SAIC(SAIC) - 2024 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed and consolidated financial statements, along with detailed notes on business overview, accounting policies, and financial instruments Condensed and Consolidated Statements of Income Condensed and Consolidated Statements of Income (in millions, except per share amounts) | Metric | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Revenues | $1,895 | $1,909 | $5,707 | $5,736 | | Operating income | $143 | $133 | $662 | $383 | | Income before income taxes | $114 | $100 | $572 | $290 | | Net income | $93 | $80 | $438 | $228 | | Net income attributable to common stockholders | $93 | $80 | $438 | $226 | | Basic EPS | $1.79 | $1.45 | $8.19 | $4.06 | | Diluted EPS | $1.76 | $1.45 | $8.11 | $4.04 | Condensed and Consolidated Statements of Comprehensive Income Condensed and Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net income | $93 | $80 | $438 | $228 | | Net unrealized (loss) gain on derivative instruments | $(3) | $29 | $(2) | $63 | | Total other comprehensive (loss) income, net of tax | $(3) | $29 | $(2) | $63 | | Comprehensive income | $90 | $109 | $436 | $291 | | Comprehensive income attributable to common stockholders | $90 | $109 | $436 | $289 | Condensed and Consolidated Balance Sheets Condensed and Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | November 3, 2023 | February 3, 2023 | | :--------------------------------------- | :--------------- | :--------------- | | ASSETS | | | | Cash and cash equivalents | $311 | $109 | | Receivables, net | $1,010 | $936 | | Total current assets | $1,388 | $1,197 | | Goodwill | $2,851 | $2,911 | | Intangible assets, net | $923 | $1,009 | | Total assets | $5,658 | $5,543 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $1,226 | $1,126 | | Long-term debt, net of current portion | $2,194 | $2,343 | | Total stockholders' equity | $1,828 | $1,704 | | Total liabilities and stockholders' equity | $5,658 | $5,543 | Condensed and Consolidated Statements of Equity Condensed and Consolidated Statements of Equity (in millions) | Metric | Balance at Feb 3, 2023 | Net Income (9 months) | Cash Dividends (9 months) | Repurchases of Stock (9 months) | Balance at Nov 3, 2023 | | :--------------------------------- | :--------------------- | :-------------------- | :------------------------ | :------------------------------ | :--------------------- | | Additional paid-in capital | $637 | — | — | $(276) | $395 | | Retained earnings | $1,035 | $438 | $(60) | — | $1,413 | | Accumulated other comprehensive income | $22 | $(2) | — | — | $20 | | Total stockholders' equity | $1,704 | $438 | $(60) | $(276) | $1,828 | Condensed and Consolidated Statements of Cash Flows Condensed and Consolidated Statements of Cash Flows (Nine Months Ended, in millions) | Cash Flow Activity | November 3, 2023 | October 28, 2022 | | :--------------------------------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $333 | $387 | | Net cash provided by (used in) investing activities | $324 | $(23) | | Net cash used in financing activities | $(455) | $(417) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $202 | $(53) | | Cash, cash equivalents and restricted cash at end of period | $320 | $62 | Notes to Condensed and Consolidated Financial Statements Note 1—Business Overview and Summary of Significant Accounting Policies - SAIC is a leading provider of technical, engineering, and enterprise information technology (IT) services primarily to the U.S. government, focusing on higher-end, differentiated technology services and solutions such as secure cloud modernization, outcome-based enterprise IT as-a-service, and defense systems integration[22][23] - The company adopted ASU 2022-04, Liabilities—Supplier Finance Programs, effective the first day of fiscal 2024, requiring annual and interim disclosures for entities using supplier finance programs[39][40] - The FASB issued ASU 2023-07, Segment Reporting, effective for fiscal years beginning after December 15, 2023, to enhance disclosures about significant segment expenses[38] Note 2—Earnings Per Share, Share Repurchases and Dividends Weighted-Average Number of Shares Outstanding (in millions) | Metric | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Basic weighted-average number of shares outstanding | 52.8 | 55.0 | 53.5 | 55.6 | | Diluted weighted-average number of shares outstanding | 53.3 | 55.5 | 54.0 | 56.0 | - As of November 3, 2023, the Company had repurchased approximately 19.6 million shares of common stock under its existing repurchase plan, which was increased by 8.0 million shares in June 2022[43] - A quarterly dividend of $0.37 per share was declared and paid during the three months ended November 3, 2023, and another $0.37 per share dividend was declared payable on January 26, 2024[44] Note 3—Revenues Disaggregated Revenues by Customer (in millions) | Customer | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :-------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Department of Defense | $992 | $969 | $2,982 | $2,799 | | Other federal government agencies | $863 | $903 | $2,611 | $2,827 | | Commercial, state and local | $40 | $37 | $114 | $110 | | Total | $1,895 | $1,909 | $5,707 | $5,736 | Disaggregated Revenues by Contract Type (in millions) | Contract Type | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :------------------ | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Cost reimbursement | $1,207 | $1,071 | $3,424 | $3,201 | | Time and materials (T&M) | $382 | $363 | $1,107 | $1,077 | | Firm-fixed price (FFP) | $306 | $475 | $1,176 | $1,458 | | Total | $1,895 | $1,909 | $5,707 | $5,736 | - As of November 3, 2023, the Company had approximately $5.5 billion of remaining performance obligations, with 80% expected to be recognized over the next 12 months and 90% over the next 24 months[53] Note 4—Divestitures - On February 4, 2023, SAIC sold 0.1% of its majority ownership in Forfeiture Support Associates J.V. (FSA), leading to deconsolidation and a $7 million gain from remeasuring the retained equity method investment[56][57] - On May 6, 2023, SAIC sold its logistics and supply chain management business for $356 million in cash, recording a pre-tax gain of $233 million, to focus resources on strategic growth areas[58] Note 5—Goodwill and Intangible Assets Goodwill and Intangible Assets (in millions) | Asset | November 3, 2023 | February 3, 2023 | | :---------------------- | :--------------- | :--------------- | | Goodwill | $2,851 | $2,911 | | Intangible assets, net | $923 | $1,009 | - Goodwill decreased by $60 million due to the sale of the Supply Chain Business, with no impairments recorded during the periods presented[60] - Amortization expense for intangible assets was $86 million for the nine months ended November 3, 2023, down from $94 million in the prior year period[61] Note 6—Income Taxes Effective Income Tax Rates | Period | November 3, 2023 | October 28, 2022 | | :-------------------------- | :--------------- | :--------------- | | Three Months Ended | 18.0% | 20.3% | | Nine Months Ended | 23.4% | 21.3% | - The nine-month effective tax rate increased primarily due to the gain from the disposition of the Supply Chain Business and associated non-deductible goodwill, partially offset by higher tax benefits from stock-based compensation and foreign-derived intangible income[64] - Unrecognized tax benefits increased to $225 million as of November 3, 2023, from $156 million as of February 3, 2023, mainly due to research tax credits and capitalized R&D costs under the TCJA[66] Note 7—Debt Obligations Long-Term Debt (in millions) | Debt Type | November 3, 2023 (Net) | February 3, 2023 (Net) | | :-------------------------- | :--------------------- | :--------------------- | | Term Loan A Facility | $1,211 | $1,225 | | Term Loan B Facility | $423 | $485 | | Term Loan B2 Facility | $233 | $268 | | Senior Notes | $396 | $396 | | Total long-term debt, net | $2,194 | $2,343 | - During the nine months ended November 3, 2023, the Company made $15 million in scheduled principal payments and $100 million in prepayments on its Term Loan Facilities[69] - The Company borrowed and repaid $160 million under its $1.0 billion Revolving Credit Facility, with no outstanding balance as of November 3, 2023, and was in compliance with covenants[69] Note 8—Derivative Instruments Designated as Cash Flow Hedges Fair Value of Derivative Instruments (in millions) | Derivative | Notional Amount (Nov 3, 2023) | Fair Value of Asset (Nov 3, 2023) | Fair Value of Asset (Feb 3, 2023) | | :------------------ | :---------------------------- | :-------------------------------- | :-------------------------------- | | Interest rate swaps 1 | $685 | $22 | $16 | | Interest rate swaps 2 | — | — | $9 | | Total | $685 | $22 | $25 | - Interest Rate Swaps 2, with a notional value of $450 million, matured during the three months ended November 3, 2023[74] Note 9—Changes in Accumulated Other Comprehensive Income (Loss) by Component Changes in Accumulated Other Comprehensive Income (Loss) (in millions) | Component | Balance at Feb 3, 2023 | Net Other Comprehensive Loss (9 months) | Balance at Nov 3, 2023 | | :--------------------------------------- | :--------------------- | :-------------------------------------- | :--------------------- | | Unrealized Gains (Losses) on Fixed Interest Rate Swap Cash Flow Hedges | $18 | $(2) | $16 | | Defined Benefit Obligation Adjustment | $4 | — | $4 | | Total | $22 | $(2) | $20 | - Net other comprehensive loss for the nine months ended November 3, 2023, was $(2) million, a decrease from net other comprehensive income of $63 million in the prior year period[77] Note 10—Sales of Receivables - The Company has a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. for the sale of up to $300 million of certain eligible U.S. government receivables[78] Purchase Discount Fees (in millions) | Period | November 3, 2023 | October 28, 2022 | | :-------------------------- | :--------------- | :--------------- | | Nine Months Ended | $7 | $4 | Note 11—Legal Proceedings and Other Commitments and Contingencies - The Company received a Federal Grand Jury Subpoena in April 2022 and October 2023 from the U.S. Department of Justice, Antitrust Division, in connection with a criminal investigation, and is fully cooperating[82] - The Assault Amphibious Vehicle (AAV) contract was terminated for convenience by the Marine Corps in October 2018, and the Company is continuing to negotiate cost recovery[83] - The Company is routinely subject to government investigations, audits, and reviews (e.g., DCAA) and believes it has adequately reserved for estimated net amounts to be refunded to customers for potential adjustments[84][86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, business overview, economic factors, operational results, and liquidity Business Overview - SAIC is a leading technology integrator and one of the largest pure-play technology service providers to the U.S. government, operating through approximately 1,900 active contracts and employing about 24,000 individuals[90] Economic Opportunities, Challenges, and Risks - 98% of SAIC's revenues are derived from U.S. government contracts, making its business performance highly dependent on government spending levels and budget priorities[91] - Potential adverse impacts include spending reductions, delayed appropriations, inflationary increases, and government shutdowns, while new spending packages (e.g., infrastructure, Inflation Reduction Act, CHIPS and Science Act) may offer opportunities in digital modernization, cyber, microelectronics, and climate resiliency[92][93] - Increased reliance on competitive bidding and small business prime set-aside contracts has intensified competition and pricing pressure in the industry[94] - SAIC differentiates itself through its scale, prime contractor leadership, long-term customer relationships, deep technical expertise, and an 'Innovation Factory' to deliver superior enterprise-class solutions[95][96] Management of Operating Performance and Reporting - Management monitors contract margin performance by evaluating risks, updating estimates, and analyzing revenue drivers and cost mix (labor, subcontractor, materials), noting that programs with a higher proportion of SAIC labor are generally more profitable[97][98] Results of Operations Summary of Results of Operations (in millions) | Metric | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Revenues | $1,895 | $1,909 | $5,707 | $5,736 | | Cost of revenues | $1,666 | $1,688 | $5,027 | $5,070 | | Selling, general and administrative expenses | $87 | $87 | $259 | $272 | | Operating income | $143 | $133 | $662 | $383 | | Net income attributable to common stockholders | $93 | $80 | $438 | $226 | | Net cash provided by operating activities | $101 | $128 | $333 | $387 | - Revenues decreased by $14 million (3 months) and $29 million (9 months) year-over-year, primarily due to the sale of the Supply Chain Business and the deconsolidation of FSA; adjusting for these, revenues grew 10.6% (3 months) and 7.3% (9 months)[100][101] - Operating income increased 8% (3 months) and 73% (9 months) year-over-year, with the nine-month increase significantly driven by a $233 million gain from the Supply Chain Business sale and a $7 million gain from the deconsolidation of FSA[100][106] - Net cash provided by operating activities decreased $54 million for the nine months ended November 3, 2023, primarily due to higher tax payments associated with Section 174 of the Internal Revenue Code and the Supply Chain Business sale, partially offset by timing of vendor payments[107] Non-GAAP Measures EBITDA and Adjusted EBITDA Reconciliation (in millions) | Metric | Three Months Ended Nov 3, 2023 | Three Months Ended Oct 28, 2022 | Nine Months Ended Nov 3, 2023 | Nine Months Ended Oct 28, 2022 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Net income | $93 | $80 | $438 | $228 | | EBITDA | $177 | $168 | $773 | $498 | | EBITDA as a percentage of revenues | 9.3% | 8.8% | 13.5% | 8.7% | | Adjusted EBITDA | $178 | $170 | $541 | $509 | | Adjusted EBITDA as a percentage of revenues | 9.4% | 8.9% | 9.5% | 8.9% | - Adjusted EBITDA as a percentage of revenues increased to 9.4% for the three months and 9.5% for the nine months ended November 3, 2023, from 8.9% in the comparable prior year periods, driven by improved contract profitability and lower indirect costs[113] Other Key Performance Measures Total Backlog (in millions) | Backlog Type | November 3, 2023 | February 3, 2023 | | :-------------------------- | :--------------- | :--------------- | | Funded backlog | $4,036 | $3,554 | | Negotiated unfunded backlog | $19,102 | $20,248 | | Total backlog | $23,138 | $23,802 | - Net bookings were an estimated $2.5 billion for the three months and $5.3 billion for the nine months ended November 3, 2023[118] Contract Type Mix (as a % of revenues, Nine Months Ended) | Contract Type | November 3, 2023 | October 28, 2022 | | :------------------ | :--------------- | :--------------- | | Cost reimbursement | 60% | 56% | | Time and materials (T&M) | 19% | 19% | | Firm-fixed price (FFP) | 21% | 25% | | Total | 100% | 100% | - The change in contract mix reflects a decrease in firm-fixed price contracts due to the divestiture of the Supply Chain Business, which historically had a higher proportion of these contracts[119] Cost of Revenues Mix (as a % of total cost of revenues, Nine Months Ended) | Cost Component | November 3, 2023 | October 28, 2022 | | :--------------------------------------- | :--------------- | :--------------- | | Labor-related cost of revenues | 54% | 54% | | Subcontractor-related cost of revenues | 31% | 29% | | Supply chain materials-related cost of revenues | 3% | 7% | | Other materials-related cost of revenues | 12% | 10% | | Total | 100% | 100% | - The decrease in supply chain materials-related costs in the cost of revenues mix is attributed to the divestiture of the Supply Chain Business[120] Liquidity and Capital Resources - SAIC expects to fund ongoing working capital, commitments, and discretionary investments using cash on hand, future operating cash flows, and borrowings under its $1.0 billion Revolving Credit Facility and $300 million MARPA Facility[121] - The capital deployment strategy prioritizes dividends, share repurchases, debt prepayments, or strategic acquisitions when cash generation exceeds the target average minimum cash balance[122] - The Tax Cuts and Jobs Act of 2017, requiring capitalization and amortization of R&D costs, is estimated to increase income taxes payable by approximately $77 million for fiscal 2024[124] Historical Cash Flow Trends Summary of Cash Flows (Nine Months Ended, in millions) | Cash Flow Activity | November 3, 2023 | October 28, 2022 | | :--------------------------------------- | :--------------- | :--------------- | | Net cash provided by operating activities | $333 | $387 | | Net cash provided by (used in) investing activities | $324 | $(23) | | Net cash used in financing activities | $(455) | $(417) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $202 | $(53) | - Net cash provided by investing activities significantly increased to $324 million for the nine months ended November 3, 2023, from cash used of $23 million in the prior year, primarily due to $356 million in cash proceeds from the sale of the Supply Chain Business[126] - Net cash used in financing activities increased to $(455) million, primarily due to higher share repurchases, partially offset by lower term loan principal payments[127] Critical Accounting Policies and Estimates - There have been no material changes to the Company's critical accounting policies and estimates during the nine months ended November 3, 2023, from those disclosed in its most recently filed Annual Report on Form 10-K[128] Recently Issued But Not Yet Adopted Accounting Pronouncements - Information on recently issued but not yet adopted accounting pronouncements is provided in Note 1 to the condensed and consolidated financial statements[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's market risks have occurred since the last Annual Report on Form 10-K - There have been no material changes to the Company's market risks from those discussed in its most recently filed Annual Report on Form 10-K[130] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls - Management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were operating and effective as of November 3, 2023[131] Changes in Internal Control Over Financial Reporting - There have been no changes in the Company's internal control over financial reporting during the quarterly period covered by this report that materially affected, or are likely to materially affect, its internal control over financial reporting[132] PART II—OTHER INFORMATION Item 1. Legal Proceedings Updated information on legal proceedings and government investigations is incorporated by reference from Note 11 - Updated information regarding legal proceedings and government investigations, audits, and reviews is incorporated by reference from Note 11 to the condensed and consolidated financial statements[135][136] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in the Company's most recently filed Annual Report on Form 10-K[137] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Details of common stock repurchases, including shares and average price, for the three months ended November 3, 2023 Common Stock Repurchases (Three Months Ended November 3, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------------- | :----------------------------- | :--------------------------- | | August 5, 2023 - September 8, 2023 | 265,748 | $117.59 | | September 9, 2023 - October 6, 2023 | 324,822 | $107.75 | | October 7, 2023 - November 3, 2023 | 313,654 | $110.78 | | Total | 904,224 | $111.69 | - As of November 3, 2023, approximately 4.89 million shares remained authorized for repurchase under the existing plan[139][140] Item 3. Defaults Upon Senior Securities No information is required regarding defaults upon senior securities - No information is required in response to this item[141] Item 4. Mine Safety Disclosures No information is required regarding mine safety disclosures - No information is required in response to this item[142] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended November 3, 2023 - No director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" during the three months ended November 3, 2023[143] Item 6. Exhibits Exhibits filed with Form 10-Q include CEO/CFO certifications and interactive data files - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and Interactive Data Files (Exhibits 101, 104)[144] Signatures The report was signed by Prabu Natarajan, Executive Vice President and Chief Financial Officer, on December 4, 2023 - The report was signed by Prabu Natarajan, Executive Vice President and Chief Financial Officer, on December 4, 2023[147]