Science Applications International Corp 10-Q

Item 1. Financial Statements SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended April 29, 2022 April 30, 2021 (in millions, except per share amounts) Revenues $ 1,996 $ 1,878 Cost of revenues 1,770 1,661 Selling, general and administrative expenses 92 80 Acquisition and integration costs 9 10 Other operating income — ( 3 ) Operating income 125 130 Interest expense 27 27 Other (income) expense, net 3 ( 2 ) Income before income taxes 95 105 Provision for income taxes ( 21 ) ( 23 ) Net income 74 82 Net income attributable to non-controlling interest 1 1 Net income attributable to common stockholders $ 73 $ 81 Earnings per share: Basic $ 1.30 $ 1.39 Diluted $ 1.29 $ 1.38 See accompanying notes to condensed and consolidated financial statements. -1- Table of Conten ts SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended April 29, 2022 April 30, 2021 (in millions) Net income $ 74 $ 82 Other comprehensive income, net of tax: Net unrealized gain on derivative instruments 37 14 Total other comprehensive income, net of tax 37 14 Comprehensive income $ 111 $ 96 Comprehensive income attributable to non-controlling interest 1 1 Comprehensive income attributable to common stockholders $ 110 $ 95 See accompanying notes to condensed and consolidated financial statements. -2- Table of Conten ts SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED BALANCE SHEETS (UNAUDITED) April 29, 2022 January 28, 2022 (in millions) ASSETS Current assets: Cash and cash equivalents $ 56 $ 106 Receivables, net 1,104 1,015 Inventory, prepaid expenses and other current assets 131 142 Total current assets 1,291 1,263 Goodwill 2,911 2,913 Intangible assets, net 1,101 1,132 Property, plant, and equipment (net of accumulated depreciation of $ 189 million and $ 182 million at April 29, 2022 and January 28, 2022, respectively) 97 100 Operating lease right of use assets 187 209 Other assets 129 129 Total assets $ 5,716 $ 5,746 LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities $ 820 $ 840 Accrued payroll and employee benefits 395 364 Long-term debt, current portion 119 148 Total current liabilities 1,334 1,352 Long-term debt, net of current portion 2,342 2,370 Operating lease liabilities 175 192 Deferred income taxes 45 43 Other long-term liabilities 170 160 Commitments and contingencies (Note 11) Equity: Common stock, $ 0.0001 par value, 1 billion shares authorized, 56 million shares issued and outstanding as of April 29, 2022 and January 28, 2022 — — Additional paid-in capital 770 838 Retained earnings 870 818 Accumulated other comprehensive loss — ( 37 ) Total common stockholders' equity 1,640 1,619 Non-controlling interest 10 10 Total stockholders' equity 1,650 1,629 Total liabilities and stockholders' equity $ 5,716 $ 5,746 See accompanying notes to condensed and consolidated financial statements. -3- Table of Contents 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 January 28, 2022 56 $ 838 $ 818 $ ( 37 ) $ 10 $ 1,629 Net income — — 73 — 1 74 Issuances of stock 1 5 — — — 5 Other comprehensive income, net of tax — — — 37 — 37 Cash dividends of $ 0.37 per share — — ( 21 ) — — ( 21 ) Stock-based compensation — ( 4 ) — — — ( 4 ) Repurchases of stock ( 1 ) ( 69 ) — — — ( 69 ) Distributions to non-controlling interest — — — — ( 1 ) ( 1 ) Balance at April 29, 2022 56 $ 770 $ 870 $ — $ 10 $ 1,650 Balance at January 29, 2021 58 $ 1,004 $ 627 $ ( 89 ) $ 10 $ 1,552 Net income — — 81 — 1 82 Issuances of stock — 4 — — — 4 Other comprehensive income, net of tax — — — 14 — 14 Cash dividends of $ 0.37 per share — — ( 21 ) — — ( 21 ) Stock-based compensation — ( 3 ) — — — ( 3 ) Repurchases of stock — ( 40 ) — — — ( 40 ) Distributions to non-controlling interest — — — — ( 1 ) ( 1 ) Balance at April 30, 2021 58 $ 965 $ 687 $ ( 75 ) $ 10 $ 1,587 See accompanying notes to condensed and consolidated financial statements. -4- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 29, 2022 April 30, 2021 (in millions) Cash flows from operating activities: Net income $ 74 $ 82 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41 42 Amortization of off-market customer contracts ( 2 ) ( 4 ) Amortization of debt issuance costs 2 2 Deferred income taxes 2 20 Stock-based compensation expense 11 10 Gain on divestitures — ( 3 ) Impairment of assets — 7 Increase (decrease) resulting from changes in operating assets and liabilities: Receivables ( 89 ) ( 61 ) Inventory, prepaid expenses and other current assets 11 ( 5 ) Other assets 3 ( 4 ) Accounts payable and accrued liabilities 39 44 Accrued payroll and employee benefits 31 57 Operating lease assets and liabilities, net ( 4 ) 5 Other long-term liabilities ( 1 ) ( 3 ) Net cash provided by operating activities 118 189 Cash flows from investing activities: Expenditures for property, plant, and equipment ( 5 ) ( 10 ) Purchases of marketable securities ( 2 ) ( 2 ) Sales of marketable securities 1 1 Proceeds from divestitures — 8 Other — ( 1 ) Net cash used in investing activities ( 6 ) ( 4 ) Cash flows from financing activities: Dividend payments to stockholders ( 22 ) ( 22 ) Principal payments on borrowings ( 59 ) ( 39 ) Issuances of stock 4 4 Stock repurchased and retired or withheld for taxes on equity awards ( 84 ) ( 53 ) Proceeds from borrowings — 16 Distributions to non-controlling interest ( 1 ) ( 1 ) Net cash used in financing activities ( 162 ) ( 95 ) Net (decrease) increase in cash, cash equivalents and restricted cash ( 50 ) 90 Cash, cash equivalents and restricted cash at beginning of period 115 190 Cash, cash equivalents and restricted cash at end of period $ 65 $ 280 See accompanying notes to condensed and consolidated financial statements. -5- Table of Contents 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 these services for large, complex projects with a targeted emphasis on higher-end, differentiated technology services and solutions that accelerate and transform secure and resilient digital environments through system development, modernization, integration, and sustainment to drive enterprise and mission outcomes. The Company is organized as a matrix comprised of two customer facing operating sectors supported by an enterprise solutions and operations organization. The Company's operating sectors are aggregated into one reportable segment for financial reporting purposes. Each of the Company’s two customer facing operating sectors is focused on providing both (1) growth and technology accelerating solutions and (2) core IT service offerings to one or more agencies of the U.S. federal government. Growth and technology accelerating solutions include the delivery of secure cloud modernization, outcome based enterprise IT as-a-service, and the integration, production and modernization of defense systems. Core IT services include systems engineering, the operation and maintenance of existing IT systems and networks, and logistics and supply chain solutions. 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. 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 28, 2022. 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. -6- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 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. 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 April 29, 2022 and January 28, 2022, the fair value of our investments totaled $ 27 million and $ 28 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: April 29, 2022 January 28, 2022 (in millions) Cash and cash equivalents $ 56 $ 106 Restricted cash included in inventory, prepaid expenses and other current assets 5 5 Restricted cash included in other assets 4 4 Cash, cash equivalents and restricted cash $ 65 $ 115 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 and severance, 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. -7- Table of Contents 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 April 29, 2022 April 30, 2021 (in millions) Acquisition (1) $ ( 1 ) $ 1 Integration (2) 10 9 Total acquisition and integration costs $ 9 $ 10 (1) Acquisition expenses for the three months ended April 29, 2022 and April 30, 2021 relate to the acquisition of Koverse. The three months ended April 29, 2022 reflects the amount recognized to reduce the fair value of the Koverse earnout liability. See Note 4 for additional information related to the acquisition. (2) Integration expenses for the three months ended April 30, 2021 include $ 7 million for the impairment of assets. 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. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be applied prospectively. Early adoption is permitted. The Company adopted the requirements of ASU 2021-08 on a prospective basis effective the first day of fiscal 2023. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or other reference rates expected to be discontinued due to reference rate reform. The Company adopted this standard on a prospective basis in the fourth quarter of fiscal 2021, and the adoption did not have a material impact on the Company’s financial statements. The Company’s credit facility and derivative instruments reference LIBOR-based rates. Although the Company does not expect the transition from LIBOR to have a material impact on its financial statements, it will continue to monitor the impact until transition is completed. Other Accounting Standards Updates effective after April 29, 2022 are not expected to have a material effect on the Company’s financial statements. Note 2— Earnings Per Share, Share Repurchases and Dividends: Earnings Per Share (EPS) Basic earnings per share 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 April 29, 2022 April 30, 2021 (in millions) Basic weighted-average number of shares outstanding 56.1 58.1 Dilutive common share equivalents - stock options and other stock-based awards 0.5 0.6 Diluted weighted-average number of shares outstanding 56.6 58.7 -8- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Antidilutive stock awards excluded from the weighted-average number of shares outstanding used to compute diluted EPS for the three months ended April 29, 2022 and April 30, 2021 were immaterial . Share Repurchases The Company may repurchase shares in accordance with established repurchase plans. The Company retires its common stock upon repurchase with the excess over par value allocated to additional paid-in capital. The Company has not made any material purchases of common stock other than in connection with established share repurchase plans. On March 27, 2019, the number of shares of our common stock that may be repurchased under our existing repurchase plan was increased by approximately 4.6 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 16.4 million shares. As of April 29, 2022, we have repurchased approximately 15.2 million shares of common stock under the program. Subsequent to the end of the quarter, the number of shares that may be repurchased increased by approximately 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. Dividends The Company declared and paid a quarterly dividend of $ 0.37 per share of its common stock during the three months ended April 29, 2022. Subsequent to the end of the quarter, on May 31, 2022, the Company's Board of Directors declared a quarterly dividend of $ 0.37 per share of the Company's common stock payable on July 29, 2022 to stockholders of record on July 15, 2022. Note 3— Revenues: Changes in Estimates on Contracts 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 April 29, 2022 April 30, 2021 (in millions, except per share amounts) Net favorable adjustments $ 5 $ 3 Net favorable adjustments, after tax 4 2 Diluted EPS impact $ 0.07 $ 0.03 Revenues were $ 4 million and $ 5 million higher for the three months ended April 29, 2022 and April 30, 2021, respectively, due to net revenue recognized from performance obligations satisfied in prior periods. -9- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 versus subcontractor to the federal government. Disaggregated revenues by customer were as follows: Three Months Ended April 29, 2022 April 30, 2021 (in millions) Department of Defense $ 946 $ 920 Other federal government agencies 1,013 923 Commercial, state and local 37 35 Total $ 1,996 $ 1,878 Disaggregated revenues by contract-type were as follows: Three Months Ended April 29, 2022 April 30, 2021 (in millions) Cost reimbursement $ 1,095 $ 990 Time and materials (T&M) 386 411 Firm-fixed price (FFP) 515 477 Total $ 1,996 $ 1,878 Disaggregated revenues by prime versus subcontractor were as follows: Three Months Ended April 29, 2022 April 30, 2021 (in millions) Prime contractor to federal government $ 1,822 $ 1,690 Subcontractor to federal government 137 153 Other 37 35 Total $ 1,996 $ 1,878 -10- Table of Contents 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 April 29, 2022 January 28, 2022 (in millions) Billed and billable receivables, net (1) Receivables, net $ 675 $ 615 Contract assets - unbillable receivables Receivables, net 429 400 Contract assets - contract retentions Other assets 17 17 Contract liabilities - current Accounts payable and accrued liabilities 44 55 Contract liabilities - non-current Other long-term liabilities $ 8 $ 9 (1) Net of allowance of $ 4 million as of April 29, 2022 and January 28, 2022. During the three months ended April 29, 2022 and April 30, 2021, the Company recognized revenues of $ 27 million and $ 50 million relating to amounts that were included in the opening balance of contract liabilities as of January 28, 2022 and January 29, 2021, respectively. Remaining Performance Obligations As of April 29, 2022, the Company had $ 4.8 billion of remaining performance obligations. Remaining performance obligations 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. During the three months ended April 29, 2022, the Company recognized revenue of $ 23 million from the exercise of purchase options under certain lessor arrangements. Operating lease income was immaterial for the three months ended April 29, 2022 and $ 9 million for the three months ended April 30, 2021. -11- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 4— Acquisitions: Halfaker On July 2, 2021, the Company completed the acquisition of Halfaker, a mission focused, pure-play health IT company for a purchase price of $ 228 million, net of $ 3 million cash acquired. The Company funded the transaction from increased borrowings and cash on hand. During the first quarter of fiscal 2023, the Company made fair value adjustments decreasing goodwill and increasing customer relationships intangible assets by $ 2 million. As of April 29, 2022, the Company has completed the determination of fair values of the acquired assets and liabilities assumed. The allocation of the purchase price resulted in goodwill of $ 104 million and intangible assets of $ 114 million, both of which are deductible for income tax purposes. The recognized goodwill is primarily associated with future customer relationships and an acquired assembled work force. The intangible assets consist of customer relationships of $ 97 million and backlog of $ 17 million that will be amortized over a period of nine years and one year , respectively. The Company made additional cash payments of $ 21 million in March 2022 associated with certain change in control provisions that are recognized as post-combination expense. Koverse 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 purchase price of $ 30 million, net of $ 2 million cash acquired. The purchase price included $ 3 million of contingent consideration, representing the acquisition date fair value recognized for up to $ 27 million gross of potential future earnout payments based on the achievement of certain revenue targets over the next four years. The Company has completed the allocation of the purchase price which resulted in goodwill of $ 21 million and intangible assets of $ 10 million, which are both 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 of post-combination compensation expense associated with certain employee retention agreements over a two year period. Note 5— Goodwill and Intangible Assets: Goodwill Goodwill had a carrying value of $ 2,911 million and $ 2,913 million as of April 29, 2022 and January 28, 2022, respectively. There were no impairments of goodwill during the periods presented. Intangible Assets Intangible assets, all of which were finite-lived, consisted of the following: April 29, 2022 January 28, 2022 Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value (in millions) Customer relationships $ 1,467 $ ( 378 ) $ 1,089 $ 1,467 $ ( 351 ) $ 1,116 Backlog 17 ( 14 ) 3 17 ( 10 ) 7 Developed technology 10 ( 2 ) 8 10 ( 2 ) 8 Trade name 1 — 1 1 — 1 Total intangible assets $ 1,495 $ ( 394 ) $ 1,101 $ 1,495 $ ( 363 ) $ 1,132 Amortization expense related to intangible assets was $ 33 million and $ 32 million for the three months ended April 29, 2022 and April 30, 2021, respectively. There were no intangible asset impairment losses during the periods presented. -12- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of April 29, 2022, the estimated future annual amortization expense related to intangible assets is as follows: Fiscal Year (in millions) Remainder of 2023 $ 92 2024 115 2025 115 2026 115 2027 115 Thereafter 549 Total $ 1,101 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 22.0 % and 22.5 % for the three months ended April 29, 2022 and April 30, 2021, respectively. The Company’s effective tax rate was lower for the three months ended April 29, 2022 compared to the prior year period primarily due to an increased deduction for foreign-derived intangible income. Tax rates for the three months ended April 29, 2022 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, and other permanent book tax differences. Note 7— Debt Obligations: The Company’s long-term debt as of the dates presented was as follows: April 29, 2022 January 28, 2022 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 2.51 % 2.84 % $ 731 $ ( 3 ) $ 728 $ 785 $ ( 5 ) $ 780 Term Loan A2 Facility due October 2023 2.51 % 2.67 % 99 — 99 100 — 100 Term Loan B Facility due October 2025 2.64 % 2.84 % 979 ( 7 ) 972 983 ( 7 ) 976 Term Loan B2 Facility due March 2027 2.64 % 3.04 % 272 ( 5 ) 267 272 ( 5 ) 267 Senior Notes due April 2028 4.88 % 5.04 % 400 ( 5 ) 395 400 ( 5 ) 395 Total long-term debt $ 2,481 $ ( 20 ) $ 2,461 $ 2,540 $ ( 22 ) $ 2,518 Less current portion 119 — 119 148 — 148 Total long-term debt, net of current portion $ 2,362 $ ( 20 ) $ 2,342 $ 2,392 $ ( 22 ) $ 2,370 As of April 29, 2022, the Company has a $ 2.5 billion credit facility (the Credit Facility) consisting of a secured Term Loan A Facility due October 2023, a secured Term Loan A2 Facility due October 2023, a secured Term Loan B Facility due October 2025, a 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 April 29, 2022. As of April 29, 2022, the Company was in compliance with the covenants under its Credit Facility. -13- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of April 29, 2022 and January 28, 2022, 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) Asset (1) at Notional Amount at April 29, 2022 Pay Fixed Rate Receive Variable Rate Settlement and Termination April 29, 2022 January 28, 2022 (in millions) (in millions) Interest rate swaps #1 $ 685 3.07 % 1-month LIBOR Monthly through October 31, 2025 $ ( 4 ) $ ( 39 ) Interest rate swaps #2 538 2.49 % 1-month LIBOR Monthly through October 31, 2023 2 ( 12 ) Total $ 1,223 $ ( 2 ) $ ( 51 ) (1) The fair value of the fixed interest rate swap liability is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets. The fair value of the fixed interest rate swap asset is included in other assets 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 $ 5 million of unrealized losses from accumulated other comprehensive loss into earnings in the twelve months following April 29, 2022. -14- Table of Contents 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 April 29, 2022 Balance at January 28, 2022 $ ( 38 ) $ 1 $ ( 37 ) Other comprehensive income before reclassifications 42 — 42 Amounts reclassified from accumulated other comprehensive loss 8 — 8 Income tax impact ( 13 ) — ( 13 ) Net other comprehensive income 37 — 37 Balance at April 29, 2022 $ ( 1 ) $ 1 $ — Three months ended April 30, 2021 Balance at January 29, 2021 $ ( 86 ) $ ( 3 ) $ ( 89 ) Other comprehensive income before reclassifications 10 — 10 Amounts reclassified from accumulated other comprehensive loss 9 — 9 Income tax impact ( 5 ) — ( 5 ) Net other comprehensive income 14 — 14 Balance at April 30, 2021 $ ( 72 ) $ ( 3 ) $ ( 75 ) (1) The amount reclassified from accumulated other comprehensive loss is included in interest expense. 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. Effective March 31, 2022, the Company amended the MARPA Facility to transition the purchase discount rate defined within the facility agreement from using LIBOR to Term Secured Overnight Finance Rate (SOFR). The amendment did not have a material impact on the Company's condensed and consolidated financial statements. During the three months ended April 29, 2022 and April 30, 2021, the Company incurred purchase discount fees of $ 1 million, which are presented in Other (income) expense, net on the condensed and consolidated statements of income. -15- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARPA Facility activity consisted of the following: Three Months Ended April 29, 2022 April 30, 2021 (in millions) Beginning balance $ 200 $ 185 Sale of receivables 934 836 Cash collections ( 934 ) ( 821 ) Outstanding balance sold to Purchaser (1) 200 200 Cash collected, not remitted to Purchaser (2) ( 22 ) ( 42 ) Remaining sold receivables $ 178 $ 158 (1) There was no net impact to cash flows from operating activities from sold receivables for the three months ended April 29, 2022. For the three months ended April 30, 2021, the Company recorded a net increase to cash flows from operating activities of $ 15 million from sold receivables. (2) Primarily represents the cash collected on behalf of but not yet remitted to the Purchaser as of April 29, 2022 and April 30, 2021. 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. 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. 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. -16- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 April 29, 2022, the Company has recorded a total liability of $ 14 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 April 29, 2022, 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. -17- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION