saic-20231103

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 3, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number

001-35832

Science Applications International Corporation

(Exact name of registrant as specified in its charter)

Delaware

46-1932921

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

12010 Sunset Hills Road,

Reston,

Virginia

20190

(Address of principal executive offices)

(Zip Code)

(703)

676-4300

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.0001 per share	SAIC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares issued and outstanding of the registrant’s common stock as of November 24, 2023 was as follows:

52,062,546 shares of common stock ($.0001 par value per share)


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS


		Page
Part I	Financial Information

Item 1	Financial Statements	1
	Condensed and Consolidated Statements of Income	1
	Condensed and Consolidated Statements of Comprehensive Income	2
	Condensed and Consolidated Balance Sheets	3
	Condensed and Consolidated Statements of Equity	4
	Condensed and Consolidated Statements of Cash Flows	5
	Notes to Condensed and Consolidated Financial Statements	6
	Note 1—Business Overview and Summary of Significant Accounting Policies	6
	Note 2—Earnings Per Share, Share Repurchases and Dividends	8
	Note 3—Revenues	9
	Note 4—Divestitures	12
	Note 5—Goodwill and Intangible Assets	13
	Note 6—Income Taxes	13
	Note 7—Debt Obligations	14
	Note 8 —Derivative Instruments Designated as Cash Flow Hedges	15
	Note 9—Changes in Accumulated Other Comprehensive Income (Loss) by Component	16
	Note 10—Sales of Receivables	17
	Note 11—Legal Proceedings and Other Commitments and Contingencies	17

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4	Controls and Procedures	27

Part II	Other Information	28

Item 1	Legal Proceedings	28

Item 1A	Risk Factors	28

Item 2	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	28

Item 3	Defaults Upon Senior Securities	28

Item 4	Mine Safety Disclosures	28

Item 5	Other Information	28

Item 6	Exhibits	29

	Signatures	30

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions, except per share amounts)
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
Acquisition and integration costs	—		1		1		11
Other operating income (includes gain on divestiture, see Note 4)	(1)		—		(242)		—
Operating income	143		133		662		383
Interest expense	31		30		97		87
Other (income) expense, net	(2)		3		(7)		6
Income before income taxes	114		100		572		290
Provision for income taxes	(21)		(20)		(134)		(62)
Net income	93		80		438		228
Net income attributable to non-controlling interest	—		—		—		2
Net income attributable to common stockholders	$	93	$	80	$	438	$	226
Earnings per share:
Basic	$	1.79	$	1.45	$	8.19	$	4.06
Diluted	$	1.76	$	1.45	$	8.11	$	4.04

See accompanying notes to condensed and consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions)
Net income	$	93	$	80	$	438	$	228
Other comprehensive (loss) income, net of tax:
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 non-controlling interest	—		—		—		2
Comprehensive income attributable to common stockholders	$	90	$	109	$	436	$	289

See accompanying notes to condensed and consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(UNAUDITED)


	November 3, 2023		February 3, 2023
	(in millions)
ASSETS
Current assets:
Cash and cash equivalents	$	311	$	109
Receivables, net	1,010		936
Inventory, prepaid expenses and other current assets	67		152
Total current assets	1,388		1,197
Goodwill	2,851		2,911
Intangible assets, net	923		1,009
Property, plant, and equipment (net of accumulated depreciation of $176 million and $194 million at November 3, 2023 and February 3, 2023, respectively)	89		92
Operating lease right of use assets	136		158
Other assets	271		176
Total assets	$	5,658	$	5,543

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	840	$	767
Accrued payroll and employee benefits	317		328
Long-term debt, current portion	69		31
Total current liabilities	1,226		1,126
Long-term debt, net of current portion	2,194		2,343
Operating lease liabilities	132		152
Other long-term liabilities	278		218
Commitments and contingencies (Note 11)
Equity:
Common stock, $0.0001 par value, 1 billion shares authorized, 52 million and 54 million shares issued and outstanding as of November 3, 2023 and February 3, 2023, respectively	—		—
Additional paid-in capital	395		637
Retained earnings	1,413		1,035
Accumulated other comprehensive income	20		22
Total common stockholders' equity	1,828		1,694
Non-controlling interest	—		10
Total stockholders' equity	1,828		1,704
Total liabilities and stockholders' equity	$	5,658	$	5,543

See accompanying notes to condensed and consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Non-controlling interest		Total
	(in millions)
Balance at August 4, 2023	53	$	480	$	1,340	$	23	$	—	$	1,843
Net income	—	—		93		—		—		93
Issuances of stock	—	4		—		—		—		4
Other comprehensive income, net of tax	—	—		—		(3)		—		(3)
Cash dividends of $0.37 per share	—	—		(20)		—		—		(20)
Stock-based compensation	—	14		—		—		—		14
Repurchases of stock	(1)	(103)		—		—		—		(103)
Balance at November 3, 2023	52	$	395	$	1,413	$	20	$	—	$	1,828

Balance at February 3, 2023	54	$	637	$	1,035	$	22	$	10	$	1,704
Net income	—	—		438		—		—		438
Issuances of stock	1	13		—		—		—		13
Other comprehensive income, net of tax	—	—		—		(2)		—		(2)
Cash dividends of $1.11 per share	—	—		(60)		—		—		(60)
Stock-based compensation	—	21		—		—		—		21
Repurchases of stock	(3)	(276)		—		—		—		(276)
Deconsolidation of non-controlling interest	—	—		—		—		(10)		(10)
Balance at November 3, 2023	52	$	395	$	1,413	$	20	$	—	$	1,828

Balance at July 29, 2022	55	$	723	$	923	$	(3)	$	10	$	1,653
Net income	—	—		80		—		—		80
Issuances of stock	—	5		—		—		—		5
Other comprehensive loss, net of tax	—	—		—		29		—		29
Cash dividends of $0.37 per share	—	—		(22)		—		—		(22)
Stock-based compensation	—	11		—		—		—		11
Repurchases of stock	—	(60)		—		—		—		(60)
Distributions to non-controlling interest	—	—		—		—		—		—
Balance at October 28, 2022	55	$	679	$	981	$	26	$	10	$	1,696

Balance at January 28, 2022	56	$	838	$	818	$	(37)	$	10	$	1,629
Net income	—	—		226		—		2		228
Issuances of stock	1	13		—		—		—		13
Other comprehensive income, net of tax	—	—		—		63		—		63
Cash dividends of $1.11 per share	—	—		(63)		—		—		(63)
Stock-based compensation	—	19		—		—		—		19
Repurchases of stock	(2)	(191)		—		—		—		(191)
Distributions to non-controlling interest	—	—		—		—		(2)		(2)
Balance at October 28, 2022	55	$	679	$	981	$	26	$	10	$	1,696

See accompanying notes to condensed and consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended
	November 3, 2023		October 28, 2022
	(in millions)
Cash flows from operating activities:
Net income	$	438	$	228
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	106		118
Amortization of off-market customer contracts	(5)		(12)
Amortization of debt issuance costs	4		8
Deferred income taxes	(33)		(29)
Stock-based compensation expense	42		35
Gain on sale of long-lived assets	(3)		—
Gain on divestitures	(247)		—
Increase (decrease) resulting from changes in operating assets and liabilities, net of the effect of divestitures:
Receivables	(142)		(44)
Inventory, prepaid expenses and other current assets	13		7
Other assets	5		5
Accounts payable and accrued liabilities	120		(21)
Accrued payroll and employee benefits	(4)		32
Income taxes payable	21		59
Operating lease assets and liabilities, net	(3)		(1)
Other long-term liabilities	21		2
Net cash provided by operating activities	333		387
Cash flows from investing activities:
Expenditures for property, plant, and equipment	(16)		(18)
Purchases of marketable securities	(6)		(5)
Sales of marketable securities	5		3
Proceeds from sale of long-lived assets	3		—
Proceeds from divestitures	356		—
Cash divested upon deconsolidation of joint venture	(8)		—
Other	(10)		(3)
Net cash provided by (used in) investing activities	324		(23)
Cash flows from financing activities:
Dividend payments to stockholders	(60)		(63)
Principal payments on borrowings	(275)		(780)
Issuances of stock	13		12
Stock repurchased and retired or withheld for taxes on equity awards	(293)		(208)
Proceeds from borrowings	160		630
Debt issuance costs	—		(6)
Distributions to non-controlling interest	—		(2)
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 beginning of period	118		115
Cash, cash equivalents and restricted cash at end of period	$	320	$	62

See accompanying notes to condensed and consolidated financial statements.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1—Business Overview and Summary of Significant Accounting Policies:

Overview

Science Applications International Corporation (collectively, with its consolidated subsidiaries, and herein referred to as "SAIC," the “Company,” "we," "us," or "our") is a leading provider of technical, engineering and enterprise information technology (IT) services primarily to the U.S. government. The Company provides these services for large, complex projects with a targeted emphasis on higher-end, differentiated technology services and solutions that accelerate and transform secure and resilient digital environments through system development, modernization, integration, and sustainment to drive enterprise and mission outcomes.

The Company is organized as a matrix comprised of two customer facing operating sectors supported by an enterprise solutions and operations organization. The Company's operating sectors are aggregated into one reportable segment for financial reporting purposes. Each of the Company’s two customer facing operating sectors is focused on providing both (1) growth and technology accelerating solutions and (2) core service offerings to one or more agencies of the U.S. federal government. Growth and technology accelerating solutions include the delivery of secure cloud modernization, outcome based enterprise IT as-a-service, and the integration, production and modernization of defense systems. Core service offerings include systems engineering and the operation and maintenance of existing IT systems and networks.

Principles of Consolidation and Basis of Presentation

The accompanying financial information was prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting purposes. References to “financial statements” refer to the condensed and consolidated financial statements of the Company, which include the statements of income and comprehensive income, balance sheets, statements of equity and statements of cash flows. These financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and account balances within the Company have been eliminated. The financial statements are unaudited, but in the opinion of management include all adjustments necessary for a fair presentation thereof. The results reported in these financial statements are not necessarily indicative of results that may be expected for the entire year and should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended February 3, 2023.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates inherent in the preparation of the financial statements may include, but are not limited to estimated profitability of long-term contracts, income taxes, fair value measurements, fair value of goodwill and other intangible assets, pension and defined benefit plan obligations, and contingencies. Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates.

Reporting Periods

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 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.

Operating Cycle

The Company’s operating cycle may be greater than one year and is measured by the average time intervening between the inception and the completion of contracts.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Derivative Instruments Designated as Cash Flow Hedges

Derivative instruments are recorded on the condensed and consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.

The Company’s fixed interest rate swaps are considered over-the-counter derivatives, and fair value is calculated using a standard pricing model for interest rate swaps with contractual terms for maturities, amortization and interest rates. Level 2, or market observable inputs (such as yield and credit curves), are used within the standard pricing models in order to determine fair value. The fair value is an estimate of the amount that the Company would pay or receive as of a measurement date if the agreements were transferred to a third party. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges.

Marketable Securities

Investments in marketable securities consist of equity securities, which are recorded at fair value using observable inputs such as quoted prices in active markets (Level 1). As of November 3, 2023 and February 3, 2023, the fair value of the Company's investments totaled $29 million and $28 million, respectively, and are included in other assets on the condensed and consolidated balance sheets. The Company's investments are primarily held in a custodial account, which includes investments to fund its deferred compensation plan liabilities.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported on the condensed and consolidated balance sheets for the periods presented:


	November 3, 2023		February 3, 2023
	(in millions)
Cash and cash equivalents	$	311	$	109
Restricted cash included in inventory, prepaid expenses and other current assets	4		5
Restricted cash included in other assets	5		4
Cash, cash equivalents and restricted cash	$	320	$	118

Acquisition and Integration Costs

Acquisition-related costs that are not part of the purchase price consideration are generally expensed as incurred, except for certain costs that are deferred in connection with the issuance of debt. These costs typically include transaction-related costs, such as finder’s fees, legal, accounting, and other professional costs. Integration-related costs represent costs directly related to combining the Company and its acquired businesses. Integration-related costs typically include strategic consulting services, facility consolidations, employee related costs, such as retention and severance, costs to integrate information technology infrastructure, enterprise planning systems, processes, and other non-recurring integration-related costs. Acquisition and integration costs are presented together as acquisition and integration costs on the condensed and consolidated statements of income.

Acquisition costs for the three and nine months ended November 3, 2023 were immaterial. During the three and nine months ended October 28, 2022, the Company recognized a benefit of $1 million and $2 million, respectively, related to the acquisition of Koverse.

During the nine months ended November 3, 2023, the Company incurred $1 million of integration costs related to the acquisitions of Halfaker and Koverse. During the three and nine months ended October 28, 2022, the Company incurred $2 million and $13 million of integration costs, respectively, related to the acquisitions of Halfaker and Koverse.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Restructuring

During the three and nine months ended November 3, 2023, the Company incurred $2 million and $8 million of restructuring costs, respectively. During the three and nine months ended October 28, 2022, the Company incurred $5 million and $7 million of restructuring costs. These costs are associated with the optimization and consolidation of certain facilities and are presented within selling, general and administrative expenses on the condensed and consolidated statements of income.

Investments in Equity Securities

The Company invests in certain companies that advance or develop new technologies applicable to its business. The Company also occasionally forms joint ventures as a part of its investment strategy for the purpose of bidding and executing on specific projects. Each investment is evaluated for consolidation under the variable interest entities (VIEs) model and/or the voting interest model. The results of these investments are not material to the unaudited condensed and consolidated financial statements for the periods presented.

The Company applies the equity method of accounting to its unconsolidated investments when it has the ability to exercise significant influence over the entity and recognizes its proportionate share of the entities’ net income or loss within other operating income on the condensed and consolidated statements of income. Equity investments in entities over which the Company does not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-temporary impairments.

Accounting Standards Updates

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280), to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. Amongst other amendments, the standard requires annual and interim disclosures of significant segment expenses that are regularly provided to the chief operating decision maker (CODM), and interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This standard does not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50), which requires annual and interim disclosures for entities that use supplier finance programs in connection with the purchase of goods and services. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. These amendments are effective for fiscal years beginning after December 15, 2022, except for the requirement to provide rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company adopted the requirements of ASU 2022-04 effective the first day of fiscal 2024.

The Company maintains a supplier finance program through a financial institution in which participating suppliers, at their sole discretion, may enroll with the financial institution to finance at a discounted price one or more payment obligations of the Company prior to their scheduled due dates. Payment obligations outstanding under the Company’s supplier finance program are presented within accounts payable and accrued liabilities on the condensed and consolidated balance sheets and were immaterial as of November 3, 2023.

Note 2—Earnings Per Share, Share Repurchases and Dividends:

Earnings Per Share (EPS)

Basic EPS is computed by dividing net income attributable to common stockholders by the basic weighted-average number of shares outstanding. Diluted EPS is computed similarly to basic EPS, except the weighted-average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards. The dilutive effect of outstanding stock options and other stock-based awards is computed using the treasury stock method.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table provides a reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS for the periods presented:


	Three Months Ended		Nine Months Ended
	November 3, 2023	October 28, 2022	November 3, 2023	October 28, 2022
	(in millions)
Basic weighted-average number of shares outstanding	52.8	55.0	53.5	55.6
Dilutive common share equivalents - stock options and other stock-based awards	0.5	0.5	0.5	0.4
Diluted weighted-average number of shares outstanding	53.3	55.5	54.0	56.0

Antidilutive stock awards excluded from the weighted-average number of shares outstanding used to compute diluted EPS for the three and nine months ended November 3, 2023 and October 28, 2022 were immaterial.

Share Repurchases

The Company may repurchase shares in accordance with established repurchase plans. The Company retires its common stock upon repurchase with the excess over par value allocated to additional paid-in capital. The Company has not made any material purchases of common stock other than in connection with established share repurchase plans. In June 2022, the number of shares of the Company's common stock that may be repurchased under its existing repurchase plan was increased by 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. As of November 3, 2023, the Company has repurchased approximately 19.6 million shares of common stock under the program.

Dividends

The Company declared and paid a quarterly dividend of $0.37 per share of its common stock during the three months ended November 3, 2023. Subsequent to the end of the quarter, on November 30, 2023, the Company's Board of Directors declared a quarterly dividend of $0.37 per share of the Company's common stock payable on January 26, 2024 to stockholders of record on January 12, 2024.

Note 3—Revenues:

Changes in Estimates on Contracts

Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur routinely over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated.

A significant portion 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. Total estimated losses are inclusive of any unexercised options that are probable of award, only if they increase the amount of the loss.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Aggregate net changes in estimates on contracts accounted for using the cost-to-cost method of accounting were recognized in operating income as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions, except per share amounts)
Net (unfavorable) favorable adjustments	$	2	$	(6)	$	6	$	4
Net (unfavorable) favorable adjustments, after tax	2		(5)		5		3
Diluted EPS impact	$	0.04	$	(0.09)	$	0.09	$	0.05

Revenues were $4 million and $8 million higher for the three and nine months ended November 3, 2023, respectively, and $2 million lower and $7 million higher for the three and nine months ended October 28, 2022, respectively, due to net revenue recognized from performance obligations satisfied in prior periods.

Disaggregation of Revenues

The Company's revenues are generated primarily from long-term contracts with the U.S. government including subcontracts with other contractors engaged in work for the U.S. government. The Company disaggregates revenues by customer, contract type and prime versus subcontractor to the federal government.

Disaggregated revenues by customer were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions)
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 were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions)
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

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Disaggregated revenues by prime versus subcontractor were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in millions)
Prime contractor to federal government	$	1,710	$	1,725	$	5,156	$	5,212
Subcontractor to federal government	145		147		437		414
Other	40		37		114		110
Total	$	1,895	$	1,909	$	5,707	$	5,736

Contract Balances

Contract balances for the periods presented were as follows:


	Balance Sheet line item	November 3, 2023		February 3, 2023
		(in millions)
Billed and billable receivables, net(1)	Receivables, net	$	603	$	572
Contract assets - unbillable receivables	Receivables, net	407		364
Contract assets - contract retentions	Other assets	15		15
Contract liabilities - current	Accounts payable and accrued liabilities	48		48
Contract liabilities - non-current	Other long-term liabilities	$	2	$	4

(1) Net of allowance of $3 million and $4 million as of November 3, 2023 and February 3, 2023, respectively.

During the three and nine months ended November 3, 2023, the Company recognized revenues of $5 million and $38 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of February 3, 2023. During the three and nine months ended October 28, 2022, the Company recognized revenues of $4 million and $39 million, respectively, relating to amounts that were included in the opening balance of contract liabilities as of January 28, 2022.

Remaining Performance Obligations

As of November 3, 2023, the Company had approximately $5.5 billion of remaining performance obligations. The Company expects to recognize revenue on approximately 80% of the remaining performance obligations over the next 12 months and approximately 90% over the next 24 months, with the remaining recognized thereafter.

Lessor Revenue

The Company leases IT equipment and hardware to its customers. All of the Company’s lessor arrangements are operating leases. Operating lease income is recognized on a straight-line basis over the term of the lease and is reported as revenue on the condensed and consolidated statements of income. During the nine months ended October 28, 2022, the Company recognized revenue of $23 million from the exercise of purchase options under certain lessor arrangements. Operating lease income was immaterial for the three and nine months ended November 3, 2023 and October 28, 2022.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 4—Divestitures:

FSA Amendment

On February 4, 2023, the Company sold 0.1% of its 50.1% majority ownership interest in Forfeiture Support Associates J.V. (FSA) to its sole joint venture partner for a nominal amount. As a result of the sale and amendment to the joint venture operating agreement of FSA, the Company no longer controls the joint venture and will account for its retained interest as an equity method investment as of the date of the transaction.

The Company remeasured its retained investment in FSA to a fair value of $14 million. The equity method investment is included within other assets on the condensed and consolidated balance sheets. The remeasurement resulted in a gain of $7 million which is included within other operating income on the condensed and consolidated statements of income and is reflected within gain on divestitures on the condensed and consolidated statements of cash flows. The Company estimated the fair value of its retained investment in FSA based on Level 3 inputs of the fair value hierarchy. The Company used the income approach which involves the use of estimates and assumptions, including revenue growth rates, projected operating margins, discount rates and terminal growth rates.

Sale of Logistics and Supply Chain Management Business

On May 6, 2023, the Company closed the sale of its logistics and supply chain management business (Supply Chain Business) to ASRC Federal Holding Company, LLC (ASRC Federal) for $356 million in cash. The sale enables the Company to focus its resources on long-term strategic growth areas. The Company recorded a pre-tax gain of $233 million, net of $7 million of transaction costs, which is included within other operating income on the condensed and consolidated statements of income.

The disposition does not represent a strategic shift in operations that will have a material effect on the Company's operations and financial results, and accordingly has not been presented as discontinued operations.

The major classes of assets and liabilities divested were as follows:


	(in millions)
Assets:
Receivables, net	$	46
Inventory, prepaid expenses and other current assets	73
Goodwill	60
Operating lease right of use assets	2
Total assets divested	$	181
Liabilities:
Accounts payable and accrued liabilities	$	63
Accrued payroll and employee benefits	1
Operating lease liabilities	1
Total liabilities divested	$	65

In connection with the sale, the Company and ASRC Federal entered into certain transition services agreements pursuant to which the Company will provide certain services to ASRC Federal through approximately the end of fiscal 2024 on a cost reimbursable basis. The transition services include certain IT, finance and other services necessary to support the transition of the sale.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 5—Goodwill and Intangible Assets:

Goodwill

Goodwill had a carrying value of $2,851 million and $2,911 million as of November 3, 2023 and February 3, 2023, respectively. Goodwill decreased $60 million compared to February 3, 2023 due to the sale of the Supply Chain Business (see Note 4). There were no impairments of goodwill during the periods presented.

Intangible Assets

Intangible assets, all of which were finite-lived, consisted of the following:


	November 3, 2023						February 3, 2023
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Customer relationships	$	1,462	$	(546)	$	916	$	1,467	$	(466)	$	1,001
Developed technology	10		(3)		7		10		(2)		8
Trade name	1		(1)		—		1		(1)		—
Total intangible assets	$	1,473	$	(550)	$	923	$	1,478	$	(469)	$	1,009

Amortization expense related to intangible assets was $28 million and $86 million for the three and nine months ended November 3, 2023, respectively, and $29 million and $94 million for the three and nine months ended October 28, 2022, respectively. There were no intangible asset impairment losses during the periods presented.

As of November 3, 2023, the estimated future annual amortization expense related to intangible assets is as follows:


Fiscal Year	(in millions)
Remainder of 2024	$	29
2025	115
2026	115
2027	115
2028	98
Thereafter	451
Total	$	923

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, and other factors.

Note 6—Income Taxes:

The Company's effective income tax rate was 18.0% and 23.4% for the three and nine months ended November 3, 2023, respectively, and 20.3% and 21.3% for the three and nine months ended October 28, 2022, respectively.

The Company’s effective tax rate for the three months ended November 3, 2023, is lower compared to the effective tax rate from the same period in the prior year due to higher tax benefits from the deduction for foreign-derived intangible income. The Company's effective tax rate for the nine months ended November 3, 2023, is higher compared to the effective tax rate from the same period in the prior year due to the gain from the disposition of the Supply Chain Business and the associated non-deductible goodwill. The increase was partially offset by higher tax benefits from stock-based compensation and the deduction for foreign-derived intangible income.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 (TCJA) removed the ability of taxpayers to immediately deduct specific research and development expenditures in the year incurred and instead requires taxpayers to capitalize and amortize such research expenditures over a period of five years.

As of November 3, 2023, the Company's unrecognized tax benefits were $225 million, compared to $156 million as of February 3, 2023. The increase during the nine months ended November 3, 2023 is primarily attributable to research tax credits and capitalized research and development costs in accordance with the TCJA. This increase also resulted in a corresponding $44 million increase to deferred tax assets. The unrecognized tax benefits are presented within other long-term liabilities on the condensed and consolidated balance sheets.

As of November 3, 2023 and February 3, 2023, the net deferred tax asset balance was $92 million and $14 million, respectively, and is presented in other assets on the condensed and consolidated balance sheets.

Note 7—Debt Obligations:

The Company’s long-term debt as of the dates presented was as follows:


	November 3, 2023										February 3, 2023
	Stated interest rate		Effective interest rate		Principal		Unamortized debt issuance costs		Net		Principal		Unamortized debt issuance costs		Net
					(dollars in millions)
Term Loan A Facility due June 2027	6.42	%	6.54	%	$	1,215	$	(4)	$	1,211	$	1,230	$	(5)	$	1,225
Term Loan B Facility due October 2025	7.30	%	7.51	%	424		(1)		423		488		(3)		485
Term Loan B2 Facility due March 2027	7.30	%	7.73	%	236		(3)		233		272		(4)		268
Senior Notes due April 2028	4.88	%	5.11	%	400		(4)		396		400		(4)		396
Total long-term debt					$	2,275	$	(12)	$	2,263	$	2,390	$	(16)	$	2,374
Less current portion					69		—		69		31		—		31
Total long-term debt, net of current portion					$	2,206	$	(12)	$	2,194	$	2,359	$	(16)	$	2,343

As of November 3, 2023, the Company had a $2.9 billion secured credit facility (the Credit Facility) consisting of a Term Loan A Facility due June 2027, a Term Loan B Facility due October 2025, a Term Loan B2 Facility due March 2027 (together, the Term Loan Facilities), and a $1.0 billion Revolving Credit Facility due June 2027 (the Revolving Credit Facility).

During the nine months ended November 3, 2023, the Company made a scheduled principal payment of $15 million on the Term Loan A Facility due June 2027 and principal prepayments of $64 million and $36 million on the Term Loan B Facility due October 2025 and the Term Loan B2 Facility due March 2027, respectively. During the nine months ended November 3, 2023, the Company borrowed and repaid $160 million under the Revolving Credit Facility. There was no balance outstanding on the Revolving Credit Facility as of November 3, 2023. Commitment fees for undrawn amounts under the Revolving Credit Facility range from 0.125% to 0.25% per annum based on the Company’s leverage ratio. As of November 3, 2023, the Company was in compliance with the covenants under its Credit Facility.

As of November 3, 2023 and February 3, 2023, the carrying value of the Company’s outstanding debt obligations approximated its fair value. The fair value of long-term debt is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s Term Loan Facilities and Senior Notes.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Maturities of long-term debt as of November 3, 2023 are:


Fiscal Year	Total
	(in millions)
Remainder of 2024	$	15
2025	77
2026	532
2027	123
2028	1,128
Thereafter	400
Total principal payments	$	2,275

Note 8—Derivative Instruments Designated as Cash Flow Hedges:

The Company’s derivative instruments designated as cash flow hedges consist of:


							Fair Value of Asset(1) at
	Notional Amount at November 3, 2023		Pay Fixed Rate		Receive Variable Rate	Settlement and Termination	November 3, 2023		February 3, 2023
	(in millions)						(in millions)
Interest rate swaps #1	$	685	2.96	%	Term SOFR	Monthly through October 31, 2025	$	22	$	16
Interest rate swaps #2	—		2.36	%	Term SOFR	Monthly through October 31, 2023	—		9
Total	$	685					$	22	$	25

(1) The fair value of the fixed interest rate swap asset is included in other assets on the condensed and consolidated balance sheets.

The Company is party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of the Company’s floating rate debt. The counterparties to all swap agreements are financial institutions.

See Note 9 for the unrealized change in fair values on cash flow hedges recognized in other comprehensive income (loss) and the amounts reclassified from accumulated other comprehensive income (loss) into earnings for the current and comparative periods presented. During the three months ended November 3, 2023, Interest Rate Swaps #2 matured which had a notional value of $450 million upon maturity. The Company estimates that it will reclassify $15 million of unrealized gains from accumulated other comprehensive income into earnings in the twelve months following November 3, 2023.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9—Changes in Accumulated Other Comprehensive Income (Loss) by Component:

The following table presents the changes in accumulated other comprehensive income (loss) attributable to the Company’s fixed interest rate swap cash flow hedges that are discussed in Note 8 and the Company's defined benefit plans.


	Unrealized Gains (Losses) on Fixed Interest Rate Swap Cash Flow Hedges(1)		Defined Benefit Obligation Adjustment		Total
	(in millions)
Three months ended November 3, 2023
Balance at August 4, 2023	$	19	$	4	$	23
Other comprehensive income before reclassifications	4		—		4
Amounts reclassified from accumulated other comprehensive income	(8)		—		(8)
Income tax impact	1		—		1
Net other comprehensive loss	(3)		—		(3)
Balance at November 3, 2023	$	16	$	4	$	20

Three months ended October 28, 2022
Balance at July 29, 2022	$	(4)	$	1	$	(3)
Other comprehensive loss before reclassifications	38		—		38
Amounts reclassified from accumulated other comprehensive loss	1		—		1
Income tax impact	(10)		—		(10)
Net other comprehensive income	29		—		29
Balance at October 28, 2022	$	25	$	1	$	26

Nine months ended November 3, 2023
Balance at February 3, 2023	$	18	$	4	$	22
Other comprehensive income before reclassifications	17		—		17
Amounts reclassified from accumulated other comprehensive income	(20)		—		(20)
Income tax impact	1		—		1
Net other comprehensive loss	(2)		—		(2)
Balance at November 3, 2023	$	16	$	4	$	20

Nine months ended October 28, 2022
Balance at January 28, 2022	$	(38)	$	1	$	(37)
Other comprehensive income before reclassifications	72		—		72
Amounts reclassified from accumulated other comprehensive loss	13		—		13
Income tax impact	(22)		—		(22)
Net other comprehensive income	63		—		63
Balance at October 28, 2022	$	25	$	1	$	26

(1)The amount reclassified from accumulated other comprehensive income (loss) is included in interest expense.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 10—Sales of Receivables:

The Company has a Master Accounts Receivable Purchase Agreement (MARPA Facility) with MUFG Bank, Ltd. (the Purchaser) for the sale of up to a maximum amount of $300 million of certain designated eligible receivables with the U.S. government.

During the nine months ended November 3, 2023 and October 28, 2022, the Company incurred purchase discount fees of $7 million and $4 million, respectively, which are presented in other (income) expense, net on the condensed and consolidated statements of income and are reflected as cash flows from operating activities on the condensed and consolidated statements of cash flows.

MARPA Facility activity consisted of the following:


	Nine Months Ended
	November 3, 2023		October 28, 2022
	(in millions)
Beginning balance	$	250	$	200
Sale of receivables	1,957		2,776
Cash collections	(1,957)		(2,716)
Outstanding balance sold to Purchaser(1)	250		260
Cash collected, not remitted to Purchaser(2)	(33)		(15)
Remaining sold receivables	$	217	$	245

(1) For the nine months ended November 3, 2023 there was no net impact to cash flows from operating activities from sold receivables. For the nine months ended October 28, 2022, the Company recorded a net increase to cash flows from operating activities of $60 million from sold receivables.

(2) Primarily represents the cash collected on behalf of but not yet remitted to the Purchaser as of November 3, 2023 and October 28, 2022. This balance is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.

Note 11—Legal Proceedings and Other Commitments and Contingencies:

Legal Proceedings

The Company is involved in various claims and lawsuits arising in the normal conduct of its business, none of which the Company’s management believes, based on current information, is expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In April 2022 and October 2023, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice, Antitrust Division (DOJ). As required by the subpoena, the Company has provided the DOJ with a broad range of documents related to the investigation, and the Company’s collection and production process remains ongoing. The Company is fully cooperating with the investigation. At this time, it is not possible to determine whether the Company will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with the investigation pursuant to which the subpoenas were issued.

AAV Termination for Convenience

On August 27, 2018, the Company received a stop-work order from the United States Marine Corps on the Assault Amphibious Vehicle (AAV) contract and on October 3, 2018 the program was terminated for convenience by the customer. The Company is continuing to negotiate with the Marine Corps to recover costs associated with the termination.

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NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Government Investigations, Audits and Reviews

The Company is routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect, in particular, to its role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. U.S. government agencies, including the Defense Contract Audit Agency (DCAA), the Defense Contract Management Agency and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its business systems. Adverse findings in these investigations, audits, or reviews can lead to criminal, civil or administrative proceedings, and the Company could face disallowance of previously billed costs, penalties, fines, compensatory damages and suspension or debarment from doing business with governmental agencies. Due to the Company’s reliance on government contracts, adverse findings could also have a material impact on the Company’s business, including its financial position, results of operations and cash flows.

The indirect cost audits by the DCAA of the Company’s business remain open for certain prior years and the current year. Although the Company has recorded contract revenues based on an estimate of costs that the Company believes will be approved on final audit, the Company does not know the outcome of any ongoing or future audits. If future completed audit adjustments exceed the Company’s reserves for potential adjustments, the Company’s profitability could be materially adversely affected.

As of November 3, 2023, the Company believes it has adequately reserved for estimated net amounts to be refunded to customers for potential adjustments for indirect cost audits and compliance with U.S. government Cost Accounting Standards.

Letters of Credit and Surety Bonds

The Company has outstanding obligations relating to letters of credit of $9 million as of November 3, 2023, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds of $19 million, principally related to performance and payment bonds on the Company’s contracts.

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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 and 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 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

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 1,900 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.

Economic Opportunities, Challenges, and Risks

During the three and nine months ended November 3, 2023, 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. Appropriations measures passed in December 2022 provided full funding for the federal government through the end of government fiscal year (GFY) 2023. In November 2023, the President signed a continuing resolution which will fund the U.S. government through January 2024. If Congress is not able to pass appropriations for GFY 2024 funding by January 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 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, and potential government shutdowns.

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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.

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 Growth Technology and CORE 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. 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 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 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.

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Results of Operations

The primary financial performance measures we use to manage our business and monitor results of operations are revenues, operating income, and cash flows from operating activities. The following table summarizes our results of operations:


	Three Months Ended								Nine Months Ended
	November 3, 2023			Percent change		October 28, 2022			November 3, 2023			Percent change		October 28, 2022
	(dollars in millions)
Revenues	$	1,895		(1	%)	$	1,909		$	5,707		(1	%)	$	5,736
Cost of revenues	1,666			(1	%)	1,688			5,027			(1	%)	5,070
As a percentage of revenues	87.9		%			88.4		%	88.1		%			88.4		%
Selling, general and administrative expenses	87			—	%	87			259			(5	%)	272
Acquisition and integration costs	—			(100	%)	1			1			(91	%)	11
Other operating income	(1)			100	%	—			(242)			100	%	—
Operating income	143			8	%	133			662			73	%	383
As a percentage of revenues	7.5		%			7.0		%	11.6		%			6.7		%
Net income attributable to common stockholders	$	93		16	%	$	80		$	438		94	%	$	226
Net cash provided by operating activities	$	101		(21	%)	$	128		$	333		(14	%)	$	387

Revenues. Revenues decreased $14 million for the three months ended November 3, 2023 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($161 million) and the deconsolidation of FSA ($35 million) (see Note 4 for additional information), and contract completions, partially offset by ramp up on existing and new contracts. Adjusting for the impact of the divestiture of the Supply Chain Business and the deconsolidation of FSA, revenues grew 10.6%.

Revenues decreased $29 million for the nine months ended November 3, 2023 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($310 million), the deconsolidation of FSA ($106 million), and contract completions, partially offset by ramp up on existing and new contracts. Adjusting for the impact of the divestiture of the Supply Chain Business and the deconsolidation of FSA, revenues grew 7.3%.

Cost of Revenues. Cost of revenues decreased $22 million for the three months ended November 3, 2023 as compared to the same period in the prior year primarily due to the sale of the Supply Chain Business ($153 million) and the deconsolidation of FSA ($32 million), partially offset by ramp up on existing and new contracts. Adjusting for the impact of the divestiture of the Supply Chain Business and the deconsolidation of FSA, cost of revenues increased 10.8%, in line with revenues.

Cost of revenues decreased $43 million for the nine months ended November 3, 2023 as compared to the same period in the prior year primarily due to the sale of the Supply Chain business ($291 million) and the deconsolidation of FSA ($97 million), partially offset by ramp up on existing and new contracts. Adjusting for the impact of the divestiture of the Supply Chain Business and the deconsolidation of FSA, cost of revenues increased 7.4%, in line with revenues.

Selling, General and Administrative Expenses (SG&A). SG&A remained consistent for the three months ended November 3, 2023 as compared to the same period in the prior year.

SG&A decreased $13 million for the nine months ended November 3, 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 November 3, 2023 increased from the comparable prior year period primarily due to improved profitability across our contract portfolio.

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Operating income as a percentage of revenues increased for the nine months ended November 3, 2023 from the comparable prior year period primarily due to a $233 million gain recognized from the sale of the Supply Chain Business, a $7 million gain recognized from the deconsolidation of FSA, improved profitability across our contract portfolio, lower indirect costs, and lower intangible asset amortization.

Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased $54 million for the nine months ended November 3, 2023 as compared to the prior year primarily due to higher tax payments in the current year associated with Section 174 of the Internal Revenue Code, tax payments in the current year associated with the sale of the Supply Chain Business and higher cash provided by the MARPA Facility in the prior year, partially offset by timing of vendor payments.

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 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.

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 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.

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


	Three Months Ended						Nine Months Ended
	November 3, 2023			October 28, 2022			November 3, 2023			October 28, 2022
	(dollars in millions)
Net income	$	93		$	80		$	438		$	228
Interest expense and loss on sale of receivables	33			32			104			91
Interest income	(4)			(1)			(9)			(1)
Provision for income taxes	21			20			134			62
Depreciation and amortization	34			37			106			118
EBITDA	177			168			773			498
EBITDA as a percentage of revenues	9.3		%	8.8		%	13.5		%	8.7		%
Acquisition and integration costs	—			1			1			11
Restructuring and impairment costs	2			5			8			7
Depreciation included in acquisition and integration costs and restructuring and impairment costs	—			(1)			—			(1)
Recovery of acquisition and integration costs and restructuring and impairment costs(1)	(1)			(3)			(1)			(6)
Gain on divestitures, net of transaction costs	—			—			(240)			—
Adjusted EBITDA	$	178		$	170		$	541		$	509
Adjusted EBITDA as a percentage of revenues	9.4		%	8.9		%	9.5		%	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 U.S. government Cost Accounting Standards.

Adjusted EBITDA as a percentage of revenues for the three and nine months ended November 3, 2023 increased to 9.4% from 8.9% and increased to 9.5% from 8.9% for the same periods in the prior year, respectively, primarily due to improved profitability across our contract portfolio and lower indirect costs.

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.

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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 3, 2023		February 3, 2023
	(in millions)
Funded backlog	$	4,036	$	3,554
Negotiated unfunded backlog	19,102		20,248
Total backlog	$	23,138	$	23,802

We had net bookings worth an estimated $2.5 billion and $5.3 billion during the three and nine months ended November 3, 2023.

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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 “Contract Types” in Part I of the most recently filed Annual Report on Form 10-K. The following table summarizes revenues by contract type as a percentage of revenues for the periods presented:


	Nine Months Ended
	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 for the nine months ended November 3, 2023 reflects a decrease in firm-fixed price type contracts due to the divestiture of the Supply Chain Business 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 for the periods presented:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(as a % of total cost of revenues)
Labor-related cost of revenues	56	%	53	%	54	%	54	%
Subcontractor-related cost of revenues	31	%	29	%	31	%	29	%
Supply chain materials-related cost of revenues	—	%	8	%	3	%	7	%
Other materials-related cost of revenues	13	%	10	%	12	%	10	%
Total	100	%	100	%	100	%	100	%

The change in cost of revenues mix for the three and nine months ended November 3, 2023 reflects a decrease in supply chain materials-related costs due to the divestiture of the Supply Chain Business.

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. When our cash generation enables us to exceed our target average minimum cash balance, we intend to deploy excess cash through dividends, share repurchases, debt prepayments or strategic acquisitions.

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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.

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. We estimate that our income taxes payable for fiscal 2024 will increase by approximately $77 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
	November 3, 2023		October 28, 2022
	(in millions)
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 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 November 3, 2023 and the comparable prior year period.

Net Cash Provided by (Used in) Investing Activities. Cash provided by investing activities for the nine months ended November 3, 2023 was $324 million compared to cash used in investing activities of $23 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 (see Note 4 to the condensed and consolidated financial statements).

Net Cash Used in Financing Activities. Cash used in financing activities for the nine months ended November 3, 2023 increased compared to the prior year period primarily due to higher share repurchases, partially offset by lower term loan principal payments.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates during the nine months ended November 3, 2023 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 and 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.

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Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) and have concluded that as of November 3, 2023 these controls and procedures were operating and effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarterly period covered by this report that materially affected, or are likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We have provided information about legal proceedings in which we are involved in our fiscal 2023 Annual Report on Form 10-K, and we have provided an update to this information in Note 11 to the condensed and consolidated financial statements contained within this report, which is incorporated herein by reference.

In addition to the described legal proceedings, we are routinely subject to investigations and reviews relating to compliance with various laws and regulations. Additional information regarding such investigations and reviews is included in our fiscal 2023 Annual Report on Form 10-K, and we have also updated this information in Note 11 to the condensed and consolidated financial statements contained within this report, under the heading “Government Investigations, Audits and Reviews,” which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our most recently filed Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

Purchases of Equity Securities. We may repurchase shares on the open market in accordance with established repurchase plans. Whether repurchases are made and the timing and amount of repurchases depend on a variety of factors including market conditions, our capital position, internal cash generation and other factors. We also repurchase shares in connection with stock option and stock award activities to satisfy tax withholding obligations.

The following table presents repurchases of our common stock during the three months ended November 3, 2023:


Period(1)	Total Number of Shares (or Units) Purchased(2)	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(3)
August 5, 2023 - September 8, 2023	265,748	$	117.59	265,748	5,524,480
September 9, 2023 - October 6, 2023	324,822	107.75		324,822	5,199,658
October 7, 2023 - November 3, 2023	313,654	110.78		313,654	4,886,004
Total	904,224	$	111.69	904,224

(1)Date ranges represent our fiscal periods during the current quarter. Our fiscal quarters typically consist of one five-week period and two four-week periods.

(2)Includes shares purchased on surrender by stockholders of previously owned shares to satisfy minimum statutory tax withholding obligations related to stock option exercises and vesting of stock awards in addition to shares purchased under our publicly announced plans or programs.

(3)In June 2022, the number of shares that may be purchased increased by 8.0 million shares, bringing the total authorized shares to be repurchased under the plan to approximately 24.4 million shares. As of November 3, 2023, we have repurchased approximately 19.6 million shares of common stock under the program.

Item 3. Defaults Upon Senior Securities

No information is required in response to this item.

Item 4. Mine Safety Disclosures

No information is required in response to this item.

Item 5. Other Information

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," as such terms are defined in Item 408 of Regulation S-K.

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Item 6. Exhibits


Exhibit Number			Description of Exhibit


31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101			Interactive Data File. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

104			The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: December 4, 2023


Science Applications International Corporation

/s/ Prabu Natarajan
Prabu Natarajan Executive Vice President and Chief Financial Officer

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