the end of its fiscal year in order to
4 SAIC, Inc. Annual Report
PART I
avoid the loss of unexpended fiscal year funds, which may favorably impact our third fiscal quarter ending October 31. In addition, as a result of the cyclical nature of the U.S. Government budget process, as well as a greater number of holidays in our fourth fiscal quarter ending January 31, as compared to our third fiscal quarter ending October 31, we have from time to time experienced higher revenues in our third fiscal quarter and lower revenues in our fourth fiscal quarter.
Regulation
We are heavily regulated in most of the fields in which we operate. We provide services and products to numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, the DoD, National Aeronautics and Space Administration, intelligence agencies and the DHS. When working with these and other U.S. Government agencies and entities, we must comply with laws and regulations relating to the formation, administration and performance of contracts. Among other things, these laws and regulations:
| require certification and disclosure of all cost or pricing data in connection with various contract negotiations |
| impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. Government contracts |
| restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data |
In order to help ensure compliance with these laws and regulations, all of our employees are required to complete ethics trainings and other compliance training relevant to their position.
Internationally, we are subject to special U.S. Government laws and regulations, local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings) and varying currency, political and economic risks.
Environmental Matters
Our operations, including the environmental consulting, logistics services and investigative services we provide to third parties, and our ownership or operation of real property are subject to various foreign, federal, state and local environmental protection and health and safety laws and regulations. Failure to comply with these laws could result in civil or criminal sanctions, including fines, penalties or suspension or debarment from contracting with the U.S. Government, or could cause us to incur costs to change, upgrade or close some of our operations or properties. Some environmental laws hold current or previous owners or operators of businesses and real property liable for contamination, even if they did not know of and were not responsible for the contamination. Environmental laws may also impose liability on any person who disposes, transports, or arranges for the disposal or transportation of hazardous substances to any site. In addition, we may face liability for personal injury, property damage and natural resource damages relating to contamination for which we are otherwise liable or relating to exposure to or the mishandling of chemicals or other hazardous substances in connection with our current and former operations or services. Although we do not currently anticipate that the costs of complying with, or the liabilities associated with, environmental laws will materially adversely affect us, we cannot ensure that we will not incur material costs or liabilities in the future.
Employees and Consultants
As of January 31, 2008, we employed approximately 43,800 full and part-time employees. We also use consultants to provide specialized technical and other services on specific projects. To date, we have not experienced any strikes or work stoppages and we consider our relations with our employees to be good.
The highly technical and complex services and products provided by us are dependent upon the availability of professional, administrative and technical personnel having high levels of training and skills and, in many cases, security clearances. Because of our growth and the increased competition for qualified personnel, it has become more difficult to meet all of our needs for these employees in a timely manner and this has affected our growth. We intend to continue to devote significant resources to recruit, develop and retain qualified employees.
Company Website and Information
Our website can be accessed at www.saic.com. The website contains information about us and our operations. Through a link on the Investor Relations section of our website, copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. The information on our website is not incorporated by reference into nor is a part of this Annual Report on Form 10-K.
SAIC, Inc. Annual Report 5
PART I
You may request a copy of the materials identified in the preceding paragraph, at no cost, by writing or telephoning us at our corporate headquarters at the following:
SAIC, Inc.
10260 Campus Point Drive
San Diego, CA 92121
Attention: Corporate Secretary
Telephone: (858) 826-6000
You should carefully consider the risks and uncertainties described below in your evaluation of our business and us. If any of these risks or uncertainties actually occur, our business, financial condition or operating results could be materially harmed and the price of our stock could decline.
Risks Relating to Our Business
We depend heavily on U.S. Government contracts, and a decline in the U.S. defense budget or a delay in the completion of the U.S. Governments budget process could result in adverse consequences on our business.
We depend on our contracts with U.S. Government agencies for a significant portion of our revenues and, if our reputation or relationships with these agencies were harmed, our future revenues and growth prospects would be adversely affected. We are heavily dependent upon the U.S. Government as our primary customer and we believe that the success and development of our business will continue to depend on our successful participation in U.S. Government contract programs. We generated 87%, 88% and 88% of our total consolidated revenues from the U.S. Government (including all branches of the U.S. military) in fiscal 2008, 2007 and 2006, respectively. We generated 10% or more of our consolidated revenues during the last three fiscal years from one or more of the U.S. Army, U.S. Navy and U.S. Air Force.
We expect to continue to derive a substantial portion of our revenues from work performed under U.S. Government contracts. Our reputation and relationship with the U.S. Government, and in particular with the agencies of the Department of Defense (DoD) and the U.S. intelligence community, are key factors in maintaining and growing revenues under contracts with the U.S. Government. Negative press reports regarding poor contract performance, employee misconduct, information security breaches or other aspects of our business could harm our reputation, particularly with these agencies. If our reputation with these agencies is negatively affected, or if we are suspended or debarred from contracting with government agencies for any reason, the amount of business with the U.S. Government would decrease and our future revenues and growth prospects would be adversely affected.
A decline in the U.S. defense budget or changes in budgetary priorities may adversely affect our future revenues and limit our growth prospects. Revenues under contracts with the DoD, including subcontracts under which the DoD is the ultimate purchaser, represented 70% of our total consolidated revenues in fiscal 2008. Changes in the budgetary priorities of the U.S. Government, or the DoD, could directly affect our operating results. While spending authorizations for defense-related programs by the U.S. Government have increased in recent years, and in particular after the September 11, 2001 terrorist attacks, these spending levels may not be sustainable, and future levels of spending and authorizations for these programs may decrease, remain constant or shift to programs in areas where we do not currently provide services. Such changes in spending authorizations and budgetary priorities could occur due to changes in the number of and intensity of political conflicts, including the current conflicts in Iraq and Afghanistan, the significant relief and recovery costs associated with natural disasters, the rapid growth of the federal budget deficit, increasing political pressure to reduce overall levels of government spending, or other factors. In addition, the U.S. Government conducts periodic reviews of U.S. defense strategies and priorities, the results of which may shift DoD budgetary priorities or reduce overall U.S. Government spending for defense-related programs, including programs from which we expect to derive a significant portion of our revenues. A significant decline in overall U.S. Government spending, including in the areas of national security, intelligence and homeland security, or a significant shift in its spending priorities, or the substantial reduction or elimination of particular defense-related programs, would adversely affect our future revenues and limit our growth prospects.
A delay in the completion of the U.S. Governments budget process could delay procurement of the services and solutions we provide and have an adverse effect on our future revenues. In years when the U.S. Government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a continuing resolution that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in the procurement of the services and solutions we provide. We have from time to time experienced a decline in revenues in our fourth quarter ending January 31 and beyond as a result of this annual budget cycle, and we could experience similar declines in revenues if the budget process is delayed significantly in future years. When supplemental budgets are required to operate the U.S. Government and passage of legislation needed to approve any supplemental budget is delayed, the overall funding environment for our Government segment could be adversely affected.
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Our failure to comply with a variety of procurement rules and regulations could result in our being liable for penalties, including termination of our U.S. Government contracts, and changes in government regulations or practices could adversely affect our profitability, cash balances or growth prospects.
We must comply with laws and regulations relating to the formation, administration and performance of U.S. Government contracts, which affect how we do business with our customers. Such laws and regulations may potentially impose added costs on our business and our failure to comply with them may lead to penalties and the termination of our U.S. Government contracts. Some significant regulations that affect us include:
| the Federal Acquisition Regulation and supplements, which regulate the formation, administration and performance of U.S. Government contracts |
| the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations |
| the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based government contracts |
The U.S. Government may revise its procurement practices or adopt new contract rules and regulations, such as Cost Accounting Standards, at any time. In addition, the U.S. Government may face restrictions or pressure regarding the amount of services it may obtain from private contractors. Any of these changes could impair our ability to obtain new contracts or renew contracts under which we currently perform when those contracts are put up for recompetition bids. Any new contracting methods could be costly or administratively difficult for us to implement and could adversely affect our future revenues.
Recent and proposed legislation, which if adopted, may potentially result in added costs on our business and our failure to comply with new laws and regulations could adversely affect our financial condition and operating results. Congressional legislation and initiatives dealing with procurement reform and shifts in the buying practices of government agencies resulting from those proposals could have adverse effects on government contractors, including us. Potential changes under consideration include continued attempts to increase the use of fixed price contracts which would transfer the assumption of some risks from the U.S. Government to the performing contractors. The FY08 National Defense Authorization Act contains a number of acquisition policy changes that, depending upon enactment language, could lead to changes in government procurement policy that could negatively impact our current business practices. Additionally, recent increases in congressional scrutiny and investigations into business practices and into major programs supported by contractors could lead to increased legal costs and has the potential to adversely effect the reputation and profitability of targeted companies.
Our business is subject to audits and cost adjustments by the U.S. Government, and our contracts with the U.S. Government are subject to review and investigation which, if resolved unfavorably to us, could adversely affect our profitability, cash position or growth prospects.
U.S. Government agencies routinely audit and review their contractors performance on contracts, cost structure, pricing practices and compliance with applicable laws, regulations and standards. They also review the adequacy of, and a contractors compliance with, its internal control systems and policies, including the contractors purchasing, property, estimating, compensation and management information systems. Such audits may result in adjustments to our contract costs, and any costs found to be improperly allocated will not be reimbursed. All of our indirect contract costs have been agreed upon through fiscal 2004 and are not subject to further adjustment. We have recorded contract revenues in fiscal 2005 through 2008 based upon costs we believe will be approved upon final audit. However, we do not know the outcome of any future audits and adjustments and, if future audit adjustments exceed our estimates, our profitability could be adversely affected.
Additionally, our contracts with the U.S. Government are subject to review and investigation. If such a review or investigation identifies improper or illegal activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and suspension or debarment from doing business with U.S. Government agencies. We could also suffer harm to our reputation if allegations of impropriety were made against us, which would impair our ability to win awards of contracts in the future or receive renewals of existing contracts. We are from time to time subject to investigations by the DoD and other agencies. Although we have never had material penalties or administrative sanctions imposed upon us, such penalties and sanctions are not uncommon in the industry. If we incur a material penalty or administrative sanction or otherwise suffer harm to our reputation, our profitability, cash position and future prospects could be adversely affected.
We derive significant revenue from contracts awarded through a competitive bidding process. Due to this competitive pressure, we may be unable to sustain our revenue growth and profitability.
We obtain many of our contracts with the U.S. Government through a competitive bidding process and expect that much of the business that we seek in the foreseeable future will be awarded through competitive bidding. The U.S. Government has increasingly relied on certain types of contracts that are subject to a competitive bidding process which has resulted in greater competition and increased pricing pressure. The competitive bidding process imposes substantial costs and
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presents a number of risks, including the substantial cost and managerial time we spend to prepare bids and proposals for competitively awarded contracts that may not be awarded to us, our failure to accurately estimate the resources and costs that will be required to service any contract we win, and the risk that we may encounter expense, delay or modifications to previously awarded contracts as a result of our competitors protesting or challenging contracts awarded to us in competitive bidding. Our failure to compete effectively in this procurement environment would adversely affect our revenues and/or profitability.
The U.S. Government may modify, curtail or terminate our contracts at any time prior to their completion and, if we do not replace them, we may be unable to sustain our revenue growth and may suffer a decline in revenues.
Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. These programs are normally funded on an annual basis. Under our contracts, the U.S. Government generally has the right not to exercise options to extend or expand our contracts and may modify, curtail or terminate the contracts and subcontracts at its convenience. Any decision by the U.S. Government not to exercise contract options or to modify, curtail or terminate our major programs or contracts would adversely affect our revenues and revenue growth.
We may not realize as revenues the full amounts reflected in our backlog, which could adversely affect our expected future revenues and growth prospects.
As of January 31, 2008, our total consolidated backlog was $15.0 billion, which included $5.1 billion in funded backlog. Due to the U.S. Governments ability to not exercise contract options or to modify, curtail or terminate our major programs or contracts and the rights of our customers in our Commercial segment to cancel contracts and purchase orders in certain circumstances, we may never realize revenues from some of the contracts that are included in our backlog. Our unfunded backlog, in particular, contains managements estimate of amounts expected to be realized on unfunded contract work that may never be realized as revenues. If we fail to realize as revenues amounts included in our backlog, our expected future revenue and growth prospects may be adversely affected.
We use estimates when entering into various contractual commitments and in recognizing revenues. If we are unable to accurately estimate the costs, time and resources or to effectively manage and control costs associated with these contractual commitments, or if we make changes to estimates used in recognizing revenue, our profitability may be adversely affected.
Over the last three fiscal years, an average of 17% of our total consolidated revenues were derived from FFP contracts, in which we bear risk that actual costs may exceed the estimated costs on which the prices are negotiated. When making proposals on these types of contracts, we rely heavily on our estimates of costs and timing for completing the associated projects, as well as assumptions regarding technical issues. In each case, our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result, and in some instances has resulted, in reduced profits or in losses. More generally, any increased or unexpected costs or unanticipated delays in connection with the performance of these contracts, including costs and delays caused by contractual disputes or other factors outside of our control, could make these contracts less profitable or unprofitable. Future losses could have a material adverse effect on our profitability.
Revenues from our contracts are primarily recognized using the percentage-of-completion method based on progress towards completion, with performance measured by the cost-to-cost method, efforts-expended method or units-of-delivery method, all of which require estimates of total costs at completion. Estimating costs at completion on our long-term contracts, particularly due to the technical nature of the services being performed, is complex and involves significant judgment. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimate is recognized as events become known. Due to the size of many of our contracts, changes in the underlying assumptions, circumstances or estimates could result in adjustments that may adversely affect future financial results.
Systems failures could disrupt our business and impair our ability to effectively provide our products and services to our customers, which could damage our reputation and adversely affect our revenues and profitability.
During the year ended January 31, 2008, we began a phased implementation of a new information technology system to be used as our accounting system. The implementation is expected to be completed in multiple phases through fiscal 2010. The transition to the new information technology system includes a significant effort in the testing of the system prior to implementation, training of employees who will be using the system and updating of our internal control process and procedures that will be impacted by the implementation.
System disruptions, including those caused by the implementation of the new information technology system, if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner.
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We are also subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our or our customers businesses, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our future results could be adversely affected.
The systems and networks that we maintain for our customers could also fail. If a system or network that we maintain were to fail or experience service interruptions, we might experience loss of revenue, remediation costs or face claims for damages or contract termination. Our errors and omissions liability insurance may be inadequate to compensate us for all of the damages that we might incur and, as a result, our future results could be adversely affected.
We face aggressive competition that can impact our ability to obtain contracts and therefore affect our future revenues and growth prospects.
Our business is highly competitive in both the Government and Commercial segments. We compete with larger companies that have greater name recognition, financial resources and larger technical staffs. We also compete with smaller, more specialized entities that are able to concentrate their resources on particular areas. In the Government segment, we compete with the U.S. Governments own capabilities and federal non-profit contract research centers. To remain competitive, we must provide superior service and performance on a cost-effective basis to our customers.
Adverse judgments or settlements in legal disputes could require us to pay potentially large damage awards, which would adversely affect our cash balances and profitability.
We are subject to, and may become a party to, a variety of litigation or other claims and suits that arise from time to time in the ordinary course of our business. Adverse judgments or settlements in some or all of these legal disputes may result in significant monetary damages or injunctive relief against us. The litigation and other claims described in this report are subject to inherent uncertainties and managements view of these matters may change in the future.
Our failure to attract, train and retain skilled employees, including our management team, would adversely affect our ability to execute our strategy.
The availability of highly trained and skilled technical, professional and management personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians and professional and management personnel is intense and competitors aggressively recruit key employees. In addition, many U.S. Government programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain and personnel with security clearances are in great demand. Because of our growth and increased competition for experienced personnel, particularly in highly specialized areas, it has become more difficult to meet all of our needs for these employees in a timely manner and this may affect our growth in the current fiscal year and in future years. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract and retain these employees. Any failure to do so would have an adverse effect on our ability to execute our strategy.
In addition to attracting and retaining qualified engineering, technical and professional personnel, we believe that our success will also depend on the continued employment of a highly qualified and experienced senior management team and its ability to generate new business. Our inability to retain appropriately qualified and experienced senior executives could cause us to lose customers or new business opportunities.
Employee misconduct, including security breaches, or our failure to comply with laws or regulations applicable to our business could cause us to lose customers or our ability to contract with the U.S. Government.
Because we are a U.S. Government contractor, misconduct, fraud or other improper activities by our employees or our failure to comply with laws or regulations could have a significant adverse impact on our business and reputation. Such misconduct could include the failure to comply with U.S. Government procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in U.S. Government contracts, regulations on lobbying or similar activities, environmental laws and any other applicable laws or regulations. Many of the systems we develop involve managing and protecting information relating to national security and other sensitive government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from having access to such critically sensitive systems. Employee misconduct could also involve data security lapses resulting in the compromise of personal information or the improper use of our customers sensitive or classified information, which could result in remediation costs, regulatory sanctions against us and serious harm to our reputation. Other examples of potential employee misconduct include time card fraud and violations of the Anti-Kickback Act. The precautions we take to prevent and detect these activities may not be effective, and we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees could subject us to fines and penalties, loss of security clearance and suspension or debarment from contracting with the U.S. Government, any of which would adversely affect our business and reputation.
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Our services and operations sometimes involve using, handling or disposing of hazardous materials, which could expose us to potentially significant liabilities.
Our services sometimes involve the investigation or remediation of environmental hazards, as well as the use, handling or disposal of hazardous materials. These activities and our operations generally subject us to extensive foreign, federal, state and local environmental protection and health and safety laws and regulations, which, among other things, require us to incur costs to comply with these regulations and could impose liability on us for contamination. Furthermore, failure to comply with these environmental protection and health and safety laws could result in civil or criminal sanctions, including fines, penalties or suspension or debarment from contracting with the U.S. Government. Additionally, our ownership and operation of real property also subjects us to environmental protection laws, some of which hold current or previous owners or operators of businesses and real property liable for contamination, even if they did not know of and were not responsible for the contamination. Although we have not incurred any significant costs related to environmental matters to date, any violations of, or liabilities pursuant to, these laws or regulations could adversely affect our financial condition and operating results.
Acquisitions, investments, joint ventures and divestitures could result in operating difficulties and other adverse consequences to our business.
Growth through acquisitions of new businesses, investments and joint ventures is an important part of our strategy and we expect that a significant portion of our planned growth will continue to come from these transactions. We evaluate potential acquisitions, investments and joint ventures on an ongoing basis. Our acquisitions, investments, joint ventures and divestitures pose many risks, including:
| we may not be able to compete successfully for available acquisition candidates, complete future acquisitions and investments or accurately estimate the financial effect of acquisitions and investments on our business |
| future acquisitions, investments and joint ventures may require us to issue capital stock or spend significant cash or may result in a decrease in our operating income or operating margins and we may be unable to recover investments made in any such acquisitions |
| we may have trouble integrating acquired businesses or retaining their personnel or customers |
| acquisitions, investments, joint ventures or divestitures may disrupt our business and distract our management from other responsibilities |
| we may not be able to effectively influence the operations of our joint ventures, which could adversely affect our operations |
| acquired entities or joint ventures may not operate profitably |
| we may assume pre-existing liabilities, whether known or unknown, of acquired companies which could be material |
| we may not realize anticipated synergies and acquisitions may not result in improved operating performance |
| divestitures may result in losses on disposal or continued financial involvement in the divested business, such as through indemnification, guarantees or other financial arrangements, for a period of time following the transaction. Losses on disposal or non-performance by those divested businesses with whom we have continuing financial involvement could affect our financial results |
| a downturn in our business could result in the write-off of goodwill and acceleration of the amortization of intangible assets related to acquisitions |
If our acquisitions, investments or joint ventures fail or perform poorly, our business and financial results could be adversely affected.
In conducting our business, we depend on other contractors and subcontractors. If these parties fail to satisfy their obligations to us or the U.S. Government, or if we are unable to maintain these relationships, our revenues, profitability and growth prospects could be adversely affected.
We depend on contractors and subcontractors in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, our hiring of a subcontractors personnel or the subcontractors failure to comply with applicable law. In addition, if any of our subcontractors fail to deliver on a timely basis the agreed-upon supplies and/or perform the agreed-upon services or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in a customer terminating a contract for default. A termination for default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders, especially if the customer is an agency of the U.S. Government.
We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner. Our future revenues and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or
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joint venture relationships with us, or if the U.S. Government terminates or reduces these other contractors programs, does not award them new contracts or refuses to pay under a contract. Additionally, companies that do not initially have access to U.S. Government contracts may perform services as our subcontractor for a U.S. Government customer, and through that exposure secure future positions as prime U.S. Government contractors. If any of our current subcontractors were awarded prime contractor status in the future, not only would we have to compete with them for future U.S. Government contracts, but our ability to perform our current and future contracts might also be impaired.
We face risks associated with our international business.
Approximately 2%, 3% and 3% of our total consolidated revenues in each of fiscal 2008, 2007 and 2006, respectively, was generated by our entities outside of the United States. Additionally, our domestic entities periodically enter into contracts with foreign customers. These international business operations are subject to a variety of the risks associated with conducting business internationally, including:
| changes in or interpretations of foreign laws, regulations or policies that may adversely affect the performance of our services, sale of our products or repatriation of our profits to the United States |
| the imposition of tariffs |
| hyperinflation or economic or political instability in foreign countries |
| imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures |
| conducting business in places where laws, business practices and customs are unfamiliar or unknown |
| the imposition of restrictive trade policies |
| the imposition of inconsistent laws or regulations |
| the imposition or increase of investment and other restrictions or requirements by foreign governments |
| uncertainties relating to foreign laws and legal and arbitration proceedings |
| compliance with a variety of U.S. laws, including the Foreign Corrupt Practices Act, by us or key subcontractors |
| compliance with U.S. export control regulations and policies that restrict our ability to communicate with non-U.S. employees and supply foreign affiliates and customers |
| fluctuations in currency exchange rates |
Although revenues derived from our international operations have been relatively low, we do not know the impact that these regulatory, geopolitical and other factors may have on our business in the future and any of these factors could adversely affect our business. Failure to comply with U.S. Government laws and regulations applicable to international business like the Foreign Corrupt Practices Act or U.S. export control regulations could have an adverse impact on our business with the U.S. Government. Additionally, these risks relating to international operations may expose us to potentially significant contract losses.
We have only a limited ability to protect our intellectual property rights, which are important to our success. Our failure to adequately protect our intellectual property rights could adversely affect our competitive position.
Our success depends, in part, upon our ability to protect our proprietary information and other intellectual property. We rely principally on trade secrets to protect much of our intellectual property where we do not believe that patent or copyright protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. In addition, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret protection would adversely affect our competitive business position. In addition, if we are unable to prevent third parties from infringing or misappropriating our copyrights, trademarks or other proprietary information, our competitive position could be adversely affected.
Our financial results may vary significantly from period-to-period.
Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our financial results may be negatively affected by any of the risk factors listed in this Risk Factors section and in particular the following:
| a reduction of government funding or delay in the completion of the U.S. Governments budget process |
| decisions by the U.S. Government not to exercise contract options or to modify, curtail or terminate our major programs or contracts |
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| failure to accurately estimate or control costs under firm-fixed-price (FFP) contracts |
| adverse judgments or settlements in contractual disputes, legal disputes or legal compliance issues |
| expenses related to restructuring actions, acquisitions, mergers or joint ventures |
| other one-time financial charges |
| seasonality of our business |
Risks Relating to Our Stock
The concentration of our capital stock ownership with our employee benefit plans, executive officers, employees, former employees and directors and their respective affiliates limits the ability of common stockholders to influence corporate matters.
As of January 31, 2008, our Class A preferred stock represented 57% of our outstanding capital stock. Our Class A preferred stock has 10 votes per share compared to our publicly-traded common stock which has one vote per share. The Class A preferred stock is held by our employee benefit plans, executive officers, employees, former employees and directors and their respective affiliates. They are able to exercise a majority of the voting power and for the foreseeable future, will have significant influence over our management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. As a result of this dual-class structure, our employee benefit plans, executive officers, employees, former employees and directors and their respective affiliates may be able to control all matters submitted to our stockholders for approval, even if they come to own less than 50% of the outstanding shares of our capital stock, except to the extent that holders of common stock may be entitled to vote as a separate class under the General Corporation Law of the State of Delaware. This concentrated control limits the ability of the common stockholders to influence corporate matters and, as a result, we may take actions that our common stockholders do not view as beneficial. As a result, the market price of our common stock could be adversely affected.
Provisions in our charter documents and under Delaware law could delay or prevent transactions that many stockholders may favor.
Some provisions of our certificate of incorporation and bylaws may have the effect of delaying, discouraging or preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which stockholders might receive a premium for their shares. These restrictions, which may also make it more difficult for our stockholders to elect directors not endorsed by our current directors and management, include the following:
| Our certificate of incorporation provides for Class A preferred stock, which currently gives our employee benefit plans, executive officers, employees, former employees and directors and their respective affiliates voting control over all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other business combination that other stockholders may view as beneficial. |
| Our certificate of incorporation provides that our bylaws and certain provisions of our certificate of incorporation may be amended by only two-thirds or more voting power of all of the outstanding shares entitled to vote. These supermajority voting requirements could impede our stockholders ability to make changes to our certificate of incorporation and bylaws, which could delay, discourage or prevent a merger, acquisition or business combination that other stockholders may consider favorable. |
| Our certificate of incorporation generally provides that mergers and certain other business combinations between us and a related person be approved by the holders of securities having at least 80% of our outstanding voting power, as well as by the holders of a majority of the voting power of such securities that are not owned by the related person. This supermajority voting requirement could prevent a merger, acquisition or business combination that our stockholders may consider favorable. |
| Our stockholders may not act by written consent or call special meetings. As a result, a holder, or holders, controlling a majority of our capital stock are limited in their ability to take certain actions other than in connection with our annual stockholders meeting. |
| Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
As a Delaware corporation, we are also subject to certain restrictions on business combinations. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years, or among other things, the board of directors has approved the business combination or the transaction pursuant to which such person became a 15% holder prior to the time the person became a 15% holder. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us.
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Forward-Looking Statement Risks
You may not be able to rely on forward-looking statements.
This report contains forward-looking statements that are based on our managements belief and assumptions about the future in light of information currently available to our management. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to:
| changes in the U.S. Government defense budget or budgetary priorities or delays in the U.S. budget process; |
| changes in U.S. Government procurement rules and regulations; |
| our compliance with various U.S. Government and other government procurement rules and regulations; |
| the outcome of U.S. Government audits of our company; |
| our ability to win contracts with the U.S. Government and others; |
| our ability to attract, train and retain skilled employees; |
| our ability to maintain relationships with prime contractors, subcontractors and joint venture partners; |
| our ability to obtain required security clearances for our employees; |
| our ability to accurately estimate costs associated with our firm-fixed-price and other contracts; |
| resolution of legal and other disputes with our customers and others or legal compliance issues |
| our ability to acquire businesses and make investments; |
| our ability to manage risks associated with our international business; |
| our ability to compete with others in the markets in which we operate; and |
| our ability to execute our business plan and long-term management initiatives effectively and to overcome these and other known and unknown risks that we face. |
In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, intends, plans, anticipates, believes, estimates, predicts, potential, continue or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. There are a number of important factors that could cause our actual results to differ materially from those results anticipated by our forward-looking statements. We do not intend to update any of the forward-looking statements or to conform these statements to actual results.
Item 1B. Unresolved Staff Comments
None.
As of January 31, 2008, we conducted our operations in approximately 400 offices located in 43 states, the District of Columbia and various foreign countries. We occupy a total of approximately 10 million square feet of space. Of this total, we own approximately 2.6 million square feet, and the remaining balance is leased. Our major locations are in the San Diego, California and Washington, D.C. metropolitan areas, where we occupy approximately 1.2 million square feet of space and 2.7 million square feet of space, respectively.
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We own and occupy the following properties:
Location | Number of buildings |
Square footage |
Acreage | |||
McLean, Virginia |
4 | 896,000 | 18.3 | |||
San Diego, California |
7 | 650,000 | 22.2 | |||
Vienna, Virginia |
2 | 272,000 | 14.7 | |||
Virginia Beach, Virginia |
2 | 159,000 | 22.5 | |||
Huntsville, Alabama |
1 | 100,000 | 11.3 | |||
Columbia, Maryland |
1 | 96,000 | 7.3 | |||
Colorado Springs, Colorado |
1 | 86,000 | 5.8 | |||
Orlando, Florida |
1 | 85,000 | 18.0 | |||
Oak Ridge, Tennessee |
1 | 83,000 | 12.5 | |||
Dayton, Ohio |
2 | 79,000 | 4.5 | |||
Reston, Virginia |
1 | 62,000 | 2.6 | |||
Richland, Washington |
1 | 24,000 | 3.1 |
The nature of our business is such that there is no practicable way to relate occupied space to industry segments. We consider our facilities suitable and adequate for our present needs. See Note 14 of the notes to consolidated financial statements contained within this Annual Report on Form 10-K for information regarding commitments under leases.
Telkom South Africa
Our former Telcordia subsidiary instituted arbitration proceedings before the International Chamber of Commerce (ICC), against Telkom South Africa in March 2001 as a result of a contract dispute. Telcordia seeks to recover damages for breach of contract, plus interest at a rate of 15.5%. Telkom South Africa counterclaimed, seeking substantial damages from Telcordia. On September 27, 2002, the arbitrator found that Telkom South Africa repudiated the contract and dismissed Telkom South Africas counterclaims against Telcordia. The damages to be recovered by Telcordia will be determined in the second phase of the arbitration. Although Telkom South Africa challenged the arbitrators partial award in Telcordias favor in the South African court system, the arbitrators decision was ultimately upheld.
The second phase of the arbitration to determine the damages to be recovered by Telcordia has now commenced. Telcordia submitted its statement of claim and related document production on March 30, 2007, which seeks damages in excess of $200 million plus interest and legal fees and costs. As a result of a preliminary hearing with the arbitrator, Telkom South Africa paid Telcordia $9 million of uncontested damages relating to one aspect of the dispute. In July 2007, the arbitrator ruled that Telcordia is entitled to 15.5% simple interest per year on awarded damages, running from the date of breach by Telkom South Africa. Due to the complexity of the remaining issues, the arbitrator cancelled a September 2007 arbitration hearing to determine the amount of Telcordias damages and scheduled an April 2008 hearing focusing only on damage issues. A final hearing with closing submissions was scheduled for June 2008 in London. In February 2008, the arbitrator appointed a third party expert to provide an independent opinion regarding specific technical issues. The parties disagree on the scope of the third party experts mandate, as well as certain discovery issues. Consequently, the hearings originally scheduled for April and June have been cancelled and a hearing to address the outstanding procedural issues is scheduled for April 2008. As a result, the completion of the arbitration will likely be delayed. Pursuant to the definitive stock purchase agreement for the sale of Telcordia, we are entitled to receive all of the proceeds, net of the tax liability incurred by Telcordia, from any judgment or settlement. We received $4 million during the year ended January 31, 2008 related to amounts collected by Telcordia from Telkom South Africa.
Due to the complex nature of the legal and factual issues involved in the dispute, the damages that Telcordia will ultimately be awarded in the second phase of arbitration, and therefore the amounts we will be entitled to receive, net of applicable taxes, are not presently determinable. We do not have any assets or liabilities recorded related to this contract and the related legal proceedings as of January 31, 2008 and 2007.
INTESA Joint Venture
We held a 60% interest in Informática, Negocios y Tecnología, S.A., (INTESA), a Venezuelan joint venture we formed in fiscal 1997 with Venezuelas national oil company, PDVSA, to provide information technology services in Latin America. INTESA derived substantially all its revenues from an outsourcing services agreement with PDVSA. The services agreement expired on June 30, 2002 and INTESA subsequently ceased operations. The operations of INTESA were classified as discontinued operations as of January 31, 2003 and INTESA is currently insolvent.
INTESA is a defendant in a number of lawsuits brought by former employees seeking unpaid severance and pension benefits. PDVSA, SAIC and SAIC Bermuda, our 100%-owned subsidiary and the entity that held our interest in INTESA,
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were added as defendants in a number of these suits. Based on the procedural standing of these cases and our understanding of applicable laws and facts, we believe that our exposure to any possible loss related to these employment claims is either remote or, if reasonably possible, immaterial.
Other
We are subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to agencies and departments of the U.S. Government and in connection with performing services in countries outside of the United States. Such matters can lead to criminal, civil or administrative proceedings and we could be faced with penalties, fines, repayments or compensatory damages. Adverse findings could also have a material adverse effect on us because of our reliance on government contracts. Although we can give no assurance, based upon managements evaluation of current matters that are subject to U.S. Government investigations of which we are aware and based on managements current understanding of the facts, we do not believe that the outcome of any such matter would likely have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.
We are subject to periodic audits by state and local governments for taxes other than income taxes. We do not believe that the outcome of any such tax matters would have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.
We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of our management, based upon current information, will likely have a material adverse effect on our consolidated financial position, results of operations, or cash flows or our ability to conduct business.
As a result of a dispute over the proper interpretation of contract pricing terms, we have initiated a lawsuit against a state government customer seeking payment for certain technical services. Although the amount of the claim, based on three unpaid invoices, is only approximately $40,000, the resolution of the claim is expected to resolve the pricing interpretation dispute and could have significant implications for the contract going forward. While we are confident in our interpretation of the pricing terms, if the customers interpretation prevails, given estimated future tasking over the five year term of the base contract and the two option years, we estimate that this could result in an aggregate loss on the contract of approximately $5 million to $50 million, with the lower end of the range more likely. We have not recorded a liability for this matter as of January 31, 2008.
In the normal conduct of our business, we seek to monetize our patent portfolio through licensing agreements. We have defended and will continue to defend our patent positions when we believe our patents have been infringed and are involved in such litigation from time to time. Pursuant to the terms of the definitive stock purchase agreement for the sale of our Telcordia subsidiary, we will receive 50% of any net proceeds that Telcordia receives in the future in connection with the enforcement of certain patent rights.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive and Other Key Officers of the Registrant
The following is a list of the names and ages (as of March 7, 2008) of all of our key officers, indicating all positions and offices held by each such person and each such persons principal occupation or employment during at least the past five years. Except as otherwise noted, each of the persons listed below has served in his or her present capacity for us for at least the past five years. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.
SAIC, Inc. Annual Report 15
PART I
Name of officer | Age | Position(s) with the company and prior business experience | ||
Deborah H. Alderson* |
51 | Group President since October 2005. Ms. Alderson previously served as Deputy Group President from August 2005 to October 2005. Prior to joining us, Ms. Alderson held various positions with Anteon International Corporation, a systems integration services provider, including President of the Systems Engineering Group from January 2002 to August 2005, and Senior Vice President and General Manager of the Systems Engineering Group from November 1998 to January 2002. Ms. Alderson held various positions with Techmatics, Inc., a systems engineering provider, from 1985 to 1998. | ||
Amy E. Alving |
45 | Chief Technology Officer since December 2007 and Senior Vice President since January 2007. Ms. Alving held various positions with us since 2005, including serving as Chief Scientist from June 2007 to December 2007. Prior to joining us, Ms. Alving served as the Director of the Special Projects Office with Defense Advanced Research Projects Agency from 2001 to 2005 and was a White House fellow at the Department of Commerce from 1997 to 1998. | ||
Joseph W. Craver III* |
49 | Group President since June 2007. Mr. Craver previously held various positions with us since 1989, including serving in successive line managerial positions from 1997 to 2007. Prior to joining us, Mr. Craver held various positions with the U.S. Navy nuclear submarine program from 1981 to 1989. | ||
Kenneth C. Dahlberg* |
63 | Chairman of the Board since July 2004 and Chief Executive Officer and Director since November 2003. Mr. Dahlberg served as President from November 2003 to March 2006. Prior to joining us, Mr. Dahlberg served as Corporate Executive Vice President of General Dynamics Corp., a defense industry contractor, from March 2001 to October 2003. Mr. Dahlberg served as President of Raytheon International from February 2000 to March 2001, and from 1997 to 2000 he served as President and Chief Operating Officer of Raytheon Systems Company. Mr. Dahlberg held various positions with Hughes Aircraft from 1967 to 1997. Mr. Dahlberg has served as a director of Teledyne Technologies since February 2006. | ||
Steven P. Fisher |
47 | Treasurer since January 2001 and Senior Vice President since July 2001. Mr. Fisher has held various positions with us since 1988, including serving as Assistant Treasurer and Corporate Vice President for Finance from 1997 to 2001 and Vice President from 1995 to 1997. | ||
John R. Hartley* |
42 | Senior Vice President and Corporate Controller since August 2005. Mr. Hartley has held various positions with our finance organization since 2001. For 12 years prior to that, Mr. Hartley was with the accounting firm currently known as Deloitte & Touche LLP. | ||
W. Greg Henson |
48 | Senior Vice President and Director of Business Development since December 2006. Prior to joining us, Mr. Henson served as Vice President of Homeland Security and Homeland Defense operations with L-3 Communications from 2005 to 2006. Mr. Henson served as Vice President of Business Development with Harris Corporation, a communications equipment company, from 2002 to 2005. Mr. Henson was Vice President of Operations with Meggitt Avionics from 2001 to 2002. Mr. Henson also held various positions with Raytheon Corporation from 1993 to 2001. | ||
Brian F. Keenan |
51 | Executive Vice President for Human Resources since September 2007. Mr. Keenan previously held various positions with us since 2000, including serving as Vice President and Director of U.S. Human Resource operations from September 2004 to September 2007. Prior to joining us, Mr. Keenan held various positions with Mobil and ExxonMobil from 1985 to 2000. | ||
Charles F. Koontz* |
46 | Group President since June 2007. Mr. Koontz previously held various positions with us since 2004, including serving as Business Unit General Manager from June 2004 to June 2007. Prior to joining us, Mr. Koontz led Cap Gemini Ernst & Youngs telecom, media and networks business from May 2000 to January 2004 and also held management and consultant positions with General Electric and Litton Industries Automation Systems. | ||
Lawrence B. Prior, III* |
52 | Chief Operating Officer since October 2007. Mr. Prior served as Group President from February 2005 to September 2007. Prior to joining us, Mr. Prior served as Chief Financial Officer and then President and Chief Executive Officer of LightPointe Communications, Inc. from 2000 until 2004. |
16 SAIC, Inc. Annual Report
PART I
Name of officer | Age | Position(s) with the company and prior business experience | ||
Arnold L. Punaro* |
61 | Executive Vice President since February 2005. Mr. Punaro has held various positions with us since 1997, including Sector Vice President, Senior Vice President and Director of Corporate Development. Mr. Punaro also served as the Staff Director of the Senate Armed Services Committee and retired as a Major General in the United States Marine Corps Reserve. | ||
Douglas E. Scott* |
51 | Executive Vice President since June 2007, General Counsel since 1992 and Secretary since July 2003. Mr. Scott has held various positions with us since 1987, including serving as a Senior Vice President from 1997 to 2007 and Corporate Vice President from 1992 to 1997. | ||
K. Stuart Shea* |
51 | Group President since October 2007. Since joining us in 2005, Mr. Shea has served as Senior Vice President and Business Unit General Manager. Prior to joining us, Mr. Shea served as Vice President and Executive Director of Northrop Grumman Corporations TASC Space and Intelligence operating unit from 1999 to 2005, and led other programs from 1987 to 1999. Mr. Shea held positions with PAR Technology Corporation from 1982 to 1987. | ||
Mark W. Sopp* |
42 | Executive Vice President and Chief Financial Officer since November 2005. Mr. Sopp had served as Senior Vice President, Chief Financial Officer and Treasurer of Titan Corporation, a defense and intelligence contractor, from April 2001 to July 2005, prior to which he had served as a Vice President and Chief Financial Officer of Titan Systems Corporation, a subsidiary of Titan Corporation, from 1998 to 2001. | ||
Joseph P. Walkush* |
56 | Executive Vice President since July 2000. Mr. Walkush has held various positions with us from 1976 to 1979 and since 1981, including serving as a Sector Vice President from 1994 to 2000. |
* | Indicates an executive officer. |
Pursuant to General Instruction G(3) of General Instructions to Form 10-K, the list above is included as an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being incorporated by reference from our definitive Proxy Statement used in connection with the solicitation of proxies for our 2008 Annual Meeting of Stockholders (2008 Proxy Statement).
SAIC, Inc. Annual Report 17
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On October 16, 2006, a reorganization merger was completed whereby Science Applications International Corporation became a 100%-owned subsidiary of SAIC, Inc. Pursuant to the reorganization merger, each share of Class A common stock and Class B common stock of Science Applications International Corporation was exchanged for two shares and 40 shares, respectively, of Class A preferred stock of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of its common stock. Our common stock is listed on the New York Stock Exchange (NYSE) and commenced trading on October 13, 2006, under the ticker symbol SAI.
Our Class A preferred stock is not listed on a national securities exchange or traded in an organized over-the-counter market. Shares of our Class A preferred stock are convertible on a one-for-one basis into shares of common stock. Shares of common stock contain the same economic rights as shares of Class A preferred stock. We expect that the market price of our common stock will determine the value of our Class A preferred stock.
Historical Stock Prices
The range of high and low sales prices at closing of our common stock on the NYSE for each fiscal quarter during the last two fiscal years, following the commencement of trading on October 13, 2006, was as follows:
Fiscal 2007 | ||||||
Fiscal Quarter | High | Low | ||||
3rd quarter (October 13, 2006 to October 31, 2006) |
$ | 20.33 | $ | 17.27 | ||
4th quarter (November 1, 2006 to January 31, 2007) |
$ | 20.20 | $ | 17.41 |
Fiscal 2008 | ||||||
Fiscal Quarter | High | Low | ||||
1st quarter (February 1, 2007 to April 30, 2007) |
$ | 18.82 | $ | 16.88 | ||
2nd quarter (May 1, 2007 to July 31, 2007) |
$ | 20.15 | $ | 16.76 | ||
3rd quarter (August 1, 2007 to October 31, 2007) |
$ | 19.84 | $ | 16.65 | ||
4th quarter (November 1, 2007 to January 31, 2008) |
$ | 20.69 | $ | 18.20 |
Holders of Common Stock and Class A Preferred Stock
As of March 7, 2008, there were approximately 924 and 41,243 holders of record of our common stock and Class A preferred stock, respectively. The number of stockholders of record of our common stock is not representative of the number of beneficial owners due to the fact that many shares are held by depositories, brokers, or nominees. Substantially all of the Class A preferred stock is owned of record or beneficially by our current and former employees, directors and consultants and their respective family members and by our various employee benefit plans. Holders of Class A preferred stock are entitled to ten votes per share and holders of common stock are entitled to one vote per share.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, except for a special dividend declared by Science Applications International Corporation of $15 per share on its Class A common stock and $300 per share on its Class B common stock that was declared prior to, and paid after, the October 2006 reorganization merger and initial public offering. We do not expect to pay any cash dividends in the foreseeable future and we currently intend to retain any future earnings to finance our operations and growth. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on available cash, estimated cash needs, earnings, financial condition, operating results, capital requirements, applicable contractual restrictions and other factors that our board of directors deems relevant. In addition, our ability to declare and pay dividends on our stock may be restricted by the provisions of Delaware law and covenants in our revolving credit facility.
18 SAIC, Inc. Annual Report
PART II
Performance Graph
The following graph compares the total cumulative return on our common stock from October 13, 2006 (the date our common stock commenced trading on the NYSE through our fiscal year ended January 31, 2008 to two indices: (i) the Standard & Poors 500 Composite Stock Index and (ii) the Goldman Sachs Technology Services Index. The graph assumes an initial investment of $100 on October 13, 2006 and that dividends, if any, have been reinvested. The comparisons in the graph are required by the Securities and Exchange Commission, based upon historical data and are not intended to forecast or be indicative of possible future performance of our common stock.
Purchases of Equity Securities
In December 2006, our board of directors authorized a stock repurchase program under which we may repurchase up to 40 million shares of our common stock as part of our overall strategy for capital allocation. Stock repurchases under this program may be made on the open market or in privately negotiated transactions with third parties. Whether repurchases are made and the timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. On March 21, 2008, our board of directors authorized the repurchase of an aggregate of 40 million of shares under the stock repurchase program from and after the open of the NYSE on March 24, 2008 (excluding shares purchased under the stock repurchase program from December 2006 through March 21, 2008).
SAIC, Inc. Annual Report 19
PART II
The following table presents repurchases of our stock during the quarter ended January 31, 2008:
Period | (a) Total Number of |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||
November 1, 2007 November 30, 2007 |
404,673 | $ | 19.78 | | 26,893,939 | ||||
December 1, 2007 December 31, 2007 |
570,975 | 20.04 | 60,000 | 26,833,939 | |||||
January 1, 2008 January 31, 2008 |
2,351,450 | 19.01 | 1,499,200 | 25,334,739 | |||||
Total |
3,327,098 | $ | 19.28 | 1,559,200 |
(1) |
Includes shares purchased as follows: |
November | December | January | ||||
Under publicly announced plans or programs |
| 60,000 | 1,499,200 | |||
Upon surrender by stockholders of previously owned shares in payment of the exercise price of non-qualified stock options |
199,118 | 485,304 | 827,470 | |||
Upon surrender by stockholders of previously owned shares to satisfy statutory tax withholding obligations related to vesting of stock awards |
205,555 | 25,671 | 24,780 | |||
Total |
404,673 | 570,975 | 2,351,450 |
(2) |
Does not include newly issued shares acquired by us in connection with employee exercise of non-qualified stock options to satisfy statutory tax withholding obligations related to the options. |
(3) |
Stock repurchase program under which we may repurchase up to 40 million shares of our common stock was publicly announced on December 12, 2006. On March 21, 2008, our board of directors authorized the repurchase of an aggregate of 40 million of shares under the stock repurchase program from and after the open of the NYSE on March 24, 2008 (excluding shares purchased under the stock repurchase program from December 2006 through March 21, 2008). |
20 SAIC, Inc. Annual Report
PART II
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for the years ended January 31, 2007, 2006, 2005 and 2004 has been reclassified to conform to the year ended January 31, 2008 presentation of discontinued operations as described in Note 17 of the notes to consolidated financial statements.
Year Ended January 31 | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(in millions, except per share data) | ||||||||||||||||||||
Consolidated Statement of Income Data: |
||||||||||||||||||||
Revenues |
$ | 8,935 | $ | 8,061 | $ | 7,518 | $ | 6,910 | $ | 5,573 | ||||||||||
Cost of revenues |
7,698 | 6,974 | 6,568 | 6,044 | 4,828 | |||||||||||||||
Selling, general and administrative expenses |
571 | 515 | 480 | 406 | 365 | |||||||||||||||
Goodwill impairment |
| | | | 7 | |||||||||||||||
Gain on sale of business units, net |
| | | 2 | | |||||||||||||||
Operating income |
666 | 572 | 470 | 462 | 373 | |||||||||||||||
Interest income (1) |
56 | 116 | 96 | 44 | 49 | |||||||||||||||
Interest expense |
(90 | ) | (92 | ) | (88 | ) | (87 | ) | (80 | ) | ||||||||||
Minority interest in income of consolidated subsidiaries |
(3 | ) | (5 | ) | (3 | ) | (3 | ) | | |||||||||||
Other income (expense), net |
(3 | ) | 5 | (7 | ) | (28 | ) | 10 | ||||||||||||
Income from continuing operations before income taxes |
626 | 596 | 468 | 388 | 352 | |||||||||||||||
Provision for income taxes |
240 | 231 | 133 | 125 | 135 | |||||||||||||||
Income from continuing operations |
386 | 365 | 335 | 263 | 217 | |||||||||||||||
Income from discontinued operations, net of tax (2) |
29 | 26 | 592 | 146 | 134 | |||||||||||||||
Net income |
$ | 415 | $ | 391 | $ | 927 | $ | 409 | $ | 351 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Income from continuing operations |
$ | .96 | $ | 1.04 | $ | .96 | $ | .72 | $ | .59 | ||||||||||
Income from discontinued operations |
.07 | .07 | 1.70 | .40 | .36 | |||||||||||||||
$ | 1.03 | $ | 1.11 | $ | 2.66 | $ | 1.12 | $ | .95 | |||||||||||
Diluted: |
||||||||||||||||||||
Income from continuing operations |
$ | .93 | $ | 1.00 | $ | .93 | $ | .70 | $ | .58 | ||||||||||
Income from discontinued operations |
.07 | .07 | 1.65 | .39 | .35 | |||||||||||||||
$ | 1.00 | $ | 1.07 | $ | 2.58 | $ | 1.09 | $ | .93 | |||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
404 | 352 | 348 | 365 | 370 | |||||||||||||||
Diluted |
417 | 364 | 359 | 375 | 377 | |||||||||||||||
January 31 | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(in millions, except per share data) | ||||||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Total assets (1) |
$ | 4,981 | $ | 4,559 | $ | 5,655 | $ | 6,010 | $ | 5,540 | ||||||||||
Long-term debt |
1,098 | 1,199 | 1,192 | 1,206 | 1,217 | |||||||||||||||
Other long-term liabilities |
150 | 102 | 110 | 99 | 86 | |||||||||||||||
Stockholders equity (1) |
1,901 | 1,536 | 2,807 | 2,351 | 2,203 | |||||||||||||||
Cash dividends per share declared and paid (1) |
| 15 | | | |
(1) |
Prior to our October 2006 reorganization merger in which Science Applications International Corporation became a subsidiary of SAIC, Inc., Science Applications International Corporation declared a dividend of $2.45 billion. SAIC, Inc. then completed an initial public offering of its common stock for net proceeds of $1.24 billion. These transactions resulted in a decrease in total assets (cash and marketable securities) and stockholders equity in fiscal 2007 and a decrease in interest income in fiscal 2008. |
(2 ) |
In fiscal 2006, we completed the sale of Telcordia and recognized a gain on sale before income taxes of $871 million. The results of operations prior to sale are reflected in income from discontinued operations for all periods presented. |
SAIC, Inc. Annual Report 21
PART II
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes. In addition to historical consolidated financial information, the following discussion contains forward-looking statements, including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations and the impact of competition. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those discussed in the forward-looking statements. See Item 1A. Risk FactorsForward-Looking Statement Risks in Part I of this Annual Report on Form 10-K. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Risk Factors. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.
Unless otherwise noted, references to years are for fiscal years ended January 31. For example, we refer to the fiscal year ended January 31, 2008 as fiscal 2008.
Overview
Science Applications International Corporation was formed in 1969. In October 2006, in connection with becoming a publicly-traded company, Science Applications International Corporation completed a merger (reorganization merger) in which it became a 100%-owned subsidiary of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of its common stock. We use the terms Company, we, us, and our to refer to SAIC, Inc. and its majority-owned and 100%-owned subsidiaries, including Science Applications International Corporation.
We are a provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers in selected commercial markets.
Our business is focused on solving issues of national and global importance in the areas of Defense, Intelligence, Homeland Security, Logistics and Product Support, Systems Engineering and Integration and Research and Development. We are also focused on expanding our business in the areas of energy, health, environmental, cyber security, and space superiority. Our significant long-term management initiatives include:
| achieving internal, or non-acquisition related, annual revenue growth through investments in business development, internal research and new product and technology development, and through increased focus on pursuing more large lead system integrator contract opportunities; |
| improving our operating income margin by increasing contract fees (by reducing the use of subcontractors, improving internal collaboration, increasing our growth in higher-margin business areas, and improving profitability on material and subcontractor deliverables) and improving our indirect cost structure (through better recovery of our indirect costs, streamlining our administrative infrastructure, and reducing unallowable and unbillable costs); |
| improving our information technology systems infrastructure and related business processes for greater effectiveness and efficiency across all business functions; |
| investing in our people, including enhanced training and career development programs, with a focus on retention and recruiting; and |
| disciplined deployment of our cash resources and use of our capital structure to enhance growth and shareholder value through strategic acquisitions, share repurchases and other uses as conditions warrant. |
Key financial highlights and events, including progress against these initiatives, during fiscal 2008 include:
| Consolidated revenues increased 11% over the prior year, reflecting an internal growth rate of 7% compared to an internal growth rate of 4% in the prior year. We calculate internal revenue growth by comparing our reported revenue to the prior year revenue adjusted to include the revenue of acquired businesses for the comparable prior year before acquisition. Our internal revenue growth for fiscal 2008 was favorably impacted by increased activity on a number of new and continuing programs in our intelligence, defense and homeland security business areas. |
| Operating income as a percentage of revenues improved from 7.1% for fiscal 2007 to 7.5% for fiscal 2008, primarily due to increased profitability on many cost reimbursable contracts as a result of the recovery of a greater percentage of our indirect costs through our indirect pricing rates, continued reductions in costs associated with management infrastructure, improved fee rates on several large programs and increased sales of more profitable border, port and mobile security products. |
22 SAIC, Inc. Annual Report
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| Income from continuing operations increased $21 million over the prior year primarily due to increased operating income of $94 million, caused by increased revenues and improved operating margins, offset by a $60 million decrease in interest income. Interest income decreased due to declines in average fiscal 2008 cash and marketable securities balances, mainly due to the payment of a $2.45 billion special dividend in November 2006 offset by the $1.24 billion raised through our October 2006 initial public offering. |
| Cash and cash equivalents decreased $17 million during fiscal 2008, primarily reflecting cash provided by operations of $345 million offset by cash used in support of investing activities of $203 million, including the acquisition of two businesses for $144 million (net of cash acquired of $29 million and $1 million of accrued acquisition payments), and cash used in support of financing activities of $157 million, largely consisting of repurchases of our stock. |
| We completed two business acquisitions during fiscal 2008 for an aggregate purchase price of $174 million. One acquired business is a consulting, engineering, and architectural design company with specific competencies in industrial manufacturing and facilities construction. The other acquired business is an India-based provider of onsite and offshore IT solutions and technology consulting in the science and engineering sector. |
| We completed a reorganization transaction resulting in the disposition of our 55% interest in our consolidated majority-owned subsidiary, AMSEC LLC, in exchange for our acquisition of certain divisions and subsidiaries of AMSEC LLC and recognized in discontinued operations a gain before income taxes of $31 million. |
| We commenced the first phase of our multi-year implementation of a new information technology system designed to bring the enterprise onto a single accounting, planning and operating platform. At the end of fiscal 2008, our corporate operations and two of our twenty operating business units (representing approximately 10% of total consolidated revenues on a full year basis) were operating on the new system, with the remainder to be implemented during fiscal 2009 and 2010. |
Reportable Segments
We have three reportable segments: Government, Commercial, and Corporate and Other. Except with respect to Other Income Statement ItemsDiscontinued Operations and Net Income and Earnings per Share all amounts in this Managements Discussion and Analysis of Financial Condition and Results of Operations are presented for our continuing operations only.
Government Segment. Through our Government segment, we provide systems engineering, systems integration and advanced technical services and solutions primarily to U.S. federal, state and local government agencies and foreign governments. Revenues from our Government segment accounted for 94%, 93% and 93% of our total consolidated revenues for fiscal 2008, 2007 and 2006, respectively. Within the Government segment, a significant portion of our revenues are derived from contracts with the U.S. Government. The revenues from contracts with the U.S. Government include contracts where we serve as the prime or lead contractor, as well as contracts where we serve as a subcontractor to other parties who are engaged directly with various U.S. Government agencies as the prime contractor. Some revenues in the Government segment are derived from certain non-government customers for whom we are required to comply with government acquisition and cost allocation regulations.
The U.S. Governments increased spending in recent years on homeland security, intelligence and defense-related programs has had a favorable impact on our business in fiscal 2008, 2007 and 2006. Our results have also been favorably impacted by the U.S. Governments increased spending on information technology (IT) outsourcing and other technical services. Future levels of spending and authorizations may decrease, remain constant or shift to areas where we do not currently provide services. Additionally, changes in spending authorizations and budgetary priorities could occur due to the rapid growth of the federal budget deficit, increasing political pressure to reduce overall levels of government spending or other factors.
Competition for contracts with the U.S. Government is intense. The U.S. Government has increasingly used contracting processes that give it the ability to select multiple winners or pre-qualify certain contractors to provide various products or services at established general terms and conditions. Such processes include purchasing services and solutions using indefinite-delivery / indefinite-quantity (IDIQ) and U.S. General Services Administration (GSA) award contract vehicles. This trend has served to increase competition for U.S. Government contracts and increase pressure on the prices we charge for our products and services.
Commercial Segment. Through our Commercial segment, we primarily target commercial customers worldwide in select industry markets, which currently include oil and gas, utilities and life sciences. While the Commercial segment provides an array of IT systems integration and advanced technical services, the focused offerings include applications and IT infrastructure management, data lifecycle management, and business transformation services. Our Commercial segment customers often benefit from leveraging our broader governmental experiences, such as geographic information systems, security, and systems engineering. Revenues from our Commercial segment accounted for 6%, 7% and 7% of our total consolidated revenues in fiscal 2008, 2007 and 2006, respectively.
SAIC, Inc. Annual Report 23
PART II
Corporate and Other Segment. Our Corporate and Other segment includes the operations of our internal real estate management subsidiary, various corporate activities, the elimination of intersegment revenues and costs and certain corporate expense items not allocable to our Government customers referred to as unallowable expenses. Our Corporate and Other segment does not contract with third parties for the purpose of generating revenues.
Key Financial Metrics
Sources of Revenues
We recognize revenues under our contracts primarily using the percentage-of-completion method. Under the percentage-of-completion method, revenues are recognized based on progress towards completion, with performance measured by the cost-to-cost method, efforts-expended method or units-of-delivery method, all of which require estimating total costs at completion. The contracting process used for procurement, including IDIQ, GSA Schedule, and other master agreement contract vehicles, does not determine revenue recognition.
Bookings and Backlog. We recorded net bookings worth an estimated $8.8 billion and $8.9 billion during fiscal 2008 and 2007, respectively. Bookings generally represent the estimated amount of revenue to be earned in the future from receipt of funded and unfunded contract awards during the year, net of any adjustments to previously reported backlog amounts. We calculate bookings as the year ending backlog plus the years revenues less prior year ending backlog and less backlog obtained in acquisitions.
Backlog represents the amount of work under negotiated contracts which has not yet been performed. We segregate our backlog into two categories as follows:
| Funded Backlog. Government segment funded backlog primarily represents contracts for which funding is appropriated less revenues previously recognized on these contracts. Government segment funded backlog does not include the unfunded portion of contracts where funding is incrementally appropriated or authorized on a quarterly or annual basis by the U.S. Government and other customers, even though the contract may call for performance over a number of years. Commercial segment funded backlog represents the full value on firm contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts. |
| Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from (1) negotiated contracts for which funding has not been appropriated or otherwise authorized and (2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedule, or other master agreement contract vehicles. |
The estimated value of our total consolidated backlog as of the end of the last two fiscal years was as follows:
January 31 | ||||||
2008 | 2007 | |||||
(in millions) | ||||||
Government segment: |
||||||
Funded backlog |
$ | 4,331 | $ | 3,902 | ||
Negotiated unfunded backlog |
9,763 | 10,185 | ||||
Total backlog |
$ | 14,094 | $ | 14,087 | ||
Commercial segment: |
||||||
Funded backlog |
$ | 749 | $ | 723 | ||
Negotiated unfunded backlog |
196 | 101 | ||||
Total backlog |
$ | 945 | $ | 824 | ||
Total consolidated: |
||||||
Funded backlog |
$ | 5,080 | $ | 4,625 | ||
Negotiated unfunded backlog |
9,959 | 10,286 | ||||
Total backlog |
$ | 15,039 | $ | 14,911 |
Total backlog may fluctuate from period to period depending on the timing of contract awards, renewals, modifications and cancellations.
We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract at any time. In addition, certain contracts in the Commercial segment include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and potential fees for work performed.
24 SAIC, Inc. Annual Report
PART II
Contract Types. We generate revenues under the following types of contracts:
| Cost-reimbursement contracts which provide for reimbursement of our direct contract costs and allocable indirect costs, plus a fee. |
| Time-and-materials (T&M) contracts which typically provide for negotiated fixed hourly rates plus reimbursement of other direct costs. |
| Fixed-price-level-of-effort contracts which are substantially similar to T&M contracts except they require a specified level of effort over a stated period of time. |
| Firm-fixed-price (FFP) contracts which provide for a fixed price for specified products, systems and/or services. If actual costs vary from planned costs on a FFP contract, we generate more or less than the planned amount of profit and may even incur a loss. |
The following table summarizes revenues by contract type as a percentage of total revenues for the last three fiscal years:
Year Ended January 31 | |||||||||
2008 | 2007 | 2006 | |||||||
Cost-reimbursement |
47 | % | 48 | % | 45 | % | |||
T&M and fixed-price-level-of-effort |
35 | 36 | 37 | ||||||
FFP |
18 | 16 | 18 | ||||||
Total |
100 | % | 100 | % | 100 | % |
Revenue Mix. We generate revenues under our contracts from (1) the efforts of our technical staff, which we refer to as labor-related revenues and (2) the materials provided on a contract and efforts of our subcontractors, which we refer to as material and subcontractor (M&S) revenues. M&S revenues are generated primarily from large, multi-year systems integration contracts and contracts in our logistics and product support business area as well as through sales of our proprietary products, such as our border, port and mobile security products. While our border, port and mobile security products provide higher margins, in most cases, M&S revenues have lower margins than our labor-related revenues. The following table presents changes in labor-related revenues and M&S revenues for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Labor-related revenues |
$ | 5,492 | 8 | % | $ | 5,106 | 9 | % | $ | 4,677 | ||||||||
As a percentage of revenues |
61 | % | 63 | % | 62 | % | ||||||||||||
M&S revenues |
3,443 | 17 | 2,955 | 4 | 2,841 | |||||||||||||
As a percentage of revenues |
39 | % | 37 | % | 38 | % |
The increase in labor-related revenues in fiscal 2008 and 2007 was primarily due to increases in labor rates and the number of direct labor personnel. At the end of fiscal 2008, we had approximately 43,800 full-time and part-time employees compared to 41,700 and 41,100 at the end of fiscal 2007 and 2006, respectively. The increase in M&S revenues in fiscal 2008 compared to the prior year was primarily due to increased activities on several large systems integration programs, including work performed for the North Atlantic Treaty Organization (NATO) and the Space and Naval Surface Warfare Center and increased sales of border, port and mobile security products. The increase in M&S revenues in fiscal 2007 was due to the delivery of significant materials under certain contracts primarily in the homeland security business area. This increase for the year was partially offset by declines in M&S activity in the systems engineering and integration business area primarily due to the completion of a large contract that had a substantial component of materials, declines in our logistics and product support business area primarily due to the completion of one of our large prime vendor contracts and a reduced volume of orders on other prime vendor contracts caused by non-recurring customer events.
Contract Concentration. The growth of our business is directly related to our ability to successfully compete for contract awards and hire personnel to perform on contracts as well as our ability to successfully deliver on these contracts. The following table summarizes information related to our larger contracts for the last three fiscal years:
Year Ended January 31 | ||||||
2008 | 2007 | 2006 | ||||
Number of contracts: |
||||||
Greater than $50 million in annual revenues recognized |
14 | 9 | 9 | |||
Greater than $10 million in annual revenues recognized |
117 | 107 | 101 |
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These larger contracts with greater than $10 million in annual revenues recognized represented 39%, 37% and 37% of our total consolidated revenues in fiscal 2008, 2007 and 2006, respectively. The remainder of our revenues is derived from a large number of smaller contracts with annual revenues of less than $10 million.
In fiscal 2008, 2007, and 2006, 87%, 88% and 88%, respectively, of our consolidated revenues were attributable to prime contracts with the U.S. Federal Government or to subcontracts with other contractors engaged in work for the U.S. Federal Government. The percentage of total consolidated revenues from customers representing greater than 10% of our total consolidated revenues were as follows:
Year Ended January 31 | |||||||||
2008 | 2007 | 2006 | |||||||
U.S. Army |
21 | % | 18 | % | 16 | % | |||
U.S. Navy |
12 | 12 | 12 | ||||||
U.S. Air Force |
8 | 9 | 10 |
Geographic Location. The majority of our services are performed in the United States. Revenues earned within the United States accounted for 98%, 97% and 97% of our total consolidated revenues in fiscal 2008, 2007 and 2006, respectively.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues includes direct labor and related fringe benefits, overhead, and direct expenses incurred to complete contracts and task orders, such as subcontract labor and materials. Overhead consists of indirect costs relating to rent/facilities, administration, certain depreciation and management information systems expenses, travel and other expenses.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses are primarily for corporate administrative functions, such as management, legal, finance and accounting, contracts and administration, human resources and certain management information systems expenses. SG&A also includes bid-and-proposal and internal research and development expenses.
Results of Operations
The following table summarizes our consolidated results of operations for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Revenues |
$ | 8,935 | 11 | % | $ | 8,061 | 7 | % | $ | 7,518 | ||||||||
Cost of revenues |
7,698 | 10 | 6,974 | 6 | 6,568 | |||||||||||||
Selling, general and administrative expenses |
571 | 11 | 515 | 7 | 480 | |||||||||||||
Operating income |
666 | 16 | 572 | 22 | 470 | |||||||||||||
As a percentage of revenues |
7.5 | % | 7.1 | % | 6.3 | % | ||||||||||||
Non-operating income (expense), net |
(40 | ) | 24 | (2 | ) | |||||||||||||
Income from continuing operations before income taxes |
626 | 5 | 596 | 27 | 468 | |||||||||||||
Provision for income taxes |
240 | 4 | 231 | 74 | 133 | |||||||||||||
Income from continuing operations |
386 | 6 | 365 | 9 | 335 | |||||||||||||
Income from discontinued operations, net of tax |
29 | 26 | 592 | |||||||||||||||
Net income |
$ | 415 | 6 | $ | 391 | (58 | ) | $ | 927 |
Revenues. Our consolidated revenues increased 11% and 7% in fiscal 2008 and 2007, respectively, primarily due to growth in revenues in our Government segment, including growth related to the acquisition of businesses. Internal, or non-acquisition, related growth was 7% and 4% for fiscal 2008 and 2007, respectively. We calculate internal revenue growth by comparing our current year reported revenue to the prior year revenue adjusted to include the revenue of acquired businesses for the comparable period before acquisition. Revenue growth related to acquisition of businesses was 4% and 3% for fiscal 2008 and 2007, respectively.
26 SAIC, Inc. Annual Report
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The following table summarizes changes in segment revenues for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Government segment revenues |
$ | 8,356 | 12 | % | $ | 7,475 | 7 | % | $ | 6,975 | ||||||||
As a percentage of total revenues |
94 | % | 93 | % | 93 | % | ||||||||||||
Commercial segment revenues |
579 | (1 | ) | 586 | 7 | 546 | ||||||||||||
As a percentage of total revenues |
6 | % | 7 | % | 7 | % | ||||||||||||
Corporate and Other segment revenues |
| | (3 | ) | ||||||||||||||
Total revenues |
$ | 8,935 | 11 | $ | 8,061 | 7 | $ | 7,518 |
Government segment revenues increased $881 million, or 12%, in fiscal 2008, including internal revenue growth of 8%. Internal revenue growth in the Government segment for fiscal 2008 was attributed to continued growth in a number of our business areas, most notably our intelligence, defense and homeland security business areas. The increase in the intelligence business area was due to new program wins and higher levels of activity on existing programs, including certain classified and operational intelligence programs in fiscal 2008. The increase in the defense business area is primarily due to increased volume in Command, Control and Communications programs with the U.S. Navy and Marine Corps customers and new program wins. This activity in our defense business area included revenue from work performed on the recently-won NATO Ballistic Missile Defense program and slightly reduced revenues from our highly visible Future Combat Systems program caused by customer budget reductions and timing of work. Increases in revenues in our homeland security business area were driven by increased sales of border, port and mobile security products as well as new program wins with various Department of Homeland Security agencies. Revenue growth related to acquisitions of businesses in the Government segment was 4% for fiscal 2008.
Government segment revenues increased $500 million, or 7%, in fiscal 2007, including internal revenue growth of 4%. Internal revenue growth in the Government segment for fiscal 2007 was positively impacted by growth in the intelligence, homeland security and defense business areas. In addition, fiscal 2006 revenues reflect a reduction in revenues associated with difficulties encountered on our Greek contract. The fiscal 2007 revenue increase was partially offset by declines in our systems engineering and integration business area primarily due to the completion of a large contract. We also experienced declines in our logistics and product support business area in fiscal 2007 primarily due to the completion of one of our large prime vendor contracts and a reduced volume of orders on other prime vendor contracts caused by non-recurring customer events. Revenue growth related to acquisitions of businesses in the Government segment was 3% for fiscal 2007.
Commercial segment revenues decreased $7 million, or 1%, in fiscal 2008, primarily due to the completion at the end of fiscal 2007 of a security product support contract. Commercial segment revenues were also impacted by reductions in information technology outsourcing revenues in our U.K. subsidiary, offset in part by increased outsourcing and consulting services volume on various domestic programs. Commercial segment revenues increased $40 million, or 7%, in fiscal 2007 due to higher volume in our consulting services and information technology outsourcing business areas.
Corporate and Other segment revenues include the elimination of intersegment revenues of $3 million in fiscal 2006. There were no intersegment revenues in fiscal 2008 and 2007.
Cost of Revenues. The following table summarizes changes in segment cost of revenues for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Government segment cost of revenues |
$ | 7,285 | 11 | % | $ | 6,557 | 6 | % | $ | 6,173 | ||||||||
As a percentage of related revenues |
87.2 | % | 87.7 | % | 88.5 | % | ||||||||||||
Commercial segment cost of revenues |
435 | | 435 | 5 | 415 | |||||||||||||
As a percentage of related revenues |
75.1 | % | 74.2 | % | 76.0 | % | ||||||||||||
Corporate and Other segment cost of revenues |
(22 | ) | (22 | ) | (18 | ) | 10 | (20 | ) | |||||||||
Total cost of revenues |
$ | 7,698 | 10 | $ | 6,974 | 6 | $ | 6,568 | ||||||||||
As a percentage of revenues |
86.2 | % | 86.5 | % | 87.4 | % |
Government segment cost of revenues improved as a percentage of related revenues for fiscal 2008 primarily due to increased profitability on many cost reimbursement contracts as a result of the recovery of a greater percentage of our indirect costs through our indirect pricing rates, continued reductions in costs associated with management infrastructure, and improved fee rates on several large programs. The indirect rate performance improvement actions resulted in both
SAIC, Inc. Annual Report 27
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increased profitability on certain cost reimbursable contracts as a result of the recovery of $15 million of prior year indirect rate overruns as well as an overall reduction in indirect rate overruns expensed to cost of revenues in fiscal 2008 compared to fiscal 2007. Government segment cost of revenues for fiscal 2008 also benefited from increases in contract fee rates, primarily due to a higher volume of sales of more profitable border, port and mobile security products. The fiscal 2008 improvement was partially offset by increased stock-based compensation expense related to both our required adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R) for stock options as well as a fiscal 2008 increase in vesting stock award activity.
The fiscal 2007 improvement in Government segment cost of revenues as a percentage of related revenues was primarily due to a decrease of $81 million in losses recognized on our Greek contract as compared to fiscal 2006, a slightly higher concentration of labor-related revenues, which typically carry higher margins than our M&S revenues, and better management of our overhead expenses for fiscal 2007 as compared to fiscal 2006. The fiscal 2007 improvement was partially offset by increased stock-based compensation expense related to stock options and discounts on the employee stock purchase plan in fiscal 2007 of $21 million as a result of the required adoption SFAS No. 123(R). There was no expense recognized for stock options or employee stock purchase plan discounts in fiscal 2006.
Commercial segment cost of revenues increased as a percentage of related revenues in fiscal 2008 primarily due to the use of higher cost labor to support a fixed-price information technology outsourcing contract in our U.K. subsidiary caused by a temporary lack of available lower cost resources in our India branch and costs associated with the consolidation of certain business activities into a single location in order to decrease ongoing operating expenses. Commercial segment cost of revenues improved as a percentage of related revenues in fiscal 2007 primarily due to improved contract margin performance on certain of our longer term information technology outsourcing contracts in that year.
Corporate and Other segment cost of revenues in fiscal 2008 and 2007 represents the elimination of intersegment facility charges to our Government and Commercial segments for use of company-owned properties.
Selling, General and Administrative Expenses. The following table summarizes changes in consolidated SG&A expense by type of activity for the last three fiscal years:
Year ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
General and administrative |
$ | 409 | 11 | % | $ | 369 | 7 | % | $ | 344 | ||||||||
As a percentage of total revenues |
4.6 | % | 4.6 | % | 4.6 | % | ||||||||||||
Bid and proposal |
113 | 1 | 112 | 3 | 109 | |||||||||||||
As a percentage of total revenues |
1.3 | % | 1.4 | % | 1.4 | % | ||||||||||||
Internal research and development |
49 | 44 | 34 | 26 | 27 | |||||||||||||
As a percentage of total revenues |
.5 | % | .4 | % | .4 | % | ||||||||||||
Total SG&A |
$ | 571 | 11 | $ | 515 | 7 | $ | 480 | ||||||||||
As a percentage of total revenues |
6.4 | % | 6.4 | % | 6.4 | % |
Total consolidated SG&A increased $56 million, or 11%, for fiscal 2008. As a percentage of revenues, consolidated SG&A for fiscal 2008 remained relatively consistent with fiscal 2007 levels, largely reflecting managements efforts to control general and administrative spending as a percentage of revenues offset by planned increases in internal research and development efforts to develop new products and technologies to meet our customers anticipated needs.
General and administrative expenses increased $40 million, or 11%, for fiscal 2008 as compared to fiscal 2007 primarily due to the fiscal 2008 acquisition of a business with a higher general and administrative cost structure, increased stock-based compensation expense, increased professional services spending and increased corporate business development spending offset by a reduction in legal expenses. The increase in stock-based compensation results from both our required adoption of SFAS 123(R) for stock options as well as a fiscal 2008 increase in vesting stock award activity. The increase in professional services spending includes activities associated with efforts to improve our information technology systems infrastructure, including the first phase of implementation during fiscal 2008 of a new information technology system, as well as efforts to improve related business processes to provide greater effectiveness and efficiency across all business functions. The reduction in fiscal 2008 legal spending reflects reduced legal activity associated with our Greek contract. Internal research and development expenses increased $15 million for fiscal 2008, consistent with our business strategy to increase efforts to develop new products and technologies to support our customers and our long-term growth. Bid and proposal (B&P) expenses increased $1 million for fiscal 2008. The level of B&P activities fluctuates depending on the timing of bidding opportunities.
Total consolidated SG&A increased $35 million, or 7% for fiscal 2007 as compared to fiscal 2006. General and administrative expenses increased $25 million, or 7%, primarily due to increased information technology and other infrastructure
28 SAIC, Inc. Annual Report
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expenditures, increased legal expenses as well as increased stock-based compensation, business development and professional services expenses. Stock-based compensation expense related to stock options and discounts on the employee stock purchase plan increased approximately $12 million during fiscal 2007 as a result of the adoption of SFAS No. 123(R). There was no expense recognized for stock options or employee stock purchase plan discounts in fiscal 2006. Professional services expense increased by $12 million for fiscal 2007 largely due to certain systems implementation projects and our Sarbanes-Oxley compliance efforts. Internal research and development expenses increased $7 million for fiscal 2007 primarily due to increased efforts to develop new products and technologies to support our customers and our long-term growth. Bid and proposal (B&P) expenses increased $3 million for fiscal 2007, reflecting increased B&P activities offset by declines in production costs stemming from government actions to simplify the bidding process and actions taken by us to make our proposal process more efficient, both of which generally reduced the average cost of responding to a given B&P opportunity.
The following table summarizes changes in SG&A expense by segment for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Government segment SG&A |
$ | 419 | 17 | % | $ | 359 | 5 | % | $ | 343 | ||||||||
As a percentage of related revenues |
5.0 | % | 4.8 | % | 4.9 | % | ||||||||||||
Commercial segment SG&A |
96 | 1 | 95 | 1 | 94 | |||||||||||||
As a percentage of related revenues |
16.6 | % | 16.2 | % | 17.2 | % | ||||||||||||
Corporate and Other segment SG&A |
56 | (8 | ) | 61 | 42 | 43 | ||||||||||||
Total SG&A |
$ | 571 | 11 | $ | 515 | 7 | $ | 480 | ||||||||||
As a percentage of revenues |
6.4 | % | 6.4 | % | 6.4 | % |
Government segment SG&A increased $60 million for fiscal 2008 primarily due to the acquisition in fiscal 2008 of a new business with a higher general and administrative cost structure, increased professional services spending, and increased internal research and development and business development spending. Government segment SG&A increased $16 million for fiscal 2007 primarily due to increased stock-based compensation, internal research and development and professional services expenses.
Commercial segment SG&A expenses increased $1 million for both fiscal 2008 and 2007. The increase for fiscal 2008 reflects costs associated with the consolidation of certain business activities into a single location and an increase in discretionary overhead investment spending mostly for business development opportunities. Increases in fiscal 2007 were primarily due to increased stock-based compensation expense.
Corporate and Other segment SG&A expenses represent corporate costs that are unallowable under Cost Accounting Standards and the net effect of various items related to operating business units that are excluded from the evaluation of a business units operating performance in the Government or Commercial segments. Corporate and Other segment SG&A decreased $5 million in fiscal 2008 primarily due to a reduction in legal expenses offset by an increase in unallowable stock option expense. Corporate and Other segment SG&A increased $18 million for fiscal 2007 primarily due to increased unallowable stock option expense, professional service and legal expenses.
Operating Income. The following tables summarize changes in segment operating income for the last three fiscal years:
Year Ended January 31 | ||||||||||||||||||
2008 | Percent change |
2007 | Percent change |
2006 | ||||||||||||||
(dollars in millions) | ||||||||||||||||||
Government segment operating income |
$ | 652 | 17 | % | $ | 559 | 22 | % | $ | 459 | ||||||||
As a percentage of related revenues |
7.8 | % | 7.5 | % | 6.6 | % | ||||||||||||
Commercial segment operating income |
48 | (14 | ) | 56 | 51 | 37 | ||||||||||||
As a percentage of related revenues |
8.3 | % | 9.6 | % | 6.8 | % | ||||||||||||
Corporate and Other segment operating income |
(34 | ) | 21 | (43 | ) | (65 | ) | (26 | ) | |||||||||
Total operating income |
$ | 666 | 16 | $ | 572 | 22 | $ | 470 | ||||||||||
As a percentage of revenues |
7.5 | % | 7.1 | % | 6.3 | % |
Total operating income increased $94 million for fiscal 2008 primarily due to increased profitability in the Government segment and reduced losses in the Corporate and Other segment offset by decreased profitability in the Commercial segment. Total operating income increased $102 million for fiscal 2007 primarily due to increased Government and Commercial segment profitability, primarily due to increased revenues and decreased losses recognized on our Greek contract, partially offset by an increase in Corporate and Other segment operating loss for the period.
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Government segment operating income increased $93 million for fiscal 2008, benefiting from increased profitability on many cost reimbursable contracts as a result of the recovery of a greater percentage of our indirect costs through our indirect pricing rates, continued reductions in costs associated with management infrastructure, improved fee rates on several large programs and increased sales of more profitable border, port and mobile security products. These benefits were partially offset by increases in stock based compensation expense due to our adoption of SFAS 123(R) for stock options and increased vesting stock award activity, increased professional services spending and increased spending on internal research and development initiatives and discretionary overhead spending mostly for business development activities. Government segment operating income increased $100 million for fiscal 2007 primarily due to growth in related revenues and decreased losses recognized on our Greek contract partially offset by increased SG&A expenses.
Commercial segment operating income decreased $8 million for fiscal 2008 primarily due to higher cost labor used to support a fixed-price information technology outsourcing contract in our U.K. subsidiary caused by a temporary lack of available lower cost resources in our India branch and costs associated with the consolidation of certain business activities into a single location. Commercial segment operating income increased $19 million for fiscal 2007 primarily due to growth in related revenues and improvements in cost of revenues as a percentage of revenues offset by increased SG&A expenses.
Corporate and Other segment operating loss decreased $9 million for fiscal 2008 primarily reflecting lower legal expenses, including expenses relating to our dispute on the Greek contract. Corporate and Other segment operating loss increased $17 million for fiscal 2007 primarily due to increased unallowable stock option expense, professional services spending and legal expenses.
Interest Income. Interest income decreased by $60 million, or 52%, for fiscal 2008 due to a decrease in our average cash and marketable securities balances, resulting primarily from the payment of a $2.45 billion special dividend in November 2006 offset by the $1.24 billion raised in our October 2006 initial public offering. Interest income increased $20 million, or 21%, in fiscal 2007 due primarily to increased average interest rates and cash balances.
Interest Expense. Interest expense reflects interest on (1) our outstanding debt securities, (2) a building mortgage, (3) deferred compensation arrangements and (4) notes payable. Interest expense remained consistent for fiscal 2008 as most of our debt instruments have fixed interest rates and there were no significant changes in the underlying debt balances during fiscal 2008. Interest expense increased slightly during fiscal 2007, reflecting short-term borrowings made on our credit facility following our initial public offering.
As more fully described in Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Note 8 of the notes to consolidated financial statements, we are currently exposed to interest rate risks and foreign currency risks that are inherent in the financial instruments arising from transactions entered into in the normal course of business. We will from time to time use derivative instruments to manage these risks. The derivative instruments we currently hold have not had a material impact on our consolidated financial position or results of operations.
Other Income (Expense), Net. The components of other income (expense), net were as follows:
Year Ended January 31 | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in millions) | ||||||||||||
Impairment losses on investments |
$ | (13 | ) | $ | (1 | ) | $ | (6 | ) | |||
Gross realized gains on sale of marketable securities |
| | 1 | |||||||||
Gross realized losses on sale of marketable securities |
| | (9 | ) | ||||||||
Net gain (loss) on sale of other investments |
1 | 1 | (1 | ) | ||||||||
Equity interest in earnings and impairment losses of unconsolidated affiliates |
6 | 2 | 5 | |||||||||
Other |
3 | 3 | 3 | |||||||||
Total other income (expense), net |
$ | (3 | ) | $ | 5 | $ | (7 | ) |
The impairment losses on investments in fiscal 2008, 2007 and 2006 were due to declines in fair value of private equity securities held by our venture capital subsidiary that were deemed to be other-than-temporary. The carrying value of our cost and equity method investments as of January 31, 2008 was $48 million, including $24 million of private equity securities held by our venture capital subsidiary.
Provision for Income Taxes. The provision for income taxes as a percentage of income from continuing operations before income taxes was 38.3% in fiscal 2008, 38.8% in fiscal 2007 and 28.4% in fiscal 2006. The lower effective tax rate for fiscal 2006 was primarily due to the reversal of approximately $50 million in accruals for uncertain tax positions as a result of settlements of federal and state audits for amounts different than the recorded accruals for uncertain tax positions, as well as the expiration of statutes on open tax years.
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We are subject to routine compliance reviews by the Internal Revenue Service (IRS), and other taxing authorities. The IRS is currently auditing fiscal 2005 and 2006. The IRS has completed audits through fiscal 2004. As of January 31, 2008, we had liabilities for uncertain tax positions of $60 million, including $28 million related to continuing operations. While we believe we have adequate accruals for our uncertain tax positions, the tax authorities may determine that we owe taxes in excess of recorded accruals or our recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.
Income from Continuing Operations. Income from continuing operations increased $21 million, or 6%, in fiscal 2008 primarily due to increased operating income of $94 million caused by increased revenues and improved operating margins offset by a $60 million decrease in interest income, an $8 million decline in other income (expense), net, primarily attributable to other-than-temporary impairment losses on investments, and a $9 million increase in income tax expense. Income from continuing operations increased $30 million, or 9%, in fiscal 2007 primarily due to increased operating income of $102 million, increased interest income of $20 million, and increased other income offset by a $98 million increase in income tax expense.
Earnings per Share (EPS) from Continuing Operations. Diluted EPS from continuing operations decreased $0.07 per share, or 7%, for fiscal 2008 as compared to fiscal 2007 despite a $21 million increase in income from continuing operations. This was primarily due to a 53 million share increase in the number of diluted weighted average shares outstanding in fiscal 2008 as compared to fiscal 2007. Diluted EPS from continuing operations increased $0.07, or 8%, for fiscal 2007 primarily due to a $30 million increase in income from continuing operations offset by a 5 million share increase in the number of diluted weighted average shares outstanding in fiscal 2007 as compared to fiscal 2006. The increase in the weighted average shares outstanding for fiscal 2008 and 2007 was primarily due to the sale of 86 million shares of common stock in connection with our October 2006 initial public offering
Discontinued Operations. During fiscal 2008, we completed a reorganization transaction resulting in the disposition of our 55% interest in our consolidated majority-owned subsidiary, AMSEC LLC, in exchange for our acquisition of certain divisions and subsidiaries of AMSEC LLC and recorded a pre-tax gain on sale of $31 million. During fiscal 2007, we sold ANX, a majority-owned subsidiary, for an initial sales price of $27 million and recorded a pre-tax gain of $19 million. During fiscal 2006, we sold our Telcordia subsidiary for $1.35 billion and recorded a pre-tax gain of $871 million.
The results of operations and the financial position of AMSEC LLC (other than the divisions and subsidiaries that we acquired in the reorganization transaction), ANX and Telcordia have been reported as discontinued operations for all fiscal years presented. The operating results of these discontinued operations for fiscal 2008, 2007 and 2006 were as follows:
Year Ended January 31 | |||||||||
2008 | 2007 | 2006 | |||||||
(in millions) | |||||||||
Revenues |
$ | 106 | $ | 246 | $ | 363 | |||
Costs and expenses: |
|||||||||
Cost of revenues |
96 | 215 | 290 | ||||||
Selling, general and administrative expenses |
4 | 13 | 42 | ||||||
Non-operating income |
| 3 | | ||||||
Income before minority interest in income of consolidated subsidiaries and income taxes |
$ | 6 | $ | 21 | $ | 31 |
The AMSEC LLC reorganization transaction was generally treated as a tax-free liquidation of our interest in AMSEC LLC for income tax purposes.
With respect to the sale of Telcordia, we have indemnified the buyer for all income tax obligations on and through the closing date of the transaction. While we believe we have appropriate accruals for these uncertain tax positions, the ultimate resolution of these matters could differ from the amounts accrued. We also have customary indemnification obligations owing to the buyer and are entitled to receive additional amounts as contingent sale price, including all of the proceeds, net of the tax liability incurred by Telcordia, from any judgment or settlement of the litigation Telcordia initiated against Telkom South Africa and 50% of the net proceeds received in connection with the prosecution of certain patent rights of Telcordia as described in Commitments and Contingencies. All future contingent payments or contingent purchase price proceeds and changes in our estimates of these items and other related items will be reflected as discontinued operations and result in adjustments to the gain on sale in the period in which they arise.
Net Income and EPS. Net income increased $24 million, or 6%, for fiscal 2008. This reflects a $21 million increase in income from continuing operations and a $3 million increase in income from discontinued operations. Diluted EPS decreased $0.07 per share, or 7%, for fiscal 2008 despite the $24 million increase in net income due to a 53 million share increase in the number of diluted weighted average shares outstanding for fiscal 2008 compared to fiscal 2007. Net income decreased $536 million for fiscal 2007 primarily due to reduced income from discontinued operations of $566 million related to the fiscal 2006 sale of Telcordia offset by a $30 million increase in income from continuing operations. Diluted EPS decreased $1.51 per share, or 59%, for fiscal 2007 primarily due to the $1.58 per share decline in income from discontinued operations. The
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increase in the number of weighted average shares outstanding for fiscal 2008 and 2007 was primarily due to the sale of 86 million shares of common stock in connection with our October 2006 initial public offering.
Liquidity and Capital Resources
We have financed our operations from our inception in 1969 primarily through cash flow from operations, proceeds from the sales of investments, issuances of debt securities and borrowings under our credit facilities. In connection with the October 2006 initial public offering, we received net proceeds of $1.24 billion, after deducting underwriting commissions and discounts and other offering-related costs. Prior to the initial public offering and reorganization merger, our 100%-owned subsidiary, Science Applications International Corporation, declared a special dividend of $2.45 billion to its stockholders, which was paid in November 2006. We anticipate our principal sources of liquidity for the next 12 months and beyond will be cash flows from operations. We may also make borrowings under our revolving credit facility. We anticipate our principal uses of cash will be for operating expenses, capital expenditures, working capital requirements, acquisitions, debt service requirements, stock repurchases, and funding of pension obligations. We anticipate that our operating cash flows, existing cash and cash equivalents and borrowing capacity under our revolving credit facility will be sufficient to meet our anticipated cash requirements for at least the next 12 months.
Historical Trends
Cash and cash equivalents totaled $1.10 billion and $1.11 billion at January 31, 2008 and 2007, respectively. The following table summarizes cash provided or used by type of activity for the last three fiscal years:
Year Ended January 31 | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in millions) | ||||||||||||
Total cash flows provided by operations |
$ | 345 | $ | 693 | $ | 573 | ||||||
Total cash flows provided by (used in) investing activities |
(203 | ) | 1,211 | (581 | ) | |||||||
Total cash flows used in financing activities |
(157 | ) | (1,833 | ) | (707 | ) | ||||||
Increase (decrease) in cash and cash equivalents from discontinued operations |
(2 | ) | 7 | 761 | ||||||||
Total increase (decrease) in cash and cash equivalents |
$ | (17 | ) | $ | 78 | $ | 46 |
Cash Provided by Operations. The $348 million decrease in fiscal 2008 cash flows from operations compared to fiscal 2007 was primarily due to an increase in accounts receivable due to increased revenues and an increase in the average time to collect receivables at the end of fiscal 2008 as compared to fiscal 2007, a greater portion of fiscal 2007 bonuses and retirement plan contributions paid in cash instead of stock in fiscal 2008, an increase in inventories primarily related to increased activity in our logistics and products support business area and increased cash paid for income taxes. The increase in the average time to collect receivables at the end of fiscal 2008 as compared to fiscal 2007 was largely due to invoice processing delays arising from a system implementation at a major customer and billing delays attributable to our implementation of our new information technology system. During fiscal 2008, we recognized $64 million of excess tax benefits realized from stock options exercised and unvested stock that vested subsequent to our reorganization merger as cash inflows from financing activities as required by SFAS No. 123(R) Share-Based Payment. Excess tax benefits, realized prior to the reorganization merger and initial public offering were presented as cash flows from operations as previously required by SFAS No. 95 Statement of Cash Flows. The $120 million increase in fiscal 2007 cash flows from operations compared to fiscal 2006 was primarily due to decreases in cash paid for income taxes, higher income from continuing operations, and additional non-cash stock based compensation offset by increased accounts receivable balances due to increased revenue during the fourth quarter of fiscal 2007 as compared to the same period in fiscal 2006.
Cash Provided by (Used in) Investing Activities. We used $203 million of cash in support of investing activities during fiscal 2008, including $144 million to acquire two businesses, one in the Government segment and one in the Commercial segment and $61 million for purchases of property, plant and equipment. We generated cash from investing activities of $1.21 billion in fiscal 2007 primarily due to the liquidation of $1.66 billion in marketable securities in preparation for the November 2006 payment of the $2.45 billion special dividend offset by $377 million used in the acquisition of eight businesses and $73 million in purchases of property, plant and equipment. We used $581 million of cash in support of investing activities during fiscal 2006, including $291 million to purchase marketable securities, $212 million in the acquisition of four businesses and $52 million in purchases of property, plant and equipment.
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Cash Used in Financing Activities. We used $157 million of cash in support of financing activities during fiscal 2008, including $309 million used to repurchase shares of preferred and common stock, offset by $98 million in proceeds from the sale of stock and exercise of stock options and $64 million in excess tax benefits associated with stock-based compensation. We used cash in financing activities of $1.83 billion during fiscal 2007 primarily representing the payment of a special dividend of $2.45 billion and the repurchase of $724 million of stock offset by sales of $1.34 billion of stock, including $1.24 billion though our initial public offering, and exercise of stock options. We used $707 million of cash in support of financing activities in fiscal 2006, primarily representing repurchases of our stock of $818 million offset by sales of stock and exercises of stock options of $155 million. Repurchases of stock for each of the last three fiscal years were as follows:
Year Ended January 31 | |||||||||
2008 | 2007 | 2006 | |||||||
(in millions) | |||||||||
Repurchases of stock: |
|||||||||
Under publicly announced repurchase plans |
$ | 215 | $ | 42 | $ | | |||
Limited market stock trades |
| 230 | 399 | ||||||
Retirement plans |
| 360 | 228 | ||||||
Upon employee terminations |
| | 112 | ||||||
Other stock repurchases |
94 | 92 | 79 | ||||||
Total |
$ | 309 | $ | 724 | $ | 818 |
Prior to the initial public offering, we maintained an internal, limited market for the purpose of allowing our employees and retirement plans to periodically buy and sell shares of our stock. We had the right, but not the obligation, to repurchase stock in the limited market and retirement plan trades that we conducted, to the extent that the number of shares offered for sale exceeded the number of shares sought to be purchased. As a publicly traded company, we no longer conduct limited market or retirement plan trades.
Stock Repurchase Program
In December 2006, our board of directors authorized a stock repurchase program under which we may repurchase up to 40 million shares of our common stock. Stock repurchases under this program may be made on the open market or in privately negotiated transactions with third parties. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate and regulatory requirements and other market conditions. Through January 31, 2008, we repurchased 14.7 million shares of our common stock under this program, which includes 12.2 million shares repurchased in fiscal 2008. On March 21, 2008, our board of directors authorized the repurchase of an aggregate of 40 million of shares under the stock repurchase program from and after the open of the NYSE on March 24, 2008 (excluding shares purchased under the stock repurchase program from December 2006 through March 21, 2008).
Underfunded Pension Obligation
We sponsor a defined benefit pension plan for eligible employees of our United Kingdom subsidiary that perform services on a specific customer contract. As of January 31, 2008, the pension plan had an underfunded projected benefit obligation of $21 million, which we expect to fund over future years. A dispute exists with the customer over the timeframe in which this underfunded pension obligation is required to be funded under terms of the customer contract and applicable pension regulations. The resolution of this dispute may result in an acceleration of both the funding and expense recognition of the unrecognized actuarial loss.
Outstanding Indebtedness
Notes Payable and Long-term Debt. Our outstanding notes payable and long-term debt consisted of the following:
January 31 | ||||||
2008 | 2007 | |||||
(in millions) | ||||||
6.25% notes due fiscal 2013 |
$ | 549 | $ | 549 | ||
5.5% notes due fiscal 2034 |
296 | 296 | ||||
7.125% notes due fiscal 2033 |
248 | 248 | ||||
6.75% notes due fiscal 2009 |
100 | 96 | ||||
Other notes payable |
35 | 39 | ||||
1,228 | 1,228 | |||||
Less current portion |
130 | 29 | ||||
Total |
$ | 1,098 | $ | 1,199 |
We paid $100 million to settle the 6.75% notes at maturity on February 1, 2008.
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All of the notes described above contain customary restrictive covenants, including, among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions. We were in compliance with such covenants as of January 31, 2008. Our other notes payable have interest rates from 5.0% to 11.0% and are due on various dates through fiscal 2017. For additional information on our notes payable and long-term debt, see Note 7 of the notes to consolidated financial statements.
Credit Facility. We have a revolving credit facility providing for $750 million in unsecured borrowing capacity at interest rates determined, at our option, based on either LIBOR plus a margin or a defined base rate through fiscal 2013. As of January 31, 2008, $745 million of the revolving credit facility was available, due to $5 million of outstanding standby letters of credit issued in connection with our contract with the Greek government. The terms of the standby letters of credit require them to remain outstanding until the customer formally accepts the system pursuant to the contract. See also Commitments and ContingenciesFirm-Fixed-Price Contract with the Greek Government.
The facility contains various customary restrictive covenants, including financial covenants. As of January 31, 2008, we were in compliance with all covenants under the credit facility.
Off-Balance Sheet Arrangements
We have outstanding performance guarantees and cross-indemnity agreements in connection with certain of our unconsolidated joint venture investments as described in Note 18 of the notes to consolidated financial statements. These off-balance sheet arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital resources, operations or financial condition.
Contractual Obligations
The following table summarizes our obligations to make future payments pursuant to certain contracts or arrangements as of January 31, 2008, as well as an estimate of the timing in which these obligations are expected to be satisfied:
Payments Due by Fiscal Year | |||||||||||||||
Total | 2009 | 2010- 2011 |
2012- 2013 |
2014 and Thereafter | |||||||||||
(in millions) | |||||||||||||||
Contractual obligations: |
|||||||||||||||
Long-term debt (including current portion) (1) |
$ | 2,250 | $ | 201 | $ | 139 | $ | 671 | $ | 1,239 | |||||
Operating lease obligations (2) |
310 | 117 | 124 | 42 | 27 | ||||||||||
Capital lease obligations |
1 | 1 | | | | ||||||||||
Estimated purchase obligations (3) |
21 | 19 | 1 | | 1 | ||||||||||
Liabilities for uncertain tax positions (4) |
32 | 32 | | | | ||||||||||
Other long-term liabilities (5) |
150 | 42 | 50 | 20 | 38 | ||||||||||
Total contractual obligations |
$ | 2,764 | $ | 412 | $ | 314 | $ | 733 | $ | 1,305 |
(1) |
Includes total interest payments on our outstanding debt of $72 million in fiscal 2009, $138 million in fiscal 2010-2011, $120 million in fiscal 2012-2013 and $686 million in fiscal 2014 and thereafter. |
(2) |
Excludes $78 million related to an operating lease on a contract with the Greek government as we are not obligated to make the lease payments to the lessee if our customer defaults on payments to us. |
(3) |
Includes estimated obligations to transfer funds under legally enforceable agreements for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices. Excludes purchase orders for products or services to be delivered pursuant to U.S. Government contracts in which we have full recourse under normal contract termination clauses. |
(4) |
Excludes obligations for uncertain tax positions of $28 million, which are included in other long-term liabilities. |
(5) |
Other long-term liabilities were allocated by fiscal year as follows: a liability for our foreign defined benefit pension plan is based upon payments made in prior years and estimated future payments to the plan; liabilities under deferred compensation arrangements are based upon the average annual payments in prior years upon termination of employment by participants; liabilities for uncertain tax positions are based upon the fiscal year that the statute of limitations is currently expected to expire, a liability to reimburse a customer for cash advances on a contract that is periodically renewed is based upon the fiscal year that the most recent contract renewal is ending; and other liabilities are based on the fiscal year that the liabilities are expected to be realized. |
Commitments and Contingencies
Telkom South Africa
Our former Telcordia subsidiary instituted arbitration proceedings before the International Chamber of Commerce (ICC), against Telkom South Africa in March 2001 as a result of a contract dispute. Telcordia seeks to recover damages for breach
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of contract, plus interest at a rate of 15.5%. Telkom South Africa counterclaimed, seeking substantial damages from Telcordia. On September 27, 2002, the arbitrator found that Telkom South Africa repudiated the contract and dismissed Telkom South Africas counterclaims against Telcordia. The damages to be recovered by Telcordia will be determined in the second phase of the arbitration. Although Telkom South Africa challenged the arbitrators partial award in Telcordias favor in the South African court system, the arbitrators decision was ultimately upheld.
The second phase of the arbitration to determine the damages to be recovered by Telcordia has now commenced. Telcordia submitted its statement of claim and related document production on March 30, 2007, which seeks damages in excess of $200 million plus interest and legal fees and costs. As a result of a preliminary hearing with the arbitrator, Telkom South Africa paid Telcordia $9 million of uncontested damages relating to one aspect of the dispute. In July 2007, the arbitrator ruled that Telcordia is entitled to 15.5% simple interest per year on awarded damages, running from the date of breach by Telkom South Africa. Due to the complexity of the remaining issues, the arbitrator cancelled a September 2007 arbitration hearing to determine the amount of Telcordias damages and scheduled an April 2008 hearing focusing only on damage issues. A final hearing with closing submissions was scheduled for June 2008 in London. In February 2008, the arbitrator appointed a third party expert to provide an independent opinion regarding specific technical issues. The parties disagree on the scope of the third party experts mandate, as well as certain discovery issues. Consequently, the hearings originally scheduled for April and June have been cancelled and a hearing to address the outstanding procedural issues is scheduled for April 2008. As a result, the completion of the arbitration will likely be delayed. Pursuant to the definitive stock purchase agreement for the sale of Telcordia, we are entitled to receive all of the proceeds, net of the tax liability incurred by Telcordia, from any judgment or settlement. We received $4 million during the year ended January 31, 2008 related to amounts collected by Telcordia from Telkom South Africa.
Due to the complex nature of the legal and factual issues involved in the dispute, the damages that Telcordia will ultimately be awarded in the second phase of arbitration, and therefore the amounts we will be entitled to receive, net of applicable taxes, are not presently determinable. We do not have any assets or liabilities recorded related to this contract and the related legal proceedings as of January 31, 2008 and 2007.
Firm-Fixed-Price Contract with the Greek Government
Original Contract. In May 2003, we entered into a euro-denominated firm-fixed-price contract (the Greek contract) with the Hellenic Republic of Greece (the Customer) to provide a Command, Control, Communications, Coordination and Integration (C4I) System (the System), to support the 2004 Athens Summer Olympic Games (the Olympics), and to serve as the security system for the Customers public order departments following completion of the Olympics. The System is comprised of 29 subsystems, organized into three major functional areas: the Command Decision Support System (CDSS), the Communication and Information System and the Command Center Systems. Under the Greek contract, the System was to be completed, tested, and accepted by September 1, 2004, at a price of approximately $199 million. The Greek contract also requires us to provide five years of System support and maintenance for approximately $15 million and ten years of TETRA radio network services for approximately $125 million. The Greek contract contains an unpriced option for an additional five years of TETRA network services.
The Customer took delivery of the System for use and operation during the Olympics beginning in August 2004, and continues to use significant portions of the System today. In November 2004, we delivered a revised version of the CDSS portion of the System to the Customer. Beginning in December 2004 and continuing through April 2005, the Customer performed subsystems acceptance testing on each of the subsystems comprising the System based on test procedures that had not been mutually agreed upon by the parties. The Customer identified numerous omissions and deviations in its test reports. We believe that certain of these omissions and deviations were valid, while others were not.
Modification of Contract. On March 29, 2007, we and the Customer executed a modification to the Greek contract which establishes specific requirements, contract terms, and a payment schedule under which the various subsystems can be completed and provides for, among other things, the following:
| acceptance of 20 specific subsystems of the 29 subsystems comprising the System within 70 days of the execution of the modification |
| payment of $34 million within 30 days of our submitting invoices for certain work already performed on both the system development portion and service portion of the Greek contract |
| reduction of the advance payment and performance bonds maintained by us in favor of the Customer by at least $123 million which represents the value of the 20 subsystems required to be accepted within 70 days of the execution of the modification |
| credit for past warranty, maintenance and TETRA services |
| a revised test and acceptance process for the remaining subsystems being re-delivered during 2008 |
| provision of subsystem maintenance for a period of up to 5 years following subsystem acceptance |
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In connection with the acceptance of 20 of the 29 subsystems referred to above, the Greek contract modification provides a framework for the parties to determine the price reduction for omissions and deviations relating to those subsystems. An agreement of the parties limits the total price reduction for these subsystems to a maximum of $11 million. On September 11, 2007, the Greek contract was further modified to provide for an extension of the system development portion of the Greek contract to October 2008, as previously agreed.
Performance of Modified Contract. Subsequent to the modification of the Greek contract on March 29, 2007, the following developments have occurred:
| 18 of the 20 subsystems to have been accepted within 70 days of March 29, 2007 have been fully and finally accepted by the Customer. A subcontractor, in consultation with us and the Customer, has chosen to remediate omissions and deviations in the remaining two subsystems it delivered, in an effort to minimize or eliminate the price reduction associated with them. The contract authorizes such remediation as long as it is completed before the System acceptance testing to be conducted in fiscal 2009. |
| The Customer has paid substantially all of the $34 million related to services previously performed required to be paid within 30 days of us submitting our invoices. |
| The initial price reduction assessed by the Customer for omissions and deviations on the 18 subsystems accepted to date totaled $14 million, which is $3 million in excess of the previously agreed-upon maximum price reduction limit of $11 million. Accordingly, the parties have entered into negotiation under the provisions of the Greek contract to resolve this discrepancy. We have an informal agreement with the Customer to resolve the omissions and deviations on these 18 subsystems for a total price reduction of $6 million which has not yet been finalized through a contract modification. |
| The Customer has reduced the advance payment, performance and offset bonds requirement by $154 million. |
| We and our subcontractors are performing work under the terms of the modified Greek contract and modified subcontracts, including the requirement to deliver a modified CDSS. |
| The parent corporation of our principal subcontractor has been subject to a number of investigations focusing on alleged improper payments to government officials and political parties in a number of countries, including Greece. Our subcontractor has represented to us that it did not make improper payments in connection with the Greek contract. We have taken a number of actions to confirm the accuracy of our subcontractors representations. If the subcontractors representations are ultimately determined to be false and improper payments were in fact made in connection with the Greek contract, the legal compliance and political issues that this would raise could impact our subcontractors ability to perform the subcontract and our ability to perform the Greek contract. This could have a material adverse affect on our consolidated financial position, results of operations and cash flows. |
Financial Status and Contingencies of the Greek Contract. We have recorded $124 million of losses under the Greek contract as of January 31, 2008. We recorded $1 million and $2 million of losses relating to foreign currency translation in fiscal 2008 and 2007, respectively, and $83 million of losses in fiscal 2006. The $124 million loss reflected our estimated total cost to complete the System under the original Greek contract and assumed the Greek contract value was limited to the cash received to date.
The Greek contract modification resulted in significant changes to the terms and conditions and the deliverables under the Greek contract and clarifies the parties responsibilities. If we complete the work and receive future payments as required under the modified Greek contract, we may reverse a portion of the losses previously recognized. However, based on the complex nature of this contractual situation and the difficulties encountered to date, significant uncertainties exist and we are unable to reliably estimate the ultimate outcome. Accordingly, we have not adjusted and will not adjust the losses on this contract until such time as we can reliably estimate the ultimate outcome of the modified contract. Also, as a result of the significant uncertainties that remain on this contract, we are utilizing the completed-contract method of accounting for the system development portion of this contract. Examples of these uncertainties include acceptance of the remaining subsystems and the overall system, receipt of the remaining payments, release of the remaining bonds, changes in the political representatives from the Greek government involved with the project and subcontractor performance and legal compliance issues. Accordingly, no additional revenue will be recognized on the development portion of the contract until it is completed. Revenue on the maintenance portion of the contract is recognized as maintenance payments are received from the Customer. Although we expect to receive additional payments in accordance with the terms of the modified Greek contract, our accounting as of January 31, 2008 was based on cash received to date. Through January 31, 2008, we have recognized revenues of $157 million, which represents a portion of the $201 million of cash received to date. We recognized $37 million of revenues and equal amounts of costs on the maintenance portion of the Greek contract during the year ended January 31, 2008, primarily related to the receipt of payments from the Customer for services previously rendered.
We have $15 million of accounts receivable (classified as other assets) relating to value added taxes (VAT) that we have paid and believe we are entitled to recover either as a refund from the taxing authorities or as a payment under the Greek contract upon final billing. The Customer has paid to us all amounts owed for VAT to date for the subsystems accepted and services provided. Failure by the Customer to pay any future VAT amounts could result in an additional obligation payable by us to the Greek taxing authorities and could increase our total losses on the Greek contract.
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In accordance with the terms of the Greek contract, we are required to maintain certain advance payment, performance and offset bonds in favor of the Customer. These bonding requirements have been met through the issuance of standby letters of credit. As of January 31, 2008, there were $111 million in advance payment and performance standby letters of credit and $7 million in offset bonds outstanding. If the standby letters of credit are called based on a future failure to fulfill our obligations under the Greek contract, we may have the right to call some of the $71 million of bonds provided by our subcontractors in connection with their work under the Greek contract if the performance failure relates to subcontracted work.
If we and our subcontractors are unable to perform in accordance with the modified Greek contract, damages or claims by the Customer or subcontractors may be successfully asserted against us, our bonds may be called, and the Customer may be able to recover additional contract costs required to fulfill our obligations. This could have a material adverse affect on our consolidated financial position, results of operations and cash flows.
INTESA Joint Venture
We held a 60% interest in Informática, Negocios y Tecnología, S.A., (INTESA), a Venezuelan joint venture the Company formed in fiscal 1997 with Venezuelas national oil company, PDVSA, to provide information technology services in Latin America. INTESA derived substantially all its revenues from an outsourcing services agreement with PDVSA. The services agreement expired on June 30, 2002 and INTESA subsequently ceased operations. The operations of INTESA were classified as discontinued operations as of January 31, 2003 and INTESA is currently insolvent.
INTESA is a defendant in a number of lawsuits brought by former employees seeking unpaid severance and pension benefits. PDVSA, SAIC and SAIC Bermuda, our 100%-owned subsidiary and the entity that held our interest in INTESA, were added as defendants in a number of these suits. Based on the procedural standing of these cases and our understanding of applicable laws and facts, we believe that our exposure to any possible loss related to these employment claims is either remote or, if reasonably possible, immaterial.
DS&S Joint Venture
In March 2006, we sold our interest in DS&S, a joint venture in which we owned a 50% interest. As part of the sale, we agreed to indemnify the purchaser for certain legal costs and expenses, including those relating to a government investigation involving DS&S and any litigation resulting from that investigation up to the sum of the sales price of $9 million plus $1 million received by us in repayment of a loan owed by DS&S. As of January 31, 2008, we have deferred the potential $9 million gain on this sale pending resolution of the investigation and any resulting litigation.
Other Joint Ventures
We are an investor in Danet Partnership GbR (Danet GbR), a German partnership accounted for under the equity method. Danet GbR has an internal equity trading market similar to the limited market that was formerly maintained by Science Applications International Corporation. We are required to provide liquidity rights to the other Danet GbR investors in certain circumstances. These rights allow Danet GbR investors who are withdrawing from the partnership to put their Danet GbR shares to us in exchange for the current fair value of those shares. We do not currently record a liability for these put rights because their exercise is contingent upon the occurrence of future events which we cannot determine will occur with any certainty. The carrying value of our investment in Danet GbR was $17 million as of January 31, 2008. The maximum potential obligation, assuming all the current Danet GbR investors were to put their Danet GbR shares to us, was $8 million as of January 31, 2008.
We have a guarantee that relates only to claims brought by the sole customer of another of our joint ventures, Bechtel SAIC Company, LLC, for specific contractual nonperformance of the joint venture. We also have a cross-indemnity agreement with the joint venture partner, pursuant to which we will only be ultimately responsible for the portion of any losses incurred under the guarantee equal to our ownership interest of 30%. Due to the nature of the guarantee, we are not able to project the maximum potential obligations we could be required to make under the guarantee as of January 31, 2008 but, based on current conditions, we believe the likelihood of having to make any payment is remote. Accordingly, no liability relating to this guarantee is currently recorded.
On September 15, 2004, we entered into an agreement with EG&G Technical Services, Inc. (EG&G), and Parsons Infrastructure & Technology Group, Inc. (Parsons), to form Research and Development Solutions, LLC (RDS), a Delaware limited liability company that will pursue contracts offered by the Department of Energys National Energy Technical Laboratory. We, EG&G and Parsons, each have a one-third equal joint venture interest. In conjunction with a contract award to RDS, each joint venture partner was required to sign a performance guarantee agreement with the U.S. Government. Under this agreement, we unconditionally guarantee all of RDSs obligations to the U.S. Government under the contract award, which has a total value of up to $217 million. We also have a cross-indemnity agreement with each of the other two joint venture partners to protect us from liabilities for any U.S. Government claims resulting from the actions of the other two joint venture partners and to limit our liability to our share of the contract work. As of January 31, 2008, the fair value of the guarantee is not material.
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Debt Guarantee
SAIC Inc. has fully and unconditionally guaranteed the obligations of Science Applications International Corporation, a 100%-owned subsidiary, under its revolving credit facility, $300 million 5.5% notes, $550 million 6.25% notes, $250 million 7.125% notes, and $100 million 6.75% notes and certain letters of credit. We paid $100 million to settle the 6.75% notes at maturity on February 1, 2008.
Letters of Credit and Surety Bonds
We have outstanding letters of credit aggregating to $166 million at January 31, 2008, principally related to guarantees on contracts with domestic commercial and foreign government customers. Of the total outstanding letters of credit, $118 million was related to the firm-fixed-price contract with the Greek government described above, $5 million of which was issued under our revolving credit facility. We also have outstanding surety bonds aggregating to $169 million, principally related to performance and payment bonds.
Other
We are subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to agencies and departments of the U.S. Government and in connection with performing services in countries outside of the United States. Such matters can lead to criminal, civil or administrative proceedings and we could be faced with penalties, fines, repayments or compensatory damages. Adverse findings could also have a material adverse effect on us because of our reliance on government contracts. Although we can give no assurance, based upon managements evaluation of current matters that are subject to U.S. Government investigations of which we are aware and based on managements current understanding of the facts, we do not believe that the outcome of any such matter would likely have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.
During the year ended January 31, 2008, we recorded $8 million in costs associated with actions taken to remediate a data security lapse affecting several customer contracts. As part of the remediation effort, we continue to review our technology assets to evaluate any other areas of potential information security risk.
We maintain self-insured medical and workers compensation insurance plans. We provided estimated accruals for claims incurred but not yet reported of $25 million and $27 million as of January 31, 2008 and 2007, respectively.
We are subject to periodic audits by state and local governments for taxes other than income taxes. We do not believe that the outcome of any such tax matters would have a material adverse effect on our consolidated financial position, results of operations, cash flows or our ability to conduct business.
We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of our management, based upon current information, will likely have a material adverse effect on our consolidated financial position, results of operations, or cash flows or our ability to conduct business.
As a result of a dispute over the proper interpretation of contract pricing terms, we have initiated a lawsuit against a state government customer seeking payment for certain technical services. Although the amount of the claim, based on three unpaid invoices, is only approximately $40,000, the resolution of the claim is expected to resolve the pricing interpretation dispute and could have significant implications for the contract going forward. While we are confident in our interpretation of the pricing terms, if the customers interpretation prevails, given estimated future tasking over the five year term of the base contract and the two option years, we estimate that this could result in an aggregate loss on the contract of approximately $5 million to $50 million, with the lower end of the range more likely. We have not recorded a liability for this matter as of January 31, 2008.
In the normal conduct of our business, we seek to monetize our patent portfolio through licensing agreements. We have defended and will continue to defend our patent positions when we believe our patents have been infringed and are involved in such litigation from time to time. As described in Note 17 of the notes to consolidated financial statements, we sold our Telcordia subsidiary in fiscal 2006. Pursuant to the terms of the definitive stock purchase agreement, we will receive 50% of any net proceeds that Telcordia receives in the future in connection with the enforcement of certain patent rights.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on an on-going basis. Our estimates and assumptions have been
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prepared on the basis of the most current reasonably available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.
We have several critical accounting policies that are both important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:
Revenue Recognition. Our revenues are primarily recognized using the percentage-of-completion method as discussed in Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage-of-completion method, revenues are recognized based on progress towards completion, with performance measured by the cost-to-cost method, efforts-expended method or units-of-delivery method, all of which require estimating total costs at completion. Estimating costs at completion on our long-term contracts, particularly due to the technical nature of the services being performed, is complex and involves significant judgment. Factors that must be considered in making estimates include labor productivity and availability, the nature and technical complexity of the work to be performed, potential performance delays, the availability and timing of funding from the customer, the progress toward completion and the recoverability of claims. Adjustments to original estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimates is made when facts develop, events become known or an adjustment is otherwise warranted, such as in the case of a contract modification. When estimates indicate that we will experience a loss on the contract, we recognize the estimated loss at the time it is determined. Additional information may subsequently indicate that the loss is more or less than initially recognized, which would require further adjustment in our financial statements. We have procedures and processes in place to monitor the actual progress of a project against estimates and our estimates are updated quarterly or more frequently if circumstances warrant.
Although our primary revenue recognition policy is the percentage-of-completion method, we do have contracts for which we use other acceptable methods to record revenue (see Note 1 of the notes to consolidated financial statements). Selecting the appropriate revenue recognition method involves judgment based on the contract and can be complex depending upon the structure and terms and conditions of the contract.
Costs incurred on projects accounted for under the percentage-of-completion method may be recognized as pre-contract costs and deferred as assets when we have been requested by the customer to begin work under a new arrangement. We record pre-contract costs when formal contracts have not yet been executed, and it is probable that we will recover the costs through the issuance of a contract. When the formal contract has been executed, the costs are recorded to the contract and revenue is recognized based on the percentage-of-completion method of accounting.
Contract claims are unanticipated additional costs incurred but not provided for in the executed contract price that we seek to recover from the customer. Such costs are expensed as incurred. Additional revenue related to contract claims is recognized when the amounts are awarded by the customer.
Stock-Based Compensation. We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The estimation of stock option fair value requires management to make complex estimates and judgments about, among other things, employee exercise behavior, forfeiture rates, and the volatility of our common stock. These judgments directly affect the amount of compensation expense that will ultimately be recognized. As our common stock was not publicly-traded until October 13, 2006, the expected term of option awards granted is derived utilizing the simplified method presented in SEC Staff Accounting Bulletin Nos. 107 and 110, Share-Based Payment, and volatility is estimated based on a weighted average historical volatility of a group of publicly-traded, peer companies for a period consistent with the expected option term. We assumed weighted average volatilities of 26.8% and 33.4% for fiscal 2008 and 2007, respectively. All other assumptions held constant, a ten percentage point change in our fiscal 2008 volatility assumption would have increased or decreased the grant-date fair value of our fiscal 2008 option awards by approximately 23%.
Income Taxes. Provision for income taxes is recorded utilizing the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Under the liability method, changes in tax rates and laws are reflected in income in the period such changes are enacted. In addition, the provision for federal, state, foreign and local income taxes is calculated on reported financial statement income before income taxes based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. We also have recognized liabilities for uncertain tax positions
SAIC, Inc. Annual Report 39
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in accordance with the Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. We recognize liabilities for uncertain tax positions on open tax years when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured at our best estimate of the taxes ultimately expected to be paid. A significant portion of our income taxes payable balance is comprised of liabilities for uncertain tax positions. We have experienced years when liabilities for uncertain tax positions were settled for amounts different from recorded amounts as described in Note 12 of the notes to the consolidated financial statements. Including interest and penalties, we have liabilities for uncertain tax positions of $60 million at January 31, 2008, of which $32 million is classified as current income taxes payable on our consolidated balance sheet.
Recording our provision for income taxes requires management to make significant judgments and estimates for matters whose ultimate resolution may not become known until final resolution of an examination by the IRS or State agencies. Additionally, recording liabilities for uncertain tax positions involves significant judgment in evaluating our tax positions and developing our best estimate of the taxes ultimately expected to be paid.
Business Combinations and Goodwill and Intangible Assets Impairment. We have engaged and expect to continue to engage in business acquisition activity. The accounting for business combinations requires management to make judgments and estimates of the fair value of assets acquired, including the identification and valuation of intangible assets, as well as the liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with each acquisition.
Goodwill is assessed for impairment annually and whenever events or circumstances indicate a condition of impairment may exist. We perform our annual goodwill impairment assessment as of the beginning of the fourth quarter. The goodwill impairment test is a two-step process performed at the reporting unit level. The first step consists of estimating the fair values of each of the reporting units based on a combination of two valuation methods, a market approach and an income approach. Fair value computed using these two methods is determined using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, comparable market data with a consistent industry grouping, and the cost of capital. The estimated fair values are compared with the carrying values of the reporting units, which include the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting units identifiable assets and liabilities from its estimated fair value calculated in the first step. The impairment expense represents the excess of the carrying amount of the reporting units goodwill over the implied fair value of the reporting units goodwill. The goodwill impairment test process requires management to make significant judgments and assumptions, including revenue, profit and cash flow forecasts, about the business units to which goodwill is assigned. Misjudgments in this forecasting process could prevent management from taking an impairment charge when one may be required. Our goodwill impairment tests performed in fiscal years 2008, 2007, and 2006 did not result in any impairment of goodwill. The carrying value of goodwill as of January 31, 2008 was $1.08 billion.
Intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that a condition of impairment may exist. We did not recognize any impairment losses on intangible assets in fiscal 2008 and 2007. We recognized immaterial impairment losses on intangible assets in fiscal 2006. The carrying value of intangible assets as of January 31, 2008 was $102 million.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for us in the first quarter of fiscal 2009 and will be applied prospectively. Subsequent to the issuance of SFAS No. 157, the FASB issued FASB Staff Position No. FAS 157-1 and No. FAS 157-2, which exclude the lease classification measurements under SFAS No. 13 Accounting for Leases from the scope of SFAS No. 157 and delay the effective date on SFAS No. 157 for all non-recurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. We do not believe that the adoption of the provisions of SFAS No. 157 will materially impact our consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (Including an Amendment of FASB Statement No. 115). SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Most of the provisions in SFAS No. 159 are elective. This statement is effective for us in the first quarter of fiscal 2009 and may be applied prospectively. We do not intend to adopt the elective provisions of this statement.
In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. SFAS No. 141(R) changes the requirements for an acquirers recognition and measurement of the assets acquired and liabilities assumed in a business
40 SAIC, Inc. Annual Report
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combination. This statement is effective for us with respect to all business combinations for which the acquisition date is after January 31, 2009. Adoption is not expected to materially impact our consolidated financial position or results of operations directly when it becomes effective, as the only impact that the statement will have on recorded amounts at that time is that related to disposition of uncertain tax positions related to prior acquisitions. Following the date of adoption of the statement, the resolution of such items at values that differ from recorded amounts will be adjusted through earnings, rather than through goodwill. Adoption of this statement is, however, expected to have significant effect on how acquisition transactions subsequent to January 31, 2009 are reflected in the financial statements.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements (an amendment of ARB No. 51). SFAS No. 160 requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, that changes in a parents ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This statement is effective for us as of February 1, 2009, and shall be applied prospectively except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented. As of January 31, 2008, we do not have any consolidated subsidiaries in which there is a noncontrolling interest. The retrospective presentation and disclosure requirements of this statement will be applied to any prior periods presented in financial statements for the fiscal year ending January 31, 2010 and later periods during which we had a consolidated subsidiary with a noncontrolling interest.
In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities (an amendment of FASB Statement No. 133). SFAS No. 161 requires enhanced disclosures about derivative instruments and hedging activities and their effects on an entitys financial position, financial performance, and cash flows. The requirements of this statement are effective for us in the first quarter of fiscal 2010. Since this statement only pertains to disclosures in the notes to consolidated financial statements, it will not impact our consolidated financial position and results of operations.
Effects of Inflation
Our cost-reimbursement type contracts are generally completed within one year. As a result, we have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term FFP and T&M contracts typically include sufficient provisions for labor and other cost escalations to cover cost increases over the period of performance. Consequently, revenues and costs have generally both increased commensurate with the general economy. As a result, net income as a percentage of total consolidated revenues has not been significantly impacted by inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the normal course of business. Our current market risk exposures are primarily related to interest rates and foreign currency fluctuations. The following information about our market sensitive financial instruments contains forward-looking statements.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents, investments in marketable securities, interest rate swaps and long-term debt obligations.
We have established an investment policy to protect the safety, liquidity and after-tax yield of invested funds. This policy establishes guidelines regarding acceptability of instruments and maximum maturity dates and requires diversification in the investment portfolios by establishing maximum amounts that may be invested in designated instruments and issuers. We do not authorize the use of derivative financial instruments in our managed short-term investment portfolios. Our policy authorizes, with board of director approval, the limited use of derivative instruments only to hedge specific interest rate risks.
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The table below provides information about our financial instruments at January 31, 2008 that are sensitive to changes in interest rates. For debt obligations and short-term investments, the table presents principal cash flows in U.S. dollars and related weighted average interest rates by expected maturity dates. For interest rate swap agreements, the table presents the notional amounts and weighted average interest rates. The notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts. As described in Note 8 of the notes to consolidated financial statements, the swap agreements we entered into in May 2003 are expected to substantially offset interest rate exposures related to the swap agreements previously entered into in January 2002. As a result, on a combined basis, these swaps are no longer exposed to changing interest rates and we have excluded these swap agreements from the table below.
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | Estimated Fair Value as of January 31, 2008 | ||||||||||||||||||||||
(dollars in millions) | |||||||||||||||||||||||||||||
Assets: |
|||||||||||||||||||||||||||||
Cash and cash equivalents (1) |
$ | 1,096 | $ | | $ | | $ | | $ | | $ | | $ | 1,096 | $ | 1,096 | |||||||||||||
Average interest rate |
4.27 | % | | | | | | ||||||||||||||||||||||
Liabilities: |
|||||||||||||||||||||||||||||
Short-term and long-term debt: |
|||||||||||||||||||||||||||||
Variable interest rate (2) |
$ | 28 | $ | | $ | 1 | $ | | $ | 1 | $ | 2 | $ | 32 | $ | 32 | |||||||||||||
Weighted average interest rate |
5.22 | % | | 7.00 | % | | 7.00 | % | 7.00 | % | |||||||||||||||||||
Fixed rate |
$ | 102 | $ | 1 | $ | | $ | | $ | 550 | $ | 550 | $ | 1,203 | $ | 1,217 | |||||||||||||
Weighted average interest rate |
6.77 | % | 7.05 | % | | | 6.25 | % | 6.24 | % | |||||||||||||||||||
Interest Rate Derivatives |
|||||||||||||||||||||||||||||
Interest rate swap agreements: |
|||||||||||||||||||||||||||||
Fixed to variable(3) |
$ | 100 | | | | | | $ | 100 | $ | 1 | ||||||||||||||||||
Average receive rate |
6.75 | % | |||||||||||||||||||||||||||
Average pay rate |
8.40 | % |
(1) |
Includes $42 million denominated in British pounds, $2 million denominated in Canadian dollars, $2 million denominated in Euros and $2 million denominated in Indian rupees. |
(2) |
The fiscal 2009 amount includes $26 million and $1 million denominated in Euros and Indian rupees, respectively. |
(3 ) |
We settled this swap agreement at its expiration date, which coincided with the payment of $100 million to settle the 6.75% notes at maturity on February 1, 2008. |
At January 31, 2008, our cash and cash equivalents, which include money market funds and money market accounts, bear variable interest rates. A 10% unfavorable interest rate movement would not materially impact the value of the holdings but would impact interest income in future periods.
Foreign Currency Risk. Although the majority of our transactions are denominated in U.S. dollars, some transactions are denominated in various foreign currencies. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to mitigate adverse fluctuations in earnings and cash flows associated with foreign currency exchange rate fluctuations. Our policy allows us to actively manage cash flows, anticipated transactions and firm commitments through the use of natural hedges and forward foreign exchange contracts. We do not use foreign currency derivative instruments for trading purposes.
We assess the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates on market sensitive instruments by performing a sensitivity analysis. The differences that result from comparing hypothetical foreign exchange rates and actual spot rates as of January 31, 2008 are the hypothetical gains and losses associated with foreign currency risk. As of January 31, 2008, holding all other variables constant, a 10% weakening of the U.S. dollar against the hedged currency would affect the fair values of the forward foreign exchange contracts by immaterial amounts.
Item 8. Financial Statements and Supplementary Data
See our consolidated financial statements attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
42 SAIC, Inc. Annual Report
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer (our Chairman and Chief Executive Officer) and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of January 31, 2008, and our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes In Internal Control Over Financial Reporting
During the year ended January 31, 2008, we began a phased implementation of a new information technology system to be used as our accounting system. The implementation is expected to be completed in multiple phases through fiscal 2010. The transition to the new information technology system includes a significant effort in the testing of the system prior to implementation, training of employees who will be using the system and updating of our internal control process and procedures that will be impacted by the implementation. During each phase of the implementation, an appropriate level of testing and monitoring of the financial results recorded in the system will be conducted and our management will update the system of internal control over the impacted areas.
During the year ended January 31, 2008, our corporate operations and two of our twenty operating business units (representing approximately 10% of total consolidated revenues on a full year basis) were migrated to the new system. This migration did not materially affect our internal control over financial reporting because of the relatively low level of activity being performed in the new system. This phased implementation will materially affect our internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred in the fourth quarter of the annual period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Managements Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness, as of January 31, 2008, of our internal control over financial reporting based on the framework established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has assessed in its evaluation the effectiveness of our internal control over financial reporting as of January 31, 2008 and has concluded that our internal control over financial reporting as of that date was effective.
Deloitte & Touche LLP, an independent registered public accounting firm, audited our consolidated financial statements included in this Annual Report on Form 10-K and our internal control over financial reporting, and that firms report on our internal control over financial reporting is set forth below.
SAIC, Inc. Annual Report 43
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
SAIC, Inc.
San Diego, CA
We have audited the internal control over financial reporting of SAIC, Inc. and subsidiaries (the Company) as of January 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2008, of the Company and our report dated March 25, 2008, expressed an unqualified opinion on those financial statements and included an explanatory paragraph for the adoption of new accounting standards relating to share-based payment and defined benefit pension obligations.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 25, 2008
44 SAIC, Inc. Annual Report
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None.
SAIC, Inc. Annual Report 45
Item 10. Directors, Executive Officers and Corporate Governance
For certain information required by Item 10 with respect to our executive officers, see Executive and Other Key Officers of the Registrant at the end of Part I of this Annual Report on Form 10-K. For additional information required by Item 10 with respect to our executive officers and directors, including our audit committee and audit committee financial experts, and procedures by which stockholders may recommend nominees to our board of directors, see the information set forth under the captions Election of Directors, Corporate Governance and Other Information appearing in the 2008 Proxy Statement, which information is incorporated by reference into this Annual Report on Form 10-K.
We have adopted a code of business ethics that applies to our principal executive officer and our senior financial officers. A copy of our Code of Ethics for Principal Executive Officer and Senior Financial Officers was filed as Exhibit 14 to the Annual Report of Science Applications International Corporation on Form 10-K for the fiscal year ended January 31, 2004 and is also available on our website free of charge at www.saic.com. We intend to post on our website any material changes to or waivers from our code of business ethics, if any.
Item 11. Executive Compensation
For information required by Item 11 with respect to executive compensation, see the information set forth under the captions Compensation Discussion and Analysis, Executive Compensation and Director Compensation in the 2008 Proxy Statement, which information is incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
For information required by Item 12 with respect to the security ownership of certain beneficial owners and management, see the information set forth under the caption Stock Ownership of Certain Beneficial Owners and Management in the 2008 Proxy Statement, which information is incorporated by reference into this Annual Report on Form 10-K.
Information with respect to our equity compensation plans as of January 31, 2008 is set forth below:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) |
Weighted-average exercise price of outstanding options, warrants and rights(b) |
Number of securities plans (excluding |
||||||
Equity compensation plans approved by security holders (1) |
53,495,394 | (2) | $ | 13.41 | 96,188,698 | (3) | |||
Equity compensation plans not approved by security holders (4) |
| | | (4) | |||||
Total |
53,495,394 | $ | 13.41 | 96,188,698 |
(1) | The following equity compensation plans approved by security holders are included in this plan category: the 1999 Stock Incentive Plan, the 2006 Equity Incentive Plan and the 2006 Employee Stock Purchase Plan. |
(2) | Represents shares of our stock reserved for issuance upon the exercise of outstanding options awarded under the 2006 Equity Incentive Plan and the 1999 Stock Incentive Plan. Does not include shares to be issued pursuant to purchase rights under the 2006 Employee Stock Purchase Plan. |
(3) | Represents 10,665,929 shares of our stock under the 2006 Employee Stock Purchase Plan and 85,522,769 shares under the 2006 Equity Incentive Plan. The maximum number of shares initially available for issuance under the 2006 Employee Stock Purchase Plan was 9 million. The 2006 Employee Stock Purchase Plan provides for an automatic increase to the share reserve on the first day of each fiscal year beginning on February 1, 2007 in an amount equal to the lesser of (i) 9 million shares, (ii) two percent of the number of shares of the Companys common stock outstanding on the last day of the immediately preceding fiscal year (measured on an as-converted basis with respect to outstanding shares of Class A preferred stock) or (iii) a number determined by the compensation committee of the board of directors. The maximum number of shares initially available for issuance under the 2006 Equity Incentive Plan was 75 million. The 2006 Equity Incentive Plan provides for an automatic increase to the share reserve on the first day of each fiscal year beginning on February 1, 2007 in an amount equal to the lesser of (i) 30 million shares, (ii) five percent of the number of shares of the Companys common stock outstanding on the last day of the immediately preceding fiscal year (measured on an as-converted basis with respect to outstanding shares of Class A preferred stock) or (iii) a number determined by the board of directors or compensation committee. Those shares (i) that are issued under the 2006 Equity Incentive Plan that are forfeited or repurchased by the Company at the original purchase price or less or that are issuable upon exercise of awards granted under the Plan that expire or become unexercisable for any reason after their grant date without having been exercised in full, (ii) that are withheld from an option or stock award pursuant to a Company-approved net exercise provision, (iii) that are retained upon exercise of a stock appreciation right or (iv) that are not delivered to or are award shares surrendered by a holder in consideration for applicable tax withholding will continue to be available for issuance under the Plan. |
46 SAIC, Inc. Annual Report
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(4) | The Stock Compensation Plan and the Management Stock Compensation Plan have not been approved by security holders and are included in this plan category. These plans do not provide for a maximum number of shares available for future issuance. |
Some of the principal features of the Stock Compensation Plan and the Management Stock Compensation Plan, together referred to as the Stock Compensation Plans, are summarized below, which summary is qualified in its entirety by the full text of the Stock Compensation Plans. Stockholder approval of the Stock Compensation Plans was not required.
Summary of the Stock Compensation Plans
The Stock Compensation Plans have been adopted to provide a long-term incentive to key employees by making deferred awards of shares of our stock. All officers and employees are eligible to receive awards under the Stock Compensation Plan. However, only a select group of management and highly compensated senior employees are eligible to receive awards under the Management Stock Compensation Plan. We intend to limit participants of the Management Stock Compensation Plan to individuals that would permit the Plan to be treated as a top hat plan under applicable Internal Revenue Service and Department of Labor Regulations.
The awarding authority (as appointed by our board of directors) designates those key employees receiving awards and the number of share units to be awarded. The number of share units awarded represents an interest in a trust maintained by Wachovia Bank, N.A. as trustee under a trust agreement between the trustee and us. The trust is a special type of trust known as a rabbi trust. In order to avoid current taxation of awards under the Stock Compensation Plans, the trust must permit our creditors to reach the assets of the trust in the event of our bankruptcy or insolvency. Each share unit generally corresponds to one share of stock, but the employee receiving an award of share units will not have a direct ownership interest in the shares of stock represented by the share units.
The awarding authority will establish a vesting schedule of not more than seven years for each account in the trust. Awards granted prior to January 1, 2006 will generally vest at the rate of one-third at the end of each of the fifth, sixth and seventh year following the date of award. The death of a participant or a change in control of us will result in full vesting of an award. A participant will forfeit any unvested portions of the account if the participants employment terminates for any reason other than death. We receive the benefit of forfeited amounts either by return of shares to us or use of the forfeitures to satisfy future awards under the Stock Compensation Plans.
Awards issued on or after January 1, 2006 will generally vest 100% at the end of the fourth year following the date of award. Participants of the Stock Compensation Plan receive a lump sum distribution of their awards in shares of stock once they become vested while participants of the Management Stock Compensation Plan receive a distribution of their awards in shares of stock following termination or retirement. Participants will be taxed on the value of any amounts distributed from the Stock Compensation Plans at the time of the distribution.
The day-to-day administration of the Stock Compensation Plans is provided by the nonqualified plans committee appointed by our board of directors. We have the right to amend or terminate the Stock Compensation Plans at any time and for any reason.
Item 13. Certain Relationships and Related Transactions, and Director Independence
For information required by Item 13 with respect to certain relationships and related transactions and the independence of our directors and nominees, see the information set forth under the caption Corporate Governance in the 2008 Proxy Statement, which information is incorporated by reference into this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
For information required by Item 14 with respect to principal accounting fees and services, see the information set forth under the caption Audit Matters in the 2008 Proxy Statement, which information is incorporated by reference into this Annual Report on Form 10-K.
SAIC, Inc. Annual Report 47
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the report:
1. Financial Statements
Our consolidated financial statements are attached hereto and listed on the Index to Consolidated Financial Statements set forth on page F-1 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
3. Exhibits
Exhibit Number |
Description of Exhibit | |
2.1 | Agreement and Plan of Merger, as amended and restated as of July 24, 2006, by and among Science Applications International Corporation, Registrant and SAIC Merger Sub, Inc. Incorporated by reference to Exhibit 2.1 to Registrants Post-Effective Amendment No. 3 to Form S-4 Registration Statement No. 333-128022, filed on July 25, 2006. | |
3.1 | Restated Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.2 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2007 as filed December 11, 2007 with the SEC. | |
3.2 | Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3.3 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2007 as filed December 11, 2007 with the SEC. | |
4.1 | Form of Indenture between Science Applications International Corporation and The Chase Manhattan Bank, as Trustee. Incorporated by reference to Exhibit 4.1 to Science Applications International Corporations Amendment No. 1 to Form S-3 Registration No. 333-37117 filed on November 19, 1997. | |
4.2 | Indenture dated June 28, 2002 between Science Applications International Corporation and JPMorgan Chase Bank, as trustee. Incorporated by reference to Exhibit 4.2 to Science Applications International Corporations Current Report on Form 8-K as filed July 3, 2002 with the SEC. SEC File No: 0-12771. | |
4.3 | First Supplemental Indenture, dated October 13, 2006, by and among Science Applications International Corporation, Registrant and The Bank of New York Trust Company, N.A., as successor trustee to JPMorgan Chase f/k/a The Chase Manhattan Bank. Incorporated by reference to Exhibit 4.1 to Registrants Current Report on Form 8-K as filed October 17, 2006 with the SEC. | |
4.4 | First Supplemental Indenture, dated October 13, 2006, by and among Science Applications International Corporation, between Registrant and The Bank of New York Trust Company, N.A., as successor trustee to JPMorgan Chase Bank, N.A. Incorporated by reference to Exhibit 4.2 to Registrants Current Report on Form 8-K as filed October 17, 2006 with the SEC. | |
10.1 | Assignment and Assumption Agreement, dated October 16, 2006, between Registrant and Science Applications International Corporation. Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K as filed October 17, 2006 with the SEC. | |
10.2 | Guaranty of Registrant in favor of Citicorp USA, Inc, in its capacity as administrative agent, and other lenders. Incorporated by reference to Exhibit 10.2 to Registrants Current Report on Form 8-K as filed October 17, 2006 with the SEC. | |
10.3* | Registrants 2006 Equity Incentive Plan (as amended June 8, 2007). Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K as filed on June 14, 2007 with the SEC. | |
10.4* | Science Applications International Corporations Stock Compensation Plan, as amended and restated effective January 1, 2005. Incorporated by reference to Exhibit 10.3 to Science Applications International Corporation s Current Report on Form 8-K as filed on April 3, 2006 with the SEC. | |
10.5* | Science Applications International Corporations Management Stock Compensation Plan, as amended and restated effective January 1, 2005. Incorporated by reference to Exhibit 10.2 to Science Applications International Corporations Current Report on Form 8-K as filed on April 3, 2006 with the SEC. | |
10.6* | Science Applications International Corporations Keystaff Deferral Plan, as amended and restated effective January 1, 2005. Incorporated by reference to Exhibit 10.4 to Science Applications International Corporations Current Report on Form 8-K as filed on April 3, 2006 with the SEC. | |
10.7* | Science Applications International Corporations Key Executive Stock Deferral Plan, as amended and restated effective January 1, 2005. Incorporated by reference to Exhibit 10.1 to Science Applications International Corporations Current Report on Form 8-K as filed March 1, 2006 with the SEC. |
48 SAIC, Inc. Annual Report
PART IV
Exhibit Number |
Description of Exhibit | |
10.8* | Registrants 2006 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.25 to Registrants Post-Effective Amendment No. 3 to Form S-4 Registration Statement No. 333-128022, filed on July 25, 2006. | |
10.9* | Form of Stock Award Agreement of Registrants 2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.3 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006 as filed on December 13, 2006 with the SEC. | |
10.10* | Form of Nonstatutory Stock Option Agreement of Registrants 2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006 as filed on December 13, 2006 with the SEC. | |
10.11* | Form of Stock Award Agreement (Non-Employee Directors) of Registrants 2006 Equity Incentive Plan. | |
10.12* | Form of Nonstatutory Stock Option Agreement (Non-Employee Directors) of Registrants 2006 Equity Incentive Plan. | |
10.13* | Science Applications International Corporations 1999 Stock Incentive Plan, as amended through August 15, 1999. Incorporated by reference to Exhibit 10(e) to Science Applications International Corporations Annual Report on Form 10-K for the fiscal year ended January 31, 2000. SEC File No: 0-12771. | |
10.14* | Science Applications International Corporations Bonus Compensation Plan, as restated effective July 9, 1999. Incorporated by reference to Annex III to Science Applications International Corporations Proxy Statement for the 1999 Annual Meeting of Stockholders as filed April 29, 1999 with the SEC. SEC File No: 0-12771. | |
10.15 | Five Year Credit Agreement, dated June 6, 2006, by and among Science Applications International Corporation, Citicorp USA, Inc., as administrative agent, Wachovia Bank, National Association, as syndication agent, and the other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Science Applications International Corporations Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2006 as filed on June 9, 2006 with the SEC. | |
10.16 | Letter Amendment, dated effective August 23, 2006, to Five Year Credit Agreement, dated June 6, 2006, by and among Science Applications International Corporation, Citicorp USA, Inc., as administrative agent, Wachovia Bank, National Association, as syndication agent, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Science Applications International Corporations Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2006 as filed on September 5, 2006 with the SEC. | |
10.17* | Letter Amendment No. 2, dated effective July 31, 2007, to Five Year Credit Agreement, dated June 6, 2006, by and among Science Applications International Corporation, Citicorp USA, Inc., as administrative agent, Wachovia Bank, National Association, as syndication agent, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K as filed on August 1, 2007 with the SEC. | |
10.18* | Employment Agreement dated October 3, 2003, between Kenneth C. Dahlberg and Science Applications International Corporation. Incorporated by reference to Exhibit 10.1 to Science Applications International Corporations Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2003 as filed on December 12, 2003 with the SEC. | |
10.19* | Stock Offer Letter dated October 3, 2003, to Kenneth C. Dahlberg from Science Applications International Corporation. Incorporated by reference to Exhibit 10.2 to Science Applications International Corporations Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2003 as filed on December 12, 2003 with the SEC. | |
10.20 | Stock Purchase Agreement between Science Applications International Corporation and TTI Holding Corporation dated as of November 17, 2004, as amended on February 14, 2005 and March 11, 2005. Incorporated by reference to Exhibit 99.1 to Science Applications International Corporations Current Report on Form 8-K as filed on March 21, 2005 with the SEC. | |
10.21* | Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2007 as filed on June 7, 2007 with the SEC. | |
10.22* | Form of Severance Protection Agreement. Incorporated by reference to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006 as filed on December 13, 2006 with the SEC. | |
10.23* | Employment Letter Agreement between Science Applications International Corporation and Mark Sopp, dated as of November 17, 2005. Incorporated by reference to Exhibit 10.1 to Science Applications International Corporations Current Report on Form 8-K as filed on November 28, 2005 with the SEC. | |
10.24* | Stock Offer Letter dated November 14, 2005 to Mark Sopp from Science Applications International Corporation. Incorporated by reference to Exhibit 10.2 to Science Applications International Corporations Current Report on Form 8-K as filed on November 28, 2005 with the SEC. | |
14 | Registrants Code of Ethics for Principal Executive Officer and Senior Financial Officers. Incorporated by reference to Exhibit 14 to Science Applications International Corporations Annual Report on Form 10-K for the fiscal year ended January 31, 2004 as filed with the SEC on April 16, 2004. |
SAIC, Inc. Annual Report 49
Exhibit Number |
Description of Exhibit | |
18.1 | Letter dated March 25, 2008 from Deloitte & Touche LLP regarding change in Accounting Principle. | |
21 | Subsidiaries of Registrant. | |
23.1 | Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP. | |
31.1 | Certification of Chief Executive Officer adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Executive Compensation Plans and Arrangements |
50 SAIC, Inc. Annual Report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SAIC, Inc. | ||
By | /s/ KENNETH C. DAHLBERG | |
Kenneth C. Dahlberg Chairman of the Board and Chief Executive Officer |
Dated: March 25, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/s/ KENNETH C. DAHLBERG Kenneth C. Dahlberg |
Chairman of the Board and Principal Executive Officer |
March 25, 2008 | ||
/s/ MARK W. SOPP Mark W. Sopp |
Principal Financial Officer |
March 25, 2008 | ||
/s/ JOHN R. HARTLEY John R. Hartley |
Principal Accounting Officer |
March 25, 2008 | ||
/s/ FRANCE A. CÓRDOVA France A. Córdova |
Director |
March 25, 2008 | ||
/s/ WOLFGANG H. DEMISCH Wolfgang H. Demisch |
Director |
March 25, 2008 | ||
/s/ JERE A. DRUMMOND Jere A. Drummond |
Director |
March 25, 2008 | ||
/s/ JOHN J. HAMRE John J. Hamre |
Director |
March 25, 2008 | ||
/s/ MIRIAM E. JOHN Miriam E. John |
Director |
March 25, 2008 | ||
/s/ ANITA K. JONES Anita K. Jones |
Director |
March 25, 2008 | ||
/s/ JOHN P. JUMPER John P. Jumper |
Director |
March 25, 2008 | ||
/s/ HARRY M.J. KRAEMER, JR. Harry M. J. Kraemer, Jr. |
Director |
March 25, 2008 | ||
/s/ EDWARD J. SANDERSON, JR. Edward J. Sanderson, Jr. |
Director |
March 25, 2008 | ||
/s/ LOUIS A. SIMPSON Louis A. Simpson |
Director |
March 25, 2008 | ||
/s/ A. THOMAS YOUNG A. Thomas Young |
Director |
March 25, 2008 |
SAIC, Inc. Annual Report 51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
F-2 | ||
CONSOLIDATED FINANCIAL STATEMENTS |
||
Consolidated Statements of Income for each of the three years in the period ended January 31, 2008 |
F-3 | |
F-4 | ||
F-5 | ||
F-6 | ||
F-7 |
Financial statement schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or the notes thereto.
SAIC, Inc. Annual Report F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
SAIC, Inc.
San Diego, CA
We have audited the accompanying consolidated balance sheets of SAIC, Inc. and subsidiaries (the Company) as of January 31, 2008 and 2007, and the related consolidated statements of income, stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended January 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of SAIC, Inc. and subsidiaries as of January 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the adoption of SFAS No. 123(R), Share-Based Payment, effective February 1, 2006, and its method of accounting for the adoption of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, effective January 31, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of January 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25, 2008, expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 25, 2008
F-2 SAIC, Inc. Annual Report
CONSOLIDATED STATEMENTS OF INCOME
Year Ended January 31 | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in millions, except per share amounts) |
||||||||||||
Revenues |
$ | 8,935 | $ | 8,061 | $ | 7,518 | ||||||
Costs and expenses: |
||||||||||||
Cost of revenues |
7,698 | 6,974 | 6,568 | |||||||||
Selling, general and administrative expenses |
571 | 515 | 480 | |||||||||
Operating income |
666 | 572 | 470 | |||||||||
Non-operating income (expense): |
||||||||||||
Interest income |
56 | 116 | 96 | |||||||||
Interest expense |
(90 | ) | (92 | ) | (88 | ) | ||||||
Minority interest in income of consolidated subsidiaries |
(3 | ) | (5 | ) | (3 | ) | ||||||
Other income (expense), net |
(3 | ) | 5 | (7 | ) | |||||||
Income from continuing operations before income taxes |
626 | 596 | 468 | |||||||||
Provision for income taxes |
240 | 231 | 133 | |||||||||
Income from continuing operations |
386 | 365 | 335 | |||||||||
Discontinued operations (Note 17): |
||||||||||||
Income from discontinued operations before minority interest in income of consolidated subsidiaries and income taxes (including net gain on sales of $34 million, $19 million and $871 million in fiscal 2008, 2007 and 2006, respectively) |
40 | 40 | 902 | |||||||||
Minority interest in income of consolidated subsidiaries |
(2 | ) | (9 | ) | (11 | ) | ||||||
Provision for income taxes |
9 | 5 | 299 | |||||||||
Income from discontinued operations |
29 | 26 | 592 | |||||||||
Net income |
$ | 415 | $ | 391 | $ | 927 | ||||||
Earnings per share: |
||||||||||||
Basic: |
||||||||||||
Income from continuing operations |
$ | .96 | $ | 1.04 | $ | .96 | ||||||
Income from discontinued operations |
.07 | .07 | 1.70 | |||||||||
$ | 1.03 | $ | 1.11 | $ | 2.66 | |||||||
Diluted: |
||||||||||||
Income from continuing operations |
$ | .93 | $ | 1.00 | $ | .93 | ||||||
Income from discontinued operations |
.07 | .07 | 1.65 | |||||||||
$ | 1.00 | $ | 1.07 | $ | 2.58 | |||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
404 | 352 | 348 | |||||||||
Diluted |
417 | 364 | 359 |
See accompanying notes to consolidated financial statements.
SAIC, Inc. Annual Report F-3
CONSOLIDATED BALANCE SHEETS
January 31 | ||||||||
2008 | 2007 | |||||||
(in millions) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,096 | $ | 1,109 | ||||
Receivables, net |
1,886 | 1,598 | ||||||
Inventory, prepaid expenses and other current assets |
255 | 190 | ||||||
Assets of discontinued operations |
| 85 | ||||||
Total current assets |
3,237 | 2,982 | ||||||
Property, plant and equipment, net |
393 | 382 | ||||||
Intangible assets, net |
102 | 109 | ||||||
Goodwill |
1,077 | 920 | ||||||
Deferred income taxes |
71 | 57 | ||||||
Other assets |
101 | 109 | ||||||
$ | 4,981 | $ | 4,559 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 1,111 | $ | 1,032 | ||||
Accrued payroll and employee benefits |
562 | 507 | ||||||
Income taxes payable |
29 | 73 | ||||||
Notes payable and long-term debt, current portion |
130 | 29 | ||||||
Liabilities of discontinued operations |
| 25 | ||||||
Total current liabilities |
1,832 | 1,666 | ||||||
Notes payable and long-term debt, net of current portion |
1,098 | 1,199 | ||||||
Other long-term liabilities |
150 | 102 | ||||||
Commitments and contingencies (Notes 14 and 18) |
||||||||
Minority interest in consolidated subsidiaries |
| 56 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.0001 par value, 1.5 billion shares authorized, 234 million and 320 million shares issued and outstanding at January 31, 2008 and 2007, respectively |
| | ||||||
Common stock, $.0001 par value, 2 billion shares authorized, 179 million and 92 million shares issued and outstanding at January 31, 2008 and 2007, respectively |
| | ||||||
Additional paid-in capital |
1,836 | 1,557 | ||||||
Retained earnings |
88 | 6 | ||||||
Accumulated other comprehensive loss |
(23 | ) | (27 | ) | ||||
Total stockholders equity |
1,901 | 1,536 | ||||||
$ | 4,981 | $ | 4,559 |
See accompanying notes to consolidated financial statements.
F-4 SAIC, Inc. Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
Shares | Additional |
Retained |
Other |
Accumulated |
Comprehensive | ||||||||||||||||||||
Common stock |
Preferred stock |
||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Balance at February 1, 2005 |
| 363 | $ | 2,280 | $ | 212 | $ | (105 | ) | $ | (36 | ) | |||||||||||||
Net income |
| | | 927 | | | $ | 927 | |||||||||||||||||
Other comprehensive income |
| | | | | 4 | 4 | ||||||||||||||||||
Issuances of stock |
| 27 | 443 | | | | | ||||||||||||||||||
Repurchases of stock |
| (47 | ) | (283 | ) | (724 | ) | | | | |||||||||||||||
Income tax benefit from employee stock transactions |
| | 67 | | | | | ||||||||||||||||||
Stock-based compensation |
| | 1 | | | | | ||||||||||||||||||
Unearned stock compensation, net of amortization |
| | | | 21 | | | ||||||||||||||||||
Balance at January 31, 2006 |
| 343 | 2,508 | 415 | (84 | ) | (32 | ) | $ | 931 | |||||||||||||||
Net income |
| | | 391 | | | $ | 391 | |||||||||||||||||
Other comprehensive income |
| | | | | 15 | 15 | ||||||||||||||||||
Initial public offering of common stock |
86 | | 1,243 | | | | | ||||||||||||||||||
Issuances of preferred stock and other stock transactions |
| 21 | 289 | | | | | ||||||||||||||||||
Repurchases of stock |
(2 | ) | (36 | ) | (267 | ) | (602 | ) | | | | ||||||||||||||
Conversion of preferred stock to common stock |
8 | (8 | ) | | | | | | |||||||||||||||||
Special dividend |
| | (2,245 | ) | (198 | ) | | | | ||||||||||||||||
Income tax benefit from employee stock transactions |
| | 41 | | | | | ||||||||||||||||||
Stock-based compensation |
| | 44 | | 28 | | | ||||||||||||||||||
Adjustment to initially apply FASB Statement No. 158, net of tax |
| | | | | (10 | ) | | |||||||||||||||||
Elimination of unearned compensation upon modification of stock awards |
| | (56 | ) | | 56 | | | |||||||||||||||||
Balance at January 31, 2007 |
92 | 320 | 1,557 | 6 | | (27 | ) | $ | 406 | ||||||||||||||||
Net income |
| | | 415 | | | $ | 415 | |||||||||||||||||
Other comprehensive income |
| | | | | 4 | 4 | ||||||||||||||||||
Issuances of preferred stock and other stock transactions |
| 28 | 292 | | | | | ||||||||||||||||||
Repurchases of stock |
(12 | ) | (15 | ) | (166 | ) | (332 | ) | | | | ||||||||||||||
Conversion of preferred stock to common stock |
99 | (99 | ) | | | | | | |||||||||||||||||
Income tax benefit from employee stock transactions |
| | 64 | | | | | ||||||||||||||||||
Stock-based compensation |
| | 89 | | | | | ||||||||||||||||||
Adjustment to initially apply FIN 48, net of tax |
| | | (1 | ) | | | | |||||||||||||||||
Balance at January 31, 2008 |
179 | 234 | $ | 1,836 | $ | 88 | $ | | $ | (23 | ) | $ | 419 |
See accompanying notes to consolidated financial statements.
SAIC, Inc. Annual Report F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 31 | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in millions) | ||||||||||||
Cash flows from operations: |
||||||||||||
Net income |
$ | 415 | $ | 391 | $ | 927 | ||||||
Income from discontinued operations |
(29 | ) | (26 | ) | (592 | ) | ||||||
Adjustments to reconcile net income to net cash provided by operations: |
||||||||||||
Depreciation and amortization |
80 | 71 | 68 | |||||||||
Stock-based compensation |
89 | 64 | 39 | |||||||||
Excess tax benefits from stock-based compensation |
(64 | ) | (9 | ) | | |||||||
Other non-cash items |
24 | 22 | 16 | |||||||||
Increase (decrease) in cash and cash equivalents, excluding effects of acquisitions and divestitures, resulting from changes in: |
||||||||||||
Receivables |
(237 | ) | (68 | ) | 49 | |||||||
Inventory, prepaid expenses and other current assets |
(46 | ) | 8 | 41 | ||||||||
Deferred income taxes |
(4 | ) | 3 | (42 | ) | |||||||
Other assets |
(5 | ) | 2 | (19 | ) | |||||||
Accounts payable and accrued liabilities |
47 | 33 | 53 | |||||||||
Accrued payroll and employee benefits |
54 | 97 | 95 | |||||||||
Income taxes payable |
28 | 108 | (75 | ) | ||||||||
Other long-term liabilities |
(7 | ) | (3 | ) | 13 | |||||||
Total cash flows provided by operations |
345 | 693 | 573 | |||||||||
Cash flows from investing activities: |
||||||||||||
Expenditures for property, plant and equipment |
(61 | ) | (73 | ) | (52 | ) | ||||||
Acquisitions of businesses, net of cash acquired of $29, $14 and $4 in fiscal 2008, 2007 and 2006, respectively |
(144 | ) | (377 | ) | (212 | ) | ||||||
Payments for businesses acquired in previous years |
(1 | ) | (1 | ) | (14 | ) | ||||||
Purchases of marketable securities available-for-sale |
| (4,258 | ) | (7,852 | ) | |||||||
Proceeds from sales and maturities of marketable securities available-for-sale |
| 5,917 | 7,561 | |||||||||
Other |
3 | 3 | (12 | ) | ||||||||
Total cash flows provided by (used in) investing activities |
(203 | ) | 1,211 | (581 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Payments on notes payable and long-term debt |
(10 | ) | (20 | ) | (40 | ) | ||||||
Sales of stock through initial public offering |
| 1,243 | | |||||||||
Sales of stock and exercise of stock options |
98 | 100 | 155 | |||||||||
Repurchases of stock |
(309 | ) | (724 | ) | (818 | ) | ||||||
Payment of a special dividend |
(2 | ) | (2,439 | ) | | |||||||
Excess tax benefits from stock-based compensation |
64 | 9 | | |||||||||
Other |
2 | (2 | ) | (4 | ) | |||||||
Total cash flows used in financing activities |
(157 | ) | (1,833 | ) | (707 | ) | ||||||
Increase (decrease) in cash and cash equivalents from continuing operations |
(15 | ) | 71 | (715 | ) | |||||||
Cash flows of discontinued operations: |
||||||||||||
Cash provided by (used in) operating activities of discontinued operations |
(3 | ) | 22 | (296 | ) | |||||||
Cash provided by investing activities of discontinued operations |
1 | 15 | 1,063 | |||||||||
Cash used in financing activities of discontinued operations |
| (30 | ) | (6 | ) | |||||||
Increase (decrease) in cash and cash equivalents from discontinued operations |
(2 | ) | 7 | 761 | ||||||||
Total increase (decrease) in cash and cash equivalents |
(17 | ) | 78 | 46 | ||||||||
Cash and cash equivalents at beginning of yearcontinuing operations |
1,109 | 1,001 | 959 | |||||||||
Cash and cash equivalents at beginning of yeardiscontinued operations |
4 | 34 | 30 | |||||||||
Cash and cash equivalents at beginning of year |
1,113 | 1,035 | 989 | |||||||||
Cash and cash equivalents at end of yearcontinuing operations |
1,096 | 1,109 | 1,001 | |||||||||
Cash and cash equivalents at end of yeardiscontinued operations |
| 4 | 34 | |||||||||
Cash and cash equivalents at end of year |
$ | 1,096 | $ | 1,113 | $ | 1,035 |
See accompanying notes to consolidated financial statements.
F-6 SAIC, Inc. Annual Report
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Summary of Significant Accounting Policies:
Reporting Entity
Science Applications International Corporation was formed in 1969. In October 2006, in connection with becoming a publicly-traded company, Science Applications International Corporation completed a merger (reorganization merger) in which it became a 100%-owned subsidiary of SAIC, Inc. Pursuant to the reorganization merger, the shares of common stock of Science Applications International Corporation were exchanged for shares of Class A preferred stock of SAIC, Inc., after which SAIC, Inc. completed an initial public offering of 86.25 million shares of its common stock.
In October 2006, SAIC, Inc. completed the initial public offering of its common stock for net proceeds of $1.24 billion, after deducting underwriting commissions and discounts and other offering-related costs. The common stock began trading on the New York Stock Exchange under the ticker symbol SAI on October 13, 2006.
Nature of Operations and Basis of Presentation
SAIC, Inc. is a provider of scientific, engineering, systems integration and technical services and solutions to all branches of the U.S. military, agencies of the U.S. Department of Defense, the intelligence community, the U.S. Department of Homeland Security and other U.S. Governmental civil agencies, state and local government agencies, foreign governments and customers in selected commercial markets.
The consolidated financial statements include the accounts of SAIC, Inc. and all majority-owned and 100%-owned subsidiaries, including Science Applications International Corporation (collectively referred to as the Company). All intercompany transactions and accounts have been eliminated in consolidation. Outside investors interests in the majority-owned subsidiaries are reflected as minority interest. Unless otherwise noted, references to years are for fiscal years ended January 31. For example, the fiscal year ended January 31, 2008 is referred to as fiscal 2008 in these notes to consolidated financial statements.
Reorganization Merger
Pursuant to the October 2006 reorganization merger, each share of Class A common stock and Class B common stock of Science Applications International Corporation was exchanged for two shares and 40 shares, respectively, of Class A preferred stock of SAIC, Inc. The number and exercise price of stock options outstanding were adjusted for this exchange.
The shares of Class A preferred stock of SAIC, Inc. were allocated 20% to series A-1 preferred stock, 20% to series A-2 preferred stock, 30% to series A-3 preferred stock, and 30% to series A-4 preferred stock. The different series were identical, except for applicable restriction periods. Shares of Class A preferred stock were not transferable or convertible into common stock until the applicable restriction periods expired. On October 9, 2007, each share of series A-1, A-2, A-3 and A-4 preferred stock was reclassified as one share of Class A preferred stock without any series designation. All applicable restriction periods lapsed prior to the reclassification as Class A preferred stock. When shares of Class A preferred stock are sold or transferred to other than a permitted transferee, as defined in the certificate of incorporation of SAIC, Inc., the shares convert into common stock on a one-for-one basis.
Special Dividend
Prior to the October 2006 reorganization merger and the initial public offering, the board of directors of Science Applications International Corporation declared a special dividend of $15 per share of Class A common stock and $300 per share of Class B common stock to holders of record as of October 12, 2006. The stock options outstanding as of the dividend record date were adjusted to maintain the pre-dividend fair value. This adjustment resulted in an increase in the number of options outstanding and a reduction in the exercise price of each option outstanding (Note 10). Stock-based compensation was not affected by this adjustment as it was required by the terms of the 1999 Stock Incentive Plan. The special dividend of $2.45 billion was paid in November 2006.
Operating Cycle
The Companys operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. Contract related assets and liabilities are classified as current assets and current liabilities.
SAIC, Inc. Annual Report F-7
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
On July 13, 2007, the Company completed a reorganization transaction involving AMSEC LLC. Before this transaction was completed, AMSEC LLC was jointly owned 55% by the Company and 45% by another party, and AMSEC LLCs results were reported as a consolidated majority-owned subsidiary of the Company within the Government segment. The reorganization transaction resulted in the disposition of the Companys 55% interest in AMSEC LLC, in exchange for the acquisition by the Company of certain divisions and subsidiaries of AMSEC LLC. The Company no longer owns any interest in AMSEC LLC nor are there any minority investors in any consolidated subsidiary. On October 27, 2006, the Company completed the sale of its majority-owned subsidiary, ANXeBusiness Corp. (ANX). On March 15, 2005, the Company completed the sale of its subsidiary, Telcordia Technologies, Inc. (Telcordia). The operating results of AMSEC LLC (other than the divisions and subsidiaries that the Company acquired in the reorganization transaction), ANX and Telcordia have been classified as discontinued operations (Note 17) for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an on-going basis including those relating to allowances for doubtful accounts, inventories, fair value and impairment of intangible assets and goodwill, income taxes, estimated profitability of long-term contracts, pension benefits, stock-based compensation expense, contingencies and litigation. Estimates have been prepared by management on the basis of the most current and best available information and actual results could differ from those estimates.
Revenue Recognition
The Companys revenues are generated primarily from contracts with the U.S. Government, commercial customers, and various international, state and local governments or from subcontracts with other contractors engaged in work with such customers. The Company performs under a variety of contracts, some of which provide for reimbursement of cost plus fees, or target cost and fee with risk sharing, and others which are fixed-price or time-and-materials type contracts. Revenues and fees on these contracts are primarily recognized using the percentage-of-completion method of accounting, most often based on contract costs incurred to date compared with total estimated costs at completion (cost-to-cost method). The Company also uses the efforts-expended method of percentage-of-completion using measures such as labor dollars for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. For example, the efforts-expended method is utilized when there are significant amounts of materials or hardware incurred on a contract for which procurement of materials does not represent significant progress on the contract. Additionally, the Company utilizes the units-of-delivery method under percentage-of-completion on contracts where separate units of output are produced. Under the units-of-delivery method, revenue is recognized when the units are delivered to the customer, provided that all other requirements for revenue recognition have been met. On contracts that provide for incentive or award fees, the Company includes an estimate of the ultimate incentive or award fee to be received on the contract in the estimate of contract revenues for purposes of applying the percentage-of-completion method of accounting.
Revenues from services and maintenance contracts are recognized over the term of the respective contracts as the services are performed and revenue is earned. Revenues from unit-priced contracts are recognized as transactions are processed based on objective measures of output. Revenues from the sale of manufactured products are recorded upon passage of title and risk of loss to the customer, which is generally upon delivery, provided that all other requirements for revenue recognition have been met. The Company evaluates its contracts for multiple deliverables and, when appropriate, segments the contracts into separate units of accounting for proper revenue recognition.
The Company provides for anticipated losses on contracts by recording an expense during the period in which the losses are first identified. Amounts billed and collected but not yet recognized as revenue under certain types of contracts are deferred. Contract costs incurred for U.S. Government contracts, including indirect costs, are subject to audit and adjustment through negotiations between the Company and government representatives. The Company has agreed upon and settled indirect contract costs through fiscal 2004. Revenues on U.S. Government contracts have been recorded in amounts that are expected to be realized upon final settlement.
The Companys accounts receivable include unbilled receivables, which consist of costs and fees billable on contract completion or other specified events, the majority of which is expected to be billed and collected within one year. Unbilled receivables are stated at estimated realizable value. Contract retentions are billed when the Company has negotiated final indirect rates with the U.S. Government and, once billed, are subject to audit and approval by government representatives. Consequently, the timing of collection of retention balances is outside the Companys control. Based on the Companys historical experience, the majority of the retention balances are expected to be collected beyond one year.
F-8 SAIC, Inc. Annual Report
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract claims are unanticipated additional costs incurred but not provided for in the executed contract price that the Company seeks to recover from the customer. Such costs are expensed as incurred. Additional revenue related to contract claims is recognized when the amounts are awarded by the customer.
Pre-contract Costs
Costs incurred on projects accounted for under the percentage-of-completion accounting method may be recognized as pre-contract costs and deferred as assets (inventory, prepaid expenses and other current assets) when the Company has been requested by the customer to begin work under a new arrangement prior to contract execution. The Company records pre-contract costs when formal contracts have not yet been executed, and it is probable that the Company will recover the costs through the issuance of a contract. When the formal contract has been executed, the costs are recorded to the contract and revenue is recognized based on the percentage-of-completion method of accounting.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original maturities of three months or less. Cash equivalents are invested in institutional money market funds, money market accounts and time deposits.
Investments
Investments in affiliates and corporate joint ventures where the Company has an ownership interest representing between 20% and 50%, or over which the Company has the ability to exercise significant influence, are accounted for under the equity method whereby the Company recognizes its proportionate share of the affiliates net income or loss and does not consolidate the affiliates individual assets and liabilities. The Company recognized revenues of $21 million, $16 million and $15 million on sales to these equity method investees during the years ended January 31, 2008, 2007 and 2006, respectively.
Equity investments in affiliates over which the Company does not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or adjusted cost net of other-than-temporary impairments.
Management evaluates its investments in private equity securities for other-than-temporary impairment at each balance sheet date. If management determines that an other-than-temporary decline in the fair value of an investment has occurred, an impairment loss is recognized to reduce the security to its estimated fair value (Note 11).
Inventories
Inventories are valued at the lower of cost or estimated net realizable value. Raw material inventory is valued using the average cost or first-in, first-out methods and consists of material used in the production of border, port and mobile security products. Work-in-process inventory, which consists of border, port and mobile security products, includes raw material costs plus labor costs, including fringe benefits, and allocable overhead costs. Finished goods inventory consists primarily of purchased finished goods for resale to customers in addition to manufactured border, port and mobile security products. The Company evaluates inventory against historical and planned usage to determine appropriate provisions for obsolete inventory.
Property, Plant and Equipment
Depreciation of buildings is recognized using the straight-line method over estimated useful lives of ten to forty years while the related improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of ten years. Depreciation of equipment is recognized using the straight-line method or the declining-balance method over the estimated useful lives of three to nine years.
Purchases of property and equipment as well as costs associated with major renewals and betterments are capitalized. Maintenance, repairs and minor renewals and betterments are expensed as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized.
The Company evaluates its long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances have made the recovery of an assets carrying value unlikely and the carrying amount of the asset exceeds its estimated future undiscounted cash flows. When the carrying amount of the asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized to reduce the assets carrying amount to its estimated fair value based on the present value of its estimated future cash flows.
SAIC, Inc. Annual Report F-9
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Intangible Assets
Goodwill (Note 5) is assessed for impairment annually and whenever events or circumstances indicate a condition of impairment may exist. The goodwill impairment test is a two-step process performed at the reporting unit level. The first step consists of estimating the fair values of each of the reporting units based on a combination of two valuation methods, a market approach and an income approach. Fair value computed using these two methods is determined using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, comparable market data with a consistent industry grouping, and the cost of capital. The estimated fair values are compared with the carrying values of the reporting units, which include the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting units identifiable assets and liabilities from its estimated fair value calculated in the first step. The impairment expense represents the excess of the carrying amount of the reporting units goodwill over the implied fair value of the reporting units goodwill.
During the fourth quarter ended January 31, 2008, the Company changed the date of its annual goodwill impairment assessment from the beginning of the final month of the fourth quarter to the beginning of the fourth quarter. This change was performed to better support the completion of the assessment prior to the Companys new 60-day filing requirement for its Annual Report on Form 10-K as an accelerated filer for the year ended January 31, 2008, and in order to better align the timing of this assessment with the Companys normal process for updating its strategic plan and forecasts. The Company believes that the resulting change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. The goodwill impairment tests performed in fiscal years 2008, 2007, and 2006 did not result in any impairment of goodwill. The Company determined that the change in accounting principle related to the annual testing date is preferable under the circumstances and does not result in adjustments to the financial statements when applied retrospectively.
Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives of one to fifteen years. Intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that a condition of impairment may exist. Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Income Taxes
Provision for income taxes is recorded utilizing the liability method in accordance with Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes and related interpretations. The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities on an annual basis (Note 12). Under the liability method, changes in tax rates and laws are reflected in income in the period such changes are enacted.
The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based on current tax law and include the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 on February 1, 2007 (Note 12). The Company recognizes liabilities for uncertain tax positions on open tax years when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured at the Companys best estimate of the taxes ultimately expected to be paid. A significant portion of the Companys income taxes payable balance is comprised of liabilities for uncertain tax positions.
Stock-Based Compensation
On February 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (Note 10). This statement requires that the Company recognize as compensation expense the fair value of all stock-based awards, including stock options, granted to employees and directors in exchange for services over the requisite service period, which is typically the vesting period. SFAS No. 123(R) requires that the Company recognize as compensation expense the fair value of any discount greater than 5% on employee stock purchases made under its employee stock purchase plan (ESPP).
F-10 SAIC, Inc. Annual Report
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Defined Benefit Plans
The Company sponsors a defined benefit plan for eligible employees of its United Kingdom subsidiary that perform services on a specific customer contract. The Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132(R)) on January 31, 2007 (Note 9).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable, short-term investments, foreign currency forward exchange contracts, and interest rate derivative contracts. At January 31, 2008, the Companys cash and cash equivalents, which include money market funds and money market accounts, bear variable interest rates.
Although credit risk is limited, the Companys receivables are concentrated with its principal customers, which are the various agencies of the U.S. Government and customers engaged in work for the U.S. Government.
Fair Value of Financial Instruments
The fair value of financial instruments is determined based on quoted market prices, if available, or managements best estimate. It is managements belief that the carrying amounts of the Companys financial instruments, which include cash equivalents and long-term investments in private equity securities, are reasonable estimates of their related fair values. Cash equivalents are recorded at fair value. The fair value of long-term investments in private equity securities is estimated using various valuation techniques and factors, such as discounted cash flow models, market prices of comparable companies and recent capital transactions of portfolio companies. The fair value of long-term debt (Note 7) is estimated based on quoted market prices for similar instruments and current rates offered to the Company for similar debt with the same remaining maturities.
Foreign Currency
Financial statements of consolidated international subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for revenues, expenses, gains and losses. Translation adjustments are recorded as accumulated other comprehensive income (loss) in stockholders equity. Transaction gains and losses are recognized when realized.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for the Company in the first quarter of fiscal 2009 and will be applied prospectively. Subsequent to the issuance of SFAS No. 157, the FASB issued FASB Staff Position No. FAS 157-1 and No. FAS 157-2, which exclude the lease classification measurements under SFAS No. 13 Accounting for Leases from the scope of SFAS No. 157 and delay the effective date on SFAS No. 157 for all non-recurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (Including an Amendment of FASB Statement No. 115). SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Most of the provisions in SFAS No. 159 are elective. This statement is effective for the Company in the first quarter of fiscal 2009 and may be applied prospectively. The Company does not intend to adopt the elective provisions of this statement.
In December 2007, the FASB issued SFAS No. 141(R) Business Combinations. SFAS No. 141(R) changes the requirements for an acquirers recognition and measurement of the assets acquired and liabilities assumed in a business combination. This statement is effective for the Company with respect to all business combinations for which the acquisition date is after January 31, 2009. Adoption is not expected to materially impact the Companys consolidated financial position or results of operations directly when it becomes effective, as the only impact that the statement will have on recorded amounts at that time is that related to disposition of uncertain tax positions related to prior acquisitions. Following the date of adoption of the statement, the resolution of such items at values that differ from recorded amounts will be adjusted through earnings, rather than through goodwill. Adoption of this statement is, however, expected to have significant effect on how acquisition transactions subsequent to January 31, 2009 are reflected in the financial statements.
SAIC, Inc. Annual Report F-11
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements (an amendment of ARB No. 51). SFAS No. 160 requires that noncontrolling (minority) interests be reported as a component of equity, that net income attributable to the parent and to the non-controlling interest be separately identified in the income statement, that changes in a parents ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. This statement is effective for the Company as of February 1, 2009, and shall be applied prospectively except for the presentation and disclosure requirements which shall be applied retrospectively for all periods presented. As of January 31, 2008, the Company does not have any consolidated subsidiaries in which there is a noncontrolling interest. The retrospective presentation and disclosure requirements of this statement will be applied to any prior periods presented in financial statements for the fiscal year ending January 31, 2010, and later periods during which the Company had a consolidated subsidiary with a noncontrolling interest.
In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities (an amendment of FASB Statement No. 133). SFAS No. 161 requires enhanced disclosures about derivative instruments and hedging activities and their effects on an entitys financial position, financial performance, and cash flows. The requirements of this statement are effective for the Company in the first quarter of fiscal 2010. Since this statement only pertains to disclosures in the notes to consolidated financial statements, it will not impact the Companys consolidated financial position and results of operations.
Note 2Earnings Per Share (EPS):
The following EPS information reflects the exchange of shares in the reorganization merger as described in Note 1. Shares of common stock contain the same economic rights as shares of Class A preferred stock, however, holders of Class A preferred stock are entitled to 10 votes per share while holders of common stock are entitled to one vote per share. The computation of EPS by applying the two-class method to the Class A preferred stock does not yield a different result than that provided under the if-converted method. Therefore, the two-class method is not shown below.
Basic EPS is computed by dividing income by the weighted average number of shares outstanding. Stock awards are included in the computation of basic EPS only after the shares become vested. Included in the number of shares of Class A preferred stock issued and outstanding as of January 31, 2008 and 2007 were 10 million shares and 8 million shares, respectively, that were unvested and therefore excluded from the computation of basic EPS. Diluted EPS is computed similar to basic EPS, except the weighted average number of shares outstanding is increased to include the dilutive effect of stock options, unvested stock and other stock-based awards granted under stock-based compensation plans that were outstanding during the periods.
A reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS is as follows:
Year Ended January 31 | ||||||
2008 | 2007 | 2006 | ||||
(in millions) | ||||||
Basic weighted average number of shares outstanding |
404 | 352 | 348 | |||
Add: Dilutive common share equivalents |
||||||
Stock options |
11 | 9 | 8 | |||
Unvested stock awards and other stock-based awards |
2 | 3 | 3 | |||
Diluted weighted average number of shares outstanding |
417 | 364 | 359 | |||
Antidilutive shares excluded (stock options) |
6 | 1 | |
There were no adjustments to income from continuing operations and income from discontinued operations in calculating basic and diluted EPS for the years ended January 31, 2008, 2007 and 2006.
F-12 SAIC, Inc. Annual Report
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3Composition of Certain Financial Statement Captions:
January 31 | ||||||
2008 | 2007 | |||||
(in millions) | ||||||
Receivables, net: |
||||||
Billed less allowance for doubtful accounts of $9 million and $5 million as of January 31, 2008 and 2007, respectively |
$ | 1,419 | $ | 1,204 | ||
Unbilled |
452 | 379 | ||||
Contract retentions |
15 | 15 | ||||
$ | 1,886 | $ | 1,598 | |||
Inventory, prepaid expenses and other current assets: |
||||||
Inventories |
$ | 99 | $ | 50 | ||
Prepaid expenses |
52 | 41 | ||||
Restricted cash |
20 | 22 | ||||
Pre-contract costs (Note 1) |
7 | 7 | ||||
Deferred income taxes |
43 | 21 | ||||
Other |
34 | 49 | ||||
$ | 255 | $ | 190 | |||
Property, plant and equipment, net: |
||||||
Computers and other equipment |
$ | 226 | $ | 199 | ||
Buildings and improvements |
232 | 232 | ||||
Leasehold improvements |
133 | 108 | ||||
Office furniture and fixtures |
50 | 41 | ||||
Land |
47 | 47 | ||||
Construction in progress |
2 | 16 | ||||
690 | 643 | |||||
Less accumulated depreciation and amortization |
297 | 261 | ||||
$ | 393 | $ | 382 | |||
Other assets: |
||||||
Equity method investments |
$ | 26 | $ | 20 | ||
Cost method investments |
22 | 36 | ||||
Other |
53 | 53 | ||||
$ | 101 | $ | 109 | |||
Accounts payable and accrued liabilities: |
||||||
Accounts payable |
$ | 491 | $ | 462 | ||
Accrued liabilities |
465 | 423 | ||||
Collections in excess of revenues on uncompleted contracts and deferred revenue |
155 | 147 | ||||
$ | 1,111 | $ | 1,032 | |||
Accrued payroll and employee benefits: |
||||||
Salaries, bonuses and amounts withheld from employees compensation |
$ | 337 | $ | 300 | ||
Accrued vacation |
208 | 189 | ||||
Accrued contributions to employee benefit plans |
17 | 18 | ||||
$ | 562 | $ | 507 | |||
Other long-term liabilities: |
||||||
Accrued pension liabilities |
$ | 21 | $ | 24 | ||
Deferred compensation |
41 | 43 | ||||
Liability for uncertain tax positions |
28 | | ||||
Other |
60 | 35 | ||||
$ | 150 | $ | 102 |
Note 4Acquisitions:
The Company completed acquisitions of certain businesses in fiscal 2008, 2007 and 2006, which individually and in the aggregate were not considered material business combinations in the year acquired.
In fiscal 2008, the Company completed two acquisitions, one in the Government segment (Note 16) and one in the Commercial segment for an aggregate purchase price of $173 million in cash and $1 million of accrued acquisition
SAIC, Inc. Annual Report F-13
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments. One acquired business is a consulting, engineering, and architectural design company with specific competencies in industrial manufacturing and facilities construction. The other acquired business is an India-based provider of onsite and offshore IT solutions and technology consulting in the science and engineering sector. The preliminary purchase price allocations related to these acquisitions resulted in identifiable intangible assets of $26 million ($24 million assigned to the Government segment and $2 million assigned to the Commercial segment) and goodwill of $118 million ($104 million assigned to the Government segment and $14 million to the Commercial segment), $104 million of which was tax deductible. The intangible assets consisted of customer relationships that are amortizable over a weighted average life of seven years. The Company has not yet obtained all of the information required to complete the purchase price allocations related to these acquisitions. The final purchase price allocations will be completed once the information identified by the Company has been received.
In fiscal 2008, the Company also completed a reorganization transaction resulting in the disposition of its 55% interest in its consolidated majority-owned subsidiary, AMSEC LLC, in exchange for the Companys acquisition of certain divisions and subsidiaries of AMSEC LLC. The Company recorded intangible assets of $7 million and non-tax deductible goodwill of $20 million in the Government segment related to the former AMSEC LLC divisions and subsidiaries acquired in the reorganization. The intangible assets consisted of customer relationships that are amortizable over a weighted average life of nine years.
In fiscal 2007, the Company completed eight acquisitions in its Government segment for an aggregate purchase price of $395 million, which consisted of $392 million in cash and $3 million of accrued acquisition payments. The final purchase price allocations resulted in identifiable intangible assets of $60 million (amortizable over a weighted average life of five years) and goodwill of $305 million, of which $221 million was tax deductible. The intangible assets consisted of customer relationships of $37 million that are amortizable over a weighted average life of six years, software and technology of $19 million that are amortizable over a weighted average life of four years and non-amortizable tradenames of $4 million.
In fiscal 2006, the Company completed four acquisitions for an aggregate purchase price of $234 million, which consisted of $217 million in cash and 781,000 shares of the Companys stock that had a fair value of $17 million on the date of issuance. The final purchase price allocations resulted in identifiable intangible assets of $36 million (amortizable over a weighted average life of seven years) and goodwill of $195 million, $32 million of which was tax deductible. The intangible assets consisted of customer relationships of $17 million that are amortizable over a weighted average life of four years, software and technology of $14 million that are amortizable over a weighted average life of 12 years and other intangible assets of $5 million that are amortizable over a weighted average life of 2 years.
In March 2008, the Company entered into definitive purchase agreements to acquire two companies for an aggregate purchase price of approximately $200 million. These acquisitions are subject to customary closing conditions including termination or expiration of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Note 5Goodwill and Intangible Assets:
The changes in the carrying amount of goodwill by segment were as follows:
Government | Commercial | Total | ||||||||
(in millions) | ||||||||||
Goodwill at January 31, 2006 |
$ | 600 | $ | 24 | $ | 624 | ||||
Acquisitions |
291 | | 291 | |||||||
Foreign currency translation |
| 2 | 2 | |||||||
Adjustments |
6 | (3 | ) | 3 | ||||||
Goodwill at January 31, 2007 |
897 | 23 | 920 | |||||||
Acquisitions |
124 | 14 | 138 | |||||||
Foreign currency translation |
| 1 | 1 | |||||||
Adjustments |
18 | | 18 | |||||||
Goodwill at January 31, 2008 |
$ | 1,039 | $ | 38 | $ | 1,077 |
Goodwill adjustments in fiscal 2008 and 2007 resulted from the finalization of purchase price allocations related to prior year acquisitions. The incremental goodwill of $20 million related to the reorganization transaction of AMSEC LLC in fiscal 2008 is included in the acquisitions amount for the Government segment.
F-14 SAIC, Inc. Annual Report
SAIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets consisted of the following:
January 31 | ||||||||||||||||||
2008 | 2007 | |||||||||||||||||
Gross carrying value |
Accumulated amortization |
Net carrying value |
Gross carrying value |
Accumulated |