Business context and reporting period
Science Applications International Corporation (SAIC) filed this unaudited Form 10-Q for the quarter ended July 31, 2020, the second quarter of fiscal 2021. SAIC provides technical, engineering and enterprise IT services, primarily to U.S. government customers. It reports one segment. The comparative quarter ended August 2, 2019.
On March 13, 2020, SAIC acquired Unisys Federal for approximately $1.2 billion, expanding its federal IT, cloud and modernization capabilities. The acquisition contributed $175 million of second-quarter revenue and $279 million for the six-month period.
Key financial results
| Metric | Three months ended July 31, 2020 | Three months ended August 2, 2019 | Six months ended July 31, 2020 | Six months ended August 2, 2019 |
|---|---|---|---|---|
| Revenue | $1.764 billion | $1.594 billion | $3.521 billion | $3.209 billion |
| Operating income | $100 million | $95 million | $178 million | $188 million |
| Operating margin | 5.7% | 6.0% | 5.1% | 5.9% |
| Net income attributable to common stockholders | $51 million | $57 million | $87 million | $112 million |
| Diluted EPS | $0.87 | $0.96 | $1.49 | $1.88 |
| Net cash from operating activities | $104 million | $95 million | $471 million | $273 million |
Cost of revenues was 88.7% of revenue in the quarter versus 88.4% a year earlier, and 89.1% for the six months versus 88.6%. Interest expense was $32 million for the quarter and $63 million for the six months, up from $22 million and $47 million, respectively.
At July 31, 2020, cash and cash equivalents were $197 million. Debt totaled $2.783 billion principal ($2.747 billion net of issuance costs), including $90 million current; no revolving-credit borrowings were outstanding, and SAIC reported compliance with credit-facility covenants. Current assets were $1.413 billion and current liabilities $1.373 billion. Operating lease liabilities totaled $270 million.
Changes versus prior comparable periods
- Second-quarter revenue grew 10.7%; excluding Unisys Federal, SAIC said revenue declined 0.7%, primarily due to COVID-19. Six-month revenue grew 9.7%; excluding the acquisition, it grew 1.1%.
- Quarterly operating income rose 5%, but operating margin fell 0.3 percentage points. Six-month operating income declined 5% and margin fell 0.8 points.
- Common-stockholder net income declined 11% for the quarter and 22% for the six months, principally reflecting higher interest expense and, for the six months, lower operating income.
- Six-month operating cash flow increased $198 million. The company attributed this partly to $200 million of net cash-flow benefit from receivables sales, Unisys Federal operations and deferred payroll taxes; COVID-related billing delays and prior-year customer collections partly offset the increase.
- Debt rose to fund the acquisition. SAIC borrowed $1 billion during the six months, including a $400 million senior-note issue and term-loan financing; it made $158 million of principal payments. After quarter-end, it made a further $100 million voluntary Term Loan B2 prepayment.
Outlook, commentary and risks
SAIC did not provide specific financial guidance in the supplied filing text. At July 31, total backlog was $19.424 billion, including $3.144 billion funded. Net bookings were $4.6 billion for the quarter and $6.2 billion for the six months. A $2.9 billion U.S. Army award and $1.5 billion of acquired Unisys Federal backlog contributed to the increase. Separately, remaining performance obligations were $4.6 billion; SAIC expected to recognize approximately 80% within 12 months and 90% within 24 months.
Management estimated that COVID-19 reduced six-month revenue by about $110 million and operating income by about $16 million. CARES Act provisions allowed recovery of certain labor costs when employees could not access required facilities, generally without profit; the provision was due to expire September 30, 2020, and management warned that non-extension could adversely affect revenue and operating income. Government appropriations uncertainty, potential shutdowns, competitive bidding and pricing pressure also pose risks.
Unisys Federal’s purchase-price allocation remained preliminary; changes could affect goodwill and other acquired balances. SAIC recorded an $11 million loss on the sale of non-strategic international operations. Government contract audits and reviews remain ongoing; the company recorded a $48 million liability for potential indirect-cost and compliance adjustments. It continues to negotiate recovery of costs following termination of the Marine Corps Assault Amphibious Vehicle contract. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether COVID-19 work restrictions and the expiration or extension of CARES Act cost-recovery provisions affect contract activity and profitability.
- Unisys Federal integration performance, acquisition-related costs, and final purchase-price allocation.
- Whether backlog converts into funded work and revenue on the expected schedule, including the large Army award.
- Debt repayment, interest costs and leverage following the acquisition; distinguish recurring operating cash generation from receivables-sale proceeds and deferred payroll taxes.
- Outcomes of government audits, the AAV termination-cost negotiations, and other recorded contingencies.