Science Applications International Corporation (SAIC) — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended July 30, 2021; comparatives are the periods ended July 31, 2020. SAIC provides technical, engineering, and enterprise IT services primarily to the U.S. government; more than 95% of revenue came from U.S. government contracts. Results are unaudited.
Key financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1.836bn | $1.764bn | $3.714bn | $3.521bn |
| Operating income | $133m | $100m | $263m | $178m |
| Operating margin | 7.2% | 5.7% | 7.1% | 5.1% |
| Net income attributable to common stockholders | $82m | $51m | $163m | $87m |
| Diluted EPS | $1.41 | $0.87 | $2.79 | $1.49 |
| Operating cash flow | $92m | $104m | $281m | $471m |
- Q2 revenue grew 4.1%; six-month revenue grew 5.5%. Management cited contract ramp-ups and new awards, partly offset by contract completions. On an acquired- and divested-revenue-adjusted basis, revenue growth was 3.8% for Q2 and 3.2% for the six-month period.
- Operating income and margins improved, which management attributed to stronger contract profitability, favorable contract estimate changes, accelerated amortization of certain off-market contract liabilities, and lower intangible amortization. Six-month results also benefited from lower acquisition and integration costs and a favorable prior indirect-rate settlement.
- Q2 net favorable contract estimate adjustments added $6m to operating income and $0.08 to diluted EPS; six-month adjustments were $9m and $0.12 per diluted share.
- Six-month operating cash flow declined $190m year over year, primarily because the net cash-flow benefit from the receivables sale facility was $185m lower. Six-month investing cash use was $256m, including $244m for acquisitions; financing cash use was $73m. Cash, cash equivalents, and restricted cash ended at $142m, down $48m from the fiscal-year start.
Balance sheet, debt, and liquidity
- At July 30, 2021, cash and cash equivalents were $133m; current assets were $1.343bn and current liabilities were $1.383bn. Receivables were $1.064bn.
- Debt was $2.573bn net of unamortized issuance costs ($2.598bn principal), including $112m current and $2.461bn long-term. The $400m revolving credit facility had no balance outstanding; SAIC reported compliance with credit covenants.
- SAIC borrowed $100m under a new Term Loan A2 facility to fund part of the Halfaker purchase price. Management said existing cash, expected operating cash flow, and financing access should support near- and long-term needs, while noting access to financing depends on market and company-specific conditions.
- Six-month dividends were $0.74 per share. SAIC repurchased $91m of stock during the period; the quarterly dividend declared after quarter-end was $0.37 per share.
Business developments, outlook, and risks
- SAIC acquired Halfaker, a health IT company, on July 2 for a preliminary purchase price of $217m net of cash acquired, and Koverse, a data-management software company, on May 3 for $30m net of cash acquired. The preliminary purchase-price allocations included $92m and $21m of goodwill, respectively. Koverse also has contingent earnout consideration of up to $27m.
- Remaining performance obligations were $4.9bn at quarter-end; SAIC expected to recognize about 80% within 12 months and 90% within 24 months. Total backlog was $24.237bn, including $3.299bn funded backlog. Net bookings were $1.6bn for Q2 and $5.8bn for the six-month period. Backlog includes negotiated work and is not equivalent to funded revenue; options and unissued IDIQ task orders are excluded from remaining performance obligations.
- The filing provides no clear quantitative full-year earnings or revenue guidance. Management highlighted potential opportunities from proposed infrastructure and budget measures, but identified federal spending changes, continuing resolutions, debt-ceiling constraints, shutdowns, competitive bidding, and pricing pressure as risks.
- COVID-19-related reduced contract activity lowered six-month revenue by about $69m, net of $57m of labor costs recovered under CARES Act Section 3610, and reduced operating income by about $5m. SAIC had deferred approximately $103m in payroll taxes, with repayment beginning in fiscal Q4 2022. Management said it could not estimate the pandemic’s overall impact.
- Open government audits may result in cost disallowances, penalties, or other adverse consequences; SAIC recorded a $17m liability for estimated indirect-cost and Cost Accounting Standards adjustments. The company is still negotiating with the Marine Corps to recover costs related to the 2018 termination for convenience of its Assault Amphibious Vehicle program. Management did not expect other reported legal matters to materially affect financial position, results, or cash flows.
- Other notable items include $10m of right-of-use asset impairment in the six-month period and a $68m liability for unrecognized tax benefits. The company estimated $34m of hedge losses would be reclassified to earnings over the next 12 months.
Important facts for investors to verify
- How much margin improvement is repeatable versus attributable to favorable estimate changes, acquisition effects, settlements, and amortization timing.
- Whether operating cash conversion improves, including the effects of receivables timing and continued use of the receivables-sale facility.
- Post-acquisition performance, final purchase-price allocations, integration costs, and Koverse earnout or retention-related payments.
- Federal budget and contract-award trends, backlog funding and conversion, and outcomes of open government audits and the AAV termination-cost negotiations.
- Debt repayment capacity, variable-rate exposure, and the scheduled repayment of deferred payroll taxes.