Science Applications International Corp - Quarter Report: 2022 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
Form 10-Q
_________________________________________________________
(Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended July 29, 2022
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 | Exact Name of Registrant as Specified in its Charter, Address of Principal Executive Offices and Telephone Number | State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification No. | ||||||||||||||||||||
| 001-35832 | Science Applications International Corporation | Delaware | 46-1932921 | ||||||||||||||||||||
12010 Sunset Hills Road, Reston, VA 20190
703-676-4300
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $.0001 per share | SAIC | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares issued and outstanding of the registrant’s common stock as of August 19, 2022 was as follows:
55,128,060 shares of common stock ($.0001 par value per share)
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| FORM 10-Q | ||||||||
TABLE OF CONTENTS | ||||||||
| Page | |||||||||||
| Part I | |||||||||||
| Item 1 | |||||||||||
| Item 2 | |||||||||||
| Item 3 | |||||||||||
| Item 4 | |||||||||||
| Part II | |||||||||||
| Item 1 | |||||||||||
| Item 1A | |||||||||||
| Item 2 | |||||||||||
| Item 3 | |||||||||||
| Item 4 | |||||||||||
| Item 5 | |||||||||||
| Item 6 | |||||||||||
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||
| CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME | ||
| (UNAUDITED) | ||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||
| Revenues | $ | 1,831 | $ | 1,836 | $ | 3,827 | $ | 3,714 | |||||||||||||||
| Cost of revenues | 1,612 | 1,604 | 3,382 | 3,265 | |||||||||||||||||||
| Selling, general and administrative expenses | 93 | 85 | 185 | 165 | |||||||||||||||||||
| Acquisition and integration costs | 1 | 14 | 10 | 24 | |||||||||||||||||||
| Other operating income | — | — | — | (3) | |||||||||||||||||||
| Operating income | 125 | 133 | 250 | 263 | |||||||||||||||||||
| Interest expense | 30 | 26 | 57 | 53 | |||||||||||||||||||
| Other (income) expense, net | — | (1) | 3 | (3) | |||||||||||||||||||
| Income before income taxes | 95 | 108 | 190 | 213 | |||||||||||||||||||
| Provision for income taxes | (21) | (26) | (42) | (49) | |||||||||||||||||||
| Net income | 74 | 82 | 148 | 164 | |||||||||||||||||||
| Net income attributable to non-controlling interest | 1 | — | 2 | 1 | |||||||||||||||||||
| Net income attributable to common stockholders | $ | 73 | $ | 82 | $ | 146 | $ | 163 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 1.31 | $ | 1.42 | $ | 2.61 | $ | 2.81 | |||||||||||||||
| Diluted | $ | 1.30 | $ | 1.41 | $ | 2.59 | $ | 2.79 | |||||||||||||||
See accompanying notes to condensed and consolidated financial statements.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||
| CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||
| (UNAUDITED) | ||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Net income | $ | 74 | $ | 82 | $ | 148 | $ | 164 | |||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Net unrealized (loss) gain on derivative instruments | (3) | 1 | 34 | 15 | |||||||||||||||||||
| Total other comprehensive (loss) income, net of tax | (3) | 1 | 34 | 15 | |||||||||||||||||||
| Comprehensive income | $ | 71 | $ | 83 | $ | 182 | $ | 179 | |||||||||||||||
| Comprehensive income attributable to non-controlling interest | 1 | — | 2 | 1 | |||||||||||||||||||
| Comprehensive income attributable to common stockholders | $ | 70 | $ | 83 | $ | 180 | $ | 178 | |||||||||||||||
See accompanying notes to condensed and consolidated financial statements.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||
| CONDENSED AND CONSOLIDATED BALANCE SHEETS | ||
| (UNAUDITED) | ||
| July 29, 2022 | January 28, 2022 | ||||||||||
| (in millions) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 99 | $ | 106 | |||||||
| Receivables, net | 1,036 | 1,015 | |||||||||
| Inventory, prepaid expenses and other current assets | 135 | 142 | |||||||||
| Total current assets | 1,270 | 1,263 | |||||||||
| Goodwill | 2,911 | 2,913 | |||||||||
| Intangible assets, net | 1,069 | 1,132 | |||||||||
Property, plant, and equipment (net of accumulated depreciation of $194 million and $182 million at July 29, 2022 and January 28, 2022, respectively) | 95 | 100 | |||||||||
| Operating lease right of use assets | 173 | 209 | |||||||||
| Other assets | 136 | 129 | |||||||||
| Total assets | $ | 5,654 | $ | 5,746 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 853 | $ | 840 | |||||||
| Accrued payroll and employee benefits | 337 | 364 | |||||||||
| Long-term debt, current portion | — | 148 | |||||||||
| Total current liabilities | 1,190 | 1,352 | |||||||||
| Long-term debt, net of current portion | 2,462 | 2,370 | |||||||||
| Operating lease liabilities | 162 | 192 | |||||||||
| Deferred income taxes | 7 | 43 | |||||||||
| Other long-term liabilities | 180 | 160 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Equity: | |||||||||||
Common stock, $0.0001 par value, 1 billion shares authorized, 55 million and 56 million shares issued and outstanding as of July 29, 2022 and January 28, 2022, respectively | — | — | |||||||||
| Additional paid-in capital | 723 | 838 | |||||||||
| Retained earnings | 923 | 818 | |||||||||
| Accumulated other comprehensive loss | (3) | (37) | |||||||||
| Total common stockholders' equity | 1,643 | 1,619 | |||||||||
| Non-controlling interest | 10 | 10 | |||||||||
| Total stockholders' equity | 1,653 | 1,629 | |||||||||
| Total liabilities and stockholders' equity | $ | 5,654 | $ | 5,746 | |||||||
See accompanying notes to condensed and consolidated financial statements.
-3-
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| CONDENSED AND CONSOLIDATED STATEMENTS OF EQUITY | ||||||||
| (UNAUDITED) | ||||||||
| Shares of common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Non-controlling interest | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Balance at April 29, 2022 | 56 | $ | 770 | $ | 870 | $ | — | $ | 10 | $ | 1,650 | ||||||||||||||||||||||||
| Net income | — | — | 73 | — | 1 | 74 | |||||||||||||||||||||||||||||
| Issuances of stock | — | 3 | — | — | — | 3 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (3) | — | (3) | |||||||||||||||||||||||||||||
Cash dividends of $0.37 per share | — | — | (20) | — | — | (20) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 12 | — | — | — | 12 | |||||||||||||||||||||||||||||
| Repurchases of stock | (1) | (62) | — | — | — | (62) | |||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||
| Balance at July 29, 2022 | 55 | $ | 723 | $ | 923 | $ | (3) | $ | 10 | $ | 1,653 | ||||||||||||||||||||||||
| Balance at January 28, 2022 | 56 | $ | 838 | $ | 818 | $ | (37) | $ | 10 | $ | 1,629 | ||||||||||||||||||||||||
| Net income | — | — | 146 | — | 2 | 148 | |||||||||||||||||||||||||||||
| Issuances of stock | 1 | 8 | — | — | — | 8 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 34 | — | 34 | |||||||||||||||||||||||||||||
Cash dividends of $0.74 per share | — | — | (41) | — | — | (41) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 8 | — | — | — | 8 | |||||||||||||||||||||||||||||
| Repurchases of stock | (2) | (131) | — | — | — | (131) | |||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | (2) | (2) | |||||||||||||||||||||||||||||
| Balance at July 29, 2022 | 55 | $ | 723 | $ | 923 | $ | (3) | $ | 10 | $ | 1,653 | ||||||||||||||||||||||||
| Balance at April 30, 2021 | 58 | $ | 965 | $ | 687 | $ | (75) | $ | 10 | $ | 1,587 | ||||||||||||||||||||||||
| Net income | — | — | 82 | — | — | 82 | |||||||||||||||||||||||||||||
| Issuances of stock | — | 4 | — | — | — | 4 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||
Cash dividends of $0.37 per share | — | — | (22) | — | — | (22) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 13 | — | — | — | 13 | |||||||||||||||||||||||||||||
| Repurchases of stock | — | (37) | — | — | — | (37) | |||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Balance at July 30, 2021 | 58 | $ | 945 | $ | 747 | $ | (74) | $ | 10 | $ | 1,628 | ||||||||||||||||||||||||
| Balance at January 29, 2021 | 58 | $ | 1,004 | $ | 627 | $ | (89) | $ | 10 | $ | 1,552 | ||||||||||||||||||||||||
| Net income | — | — | 163 | — | 1 | 164 | |||||||||||||||||||||||||||||
| Issuances of stock | — | 8 | — | — | — | 8 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 15 | — | 15 | |||||||||||||||||||||||||||||
Cash dividends of $0.74 per share | — | — | (43) | — | — | (43) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 10 | — | — | — | 10 | |||||||||||||||||||||||||||||
| Repurchases of stock | — | (77) | — | — | — | (77) | |||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||
| Balance at July 30, 2021 | 58 | $ | 945 | $ | 747 | $ | (74) | $ | 10 | $ | 1,628 | ||||||||||||||||||||||||
See accompanying notes to condensed and consolidated financial statements.
-4-
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||
| CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS | ||
| (UNAUDITED) | ||
| Six Months Ended | |||||||||||
| July 29, 2022 | July 30, 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 148 | $ | 164 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 81 | 79 | |||||||||
| Amortization of off-market customer contracts | (6) | (17) | |||||||||
| Amortization of debt issuance costs | 6 | 4 | |||||||||
| Deferred income taxes | (22) | 31 | |||||||||
| Stock-based compensation expense | 23 | 24 | |||||||||
| Gain on divestitures | — | (2) | |||||||||
| Impairment of assets | — | 10 | |||||||||
| Increase (decrease) resulting from changes in operating assets and liabilities, net of the effect of acquisitions: | |||||||||||
| Receivables | (21) | (80) | |||||||||
| Inventory, prepaid expenses and other current assets | 7 | 10 | |||||||||
| Other assets | 5 | (8) | |||||||||
| Accounts payable and accrued liabilities | 29 | 42 | |||||||||
| Accrued payroll and employee benefits | (27) | 20 | |||||||||
| Income taxes payable | 36 | — | |||||||||
| Operating lease assets and liabilities, net | — | 3 | |||||||||
| Other long-term liabilities | — | 1 | |||||||||
| Net cash provided by operating activities | 259 | 281 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Expenditures for property, plant, and equipment | (12) | (17) | |||||||||
| Purchases of marketable securities | (4) | (3) | |||||||||
| Sales of marketable securities | 2 | 2 | |||||||||
| Cash paid for acquisitions, net of cash acquired | — | (244) | |||||||||
| Proceeds from divestitures | — | 8 | |||||||||
| Other | (3) | (2) | |||||||||
| Net cash used in investing activities | (17) | (256) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Dividend payments to stockholders | (42) | (44) | |||||||||
| Principal payments on borrowings | (575) | (61) | |||||||||
| Issuances of stock | 8 | 8 | |||||||||
| Stock repurchased and retired or withheld for taxes on equity awards | (148) | (91) | |||||||||
| Proceeds from borrowings | 515 | 116 | |||||||||
| Debt issuance costs | (5) | — | |||||||||
| Distributions to non-controlling interest | (2) | (1) | |||||||||
| Net cash used in financing activities | (249) | (73) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (7) | (48) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 115 | 190 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 108 | $ | 142 | |||||||
See accompanying notes to condensed and consolidated financial statements.
-5-
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Note 1—Business Overview and Summary of Significant Accounting Policies:
Overview
Science Applications International Corporation (collectively, with its consolidated subsidiaries, the “Company”) is a leading provider of technical, engineering and enterprise information technology (IT) services primarily to the U.S. government. The Company provides these services for large, complex projects with a targeted emphasis on higher-end, differentiated technology services and solutions that accelerate and transform secure and resilient digital environments through system development, modernization, integration, and sustainment to drive enterprise and mission outcomes.
The Company is organized as a matrix comprised of two customer facing operating sectors supported by an enterprise solutions and operations organization. The Company's operating sectors are aggregated into one reportable segment for financial reporting purposes. Each of the Company’s two customer facing operating sectors is focused on providing both (1) growth and technology accelerating solutions and (2) core IT service offerings to one or more agencies of the U.S. federal government. Growth and technology accelerating solutions include the delivery of secure cloud modernization, outcome based enterprise IT as-a-service, and the integration, production and modernization of defense systems. Core IT services include systems engineering, the operation and maintenance of existing IT systems and networks, and logistics and supply chain solutions.
During the second quarter of fiscal 2022, the Company completed the acquisition of Halfaker and Associates, LLC (Halfaker), a mission focused, pure-play health IT company, growing the Company's digital transformation portfolio. Additionally, the Company acquired Koverse, a software company that provides a data management platform enabling artificial intelligence and machine learning on complex sensitive data.
Principles of Consolidation and Basis of Presentation
The accompanying financial information has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting purposes. References to “financial statements” refer to the condensed and consolidated financial statements of the Company, which include the statements of income and comprehensive income, balance sheets, statements of equity and statements of cash flows. These financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and account balances within the Company have been eliminated. The financial statements are unaudited, but in the opinion of management include all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended January 28, 2022.
Non-controlling Interest. The Company holds a 50.1% majority interest in Forfeiture Support Associates J.V. (FSA). The results of operations of FSA are included in the Company's condensed and consolidated statements of income and comprehensive income and statements of cash flows. The non-controlling interest reported on the condensed and consolidated balance sheets represents the portion of FSA's equity that is attributable to the non-controlling interest.
Use of Estimates
The preparation of the financial statements in conformity 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 periods. Significant estimates inherent in the preparation of the financial statements may include, but are not limited to estimated profitability of long-term contracts, income taxes, fair value measurements, fair value of goodwill and other intangible assets, pension and defined benefit plan obligations, and contingencies. Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Reporting Periods
The Company utilizes a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2023 began on January 29, 2022 and ends on February 3, 2023, while fiscal 2022 began on January 30, 2021 and ended on January 28, 2022.
Operating Cycle
The Company’s operating cycle may be greater than one year and is measured by the average time intervening between the inception and the completion of contracts.
Derivative Instruments Designated as Cash Flow Hedges
Derivative instruments are recorded on the condensed and consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.
The Company’s fixed interest rate swaps are considered over-the-counter derivatives, and fair value is calculated using a standard pricing model for interest rate swaps with contractual terms for maturities, amortization and interest rates. Level 2, or market observable inputs (such as yield and credit curves), are used within the standard pricing models in order to determine fair value. The fair value is an estimate of the amount that the Company would pay or receive as of a measurement date if the agreements were transferred to a third party or canceled. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges.
Marketable Securities
Investments in marketable securities consist of equity securities which are recorded at fair value using observable inputs such as quoted prices in active markets (Level 1). As of July 29, 2022 and January 28, 2022, the fair value of our investments totaled $27 million and $28 million, respectively, and are included in other assets on the condensed and consolidated balance sheets. The Company's investments are primarily held in a custodial account, which includes investments to fund our deferred compensation plan liabilities.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed and consolidated balance sheets for the periods presented:
| July 29, 2022 | January 28, 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 99 | $ | 106 | |||||||
| Restricted cash included in inventory, prepaid expenses and other current assets | 5 | 5 | |||||||||
| Restricted cash included in other assets | 4 | 4 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 108 | $ | 115 | |||||||
Acquisition and Integration Costs
Acquisition-related costs that are not part of the purchase price consideration are generally expensed as incurred, except for certain costs that are deferred in connection with the issuance of debt. These costs typically include transaction-related costs, such as finder’s fees, legal, accounting, and other professional costs. Integration-related costs represent costs directly related to combining the Company and its acquired businesses. Integration-related costs typically include strategic consulting services, facility consolidations, employee related costs, such as retention and severance, costs to integrate information technology infrastructure, enterprise planning systems, processes, and other non-recurring integration-related costs. Acquisition and integration costs are presented together as acquisition and integration costs on the condensed and consolidated statements of income.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
The amounts recognized in acquisition and integration costs on the condensed and consolidated statements of income are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
Acquisition(1) | $ | — | $ | 2 | $ | (1) | $ | 3 | |||||||||||||||
Integration(2) | 1 | 12 | 11 | 21 | |||||||||||||||||||
| Total acquisition and integration costs | $ | 1 | $ | 14 | $ | 10 | $ | 24 | |||||||||||||||
(1) Acquisition expenses for the six months ended July 29, 2022 reflects the amount recognized to reduce the fair value of the Koverse earnout liability. Acquisition expenses for the three and six months ended July 30, 2021 are related to the acquisitions of Halfaker and Koverse. See Note 4 for additional information related to the acquisitions.
(2) Integration expenses for the three and six months ended July 30, 2021 include $3 million and $10 million, respectively, for the impairment of assets.
Restructuring
During the three and six months ended July 29, 2022, the Company incurred $2 million of restructuring costs associated with the optimization and consolidation of certain facilities. These costs are presented within selling, general and administrative expenses in the condensed and consolidated statements of income.
Accounting Standards Updates
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured at the acquisition date in accordance with Topic 606 as if the acquirer had originated the contracts. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be applied prospectively. Early adoption is permitted. The Company adopted the requirements of ASU 2021-08 on a prospective basis effective the first day of fiscal 2023.
Other Accounting Standards Updates effective after July 29, 2022 are not expected to have a material effect on the Company’s financial statements.
Note 2—Earnings Per Share, Share Repurchases and Dividends:
Earnings Per Share (EPS)
Basic earnings per share is computed by dividing net income attributable to common stockholders by the basic weighted-average number of shares outstanding. Diluted EPS is computed similarly to basic EPS, except the weighted-average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.
A reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS was:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
Basic weighted-average number of shares outstanding | 55.6 | 57.9 | 55.9 | 58.0 | |||||||||||||||||||
Dilutive common share equivalents - stock options and other stock-based awards | 0.3 | 0.5 | 0.4 | 0.5 | |||||||||||||||||||
Diluted weighted-average number of shares outstanding | 55.9 | 58.4 | 56.3 | 58.5 | |||||||||||||||||||
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Antidilutive stock awards excluded from the weighted-average number of shares outstanding used to compute diluted EPS for the three and six months ended July 29, 2022 and July 30, 2021 were immaterial.
Share Repurchases
The Company may repurchase shares in accordance with established repurchase plans. The Company retires its common stock upon repurchase with the excess over par value allocated to additional paid-in capital. The Company has not made any material purchases of common stock other than in connection with established share repurchase plans. In June 2022, the number of shares of our common stock that may be repurchased under our existing repurchase plan was increased by 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. As of July 29, 2022, we have repurchased approximately 15.9 million shares of common stock under the program.
Dividends
The Company declared and paid a quarterly dividend of $0.37 per share of its common stock during the three months ended July 29, 2022. Subsequent to the end of the quarter, on August 30, 2022, the Company's Board of Directors declared a quarterly dividend of $0.37 per share of the Company's common stock payable on October 28, 2022 to stockholders of record on October 14, 2022.
Note 3—Revenues:
Changes in Estimates on Contracts
Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur routinely over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated.
Many of the Company's contracts recognize revenue on performance obligations using a cost input measure (cost-to-cost), which requires estimates of total costs at completion. In cases when total expected costs exceed total estimated revenues for a performance obligation, the Company recognizes the total estimated loss in the quarter identified. Total estimated losses are inclusive of any unexercised options that are probable of award, only if they increase the amount of the loss.
Aggregate net changes in estimates on contracts accounted for using the cost-to-cost method of accounting were recognized in operating income as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||
| Net favorable adjustments | $ | 5 | $ | 6 | $ | 10 | $ | 9 | |||||||||||||||
| Net favorable adjustments, after tax | 4 | 5 | 8 | 7 | |||||||||||||||||||
| Diluted EPS impact | $ | 0.07 | $ | 0.08 | $ | 0.14 | $ | 0.12 | |||||||||||||||
Revenues were $5 million and $9 million higher for the three and six months ended July 29, 2022, respectively, and $15 million and $20 million higher for the three and six months ended July 30, 2021, respectively, due to net revenue recognized from performance obligations satisfied in prior periods.
-9-
| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Disaggregation of Revenues
The Company's revenues are generated primarily from long-term contracts with the U.S. government including subcontracts with other contractors engaged in work for the U.S. government. The Company disaggregates revenues by customer, contract-type and prime versus subcontractor to the federal government.
Disaggregated revenues by customer were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Department of Defense | $ | 884 | $ | 900 | $ | 1,830 | $ | 1,820 | |||||||||||||||
| Other federal government agencies | 911 | 899 | 1,924 | 1,822 | |||||||||||||||||||
| Commercial, state and local | 36 | 37 | 73 | 72 | |||||||||||||||||||
| Total | $ | 1,831 | $ | 1,836 | $ | 3,827 | $ | 3,714 | |||||||||||||||
Disaggregated revenues by contract-type were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cost reimbursement | $ | 1,035 | $ | 993 | $ | 2,130 | $ | 1,983 | |||||||||||||||
| Time and materials (T&M) | 328 | 365 | 714 | 776 | |||||||||||||||||||
| Firm-fixed price (FFP) | 468 | 478 | 983 | 955 | |||||||||||||||||||
| Total | $ | 1,831 | $ | 1,836 | $ | 3,827 | $ | 3,714 | |||||||||||||||
Disaggregated revenues by prime versus subcontractor were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Prime contractor to federal government | $ | 1,665 | $ | 1,657 | $ | 3,487 | $ | 3,347 | |||||||||||||||
| Subcontractor to federal government | 130 | 142 | 267 | 295 | |||||||||||||||||||
| Other | 36 | 37 | 73 | 72 | |||||||||||||||||||
| Total | $ | 1,831 | $ | 1,836 | $ | 3,827 | $ | 3,714 | |||||||||||||||
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Contract Balances
Contract balances for the periods presented were as follows:
| Balance Sheet line item | July 29, 2022 | January 28, 2022 | ||||||||||||
| (in millions) | ||||||||||||||
Billed and billable receivables, net(1) | Receivables, net | $ | 593 | $ | 615 | |||||||||
| Contract assets - unbillable receivables | Receivables, net | 443 | 400 | |||||||||||
| Contract assets - contract retentions | Other assets | 17 | 17 | |||||||||||
| Contract liabilities - current | Accounts payable and accrued liabilities | 40 | 55 | |||||||||||
| Contract liabilities - non-current | Other long-term liabilities | $ | 6 | $ | 9 | |||||||||
(1) Net of allowance of $4 million as of July 29, 2022 and January 28, 2022.
During the three and six months ended July 29, 2022, the Company recognized revenues of $8 million and $35 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of January 28, 2022. During the three and six months ended July 30, 2021, the Company recognized revenues of $14 million and $64 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of January 29, 2021.
Remaining Performance Obligations
As of July 29, 2022, the Company had $5.0 billion of remaining performance obligations. Remaining performance obligations exclude any variable consideration that is allocated entirely to unsatisfied performance obligations on our supply chain contracts. The Company expects to recognize revenue on approximately 80% of the remaining performance obligations over the next 12 months and approximately 90% over the next 24 months, with the remaining recognized thereafter.
Lessor Revenue
The Company leases IT equipment and hardware to its customers. All of the Company’s lessor arrangements are operating leases. Operating lease revenue is recognized on a straight-line basis over the term of the lease. Operating lease income is reported as revenue on the condensed and consolidated statements of income. During the six months ended July 29, 2022, the Company recognized revenue of $23 million from the exercise of purchase options under certain lessor arrangements. Operating lease income was immaterial for the three and six months ended July 29, 2022 and $2 million and $11 million for the three and six months ended July 30, 2021, respectively.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Note 4—Acquisitions:
Halfaker
On July 2, 2021, the Company completed the acquisition of Halfaker, a mission focused, pure-play health IT company for a purchase price of $228 million, net of $3 million cash acquired. The Company funded the transaction from increased borrowings and cash on hand. During the first quarter of fiscal 2023, the Company made fair value adjustments decreasing goodwill and increasing customer relationships intangible assets by $2 million. The Company has completed the determination of fair values of the acquired assets and liabilities assumed. The allocation of the purchase price resulted in goodwill of $104 million and intangible assets of $114 million, both of which are deductible for income tax purposes. The recognized goodwill is primarily associated with future customer relationships and an acquired assembled work force. The intangible assets consist of customer relationships of $97 million and backlog of $17 million that will be amortized over a period of nine years and one year, respectively. The Company made additional cash payments of $21 million in March 2022 associated with certain change in control provisions that are recognized as post-combination expense.
Koverse
On May 3, 2021, the Company acquired Koverse, a software company that provides a data management platform enabling artificial intelligence and machine learning on complex sensitive data, for a purchase price of $30 million, net of $2 million cash acquired. The purchase price included $3 million of contingent consideration, representing the acquisition date fair value recognized for up to $27 million gross of potential future earnout payments based on the achievement of certain revenue targets over the next four years. The Company has completed the allocation of the purchase price which resulted in goodwill of $21 million and intangible assets of $10 million, which are both not deductible for income tax purposes. The goodwill is primarily associated with intellectual capital, future customer relationships, and an acquired assembled work force. The intangible assets, which primarily consist of developed technology, are being amortized over a weighted-average period of seven years. As of July 29, 2022, the Company has recognized $10 million of the additional $13 million of post-combination compensation expense associated with certain employee retention agreements.
Unisys Federal
During the second quarter of fiscal 2023 and 2022, the Company accelerated the amortization for certain off-market customer contracts as a result of a change in their expected contractual terms. The acceleration resulted in additional amortization of $2 million and $8 million, respectively. The remaining unamortized balance of the provision for certain off-market customer contracts is expected to be amortized by the end of fiscal 2024.
Note 5—Goodwill and Intangible Assets:
Goodwill
Goodwill had a carrying value of $2,911 million and $2,913 million as of July 29, 2022 and January 28, 2022, respectively. There were no impairments of goodwill during the periods presented.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Intangible Assets
Intangible assets, all of which were finite-lived, consisted of the following:
| July 29, 2022 | January 28, 2022 | ||||||||||||||||||||||||||||||||||
| Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 1,467 | $ | (407) | $ | 1,060 | $ | 1,467 | $ | (351) | $ | 1,116 | |||||||||||||||||||||||
| Backlog | — | — | — | 17 | (10) | 7 | |||||||||||||||||||||||||||||
| Developed technology | 10 | (2) | 8 | 10 | (2) | 8 | |||||||||||||||||||||||||||||
| Trade name | 1 | — | 1 | 1 | — | 1 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 1,478 | $ | (409) | $ | 1,069 | $ | 1,495 | $ | (363) | $ | 1,132 | |||||||||||||||||||||||
Amortization expense related to intangible assets was $32 million and $65 million for the three and six months ended July 29, 2022, respectively, and $29 million and $61 million for the three and six months ended July 30, 2021, respectively. There were no intangible asset impairment losses during the periods presented.
As of July 29, 2022, the estimated future annual amortization expense related to intangible assets is as follows:
| Fiscal Year | (in millions) | ||||
| Remainder of 2023 | $ | 60 | |||
| 2024 | 115 | ||||
| 2025 | 115 | ||||
| 2026 | 115 | ||||
| 2027 | 115 | ||||
| Thereafter | 549 | ||||
| Total | $ | 1,069 | |||
Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, and other factors.
Note 6—Income Taxes:
The Company's effective income tax rate was 21.8% and 21.9% for the three and six months ended July 29, 2022, respectively, and 23.6% and 23.0% for the three and six months ended July 30, 2021, respectively. The Company’s effective tax rate was lower for the three and six months ended July 29, 2022 compared to the prior year periods primarily due to an increased deduction for foreign-derived intangible income. Tax rates for the three and six months ended July 29, 2022 were lower than the combined federal and state statutory rates principally due to excess tax benefits related to employee stock-based compensation, research and development tax credits, a deduction for foreign-derived intangible income, and other permanent book tax differences.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Note 7—Debt Obligations:
The Company’s long-term debt as of the dates presented was as follows:
| July 29, 2022 | January 28, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Stated interest rate | Effective interest rate | Principal | Unamortized debt issuance costs | Net | Principal | Unamortized debt issuance costs | Net | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Term Loan A Facility due June 2027 | 3.68 | % | 3.79 | % | $ | 1,230 | $ | (5) | $ | 1,225 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
Term Loan A Facility due October 2023 | — | % | — | % | — | — | — | 785 | (5) | 780 | |||||||||||||||||||||||||||||||||||||
| Term Loan A2 Facility due October 2023 | — | % | — | % | — | — | — | 100 | — | 100 | |||||||||||||||||||||||||||||||||||||
Term Loan B Facility due October 2025 | 4.30 | % | 4.51 | % | 578 | (3) | 575 | 983 | (7) | 976 | |||||||||||||||||||||||||||||||||||||
Term Loan B2 Facility due March 2027 | 4.30 | % | 4.72 | % | 272 | (5) | 267 | 272 | (5) | 267 | |||||||||||||||||||||||||||||||||||||
Senior Notes due April 2028 | 4.88 | % | 5.11 | % | 400 | (5) | 395 | 400 | (5) | 395 | |||||||||||||||||||||||||||||||||||||
| Total long-term debt | $ | 2,480 | $ | (18) | $ | 2,462 | $ | 2,540 | $ | (22) | $ | 2,518 | |||||||||||||||||||||||||||||||||||
| Less current portion | — | — | — | 148 | — | 148 | |||||||||||||||||||||||||||||||||||||||||
Total long-term debt, net of current portion | $ | 2,480 | $ | (18) | $ | 2,462 | $ | 2,392 | $ | (22) | $ | 2,370 | |||||||||||||||||||||||||||||||||||
As of July 29, 2022, the Company has a $3.1 billion secured credit facility (the Credit Facility) consisting of a Term Loan A Facility due June 2027, a Term Loan B Facility due October 2025, a Term Loan B2 Facility due March 2027 (together, the Term Loan Facilities), and a $1.0 billion Revolving Credit Facility due June 2027. During the quarter, the Company borrowed and repaid $85 million under the Revolving Credit Facility. There was no balance outstanding on the Revolving Credit Facility as of July 29, 2022. As of July 29, 2022, the Company was in compliance with the covenants under its Credit Facility.
On June 30, 2022, the Company executed the Fifth Amendment to the Third Amended and Restated Credit Agreement (Fifth Amendment), which established, among other things, a $1,230 million senior secured term loan credit facility (Term Loan A Facility due June 2027) and increased the Revolving Credit Facility commitment from $400 million to $1,000 million. The entire Term Loan A Facility due June 2027 was immediately borrowed by the Company and the proceeds were used to pay in full the outstanding principal balances under the Term Loan A Facility due October 2023 and Term Loan A2 Facility due October 2023 and to prepay $400 million of principal on the Term Loan B Facility due October 2025. For the three months ended July 29, 2022, the Company wrote off deferred debt issuance costs of $3 million associated with the Term Loan B Facility due October 2025 voluntary principal prepayments which was recognized in interest expense.
Borrowings under the Term Loan A Facility due June 2027 amortize quarterly beginning on October 31, 2023 at 1.250% of the original borrowed amount thereunder, with such quarterly amortization increasing to 1.875% on October 31, 2024 and to 2.500% on October 31, 2025. The Term Loan A Facility due June 2027 may be prepaid at any time without penalty and is subject to the same mandatory prepayments, including from excess cash flow, as the Company’s existing term loans under the Credit Facility.
As a result of the Fifth Amendment, the maturity date for the Revolving Credit Facility was extended to, and the maturity date of the Term Loan A Facility due June 2027 is, the earlier of June 30, 2027 or 91 days prior to the earliest term loan “B” facility maturity date (subject to acceleration in certain circumstances). The Term Loan A Facility due June 2027 is secured by substantially all of the assets of the Company and the Company’s wholly owned domestic subsidiaries, and is guaranteed by each of the Company’s wholly owned domestic subsidiaries. The Term Loan A Facility due June 2027 is subject to the same covenants and events of default as the Company’s existing term loans under the Credit Facility.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Effective with the Fifth Amendment, all interest rates under the Credit Facility transitioned from LIBOR to Secured Overnight Financing Rate (SOFR) plus 0.10% for US dollar denominated loans, Sterling Overnight Index Average (SONIA) for UK pound sterling denominated loans, and Euro Interbank Offered Rate (EURIBOR) for Euro denominated loans. The applicable interest rate margins under the Term Loan A Facility due June 2027 and the Revolving Credit Facility were reduced to a range from 0.75% to 1.75% per annum for SOFR, SONIA and EURIBOR loans, and from 0% to 0.75% per annum for base rate loans, in each case based on the Company’s leverage ratio. Commitment fees for undrawn amounts under the Revolving Credit Facility were also reduced to a range of 0.125% to 0.25% per annum based on the Company’s leverage ratio.
During the three months ended July 29, 2022, the Company incurred $8 million of debt issuance costs associated with the Fifth Amendment, of which $2 million was recognized in interest expense, with the remaining $6 million deferred and amortized to interest expense through the maturity date of the facility utilizing the effective interest rate method.
As of July 29, 2022 and January 28, 2022, the carrying value of the Company’s outstanding debt obligations approximated its fair value. The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s Term Loan Facilities and Senior Notes.
Maturities of long-term debt as of July 29, 2022 are:
| Fiscal Year | Total | ||||
| (in millions) | |||||
| Remainder of 2023 | $ | — | |||
| 2024 | 31 | ||||
| 2025 | 77 | ||||
| 2026 | 686 | ||||
| 2027 | 123 | ||||
| Thereafter | 1,563 | ||||
| Total principal payments | $ | 2,480 | |||
Note 8—Derivative Instruments Designated as Cash Flow Hedges:
The Company’s derivative instruments designated as cash flow hedges consist of:
Fair Value of (Liability) Asset(1) at | |||||||||||||||||||||||||||||||||||
| Notional Amount at July 29, 2022 | Pay Fixed Rate | Receive Variable Rate | Settlement and Termination | July 29, 2022 | January 28, 2022 | ||||||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||
| Interest rate swaps #1 | $ | 685 | 2.96 | % | Term SOFR | Monthly through October 31, 2025 | $ | (8) | $ | (39) | |||||||||||||||||||||||||
| Interest rate swaps #2 | 525 | 2.36 | % | Term SOFR | Monthly through October 31, 2023 | 3 | (12) | ||||||||||||||||||||||||||||
| Total | $ | 1,210 | $ | (5) | $ | (51) | |||||||||||||||||||||||||||||
(1) The fair value of the fixed interest rate swap liability is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets. The fair value of the fixed interest rate swap asset is included in other assets on the condensed and consolidated balance sheets.
The Company is party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of the Company’s floating rate debt. The counterparties to all swap agreements are financial institutions.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
On June 30, 2022 and in conjunction with the Fifth Amendment, the Company transitioned the variable rate on its interest rate swaps from 1-month LIBOR to 1-month Term SOFR. Effective with the transition, the Company will pay fixed rates of 2.96% and 2.36% on the group of interest rate swaps maturing on October 31, 2025 and October 31, 2023, respectively. The Company elected to apply the optional expedient in connection with transitioning its interest rate swaps from LIBOR to Term SOFR that enabled it to consider the new swaps a continuation of the existing contracts. As a result, the transition did not have an impact on the Company’s hedge accounting or a material impact to the Company’s financial statements.
See Note 9 for the unrealized change in fair values on cash flow hedges recognized in other comprehensive income (loss) and the amounts reclassified from accumulated other comprehensive loss into earnings for the current and comparative periods presented. The Company estimates that it will reclassify $3 million of unrealized gains from accumulated other comprehensive loss into earnings in the twelve months following July 29, 2022.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Note 9—Changes in Accumulated Other Comprehensive Loss by Component:
The following table presents the changes in accumulated other comprehensive loss attributable to the Company’s fixed interest rate swap cash flow hedges that are discussed in Note 8 and the Company's defined benefit plans.
Unrealized Gains (Losses) on Fixed Interest Rate Swap Cash Flow Hedges(1) | Defined Benefit Obligation Adjustment | Total | |||||||||||||||
| (in millions) | |||||||||||||||||
| Three months ended July 29, 2022 | |||||||||||||||||
| Balance at April 29, 2022 | $ | (1) | $ | 1 | $ | — | |||||||||||
| Other comprehensive loss before reclassifications | (8) | — | (8) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 4 | — | 4 | ||||||||||||||
| Income tax impact | 1 | — | 1 | ||||||||||||||
| Net other comprehensive loss | (3) | — | (3) | ||||||||||||||
| Balance at July 29, 2022 | $ | (4) | $ | 1 | $ | (3) | |||||||||||
| Three months ended July 30, 2021 | |||||||||||||||||
| Balance at April 30, 2021 | $ | (72) | $ | (3) | $ | (75) | |||||||||||
| Other comprehensive loss before reclassifications | (6) | — | (6) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 8 | — | 8 | ||||||||||||||
| Income tax impact | (1) | — | (1) | ||||||||||||||
| Net other comprehensive income | 1 | — | 1 | ||||||||||||||
| Balance at July 30, 2021 | $ | (71) | $ | (3) | $ | (74) | |||||||||||
| Six months ended July 29, 2022 | |||||||||||||||||
| Balance at January 28, 2022 | $ | (38) | $ | 1 | $ | (37) | |||||||||||
| Other comprehensive income before reclassifications | 34 | — | 34 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 12 | — | 12 | ||||||||||||||
| Income tax impact | (12) | — | (12) | ||||||||||||||
| Net other comprehensive income | 34 | — | 34 | ||||||||||||||
| Balance at July 29, 2022 | $ | (4) | $ | 1 | $ | (3) | |||||||||||
| Six months ended July 30, 2021 | |||||||||||||||||
| Balance at January 29, 2021 | $ | (86) | $ | (3) | $ | (89) | |||||||||||
| Other comprehensive income before reclassifications | 4 | — | 4 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 17 | — | 17 | ||||||||||||||
Income tax impact | (6) | — | (6) | ||||||||||||||
| Net other comprehensive income | 15 | — | 15 | ||||||||||||||
| Balance at July 30, 2021 | $ | (71) | $ | (3) | $ | (74) | |||||||||||
(1)The amount reclassified from accumulated other comprehensive loss is included in interest expense.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Note 10—Sales of Receivables:
The Company has a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (the Purchaser) for the sale of up to a maximum amount of $300 million of certain designated eligible receivables with the U.S. government. Effective March 31, 2022, the Company amended the MARPA Facility to transition the purchase discount rate defined within the facility agreement from using LIBOR to Term SOFR. The amendment did not have a material impact on the Company's financial statements.
During the six months ended July 29, 2022 and July 30, 2021, the Company incurred purchase discount fees of $2 million and $1 million, respectively, which are presented in Other (income) expense, net on the condensed and consolidated statements of income.
MARPA Facility activity consisted of the following:
| Six Months Ended | |||||||||||
| July 29, 2022 | July 30, 2021 | ||||||||||
| (in millions) | |||||||||||
| Beginning balance | $ | 200 | $ | 185 | |||||||
| Sale of receivables | 2,010 | 1,638 | |||||||||
| Cash collections | (1,950) | (1,623) | |||||||||
Outstanding balance sold to Purchaser(1) | 260 | 200 | |||||||||
Cash collected, not remitted to Purchaser(2) | (29) | (46) | |||||||||
| Remaining sold receivables | $ | 231 | $ | 154 | |||||||
(1) For the six months ended July 29, 2022 and July 30, 2021, the Company recorded a net increase to cash flows from operating activities of $60 million and $15 million, respectively, from sold receivables.
(2) Primarily represents the cash collected on behalf of but not yet remitted to the Purchaser as of July 29, 2022 and July 30, 2021. This balance is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.
Note 11—Legal Proceedings and Other Commitments and Contingencies:
Legal Proceedings
The Company is involved in various claims and lawsuits arising in the normal conduct of its business, none of which the Company’s management believes, based on current information, is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
AAV Termination for Convenience
On August 27, 2018, the Company received a stop-work order from the United States Marine Corps on the Assault Amphibious Vehicle (AAV) contract and on October 3, 2018 the program was terminated for convenience by the customer. The Company is continuing to negotiate with the Marine Corps to recover costs associated with the termination.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
| NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
| (UNAUDITED) | ||||||||
Government Investigations, Audits and Reviews
The Company is routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect, in particular, to its role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. U.S. government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its business systems. Adverse findings in these investigations, audits, or reviews can lead to criminal, civil or administrative proceedings, and the Company could face disallowance of previously billed costs, penalties, fines, compensatory damages and suspension or debarment from doing business with governmental agencies. Due to the Company’s reliance on government contracts, adverse findings could also have a material impact on the Company’s business, including its financial position, results of operations and cash flows.
The indirect cost audits by the DCAA of the Company’s business remain open for certain prior years and the current year. Although the Company has recorded contract revenues based on an estimate of costs that the Company believes will be approved on final audit, the Company does not know the outcome of any ongoing or future audits. If future completed audit adjustments exceed the Company’s reserves for potential adjustments, the Company’s profitability could be materially adversely affected.
As of July 29, 2022, the Company believes it has adequately reserved for estimated net amounts to be refunded to customers for potential adjustments for indirect cost audits and compliance with Cost Accounting Standards.
Letters of Credit and Surety Bonds
The Company has outstanding obligations relating to letters of credit of $9 million as of July 29, 2022, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds in the amount of $19 million, principally related to performance and payment bonds on the Company’s contracts.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations and quantitative and qualitative disclosures about market risk should be read in conjunction with our unaudited condensed and consolidated financial statements and the related notes. It contains forward-looking statements (which may be identified by words such as those described in “Risk Factors—Forward-Looking Statement Risks” in Part I of the most recently filed Annual Report on Form 10-K), including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations (including our financial targets discussed below under “Management of Operating Performance and Reporting” and “Liquidity and Capital Resources”); backlog; our industry; government budgets and spending; market opportunities; the impact of competition; and the impact of acquisitions. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Risks, uncertainties and assumptions that could cause or contribute to these differences include those discussed below, in “Risk Factors” in Part II of this report and in Part I of the most recently filed Annual Report on Form 10-K. Due to such risks, uncertainties and assumptions, 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 results or developments.
We use the terms "SAIC," the “Company,” “we,” “us” and “our” to refer to Science Applications International Corporation and its consolidated subsidiaries.
The Company utilizes a 52/53 week fiscal year, ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2023 began on January 29, 2022 and ends on February 3, 2023, while fiscal 2022 began on January 30, 2021 and ended on January 28, 2022.
Business Overview
We are a leading technology integrator providing full life cycle services and solutions in the technical, engineering and enterprise information technology (IT) markets. We developed our brand by addressing our customers’ mission critical needs and solving their most complex problems for over 50 years. As one of the largest pure-play technology service providers to the U.S. government, we serve markets of significant scale and opportunity. Our primary customers are the departments and agencies of the U.S. government. We serve our customers through approximately 1,900 active contracts and task orders and employ approximately 26,000 individuals who are led by an experienced executive team of proven industry leaders. Our long history of serving the U.S. government has afforded us the ability to develop strong and longstanding relationships with some of the largest customers in the markets we serve. Substantially all of our revenues and tangible long-lived assets are generated by or owned by entities located in the United States.
Economic Opportunities, Challenges, and Risks
During the three and six months ended July 29, 2022, we generated approximately 98% of our revenues from contracts with the U.S. government, including subcontracts on which we perform. Our business performance is affected by the overall level of U.S. government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. government. Appropriations measures passed in March 2022 provided full funding for the federal government through the end of government fiscal year 2022. In October 2021, the Federal debt ceiling was increased by $480 billion and in December 2021 was further increased by $2.5 trillion which is expected to allow the U.S. government to operate into 2023. It is unlikely but possible these measures could expire without extension and lead to a partial or full government shutdown.
Adverse changes in fiscal and economic conditions could materially impact our business. Some changes that could have an adverse impact on our business include adverse regulations, the implementation of future spending reductions (including sequestration), delayed passage of appropriations bills resulting in temporary or full-year continuing resolutions, extreme inflationary increases adversely impacting fixed price contracts, inability to increase or suspend the Federal debt ceiling, and potential government shutdowns.
Spending packages, including the infrastructure bill, Inflation Reduction Act, and CHIPS and Science Act, as well as future potential spending packages, may provide additional opportunity in areas of SAIC focus such as digital modernization, cyber, microelectronics support, and climate resiliency.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
The U.S. government has increasingly relied on contracts that are subject to a competitive bidding process (including indefinite delivery, indefinite quantity (IDIQ), U.S. General Services Administration (GSA) schedules, and other multi-award contracts), which has resulted in greater competition and increased pricing pressure.
Despite the budget and competitive pressures affecting the industry, we believe we are well-positioned to protect and expand existing customer relationships and benefit from opportunities that we have not previously pursued. Our scale, size, and prime contractor leadership position are expected to help differentiate us from our competitors, especially on large contract opportunities. We believe our long-term, trusted customer relationships and deep technical expertise provide us with the sophistication to handle highly complex, mission-critical contracts. Our value proposition is found in the proven ability to serve as a trusted adviser to our customers. In doing so, we leverage our expertise and scale to help them execute their mission.
We succeed as a business based on the solutions we deliver, our past performance, and our ability to compete on price. Our solutions are inspired through innovation based on adoption of best practices and technology integration of the best capabilities available. Our past performance was achieved by employees dedicated to supporting our customers' most challenging missions. Our current cost structure and ongoing efforts to reduce costs by strategic sourcing and developing repeatable offerings sold "as a service" and as managed services in a more commercial business model are expected to allow us to compete effectively on price in an evolving environment. Our ability to be competitive in the future will continue to be driven by our reputation for successful program execution, competitive cost structure, development of new pricing and business models, and efficiencies in assigning the right people, at the right time, in support of our contracts.
On July 2, 2021, we completed the acquisition of Halfaker and Associates, LLC (Halfaker). The acquisition of Halfaker, in alignment with our long-term strategy, grows the Company's digital transformation portfolio while expanding its ability to support the government's healthcare mission.
Impacts of the COVID-19 Pandemic
We are continuing to monitor the ongoing outbreak of the coronavirus disease 2019 ("COVID-19") and we continue to work with our stakeholders to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.
The CARES Act allowed for the deferral of certain payroll tax payments through December 31, 2020 and we deferred total payments of approximately $103 million. The first installment of these deferred payroll taxes was paid during the third quarter of fiscal 2022 (approximately $51 million) with the remaining amounts due in the fourth quarter of fiscal 2023.
In September 2021, the President issued an executive order which requires all federal employees and contractors to be fully vaccinated by January 18, 2022, unless an employee is legally entitled to an accommodation. In December 2021, a federal district judge issued an order, which temporarily enjoined the federal contractor vaccine mandate. We had taken steps to comply with the vaccine mandate across our workforce until it was enjoined. We are continuing to monitor the impact that the enforcement of this executive order will have on our workforce and operations, but at this point the impact has not been material.
We have not experienced a significant impact to our liquidity or access to capital as a result of the COVID-19 pandemic. While we continue to navigate the impacts of the COVID-19 pandemic, COVID-19 did not have a material impact to revenues and operating income for the three and six months ended July 29, 2022. The full extent of the impact of COVID-19 on our business and our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, all of which are uncertain and cannot be predicted.
Management of Operating Performance and Reporting
Our business and program management process is directed by professional managers focused on serving our customers by providing high quality services in achieving program requirements. These managers carefully monitor contract margin performance by constantly evaluating contract risks and opportunities. Throughout each contract's life cycle, program managers review performance and update contract performance estimates to reflect their understanding of the best information available. For performance obligations satisfied over time, updates to estimates are generally recognized on inception-to-date activity, during the period of adjustment, resulting in either a favorable or unfavorable impact to operating income.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
We evaluate our results of operations by considering the drivers causing changes in revenues, operating income and operating cash flows. Given that revenues fluctuate on our contract portfolio over time due to contract awards and completions, changes in customer requirements, and increases or decreases in ordering volume of materials, we evaluate significant trends and fluctuations in these terms. Whether performed by our employees or by our subcontractors, we primarily provide services and, as a result, our cost of revenues are predominantly variable. We also analyze our cost mix (labor, subcontractor or materials) in order to understand operating margin because programs with a higher proportion of SAIC labor are generally more profitable. Changes in costs of revenues as a percentage of revenue other than from revenue volume or cost mix are normally driven by fluctuations in shared or corporate costs, or cumulative revenue adjustments due to changes in estimates.
Changes in operating cash flows are described with regard to changes in cash generated through the delivery of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements.
Results of Operations
The primary financial performance measures we use to manage our business and monitor results of operations are revenues, operating income, and cash flows from operating activities. The following table summarizes our results of operations:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 29, 2022 | Percent change | July 30, 2021 | July 29, 2022 | Percent change | July 30, 2021 | ||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 1,831 | — | % | $ | 1,836 | $ | 3,827 | 3 | % | $ | 3,714 | |||||||||||||||||||||||
| Cost of revenues | 1,612 | — | % | 1,604 | 3,382 | 4 | % | 3,265 | |||||||||||||||||||||||||||
| As a percentage of revenues | 88.0 | % | 87.4 | % | 88.4 | % | 87.9 | % | |||||||||||||||||||||||||||
Selling, general and administrative expenses | 93 | 9 | % | 85 | 185 | 12 | % | 165 | |||||||||||||||||||||||||||
| Acquisition and integration costs | 1 | (93 | %) | 14 | 10 | (58 | %) | 24 | |||||||||||||||||||||||||||
| Other operating income | — | — | % | — | — | (100 | %) | (3) | |||||||||||||||||||||||||||
| Operating income | 125 | (6 | %) | 133 | 250 | (5 | %) | 263 | |||||||||||||||||||||||||||
| As a percentage of revenues | 6.8 | % | 7.2 | % | 6.5 | % | 7.1 | % | |||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 73 | (11 | %) | $ | 82 | $ | 146 | (10 | %) | $ | 163 | |||||||||||||||||||||||
| Net cash provided by operating activities | $ | 141 | 53 | % | $ | 92 | $ | 259 | (8 | %) | $ | 281 | |||||||||||||||||||||||
Revenues. Revenues decreased $5 million for the three months ended July 29, 2022 as compared to the same period in the prior year primarily due to contract completions, one fewer working day compared to the prior year period, lower net favorable changes in contract estimates, and higher accelerated amortization on certain off-market liability contracts during the prior year period, partially offset by ramp up on new and existing contracts and the acquisition of Halfaker (approximately $30 million). Adjusting for the impact of acquired and divested revenues, revenues contracted 1.8%.
Revenues increased $113 million for the six months ended July 29, 2022 as compared to the same period in the prior year due to ramp up on new and existing contracts and the acquisition of Halfaker (approximately $72 million), partially offset by contract completions, lower net favorable changes in contract estimates, and higher accelerated amortization on certain off-market liability contracts during the prior year period. Adjusting for the impact of acquired and divested revenues, revenues grew 1.1%.
Cost of Revenues. Cost of revenues increased $8 million for the three months ended July 29, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts, the acquisition of Halfaker, and higher indirect costs.
Cost of revenues increased $117 million for the six months ended July 29, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts and the acquisition of Halfaker.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
Selling, General and Administrative Expenses. SG&A increased $8 million for the three months ended July 29, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and intangible asset amortization related to the acquisition of Halfaker.
SG&A increased $20 million for the six months ended July 29, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and the acquisition of Halfaker including the related intangible asset amortization.
Operating Income. Operating income as a percentage of revenues for the three months ended July 29, 2022 decreased from the comparable prior year period primarily due to lower net favorable changes in contract estimates, higher accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by lower acquisition and integration costs and higher benefit from net favorable settlement of prior indirect rate years in the current year period.
Operating income as a percentage of revenues decreased for the six months ended July 29, 2022 from the comparable prior year period primarily due to lower net favorable changes in contract estimates, higher accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by lower acquisition and integration costs.
Net Cash Provided by Operating Activities. Net cash provided by operating activities was $259 million for the six months ended July 29, 2022, a decrease of $22 million compared to the prior year, primarily due to timing of customer collections, cash payments during the year associated with certain change in control provisions related to the acquisition of Halfaker, and lower net earnings, partially offset by higher cash provided by the MARPA Facility.
Non-GAAP Measures
Earnings before interest, taxes, depreciation and amortization (EBITDA), and adjusted EBITDA are non-GAAP financial measures. While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP. Reconciliations, definitions, and how we believe these measures are useful to management and investors are provided below. Other companies may define similar measures differently.
EBITDA and Adjusted EBITDA. The performance measure EBITDA is calculated by taking net income and excluding interest and loss on sale of receivables, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing performance. Adjusted EBITDA is calculated by taking EBITDA and excluding acquisition and integration costs, impairments, restructuring costs, and any other material non-recurring costs. Integration costs are costs to integrate acquired companies including costs of strategic consulting services, facility consolidations and employee related costs such as retention and severance costs. The acquisition and integration costs relate to the Company's acquisitions of Halfaker and Koverse in fiscal 2022 and Unisys Federal in fiscal 2021.
We believe that EBITDA and adjusted EBITDA provide management and investors with useful information in assessing trends in our ongoing operating performance and may provide greater visibility in understanding the long-term financial performance of the Company.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
EBITDA and adjusted EBITDA for the periods presented were calculated as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Net income | $ | 74 | $ | 82 | $ | 148 | $ | 164 | |||||||||||||||
| Interest expense and loss on sale of receivables | 31 | 26 | 59 | 54 | |||||||||||||||||||
| Provision for income taxes | 21 | 26 | 42 | 49 | |||||||||||||||||||
| Depreciation and amortization | 40 | 37 | 81 | 79 | |||||||||||||||||||
| EBITDA | 166 | 171 | 330 | 346 | |||||||||||||||||||
| EBITDA as a percentage of revenues | 9.1 | % | 9.3 | % | 8.6 | % | 9.3 | % | |||||||||||||||
| Acquisition and integration costs | 1 | 14 | 10 | 24 | |||||||||||||||||||
| Restructuring costs | 2 | — | 2 | — | |||||||||||||||||||
| Depreciation included in acquisition and integration costs | — | — | — | (1) | |||||||||||||||||||
Recovery of acquisition and integration costs and restructuring costs(1) | (3) | — | (3) | — | |||||||||||||||||||
| Adjusted EBITDA | $ | 166 | $ | 185 | $ | 339 | $ | 369 | |||||||||||||||
| Adjusted EBITDA as a percentage of revenues | 9.1 | % | 10.1 | % | 8.9 | % | 9.9 | % | |||||||||||||||
(1) Adjustment reflects the portion of acquisition and integration costs and restructuring costs recovered through the Company's indirect rates in accordance with Cost Accounting Standards.
Adjusted EBITDA as a percentage of revenues for the three months ended July 29, 2022 decreased to 9.1% from 10.1% for the same period in the prior year primarily due to lower net favorable changes in contract estimates, higher revenue resulting from accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by higher benefit from net favorable settlement of prior indirect rate years in the current year period.
Adjusted EBITDA as a percentage of revenues for the six months ended July 29, 2022 decreased to 8.9% from 9.9% for the same period in the prior year primarily due to lower net favorable changes in contract estimates, higher revenue resulting from accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period.
Other Key Performance Measures
In addition to the financial measures described above, we believe that bookings and backlog are useful measures for management and investors to evaluate our potential future revenues. We also consider measures such as contract types and cost of revenues mix to be useful for management and investors to evaluate our operating income and performance.
Net Bookings and Backlog. Net bookings represent the estimated amount of revenues to be earned in the future from funded and negotiated unfunded contract awards that were received during the period, net of adjustments to estimates on previously awarded contracts. We calculate net bookings as the period’s ending backlog plus the period’s revenues less the prior period’s ending backlog and initial backlog obtained through acquisitions.
Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. We do not include in backlog estimates of revenues to be derived from IDIQ contracts, but rather record backlog and bookings when task orders are awarded on these contracts. Given that much of our revenue is derived from IDIQ contract task orders that renew annually, bookings on these contracts tend to refresh annually as the task orders are renewed. Additionally, we do not include in backlog contract awards that are under protest until the protest is resolved in our favor.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
We segregate our backlog into two categories as follows:
•Funded Backlog. Funded backlog for contracts with government agencies primarily represents estimated amounts of revenue to be earned in the future from contracts for which funding is appropriated less revenues previously recognized on these contracts. It does not include the unfunded portion of contracts in which 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. Funded backlog for contracts with non-government customers represents the estimated value on 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 negotiated contracts for which funding has not been appropriated or otherwise authorized and from unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedules or other master agreement contract vehicles.
We expect to recognize revenue from a substantial portion of our funded backlog within the next twelve months. However, the U.S. government can adjust the scope of services of or cancel contracts at any time. Similarly, certain contracts with commercial customers include provisions that allow the customer to cancel prior to contract completion. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees (contract profit) for work performed.
The estimated value of our total backlog as of the dates presented was:
| July 29, 2022 | January 28, 2022 | ||||||||||
| (in millions) | |||||||||||
| Funded backlog | $ | 3,630 | $ | 3,491 | |||||||
| Negotiated unfunded backlog | 20,695 | 20,601 | |||||||||
| Total backlog | $ | 24,325 | $ | 24,092 | |||||||
We had net bookings worth an estimated $2.1 billion and $4.1 billion during the three and six months ended July 29, 2022. Total backlog at the end of the second quarter is consistent with our total backlog at prior year end.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
Contract Types. Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract. For a discussion of the types of contracts under which we generate revenues, see “Contract Types” in Part I of the most recently filed Annual Report on Form 10-K. The following table summarizes revenues by contract type as a percentage of revenues for the periods presented:
| Six Months Ended | |||||||||||
| July 29, 2022 | July 30, 2021 | ||||||||||
| Cost reimbursement | 56 | % | 53 | % | |||||||
| Time and materials (T&M) | 18 | % | 21 | % | |||||||
| Firm-fixed price (FFP) | 26 | % | 26 | % | |||||||
| Total | 100 | % | 100 | % | |||||||
Cost of Revenues Mix. We generate revenues by providing a customized mix of services to our customers. The profit generated from our service contracts is affected by the proportion of cost of revenues incurred from the efforts of our employees (which we refer to below as labor-related cost of revenues), the efforts of our subcontractors and the cost of materials used in the performance of our service obligations under our contracts. Contracts performed with a higher proportion of SAIC labor are generally more profitable. The following table presents cost mix for the periods presented:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 29, 2022 | July 30, 2021 | July 29, 2022 | July 30, 2021 | ||||||||||||||||||||
| (as a % of total cost of revenues) | |||||||||||||||||||||||
| Labor-related cost of revenues | 53 | % | 54 | % | 54 | % | 54 | % | |||||||||||||||
| Subcontractor-related cost of revenues | 30 | % | 30 | % | 29 | % | 29 | % | |||||||||||||||
| Supply chain materials-related cost of revenues | 7 | % | 8 | % | 7 | % | 8 | % | |||||||||||||||
| Other materials-related cost of revenues | 10 | % | 8 | % | 10 | % | 9 | % | |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
Cost of revenues mix for the three and six months ended July 29, 2022 were consistent with the same period in the prior year.
Liquidity and Capital Resources
As a services provider, our business generally requires minimal infrastructure investment. We expect to fund our ongoing working capital, commitments and any other discretionary investments with cash on hand, future operating cash flows and, if needed, borrowings under our $1.0 billion Revolving Credit Facility and $300 million MARPA Facility.
We anticipate that our future cash needs will be for working capital, capital expenditures, and contractual and other commitments. We consider various financial measures when we develop and update our capital deployment strategy, which include evaluating cash provided by operating activities, free cash flow and financial leverage. When our cash generation enables us to exceed our target average minimum cash balance, we intend to deploy excess cash through dividends, share repurchases, debt prepayments or strategic acquisitions.
Our ability to fund these needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our direct control. Although we believe that the financing arrangements in place will permit us to finance our operations on acceptable terms and conditions for at least the next year, our future access to, and the availability of financing on acceptable terms and conditions will be impacted by many factors (including our credit rating, capital market liquidity and overall economic conditions). Therefore, we cannot ensure that such financing will be available to us on acceptable terms or that such financing will be available at all. Nevertheless, we believe that our existing cash on hand, generation of future operating cash flows, and access to bank financing and capital markets will provide adequate resources to meet our short-term liquidity and long-term capital needs.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
During the second quarter of fiscal 2023, we amended our Credit Facility. See Note 7 to the condensed and consolidated financial statements contained within this report for additional information.
Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 requires the capitalization of research and development costs for tax purposes, which can then be amortized over five years. Congress may defer, modify, or repeal this provision. However, if the current effective date and current legislation remain in place, the Company's initial assessment is that our cash flows from operations in fiscal 2023 will decrease by a minimum of $90 million, but our net deferred tax assets will increase by a similar amount. The cash flow impact would continue over the five-year amortization period, but would decrease over the period and be immaterial in year six.
Historical Cash Flow Trends
The following table summarizes our cash flows:
| Six Months Ended | |||||||||||
| July 29, 2022 | July 30, 2021 | ||||||||||
| (in millions) | |||||||||||
| Net cash provided by operating activities | $ | 259 | $ | 281 | |||||||
| Net cash used in investing activities | (17) | (256) | |||||||||
| Net cash used in financing activities | (249) | (73) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (7) | $ | (48) | |||||||
Net Cash Provided by Operating Activities. Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the six months ended July 29, 2022 and the comparable prior year period.
Net Cash Used in Investing Activities. Cash used in investing activities for the six months ended July 29, 2022 decreased compared to the prior year period primarily due to cash paid for the acquisitions of Halfaker and Koverse in the prior year period.
Net Cash Used in Financing Activities. Cash used in financing activities for the six months ended July 29, 2022 increased compared to the prior year period as a result of borrowings obtained to finance the Halfaker acquisition in the prior year period, higher share repurchases, and higher term loan principal payments in the current year period.
Critical Accounting Policies
There have been no changes to our critical accounting policies during the six months ended July 29, 2022 from those disclosed in our most recently filed Annual Report on Form 10-K.
Recently Issued But Not Yet Adopted Accounting Pronouncements
For information on recently issued but not yet adopted accounting pronouncements, see Note 1 to the condensed and consolidated financial statements contained within this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our Market Risks from those discussed in our most recently filed Annual Report on Form 10-K.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) and have concluded that as of July 29, 2022 these controls and procedures were operating and effective.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarterly period covered by this report that materially affected, or are likely to materially affect, our internal control over financial reporting.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about legal proceedings in which we are involved in our fiscal 2022 Annual Report on Form 10-K, and we have provided an update to this information in Note 11 to the condensed and consolidated financial statements contained within this report.
In addition to the described legal proceedings, we are routinely subject to investigations and reviews relating to compliance with various laws and regulations. Additional information regarding such investigations and reviews is included in our fiscal 2022 Annual Report on Form 10-K, and we have also updated this information in Note 11 to the condensed and consolidated financial statements contained within this report, under the heading “Government Investigations, Audits and Reviews.”
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in our most recently filed Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities. We may repurchase shares on the open market in accordance with established repurchase plans. Whether repurchases are made and the timing and amount of repurchases depend on a variety of factors including market conditions, our capital position, internal cash generation and other factors. We also repurchase shares in connection with stock option and stock award activities to satisfy tax withholding obligations.
The following table presents repurchases of our common stock during the three months ended July 29, 2022:
Period(1) | Total Number of Shares (or Units) Purchased(2) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(3) | |||||||||||||||||||
| April 30, 2022 - June 3, 2022 | 358,544 | $ | 83.26 | 358,544 | 889,571 | ||||||||||||||||||
| June 4, 2022 - July 1, 2022 | 165,457 | 91.10 | 165,457 | 8,724,114 | |||||||||||||||||||
| July 2, 2022 - July 29, 2022 | 182,378 | 93.21 | 182,378 | 8,541,736 | |||||||||||||||||||
| Total | 706,379 | $ | 87.66 | 706,379 | |||||||||||||||||||
(1)Date ranges represent our fiscal periods during the current quarter. Our fiscal quarters typically consist of one five-week period and two four-week periods.
(2)Includes shares purchased on surrender by stockholders of previously owned shares to satisfy minimum statutory tax withholding obligations related to stock option exercises and vesting of stock awards in addition to shares purchased under our publicly announced plans or programs.
(3)In June 2022, the number of shares that may be purchased increased by 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. As of July 29, 2022, we have repurchased approximately 15.9 million shares of common stock under the program.
Item 3. Defaults Upon Senior Securities
No information is required in response to this item.
Item 4. Mine Safety Disclosures
No information is required in response to this item.
Item 5. Other Information
No information is required in response to this item.
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
Item 6. Exhibits
| Exhibit Number | Description of Exhibit | ||||
| 101 | Interactive Data File. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 104 | The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL. | ||||
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| SCIENCE APPLICATIONS INTERNATIONAL CORPORATION | ||||||||
SIGNATURES
Pursuant to the requirements 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.
Date: September 1, 2022
| Science Applications International Corporation | ||
| /s/ Prabu Natarajan | ||
| Prabu Natarajan Executive Vice President and Chief Financial Officer | ||
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