Science Applications International Corporation (SAIC) — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months ended October 29, 2021; comparisons are with the corresponding 2020 periods. SAIC is a technical, engineering and IT services provider, primarily serving the U.S. government. It reports as one segment.
Financial performance and position
| Metric | Three months ended Oct. 29, 2021 | Nine months ended Oct. 29, 2021 | Prior comparable period |
|---|---|---|---|
| Revenue | $1.898 billion; up 4% | $5.612 billion; up 5% | $1.818 billion and $5.339 billion |
| Operating income | $114 million; 6.0% margin | $377 million; 6.7% margin | $110 million / 6.1%; $288 million / 5.4% |
| Net income attributable to common stockholders | $71 million | $234 million | $60 million and $147 million |
| Diluted EPS | $1.22 | $4.01 | $1.02 and $2.51 |
| Operating cash flow | $134 million | $415 million | $231 million and $702 million |
For the first nine months, cost of revenues was $4.950 billion (88.2% of revenue), versus $4.747 billion (88.9%). Adjusted EBITDA, a non-GAAP measure, was $540 million, or 9.6% of revenue, compared with $468 million, or 8.8%. Quarterly adjusted EBITDA margin was 9.0%, unchanged year over year.
At October 29, cash and cash equivalents were $148 million; current assets were $1.383 billion and current liabilities $1.395 billion. Debt was $2.575 billion principal, or $2.552 billion net of issuance costs; $119 million was current. The $400 million revolving facility had no balance outstanding, and SAIC reported compliance with its credit covenants. Nine-month dividends were $65 million and share repurchases were $154 million. Cash, cash equivalents and restricted cash totaled $157 million.
Changes versus the prior comparable periods
- Revenue rose 4% for the quarter and 5% year to date. Excluding acquired and divested revenue, growth was 2.1% and 2.8%, respectively, primarily from program volume and new awards.
- Nine-month operating income and margin improved, reflecting portfolio profitability, favorable contract estimate changes and accelerated amortization of certain off-market contract liabilities. Quarterly margin was slightly lower, reflecting prior-year lower employee benefit costs and higher current-quarter acquisition and integration expense.
- Nine-month net income attributable to common stockholders increased to $234 million from $147 million. The effective tax rate was 22.0%, compared with 22.2%; the quarter’s rate fell to 19.4% from 22.4%, partly due to prior-year tax-return planning adjustments recorded in the current quarter.
- Nine-month operating cash flow declined $287 million to $415 million, primarily due to a $185 million year-over-year reduction in net cash received through the receivables-sale facility and working-capital effects related to deferred payroll taxes.
Outlook, management commentary and risks
- SAIC reported $6.0 billion of remaining performance obligations, expecting to recognize approximately 80% within 12 months and 90% within 24 months. Total backlog was $23.654 billion, including $3.441 billion funded and $20.213 billion negotiated unfunded. The company recorded $1.4 billion of net bookings in the quarter and $7.2 billion year to date. These measures have different definitions and are not equivalent to guaranteed revenue.
- The company did not provide specific forward financial guidance in the supplied filing text. Management said it expects to fund operations and capital needs through cash, future operating cash flow and available financing, and believes current resources are adequate for short- and long-term needs.
- Approximately 98% of revenue came from U.S. government contracts. Management cited federal budget and continuing-resolution uncertainty, potential shutdowns or spending reductions, competition and pricing pressure, and inflation risk on fixed-price contracts.
- COVID-related reduced contract activity lowered nine-month revenue by approximately $99 million, net of $60 million of labor recovered under the CARES Act, and reduced operating income by approximately $7 million. CARES Act labor-cost support ended September 30, 2021. Management said the vaccination requirement’s impact had not been material to date.
- SAIC acquired Halfaker, a health IT company, for a preliminary $220 million, and Koverse, a data-management software company, for a preliminary $30 million. Halfaker contributed $98 million of goodwill and $112 million of intangible assets; Koverse contributed $21 million and $10 million, respectively. Purchase accounting remained preliminary. The filing also describes future post-combination compensation costs and a potential Koverse earnout.
- Unusual items include a $10 million right-of-use asset impairment included in nine-month integration expense and accelerated amortization on certain Unisys Federal off-market contracts. The filing identifies ongoing government audits and reviews; SAIC recorded an $18 million liability for estimated indirect-cost and compliance adjustments. It also reported $71 million of unrecognized tax benefits and continued negotiations to recover costs after termination of the AAV contract.
Important facts for investors to verify
- Whether backlog and remaining performance obligations convert to revenue on the expected schedule, considering funding, task-order and cancellation conditions.
- Whether operating cash flow recovers from the year-over-year decline and how receivables sales and working-capital movements affect reported cash generation.
- Integration costs, purchase-price adjustments and expected post-combination compensation and earnout payments for Halfaker and Koverse.
- Potential outcomes of open government audits, tax matters and the AAV termination-cost negotiations; the filing does not provide a clear estimate of the AAV recovery.
- Effects of federal budget uncertainty, competitive pricing, inflation on fixed-price contracts and ongoing COVID-related workforce or contract impacts.