What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-05 compared with 2022-12-05 · 59 added, 90 removed, 155 unchanged (49% of the section changed)

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the impact of competition;

and the impact of acquisitions.

and the impact of acquisitions and divestitures.

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.

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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 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.

Fiscal 2024 began on February 4, 2023 and ends on February 2, 2024, while fiscal 2023 began on January 29, 2022 and ended on February 3, 2023.

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

During the three and nine months ended October 28, 2022, we generated approximately 98% of our revenues from contracts with the U.S.

During the three months ended May 5, 2023, we generated 98% of our revenues from contracts with the U.S.

government, including subcontracts on which we perform.

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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 (GFY) 2022.

government is currently operating under a Continuing Resolution for GFY 2023.

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 (GFY) 2023.

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

Department of the Treasury was operating under "extraordinary measures." In June 2023, the President signed the Fiscal Responsibility Act of 2023 which suspends the Federal debt ceiling until January 1, 2025, postponing the threat of a federal government default.

Adverse changes in fiscal and economic conditions could materially impact our business.

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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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

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Our current cost structure and ongoing efforts to reduce costs by strategic sourcing and developing repeatable offerings sold "as a service" and as managed services in a more commercial business model are expected to allow us to compete effectively on price in an evolving environment.

Our ability to be competitive in the future will continue to be driven by our reputation for successful program execution, competitive cost structure, development of new pricing and business models, and efficiencies in assigning the right people, at the right time, in support of our contracts.

On July 2, 2021, we completed the acquisition of Halfaker and Associates, LLC (Halfaker).

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

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.

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

The first installment of these deferred payroll taxes was paid during the third quarter of fiscal 2022 (approximately $51 million) with the remaining amounts due in the fourth quarter of fiscal 2023.

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 a material impact to revenues and operating income for the three and nine months ended October 28, 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.

We believe that our ability to be competitive in the future will continue to be driven by our reputation for successful program execution, competitive cost structure, development of new pricing and business models, and efficiencies in assigning the right people, at the right time, in support of our contracts.

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 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

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.

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 delivery of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements.

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

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Results of Operations

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The following table summarizes our results of operations:

Three Months Ended Nine Months Ended

change October 29,

2021 October 28,

change October 29,

Three Months Ended

change April 29,

(dollars in millions)

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Selling, general and administrative expenses

87 — % 87 272 8 % 252

Acquisition and integration costs — (100 %) 9

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Net cash provided by operating activities $ 82 (31 %) $ 118

Revenues increased $11 million for the three months ended October 28, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts, partially offset by contract completions and lower accelerated amortization on certain off-market liability contracts.

Revenues increased $124 million for the nine months ended October 28, 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, one fewer working day compared to the prior year period, lower net favorable changes in contract estimates, and lower accelerated amortization on certain off-market liability contracts.

Adjusting for the impact of acquired and divested revenues, revenues grew approximately 1%.

Revenues increased $32 million for the three months ended May 5, 2023 as compared to the same period in the prior year primarily due to ramp up on existing and new contracts, partially offset by contract completions and $37 million due to the deconsolidation of FSA (see Note 4 for additional information).

Adjusting for the impact of the deconsolidation of FSA, revenues grew 3.5%.

Cost of Revenues.

Cost of revenues increased $3 million for the three months ended October 28, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts.

Cost of revenues increased $120 million for the nine months ended October 28, 2022 as compared to the same period in the prior year primarily due to ramp up on new and existing contracts and the acquisition of Halfaker.

Selling, General and Administrative Expenses.

SG&A remained consistent for the three months ended October 28, 2022 as compared with the same period in the prior year.

SG&A increased $20 million for the nine months ended October 28, 2022 as compared to the same period in the prior year primarily due to higher indirect expenses and the acquisition of Halfaker.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Cost of revenues increased $23 million for the three months ended May 5, 2023 as compared to the same period in the prior year primarily due to ramp up on existing and new contracts, partially offset by the deconsolidation of FSA ($33 million).

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

SG&A decreased $8 million for the three months ended May 5, 2023 as compared to the same period in the prior year primarily due to lower indirect costs and intangible asset amortization.

Operating Income.

Operating income as a percentage of revenues for the three months ended October 28, 2022 increased from the comparable prior year period primarily due to lower acquisition and integration costs and indirect costs, partially offset by lower accelerated amortization on certain off-market liability contracts.

Operating income as a percentage of revenues remained consistent for the nine months ended October 28, 2022 as compared with the same period in the prior year.

Lower net favorable changes in contract estimates and accelerated amortization on certain off-market liability contracts were offset by lower acquisition and integration costs.

Operating income as a percentage of revenues for the three months ended May 5, 2023 increased from the comparable prior year period primarily due to lower indirect costs, lower acquisition and integration costs, and a $7 million gain recognized from the deconsolidation of FSA (see Note 4).

Net Cash Provided by Operating Activities.

Net cash provided by operating activities was $387 million for the nine months ended October 28, 2022, a decrease of $28 million compared to the prior year, primarily due to the timing of customer collections and other changes in working capital, 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 the first installment of the deferred payroll taxes allowed under the CARES Act paid in the prior year and higher cash provided by the MARPA Facility.

Net cash provided by operating activities decreased $36 million for the three months ended May 5, 2023 as compared to the prior year primarily due to the timing of payroll payments, partially offset by the timing of customer collections and vendor payments, and cash payments during the prior year associated with certain change in control provisions related to the acquisition of Halfaker and Associates, LLC.

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.

While we believe that these non-GAAP financial measures are 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.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

EBITDA and Adjusted EBITDA.

The performance measure EBITDA is calculated by taking net income and excluding interest and loss on sale of receivables, provision for income taxes, and depreciation and amortization.

Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing performance.

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 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.

Adjusted EBITDA is a performance measure that excludes the impact of non-recurring transactions that we do not consider to be indicative of our ongoing performance.

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

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.

We believe that EBITDA and adjusted EBITDA provide management and investors with useful information in assessing trends in our ongoing operating performance and may provide greater visibility in understanding the long-term financial performance of the Company.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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

Three Months Ended Nine Months Ended

2022 October 29,

2021 October 28,

2022 October 29,

(in millions)

Three Months Ended

2023 April 29,

(dollars in millions)

Net income $ 98 $ 74

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Restructuring and impairment costs 1 —

Depreciation included in acquisition and integration costs and restructuring and impairment costs

(1) — (1) (1)

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

(3) (1) (6) (1)

Gain on divestitures, net of transaction costs (6) —

Adjusted EBITDA $ 189 $ 173

Adjusted EBITDA as a percentage of revenues 9.3 % 8.7 %

(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 for the three months ended October 28, 2022 decreased to 8.9% from 9.0% for the same period in the prior year primarily due to lower revenue resulting from accelerated amortization on certain off-market liability contracts and net unfavorable changes in contract estimates, partially offset by lower indirect costs.

Adjusted EBITDA as a percentage of revenues for the nine months ended October 28, 2022 decreased to 8.9% from 9.6% for the same period in the prior year primarily due to lower net favorable changes in contract estimates and lower revenue resulting from accelerated amortization on certain off-market liability contracts.

Adjusted EBITDA as a percentage of revenues for the three months ended May 5, 2023 increased to 9.3% from 8.7% for the same period in the prior year primarily due to lower indirect costs and improved profitability across our contract portfolio.

Other Key Performance Measures

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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:

2022 January 28,

2023 February 3,

(in millions)

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Total backlog $ 23,794 $ 23,802

We had net bookings worth an estimated $2.0 billion and $6.1 billion during the three and nine months ended October 28, 2022.

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

We had net bookings worth an estimated $2.1 billion during the three months ended May 5, 2023.

Total backlog at the end of the first quarter of fiscal 2024 is consistent with our total backlog at prior year end.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

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

Nine Months Ended

2022 October 29,

Three Months Ended

2023 April 29,

Cost reimbursement 55 % 55 %

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The following table presents cost mix for the periods presented:

Three Months Ended Nine Months Ended

2022 October 29,

2021 October 28,

2022 October 29,

Three Months Ended

2023 April 29,

(as a % of total cost of revenues)

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Total 100 % 100 %

Cost of revenues mix for the three and nine months ended October 28, 2022 were consistent with the same periods in the prior year.

Liquidity and Capital Resources

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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 and requires taxpayers to amortize such expenditures over five years.

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 cash flows from operations in fiscal 2023 will decrease by a minimum of $90 million, but 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.

We estimate that our income taxes payable for fiscal 2024 will increase by approximately $76 million as a result of this provision, offset by a corresponding deferred tax asset.

The actual impact will depend on the amount of research and development costs incurred by the Company, whether the U.S.

Congress modifies, or repeals this provision and whether new guidance and interpretive rules are issued by the U.S.

Treasury, among other factors.

Historical Cash Flow Trends

The following table summarizes our cash flows:

Nine Months Ended

2022 October 29,

Three Months Ended

2023 April 29,

(in millions)

Net cash provided by operating activities $ 82 $ 118

Net cash used in investing activities (23) (272)

Net cash provided by (used in) investing activities 336 (6)

Net cash used in financing activities (105) (162)

Net decrease in cash, cash equivalents and restricted cash $ (53) $ (33)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 313 $ (50)

Net Cash Provided by Operating Activities.

Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the nine months ended October 28, 2022 and the comparable prior year period.

Net Cash Used in Investing Activities.

Cash used in investing activities for the nine months ended October 28, 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.

Refer to “Results of Operations” above for a discussion of the changes in cash provided by operating activities between the three months ended May 5, 2023 and the comparable prior year period.

Net Cash Provided by (Used in) Investing Activities.

Cash provided by investing activities for the three months ended May 5, 2023 was $336 million compared to cash used in investing activities of $6 million in the prior year period.

This change is primarily due to the $355 million refundable cash deposit received for the sale of our logistics and supply chain management business which closed subsequent to the end of the first quarter of fiscal 2024 (see Note 4 and Note 12 to the condensed and consolidated financial statements).

Net Cash Used in Financing Activities.

Cash used in financing activities for the nine months ended October 28, 2022 increased compared to the prior year period as a result of borrowings obtained to finance the Halfaker acquisition in the prior year period, a $90 million voluntary principal prepayment during the third quarter of fiscal 2023, and higher share repurchases of $53 million.

Critical Accounting Policies

There have been no changes to our critical accounting policies during the nine months ended October 28, 2022 from those disclosed in our most recently filed Annual Report on Form 10-K.

Cash used in financing activities for the three months ended May 5, 2023 decreased compared to the prior year period due to term loan principal payments in the prior year period.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates during the three months ended May 5, 2023 from those disclosed in our most recently filed Annual Report on Form 10-K.

Recently Issued But Not Yet Adopted Accounting Pronouncements

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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