Science Applications International Corporation (SAIC) — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2020. The filing’s fourth-quarter figures are for the three months ended on that date; this is not a calendar-year 2019 report. Dollar amounts are in millions unless noted.
Business context
SAIC provides technical, engineering, systems-integration and enterprise IT services, primarily to U.S. government customers. More than 95% of revenue came from U.S. government prime contracts and subcontracts; the filing reports 98% of FY2020 revenue from the U.S. government. The January 2019 Engility acquisition materially expanded the business. SAIC acquired Unisys Federal on March 13, 2020, after fiscal year-end.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $6,379 | $4,659 |
| Operating income | $370; 5.8% margin | $220; 4.7% margin |
| Net income | $229 | $137 |
| Net income attributable to common stockholders | $226 | $137 |
| Diluted EPS | $3.83 | $3.11 |
| Operating cash flow | $458 | $184 |
| Cash and cash equivalents at year-end | $188 | $237 |
| Long-term debt, including current portion | $1,921 | $2,089 |
Revenue grew 37%, primarily because Engility was included for a full year; excluding acquired revenue, revenue contracted 1.4%, reflecting completed contracts and acquisition-related dis-synergies, partly offset by increased program volume. Operating margin improved with a more labor-intensive cost mix, acquisition synergies and lower acquisition/integration costs. Net income growth also reflected higher operating income, partly offset by higher interest expense. Operating cash flow increased by $274, mainly from Engility operations, recovery of collections delayed by the prior-year federal shutdown, and lower acquisition/integration payments.
FY2020 fourth quarter: Revenue was $1,540, operating income $88, net income $60, and diluted EPS $1.01. In FY2019’s fourth quarter, revenue was $1,192, operating income $7, net loss $9, and diluted EPS was a loss of $0.20. The filing’s quarterly table reports the figures but does not clearly attribute the year-over-year fourth-quarter profit change to specific causes.
Liquidity, debt and other indicators
- Year-end current assets were $1,430 and current liabilities $1,128; cash was $188 and receivables $1,099.
- FY2020 investing cash outflow was $47 and financing cash outflow was $455. Capital expenditures were $21. The company paid $87 in dividends and repurchased approximately 2.2 million shares for $177 under its repurchase program.
- Total backlog rose to $15.3 billion from $13.8 billion; net bookings were an estimated $7.9 billion versus $4.6 billion. Funded backlog was $2.6 billion and negotiated unfunded backlog $12.7 billion.
- Cost-reimbursement contracts accounted for 57% of revenue, time-and-materials 20%, and firm-fixed-price 23%. The labor-related share of cost of revenue increased to 54% from 48%.
- At January 31, debt was $1.941 billion principal ($1.921 billion net of issuance costs). SAIC reported compliance with credit-facility covenants and no revolver balance outstanding. The filing’s contractual-obligations table lists $1.941 billion of debt payments and $270 million of estimated interest payments.
Outlook, risks and unusual items
- No specific FY2021 revenue or earnings guidance is provided. Management said it believed existing cash, expected operating cash flows and financing access would provide adequate resources for near- and long-term needs.
- Management reported minimal COVID-19 operational impact at the filing date, while warning that a prolonged pandemic could adversely affect operations, customers, supply chains, financial results and cash flows.
- Unisys Federal was acquired after year-end for approximately $1.2 billion. To fund it, SAIC issued $400 million of 4.875% notes due 2028, borrowed $600 million under a new term loan, and sold approximately $200 million of receivables in February 2020. These transactions are not reflected in FY2020 year-end debt.
- SAIC expected to complete Engility-related restructuring in FY2021; total restructuring costs were estimated at approximately $49 million, including costs already incurred.
- Key exposures include reliance on federal budgets and contract awards, competitive pricing, contract cost-estimation risk, government audits and investigations, cybersecurity, and workforce recruitment and retention. The company had a $54 million liability for potential refunds from open indirect-cost audits and CAS matters. The final audit outcomes remain uncertain.
- Contract estimate changes increased FY2020 operating income by a net $22 million. The company also recorded an $11 million R&D tax-credit benefit, including credits related to earlier years; management expected the effective tax rate to increase in FY2021 as that benefit would not recur at the same level.
- Goodwill impairment testing found reporting-unit fair values significantly above carrying values; no goodwill impairment was recorded. The auditor issued unqualified opinions on the financial statements and internal controls, and identified revenue estimation, government audit reserves and uncertain tax benefits as critical audit matters.
Important facts for investors to verify
- How much of reported growth and backlog converts to revenue and cash, given the 1.4% contraction excluding acquired revenue and the large unfunded backlog component.
- Unisys Federal’s integration, expected contribution and post-acquisition leverage, including the new notes, term loan and receivables facility.
- Results of open government audits and whether the $54 million reserve is sufficient.
- Whether cost synergies and labor-mix improvements persist, and whether contract estimates or fixed-price cost overruns materially affect margins.
- COVID-19 effects on contract performance, workforce availability, customer payments and cash flow, along with federal budget and procurement developments.