Science Applications International Corporation (SAIC) — Q3 FY2023 Form 10-Q
Reporting period: Quarter ended October 28, 2022; fiscal year ends February 3, 2023. The company provides technical, engineering and IT services primarily to the U.S. government and reports as one segment. Approximately 98% of revenue came from U.S. government contracts.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $1.909 billion | $1.898 billion | $5.736 billion | $5.612 billion |
| Operating income | $133 million | $114 million | $383 million | $377 million |
| Operating margin | 7.0% | 6.0% | 6.7% | 6.7% |
| Net income attributable to common stockholders | $80 million | $71 million | $226 million | $234 million |
| Diluted EPS | $1.45 | $1.22 | $4.04 | $4.01 |
| Net cash from operating activities | $128 million | $134 million | $387 million | $415 million |
| Adjusted EBITDA margin | 8.9% | 9.0% | 8.9% | 9.6% |
Q3 revenue rose 1%; nine-month revenue rose 2%, including approximately $72 million from the prior-year Halfaker acquisition. Excluding acquired and divested revenue, nine-month growth was approximately 1%. Q3 operating margin improved mainly because acquisition and integration costs and indirect costs were lower. Nine-month operating margin was unchanged. Nine-month common-stockholder income declined 3%, while diluted EPS increased slightly as average diluted shares fell to 56.0 million from 58.4 million.
Cash, debt and liquidity
- Operating cash flow for the first nine months was $387 million, down $28 million year over year, primarily due to collection timing, working capital changes, Halfaker-related payments and lower earnings; higher cash generated through the receivables facility partly offset the decline.
- Cash and cash equivalents were $53 million at October 28, 2022, versus $106 million at January 28, 2022. Total debt principal was $2.390 billion; the $1.0 billion revolving credit facility had no outstanding balance. The company reported compliance with credit-facility covenants.
- During the period, SAIC refinanced term debt, made a $90 million voluntary Term Loan B prepayment, paid $63 million in dividends and repurchased $208 million of stock. The quarterly dividend was $0.37 per share; the board declared the same amount for payment in January 2023.
- Receivables sold under the MARPA facility provided a net $60 million increase to operating cash flow in the nine months. Remaining sold receivables were $245 million at period end.
Backlog, outlook and management commentary
- Remaining performance obligations were $5.0 billion; SAIC expected to recognize approximately 85% within 12 months and 95% within 24 months. Total backlog was $24.432 billion, including $4.019 billion funded and $20.413 billion negotiated unfunded. Net bookings were an estimated $2.0 billion in Q3 and $6.1 billion year to date.
- The filing provides no clear numeric full-year revenue or earnings guidance. Management said existing cash, expected operating cash flows and financing access should provide adequate resources for short- and long-term needs, while noting financing availability depends on market and company-specific factors.
- The U.S. government was operating under a continuing resolution for GFY 2023. Management cited potential delays in appropriations, spending reductions or shutdowns, inflation pressure on fixed-price contracts, increased competition and small-business set-asides as risks. It also identified potential opportunities in digital modernization, cyber, microelectronics and climate resiliency.
- SAIC estimated that the tax-law requirement to capitalize research and development costs could reduce fiscal 2023 operating cash flow by at least $90 million if unchanged, with a corresponding increase in deferred tax assets.
Unusual items, risks and contingencies
- Cost-to-cost contract estimate changes were unfavorable by $6 million in Q3, reducing diluted EPS by $0.09; nine-month changes were favorable by $4 million. Management said lower favorable estimate adjustments and accelerated amortization on certain off-market customer contracts weighed on nine-month adjusted EBITDA margin.
- Routine legal claims were not expected by management to have a material adverse effect. Negotiations continue with the Marine Corps to recover costs after termination for convenience of the Assault Amphibious Vehicle contract.
- Government contract audits and reviews remain ongoing, including open indirect-cost audits for prior and current years. Adverse findings could result in cost disallowances, penalties or other consequences; SAIC said it believed reserves were adequate.
- The company reported no material change in risk factors and said disclosure controls were effective as of October 28, 2022.
Important facts for investors to verify
- Whether federal appropriations and contract awards support the expected conversion of backlog into revenue, particularly the large unfunded portion.
- Cash conversion, working capital and the effect of R&D tax capitalization on fiscal 2023 cash flow.
- Debt, interest expense and refinancing terms as floating-rate exposure and scheduled maturities evolve.
- Contract estimate adjustments, fixed-price contract performance and the trend in adjusted EBITDA margin.
- Outcomes of open government audits and the unresolved AAV termination cost-recovery negotiations.