Business context and reporting period
Science Applications International Corporation (SAIC) filed this unaudited Form 10-Q for its first quarter of fiscal 2021, the three months ended May 1, 2020. SAIC provides technical, engineering and IT services, primarily to U.S. government customers; it reports one operating segment. The comparable quarter ended May 3, 2019.
On March 13, 2020, SAIC acquired Unisys Federal for approximately $1.2 billion. The acquisition contributed $104 million of quarterly revenue and $11 million of net income attributable to common stockholders. Purchase-price allocation remained preliminary at quarter-end.
Financial results and liquidity
| Metric | Quarter ended May 1, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $1.757 billion | $1.615 billion |
| Operating income | $78 million | $93 million |
| Operating margin | 4.4% | 5.8% |
| Net income attributable to common stockholders | $36 million | $55 million |
| Diluted EPS | $0.62 | $0.92 |
| Adjusted EBITDA | $137 million; 7.8% margin | $135 million; 8.4% margin |
| Operating cash flow | $367 million | $178 million |
| Cash and cash equivalents at period-end | $276 million | $188 million at January 31, 2020 |
Revenue rose 8.8%, including $104 million from Unisys Federal; excluding acquired revenue, SAIC reported 3.0% growth. Cost of revenue increased 9.7% to $1.574 billion, or 89.6% of revenue versus 88.9%. The filing attributes lower operating income principally to COVID-19 effects and increased acquisition and integration costs. Net income also reflected higher interest expense. The effective tax rate was 17.5%, compared with 19.8%.
Operating cash flow increased $189 million year over year, primarily reflecting $200 million of cash generated from receivable sales under the MARPA facility and cash from Unisys Federal, partly offset by comparison with prior-year customer collections. Investing cash outflow was $1.202 billion, including $1.196 billion paid for the acquisition. Financing cash inflow was $927 million, including $1.0 billion of borrowings. Cash, cash equivalents and restricted cash totaled $294 million at quarter-end.
Principal debt was $2.925 billion ($2.884 billion net carrying amount), versus $1.941 billion principal at January 31, 2020. The company had no borrowings outstanding on its $400 million revolving credit facility and reported compliance with credit covenants. Subsequent to quarter-end, SAIC made $125 million of voluntary prepayments on its Term Loan B2. It also had a receivables purchase facility with a $300 million limit.
Material changes, outlook and risks
- COVID-19: Reduced contract activity, including travel and other direct costs, lowered revenue by approximately $33 million versus the prior-year quarter. CARES Act recovery provisions applied to some labor costs for employees unable to access required facilities; SAIC generally could not bill profit on those costs. Management estimated an approximately $8 million reduction in operating income and cautioned that funding limits or contract modifications could prevent full recovery.
- Acquisition and integration: The Unisys Federal transaction added $615 million of goodwill and $548 million of intangible assets on a preliminary basis. Acquisition and integration costs were $29 million, versus $10 million. SAIC described the acquisition as highly accretive across key financial metrics; pro forma results are not a forecast of future performance.
- Revenue visibility: Remaining performance obligations were $4.7 billion; management expected to recognize approximately 85% within 12 months and 90% within 24 months. Total backlog was $16.633 billion, including $1.5 billion acquired from Unisys Federal. Net bookings were an estimated $1.6 billion.
- Restructuring and distributions: SAIC expected to complete restructuring activities in fiscal 2021, with total costs of approximately $50 million. It paid a quarterly dividend of $0.37 per share and declared the same dividend for payment July 31, 2020.
- Contingencies: SAIC continued negotiating with the Marine Corps to recover costs associated with the terminated Assault Amphibious Vehicle program. Government audits and reviews remain ongoing; the company recorded a $49 million liability for estimated indirect-cost and Cost Accounting Standards adjustments. Management did not expect routine legal matters to have a material adverse effect, based on information available.
- Management’s liquidity view: SAIC said cash, expected operating cash flow and access to bank and capital markets should meet short- and long-term needs, while noting financing availability and future results depend on factors outside its control. The filing provided no specific earnings guidance.
Important facts for investors to verify
- How much of operating cash flow reflects recurring operations versus the $200 million net increase from receivable sales under MARPA.
- Whether COVID-19-related cost and revenue effects persist, and the extent to which CARES Act labor costs are ultimately recovered.
- Final Unisys Federal purchase accounting, integration costs and realized operating contribution.
- Debt repayment and leverage trends following the acquisition and the subsequent $125 million prepayment.
- Outcomes of government contract audits and the AAV termination-cost recovery negotiations.
- Execution against backlog and remaining-performance-obligation conversion expectations; contract scope and funding can change.