What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-06-06 compared with 2021-12-06 · 56 added, 81 removed, 168 unchanged (45% of the section changed)

13 unchanged sentences

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.

Fiscal 2023 began on January 29, 2022 and ends on February 3, 2023, while fiscal 2022 began on January 30, 2021 and ended on January 28, 2022.

Business Overview

1 unchanged sentence

We developed our brand by addressing our customers’ mission critical needs and solving their most complex problems for over 50 years.

As one of the largest pure-play technical service providers to the U.S.

As one of the largest pure-play technology service providers to the U.S.

government, we serve markets of significant scale and opportunity.

5 unchanged sentences

Economic Opportunities, Challenges, and Risks

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

During the three months ended April 29, 2022, we generated approximately 98% of our revenues from contracts with the U.S.

government, including subcontracts on which we perform.

1 unchanged sentence

government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S.

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 raised the Budget Control Act spending caps enacted in August 2011 and suspended the Federal debt ceiling until July 31, 2021.

Appropriations measures passed in March 2022 provided full funding for the federal government through the end of government fiscal year 2022.

In October 2021, the Federal debt ceiling was increased by $480 billion and in December 2021 was further increased by $2.5 trillion which is expected to allow the U.S.

government to operate into 2023.

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

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, and potential government shutdowns.

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.

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, extreme inflationary increases adversely impacting fixed price contracts, inability to increase or suspend the Federal debt ceiling, and potential government shutdowns.

Spending packages, including the infrastructure bill and future potential spending packages, may provide additional opportunity in areas of SAIC focus such as broadband, cyber, and climate resiliency.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

1 unchanged sentence

General Services Administration (GSA) schedules, and other multi-award contracts), which has resulted in greater competition and increased pricing pressure.

We expect a majority of the business we seek in the foreseeable future will be awarded through a competitive bidding process.

Despite the budget and competitive pressures affecting the industry, we believe we are well-positioned to protect and expand existing customer relationships and benefit from opportunities that we have not previously pursued.

1 unchanged sentence

We believe our long-term, trusted customer relationships and deep technical expertise provide us with the sophistication to handle highly complex, mission-critical contracts.

SAIC’s value proposition is found in the proven ability to serve as a trusted adviser to our customers.

Our value proposition is found in the proven ability to serve as a trusted adviser to our customers.

In doing so, we leverage our expertise and scale to help them execute their mission.

6 unchanged sentences

The acquisition of Halfaker, in alignment with our long-term strategy, grows the Company's digital transformation portfolio while expanding its ability to support the government's healthcare mission.

On March 13, 2020, we completed the acquisition of Unisys Federal, a former operating unit of Unisys Corporation.

The acquisition of Unisys Federal, in alignment with our long-term strategy, positions SAIC as a leading government services technology integrator in digital transformation and is highly accretive across all key financial metrics.

Impacts of the COVID-19 Pandemic

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 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 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 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.

In December 2021, a federal district judge issued an order, which temporarily enjoined the federal contractor vaccine mandate.

We had taken steps to comply with the vaccine mandate across our workforce until it was enjoined.

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

The longer the duration of the event, the more likely that there may be an adverse impact on our business, financial position, results of operations and/or cash flows.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

While we continue to navigate the impacts of the COVID-19 pandemic, COVID-19 did not have as significant an impact on revenues and operating income as compared to the prior year.

The full extent of the impact of COVID-19 on our business and our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, all of which are uncertain and cannot be predicted.

Management of Operating Performance and Reporting

3 unchanged sentences

For performance obligations satisfied over time, updates to estimates are recognized on inception-to-date activity, during the period of adjustment, resulting in either a favorable or unfavorable impact to operating income.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

We evaluate our results of operations by considering the drivers causing changes in revenues, operating income and operating cash flows.

7 unchanged sentences

The following table summarizes our results of operations:

Three Months Ended Nine Months Ended

change October 30,

2020 October 29,

change October 30,

Three Months Ended

change April 30,

(dollars in millions)

3 unchanged sentences

Selling, general and administrative expenses

87 (9 %) 96 252 (3 %) 261

Acquisition and integration costs 9 (10 %) 10

4 unchanged sentences

Net cash provided by operating activities $ 118 (38 %) $ 189

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 $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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Revenues increased $118 million for the three months ended April 29, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts and the acquisition of Halfaker (approximately $42 million), partially offset by contract completions.

Adjusting for the impact of acquired revenues and divested revenues, revenues grew 3.9% primarily due to ramp up on new and existing contracts.

Cost of Revenues.

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.

Cost of revenues increased $109 million for the three months ended April 29, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts and the acquisition of Halfaker.

Selling, General and Administrative Expenses.

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.

SG&A increased $12 million for the three months ended April 29, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and the acquisition of Halfaker.

Operating Income.

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.

Operating income as a percentage of revenues for the three months ended April 29, 2022 decreased from the comparable prior year period primarily due to higher indirect costs in the current year period and higher benefit from net favorable settlement of prior indirect rate years in the prior year period, partially offset by improved profitability across our contract portfolio.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Net Cash Provided by Operating Activities.

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.

Net cash provided by operating activities was $118 million for the three months ended April 29, 2022, a decrease of $71 million compared to the prior year, primarily due to lower net earnings, cash payments during the quarter associated with certain change in control provisions related to the acquisition of Halfaker, and timing of customer collections and vendor disbursements.

Non-GAAP Measures

8 unchanged sentences

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.

The acquisition and integration costs relate to the Company's acquisitions of Halfaker and Koverse in fiscal 2022 and Unisys Federal in fiscal 2021.

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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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

Three Months Ended Nine Months Ended

2021 October 30,

2020 October 29,

2021 October 30,

Three Months Ended

2022 April 30,

(in millions)

1 unchanged sentence

Interest expense and loss on sale of receivables 28 28

Interest income — — — (1)

Provision for income taxes 21 23

3 unchanged sentences

Acquisition and integration costs 9 10

Restructuring and impairment costs 1 4 1 4

Depreciation included in acquisition and integration costs — (1)

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

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

Adjusted EBITDA $ 173 $ 184

Adjusted EBITDA as a percentage of revenues 8.7 % 9.8 %

(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.

Adjusted EBITDA as a percentage of revenues for the three months ended April 29, 2022 decreased to 8.7% from 9.8% for the same period in the prior year primarily due to higher indirect costs in the current year period and higher benefit from net favorable settlement of prior indirect rate years in the prior year period, partially offset by improved profitability across our contract portfolio.

Other Key Performance Measures

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.

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.

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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Net Bookings and Backlog.

5 unchanged sentences

Additionally, we do not include in backlog contract awards that are under protest until the protest is resolved in our favor.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

We segregate our backlog into two categories as follows:

18 unchanged sentences

Total backlog $ 24,112 $ 24,092

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.

We had net bookings worth an estimated $2.0 billion during the three months ended April 29, 2022.

Total backlog at the end of the first quarter is consistent with our total backlog at prior year end.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Contract Types.

2 unchanged sentences

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

Nine Months Ended

2021 October 30,

Three Months Ended

2022 April 30,

Cost reimbursement 55 % 53 %

2 unchanged sentences

Total 100 % 100 %

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Cost of Revenues Mix.

3 unchanged sentences

The following table presents cost mix for the periods presented:

Three Months Ended Nine Months Ended

2021 October 30,

2020 October 29,

2021 October 30,

Three Months Ended

2022 April 30,

(as a % of total cost of revenues)

Labor-related cost of revenues 54 % 54 %

3 unchanged sentences

Total 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).

Cost of revenues mix for the three months ended April 29, 2022 were consistent with the same period in the prior year.

Liquidity and Capital Resources

As a services provider, our business generally requires minimal infrastructure investment.

We expect to fund our ongoing working capital, commitments and any other discretionary investments with cash on hand, future operating cash flows and, if needed, borrowings under our $400 million Revolving Credit Facility and $300 million receivable factoring facility.

We anticipate that our future cash needs will be for working capital, capital expenditures, and contractual and other commitments.

We consider various financial measures when we develop and update our capital deployment strategy, which includes evaluating cash provided by operating activities, free cash flow and financial leverage.

We consider various financial measures when we develop and update our capital deployment strategy, which include evaluating cash provided by operating activities, free cash flow and financial leverage.

When our cash generation enables us to exceed our target average minimum cash balance, we intend to deploy excess cash through dividends, share repurchases, debt prepayments or strategic acquisitions.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Our ability to fund these needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results.

3 unchanged sentences

Nevertheless, we believe that our existing cash on hand, generation of future operating cash flows, and access to bank financing and capital markets will provide adequate resources to meet our short-term liquidity and long-term capital needs.

Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 requires the capitalization of research and development costs for tax purposes, which can then be amortized over five years.

Congress has proposed tax legislation to delay the effective date of this change to 2026, but it is uncertain whether the proposed legislation will ultimately be enacted into law.

If the current effective date and current legislation remains in place, the Company's initial assessment is that our cash flows from operations in fiscal 2023 will decrease by a minimum of $90 million, but our net deferred tax assets will increase by a similar amount.

Historical Cash Flow Trends

The following table summarizes our cash flows:

Nine Months Ended

2021 October 30,

Three Months Ended

2022 April 30,

(in millions)

1 unchanged sentence

Net cash used in investing activities (6) (4)

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

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

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Net cash used in financing activities (162) (95)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (50) $ 90

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.

Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the three months ended April 29, 2022 and the comparable prior year period.

Net Cash Used in Investing Activities.

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 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.

Cash used in investing activities for the three months ended April 29, 2022 increased compared to the prior year period primarily due to proceeds from divestitures in the prior year period, partially offset by lower capital expenditures for property, plant, and equipment.

Net Cash Used in Financing Activities.

Cash used in financing activities for the three months ended April 29, 2022 increased compared to the prior year period as a result of higher term loan principal payments in the current year period and higher share repurchases.

Critical Accounting Policies

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.

There have been no changes to our critical accounting policies during the three months ended April 29, 2022 from those disclosed in our most recently filed Annual Report on Form 10-K.

Recently Issued But Not Yet Adopted Accounting Pronouncements

2 unchanged sentences

There have been no material changes to our Market Risks from those discussed in our most recently filed Annual Report on Form 10-K.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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