Science Applications International Corp - Quarter Report: 2024 August (Form 10-Q)

Goodwill is not amortized, but rather tested for potential impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The goodwill impairment test is performed at

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

impairment. For the goodwill impairment test immediately after the reorganization, the Company performed a quantitative assessment of its goodwill as of February 3, 2024 for its new goodwill reporting units. The Company estimated the fair value of each reporting unit using a 50:50 weighting of fair values derived from an income approach and market approach.

Under the income approach, the Company estimated the fair value of its reporting units using a multi-year discounted cash flow model involving assumptions about projected future revenue growth, operating margins, income tax rates, capital expenditures, discount rate, and terminal value. Under the market approach, the Company estimated the fair value of its reporting units based on multiples of earnings derived from observable market data of comparable public companies.

Intangible Assets

$()$ $ $()$ Developed technology () () Trade name () () Total intangible assets$ $()$ $ $()$

Amortization expense related to intangible assets was $ million and $ million for the three and six months ended August 2, 2024 and August 4, 2023, respectively. There were intangible asset impairment losses during the periods presented.

2026 2027 2028 2029 Thereafter Total$

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, and other factors.

% and % for the three and six months ended August 2, 2024, respectively, and % and % for the three and six months ended August 4, 2023, respectively. The Company’s effective tax rate primarily differs from the statutory tax rate due to the deduction for foreign derived intangible income, research and development tax credits, and stock-based compensation windfalls.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

% %$ $()$ $ $()$ Term Loan B Facility due October 2025 % % ()

Term Loan B2 Facility due March 2027

% % ()

Term Loan B3 Facility due February 2031

% % () Senior Notes due April 2028 % % () () Revolving Credit Facility due June 2027 % %

Total debt

$ $()$ $ $()$ Less current portion

Total debt, net of current portion

$ $()$ $ $()$

As of August 2, 2024, the Company had a $ billion secured credit facility (the Credit Facility) consisting of a Term Loan A Facility due June 2027, a Term Loan B3 Facility due February 2031 (together, the "Term Loan Facilities"), and a $ billion Revolving Credit Facility due June 2027 (the "Revolving Credit Facility").

On February 8, 2024, the Company executed the Sixth Amendment to the Third Amended and Restated Credit Agreement ("Sixth Amendment"), which established a $ million senior secured term loan credit facility ("Term Loan B3 Facility due February 2031"). The entire Term Loan B3 Facility due February 2031 was immediately borrowed by the Company and the proceeds were used to pay in full the outstanding principal balances under the Term Loan B Facility due October 2025 and Term Loan B2 Facility due March 2027. The Tranche B3 Facility is subject to the same covenants and events of default as the Company's existing Term Loan Facilities.

Borrowings under the Term Loan B3 Facility due February 2031 amortize quarterly beginning on July 31, 2024 at % of the original borrowed amount with the remaining unamortized balance due in full upon its maturity on February 8, 2031. Borrowings will bear interest based on the Term Secured Overnight Financing Rate ("Term SOFR") or a base rate, plus an applicable margin of % for Term SOFR loans and % for base rate loans. In the event any portion of the Term Loan B3 Facility due February 2031 is repaid prior to August 8, 2024 as a result of a repricing event, the Company will be required to repay a % fee of the amount repaid. After this initial six month period, the Term Loan B3 Facility due February 2031 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.

During the six months ended August 2, 2024, the Company incurred $ million of debt issuance costs associated with the Sixth Amendment, of which $ million was recognized in interest expense and the remaining $ million deferred and amortized to interest expense through the maturity date of the facility utilizing the effective interest rate method.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

million and $ million, respectively, on the Term Loan A Facility due June 2027 and made a scheduled principal payment of $ million on the Term Loan B3 Facility due February 2031.

During the three and six months ended August 2, 2024, the Company borrowed $ million and $ million, respectively, and repaid $ million and $ million, respectively, under the Revolving Credit Facility. As of August 2, 2024, the outstanding principal under the Revolving Credit Facility was classified as current portion of debt on the condensed consolidated balance sheets. Subsequent to quarter end, the Company repaid $ million on the Revolving Credit Facility. Commitment fees for undrawn amounts under the Revolving Credit Facility range from % to % per annum based on the Company’s leverage ratio.

As of August 2, 2024, the Company was in compliance with the covenants under its Credit Facility.

As of August 2, 2024 and February 2, 2024, the carrying value of the Company’s outstanding debt obligations approximated its fair value. The fair value of 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.

2026 2027 2028 2029 Thereafter Total principal payments$

% $ $

(1) The fair value of the fixed interest rate swap asset is included in "Other assets" on the condensed 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 within the Credit Facility. The counterparties to all swap agreements are financial institutions.

million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following August 2, 2024.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

$ $

Other comprehensive loss before reclassifications

() ()Amounts reclassified from accumulated other comprehensive income() ()Income tax impact

Net other comprehensive loss

() ()Balance at August 2, 2024$ $ $ Three months ended August 4, 2023Balance at May 5, 2023$ $ $

Other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income

() ()Income tax impact() ()

Net other comprehensive income

Balance at August 4, 2023$ $ $ Six months ended August 2, 2024Balance at February 2, 2024$ $ $ Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income() ()Income tax impact

Net other comprehensive loss

() ()Balance at August 2, 2024$ $ $ Six months ended August 4, 2023 Balance at February 3, 2023$ $ $ Other comprehensive income before reclassifications

Amounts reclassified from accumulated other comprehensive income

() ()

Income tax impact

Net other comprehensive income

Balance at August 4, 2023$ $ $ "

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

million of certain designated eligible receivables with the U.S. government.

During the three and six months ended August 2, 2024, the Company incurred purchase discount fees of $ million and $ million, respectively. During the three and six months ended August 4, 2023, the Company incurred purchase discount fees of $ million and $ million, respectively. The purchase discount fees are presented in "Other (income) expense, net" on the condensed consolidated statements of income and are reflected as cash flows from operating activities on the condensed consolidated statements of cash flows.

$ Sale of receivables Cash collections()()

Outstanding balance sold to Purchaser(1)

Cash collected, not remitted to Purchaser(2)

()()Remaining sold receivables$ $

(1) For the six months ended August 2, 2024, the Company recorded a net decrease of $ million to cash flows from operating activities from sold receivables. For the six months ended August 4, 2023, there was no net impact to cash flows from operating activities from sold receivables.

customer facing operating sectors with five customer facing business groups supported by the enterprise organizations, including the Innovation Factory. The business groups represent the Company’s operating segments and have been aggregated into reportable segments (Defense and Intelligence, and Civilian) given the similarity in economic and qualitative characteristics, and based on the nature of the customers they serve. The Company defines its operating segments based on the way the CODM, currently the Company's CEO, manages the operations for the purpose of allocating resources and assessing performance.

The Defense and Intelligence segment provides a diverse portfolio of national security solutions to the defense and intelligence departments and agencies of the United States Government.

The Civilian segment provides solutions to the civilian markets, encompassing federal, state, and local governments, in order to deliver services for citizen well-being and protecting lives. This includes integrating solutions into a spectrum of public service missions that impact travel, trade, health and the economy.

The offerings of both reportable segments entail the integration of emerging technologies into mission critical operations that modernize and enable national imperatives, including IT modernization, digital engineering, AI, mission systems support, training and simulation, and ground vehicles support. These services include end-to-end solutions spanning the design, development, integration, deployment, management and operations, sustainment and security of the customers’ entire IT infrastructure.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

$ $ $

Civilian

Total revenues

$ $ $ $

Operating income (loss):

Defense and Intelligence

$ $ $ $

Civilian

Corporate

() ()

Total operating income (loss)

$ $ $ $

The income statement performance measures regularly provided to the CODM are "Revenues" and "Operating income." As a result, "Interest expense, net," "Other (income) expense, net" and "Provision for income taxes" as reported in the condensed consolidated statements of income are not allocated to the Company's segments.

Asset information by segment is not a key measure of performance used by the CODM.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

million as of August 2, 2024, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds of $ million, principally related to performance and payment bonds on the Company’s contracts.

million as of August 2, 2024 and is recorded within "Other assets" on the condensed consolidated balance sheets. The transaction is not expected to result in a loss for the Company.

Quarterly Dividend Declared

On August 29, 2024, the Company's Board of Directors declared a quarterly dividend of $ per share of the Company's common stock payable on October 25, 2024 to stockholders of record on October 11, 2024.

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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 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 and divestitures. 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 2025 began on February 3, 2024 and ends on January 31, 2025, while fiscal 2024 began on February 4, 2023 and ended on February 2, 2024.

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 1,800 active contracts and task orders and employ approximately 24,000 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 and located in the United States.

Effective February 3, 2024, the first day of fiscal 2025, we completed a business reorganization which replaced our previous two operating sectors with five customer facing business groups supported by the enterprise organizations, including the Innovation Factory. The five business groups represent our operating segments and have been aggregated into reportable segments (Defense and Intelligence, and Civilian) given the similarity in economic and qualitative characteristics, and based on the nature of the customers they serve.

The Defense and Intelligence segment provides a diverse portfolio of national security solutions to the defense and intelligence departments and agencies of the United States Government.

The offerings of both reportable segments entail the integration of emerging technologies into mission critical operations that modernize and enable national imperatives, including IT modernization, digital engineering, artificial intelligence ("AI"), mission systems support and advisory, training and simulation, and ground vehicles support. These services include end-to-end solutions spanning the design, development, integration, deployment, management and operations, sustainment and security of the customers’ entire IT infrastructure.

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Our Innovation Factory supports the operating segments by developing superior enterprise-class solutions which are delivered to the our customers as stand-alone solutions or integrated with and aligned to product offerings through the operations of the business to meet complex customer needs and accelerate digital transformation. The Innovation Factory includes designated teams focused on AI, application development, network services, platforms and cloud, and cybersecurity. It uses a highly automated, cloud-hosted tool set to rapidly build, test and deploy solutions and works with customers to enhance solutions going forward.

Costs associated with corporate functions that are not allocable to the reportable segments are presented as Corporate. See Note 11—Business Segments Information to the condensed consolidated financial statements contained within this report for additional information.

Economic Opportunities, Challenges, and Risks

During the three and six months ended August 2, 2024, we generated 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. In March 2024, the President signed appropriation measures that provide funding for GFY 2024 for all of the U.S. government and submitted the GFY 2025 budget request which adheres to the Fiscal Responsibility Act of 2023. The GFY 2025 budget includes 1% growth for defense budgets and an overall 1% growth for non-defense budgets. If Congress is not able to pass the GFY 2025 funding measures by the end of September 2024, it could result in the U.S. government operating on a continuing resolution or could potentially lead to a partial or full government shutdown.

In January 2023, the Federal debt ceiling was reached and the U.S. Department of the Treasury was operating under "extraordinary measures." In June 2023, the President signed the Fiscal Responsibility Act of 2023 which suspends the Federal debt ceiling until January 1, 2025, postponing the threat of a federal government default. If a new debt ceiling agreement is not reached by January 2025, the U.S. Department of the Treasury will return to operating under "extraordinary measures."

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, 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.

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. Additionally, the U.S. government has put renewed emphasis on increasing the number of small business prime set-aside contracts that further reduce the addressable market in some areas.

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 Innovation Factory develops superior enterprise-class solutions which are delivered to our customers as stand-alone solutions or integrated with and aligned to our product offerings to meet complex customer needs and accelerate the digital transformation. 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

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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.

Management of Operating Performance and Reporting

Our business and program management process is directed by professionals focused on serving our customers by providing high quality services in achieving program requirements. These professionals 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.

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 resulting from these factors. 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 and materials) in order to understand operating margin because programs with a higher proportion of SAIC labor are generally more profitable. Changes in cost of revenues as a percentage of revenues 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 provision of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements.

Condensed Consolidated 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 condensed consolidated results of operations:


	Three Months Ended								Six Months Ended
	August 2, 2024			Percent change		August 4, 2023			August 2, 2024			Percent change		August 4, 2023
	(dollars in millions)
Revenues	$	1,818		2	%	$	1,784		$	3,665		(4	%)	$	3,812
Cost of revenues	1,608			3	%	1,568			3,242			(4	%)	3,361
As a percentage of revenues	88.4		%			87.9		%	88.5		%			88.2		%
Selling, general and administrative expenses	77			(13	%)	88			162			(6	%)	172
(Gain) loss on divestitures, net of transaction costs	—			(100	%)	(234)			—			(100	%)	(240)
Other operating (income) expense	(1)			100	%	—			(4)			100	%	—
Operating income	134			(63	%)	362			265			(49	%)	519
As a percentage of revenues	7.4		%			20.3		%	7.2		%			13.6		%
Provision for income taxes	(19)			(78	%)	(88)			(37)			(67	%)	(113)
Net income	$	81		(67	%)	$	247		$	158		(54	%)	$	345

Revenues. Revenues increased $34 million for the three months ended August 2, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing and new contracts, partially offset by contract completions.

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Revenues decreased $147 million for the six months ended August 2, 2024 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($188 million) in the prior year (see Note 4—Divestitures to the condensed consolidated financial statements), and contract completions. This was partially offset by ramp up in volume on existing and new contracts. Adjusting for the impact of the divestiture, revenues grew 1.1%.

Operating Income. Operating income as a percentage of revenues for the three months ended August 2, 2024 decreased from the comparable prior year period primarily due to the gain on the sale of the Supply Chain Business ($234 million) in the prior year period, and contract completions, partially offset by ramp up in volume on existing and new contracts.

Operating income as a percentage of revenues for the six months ended August 2, 2024 decreased from the comparable prior year period primarily due to the gain on the sale of the Supply Chain Business ($233 million) in the prior year, a gain recognized from the deconsolidation of FSA ($7 million), and contract completions, partially offset by ramp up in volume on existing and new contracts.

Income Taxes. Our effective income tax rate was 19.6% and 19.3% for the three and six months ended August 2, 2024, respectively, and 26.4% and 24.7% for the three and six months ended August 4, 2023, respectively. Our effective tax rate differs from the statutory tax rate primarily due to the deduction for foreign derived intangible income, research and development tax credits, and stock-based compensation windfalls.

Our effective tax rate for the three and six months ended August 2, 2024 decreased compared to the same periods in the previous year due to the non-recurrence of a gain from the disposition of the Supply Chain Business and the associated non-deductible goodwill.

Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. While the impact to income taxes payable was most significant in fiscal 2023, this impact will decrease over the five-year amortization period and is anticipated to be immaterial in year six. The actual impact will depend on the amount of research and development costs incurred by us, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors.

In December 2021, the Organisation for Economic Co-operation and Development (OECD) enacted model rules for a new 15% global minimum tax framework (“Pillar Two”) which became effective in certain jurisdictions beginning in fiscal 2024. We do not anticipate Pillar Two to have a significant impact on our effective tax rate or our consolidated results of operations, financial position, and cash flows.

Segment and Corporate Results

The primary financial performance measures we use to manage our reportable segments and monitor results of operations are revenues and operating income. The following tables summarize our results of operations by reportable segment:


Defense and Intelligence	Three Months Ended								Six Months Ended
	August 2, 2024			Percent change		August 4, 2023			August 2, 2024			Percent change		August 4, 2023
	(dollars in millions)
Revenues	$	1,415		2	%	$	1,389		$	2,851		(5	%)	$	2,986
Operating income	$	107		1	%	$	106		$	214		(7	%)	$	230
As a percentage of revenues	7.6		%			7.6		%	7.5		%			7.7		%

Revenues: Revenues increased $26 million for the three months ended August 2, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing and new contracts, partially offset by contract completions.

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Revenues decreased $135 million for the six months ended August 2, 2024 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($188 million) in the prior year, and contract completions. This was partially offset by ramp up in volume on existing and new contracts. Adjusting for the impact of the divestiture, revenues grew 1.9%.

Operating Income: Operating income as a percentage of revenues for the three months ended August 2, 2024 was comparable to the prior year period, primarily due to ramp up in volume on existing and new contracts, offset by contract completions.

Operating income as a percentage of revenues for the six months ended August 2, 2024 decreased from the comparable prior year period primarily due to contract completions and the sale of the Supply Chain Business in the prior year, partially offset by ramp up in volume on existing and new contracts.


Civilian	Three Months Ended								Six Months Ended
	August 2, 2024			Percent change		August 4, 2023			August 2, 2024			Percent change		August 4, 2023
	(dollars in millions)
Revenues	$	403		2	%	$	395		$	814		(1	%)	$	826
Operating income	$	34		(21	%)	$	43		$	68		(20	%)	$	85
As a percentage of revenues	8.4		%			10.9		%	8.4		%			10.3		%

Revenues: Revenues increased $8 million for the three months ended August 2, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing contracts.

Revenues decreased $12 million for the six months ended August 2, 2024 as compared to the same period in the prior year primarily due to reduced volume on existing contracts, partially offset by new contracts.

Operating Income: Operating income as a percentage of revenues for the three months ended August 2, 2024 decreased from the comparable prior year period partially due to timing and volume mix.

Operating income as a percentage of revenues for the six months ended August 2, 2024 decreased from the comparable prior year primarily due to reduced volume on existing contracts.


Corporate	Three Months Ended						Six Months Ended
	August 2, 2024		Percent change		August 4, 2023		August 2, 2024		Percent change		August 4, 2023
	(dollars in millions)
Operating (loss) income	$	(7)	103	%	$	213	$	(17)	108	%	$	204

Operating (Loss) Income: Operating loss increased $220 million for the three months ended August 2, 2024 as compared to the same period in the prior year primarily due to the gain recognized from the divestiture of the Supply Chain Business in the prior year period ($234 million), partially offset by lower selling, general and administrative expenses.

Operating loss increased $221 million for the six months ended August 2, 2024 as compared to the same period in the prior year primarily due to the divestiture of the Supply Chain Business in the prior year ($233 million) and the gain recognized from the deconsolidation of FSA ($7 million), partially offset by lower selling, general and administrative expenses.

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 are also useful for management and investors 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.

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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 consolidation and employee related costs such as retention and severance costs. The acquisition and integration costs relate to our acquisitions.

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 our long-term financial performance.

EBITDA and adjusted EBITDA for the periods presented were calculated as follows:


	Three Months Ended						Six Months Ended
	August 2, 2024			August 4, 2023			August 2, 2024			August 4, 2023
	(dollars in millions)
Net income	$	81		$	247		$	158		$	345
Interest expense, net and loss on sale of receivables	35			31			72			66
Provision for income taxes	19			88			37			113
Depreciation and amortization	34			36			69			72
EBITDA	169			402			336			596
EBITDA as a percentage of revenues	9.3		%	22.5		%	9.2		%	15.6		%
Acquisition and integration costs(1)	—			1			(2)			1
Restructuring and impairment costs	2			5			4			6
Recovery of acquisition and integration costs and restructuring and impairment costs(2)	(1)			—			(2)			—
(Gain) loss on divestitures, net of transaction costs	—			(234)			—			(240)
Adjusted EBITDA	$	170		$	174		$	336		$	363
Adjusted EBITDA as a percentage of revenues	9.4		%	9.8		%	9.2		%	9.5		%

(1) Adjustment consists of a reversal of immaterial costs related to the Koverse acquisition.

(2) Adjustment reflects the portion of acquisition and integration costs and restructuring and impairment costs recovered through our indirect rates in accordance with U.S. government Cost Accounting Standards.

Adjusted EBITDA as a percentage of revenues for the three and six months ended August 2, 2024 decreased compared to the same periods in the prior year primarily due to contract completions, partially offset by ramp up in volume on existing and new contracts.

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.

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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.

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, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.

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:


	August 2, 2024						February 2, 2024
	Defense and Intelligence		Civilian		Total SAIC		Defense and Intelligence		Civilian		Total SAIC
	(in millions)
Funded backlog	$	3,411	$	826	$	4,237	$	2,707	$	832	$	3,539
Negotiated unfunded backlog	15,819		2,843		18,662		16,316		2,908		19,224
Total backlog	$	19,230	$	3,669	$	22,899	$	19,023	$	3,740	$	22,763

We had net bookings worth an estimated $1.2 billion and $3.8 billion during the three and six months ended August 2, 2024.

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 “Business - Contract Types” in Part I, Item 1 of the most recently filed Annual Report on Form 10-K. The following table summarizes revenues by contract type as a percentage of each reportable segment and total SAIC revenues for the periods presented:

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	Three Months Ended
	August 2, 2024						August 4, 2023
	Defense and Intelligence		Civilian		Total SAIC		Defense and Intelligence		Civilian		Total SAIC
	(in millions)
Cost reimbursement	77	%	5	%	61	%	79	%	3	%	62	%
Time and materials ("T&M")	11	%	66	%	23	%	8	%	62	%	20	%
Firm-fixed price ("FFP")	12	%	29	%	16	%	13	%	35	%	18	%
Total	100	%	100	%	100	%	100	%	100	%	100	%


	Six Months Ended
	August 2, 2024						August 4, 2023
	Defense and Intelligence		Civilian		Total SAIC		Defense and Intelligence		Civilian		Total SAIC
	(in millions)
Cost reimbursement	78	%	5	%	62	%	73	%	4	%	58	%
Time and materials ("T&M")	11	%	65	%	23	%	8	%	60	%	19	%
Firm-fixed price ("FFP")	11	%	30	%	15	%	19	%	36	%	23	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

The change in contract mix for the six months ended August 2, 2024 is primarily due to a decrease in firm-fixed price type contracts due to the divestiture of the Supply Chain Business in the prior year, which historically had a higher proportion of these contracts.

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 as a percentage of each reportable segment and total SAIC revenues for the periods presented:


	Three Months Ended
	August 2, 2024						August 4, 2023
	Defense and Intelligence		Civilian		Total SAIC		Defense and Intelligence		Civilian		Total SAIC
	(in millions)
Labor-related cost of revenues	56	%	59	%	56	%	55	%	59	%	56	%
Subcontractor-related cost of revenues	29	%	33	%	30	%	31	%	35	%	32	%
Other materials-related cost of revenues	15	%	8	%	14	%	14	%	6	%	12	%
Total	100	%	100	%	100	%	100	%	100	%	100	%


	Six Months Ended
	August 2, 2024						August 4, 2023
	Defense and Intelligence		Civilian		Total SAIC		Defense and Intelligence		Civilian		Total SAIC
	(in millions)
Labor-related cost of revenues	57	%	59	%	57	%	53	%	58	%	54	%
Subcontractor-related cost of revenues	29	%	32	%	30	%	29	%	34	%	30	%
Supply chain materials-related cost of revenues	—	%	—	%	—	%	5	%	—	%	4	%
Other materials-related cost of revenues	14	%	9	%	13	%	13	%	8	%	12	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

The change in cost of revenues mix for the six months ended August 2, 2024 is primarily due to a decrease in supply chain materials-related costs due to the divestiture of the Supply Chain Business in the prior year.

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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.

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.

During the first quarter of fiscal 2025, we amended our Credit Facility. See Note 7—Debt Obligations to the condensed consolidated financial statements contained within this report for additional information.

Historical Cash Flow Trends

The following table summarizes our cash flows:


	Six Months Ended
	August 2, 2024		August 4, 2023
	(in millions)
Net cash provided by operating activities	$	236	$	232
Net cash (used in) provided by investing activities	(16)		334
Net cash used in financing activities	(267)		(323)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(47)	$	243

Net Cash Provided by Operating Activities. Cash flows provided by operating activities increased $4 million for the six months ended August 2, 2024 as compared to the prior year primarily due to timing of customer collections and vendor payments, lower tax payments in the current year, and other net favorable changes in working capital, partially offset by higher incentive-based compensation payments and higher cash used from the Master Accounts Receivable Purchase Agreement ("MARPA Facility") in the current year (see Note 10—Sales of Receivables to the condensed consolidated financial statements contained within this report for additional information).

Net Cash (Used in) Provided by Investing Activities. Cash used in investing activities for the six months ended August 2, 2024 was $16 million compared to cash provided by investing activities of $334 million in the prior year period. This change is primarily due to the $355 million of cash proceeds for the sale of the Supply Chain Business in the prior year period (see Note 4 to the condensed consolidated financial statements).

Net Cash Used in Financing Activities. Cash used in financing activities for the six months ended August 2, 2024 decreased compared to the prior year period primarily due to higher proceeds received from borrowings, net of principal payments, partially offset by higher share repurchases in the current year.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates during the six months ended August 2, 2024 from those disclosed in our most recently filed Annual Report on Form 10-K.

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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 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, under the supervision and 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 August 2, 2024 these controls and procedures were operating and effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarterly period covered by this report which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We have provided information about legal proceedings in which we are involved in our fiscal 2024 Annual Report on Form 10-K, and we have provided an update to this information in Note 12—Legal Proceedings and Other Commitments and Contingencies to the condensed consolidated financial statements contained within this report, which is incorporated herein by reference.

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 2024 Annual Report on Form 10-K, and we have also updated this information in Note 12—Legal Proceedings and Other Commitments and Contingencies to the condensed consolidated financial statements contained within this report, under the heading “Government Investigations, Audits and Reviews,” which is incorporated herein by reference.

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 August 2, 2024:


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)
May 4, 2024 - June 7, 2024	269,779	$	129.67	268,906	3,297,270
June 8, 2024 - July 5, 2024	390,280	116.08		390,280	2,906,990
July 6, 2024 - August 2, 2024	1,016,832	119.14		1,015,737	1,891,253
Total	1,676,891	$	120.12	1,674,923

(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 August 2, 2024, we have repurchased approximately 22.6 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

During the three months ended August 2, 2024, director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement," as such terms are defined in Item 408 of Regulation S-K.

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Item 6. Exhibits


Exhibit Number			Description of Exhibit

31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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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 5, 2024


Science Applications International Corporation

/s/ Prabu Natarajan
Prabu Natarajan Executive Vice President and Chief Financial Officer

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Science Applications International Corp - Quarter Report: 2024 August (Form 10-Q)

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