CSRA's Q2 Earnings & Revenues Beat Estimates,'18 View Intact

CSRA Inc. (NYSE:CSRA) reported non-GAAP earnings of 46 cents per share in second-quarter fiscal 2018, surpassing the Zacks Consensus Estimate by a penny but down 9.8% on a year-over-year basis.

Revenues of $1.27 billion inched up 0.7% from the year-ago quarter and beat the Zacks Consensus Estimate. Segment-wise, Defense and Intelligence (43.8% of revenues) declined 3.1% to $557 million, while Civil (56.2% of revenues) increased 3.9% to $715 million.

CSRA is benefiting from its domain expertise and strong partnerships with the likes of Amazon (NASDAQ:AMZN) Web Services, ServiceNow Inc. (NYSE:NOW) , Microsoft Corporation (NASDAQ:MSFT) , Cisco Systems Inc. (NASDAQ:CSCO) , VMware Inc. and Oracle Corporation (NYSE:ORCL).

The company is partnering with emerging technology vendors like Perspica and ScienceLogic to predict system outages and suggest preventive maintenance for the company’s data centers. It has also collaborated with Pondera to capture diversified data sources to root out and prevent Medicare fraud.

During the quarter, CSRA successfully defended its largest contract worth $2.4 billion, for the next 10 years, from Department of Defense (DoD) Enterprise IT support.

The company stated that new business wins in the quarter totaled about $900 million or more than $1 billion including the protested wins.

Notably, CSRA’s stock has lost 0.4% year to date, versus the 32.7% rally of the industry.

Program Wins Drive Bookings

Bookings totaled $4.2 billion in the reported quarter, representing a book-to-bill ratio of 3.3 times. Apart from the DoD Enterprise IT support program, the company had other noticeable wins in the quarter.

The five-year $164-million Defense Information Systems Agency (DISA) Endpoint Security Solution (ESS) was one of such programs. CSRA will be working along with Microsoft and McAfee to protect the Defense Department from internal and external cyber threats.

Recently, CSRA launched the Cyber Center of Excellence, which is a virtual center operating out of Columbia, Maryland and ITC in Bossier City, LA.

The Department of Veterans Affairs (VA) awarded CSRA a three-year $158-million task order to digitize the health records of more than 7 million veterans at the RMC in St. Louis, MO.

CSRA also won a four-month $95-million task order to support Federal Emergency Management Agency (FEMA) Surge Call Center. The company is providing assistance to survivors of recent disasters, including hurricanes Harvey, Irma and Maria as well as the California wildfires.

The other wins were from Department of State (DoS) Digitus, Littoral Combat Ship (LCS) Integrated Tactical Trainer (ITT) and Navy Research and Development Establishment (NR&DE) Cloud.

CSRA’s backlog of signed business orders was $17.7 billion, up 14% sequentially. Funded backlog was $2.7 billion, up 11% quarter over quarter.

EBITDA Margin Declines in Q2

Adjusted EBITDA was $198 million, down 2.5% from the year-ago quarter. EBITDA margin of 15.6% contracted 50 basis points (bps) from the year-ago quarter. Management noted that the EBITDA margin surpassed the company’s long-term target of 14-15%.

Contract mix, as a percentage of total revenues, was constant. Management noted that 44% was on fixed price contracts, 21% on time and material contracts and 35% on cost plus contracts.

Selling, general and administrative (SG&A) expenses, as percentage of revenues, fell almost 40 bps on a year-over-year basis to 4%.

Segment operating margin expanded 120 bps on a year-over-year basis to 13.6%. Defense and Intelligence segment operating margin increased 150 bps, while Civil segment operating margin rose 90 bps in the reported quarter.

Cash, Share Buyback, Dividend

Cash & cash equivalents as of Sep 29 was $91 million, down $28 million from the previous quarter.

During the quarter, CSRA returned $18 million to shareholders, including $16 million in dividends and $2 million in share repurchases.

Acquisitions

During the quarter, CSRA completed the acquisition of NES Associates for $104 million, including $101 million in cash.

In October, CSRA announced plans to acquire Praxis Engineering for approximately $235 million in cash. The deal is expected to close in the current quarter.

Reiterates Fiscal 2018 Guidance

CSRA expects year-over-year growth to accelerate in second-half fiscal 2018 and surpass its long-term target of 2-3%. Management believes that new business opportunities scheduled to be awarded in the later part of the year will continue to strengthen the company’s momentum heading into fiscal 2019.

In this regard, CSRA stated that submit volume of $6 billion in total and $5 billion in new work, was ahead of plan. At the end of the quarter, the company had $10 billion in submits outstanding, including about $8 billion in new work pending decision.

For fiscal 2018, revenues are still expected in the range of $5-$5.2 billion. Adjusted EBITDA projection is maintained at the $770-$800 million band.

At the mid-point of the top-line guided range, management expects that about 98% of revenues will come from existing business, up from the previous expectation of 91%. Of the remaining 2%, more than half will come from re-competes and the remainder from new businesses.

EBITDA margin are anticipated to be lower in the second half due to the addition of Praxis’ low-margin business.

Earnings are still estimated in the range of $1.88-2.00 per share. Free cash flow is anticipated in the range of $330-$380 million.

In the third quarter, revenues will benefit from the addition of FEMA program. However, EBITDA and earnings are anticipated to decline sequentially due to seasonality. Nevertheless, both are expected to rebound in the fourth quarter.

CSRA expects earnings to accelerate in the fourth quarter as investments in milCloud 2.0 and other early-stage programs start contributing meaningfully.

Zacks Rank

CSRA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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