Item 1. Financial Statements
Item 1. Financial Statements
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions, except per share amounts)
Revenues $ 1,898 $ 1,818 $ 5,612 $ 5,339
Cost of revenues 1,685 1,609 4,950 4,747
Selling, general and administrative expenses 87 96 252 261
Acquisition and integration costs 12 3 36 47
Other operating income — — ( 3 ) ( 4 )
Operating income 114 110 377 288
Interest expense 26 32 79 95
Other (income) expense, net — — ( 3 ) —
Income before income taxes 88 78 301 193
Provision for income taxes ( 17 ) ( 18 ) ( 66 ) ( 43 )
Net income 71 60 235 150
Net income attributable to non-controlling interest — — 1 3
Net income attributable to common stockholders $ 71 $ 60 $ 234 $ 147
Earnings per share:
Basic $ 1.24 $ 1.03 $ 4.05 $ 2.53
Diluted $ 1.22 $ 1.02 $ 4.01 $ 2.51
See accompanying notes to condensed and consolidated financial statements.
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Table of Conten ts
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Net income $ 71 $ 60 $ 235 $ 150
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on derivative instruments 17 11 32 ( 26 )
Total other comprehensive income (loss), net of tax 17 11 32 ( 26 )
Comprehensive income $ 88 $ 71 $ 267 $ 124
Comprehensive income attributable to non-controlling interest — — 1 3
Comprehensive income attributable to common stockholders $ 88 $ 71 $ 266 $ 121
See accompanying notes to condensed and consolidated financial statements.
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Table of Conten ts
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 29,
2021 January 29,
2021
(in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 148 $ 171
Receivables, net 1,107 962
Inventory, prepaid expenses and other current assets 128 156
Total current assets 1,383 1,289
Goodwill 2,905 2,787
Intangible assets, net 1,166 1,138
Property, plant, and equipment (net of accumulated depreciation of $ 181 million and $ 158 million at October 29, 2021 and January 29, 2021, respectively)
103 108
Operating lease right of use assets 223 236
Other assets 136 165
Total assets $ 5,916 $ 5,723
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 877 $ 861
Accrued payroll and employee benefits 399 346
Long-term debt, current portion 119 68
Total current liabilities 1,395 1,275
Long-term debt, net of current portion 2,433 2,447
Operating lease liabilities 202 205
Other long-term liabilities 241 244
Commitments and contingencies (Note 11)
Equity:
Common stock, $ 0.0001 par value, 1 billion shares authorized, 57 million shares and 58 million shares issued and outstanding as of October 29, 2021 and January 29, 2021, respectively
— —
Additional paid-in capital 896 1,004
Retained earnings 796 627
Accumulated other comprehensive loss ( 57 ) ( 89 )
Total common stockholders' equity 1,635 1,542
Non-controlling interest 10 10
Total stockholders' equity 1,645 1,552
Total liabilities and stockholders' equity $ 5,916 $ 5,723
See accompanying notes to condensed and consolidated financial statements.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
Shares of
common
stock Additional
paid-in
capital Retained
earnings Accumulated
other
comprehensive
loss Non-controlling
interest Total
(in millions)
Balance at July 30, 2021 58 $ 945 $ 747 $ ( 74 ) $ 10 $ 1,628
Net income — — 71 — — 71
Issuances of stock 1 4 — — — 4
Other comprehensive income, net of tax — — — 17 — 17
Cash dividends of $ 0.37 per share
— — ( 22 ) — — ( 22 )
Stock-based compensation — 11 — — — 11
Repurchases of stock ( 2 ) ( 64 ) — — — ( 64 )
Distributions to non-controlling interest — — — — — —
Balance at October 29, 2021 57 $ 896 $ 796 $ ( 57 ) $ 10 $ 1,645
Balance at January 29, 2021 58 $ 1,004 $ 627 $ ( 89 ) $ 10 $ 1,552
Net income — — 234 — 1 235
Issuances of stock 1 12 — — — 12
Other comprehensive income, net of tax — — — 32 — 32
Cash dividends of $ 1.11 per share
— — ( 65 ) — — ( 65 )
Stock-based compensation — 21 — — — 21
Repurchases of stock ( 2 ) ( 141 ) — — — ( 141 )
Distributions to non-controlling interest — — — — ( 1 ) ( 1 )
Balance at October 29, 2021 57 $ 896 $ 796 $ ( 57 ) $ 10 $ 1,645
Balance at July 31, 2020 58 $ 996 $ 550 $ ( 109 ) $ 13 $ 1,450
Net income — — 60 — — 60
Issuances of stock — 4 — — — 4
Other comprehensive income, net of tax — — — 11 — 11
Cash dividends of $ 0.37 per share
— — ( 23 ) — — ( 23 )
Stock-based compensation — 11 — — — 11
Repurchases of stock — ( 1 ) — — — ( 1 )
Distributions to non-controlling interest — — — — ( 2 ) ( 2 )
Balance at October 30, 2020 58 $ 1,010 $ 587 $ ( 98 ) $ 11 $ 1,510
Balance at January 31, 2020 58 $ 983 $ 506 $ ( 72 ) $ 10 $ 1,427
Net income — — 147 — 3 150
Issuances of stock — 10 — — — 10
Other comprehensive loss, net of tax — — — ( 26 ) — ( 26 )
Cash dividends of $ 1.11 per share
— — ( 66 ) — — ( 66 )
Stock-based compensation — 20 — — — 20
Repurchases of stock — ( 3 ) — — — ( 3 )
Distributions to non-controlling interest — — — — ( 2 ) ( 2 )
Balance at October 30, 2020 58 $ 1,010 $ 587 $ ( 98 ) $ 11 $ 1,510
See accompanying notes to condensed and consolidated financial statements.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
October 29,
2021 October 30,
2020
(in millions)
Cash flows from operating activities:
Net income $ 235 $ 150
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 123 131
Amortization of off-market customer contracts ( 30 ) ( 11 )
Amortization of debt issuance costs 6 19
Deferred income taxes 41 17
Stock-based compensation expense 35 30
(Gain) loss on divestitures ( 2 ) 10
Impairment of right of use assets 10 —
Increase (decrease) resulting from changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables ( 123 ) 131
Inventory, prepaid expenses and other current assets 28 9
Other assets ( 8 ) ( 11 )
Accounts payable and accrued liabilities 47 9
Accrued payroll and employee benefits 45 141
Operating lease assets and liabilities, net 4 ( 7 )
Other long-term liabilities 4 84
Net cash provided by operating activities 415 702
Cash flows from investing activities:
Expenditures for property, plant, and equipment ( 27 ) ( 32 )
Purchases of marketable securities ( 5 ) ( 5 )
Sales of marketable securities 4 8
Cash paid for acquisitions, net of cash acquired ( 247 ) ( 1,202 )
Proceeds from divestitures 8 4
Other ( 5 ) ( 2 )
Net cash used in investing activities ( 272 ) ( 1,229 )
Cash flows from financing activities:
Dividend payments to stockholders ( 65 ) ( 65 )
Principal payments on borrowings ( 84 ) ( 376 )
Issuances of stock 12 9
Stock repurchased and retired or withheld for taxes on equity awards ( 154 ) ( 13 )
Proceeds from borrowings 116 1,000
Debt issuance costs — ( 27 )
Distributions to non-controlling interest ( 1 ) ( 2 )
Net cash (used in) provided by financing activities ( 176 ) 526
Net decrease in cash, cash equivalents and restricted cash ( 33 ) ( 1 )
Cash, cash equivalents and restricted cash at beginning of period 190 202
Cash, cash equivalents and restricted cash at end of period $ 157 $ 201
See accompanying notes to condensed and consolidated financial statements.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1— Business Overview and Summary of Significant Accounting Policies:
Overview
Science Applications International Corporation (collectively, with its consolidated subsidiaries, the “Company”) is a leading provider of technical, engineering and enterprise information technology (IT) services primarily to the U.S. government. The Company provides engineering and integration services for large, complex projects and offers a broad range of services with a targeted emphasis on higher-end, differentiated technology services. The Company is organized as a matrix comprised of two customer facing operating sectors supported by an enterprise solutions and operations organization. Each of the Company’s two customer facing operating sectors is focused on providing the Company’s comprehensive technical and enterprise IT service offerings to one or more agencies of the U.S. federal government. The Company's operating sectors are aggregated into one reportable segment for financial reporting purposes.
During the second quarter of fiscal 2022, the Company completed the acquisition of Halfaker and Associates, LLC (Halfaker), a mission focused, pure-play health IT company, growing the Company's digital transformation portfolio. Additionally, the Company acquired Koverse, a software company that provides a data management platform enabling artificial intelligence and machine learning on complex sensitive data.
During the first quarter of fiscal 2021, the Company completed the acquisition of Unisys Federal, a former operating unit of Unisys Corporation, which enhances our capabilities in government priority areas, expands our portfolio of intellectual property and technology-driven offerings, and increases our access to current and new customers.
Principles of Consolidation and Basis of Presentation
The accompanying financial information has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting purposes. References to “financial statements” refer to the condensed and consolidated financial statements of the Company, which include the statements of income and comprehensive income, balance sheets, statements of equity and statements of cash flows. These financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and account balances within the Company have been eliminated. The financial statements are unaudited, but in the opinion of management include all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended January 29, 2021.
Non-controlling Interest. The Company holds a 50.1 % majority interest in Forfeiture Support Associates J.V. (FSA). The results of operations of FSA are included in the Company's condensed and consolidated statements of income and comprehensive income and statements of cash flows. The non-controlling interest reported on the condensed and consolidated balance sheets represents the portion of FSA's equity that is attributable to the non-controlling interest.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates inherent in the preparation of the financial statements may include, but are not limited to estimated profitability of long-term contracts, income taxes, fair value measurements, fair value of goodwill and other intangible assets, pension and defined benefit plan obligations, and contingencies. Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates.
Reporting Periods
The Company utilizes a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2021 began on February 1, 2020 and ended on January 29, 2021, while fiscal 2022 began on January 30, 2021 and ends on January 28, 2022.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Cycle
The Company’s operating cycle may be greater than one year and is measured by the average time intervening between the inception and the completion of contracts.
Derivative Instruments Designated as Cash Flow Hedges
Derivative instruments are recorded on the condensed and consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.
The Company’s fixed interest rate swaps are considered over-the-counter derivatives, and fair value is calculated using a standard pricing model for interest rate swaps with contractual terms for maturities, amortization and interest rates. Level 2, or market observable inputs (such as yield and credit curves), are used within the standard pricing models in order to determine fair value. The fair value is an estimate of the amount that the Company would pay or receive as of a measurement date if the agreements were transferred to a third party or canceled. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges.
Marketable Securities
Investments in marketable securities consist of equity securities which are recorded at fair value using observable inputs such as quoted prices in active markets (Level 1). As of October 29, 2021 and January 29, 2021, the fair value of our investments totaled $ 31 million and $ 27 million, respectively, and are included in other assets on the condensed and consolidated balance sheets. The Company's investments are primarily held in a custodial account, which includes investments to fund our deferred compensation plan liabilities.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed and consolidated balance sheets for the periods presented:
October 29,
2021 January 29,
2021
(in millions)
Cash and cash equivalents $ 148 $ 171
Restricted cash included in inventory, prepaid expenses and other current assets 5 5
Restricted cash included in other assets 4 14
Cash, cash equivalents and restricted cash $ 157 $ 190
Acquisition and Integration Costs
Acquisition-related costs that are not part of the purchase price consideration are generally expensed as incurred, except for certain costs that are deferred in connection with the issuance of debt. These costs typically include transaction-related costs, such as finder’s fees, legal, accounting, and other professional costs. Integration-related costs represent costs directly related to combining the Company and its acquired businesses. Integration-related costs typically include strategic consulting services, facility consolidation, employee related costs, such as retention, severance and accelerated vesting of assumed stock awards, costs to integrate information technology infrastructure, enterprise planning systems, processes, and other non-recurring integration-related costs. Acquisition and integration costs are presented together as acquisition and integration costs on the condensed and consolidated statements of income.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amounts recognized in acquisition and integration costs on the condensed and consolidated statements of income are as follows:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Acquisition (1)
$ — $ — $ 3 $ 20
Integration (2)
12 3 33 27
Total acquisition and integration costs $ 12 $ 3 $ 36 $ 47
(1) Acquisition expenses for the nine months ended October 29, 2021 were related to the acquisitions of Halfaker and Koverse. Acquisition expenses for the nine months ended October 30, 2020 were related to the acquisition of Unisys Federal.
(2) Integration expenses for the nine months ended October 29, 2021 include a $ 10 million impairment of right of use lease assets. Integration expenses for the nine months ended October 30, 2020 include an $ 11 million loss on divestiture of non-strategic international operations. Integration expenses for the three and nine months ended October 30, 2020 also include restructuring costs of $ 2 million and $ 6 million, respectively.
Restructuring
During the three and nine months ended October 30, 2020, the Company incurred $ 4 million of severance and other employee costs associated with an internal reorganization. These costs are presented within selling, general and administrative expenses in the condensed and consolidated statements of income.
Accounting Standards Updates
In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured at the acquisition date in accordance with Topic 606 as if the acquirer had originated the contracts. ASU 2021-08 becomes effective for the Company in the first quarter of fiscal 2024 and is required to be adopted on a prospective basis with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.
Other Accounting Standards Updates effective after October 29, 2021 are not expected to have a material effect on the Company’s financial statements.
Note 2— Earnings Per Share and Dividends:
Basic earnings per share (EPS) is computed by dividing net income attributable to common stockholders by the basic weighted-average number of shares outstanding. Diluted EPS is computed similarly to basic EPS, except the weighted-average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.
A reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS was:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Basic weighted-average number of shares outstanding
57.5 58.2 57.8 58.1
Dilutive common share equivalents - stock options and other stock-based awards
0.5 0.5 0.6 0.5
Diluted weighted-average number of shares outstanding
58.0 58.7 58.4 58.6
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following stock-based awards were excluded from the weighted-average number of shares outstanding used to compute diluted EPS:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Antidilutive stock options excluded — 0.4 — 0.4
Dividends
The Company declared and paid a quarterly dividend of $ 0.37 per share of its common stock during the three months ended October 29, 2021. Subsequent to the end of the quarter, on December 1, 2021, the Company's Board of Directors declared a quarterly dividend of $ 0.37 per share of the Company's common stock payable on January 28, 2022 to stockholders of record on January 14, 2022.
Note 3— Revenues:
Changes in Estimates
Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur routinely over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated.
Many of the Company's contracts recognize revenue on performance obligations using a cost input measure (cost-to-cost), which requires estimates of total costs at completion. In cases when total expected costs exceed total estimated revenues for a performance obligation, the Company recognizes the total estimated loss in the quarter identified. Total estimated losses are inclusive of any unexercised options that are probable of award only if they increase the amount of the loss.
Aggregate net changes in estimates on contracts accounted for using the cost-to-cost method of accounting were recognized in operating income as follows:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions, except per share amounts)
Net favorable (unfavorable) adjustments $ — $ ( 4 ) $ 9 $ ( 1 )
Net favorable (unfavorable) adjustments, after tax — ( 3 ) 7 ( 1 )
Diluted EPS impact $ — $ ( 0.05 ) $ 0.12 $ ( 0.01 )
Revenues were $ 1 million and $ 21 million higher for the three and nine months ended October 29, 2021, respectively, and $ 1 million lower and $ 5 million higher for the three and nine months ended October 30, 2020, respectively, due to net revenue recognized from performance obligations satisfied in prior periods.
Disaggregation of Revenues
The Company's revenues are generated primarily from long-term contracts with the U.S. government including subcontracts with other contractors engaged in work for the U.S. government. The Company disaggregates revenues by customer, contract-type and prime vs. subcontractor to the federal government.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Disaggregated revenues by customer were as follows:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Department of Defense $ 920 $ 851 $ 2,740 $ 2,543
Other federal government agencies 940 926 2,762 2,683
Commercial, state and local 38 41 110 113
Total $ 1,898 $ 1,818 $ 5,612 $ 5,339
Disaggregated revenues by contract-type were as follows:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Cost reimbursement $ 1,045 $ 962 $ 3,028 $ 2,869
Time and materials (T&M) 363 405 1,139 1,181
Firm-fixed price (FFP) 490 451 1,445 1,289
Total $ 1,898 $ 1,818 $ 5,612 $ 5,339
Disaggregated revenues by prime vs. subcontractor were as follows:
Three Months Ended Nine Months Ended
October 29,
2021 October 30,
2020 October 29,
2021 October 30,
2020
(in millions)
Prime contractor to federal government $ 1,722 $ 1,632 $ 5,069 $ 4,813
Subcontractor to federal government 138 145 433 413
Other 38 41 110 113
Total $ 1,898 $ 1,818 $ 5,612 $ 5,339
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contract Balances
Contract balances for the periods presented were as follows:
Balance Sheet line item October 29,
2021 January 29,
2021
(in millions)
Billed and billable receivables, net (1)
Receivables, net $ 673 $ 600
Contract assets - unbillable receivables Receivables, net 434 362
Contract assets - contract retentions Other assets 17 18
Contract liabilities - current Accounts payable and accrued liabilities 49 82
Contract liabilities - non-current Other long-term liabilities $ 11 $ 17
(1) Net of allowance of $ 3 million as of October 29, 2021 and January 29, 2021.
During the three and nine months ended October 29, 2021, the Company recognized revenues of $ 8 million and $ 72 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of January 29, 2021. During the three and nine months ended October 30, 2020, the Company recognized revenues of $ 5 million and $ 27 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of January 31, 2020.
Remaining Performance Obligations
As of October 29, 2021, the Company had $ 6.0 billion of remaining performance obligations. Remaining performance obligations represent the expected value, both funded and unfunded, yet to be recognized on exercised contracts. Remaining performance obligations exclude unexercised option periods and unissued task orders under indefinite delivery, indefinite quantity (IDIQ) contracts. Remaining performance obligations also exclude any variable consideration that is allocated entirely to unsatisfied performance obligations on our supply chain contracts. The Company expects to recognize revenue on approximately 80 % of the remaining performance obligations over the next 12 months and approximately 90 % over the next 24 months, with the remaining recognized thereafter.
Lessor revenue
The Company leases IT equipment and hardware to its customers. All of the Company’s lessor arrangements are operating leases. Operating lease revenue is recognized on a straight-line basis over the term of the lease. Operating lease income is reported as revenue on the condensed and consolidated statements of income. Operating lease income was $ 3 million and $ 14 million for the three and nine months ended October 29, 2021, respectively, and $ 11 million and $ 28 million for the three and nine months ended October 30, 2020, respectively.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4— Acquisitions:
Halfaker Acquisition
On July 2, 2021, the Company completed the acquisition of Halfaker, a mission focused, pure-play health IT company for a preliminary purchase price of $ 220 million, net of $ 3 million cash acquired, subject to post-closing adjustments. The Company funded the transaction from increased borrowings (as discussed in Note 7) and cash on hand. The allocation of the preliminary purchase price resulted in goodwill of $ 98 million and intangible assets of $ 112 million, all of which is deductible for income tax purposes. During the third quarter of fiscal 2022, the Company increased goodwill by $ 6 million which consisted of a $ 3 million increase in the preliminary purchase price for final working capital adjustments and $ 3 million in fair value adjustments for other assets acquired. The goodwill is primarily associated with future customer relationships and an acquired assembled work force. The intangible assets consist of customer relationships of $ 95 million and backlog of $ 17 million that will be amortized over a period of nine years and one year , respectively. The Company has not yet finalized the purchase accounting for the acquisition as it is still in the process of finalizing the valuation for certain assets acquired. The Company will make additional cash payments of $ 21 million in March 2022 associated with certain change in control provisions that will be recognized as post-combination expense.
Koverse Acquisition
On May 3, 2021, the Company acquired Koverse, a software company that provides a data management platform enabling artificial intelligence and machine learning on complex sensitive data, for a preliminary purchase price of $ 30 million, net of $ 2 million cash acquired, subject to post-closing adjustments. The preliminary purchase price includes $ 3 million of contingent consideration, representing the fair value recognized for potential future earnout payments of up to $ 27 million based on the achievement of certain revenue targets over the next four years. The allocation of the preliminary purchase price resulted in goodwill of $ 21 million and intangible assets of $ 10 million, which are not deductible for income tax purposes. The goodwill is primarily associated with intellectual capital, future customer relationships, and an acquired assembled work force. The intangible assets, which primarily consist of developed technology, are being amortized over a weighted average period of seven years . The Company is recognizing an additional $ 13 million in post-combination compensation expense over the next two years associated with employee retention agreements.
Unisys Federal Acquisition
On March 13, 2020, the Company completed the acquisition of Unisys Federal, a former operating unit of Unisys Corporation. Unisys Federal provides infrastructure modernization, cloud migration, managed services, and enterprise IT-as-a-service solutions to U.S. federal civilian agencies and the Department of Defense. The Company purchased substantially all of the assets and liabilities of Unisys Federal for an aggregate purchase price of $ 1.2 billion. The Company used the net proceeds from its offering of Senior Notes and borrowings under the Term Loan B2 Facility, proceeds from the sale of receivables under its MARPA Facility, and cash on its balance sheet to finance the acquisition and pay related fees and expenses.
During the second quarter of fiscal 2022, the Company accelerated the amortization for certain off-market customer contracts as a result of a change in the expected contractual terms which resulted in additional amortization of $ 9 million and $ 17 million for the three and nine months ended October 29, 2021. Amortization for the next four years is expected to be as follows: $ 3 million for the remainder of 2022, $ 9 million in 2023, $ 8 million in 2024, and $ 2 million in 2025.
The amount of Unisys Federal's revenue included in the condensed and consolidated statements of income for the three and nine months ended October 30, 2020, was $ 200 million and $ 479 million, respectively, and the amount of net income attributable to common stockholders included in the condensed and consolidated statements of income for the three and nine months ended October 30, 2020, was $ 21 million and $ 40 million, respectively.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma financial information presents the combined results of operations for Unisys Federal and the Company for the three and nine months ended October 30, 2020:
Three Months Ended Nine Months Ended
October 30, 2020 October 30, 2020
(in millions)
Revenues $ 1,818 $ 5,429
Net income attributable to common stockholders $ 71 $ 186
The unaudited pro forma combined financial information presented above has been prepared from historical financial statements that have been adjusted to give effect to the acquisition of Unisys Federal as though it had occurred on February 2, 2019. They include adjustments for intangible asset amortization; interest expense and debt issuance costs on long-term debt; acquisition and other transaction costs; and certain costs allocated from the former parent. The unaudited pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had occurred on February 2, 2019, nor is it indicative of future operating results.
Note 5— Goodwill and Intangible Assets:
Goodwill
Goodwill had a carrying value of $ 2,905 million and $ 2,787 million as of October 29, 2021 and January 29, 2021, respectively. Goodwill increased by $ 118 million during the nine months ended October 29, 2021, primarily due to the acquisitions of Halfaker ($ 98 million) and Koverse ($ 21 million) as discussed in Note 4. There were no impairments of goodwill during the periods presented.
Intangible Assets
Intangible assets, all of which were finite-lived, consisted of the following:
October 29, 2021 January 29, 2021
Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value
(in millions)
Customer relationships $ 1,467 $ ( 323 ) $ 1,144 $ 1,371 $ ( 241 ) $ 1,130
Backlog 17 ( 5 ) 12 47 ( 41 ) 6
Developed technology 10 ( 1 ) 9 9 ( 7 ) 2
Trade name 1 — 1 — — —
Total intangible assets $ 1,495 $ ( 329 ) $ 1,166 $ 1,427 $ ( 289 ) $ 1,138
Amortization expense related to intangible assets was $ 33 million and $ 94 million for the three and nine months ended October 29, 2021, respectively, and $ 40 million and $ 108 million for the three and nine months ended October 30, 2020, respectively. There were no intangible asset impairment losses during the periods presented.
As of October 29, 2021, the estimated future annual amortization expense related to intangible assets is as follows:
Fiscal Year Ending (in millions)
Remainder of 2022 $ 33
2023 125
2024 115
2025 115
2026 115
Thereafter 663
Total $ 1,166
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, and other factors.
Note 6— Income Taxes:
The Company's effective income tax rate was 19.4 % and 22.0 % for the three and nine months ended October 29, 2021, respectively, and 22.4 % and 22.2 % for the three and nine months ended October 30, 2020, respectively. The Company’s effective tax rate was lower for the three and nine months ended October 29, 2021 compared to the prior year periods primarily due to the completion of prior year tax return planning efforts recorded during the three months ended October 29, 2021. Tax rates for the three and nine months ended October 29, 2021 were lower than the combined federal and state statutory rates principally due to excess tax benefits related to employee stock-based compensation, research and development tax credits, a Foreign Derived Intangible Income deduction, and other permanent book tax differences.
As of October 29, 2021, the Company's total liability for unrecognized tax benefits was $ 71 million, which is classified as other long-term liabilities on the condensed and consolidated balance sheets, and if recognized, would positively impact the effective tax rate.
While the Company believes it has adequate accruals for uncertainty in income taxes, the tax authorities, on review of the Company’s tax filings, may determine that the Company owes taxes in excess of recorded accruals, or the recorded accruals may be in excess of the final settlement amounts agreed to by the tax authorities. Although the timing of such reviews is not certain, over the next 12 months the Company does not expect a significant increase or decrease in the unrecognized tax benefits recorded at October 29, 2021.
Note 7— Debt Obligations:
The Company’s long-term debt as of the dates presented was as follows:
October 29, 2021 January 29, 2021
Stated
interest
rate Effective
interest
rate Principal Unamortized
debt
issuance
costs Net Principal Unamortized
debt
issuance
costs Net
(in millions)
Term Loan A Facility due October 2023
1.84 % 2.16 % $ 785 $ ( 5 ) $ 780 $ 844 $ ( 6 ) $ 838
Term Loan A2 Facility due October 2023 1.84 % 1.99 % 100 — 100 — — —
Term Loan B Facility due October 2025
1.96 % 2.16 % 1,018 ( 8 ) 1,010 1,026 ( 9 ) 1,017
Term Loan B2 Facility due March 2027
1.96 % 2.36 % 272 ( 5 ) 267 272 ( 6 ) 266
Senior Notes due April 2028
4.88 % 5.04 % 400 ( 5 ) 395 400 ( 6 ) 394
Total long-term debt $ 2,575 $ ( 23 ) $ 2,552 $ 2,542 $ ( 27 ) $ 2,515
Less current portion 119 — 119 68 — 68
Total long-term debt, net of current portion
$ 2,456 $ ( 23 ) $ 2,433 $ 2,474 $ ( 27 ) $ 2,447
As of October 29, 2021, the Company has a $ 2.6 billion credit facility (the Credit Facility) consisting of a $ 785 million secured Term Loan A Facility due October 2023, a $ 100 million secured Term Loan A2 Facility due October 2023, a $ 1,018 million secured Term Loan B Facility due October 2025, a $ 272 million secured Term Loan B2 Facility due March 2027 (together, the Term Loan Facilities), and a $ 400 million secured Revolving Credit Facility due October 2023. There is no balance outstanding on the Revolving Credit Facility as of October 29, 2021. As of October 29, 2021, the Company was in compliance with the covenants under its Credit Facility.
On March 1, 2021, the Company executed the Third Amendment to the Third Amended and Restated Credit Agreement, which reduced the applicable margin for the Term Loan B2 Facility due March 2027 for LIBOR loans from 2.25 % to 1.875 % and for base rate loans from 1.25 % to 0.875 %.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 2, 2021, the Company executed the Fourth Amendment to the Third Amended and Restated Credit Agreement, which established a new senior secured incremental term loan credit facility commitment in the amount of $ 100 million (the Term Loan A2 Facility due October 2023). The entirety of the Term Loan A2 Facility due October 2023 was borrowed by the Company and the proceeds were immediately used to pay a portion of the purchase price of Halfaker (see Note 4).
The Term Loan A2 Facility due October 2023 will amortize quarterly beginning October 31, 2021 at 0.3125 % of the original borrowed amount thereunder. The Term Loan A2 Facility due October 2023 may be prepaid at any time without penalty and is subject to the same mandatory prepayments, including from excess cash flow, as the Company’s existing term loans under the Credit Facility. The Term Loan A2 Facility due October 2023 will mature and be due and payable in full on October 31, 2023.
The Term Loan A2 Facility due October 2023 is secured by substantially all of the assets of the Company and the Company’s wholly owned domestic subsidiaries, and is guaranteed by each of the Company’s wholly owned domestic subsidiaries. The Term Loan A2 Facility due October 2023 will bear interest at a variable rate of interest based on LIBOR or a base rate, plus an applicable margin of 1.25 % to 2.00 % for LIBOR loans and 0.25 % to 1.00 % for base rate loans, dependent upon the Company’s leverage ratio.
The Term Loan A2 Facility due October 2023 is subject to the same covenants and events of default as the Company’s existing term loans under the Credit Facility.
As of October 29, 2021 and January 29, 2021, the carrying value of the Company’s outstanding debt obligations approximated its fair value. The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s Term Loan Facilities and Senior Notes.
Note 8— Derivative Instruments Designated as Cash Flow Hedges:
The Company’s derivative instruments designated as cash flow hedges consist of:
Fair Value of Liability (1) at
Notional Amount at October 29, 2021 Pay Fixed
Rate Receive
Variable
Rate Settlement and
Termination October 29,
2021 January 29, 2021
(in millions) (in millions)
Interest rate swaps #1 $ — 2.78 % 1-month
LIBOR Monthly through
July 30, 2021 $ — $ ( 3 )
Interest rate swaps #2 685 3.07 % 1-month
LIBOR Monthly through October 31, 2025 ( 55 ) ( 81 )
Interest rate swaps #3 563 2.49 % 1-month
LIBOR Monthly through October 31, 2023 ( 19 ) ( 33 )
Total $ 1,248 $ ( 74 ) $ ( 117 )
(1) The fair value of the fixed interest rate swaps liability is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.
The Company is party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of the Company’s floating rate debt. The counterparties to all swap agreements are financial institutions. See Note 9 for the unrealized change in fair values on cash flow hedges recognized in other comprehensive income (loss) and the amounts reclassified from accumulated other comprehensive loss into earnings for the current and comparative periods presented. The Company estimates that it will reclassify $ 32 million of unrealized losses from accumulated other comprehensive loss into earnings in the twelve months following October 29, 2021.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9— Changes in Accumulated Other Comprehensive Loss by Component:
The following table presents the changes in accumulated other comprehensive loss attributable to the Company’s fixed interest rate swap cash flow hedges that are discussed in Note 8 and the Company's defined benefit plans.
Unrealized Gains
(Losses) on Fixed
Interest Rate
Swap Cash Flow
Hedges (1)
Defined Benefit
Obligation
Adjustment Total
(in millions)
Three months ended October 29, 2021
Balance at July 30, 2021 $ ( 71 ) $ ( 3 ) $ ( 74 )
Other comprehensive income before reclassifications 13 — 13
Amounts reclassified from accumulated other comprehensive loss
9 — 9
Income tax impact ( 5 ) — ( 5 )
Net other comprehensive income 17 — 17
Balance at October 29, 2021 $ ( 54 ) $ ( 3 ) $ ( 57 )
Three months ended October 30, 2020
Balance at July 31, 2020 $ ( 104 ) $ ( 5 ) $ ( 109 )
Other comprehensive income before reclassifications 7 — 7
Amounts reclassified from accumulated other comprehensive loss
8 — 8
Income tax impact ( 4 ) — ( 4 )
Net other comprehensive income 11 — 11
Balance at October 30, 2020 $ ( 93 ) $ ( 5 ) $ ( 98 )
Nine months ended October 29, 2021
Balance at January 29, 2021 $ ( 86 ) $ ( 3 ) $ ( 89 )
Other comprehensive income before reclassifications 17 — 17
Amounts reclassified from accumulated other comprehensive loss
26 — 26
Income tax impact ( 11 ) — ( 11 )
Net other comprehensive income 32 — 32
Balance at October 29, 2021 $ ( 54 ) $ ( 3 ) $ ( 57 )
Nine months ended October 30, 2020
Balance at January 31, 2020 $ ( 67 ) $ ( 5 ) $ ( 72 )
Other comprehensive loss before reclassifications ( 55 ) — ( 55 )
Amounts reclassified from accumulated other comprehensive loss
20 — 20
Income tax impact
9 — 9
Net other comprehensive loss ( 26 ) — ( 26 )
Balance at October 30, 2020 $ ( 93 ) $ ( 5 ) $ ( 98 )
(1) The amount reclassified from accumulated other comprehensive loss is included in interest expense.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10— Sales of Receivables:
The Company has a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (the Purchaser) for the sale of up to a maximum amount of $ 300 million of certain designated eligible receivables with the U.S. government.
During the nine months ended October 29, 2021 and October 30, 2020, the Company incurred purchase discount fees of $ 2 million, which are presented in Other (income) expense, net on the condensed and consolidated statements of income.
MARPA Facility activity consisted of the following:
Nine Months Ended
October 29,
2021 October 30,
2020
(in millions)
Beginning balance $ 185 $ —
Sale of receivables 2,484 2,416
Cash collections ( 2,469 ) ( 2,216 )
Outstanding balance sold to Purchaser (1)
200 200
Cash collected, not remitted to Purchaser (2)
( 31 ) ( 25 )
Remaining sold receivables $ 169 $ 175
(1) For the nine months ended October 29, 2021 and October 30, 2020, the Company recorded a net increase to cash flows from operating activities of $ 15 million and $ 200 million, respectively, from sold receivables.
(2) Primarily represents the cash collected on behalf of but not yet remitted to the Purchaser as of October 29, 2021 and October 30, 2020. This balance is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.
Note 11— Legal Proceedings and Other Commitments and Contingencies:
Legal Proceedings
The Company is involved in various claims and lawsuits arising in the normal conduct of its business, none of which the Company’s management believes, based on current information, is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
AAV Termination for Convenience
On August 27, 2018, the Company received a stop-work order from the United States Marine Corps on the Assault Amphibious Vehicle (AAV) contract and on October 3, 2018 the program was terminated for convenience by the customer. The Company is continuing to negotiate with the Marine Corps to recover costs associated with the termination.
Beginning in fiscal 2018, the Company entered into contracts with various vendors for long-lead time materials that would be necessary to complete the low-rate initial production (LRIP) phase of the program, including portions of the LRIP phase that had not yet been awarded.
Government Investigations, Audits and Reviews
The Company is routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect, in particular, to its role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. U.S. government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its business systems. Adverse findings in these investigations, audits, or reviews can lead to criminal, civil or administrative proceedings, and the Company could face disallowance of previously billed costs, penalties, fines, compensatory damages and suspension or debarment from doing business with governmental agencies. Due to the Company’s reliance on government contracts, adverse findings could also have a material impact on the Company’s business, including its financial position, results of operations and cash flows.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The indirect cost audits by the DCAA of the Company’s business remain open for certain prior years and the current year. Although the Company has recorded contract revenues based on an estimate of costs that the Company believes will be approved on final audit, the Company does not know the outcome of any ongoing or future audits. If future completed audit adjustments exceed the Company’s reserves for potential adjustments, the Company’s profitability could be materially adversely affected.
The Company has recorded reserves for estimated net amounts to be refunded to customers for potential adjustments for indirect cost audits and compliance with Cost Accounting Standards. As of October 29, 2021, the Company has recorded a total liability of $ 18 million which is presented in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.
Letters of Credit and Surety Bonds
The Company has outstanding obligations relating to letters of credit of $ 10 million as of October 29, 2021, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds in the amount of $ 19 million, principally related to performance and payment bonds on the Company’s contracts.
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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.