What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-06 compared with 2021-09-03 · 62 added, 61 removed, 187 unchanged (40% of the section changed)

25 unchanged sentences

Economic Opportunities, Challenges, and Risks

During the three and six months ended July 30, 2021, we generated greater than 95% of our revenues from contracts with the U.S.

During the three and nine months ended October 29, 2021, we generated approximately 98% of our revenues from contracts with the U.S.

government, including subcontracts on which we perform.

2 unchanged sentences

Appropriations measures passed in December 2020 provided full funding for the federal government through the end of government fiscal year (GFY) 2021.

These bills are funded at levels for defense and non-defense spending based on the August 2019 Bipartisan Budget Act agreement that raises the Budget Control Act spending caps enacted in August 2011 and suspended the Federal debt ceiling until July 31, 2021.

These bills are funded at levels for defense and non-defense spending based on the August 2019 Bipartisan Budget Act agreement that raised the Budget Control Act spending caps enacted in August 2011 and suspended the Federal debt ceiling until July 31, 2021.

Adverse changes in fiscal and economic conditions could materially impact our business.

Some changes that could have an adverse impact on our business include the implementation of future spending reductions (including sequestration), delayed passage of appropriations bills resulting in temporary or full-year continuing resolutions, extremely inflationary increases adversely impacting fixed price contracts, inability to increase or suspend the Federal debt ceiling after the Department of Treasury exhausts its current use of "extraordinary measures" in the October and November 2021 timeframe, and potential government shutdowns.

Potential spending packages including the infrastructure bill and the proposed budget resolution may provide additional opportunity in areas of SAIC focus.

government is currently operating under a Continuing Resolution for GFY 2022 and in October 2021 the Federal debt ceiling was temporarily increased through early December 2021.

It is unlikely but possible these measures will expire without extension and lead to a partial government shutdown.

Potential spending packages including the infrastructure bill and the proposed budget resolution may provide additional opportunity in areas of SAIC focus such as broadband, cyber, and climate resiliency.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

18 unchanged sentences

We are continuing to monitor the ongoing outbreak of the coronavirus disease 2019 ("COVID-19") and we continue to work with our stakeholders to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.

Section 3610 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was passed by Congress and signed by the President on March 27, 2020, provides a mechanism to recover our labor costs where our employees are ready and able to work but unable to access required facilities due to COVID-19.

Under the American Rescue Plan Act of 2021, this support from the CARES Act has been extended through September 30, 2021.

Reduced activity on contracts, including travel and other direct costs, caused revenues to be approximately $69 million lower for the six months ended July 30, 2021 (net of $57 million of labor recovered under the provisions of the CARES Act described above to maintain our workforce in a stand-ready state).

Section 3610 of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act provides a mechanism to recover our labor costs where our employees are ready and able to work but unable to access required facilities due to COVID-19.

This support from the CARES Act expired on September 30, 2021.

Reduced activity on contracts, including travel and other direct costs, caused revenues to be approximately $99 million lower for the nine months ended October 29, 2021 (net of $60 million of labor recovered under the provisions of the CARES Act described above to maintain our workforce in a stand-ready state).

We are generally not able to bill profit on those costs and, in some cases, funding limitations and the necessity for contract modifications may cause us not to be able to recover all of the labor costs.

As a result, operating income for the six months ended July 30, 2021 was reduced by approximately $5 million.

Our current use of the Section 3610 authorities has been limited in recent weeks.

However, as the situation with COVID-19 continues to evolve, the continued need for this provision may be required if customers return to partial operations and/or further restrict access to facilities.

In addition, the CARES Act allows for the deferral of certain payroll tax payments and we have deferred payments totaling approximately $103 million as of July 30, 2021.

We must begin repaying these deferred taxes in the fourth quarter of fiscal 2022.

As a result, operating income for the nine months ended October 29, 2021 was reduced by approximately $7 million.

In addition, the CARES Act allowed for the deferral of certain payroll tax payments through December 31, 2020 and we deferred total payments of approximately $103 million.

The first installment of these deferred payroll taxes was paid during the third quarter of fiscal 2022 (approximately $51 million) with the remaining amounts due in the fourth quarter of fiscal 2023.

In September 2021, the President issued an executive order which requires all federal employees and contractors to be fully vaccinated by January 18, 2022, unless an employee is legally entitled to an accommodation.

We are continuing to monitor the impact that the enforcement of this executive order will have on our workforce and operations, but at this point the impact has not been material.

We have not experienced a significant impact to our liquidity or access to capital as a result of the COVID-19 pandemic.

We continue to work with our customers to implement the related provisions of the CARES Act.

We cannot currently estimate the overall impact of the COVID-19 pandemic.

15 unchanged sentences

The following table summarizes our results of operations:

Three Months Ended Six Months Ended

change July 31,

2020 July 30,

change July 31,

Three Months Ended Nine Months Ended

change October 30,

2020 October 29,

change October 30,

(dollars in millions)

10 unchanged sentences

Net cash provided by operating activities $ 134 (42 %) $ 231 $ 415 (41 %) $ 702

Revenues increased $72 million or 4.1% for the three months ended July 30, 2021 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts, partially offset by contract completions.

Revenues increased $80 million for the three months ended October 29, 2021 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts, the acquisition of Halfaker, and the accelerated amortization on certain off-market liability contracts, partially offset by contract completions.

Adjusting for the impact of acquired revenues and divested revenues, revenues grew 2.1% primarily due to net increases in program volume and new awards.

Revenues increased $193 million or 5.5% for the six months ended July 30, 2021 as compared to the same period in the prior year due to ramp up on new and existing contracts, the acquisition of Unisys Federal (which occurred in the middle of the first quarter of the prior year period), net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts, partially offset by contract completions.

Revenues increased $273 million for the nine months ended October 29, 2021 as compared to the same period in the prior year due to ramp up on new and existing contracts, the acquisitions of Unisys Federal (which occurred in the middle of the first quarter of the prior year period) and Halfaker, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts, partially offset by contract completions.

Adjusting for the impact of acquired revenues and divested revenues, revenues grew 2.8% primarily due to net increases in program volume and new awards.

1 unchanged sentence

Cost of Revenues.

Cost of revenues increased $40 million for the three months ended July 30, 2021 as compared to the same period in the prior year primarily due to an increase in volume on existing contracts.

Cost of revenues as a percentage of revenues decreased from the prior year quarter, primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts.

Cost of revenues increased $127 million or 4.0% for the six months ended July 30, 2021 as compared to the same period in the prior year primarily due to an increase in volume on existing contracts and the acquisition of Unisys Federal (which occurred in the middle of the first quarter of the prior year period).

Cost of revenues increased $76 million for the three months ended October 29, 2021 as compared to the same period in the prior year primarily due to an increase in volume on existing contracts and the acquisition of Halfaker.

Cost of revenues as a percentage of revenues increased from the prior year quarter, primarily due to lower employee benefit costs in the prior year period.

Cost of revenues increased $203 million for the nine months ended October 29, 2021 as compared to the same period in the prior year primarily due to an increase in volume on existing contracts and the acquisitions of Unisys Federal (which occurred in the middle of the first quarter of the prior year period) and Halfaker.

Cost of revenues as a percentage of revenues decreased from the prior year, primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts.

Selling, General and Administrative Expenses.

SG&A decreased $4 million for the three months ended July 30, 2021 as compared to the same period in the prior year primarily due to decreased intangible asset amortization as compared to the prior year quarter, partially offset by gains related to the resolution of certain legal matters in the prior year quarter and the acquisitions of Halfaker and Koverse.

SG&A for the six months ended July 30, 2021 remained consistent with the same period in the prior year.

Decreases in intangible asset amortization were offset by gains related to the resolution of certain legal matters in the prior year.

SG&A decreased $9 million for the three months ended October 29, 2021 as compared to the same period in the prior year primarily due to decreased intangible asset amortization related to the acquisition of Unisys Federal, partially offset by intangible amortization related to the acquisition of Halfaker.

SG&A decreased $9 million for the nine months ended October 29, 2021 as compared to the same period in the prior year primarily due to decreased intangible asset amortization related to the acquisition of Unisys Federal, partially offset by intangible amortization related to the acquisition of Halfaker and gains related to the resolution of certain legal matters in the prior year.

Operating Income.

Operating income as a percentage of revenues of 7.2% for the three months ended July 30, 2021 increased from 5.7% in the comparable prior year period primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, the accelerated amortization on certain off-market liability contracts, and decreased intangible asset amortization, partially offset by gains related to the resolution of certain legal and other program contract matters in the prior year.

Operating income as a percentage of revenues increased to 7.1% for the six months ended July 30, 2021 from 5.1% in the comparable prior year period primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, the accelerated amortization on certain off-market liability contracts, lower acquisition and integration costs, and benefit from a net favorable settlement of prior indirect rate years, partially offset by gains related to the resolution of certain legal and other program contract matters in the prior year.

Operating income as a percentage of revenues of 6.0% for the three months ended October 29, 2021 decreased from 6.1% in the comparable prior year period primarily due to lower employee benefit costs in the prior year period and higher acquisition and integration costs in the current year period, partially offset by net favorable changes in contract estimates and the accelerated amortization on certain off-market liability contracts.

Operating income as a percentage of revenues increased to 6.7% for the nine months ended October 29, 2021 from 5.4% in the comparable prior year period primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts, partially offset by gains related to the resolution of certain legal and other program contract matters in the prior year.

Net Cash Provided by Operating Activities.

Net cash provided by operating activities was $281 million for the six months ended July 30, 2021, a decrease of $190 million compared to the prior year, primarily due to a net decrease in cash received under the MARPA Facility ($185 million).

Net cash provided by operating activities was $415 million for the nine months ended October 29, 2021, a decrease of $287 million compared to the prior year, primarily due to a net decrease in cash received under the MARPA Facility ($185 million) and working capital impact related to the deferred payroll taxes allowed under the CARES Act.

Non-GAAP Measures

5 unchanged sentences

The performance measure EBITDA is calculated by taking net income and excluding interest and loss on sale of receivables, provision for income taxes, and depreciation and amortization.

Adjusted EBITDA is calculated by taking EBITDA and excluding acquisition and integration costs and restructuring costs.

Integration costs excluded are costs to integrate acquired companies including costs of strategic consulting services, facility consolidation and employee related costs such as retention and severance costs.

The acquisition and integration costs relate to the Company's acquisitions of Engility, Unisys Federal, Halfaker, and Koverse.

Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing performance.

Adjusted EBITDA is calculated by taking EBITDA and excluding acquisition and integration costs, impairments, restructuring costs, and any other material non-recurring costs.

Integration costs are costs to integrate acquired companies including costs of strategic consulting services, facility consolidation and employee related costs such as retention and severance costs.

The acquisition and integration costs relate to the Company's acquisitions of Engility, Unisys Federal, Halfaker, and Koverse.

We believe that EBITDA and adjusted EBITDA provide management and investors with useful information in assessing trends in our ongoing operating performance and may provide greater visibility in understanding the long-term financial performance of the Company.

1 unchanged sentence

EBITDA and adjusted EBITDA for the periods presented were calculated as follows:

Three Months Ended Six Months Ended

2021 July 31,

2020 July 30,

2021 July 31,

Three Months Ended Nine Months Ended

2021 October 30,

2020 October 29,

2021 October 30,

(in millions)

6 unchanged sentences

EBITDA as a percentage of revenues 8.4 % 8.7 % 9.0 % 7.9 %

9.3 % 8.6 % 9.3 % 7.4 %

Acquisition and integration costs 12 3 36 47

Restructuring and impairment costs 1 4 1 4

Depreciation included in acquisition and integration costs — — (1) —

Recovery of acquisition and integration costs (1)

Recovery of acquisition and integration costs and restructuring and impairment costs (1)

(1) (2) (1) (3)

Adjusted EBITDA $ 171 $ 164 $ 540 $ 468

Adjusted EBITDA as a percentage of revenues 9.0 % 9.0 % 9.6 % 8.8 %

10.1 % 9.5 % 9.9 % 8.6 %

(1) Adjustment to reflect the portion of acquisition and integration costs and recovered through the Company's indirect rates in accordance with Cost Accounting Standards.

Adjusted EBITDA as a percentage of revenues for the three months ended July 30, 2021 increased to 10.1% of revenues from 9.5% of revenues for the prior year quarter primarily due to a net increase in profitability across our existing contract portfolio, net favorable changes in contract estimates, and the accelerated amortization on certain off-market liability contracts, partially offset by gains related to the resolution of certain legal and program contract matters in the prior year.

Adjusted EBITDA as a percentage of revenues for the six months ended July 30, 2021 increased to 9.9% of revenues from 8.6% of revenues from the prior year driven by a net increase in profitability across our existing contract portfolio, net favorable changes in contract estimates, the accelerated amortization on certain off-market liability contracts, and benefit from a net favorable settlement of prior indirect rate years, partially offset by gains related to the resolution of certain legal and program contract matters in the prior year.

(1) Adjustment reflects the portion of acquisition and integration costs and restructuring and impairment costs recovered through the Company's indirect rates in accordance with Cost Accounting Standards.

Adjusted EBITDA as a percentage of revenues for the three months ended October 29, 2021 remained consistent with the same period in the prior year.

Net favorable changes in contract estimates and revenue resulting from the accelerated amortization on certain off-market liability contracts were offset by lower employee benefit costs in the prior year period.

Adjusted EBITDA as a percentage of revenues for the nine months ended October 29, 2021 increased to 9.6% of revenues from 8.8% of revenues from the prior year primarily due to a net increase in profitability across our existing contract portfolio, net favorable changes in contract estimates, and revenue resulting from the accelerated amortization on certain off-market liability contracts, partially offset by gains related to the resolution of certain legal and other program contract matters in the prior year.

Other Key Performance Measures

In addition to the financial measures described above, we believe that bookings and backlog are useful measures for management and investors to evaluate our potential future revenues.

In addition to the financial measures described above, we believe that net bookings and backlog are useful measures for management and investors to evaluate our potential future revenues.

We also consider measures such as contract types and cost of revenues mix to be useful for management and investors to evaluate our operating income and performance.

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Total backlog $ 23,654 $ 21,548

We had net bookings worth an estimated $1.6 billion and $5.8 billion during the three and six months ended July 30, 2021.

Total backlog at the end of the second quarter has increased compared to total backlog at prior year end primarily due to several large awards received during the period from the U.S.

We had net bookings worth an estimated $1.4 billion and $7.2 billion during the three and nine months ended October 29, 2021.

Total backlog at the end of the third quarter has increased compared to total backlog at prior year end primarily due to several large awards received during the period from the U.S.

In addition, $0.6 billion of acquired backlog from Halfaker was recorded as an increase to backlog as of the acquisition date.

3 unchanged sentences

The following table summarizes revenues by contract type as a percentage of revenues for the periods presented:

Six Months Ended

2021 July 31,

Nine Months Ended

2021 October 30,

Cost reimbursement 54 % 54 %

2 unchanged sentences

Total 100 % 100 %

Our contract mix for the six months ended July 30, 2021 reflects an increase in firm-fixed price type contracts due in part to the acquisition of Unisys Federal (which occurred in the middle of the first quarter of the prior year period and historically had a higher proportion of these contracts).

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

4 unchanged sentences

The following table presents cost mix for the periods presented:

Three Months Ended Six Months Ended

2021 July 31,

2020 July 30,

2021 July 31,

Three Months Ended Nine Months Ended

2021 October 30,

2020 October 29,

2021 October 30,

Labor-related cost of revenues 53 % 54 % 54 % 55 %

2 unchanged sentences

Other materials-related cost of revenues 10 % 10 % 9 % 7 %

Cost of revenues mix for the three and six months ended July 30, 2021 reflects an increase in other materials-related content due in part to the acquisition of Unisys Federal (which occurred in the middle of the first quarter of the prior year period and historically had a higher proportion of such costs).

Total 100 % 100 % 100 % 100 %

Cost of revenues mix for the nine months ended October 29, 2021 reflects an increase in other materials-related content due in part to the Unisys Federal acquisition (which occurred in the middle of the first quarter of the prior year period and historically had a higher proportion of such costs).

Liquidity and Capital Resources

11 unchanged sentences

The following table summarizes our cash flows:

Six Months Ended

2021 July 31,

Nine Months Ended

2021 October 30,

(in millions)

2 unchanged sentences

Net cash (used in) provided by financing activities (176) 526

Net (decrease) increase in cash, cash equivalents and restricted cash $ (48) $ 13

Net Cash Provided by Operating Activities.

Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the six months ended July 30, 2021 and the comparable prior year period.

Net decrease in cash, cash equivalents and restricted cash $ (33) $ (1)

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Net Cash Provided by Operating Activities.

Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the nine months ended October 29, 2021 and the comparable prior year period.

Net Cash Used in Investing Activities.

Cash used in investing activities for the six months ended July 30, 2021 decreased compared to the prior year period primarily due to cash paid for the acquisition of Unisys Federal in the prior year period, partially offset by cash paid for the acquisitions of Halfaker and Koverse in the current year period.

Cash used in investing activities for the nine months ended October 29, 2021 decreased compared to the prior year period primarily due to cash paid for the acquisition of Unisys Federal in the prior year period, partially offset by cash paid for the acquisitions of Halfaker and Koverse in the current year period.

Net Cash Used in / Provided by Financing Activities.

Cash used in financing activities for the six months ended July 30, 2021 was $73 million compared to cash provided by financing activities of $765 million in the prior year period.

This change is primarily due to proceeds from borrowings obtained to finance the Unisys Federal acquisition in the prior year period and higher share repurchases in the current year period, partially offset by voluntary principal prepayments in the prior year period and borrowings obtained to finance the Halfaker acquisition in the current year period.

Cash used in financing activities for the nine months ended October 29, 2021 was $176 million compared to cash provided by financing activities of $526 million in the prior year period.

This change is primarily due to proceeds from borrowings obtained to finance the Unisys Federal acquisition in the prior year period and higher share repurchases in the current year period, partially offset by voluntary principal prepayments in the prior year period and borrowings to finance the Halfaker acquisition in the current year period.

Critical Accounting Policies

There have been no changes to our critical accounting policies during the six months ended July 30, 2021 from those disclosed in our most recently filed Annual Report on Form 10-K.

There have been no changes to our critical accounting policies during the nine months ended October 29, 2021 from those disclosed in our most recently filed Annual Report on Form 10-K.

Recently Issued But Not Yet Adopted Accounting Pronouncements

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis