SAIC

Business Context and Reporting Period

Company: Science Applications International Corporation (SAIC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended November 1, 2024 (Fiscal 2025)
Business Overview: SAIC is a leading provider of technical, engineering, and enterprise IT services primarily to the U.S. government. Effective February 3, 2024, the company reorganized into five business groups aggregated into two reportable segments: Defense and Intelligence and Civilian. The company serves approximately 1,800 active contracts with roughly 24,000 employees.

Key Financial Metrics

Margins: Operating margin was 8.1% for the quarter and 7.5% for the nine-month period. Adjusted EBITDA margin was 10.0% for the quarter and 9.4% for the nine-month period.

Material Changes vs. Prior Period

• Revenue: Increased 4% ($81 million) for the quarter compared to the prior year, driven by volume ramp-up on existing and new contracts. For the nine months, revenue decreased 1% ($66 million), primarily due to the prior-year sale of the Supply Chain Business ($188 million impact) and contract completions. Adjusted for divestitures, nine-month revenue grew 2.2%.
• Operating Income: Increased 12% ($17 million) for the quarter, aided by the resolution of the Assault Amphibious Vehicle (AAV) contract termination. For the nine months, operating income decreased 36% ($237 million), largely due to the non-recurrence of a $233 million gain from the prior-year Supply Chain Business divestiture.
• Net Income: Increased 14% ($13 million) for the quarter. For the nine months, net income decreased 40% ($174 million), reflecting the absence of prior-year divestiture gains.
• Segment Performance:
  • Defense and Intelligence: Revenue up 2% for the quarter; Operating income up 23%.
  • Civilian: Revenue up 11% for the quarter; Operating income down 31% due to timing and volume mix.

Guidance, Outlook, and Risks

Management Commentary: Management attributes recent performance to volume ramp-ups and the AAV contract resolution. The company continues to focus on IT modernization, AI, and cybersecurity. The effective tax rate decreased to 15.6% (quarter) and 17.8% (nine months) compared to the prior year, benefiting from the non-recurrence of non-deductible goodwill associated with the prior-year divestiture and the release of state tax liabilities.

Capital Allocation:

• Dividends: Declared a quarterly dividend of $0.37 per share (payable Jan 24, 2025).
• Share Repurchases: On December 4, 2024, the Board authorized a new $1.2 billion share repurchase program, replacing the existing plan. The company repurchased approximately $116 million of stock in the quarter.

Risks and Contingencies:

• Government Funding: Reliance on U.S. government spending (98% of revenue). Risks include potential government shutdowns, continuing resolutions, and sequestration if appropriations are not passed by April 2025.
• Legal Proceedings: Ongoing DOJ Antitrust Division investigation (subpoenas received in 2022 and 2023); potential fines or penalties cannot be estimated. Routine government audits (DCAA) remain open.
• Contract Mix: Shift toward competitive bidding and small business set-asides may increase pricing pressure.

Investor Verification Checklist

• Divestiture Impact: Verify the extent to which current revenue and operating income growth is organic versus driven by the absence of prior-year divestiture gains (Supply Chain Business).
• AAV Settlement: Confirm the sustainability of the $13 million revenue boost from the AAV contract termination settlement.
• Debt Structure: Review the terms of the new Term Loan B3 Facility ($510 million) and the impact of the recent credit agreement amendments on interest expenses.
• Backlog Quality: Assess the ratio of funded backlog ($4.5 billion) to negotiated unfunded backlog ($17.9 billion) to gauge revenue visibility.
• DOJ Investigation: Monitor updates regarding the DOJ Antitrust Division investigation for potential material liabilities.