"Operating Income: Up 8 percent to $186 million" -- SAIC Press Release

"SAIC reports 17 pct decline in fiscal 2Q earnings" -- AP

Um, make up your minds, guys. Which was it? Did SAIC kill last quarter, or did it bomb?

Actually, both
The secret behind the conflicting headlines reporting Wednesday evening's earnings from SAIC (NYSE:SAI)? They're both right. On the one hand, the government contractor's fiscal Q2 2009 earnings from continuing operations did rise 8% to $0.26 per share -- just as predicted. On the other hand, this Motley Fool Inside Value recommendation earned less net profit last quarter than one year ago -- a consequence of last summer's divvying up of its AMSEC joint venture with Northrop Grumman (NYSE:NOC).

And is that good or bad?
Depends. According to management, things are going just swell at SAIC. For example:

  • The company's "book-to-bill ratio" -- shorthand for how many new contracts SAIC signed compared to how many it fulfilled and recognized as revenue in the quarter -- was a strong 1.3.
  • That brought total backlog to $15.9 billion, a 13% improvement over this time last year.
  • Despite a couple of non-recurring charges, management still expects to achieve its previously stated goals for the year -- 20 to 30 basis points worth of improvement in operating margin, 6% to 9% organic sales growth, and 11% to 18% profits growth (for continuing operations, to be perfectly clear).

Nitpicking a nice quarter
On the other hand, the report did contain a couple worrisome numbers. For example, see that backlog number up above? It still fell short of SAIC's 15% sales growth in the quarter. One quarter's book-to-bill ratio notwithstanding, if backlog growth fails to at least match the pace of sales growth, sales must slow sooner or later.

Also, while I have no reason to doubt management's assurance on the margin picture improving this year, I can't help but notice that those margins moved in the wrong direction last quarter, erasing Q1's gains. Q2 gross margin dropped 20 basis points to 13.8% in Q2; operating margin shed 50 basis points to end at 7.3%. Year to date, margins are flat against their fiscal 2008 totals.

Foolish takeaway
If SAIC's going to make good on its promises, and close the gap with rivals L-3 (NYSE:LLL), Lockheed (NYSE:LMT), and Accenture (NYSE:ACN) -- all of which pull down double-digit operating margins -- then all its potatoes are now in one basket. It's got to either deliver in H2, or fail.

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You've read what Rich thinks. But what about the gang from Motley Fool Inside Value? Do they detect the same suspicious odor wafting from SAIC's basket of taters? Sign up for a free trial subscription to Inside Value now, and find out.

Fool contributor Rich Smith does not own shares of any company named above. Accenture is also an Inside Value pick. The Motley Fool has a disclosure policy.