Science Applications International Corp quarterly report, Q1 FY2024

Science Applications International Corporation (SAIC) — Form 10-Q Summary

Reporting period: First quarter of fiscal 2024, the three months ended May 5, 2023. Comparisons are with the three months ended April 29, 2022; balance-sheet comparisons are with February 3, 2023. SAIC provides technical, engineering and enterprise IT services primarily to the U.S. government and reports one operating segment.

Financial performance

Metric	Quarter ended May 5, 2023	Prior comparable quarter
Revenue	$2.028 billion	$1.996 billion
Operating income / margin	$157 million / 7.7%	$125 million / 6.3%
Net income attributable to common stockholders	$98 million	$73 million
Diluted EPS	$1.79	$1.29
Net cash from operating activities	$82 million	$118 million
Adjusted EBITDA / margin	$189 million / 9.3%	$173 million / 8.7%

• Revenue increased 2% as reported. Management said growth was 3.5% excluding the impact of FSA’s deconsolidation; ramp-ups on existing and new contracts were partly offset by contract completions.
• Cost of revenues was $1.793 billion, or 88.4% of revenue, versus $1.770 billion, or 88.7%. The improvement in operating margin reflected lower indirect costs, no acquisition and integration costs compared with $9 million in the prior period, and a $7 million gain on deconsolidating FSA.
• Net income was $98 million versus $74 million, including non-controlling interest of zero versus $1 million. The effective tax rate was 20.0%, compared with 22.0%.

Cash, debt and liquidity

• Cash and cash equivalents were $422 million at May 5, 2023, up from $109 million at February 3; cash, cash equivalents and restricted cash totaled $431 million. Current assets were $1.675 billion and current liabilities $1.553 billion.
• Operating cash flow was $82 million, down $36 million year over year, primarily due to payroll-payment timing, partly offset by timing of customer collections and vendor payments. Receivables increased to $995 million from $936 million.
• Investing activities provided $336 million, principally reflecting a refundable $355 million deposit related to the planned sale of the Supply Chain Business. Financing activities used $105 million, including $160 million of borrowing repayments, $88 million of share repurchases and related withholding, and $21 million of dividends.
• Debt principal totaled $2.390 billion ($2.375 billion net of issuance costs), versus $2.390 billion principal at February 3. No amount was outstanding on the $1.0 billion revolving facility at quarter-end; SAIC reported compliance with credit-facility covenants. It borrowed and repaid $160 million under the revolver during the quarter.
• Management said cash, expected operating cash flow and access to financing should provide adequate resources for short- and long-term needs, and that financing arrangements should support operations for at least the next year. The MARPA receivables facility allows sales of eligible receivables up to $300 million.

Backlog, outlook and material developments

• Backlog was $23.794 billion at May 5, broadly unchanged from $23.802 billion at February 3. It comprised $3.899 billion funded and $19.895 billion negotiated unfunded backlog. Net bookings were an estimated $2.1 billion for the quarter.
• Remaining performance obligations were approximately $5 billion; SAIC expected to recognize about 85% within 12 months and 95% within 24 months. These measures are not guarantees of future revenue; government contracts can be changed or cancelled.
• On March 23, 2023, SAIC agreed to sell its Logistics and Supply Chain Management Business to ASRC Federal for $350 million before working-capital adjustments. It received a refundable $355 million deposit before quarter-end, and the sale closed May 6 for $355 million, subject to post-closing adjustments. Management expected to record a gain in fiscal 2024’s second quarter. The business was classified as held for sale, not discontinued operations.
• Management identified federal spending levels, appropriations delays or continuing resolutions, possible spending reductions and shutdowns, inflation on fixed-price contracts, and competition and pricing pressure as business risks. It also cited potential opportunities in digital modernization, cyber, microelectronics support and climate resiliency. No specific full-year financial guidance is provided in the supplied filing text.
• SAIC estimated fiscal 2024 income taxes payable would increase by about $76 million because of required capitalization and amortization of research and development costs, with a corresponding deferred tax asset; actual effects depend on future R&D spending and possible legislative or guidance changes.

Risks, contingencies and unusual items

• SAIC is cooperating with a Department of Justice Antitrust Division criminal investigation for which it received a grand jury subpoena in April 2022. The company said it could not determine whether it would incur fines, penalties or other liabilities, or reasonably estimate any amount.
• Government contract audits and reviews remain ongoing, including open indirect-cost audits for certain prior years and the current year. Adverse findings could result in cost disallowances, penalties or other consequences; SAIC said it believed its reserves were adequate.
• SAIC continued negotiations with the Marine Corps to recover costs following termination for convenience of the Assault Amphibious Vehicle contract. Management did not expect other ordinary-course legal matters to have a material adverse effect based on information then available.
• Other notable items included a $7 million gain from FSA deconsolidation and $5 million of favorable contract estimate adjustments, which added an estimated $0.07 to diluted EPS. Net cash flow was also affected by working-capital timing.

Key facts investors should verify

1. Whether the Supply Chain Business sale’s final working-capital adjustments and expected second-quarter gain matched management’s expectations.
2. Whether the revenue and margin improvement is sustained after excluding the FSA deconsolidation gain and other favorable contract estimate adjustments.
3. How operating cash conversion develops, particularly receivables, payroll timing and reliance on receivables sales.
4. Updates to the DOJ investigation, government contract audits and the AAV termination-cost recovery discussions.
5. Changes in funded backlog, contract awards and federal budget conditions, as well as the actual cash-tax impact of R&D capitalization requirements.