Business context and reporting period
Science Applications International Corporation (SAIC) filed this unaudited Form 10-Q for the first quarter of fiscal 2022, the three months ended April 30, 2021. The comparable prior-year quarter ended May 1, 2020. SAIC provides technical, engineering and enterprise IT services, primarily to the U.S. government, and reports one operating segment. More than 95% of quarterly revenue came from U.S. government contracts.
Financial and operating results
| Metric | Q1 FY2022 | Prior-year quarter | Change or context |
|---|---|---|---|
| Revenue | $1.878 billion | $1.757 billion | Up 6.9%; excluding acquired and divested revenue, growth was 2.6% |
| Operating income | $130 million | $78 million | Operating margin 6.9%, versus 4.4% |
| Net income attributable to common stockholders | $81 million | $36 million | Up 125% |
| Diluted EPS | $1.38 | $0.62 | — |
| Adjusted EBITDA (non-GAAP) | $184 million | $137 million | Margin 9.8%, versus 7.8% |
| Operating cash flow | $189 million | $367 million | Down $178 million |
Cost of revenues was $1.661 billion, or 88.4% of revenue, compared with $1.574 billion, or 89.6%, in the prior-year quarter. Management attributed the improved operating margin to better contract profitability, lower acquisition and integration costs, Unisys Federal’s contribution, timing of indirect costs and a favorable settlement of prior indirect rate years. A net favorable contract-estimate adjustment contributed $3 million to operating income and $0.03 to diluted EPS, in both the current and comparison quarters. The effective tax rate was 22.5%, versus 17.5%; the prior-year rate benefited from tax reserve reversals and an R&D credit adjustment.
Cash, debt and liquidity
At April 30, 2021, cash and cash equivalents were $261 million; total current assets were $1.440 billion and current liabilities were $1.398 billion. Long-term debt, net of issuance costs, was $2.494 billion, including $104 million classified as current. The $400 million revolving credit facility had no balance outstanding, and SAIC reported compliance with its credit covenants. The filing states that available cash, expected operating cash flow and financing access should be adequate for short- and long-term needs, while noting financing availability depends on market and company conditions.
Cash, cash equivalents and restricted cash totaled $280 million at quarter-end. Operating cash flow declined mainly because the year-over-year net cash-flow benefit from receivables sold under the MARPA facility was lower by $185 million. The facility permits sales of up to $300 million of eligible receivables; $158 million of sold receivables remained at quarter-end. Financing cash outflows included $39 million of debt principal payments, $22 million of dividends and $53 million of stock repurchases and shares withheld for taxes. The quarterly dividend was $0.37 per share.
Backlog, outlook and material developments
Backlog was $23.862 billion at April 30, 2021, up from $21.548 billion at fiscal year-end, including $3.319 billion funded and $20.543 billion negotiated unfunded. Net bookings were an estimated $4.2 billion, driven in part by large U.S. Army awards. Remaining performance obligations were $4.6 billion; SAIC expected to recognize approximately 85% within 12 months and 95% within 24 months. These measures are not guarantees: backlog can depend on future funding, task orders, options and customer decisions. The filing gives no specific full-year financial guidance.
COVID-19-related reduced activity, including travel and other direct costs, lowered revenue by approximately $33 million, net of $39 million of CARES Act labor recovery, and reduced operating income by approximately $4 million. SAIC had deferred approximately $103 million of payroll taxes, with repayment due to begin in fiscal 2022’s fourth quarter. Management said it could not estimate the pandemic’s overall impact and warned that a longer duration could adversely affect results or cash flows.
After quarter-end, SAIC acquired Koverse on May 3 for $28 million in cash, with potential earnout payments of up to $27 million and employee-retention payments of up to $13 million. On June 3, it agreed to acquire Halfaker and Associates for $250 million, funded with increased borrowings and cash on hand; closing was expected in fiscal 2022’s second quarter. These transactions were subsequent events, not reflected in quarter-end results. The quarter also included $10 million of acquisition and integration costs, including $7 million of right-of-use asset impairment.
Risks, contingencies and other items
SAIC’s business is exposed to federal budget and funding changes, government shutdowns, competitive bidding and pricing pressure. Government contract audits and reviews may result in cost disallowances, penalties or other consequences; $26 million was reserved for potential indirect-cost audit and Cost Accounting Standards adjustments, and certain audits remain open. The company is negotiating with the Marine Corps to recover costs from the 2018 termination for convenience of its Assault Amphibious Vehicle contract. Management did not expect the routine legal matters described to have a material adverse effect based on information then available. Unrecognized tax benefits totaled $65 million; SAIC did not expect a significant change over the next 12 months. Letters of credit and surety bond obligations were $10 million and $19 million, respectively. No material changes to the previously disclosed risk factors or market risks were reported.
Important facts for investors to verify
- Whether underlying organic revenue growth and contract margins persist after adjusting for acquisitions, contract completions and favorable one-time or timing-related items.
- How operating cash flow develops, including working-capital movements and use of the MARPA receivables facility.
- Funding, conversion timing and cancellation exposure within the substantial negotiated unfunded backlog and remaining performance obligations.
- Incremental debt, integration costs and expected returns from the Koverse and Halfaker transactions.
- Potential outcomes of government audits, the AAV termination recovery negotiations, tax uncertainties and repayment of deferred payroll taxes.