Science Applications International Corporation (SAIC) — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the three months ended April 29, 2022 (SAIC fiscal 2023 first quarter), compared with the three months ended April 30, 2021. SAIC provides technical, engineering, and IT services primarily to the U.S. government; approximately 98% of quarterly revenue came from U.S. government contracts. The company reports one segment.
Financial performance
| Metric | Quarter ended Apr. 29, 2022 | Comparable 2021 quarter |
|---|---|---|
| Revenue | $1.996 billion | $1.878 billion |
| Operating income | $125 million; 6.3% margin | $130 million; 6.9% margin |
| Net income attributable to common stockholders | $73 million | $81 million |
| Diluted EPS | $1.29 | $1.38 |
| Adjusted EBITDA | $173 million; 8.7% of revenue | $184 million; 9.8% of revenue |
| Cash provided by operating activities | $118 million | $189 million |
Revenue grew 6% year over year; excluding acquired and divested revenue, growth was 3.9%. Halfaker contributed approximately $42 million of revenue. Management attributed growth mainly to ramp-up on new and existing contracts, partly offset by contract completions. Operating income fell 4%; higher indirect costs and a prior-year benefit from favorable indirect-rate settlements offset improved contract portfolio profitability. Cost of revenue was 88.7% of revenue versus 88.4%; SG&A was $92 million versus $80 million.
Operating cash flow declined $71 million, reflecting lower earnings, Halfaker change-in-control payments, and timing of customer collections and vendor disbursements. Investing used $6 million, while financing used $162 million, including $59 million of debt principal payments, $84 million of share repurchases and related withholding, and $22 million of dividends. Cash, cash equivalents, and restricted cash ended at $65 million, down from $115 million at fiscal year-end.
At April 29, 2022, total debt was $2.461 billion net of issuance costs, including $119 million current; long-term debt, net of current portion, was $2.342 billion. The $400 million revolving credit facility had no outstanding balance, and SAIC reported compliance with its credit covenants. Current assets were $1.291 billion and current liabilities $1.334 billion. The company also had a receivables purchase facility with a maximum capacity of $300 million.
Material changes and other notable items
- Total backlog was $24.112 billion, broadly unchanged from $24.092 billion at January 28, 2022; quarterly net bookings were an estimated $2.0 billion. Funded backlog was $3.218 billion. The company expects to recognize about 80% of remaining performance obligations of $4.8 billion within 12 months and about 90% within 24 months.
- Cost-reimbursement revenue increased to $1.095 billion from $990 million; time-and-materials revenue decreased to $386 million from $411 million; firm-fixed-price revenue increased to $515 million from $477 million.
- Net favorable contract estimate adjustments were $5 million, adding an estimated $0.07 to diluted EPS. Revenue recognized from prior-period performance obligations was $4 million.
- Revenue included $23 million from customer exercise of purchase options under certain equipment leases; comparable operating lease income was $9 million in 2021.
- SAIC paid a $0.37-per-share quarterly dividend and repurchased approximately 787,000 shares under its announced plan during the quarter. After quarter-end, the authorized repurchase capacity increased by approximately 8.0 million shares.
Outlook, risks, and contingencies
The filing provides no specific full-year earnings or revenue guidance. Management said existing cash, expected operating cash flows, and access to bank financing and capital markets should provide adequate resources for short- and long-term needs, while noting financing availability depends on market and company conditions. If the current tax law requiring capitalization of research and development costs remains in effect, management initially estimated fiscal 2023 operating cash flow could decline by at least $90 million, with a similar increase in net deferred tax assets.
Management highlighted exposure to U.S. government spending priorities, appropriations delays or shutdowns, possible spending reductions, inflationary pressure on fixed-price contracts, and intense bidding competition and pricing pressure. COVID-19 had not materially affected liquidity or operations at the filing date, but future effects remained uncertain. Government contract audits and reviews could result in cost disallowances, penalties, or other consequences; $14 million was reserved for estimated customer refunds related to indirect cost audits and Cost Accounting Standards. SAIC continued negotiations with the Marine Corps to recover costs following termination for convenience of its Assault Amphibious Vehicle contract. Management did not expect other disclosed routine claims and lawsuits to materially adversely affect the company.
Important facts for investors to verify
- Whether revenue growth, backlog conversion, and new contract ramp-ups continue, and whether margins recover from the year-over-year decline.
- Whether working-capital timing and acquisition-related payments normalize and operating cash flow improves.
- Debt repayment, floating-rate exposure, and available liquidity, including the effect of the R&D tax capitalization rule.
- Outcomes of government audits and the Marine Corps termination-cost negotiations, and any resulting financial effects.
- Whether government budget, competition, and inflation risks affect awards, contract economics, or backlog realization.