U.S. government IT contractor Science Applications International Corp (SAIC) SAI.N said it planned to split into two independently traded companies to bid for more contracts which they cannot do now due to conflict-of-interest regulations.
Shares of the company, which also posted second-quarter revenue above Wall Street estimates, were up 10 percent at $12.96 in extended trading.
The company provides a wide range of IT services to the United States Department of Defense (DoD), the intelligence community, and to federal and state government agencies.
SAIC said one of the two units would focus on government technical services and enterprise IT business, while the second one would provide science and technology services for national security, engineering and health markets.
The creation of the science and technology services will eliminate conflict with technical services and give it access to an estimated 700 contracts under 78 major DoD contracts totaling $37 billion, Chief Operating Officer Stu Shea said on a post-earnings conference call with analysts.
Regulations prohibit a company from being a program manager on behalf of the U.S. government to hire contractors for a project, and also bid for the same contract, Stephens Inc analyst Timothy Quillin said.
"Estimated proforma 2013 fiscal year revenue for the technical services company is $4 billion," Shea said.
The company expects the split to take place in the form of a tax-free spinoff in the second half of next year.
SECOND-QUARTER REVENUE BEATS
Second-quarter net income fell to $110 million, or 32 cents per share, from $178 million, or 50 cents per share, a year earlier.
Revenue rose 10 percent to $2.85 billion, helped by more contracts from the defense and intelligence agencies. However, the company exercised caution going forward.
"We're cautious on revenue in the coming quarters as Washington deals with the fiscal situation and the sequestrations," Chief Executive John Jumper said on the call.
Companies like SAIC could face hundreds of millions of dollars in business claims from renegotiating contracts with suppliers if $500 billion in additional defense spending cuts - a process called sequestration - take effect in January as currently mandated.
The additional defense cuts are part of $1.2 trillion in U.S. budget cuts triggered after a congressional committee failed to reach agreement on other ways to reduce the federal deficit.
Shares of SAIC, which has a market value of $4 billion as of Wednesday, closed at $11.81 on Thursday on the New York Stock Exchange.
(Reporting by Siddharth Cavale and Neha Alawadhi in Bangalore; Editing by Maju Samuel)