Science Applications International Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 unaudited condensed consolidated financial statements and the related notes. 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 the most recently filed Annual Report on Form 10-K), including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations (including our financial targets discussed below under “Management of Operating Performance and Reporting” and “Liquidity and Capital Resources”); backlog; our industry; government budgets and spending; market opportunities; the impact of competition; 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. Risks, uncertainties and assumptions that could cause or contribute to these differences include those discussed below, in “Risk Factors” in Part II of this report and in Part I of the most recently filed Annual Report on Form 10-K. 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. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future results or developments. We use the terms "SAIC," the “Company,” “we,” “us” and “our” to refer to Science Applications International Corporation and its consolidated subsidiaries. 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 2025 began on February 3, 2024 and ends on January 31, 2025, while fiscal 2024 began on February 4, 2023 and ended on February 2, 2024. Business Overview We are a leading technology integrator providing full life cycle services and solutions in the technical, engineering and enterprise information technology ("IT") markets. We developed our brand by addressing our customers’ mission critical needs and solving their most complex problems for over 50 years. As one of the largest pure-play technology service providers to the U.S. government, we serve markets of significant scale and opportunity. Our primary customers are the departments and agencies of the U.S. government. We serve our customers through approximately 1,800 active contracts and task orders and employ approximately 24,000 individuals who are led by an experienced executive team of proven industry leaders. Our long history of serving the U.S. 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 and located in the United States. Effective February 3, 2024, the first day of fiscal 2025, we completed a business reorganization which replaced our previous two operating sectors with five customer facing business groups supported by the enterprise organizations, including the Innovation Factory. The five business groups represent our operating segments and have been aggregated into two reportable segments (Defense and Intelligence, and Civilian) given the similarity in economic and qualitative characteristics, and based on the nature of the customers they serve. The Defense and Intelligence segment provides a diverse portfolio of national security solutions to the defense and intelligence departments and agencies of the United States Government. The Civilian segment provides solutions to the civilian markets, encompassing federal, state, and local governments, in order to deliver services for citizen well-being and protecting lives. This includes integrating solutions into a spectrum of public service missions that impact travel, trade, health and the economy. The offerings of both reportable segments entail the integration of emerging technologies into mission critical operations that modernize and enable national imperatives, including IT modernization, digital engineering, artificial intelligence ("AI"), mission systems support and advisory, training and simulation, and ground vehicles support. These services include end-to-end solutions spanning the design, development, integration, deployment, management and operations, sustainment and security of the customers’ entire IT infrastructure. -24- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION Our Innovation Factory supports the operating segments by developing superior enterprise-class solutions which are delivered to the our customers as stand-alone solutions or integrated with and aligned to product offerings through the operations of the business to meet complex customer needs and accelerate digital transformation. The Innovation Factory includes designated teams focused on AI, application development, network services, platforms and cloud, and cybersecurity. It uses a highly automated, cloud-hosted tool set to rapidly build, test and deploy solutions and works with customers to enhance solutions going forward. Costs associated with corporate functions that are not allocable to the reportable segments are presented as Corporate. See Note 11—Business Segments Information to the condensed consolidated financial statements contained within this report for additional information. Economic Opportunities, Challenges, and Risks During the three and nine months ended November 1, 2024, we generated 98% of our revenues from contracts with the U.S. government, including subcontracts on which we perform. Our business performance is affected by the overall level of U.S. government spending and the alignment of our offerings and capabilities with the budget priorities of the U.S. government. In March 2024, the President signed appropriation measures that provide funding for government fiscal year ("GFY") 2024 for all of the U.S. government and submitted the GFY 2025 budget request which adheres to the Fiscal Responsibility Act of 2023. The GFY 2025 budget includes 1% growth for defense budgets and an overall 1% growth for non-defense budgets. In September 2024, the President signed a continuing resolution which will fund the U.S. government under GFY 2024 levels through December 2024. If Congress is not able to pass appropriations for GFY 2025 funding by December 2024, it could result in the U.S. government operating on additional continuing resolutions and/or could potentially lead to a partial or full government shutdown. In addition, if full-year appropriations are not signed into law by April 30, 2025, a 1% sequestration would be applied to all agencies. 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. If a new debt ceiling agreement is not reached by January 2025, the U.S. Department of the Treasury will return to operating under "extraordinary measures." Congressional debt limit brinksmanship can lead to negative impacts on our business, and any agreement to raise the ceiling that significantly reduces future funding could affect our addressable market in subsequent years. 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, 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. The U.S. 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. 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. Our scale, size, and prime contractor leadership position are expected to help differentiate us from our competitors, especially on large contract opportunities. We believe our long-term, trusted customer relationships and deep technical expertise provide us with the sophistication to handle highly complex, mission-critical contracts. 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. -25- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION We succeed as a business based on the solutions we deliver, our past performance, and our ability to compete on price. Our solutions are inspired through innovation based on adoption of best practices and technology integration of the best capabilities available. Our Innovation Factory develops superior enterprise-class solutions which are delivered to our customers as stand-alone solutions or integrated with and aligned to our product offerings to meet complex customer needs and accelerate the digital transformation. Our past performance was achieved by employees dedicated to supporting our customers' most challenging missions. 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. Management of Operating Performance and Reporting 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. We evaluate our results of operations by considering the drivers causing changes in revenues, operating income, adjusted operating income (1) , adjusted EBITDA (1) , 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 resulting from these factors. 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 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 provision of services, significant drivers of fluctuations in assets or liabilities and the impacts of changes in timing of cash receipts or disbursements. (1) Non-GAAP measure, see "Non-GAAP Measures" section below for additional information about this measure. -26- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION Condensed Consolidated Results of Operations The primary financial performance measures we use to manage our consolidated business and monitor results of operations are revenues, operating income, and cash flows from operating activities. The following table summarizes our condensed consolidated results of operations: Three Months Ended Nine Months Ended November 1, 2024 Percent change November 3, 2023 November 1, 2024 Percent change November 3, 2023 (dollars in millions) Revenues $ 1,976 4 % $ 1,895 $ 5,641 (1 %) $ 5,707 Cost of revenues 1,739 4 % 1,666 4,981 (1 %) 5,027 As a percentage of revenues 88.0 % 87.9 % 88.3 % 88.1 % Selling, general and administrative expenses 83 (5 %) 87 245 (5 %) 259 (Gain) loss on divestitures, net of transaction costs — — % — — (100 %) (240) Other operating (income) expense (6) 500 % (1) (10) 900 % (1) Operating income 160 12 % 143 425 (36 %) 662 As a percentage of revenues 8.1 % 7.5 % 7.5 % 11.6 % Provision for income taxes (20) (5 %) (21) (57) (57 %) (134) Net income $ 106 14 % $ 93 $ 264 (40 %) $ 438 Revenues. Revenues increased $81 million for the three months ended November 1, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing and new contracts, partially offset by contract completions. Revenues decreased $66 million for the nine months ended November 1, 2024 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($188 million) in the prior year (see Note 4—Divestitures), and contract completions. This was partially offset by ramp up in volume on existing and new contracts. Adjusting for the impact of the divestiture, revenues grew 2.2%. Operating Income. Operating income as a percentage of revenues for the three months ended November 1, 2024 increased from the comparable prior year period primarily due to ramp up in volume on existing and new contracts, and the resolution of the Assault Amphibious Vehicle ("AAV") contract termination (see Note 12—Legal Proceedings and Other Commitments and Contingencies for additional information), partially offset by contract completions. Operating income as a percentage of revenues for the nine months ended November 1, 2024 decreased from the comparable prior year period primarily due to the prior year gains on the sale of the Supply Chain Business ($233 million) and deconsolidation of FSA ($7 million), and contract completions, partially offset by ramp up in volume on existing and new contracts. Income Taxes. Our effective income tax rate was 15.6% and 17.8% for the three and nine months ended November 1, 2024, respectively, and 18.0% and 23.4% for the three and nine months ended November 3, 2023, respectively. Our effective tax rate differs from the statutory tax rate primarily due to the deduction for foreign derived intangible income, research and development tax credits, and stock-based compensation windfalls. The effective tax rate in the prior year further differed from the statutory tax rate due to a gain from the disposition of the Supply Chain Business and the associated non-deductible goodwill. Our effective tax rate for the three and nine months ended November 1, 2024 decreased compared to the same periods in the prior year due to the non-recurrence of a gain from the disposition of the Supply Chain Business and the associated non-deductible goodwill. In addition, the effective tax rates for the three and nine months ended November 1, 2024 benefited from the release of certain state liabilities for uncertain tax positions. -27- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION 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. While the impact to income taxes payable was most significant in fiscal 2023, this impact will decrease over the five-year amortization period and is anticipated to be immaterial in year six. The actual impact will depend on the amount of research and development costs incurred by us, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors. In December 2021, the Organisation for Economic Co-operation and Development (OECD) enacted model rules for a new 15% global minimum tax framework (“Pillar Two”) which became effective in certain jurisdictions beginning in fiscal 2024. We do not anticipate Pillar Two to have a significant impact on our effective tax rate or our consolidated results of operations, financial position, and cash flows. Segment and Corporate Results The primary financial performance measures we use to manage our reportable segments and monitor results of operations are revenues and adjusted operating income (1) . The following tables summarize our results of operations by reportable segment: Defense and Intelligence Three Months Ended Nine Months Ended November 1, 2024 Percent change November 3, 2023 November 1, 2024 Percent change November 3, 2023 (dollars in millions) Revenues $ 1,515 2 % $ 1,479 $ 4,366 (2 %) $ 4,465 Operating income 130 23 % 106 344 2 % 336 As a percentage of revenues 8.6 % 7.2 % 7.9 % 7.5 % Depreciation of property, plant and equipment 1 — % 1 1 — % 1 Amortization of intangible assets 17 6 % 16 51 2 % 50 Adjusted operating income (1) $ 148 20 % $ 123 $ 396 2 % $ 387 As a percentage of revenues 9.8 % 8.3 % 9.1 % 8.7 % (1) Non-GAAP measure, see "Non-GAAP Measures" section below for additional information about this measure. Revenues: Revenues increased $36 million for the three months ended November 1, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing and new contracts, partially offset by contract completions. Revenues decreased $99 million for the nine months ended November 1, 2024 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($188 million) in the prior year, and contract completions. This was partially offset by ramp up in volume on existing and new contracts. Adjusting for the impact of the divestiture, revenues grew 2.1%. Operating and adjusted operating income: Operating and adjusted operating income as a percentage of revenues for the three months ended November 1, 2024 increased from the comparable prior year period primarily due to ramp up in volume on existing and new contracts, and the resolution of the AAV contract termination, partially offset by contract completions. Operating and adjusted operating income as a percentage of revenues for the nine months ended November 1, 2024 increased from the comparable prior year period primarily due to ramp up in volume on existing and new contracts, and the resolution of the AAV contract termination, partially offset by contract completions and the gain on the sale of the Supply Chain Business in the prior year. -28- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION Civilian Three Months Ended Nine Months Ended November 1, 2024 Percent change November 3, 2023 November 1, 2024 Percent change November 3, 2023 (dollars in millions) Revenues $ 461 11 % $ 416 $ 1,275 3 % $ 1,242 Operating income 37 (31 %) 54 105 (24 %) 139 As a percentage of revenues 8.0 % 13.0 % 8.2 % 11.2 % Amortization of intangible assets 12 — % 12 36 — % 36 Adjusted operating income (1) $ 49 (26 %) $ 66 $ 141 (19 %) $ 175 As a percentage of revenues 10.6 % 15.9 % 11.1 % 14.1 % (1) Non-GAAP measure, see "Non-GAAP Measures" section below for additional information about this measure. Revenues: Revenues increased $45 million for the three months ended November 1, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing contracts. Revenues increased $33 million for the nine months ended November 1, 2024 as compared to the same period in the prior year primarily due to ramp up in volume on existing and new contracts, partially offset by contract completions. Operating and adjusted operating income: Operating and adjusted operating income as a percentage of revenues for the three months ended November 1, 2024 decreased from the comparable prior year period due to timing and volume mix. Operating and adjusted operating income as a percentage of revenues for the nine months ended November 1, 2024 decreased from the comparable prior year primarily due to timing and reduced volume on existing contracts. Corporate Three Months Ended Nine Months Ended November 1, 2024 Percent change November 3, 2023 November 1, 2024 Percent change November 3, 2023 (dollars in millions) Operating (loss) income $ (7) (59 %) $ (17) $ (24) 113 % $ 187 Depreciation of property, plant, and equipment 5 — % 5 16 (11 %) 18 Acquisition and integration costs (1) — — % — (2) (300 %) 1 Restructuring and impairment costs — (100 %) 2 4 (50 %) 8 Recovery of acquisition and integration costs and restructuring and impairment costs (2) — (100 %) (1) (2) 100 % (1) (Gain) loss on divestitures, net of transaction costs — — % — — (100 %) (240) Adjusted operating loss (3) $ (2) (82 %) $ (11) $ (8) (70 %) $ (27) (1) Adjustment consists of a reversal of immaterial costs related to the Koverse acquisition. (2) Adjustment reflects the portion of acquisition and integration costs and restructuring and impairment costs recovered through our indirect rates in accordance with U.S. government Cost Accounting Standards. (3) Non-GAAP measure, see "Non-GAAP Measures" section below for additional information about this measure. Operating and adjusted operating (loss) income: Operating and adjusted operating loss decreased $10 million and $9 million, respectively, for the three months ended November 1, 2024 as compared to the same period in the prior year primarily due to lower selling, general and administrative expenses and a gain on sale of an equity method investment. Operating loss increased $211 million for the nine months ended November 1, 2024 as compared to the same period in the prior year primarily due to the gain on the sale of the Supply Chain Business in the prior year ($233 million) and the gain recognized from the deconsolidation of FSA ($7 million), partially offset by lower selling, general and administrative expenses in the current year. -29- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION Adjusted operating income decreased $19 million for the nine months ended November 1, 2024 as compared to the same period in the prior year primarily due to lower selling, general and administrative expenses in the current year. Non-GAAP Measures Adjusted operating income, 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 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. Adjusted operating income. Adjusted operating income is a performance measure that primarily excludes the impact of non-recurring transactions that we do not consider to be indicative of our ongoing operating performance. Adjusted operating income is calculated by taking operating income and excluding depreciation and amortization, acquisition and integration costs, impairments, restructuring costs, and any other material non-recurring costs. The acquisition and integration costs relate to the Company's acquisitions. The restructuring and impairment costs represent the reorganization and facilities optimization costs or impairments of long-lived assets. The recovery of acquisition and integration costs and restructuring and impairment costs relate to costs recovered through the Company's indirect rates in accordance with Cost Accounting Standards. Depreciation of property, plant, and equipment relates to property, plant, and equipment specifically identifiable for each segment. Adjusted operating income also excludes amortization of intangible assets because we do not have a history of significant acquisition activity, we do not acquire businesses on a predictable cycle, and the amount of an acquisition's purchase price allocated to intangible assets and the related amortization term are unique to each acquisition. We believe that these performance measures 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. 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 consolidation and employee related costs such as retention and severance costs. The acquisition and integration costs relate to our 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 our long-term financial performance. -30- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION EBITDA and adjusted EBITDA for the periods presented were calculated as follows: Three Months Ended Nine Months Ended November 1, 2024 November 3, 2023 November 1, 2024 November 3, 2023 (dollars in millions) Net income $ 106 $ 93 $ 264 $ 438 Interest expense, net and loss on sale of receivables 36 29 108 95 Provision for income taxes 20 21 57 134 Depreciation and amortization 35 34 104 106 EBITDA 197 177 533 773 EBITDA as a percentage of revenues 10.0 % 9.3 % 9.4 % 13.5 % Acquisition and integration costs (1) — — (2) 1 Restructuring and impairment costs — 2 4 8 Recovery of acquisition and integration costs and restructuring and impairment costs (2) — (1) (2) (1) (Gain) loss on divestitures, net of transaction costs — — — (240) Adjusted EBITDA $ 197 $ 178 $ 533 $ 541 Adjusted EBITDA as a percentage of revenues 10.0 % 9.4 % 9.4 % 9.5 % (1) Adjustment consists of a reversal of immaterial costs related to the Koverse acquisition. (2) Adjustment reflects the portion of acquisition and integration costs and restructuring and impairment costs recovered through our indirect rates in accordance with U.S. government Cost Accounting Standards. Adjusted EBITDA as a percentage of revenues for the three months ended November 1, 2024 increased compared to the same periods in the prior year primarily due to the resolution of the AAV contract termination, and ramp up in volume on existing and new contracts, partially offset by contract completions. Adjusted EBITDA as a percentage of revenues for the nine months ended November 1, 2024 decreased compared to the same periods in the prior year primarily due to contract completions, partially offset by the resolution of the AAV contract termination, and ramp up in volume on existing and new contracts. Other Key Performance Measures In addition to the financial measures described above, we believe that bookings and backlog are useful measures for management and investors to evaluate our potential future revenues. We also consider measures such as contract types and cost of revenues mix to be useful for management and investors to evaluate our operating income and performance. Net Bookings and Backlog. Net bookings represent the estimated amount of revenues to be earned in the future from funded and negotiated unfunded contract awards that were received during the period, net of adjustments to estimates on previously awarded contracts. We calculate net bookings as the period’s ending backlog plus the period’s revenues less the prior period’s ending backlog and initial backlog obtained through acquisitions. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. We do not include in backlog estimates of revenues to be derived from IDIQ contracts, but rather record backlog and bookings when task orders are awarded on these contracts. Given that much of our revenue is derived from IDIQ contract task orders that renew annually, bookings on these contracts tend to refresh annually as the task orders are renewed. Additionally, we do not include in backlog contract awards that are under protest until the protest is resolved in our favor. -31- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION We segregate our backlog into two categories as follows: • Funded Backlog. Funded backlog for contracts with government agencies primarily represents estimated amounts of revenue to be earned in the future from contracts for which funding is appropriated less revenues previously recognized on these contracts. It does not include the unfunded portion of contracts in which funding is incrementally appropriated or authorized on a quarterly or annual basis by the U.S. government and other customers even though the contract may call for performance over a number of years. Funded backlog for contracts with non-government customers represents the estimated value on contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts. • Negotiated Unfunded Backlog. 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, 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. However, the U.S. government can adjust the scope of services of or cancel contracts at any time. Similarly, certain contracts with commercial customers include provisions that allow the customer to cancel prior to contract completion. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees (contract profit) for work performed. The estimated value of our total backlog as of the dates presented was: November 1, 2024 February 2, 2024 Defense and Intelligence Civilian Total SAIC Defense and Intelligence Civilian Total SAIC (in millions) Funded backlog $ 3,489 $ 977 $ 4,466 $ 2,707 $ 832 $ 3,539 Negotiated unfunded backlog 14,822 3,099 17,921 16,316 2,908 19,224 Total backlog $ 18,311 $ 4,076 $ 22,387 $ 19,023 $ 3,740 $ 22,763 We had net bookings worth an estimated $1.5 billion and $5.3 billion during the three and nine months ended November 1, 2024, respectively. 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 generate revenues, see “Business - Contract Types” in Part I, Item 1 of the most recently filed Annual Report on Form 10-K. The following table summarizes revenues by contract type as a percentage of each reportable segment and total SAIC revenues for the periods presented: Three Months Ended November 1, 2024 November 3, 2023 Defense and Intelligence Civilian Total SAIC Defense and Intelligence Civilian Total SAIC (in millions) Cost reimbursement 82 % 6 % 64 % 80 % 4 % 64 % Time and materials ("T&M") 8 % 62 % 21 % 9 % 60 % 20 % Firm-fixed price ("FFP") 10 % 32 % 15 % 11 % 36 % 16 % Total 100 % 100 % 100 % 100 % 100 % 100 % -32- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION Nine Months Ended November 1, 2024 November 3, 2023 Defense and Intelligence Civilian Total SAIC Defense and Intelligence Civilian Total SAIC (in millions) Cost reimbursement 79 % 6 % 63 % 76 % 4 % 60 % Time and materials ("T&M") 10 % 64 % 22 % 8 % 60 % 19 % Firm-fixed price ("FFP") 11 % 30 % 15 % 16 % 36 % 21 % Total 100 % 100 % 100 % 100 % 100 % 100 % The change in contract mix for the nine months ended November 1, 2024 is primarily due to a decrease in firm-fixed price type contracts due to the divestiture of the Supply Chain Business in the prior year, which historically had a higher proportion of these contracts. Cost of Revenues Mix. We generate revenues by providing a customized mix of services to our customers. The profit generated from our service contracts is affected by the proportion of cost of revenues incurred from the efforts of our employees (which we refer to below as labor-related cost of revenues), the efforts of our subcontractors and the cost of materials used in the performance of our service obligations under our contracts. Contracts performed with a higher proportion of SAIC labor are generally more profitable. The following table presents cost mix as a percentage of each reportable segment and total SAIC revenues for the periods presented: Three Months Ended November 1, 2024 November 3, 2023 Defense and Intelligence Civilian Total SAIC Defense and Intelligence Civilian Total SAIC (in millions) Labor-related cost of revenues 55 % 55 % 55 % 55 % 57 % 56 % Subcontractor-related cost of revenues 29 % 30 % 29 % 30 % 35 % 31 % Other materials-related cost of revenues 16 % 15 % 16 % 15 % 8 % 13 % Total 100 % 100 % 100 % 100 % 100 % 100 % Nine Months Ended November 1, 2024 November 3, 2023 Defense and Intelligence Civilian Total SAIC Defense and Intelligence Civilian Total SAIC (in millions) Labor-related cost of revenues 56 % 58 % 56 % 53 % 58 % 54 % Subcontractor-related cost of revenues 29 % 31 % 30 % 30 % 34 % 31 % Supply chain materials-related cost of revenues — % — % — % 4 % — % 3 % Other materials-related cost of revenues 15 % 11 % 14 % 13 % 8 % 12 % Total 100 % 100 % 100 % 100 % 100 % 100 % The change in cost of revenues mix for the nine months ended November 1, 2024 is primarily due to a decrease in supply chain materials-related costs due to the divestiture of the Supply Chain Business 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 $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. We consider various financial measures when we develop and update our capital deployment strategy, which include evaluating cash provided by operating activities, free cash flow and financial leverage. -33- Table of Contents 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. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our direct control. Although we believe that the financing arrangements in place will permit us to finance our operations on acceptable terms and conditions for at least the next year, our future access to, and the availability of financing on acceptable terms and conditions will be impacted by many factors (including our credit rating, capital market liquidity and overall economic conditions). Therefore, we cannot ensure that such financing will be available to us on acceptable terms or that such financing will be available at all. 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. During the first and third quarters of fiscal 2025, we amended our Credit Facility. See Note 7—Debt Obligations to the condensed consolidated financial statements contained within this report for additional information. Historical Cash Flow Trends The following table summarizes our cash flows: Nine Months Ended November 1, 2024 November 3, 2023 (in millions) Net cash provided by operating activities $ 379 $ 333 Net cash (used in) provided by investing activities (15) 324 Net cash used in financing activities (413) (455) Net (decrease) increase in cash, cash equivalents and restricted cash $ (49) $ 202 Net Cash Provided by Operating Activities. Cash flows provided by operating activities increased $46 million for the nine months ended November 1, 2024 as compared to the prior year primarily due to higher cash provided by the Master Accounts Receivable Purchase Agreement ("MARPA Facility") in the current year (see Note 10—Sales of Receivables to the condensed consolidated financial statements contained within this report for additional information), and lower tax payments in the current year, partially offset by timing of customer collections and vendor payments, higher incentive-based compensation payments in the current year, and other changes in working capital. Net Cash (Used in) Provided by Investing Activities. Cash used in investing activities for the nine months ended November 1, 2024 was $15 million compared to cash provided by investing activities of $324 million in the prior year period. This change is primarily due to the $356 million of cash proceeds for the sale of the Supply Chain Business in the prior year period (see Note 4 to the condensed consolidated financial statements). Net Cash Used in Financing Activities. Cash used in financing activities for the nine months ended November 1, 2024 decreased compared to the prior year period primarily due to higher proceeds received from borrowings, net of principal payments, partially offset by higher share repurchases in the current year. Critical Accounting Policies and Estimates There have been no changes to our critical accounting policies and estimates during the nine months ended November 1, 2024 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 to the condensed consolidated financial statements contained within this report. Item 3. 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. -34- Table of Contents SCIENCE APPLICATIONS INTERNATIONAL CORPORATION