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Item 7. Management’s Discussion and Analysis

2023-04-03 compared with 2022-03-28 · 85 added, 117 removed, 254 unchanged (44% of the section changed)

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The following discussion and analysis of our financial condition and results of operations, and quantitative and qualitative disclosures about market risk should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-K, as well as Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended January 28, 2022, which provides additional information on comparisons of fiscal 2022 and 2021.

It contains forward-looking statements (which may be identified by words such as those described in “Risk Factors—Forward-Looking Statement Risks” in Part I of this report), including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations;

It contains forward-looking statements (which may be identified by words such as those described in “Risk Factors—Forward-Looking Statement Risks” in Part I, Item 1A of this report), including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations;

our industry;

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Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors.

Risks, uncertainties and assumptions that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors” in Part I of this report.

Due to such risks, uncertainties and assumptions, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof.

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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 2022 began on January 30, 2021 and ended on January 28, 2022, fiscal 2021 began on February 1, 2020 and ended on January 29, 2021, and fiscal 2020 began on February 2, 2019 and ended on January 31, 2020.

Fiscal 2023 began on January 29, 2022 and ended on February 3, 2023, fiscal 2022 began on January 30, 2021 and ended on January 28, 2022, and fiscal 2021 began on February 1, 2020 and ended on January 29, 2021.

Fiscal 2023 consisted of 53 weeks with the extra week occurring in the fourth quarter, while fiscal 2022 and 2021 consisted of 52 weeks.

Business Overview

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government has afforded us the ability to develop strong and longstanding relationships with some of the largest customers in the markets we serve.

Substantially all of our revenues and tangible long-lived assets are generated by or owned by entities located in the United States.

Substantially all of our revenues and tangible long-lived assets are generated and located in the United States.

Economic Opportunities, Challenges, and Risks

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

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

The August 2019 Bipartisan Budget Act agreement suspended the Federal debt ceiling until July 31, 2021.

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.

Appropriations measures passed in December 2022 provided full funding for the federal government through the end of government fiscal year 2023.

In October 2021, the Federal debt ceiling was increased by $480 billion and in December 2021 was further increased by $2.5 trillion.

In January 2023, the Federal debt ceiling was reached and the U.S.

Department of the Treasury is currently operating under “extraordinary measures.”

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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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.

government has increasingly relied on contracts that are subject to a competitive bidding process (including indefinite delivery, indefinite quantity (IDIQ), U.S.

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.

Additionally, the U.S.

government has put renewed emphasis on increasing the number of small business prime set aside contracts that further reduce the addressable market in some areas.

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.

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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.

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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.

See “Risk Factors” in Part I of this report for additional discussion of our industry and regulatory environment.

See “Risk Factors” in Part I, Item 1A of this report for additional discussion of our industry and regulatory environment.

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 $125 million lower for fiscal 2022 (net of $62 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 fiscal 2022 was reduced by approximately $8 million.

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

The first installment ($51 million) of these deferred payroll taxes was paid during fiscal 2022 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.

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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.

While we are continuing to monitor the ongoing outbreak of COVID-19, the pandemic did not have a material impact to revenues and operating income during fiscal 2023.

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.

The Coronavirus Aid, Relief, and Economic Security Act (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 (approximately $51 million) of these deferred payroll taxes was paid during fiscal 2022 and the second and final installment was paid during fiscal 2023.

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

As discussed in “Liquidity and Capital Resources” 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.

As of January 28, 2022 we were in compliance with our debt covenants and we have not been required to obtain additional financing, or make significant modifications to our capital deployment strategy, 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.

See “Risk Factors” in Part I of this report for additional discussion of the risks associated with the COVID-19 pandemic.

As of February 3, 2023 we were in compliance with our debt covenants and we have not been required to obtain additional financing, or make significant modifications to our capital deployment strategy, as a result of the COVID-19 pandemic.

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Management of Operating Performance and Reporting

Our business and program management process is directed by professional managers focused on serving our customers by providing high quality services in achieving program requirements.

These managers carefully monitor contract margin performance by constantly evaluating contract risks and opportunities.

Our business and program management process is directed by professionals focused on serving our customers by providing high quality services in achieving program requirements.

These professionals carefully monitor contract margin performance by constantly evaluating contract risks and opportunities.

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.

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

Given that revenues fluctuate on our contract portfolio over time due to contract awards and completions, changes in customer requirements, and increases or decreases in ordering volume of materials, we evaluate significant trends and fluctuations in these terms.

Whether performed by our employees or by our subcontractors, we primarily provide services and, as a result, our cost of revenues are predominantly variable.

We also analyze our cost mix (labor, subcontractor or materials) in order to understand operating margin because programs with a higher proportion of SAIC labor are generally more profitable.

Changes in costs of revenues as a percentage of revenue other than from revenue volume or cost mix are normally driven by fluctuations in shared or corporate costs, or cumulative revenue adjustments due to changes in estimates.

Changes in operating cash flows are described with regard to changes in cash generated through the delivery of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements.

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We also analyze our cost mix (labor, subcontractor and materials) in order to understand operating margin because programs with a higher proportion of SAIC labor are generally more profitable.

Changes in cost of revenues as a percentage of revenues other than from revenue volume or cost mix are normally driven by fluctuations in shared or corporate costs, or cumulative revenue adjustments due to changes in estimates.

Changes in operating cash flows are described with regard to changes in cash generated through the rendering of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements.

Results of Operations

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The following table summarizes our results of operations:

January 28, 2022 Percent change January 29, 2021 Percent change January 31, 2020

February 3, 2023 Percent change January 28, 2022 Percent change January 29, 2021

(dollars in millions)

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Cash flows provided by operating activities $ 532 3 % $ 518 (31) % $ 755

Revenues increased $338 million from fiscal 2021 to fiscal 2022 due to ramp up on new and existing contracts, the acquisitions of Unisys Federal (which occurred in 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 2.5% primarily due to new awards and net increases in program volume.

Revenues increased $310 million from fiscal 2022 to fiscal 2023 due to ramp up on new and existing contracts, four additional working days in the current year period, and the acquisition of Halfaker (approximately $72 million), partially offset by contract completions and lower net favorable changes in contract estimates.

Adjusting for the impact of acquired and divested revenues and the estimated impact of the additional four working days in fiscal 2023, revenues grew approximately 1.5%.

Cost of Revenues.

Cost of revenues increased $271 million from fiscal 2021 to fiscal 2022 primarily due to an increase in volume on existing contracts and the acquisitions of Unisys Federal (which occurred in the first quarter of the prior year period) and Halfaker.

Cost of revenues as a percentage of revenues decreased 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 higher indirect costs.

Selling, General and Administrative Expenses.

SG&A decreased $8 million from fiscal 2021 to fiscal 2022 primarily due to decreased intangible asset amortization related to the acquisition of Unisys Federal and lower bid and proposal costs in the current year, partially offset by intangible amortization related to the acquisition of Halfaker, gains related to the resolution of certain legal matters in the prior year, and the acquisitions of Unisys Federal (which occurred in the first quarter of the prior year period) and Halfaker.

Cost of revenues increased $281 million from fiscal 2022 to fiscal 2023 primarily due to ramp up on new and existing contracts, four additional working days in the current year period, and the acquisition of Halfaker.

Selling, General and Administrative Expenses (SG&A).

SG&A increased $30 million from fiscal 2022 to fiscal 2023 primarily due to higher restructuring costs (see Note 5 to the consolidated financial statements contained within this report) and the acquisition of Halfaker.

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Acquisition and integration costs.

Acquisition and integration costs decreased $43 million from fiscal 2022 to fiscal 2023 primarily due to the acquisitions of Halfaker and Koverse in the prior year period.

Operating Income.

Operating income as a percentage of revenues increased to 6.2% for fiscal 2022, compared to 5.5% for fiscal 2021, primarily due to improved profitability across our contract portfolio, net favorable changes in contract estimates, benefit from a net favorable settlement of prior indirect rate years, and the accelerated amortization on certain off-market liability contracts, partially offset by higher indirect costs in the current year and gains related to the resolution of certain legal and other program contract matters in the prior year.

Operating income as a percentage of revenues increased from fiscal 2022 to fiscal 2023 primarily due to improved profitability across our contract portfolio and lower acquisition and integration costs, partially offset by higher restructuring costs and lower net favorable changes in contract estimates.

Cash Flows Provided by Operating Activities.

Cash flows provided by operating activities were $518 million for fiscal 2022, which represented a decrease of $237 million from fiscal 2021.

The decrease was primarily due to higher cash provided by the Master Accounts Receivable Purchase Agreement (MARPA Facility) in the prior year ($170 million), when we initially entered into the facility, and working capital impact related to the deferred payroll taxes allowed under the CARES Act, partially offset by lower cash paid for income taxes and higher net earnings.

Cash flows provided by operating activities were $532 million for fiscal 2023, which represented an increase of $14 million from fiscal 2022.

The increase was primarily due to higher cash provided by the Master Accounts Receivable Purchase Agreement (MARPA Facility) (see Note 14 to the consolidated financial statements), the timing of collections and other changes in working capital, partially offset by tax payments associated with Section 174 of the Internal Revenue Code and cash payments during the year associated with certain change in control provisions related to the acquisition of Halfaker (see Note 4 to the consolidated financial statements).

Non-GAAP Measures

Earnings before interest, taxes, depreciation and amortization (EBITDA), and adjusted EBITDA are non-GAAP financial measures.

While we believe that these non-GAAP financial measures may be useful in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP.

Reconciliations, definitions, and how we believe these measures

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are useful to management and investors are provided below.

While we believe that these non-GAAP financial measures are also useful for management and investors in evaluating our financial information, they should be considered as supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP.

Reconciliations, definitions, and how we believe these measures are useful to management and investors are provided below.

Other companies may define similar measures differently.

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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 Holdings, Inc., Unisys Federal, Halfaker, and Koverse.

See Note 5 to the consolidated financial statements contained within this report for description of our restructuring and impairment costs.

The acquisition and integration costs relate to the Company’s acquisitions.

See Note 1 and Note 5 to the consolidated financial statements contained within this report for information related to our restructuring and impairment costs.

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.

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

January 28, 2022 January 29, 2021 January 31, 2020

February 3, 2023 January 28, 2022 January 29, 2021

(in millions)

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Restructuring and impairment costs 24 2 4

Depreciation included in acquisition and integration costs (1) (1) (5)

Depreciation included in acquisition and integration costs and restructuring and impairment costs (3) (1) (1)

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

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Adjusted EBITDA as a percentage of revenues 8.8 % 9.3 % 8.9 %

(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 increased to 9.3% for fiscal 2022, compared to 8.9% for fiscal 2021, driven by a net increase in profitability across our existing contract portfolio, net favorable changes in contract estimates, benefit from a net favorable settlement of prior indirect rate years, and revenue resulting from the accelerated amortization on certain off-market liability contracts, partially offset by higher indirect costs in the current year and gains related to the resolution of certain legal and other program contract matters in the prior year.

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

government Cost Accounting Standards.

Adjusted EBITDA as a percentage of revenues decreased to 8.8% for fiscal 2023, compared to 9.3% for fiscal 2022, primarily due to lower net favorable changes in contract estimates and higher indirect expenses, partially offset by improved profitability across our contract portfolio.

Other Key Performance Measures

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

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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.

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We segregate our backlog into two categories as follows:

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Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from negotiated contracts for which funding has not been appropriated or otherwise authorized and from unexercised priced contract options.

Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedules or other master agreement contract vehicles.

Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedules or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.

We expect to recognize revenue from a substantial portion of our funded backlog within the next twelve months.

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The estimated value of our total backlog as of the dates presented was:

January 28, 2022 January 29, 2021

February 3, 2023 January 28, 2022

(in millions)

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We had net bookings worth an estimated $7.4 billion and $9.4 billion during fiscal 2023 and 2022, respectively.

Fiscal 2022 total backlog has increased from the prior year primarily due to several large awards received during the period from the U.S.

Army and U.S.

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

Contract Types.

Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract.

For a discussion of the types of contracts under which we

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generate revenues, see “Business—Contract Types” in Part I of this report.

For a discussion of the types of contracts under which we generate revenues, see “Business—Contract Types” in Part I, Item 1 of this report.

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

January 28, 2022 January 29, 2021 January 31, 2020

February 3, 2023 January 28, 2022 January 29, 2021

Cost reimbursement 56 % 54 % 54 %

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Total 100 % 100 % 100 %

Our contract mix reflects an increase in firm-fixed price type contracts due in part to the acquisitions of Unisys Federal (which occurred in the first quarter of the prior year period) and Halfaker, which historically had a higher proportion of these contracts.

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Cost of Revenues Mix.

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The following table presents cost mix for the periods presented:

January 28, 2022 January 29, 2021 January 31, 2020

February 3, 2023 January 28, 2022 January 29, 2021

(as a % of total cost of revenues)

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Total 100 % 100 % 100 %

Cost of revenues mix for fiscal 2022 remained consistent with 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.

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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.

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Upon the acquisition of Halfaker, we drew $100 million on our incremental senior secured Term Loan A2 Facility due October 2023.

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

See Note 11 to the consolidated financial statements contained within this report for additional information.

Upon the acquisition of Halfaker in fiscal 2022, we drew $100 million on our incremental senior secured Term Loan A2 Facility due October 2023.

The proceeds were used for the purchase of Halfaker.

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The proceeds were used for the purchase of Unisys Federal.

Borrowings under our Term Loan Facilities, our MARPA Facility and, if used in the future, our Revolving Credit Facility incur interest at a variable rate.

Borrowings under our Term Loan Facilities, our MARPA Facility, and our Revolving Credit Facility incur interest at a variable rate.

In accordance with our risk management objectives, we hold fixed interest rate swap agreements to hedge the variability in interest payment cash flows on a substantial portion of our outstanding variable rate debt.

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Under the swap agreements, we pay the fixed rate and the counterparties to the agreement pay a floating interest rate.

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Our Credit Facility contains customary terms and conditions including financial covenants and covenants restricting the Company's ability to merge or consolidate with another entity or undertake other fundamental changes, enter into property sale and leaseback transactions, and incur liens.

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Failure to maintain acceptable ratings could have an adverse effect on the Company’s future cost of capital and any significant increase in the level of our borrowings could negatively impact these ratings.

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 remains in place, the Company's initial assessment is that the Company would experience a material decrease in cash from operations in fiscal 2023, but our net deferred tax assets will increase by a similar amount.

Management is currently evaluating the potential impact on our operating cash flows.

Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes.

This provision resulted in an increase to income taxes payable of approximately $94 million, offset by a corresponding increase to net deferred tax assets in fiscal 2023.

The actual impact will depend on the amount of research and development costs incurred by the Company, whether Congress modifies, or repeals this provision and whether new guidance and interpretive rules are issued by the U.S.

Treasury, among other factors.

While the impact to income taxes payable is most significant in fiscal 2023, this impact will decrease over the five-year amortization period and is anticipated to be immaterial in year six.

During fiscal 2023, we repurchased approximately 2.6 million shares of our common stock for $245 million from the open market in connection with our existing share repurchase program.

Since the program’s inception in December of 2013, we have repurchased 17.0 million shares for $1,191 million.

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The following table summarizes our principal contractual commitments as of January 28, 2022:

The following table summarizes our principal contractual commitments as of February 3, 2023:

Total Due in Fiscal 2024

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Total contractual obligations $ 3,370 $ 316

(1) Amounts include an estimate of future variable interest payments on the Term Loan Facilities based on scheduled outstanding principal amounts, current applicable margin and projected 1-month LIBOR as of January 28, 2022.

The amounts presented in this table exclude the effects of interest rate swaps used to hedge against changes in 1-month LIBOR.

The amounts presented in this table exclude the effects of interest rate swaps used to hedge against changes in 1-month Term SOFR.

(2) Excludes purchase orders for services or products to be delivered pursuant to U.S.

government contracts in which we have full recourse under normal contract termination clauses.

(3) Other liabilities primarily consist of liabilities associated with deferred compensation plan obligations, liabilities for unrecognized tax benefits, and the deferral of certain payroll tax payments as permitted by the CARES Act.

(3) Other liabilities primarily consist of liabilities associated with deferred compensation plan obligations and liabilities for unrecognized tax benefits.

Deferred compensation plan obligations due in fiscal 2024 are based on participants’ payment elections on retirement and estimated retirement ages.

Liabilities for unrecognized tax benefits due in fiscal 2023 are based on the fiscal year in which the statute of limitations is currently expected to expire.

Liabilities for unrecognized tax benefits due in fiscal 2024 are based on the fiscal year in which the reversals of timing positions are likely to occur.

See respective notes to the consolidated financial statements contained within this report for further information about our long-term debt (Note 11), lease payment obligations (Note 15), liabilities for unrecognized tax benefits (Note 10), and letters of credit and surety bonds (Note 17).

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Historical Cash Flow Trends

The following table summarizes our cash flows:

January 28, 2022 January 29, 2021 January 31, 2020

February 3, 2023 January 28, 2022 January 29, 2021

(in millions)

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Net cash (used in) provided by financing activities (493) (301) 464

Total decrease in cash, cash equivalents and restricted cash $ (75) $ (12) $ (44)

Total increase (decrease) in cash, cash equivalents and restricted cash $ 3 $ (75) $ (12)

Cash Provided by Operating Activities.

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Cash Used in Investing Activities.

Cash used in investing activities decreased in fiscal 2022 compared to the prior year period primarily due to cash paid for the acquisition of Unisys Federal in the prior year period, partially offset by cash paid for the acquisitions of Halfaker and Koverse in the current year period.

Cash used in investing activities decreased in fiscal 2023 compared to the prior year period primarily due to cash paid for the acquisitions of Halfaker and Koverse in the prior year period.

Cash Used in/Provided by Financing Activities.

Cash used in financing activities in fiscal 2022 was $301 million compared to cash provided by financing activities of $464 million in fiscal 2021.

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 higher voluntary principal prepayments in the prior year period and borrowings to finance the Halfaker acquisition in the current year period.

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Cash used in financing activities increased in fiscal 2023 compared to the prior year period primarily due to borrowings obtained to finance the Halfaker acquisition in the prior year period of $100 million, a $90 million voluntary principal prepayment during the third quarter of fiscal 2023, and higher share repurchases of $37 million, partially offset by a $35 million voluntary principal prepayment during the fourth quarter of fiscal 2022.

Commitments and Contingencies

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For a discussion of these items, see Note 17 to the consolidated financial statements contained within this report.

Critical Accounting Policies

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with U.S.

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Estimates and assumptions may change in the future as more current information is available.

Management believes that our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Management believes that our critical accounting policies and estimates are those that are both material to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Typically, the circumstances that make these judgments difficult, subjective and complex have to do with making estimates about the effect of matters that are inherently uncertain.

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These estimates of costs can span several years and take into account many factors including the availability, productivity and cost of labor, potential delays in our performance and the level of future indirect cost allocations.

We provide for anticipated losses on long-term production type contracts and service contracts with the U.S.

government by recording an expense for the total expected contract loss during the period when the loss is determined.

Contract costs incurred for U.S.

government contracts (including allocated indirect costs) are subject to audit and adjustment through negotiations with government representatives.

Revenues on U.S.

government contracts have been recorded in amounts that are expected to be realized on final settlement.

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Many of our contracts include forms of variable consideration such as reimbursable costs, award and incentive fees, usage-based pricing, service-level penalties, performance bonuses, and other provisions that can either increase or decrease the transaction price.

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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.

Many of the Company's contracts recognize revenue using a cost input measure (cost-to-cost), which requires estimates of total costs at completion.

For contracts using a cost input measure, when total expected contract costs exceed total estimated contract revenues, 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 contract estimates increased operating

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

income by $13 million, $9 million and $22 million for fiscal 2022, 2021 and 2020, respectively.

Aggregate net changes in contract estimates increased operating income by $4 million, $13 million and $9 million for fiscal 2023, 2022 and 2021, respectively.

For additional information related to changes in estimates on contracts, including gross favorable and unfavorable adjustments as well as the impact to earnings per share, see Note 3 to the consolidated financial statements contained within this report.

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If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit’s fair value and the reporting unit’s carrying value.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Determining the fair value of each reporting unit involves judgment and the use of estimates and assumptions.

9 unchanged sentences

In addition, determining the carrying value of each reporting unit requires judgment and involves the assignment of assets and liabilities to the reporting units based on a systematic and rational allocation methodology.

Certain assets and liabilities may be specifically identified and assigned to a reporting unit based on the information

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

contained within our financial systems;

Certain assets and liabilities may be specifically identified and assigned to a reporting unit based on the information contained within our financial systems;

whereas, other assets and liabilities may be allocated using measurable relationships or other basis for allocation.

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

Effects of Inflation

For any of the most recent three fiscal years ended January 28, 2022, inflation has not had a significant impact on revenues or costs.

Most of our contracts are paid in U.S.

dollars and our cost to perform on these contracts are generally paid in U.S.

dollars, so inflation risk is generally limited to that which is related to the U.S.

Approximately 54% of our revenues for fiscal 2022 were derived from cost-reimbursement type contracts, which have limited inflation risk because our contracts generally entail the provision of labor on a reimbursable basis, and, when materials are acquired, they provide for billing to the customer during the period in which the materials were received.

Bids for longer-term FFP and T&M contracts typically include sufficient provisions for labor and other cost escalations to cover anticipated cost increases over the period of performance.

As a result, if we were to experience significant levels of inflation, our revenues and costs for cost-type contracts would generally both increase commensurate with inflation and operating income as a percentage of total revenues would not be significantly affected.

Operating income as a percentage of total revenues would not be significantly affected for longer-term FFP and T&M contracts to the extent that bid contract cost escalations are sufficient to cover heightened inflation levels.

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-K

Item 7. Management’s Discussion and Analysis