Science Applications International Corporation (SAIC) — FY2022 Form 10-K
Reporting period: Fiscal year ended January 28, 2022; comparisons are with the year ended January 29, 2021. SAIC provides technical, engineering, systems integration and enterprise IT services, primarily to the U.S. government. The company reported one segment; 98% of revenue came from U.S. government prime contracts or related subcontracts.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $7.394 billion | $7.056 billion | Up 5% |
| Operating income | $462 million | $390 million | Up 18% |
| Operating margin | 6.2% | 5.5% | Up 0.7 percentage points |
| Net income attributable to common stockholders | $277 million | $209 million | Up 33% |
| Diluted EPS | $4.77 | $3.56 | Up 34% |
| Operating cash flow | $518 million | $755 million | Down $237 million |
| Adjusted EBITDA (non-GAAP) | $686 million | $627 million | Up 9% |
Revenue growth reflected higher volume on new and existing contracts and acquisitions, partly offset by contract completions. Organic revenue growth, excluding acquired and divested revenue, was 2.5%. Operating margin improved with stronger contract profitability, favorable contract-estimate changes and a benefit from settling prior indirect-rate years; higher indirect costs partly offset these gains. Net favorable contract-estimate adjustments added $13 million to operating income, versus $9 million in FY2021.
Operating cash flow declined mainly because FY2021 included a $170 million initial benefit from the receivables-sale facility and because of working-capital effects related to deferred payroll taxes. FY2022 cash flow also benefited from lower income-tax payments and higher net earnings. Investing cash outflow was $292 million; financing cash outflow was $301 million. Cash and cash equivalents were $106 million at year-end ($115 million including restricted cash).
Debt, liquidity and capital allocation
Long-term debt principal was $2.540 billion, including $148 million current; the balance-sheet carrying amount, net of issuance costs, was $2.518 billion. The company had approximately $2.1 billion of variable-rate debt and used interest-rate swaps to fix rates on a substantial portion. A $400 million revolving credit facility had no amount drawn at year-end. SAIC reported covenant compliance and expects cash, operating cash generation and financing access to meet near- and long-term needs. Total contractual obligations were $3.412 billion, including $458 million due in FY2023.
SAIC repurchased approximately 2.4 million shares for $211 million during FY2022 and paid $1.48 per share in dividends. The board declared a further $0.37-per-share dividend after year-end. Backlog was $24.1 billion, up from $21.5 billion; funded backlog was $3.5 billion and negotiated unfunded backlog was $20.6 billion. Net bookings fell to $9.4 billion from $11.9 billion.
Material developments, outlook and risks
- SAIC acquired Halfaker, a health IT company, for approximately $228 million in July 2021, and Koverse, a data-management software company, for $30 million in May 2021. The acquisitions expanded health IT, digital transformation and data/AI capabilities.
- COVID-19 reduced FY2022 revenue by approximately $125 million, net of $62 million of labor cost recovery under the CARES Act, and reduced operating income by about $8 million. The CARES Act labor support expired September 30, 2021. The company said pandemic effects were less significant than in the prior year and had not materially affected liquidity.
- Management provided no numerical revenue or earnings guidance in the supplied filing text. It cited opportunities in areas including broadband, cyber and climate resiliency, while noting that future results depend on federal budgets, procurement timing and competitive awards. It warned of possible continuing resolutions or shutdowns and the risk that inflation could pressure fixed-price contracts.
- Approximately 26% of FY2022 revenue came from firm-fixed-price contracts, where cost overruns can reduce margins; cost-reimbursement contracts were 54% and time-and-materials 20%. Competition, contract-estimate judgments, employee recruitment and retention, cybersecurity, government audits, contract termination and customer concentration are key risks.
- The company expects a potentially material FY2023 cash-flow decrease if the tax-law requirement to capitalize research and development costs takes effect as scheduled; management was evaluating the impact. Its estimate of $343 million in gross NOL carryforwards may be subject to ownership-change limitations.
- DCAA indirect-cost audits remain open for certain prior years and the current year. SAIC recorded a $17 million liability for estimated customer refunds related to potential audit and Cost Accounting Standards adjustments; final audit outcomes are uncertain. The company also reported $78 million of unrecognized tax benefits and an ongoing IRS examination for fiscal 2016–2019.
- SAIC said ordinary-course litigation was not expected to materially affect its financial position or results. It continued negotiations with the Marine Corps to recover costs from the 2018 termination for convenience of its Assault Amphibious Vehicle contract.
Important facts for investors to verify
- Whether backlog converts to funded work and revenue: $20.6 billion of reported backlog was negotiated but unfunded, and bookings declined year over year.
- Whether improved contract margins and favorable estimate adjustments are repeatable, and whether fixed-price cost pressures or higher indirect costs reverse the improvement.
- How much operating cash flow was supported by receivables sales and working-capital timing, and the cash impact of the FY2023 R&D tax rule.
- Debt repayment capacity, refinancing needs and covenant headroom, particularly with $2.54 billion of debt principal and significant scheduled maturities.
- Final outcomes of open government cost audits, the recorded $17 million refund reserve, tax examinations and the AAV termination-cost recovery negotiations.
- Integration, earnout and retention costs from the Halfaker and Koverse acquisitions, and whether those acquisitions deliver the expected growth and returns.