What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-01 compared with 2022-06-06 · 58 added, 39 removed, 185 unchanged (34% of the section changed)

25 unchanged sentences

Economic Opportunities, Challenges, and Risks

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

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

government, including subcontracts on which we perform.

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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, 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.

Some changes that could have an adverse impact on our business include adverse regulations, 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, Inflation Reduction Act, and CHIPS and Science Act, as well as future potential spending packages, may provide additional opportunity in areas of SAIC focus such as digital modernization, cyber, microelectronics support, and climate resiliency.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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

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.

While we continue to navigate the impacts of the COVID-19 pandemic, COVID-19 did not have a material impact to revenues and operating income for the three and six months ended July 29, 2022.

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.

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Throughout each contract's life cycle, program managers review performance and update contract performance estimates to reflect their understanding of the best information available.

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.

For performance obligations satisfied over time, updates to estimates are generally 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

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The following table summarizes our results of operations:

Three Months Ended

change April 30,

Three Months Ended Six Months Ended

change July 30,

2021 July 29,

change July 30,

(dollars in millions)

3 unchanged sentences

Selling, general and administrative expenses

93 9 % 85 185 12 % 165

Acquisition and integration costs 1 (93 %) 14 10 (58 %) 24

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Net cash provided by operating activities $ 141 53 % $ 92 $ 259 (8 %) $ 281

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.

Revenues decreased $5 million for the three months ended July 29, 2022 as compared to the same period in the prior year primarily due to contract completions, one fewer working day compared to the prior year period, lower net favorable changes in contract estimates, and higher accelerated amortization on certain off-market liability contracts during the prior year period, partially offset by ramp up on new and existing contracts and the acquisition of Halfaker (approximately $30 million).

Adjusting for the impact of acquired and divested revenues, revenues contracted 1.8%.

Revenues increased $113 million for the six months ended July 29, 2022 as compared to the same period in the prior year due to ramp up on new and existing contracts and the acquisition of Halfaker (approximately $72 million), partially offset by contract completions, lower net favorable changes in contract estimates, and higher accelerated amortization on certain off-market liability contracts during the prior year period.

Adjusting for the impact of acquired and divested revenues, revenues grew 1.1%.

Cost of Revenues.

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.

Cost of revenues increased $8 million for the three months ended July 29, 2022 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 higher indirect costs.

Cost of revenues increased $117 million for the six months ended July 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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Selling, General and Administrative Expenses.

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.

SG&A increased $8 million for the three months ended July 29, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and intangible asset amortization related to the acquisition of Halfaker.

SG&A increased $20 million for the six months ended July 29, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and the acquisition of Halfaker including the related intangible asset amortization.

Operating Income.

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

Operating income as a percentage of revenues for the three months ended July 29, 2022 decreased from the comparable prior year period primarily due to lower net favorable changes in contract estimates, higher accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by lower acquisition and integration costs and higher benefit from net favorable settlement of prior indirect rate years in the current year period.

Operating income as a percentage of revenues decreased for the six months ended July 29, 2022 from the comparable prior year period primarily due to lower net favorable changes in contract estimates, higher accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by lower acquisition and integration costs.

Net Cash Provided by Operating Activities.

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.

Net cash provided by operating activities was $259 million for the six months ended July 29, 2022, a decrease of $22 million compared to the prior year, primarily due to timing of customer collections, cash payments during the year associated with certain change in control provisions related to the acquisition of Halfaker, and lower net earnings, partially offset by higher cash provided by the MARPA Facility.

Non-GAAP Measures

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

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

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

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

2022 April 30,

Three Months Ended Six Months Ended

2022 July 30,

2021 July 29,

2022 July 30,

(in millions)

6 unchanged sentences

Acquisition and integration costs 1 14 10 24

Restructuring costs 2 — 2 —

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

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

Adjusted EBITDA $ 166 $ 185 $ 339 $ 369

Adjusted EBITDA as a percentage of revenues 9.1 % 10.1 % 8.9 % 9.9 %

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.

(1) Adjustment reflects the portion of acquisition and integration costs and restructuring 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 July 29, 2022 decreased to 9.1% from 10.1% for the same period in the prior year primarily due to lower net favorable changes in contract estimates, higher revenue resulting from accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period, partially offset by higher benefit from net favorable settlement of prior indirect rate years in the current year period.

Adjusted EBITDA as a percentage of revenues for the six months ended July 29, 2022 decreased to 8.9% from 9.9% for the same period in the prior year primarily due to lower net favorable changes in contract estimates, higher revenue resulting from accelerated amortization on certain off-market liability contracts during the prior year period, and higher indirect costs in the current year period.

Other Key Performance Measures

1 unchanged sentence

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.

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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:

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Total backlog $ 24,325 $ 24,092

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.

We had net bookings worth an estimated $2.1 billion and $4.1 billion during the three and six months ended July 29, 2022.

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

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

3 unchanged sentences

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

Three Months Ended

2022 April 30,

Six Months Ended

2022 July 30,

Cost reimbursement 56 % 53 %

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The following table presents cost mix for the periods presented:

Three Months Ended

2022 April 30,

Three Months Ended Six Months Ended

2022 July 30,

2021 July 29,

2022 July 30,

(as a % of total cost of revenues)

4 unchanged sentences

Total 100 % 100 % 100 % 100 %

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

Cost of revenues mix for the three and six months ended July 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 MARPA Facility.

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 $1.0 billion Revolving Credit Facility and $300 million MARPA Facility.

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

1 unchanged sentence

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.

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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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

During the second quarter of fiscal 2023, we amended our Credit Facility.

See Note 7 to the condensed and consolidated financial statements contained within this report for additional information.

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.

Congress may defer, modify, or repeal this provision.

However, if the current effective date and current legislation remain 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.

The cash flow impact would continue over the five-year amortization period, but would decrease over the period and be immaterial in year six.

Historical Cash Flow Trends

The following table summarizes our cash flows:

Three Months Ended

2022 April 30,

Six Months Ended

2022 July 30,

(in millions)

2 unchanged sentences

Net cash used in financing activities (249) (73)

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

Net decrease in cash, cash equivalents and restricted cash $ (7) $ (48)

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 three months ended April 29, 2022 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 six months ended July 29, 2022 and the comparable prior year period.

Net Cash Used in Investing Activities.

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.

Cash used in investing activities for the six months ended July 29, 2022 decreased compared to the prior year period primarily due to cash paid for the acquisitions of Halfaker and Koverse in the prior year period.

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.

Cash used in financing activities for the six months ended July 29, 2022 increased compared to the prior year period as a result of borrowings obtained to finance the Halfaker acquisition in the prior year period, higher share repurchases, and higher term loan principal payments in the current year period.

Critical Accounting Policies

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.

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

Recently Issued But Not Yet Adopted Accounting Pronouncements

For information on recently issued but not yet adopted accounting pronouncements, see Note 1 of the notes to the condensed and consolidated financial statements contained within this report.

For information on recently issued but not yet adopted accounting pronouncements, see Note 1 to the condensed and consolidated financial statements contained within this report.

Quantitative and Qualitative Disclosures About Market Risk

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