Science Applications International Corporation — Form 10-Q
Business context and reporting period. SAIC provides technology, engineering and enterprise IT services, primarily to U.S. government customers. This report covers the quarter and six months ended July 29, 2022 (fiscal 2023 second quarter). Approximately 98% of revenue came from U.S. government contracts. SAIC reports one segment.
Financial performance
| Metric | Three months ended July 29, 2022 | Prior-year quarter | Six months ended July 29, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $1,831 million | $1,836 million | $3,827 million | $3,714 million |
| Operating income | $125 million | $133 million | $250 million | $263 million |
| Operating margin | 6.8% | 7.2% | 6.5% | 7.1% |
| Net income attributable to common stockholders | $73 million | $82 million | $146 million | $163 million |
| Diluted EPS | $1.30 | $1.41 | $2.59 | $2.79 |
| Adjusted EBITDA margin | 9.1% | 10.1% | 8.9% | 9.9% |
| Cash provided by operating activities | $141 million | $92 million | $259 million | $281 million |
Cash flow, debt and liquidity. Six-month investing cash use was $17 million, versus $256 million a year earlier, when acquisition spending was significant. Financing cash use was $249 million, including $575 million of debt principal payments, $515 million of new borrowings, $42 million of dividends and $148 million of share repurchases and equity-award withholding. Cash, cash equivalents and restricted cash ended the period at $108 million, including $99 million of cash and cash equivalents.
Debt principal was $2.480 billion, with $2.462 billion reported net of issuance costs. The company had no revolver balance at quarter-end and reported compliance with credit covenants. Its secured revolving facility commitment was increased to $1.0 billion. Current assets were $1.270 billion and current liabilities were $1.190 billion.
Material changes and management commentary
- Quarterly revenue was essentially flat year over year; six-month revenue grew 3%. Excluding acquired and divested revenue, management reported revenue contraction of 1.8% for the quarter and growth of 1.1% for the six-month period.
- Operating income and margins declined in both comparisons. Management cited lower favorable contract-estimate adjustments, higher indirect costs, and prior-year accelerated amortization of certain off-market contract liabilities. Lower acquisition and integration costs partly offset these pressures.
- Six-month operating cash flow declined $22 million year over year, primarily from customer-collection timing, Halfaker-related change-in-control payments and lower earnings; higher cash proceeds associated with the receivables-sale facility partly offset the decline.
- On June 30, 2022, SAIC refinanced earlier-maturing term loans with a $1.230 billion Term Loan A due 2027, prepaid $400 million of Term Loan B principal, and expanded its revolver from $400 million to $1.0 billion. Rates transitioned from LIBOR to applicable benchmark rates including SOFR.
- The company paid a quarterly dividend of $0.37 per share and increased authorized repurchases by 8.0 million shares, bringing total authorization to approximately 24.4 million. About 15.9 million shares had been repurchased under the program by July 29.
Outlook, risks and unusual items
- Remaining performance obligations were $5.0 billion; SAIC expected to recognize approximately 80% within 12 months and 90% within 24 months. Total backlog was $24.325 billion, including $3.630 billion funded. Net bookings were an estimated $2.1 billion for the quarter and $4.1 billion for six months.
- The filing provides no specific updated revenue or earnings guidance. Management said cash on hand, expected operating cash flows and financing access should provide resources for short- and long-term needs, while noting financing availability depends on market and company-specific factors.
- Management estimated that required tax capitalization of research and development costs could reduce fiscal 2023 operating cash flow by at least $90 million, with a similar increase in net deferred tax assets, if the law remained unchanged.
- Risks include federal budget and appropriations uncertainty, potential shutdowns or spending reductions, inflationary pressure on fixed-price contracts, competitive bidding and pricing pressure, and customer contract changes or cancellations. COVID-19 had no material impact on revenue or operating income in the reported periods, according to management.
- Government audits and reviews remain ongoing; adverse findings could lead to cost disallowances, penalties or other consequences. SAIC said it had adequately reserved for estimated indirect-cost and Cost Accounting Standards adjustments. The company also continued negotiations with the Marine Corps over cost recovery following termination of its Assault Amphibious Vehicle contract.
- Notable items included $2 million of restructuring costs in the six-month period and $3 million of debt issuance costs written off in connection with voluntary loan prepayments. No goodwill or intangible-asset impairment was reported.
Important facts for investors to verify
- Whether new awards and task-order activity support backlog conversion and offset the reported underlying quarterly revenue contraction.
- Whether operating and adjusted EBITDA margins stabilize as contract estimates, indirect costs and contract mix evolve.
- Cash conversion, collection timing, receivables sold under the $300 million MARPA facility, and the expected R&D tax-related cash-flow impact.
- Debt levels, borrowing costs following the refinancing and benchmark transition, and continued covenant compliance.
- Results of government audits and the status and recoverability of costs relating to the terminated AAV contract.