Moody's Affirms Ratings, Outlook on Science Applications Int'l (SAIC) Following Review

Moody's Investors Service has confirmed the ratings of Science Applications International Corporation (NYSE: SAIC) ("SAIC"), including the Corporate Family Rating of Ba3. The rating outlook is stable. This action concludes the review for upgrade that commenced on June 16th. The review followed the reduction in adjusted debt from changes in Moody's approach for capitalizing operating leases. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15th. While the reduction of adjusted debt better positions the company's CFR within the Ba3 rating band and could ultimately contribute to upward rating momentum, it alone is insufficient to support a higher rating.

RATINGS RATIONALE

The Corporate Family Rating of Ba3 reflects the company's mid-tier size, well recognized brand name within defense/intelligence services contracting, and more suitable credit metrics for the rating level given the revised approach for capitalizing operating leases. The anticipated FYE 1/31/16 debt/EBITDA ratio, pro forma for acquisition of Scitor Holdings on May 4th, is about 3.7x with a retained cash flow/net debt ratio of just below 20%. The acquisition of Scitor re-establishes SAIC's presence within the intelligence community, which ended upon spin-off from Leidos (September 2013) because Leidos retained those contracts. Greater agency customer diversity expands the range of contract opportunities that can be pursued.

Tempering considerations of the rating include a limited track record as a stand-alone business, competitive intensity and the high pace of industry consolidation. SAIC has a limited record with respect to operating acquired businesses and the Scitor purchase was all-debt funded. Consolidation of the defense services sector is unfolding rapidly and acquisitions will likely remain a part of the company's plans. Federal outlays for defense/intelligence services will probably stop declining in 2016 but operators are becoming more efficient and competitive intensity will remain keen as the government continues emphasizing value in its procurements.

The stable rating outlook considers the good conversion of earnings to free cash flow that defense services companies typically exhibit. Retention of said cash flow could help SAIC reduce debt or the extent of debt for acquisition spending.

The speculative grade liquidity rating of SGL-2, indicating a good short term liquidity profile, reflects the low likelihood of revolver utilization, cash at or above $150 million and expanding covenant headroom into 2016 with term loan reduction.

Ratings:

Outlook Actions:

..Issuer: Science Applications International Corp

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Science Applications International Corp

.... Probability of Default Rating, Confirmed at Ba3-PD

.... Corporate Family Rating, Confirmed at Ba3

....Senior Secured Bank Credit Facility, Confirmed at Ba2 (LGD3)

Affirmations:

..Issuer: Science Applications International Corp

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

Upward rating momentum would depend on revenue and backlog growth, achievement of higher operating margin (approaching 7%), debt/EBITDA in the low 3x range and RCF/net debt above 25%. Downward rating pressure would build with debt/EBITDA in the mid 4x range, free cash flow/debt below 10%, or weakening liquidity.

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