Business context and reporting period
Science Applications International Corporation (SAIC) provides technical, engineering and enterprise IT services, primarily to the U.S. government. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2024, ended November 3, 2023; comparisons are to the corresponding fiscal 2023 periods. SAIC reports one segment and generated 98% of revenue from U.S. government contracts.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $1.895B | $1.909B | $5.707B | $5.736B |
| Operating income | $143M | $133M | $662M | $383M |
| Operating margin | 7.5% | 7.0% | 11.6% | 6.7% |
| Net income attributable to common stockholders | $93M | $80M | $438M | $226M |
| Diluted EPS | $1.76 | $1.45 | $8.11 | $4.04 |
| Adjusted EBITDA margin | 9.4% | 8.9% | 9.5% | 8.9% |
| Cash from operating activities | $101M | $128M | $333M | $387M |
Adjusted EBITDA was $178M for Q3 and $541M for the nine months, versus $170M and $509M, respectively. These are non-GAAP measures; SAIC provides reconciliations in the filing.
At November 3, 2023, cash and cash equivalents were $311M (plus $9M restricted cash); total debt carrying value was $2.263B, including $69M current. No amount was outstanding on the $1.0B revolving credit facility, and SAIC reported compliance with its debt covenants. Nine-month capital expenditures were $16M. Cash dividends paid were $60M, and $293M was used for share repurchases and related withholding.
Material changes versus the prior comparable period
- Reported revenue declined about 1% in both the quarter and nine-month period. Excluding the Supply Chain Business sale and FSA deconsolidation, management reported revenue growth of 10.6% for Q3 and 7.3% for the nine months.
- Nine-month operating income and net income benefited materially from a $233M pre-tax gain on the Supply Chain Business sale and a $7M gain from deconsolidating FSA. The reported nine-month margin and earnings comparisons therefore include these divestiture-related gains.
- Management attributed improved profitability to contract-portfolio performance and lower indirect costs; nine-month results also benefited from lower intangible amortization. Adjusted EBITDA margin increased year over year.
- Nine-month operating cash flow decreased to $333M from $387M, which management attributed principally to higher tax payments, including payments associated with the Supply Chain sale, and higher prior-year cash benefits from receivables sales, partly offset by payment timing.
- Total backlog was $23.138B versus $23.802B at fiscal year-end: funded backlog rose to $4.036B from $3.554B, while negotiated unfunded backlog fell to $19.102B from $20.248B. Net bookings were an estimated $2.5B for Q3 and $5.3B for the nine months.
Outlook, risks and notable items
- SAIC reported approximately $5.5B of remaining performance obligations at November 3, 2023, expecting to recognize about 80% within 12 months and 90% within 24 months. The filing text does not provide a clear specific full-year financial guidance range.
- Management said a continuing resolution funded the U.S. government through January 2024. Delayed appropriations, further continuing resolutions or a shutdown could affect contract timing and spending. The company is also exposed to competitive bidding and pricing pressure, potential spending reductions, and inflation impacts on fixed-price contracts.
- SAIC received U.S. Department of Justice Antitrust Division grand jury subpoenas in April 2022 and October 2023 and is cooperating. The company said it cannot determine whether fines or other liabilities will result or reasonably estimate any amount.
- Government contract audits and reviews remain ongoing. Adverse findings could lead to cost disallowances, penalties or other impacts; SAIC said it believes its reserves for estimated audit adjustments are adequate.
- The company estimates that the tax treatment of research and development costs under Section 174 will increase fiscal 2024 income taxes payable by approximately $77M, with a corresponding deferred tax asset. Unrecognized tax benefits were $225M at November 3, 2023.
- The May 2023 Supply Chain Business sale generated $356M cash proceeds and a $233M pre-tax gain, net of transaction costs. SAIC expects to provide transition services to the buyer through approximately fiscal year-end 2024.
Important facts for investors to verify
- How much of the reported earnings increase reflects ongoing contract performance versus the divestiture gains and other changes in the business portfolio.
- Whether organic growth, bookings and funded backlog convert into revenue and cash flow as expected, including the impact of contract completions and awards.
- Future operating cash conversion, tax payments under Section 174, and the company’s debt reduction and capital-return priorities.
- Developments in the DOJ investigation, government contract audits and federal appropriations, for which financial outcomes are not quantified in the filing.