saic-10q_20151030.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

(Mark One)

x

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

 

For the quarterly period ended October 30, 2015

or

¨

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

  

 

Exact Name of Registrant as Specified in its Charter,
Address of Principal  Executive Offices and Telephone Number

  

State or other
jurisdiction of
incorporation or
organization

  

I.R.S. Employer
Identification
No.

001-35832

  

 

Science Applications

International Corporation

  

Delaware

 

46-1932921

 

  

 

1710 SAIC Drive, McLean, Virginia 22102

  

 

  

 

 

  

 

703-676-6942

  

 

  

 

 

 

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  x    No  ¨            

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes  x    No  ¨            

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

 

Large accelerated filer

  

x

  

    Accelerated filer

  

¨

  

    Non-accelerated filer

  

¨

  

    Smaller reporting company

  

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   x            

The number of shares issued and outstanding of the registrant’s common stock as of November 20, 2015 was as follows:

45,465,620 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 and Comprehensive Income

  

1

 

 

Condensed and Consolidated Balance Sheets

  

2

 

 

Condensed and Consolidated Statement of Equity

  

3

 

 

Condensed and Consolidated Statements of Cash Flows

  

4

 

 

Notes to Condensed and Consolidated Financial Statements

  

5

 

 

Note 1—Business Overview and Summary of Significant Accounting Policies

  

5

 

 

Note 2—Earnings Per Share (EPS)

  

7

 

 

Note 3—Scitor Acquisition

  

8

 

 

Note 4—Goodwill and Intangible Assets

  

10

 

 

Note 5—Stock-Based Compensation

  

10

 

 

Note 6—Income Taxes

  

11

 

 

Note 7—Debt Obligations

  

11

 

 

Note 8—Derivative Instruments Designated as Cash Flow Hedges

  

13

 

 

Note 9—Changes in Accumulated Other Comprehensive Loss by Component

  

14

 

 

Note 10—Operating Leases

 

15

 

 

Note 11—Legal Proceedings and Other Commitments and Contingencies

  

15

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

18

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  

26

 

 

 

Item 4

 

Controls and Procedures

  

27

 

 

 

Part II

 

Other Information

  

 

 

 

 

Item 1

 

Legal Proceedings

  

28

 

 

 

Item 1A

 

Risk Factors

  

28

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

28

 

 

 

Item 3

 

Defaults Upon Senior Securities

  

28

 

 

 

Item 4

 

Mine Safety Disclosures

  

28

 

 

 

Item 5

 

Other Information

  

29

 

 

 

Item 6

 

Exhibits

  

29

 

 

 

 

 

Signatures

  

30

 

 

 


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 30,

2015

 

 

October 31,

2014

 

 

October 30,

2015

 

 

October 31,

2014

 

 

 

(in millions, except per share amounts)

 

Revenues

 

$

1,129

 

 

$

993

 

 

$

3,216

 

 

$

2,894

 

Revenues performed by former Parent (Note 1)

 

 

7

 

 

 

11

 

 

 

28

 

 

 

39

 

Total revenues

 

 

1,136

 

 

 

1,004

 

 

 

3,244

 

 

 

2,933

 

Cost of revenues

 

 

1,023

 

 

 

906

 

 

 

2,911

 

 

 

2,645

 

Cost of revenues performed by former Parent (Note 1)

 

 

7

 

 

 

11

 

 

 

28

 

 

 

39

 

Total cost of revenues

 

 

1,030

 

 

 

917

 

 

 

2,939

 

 

 

2,684

 

Selling, general and administrative expenses

 

 

41

 

 

 

24

 

 

 

116

 

 

 

68

 

Acquisition and integration costs (Note 3)

 

 

1

 

 

 

-

 

 

 

16

 

 

 

-

 

Operating income

 

 

64

 

 

 

63

 

 

 

173

 

 

 

181

 

Interest expense

 

 

14

 

 

 

4

 

 

 

31

 

 

 

13

 

Income before income taxes

 

 

50

 

 

 

59

 

 

 

142

 

 

 

168

 

Provision for income taxes (Note 6)

 

 

(16

)

 

 

(22

)

 

 

(53

)

 

 

(63

)

Net income

 

$

34

 

 

$

37

 

 

$

89

 

 

$

105

 

Other comprehensive loss, net of tax (Note 9)

 

 

(2

)

 

 

(1

)

 

 

(1

)

 

 

-

 

Comprehensive income

 

$

32

 

 

$

36

 

 

$

88

 

 

$

105

 

Earnings per share (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

 

$

0.80

 

 

$

1.94

 

 

$

2.22

 

Diluted

 

$

0.72

 

 

$

0.77

 

 

$

1.87

 

 

$

2.15

 

Cash dividends declared and paid per share

 

$

0.31

 

 

$

0.28

 

 

$

0.90

 

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-1-


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

October 30,

2015

 

 

January 30,

2015

 

 

 

(in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

184

 

 

$

301

 

Receivables, net

 

 

674

 

 

 

544

 

Inventory, prepaid expenses and other current assets

 

 

125

 

 

 

97

 

Total current assets

 

 

983

 

 

 

942

 

Goodwill

 

 

860

 

 

 

379

 

Intangible assets, net (Note 4)

 

 

234

 

 

 

2

 

Property, plant, and equipment (net of accumulated depreciation of $109 million and $106 million at October 30, 2015 and January 30, 2015, respectively)

 

 

74

 

 

 

59

 

Other assets

 

 

25

 

 

 

13

 

Total assets

 

$

2,176

 

 

$

1,395

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

442

 

 

$

365

 

Accrued payroll and employee benefits

 

 

173

 

 

 

155

 

Long-term debt, current portion (Note 7)

 

 

67

 

 

 

31

 

Other current liabilities

 

 

22

 

 

 

25

 

Total current liabilities

 

 

704

 

 

 

576

 

Long-term debt, net of current portion (Note 7)

 

 

1,045

 

 

 

455

 

Other long-term liabilities

 

 

35

 

 

 

19

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $.0001 par value, 1 billion shares authorized, 46 million shares issued and outstanding as of October 30, 2015 and January 30, 2015

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

237

 

 

 

234

 

Retained earnings

 

 

161

 

 

 

116

 

Accumulated other comprehensive loss (Note 9)

 

 

(6

)

 

 

(5

)

Total equity

 

 

392

 

 

 

345

 

Total liabilities and equity

 

$

2,176

 

 

$

1,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-2-


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

 

 

 

Shares of

common

stock

 

 

Additional

paid-in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

loss

 

 

Total

 

 

 

(in millions)

 

Balance at January 30, 2015

 

 

46

 

 

$

234

 

 

$

116

 

 

$

(5

)

 

$

345

 

Net income

 

 

-

 

 

 

-

 

 

 

89

 

 

 

-

 

 

 

89

 

Issuances of stock

 

 

1

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

6

 

Other comprehensive loss, net of tax (Note 9)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

Cash dividends of $0.90 per share

 

 

-

 

 

 

-

 

 

 

(44

)

 

 

-

 

 

 

(44

)

Stock-based compensation

 

 

-

 

 

 

16

 

 

 

-

 

 

 

-

 

 

 

16

 

Income tax benefits from stock-based compensation

 

 

-

 

 

 

9

 

 

 

-

 

 

 

-

 

 

 

9

 

Repurchases of stock

 

 

(1

)

 

 

(28

)

 

 

-

 

 

 

-

 

 

 

(28

)

Balance at October 30, 2015

 

 

46

 

 

$

237

 

 

$

161

 

 

$

(6

)

 

$

392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-3-


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

Nine Months Ended

 

 

 

October 30,

2015

 

 

October 31,

2014

 

 

 

(in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

89

 

 

$

105

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

42

 

 

 

16

 

Stock-based compensation expense

 

 

25

 

 

 

26

 

Excess tax benefits from stock-based compensation

 

 

(9

)

 

 

(2

)

Increase (decrease) resulting from changes in operating assets and liabilities net of the effect of the acquisition:

 

 

 

 

 

 

 

 

Receivables

 

 

(44

)

 

 

(8

)

Inventory, prepaid expenses and other current assets

 

 

(5

)

 

 

32

 

Other assets

 

 

1

 

 

 

-

 

Accounts payable and accrued liabilities

 

 

36

 

 

 

7

 

Income taxes payable

 

 

-

 

 

 

6

 

Accrued payroll and employee benefits

 

 

(15

)

 

 

(3

)

Other long-term liabilities

 

 

(2

)

 

 

2

 

Total cash flows provided by operating activities

 

 

118

 

 

 

181

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Cash paid for acquisition, net of cash acquired

 

 

(764

)

 

 

-

 

Change in restricted cash

 

 

(16

)

 

 

-

 

Expenditures for property, plant and equipment

 

 

(11

)

 

 

(15

)

Total cash flows used in investing activities

 

 

(791

)

 

 

(15

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

670

 

 

 

-

 

Dividend payments to stockholders

 

 

(41

)

 

 

(40

)

Principal payments on borrowings

 

 

(29

)

 

 

(7

)

Issuances of stock

 

 

3

 

 

 

2

 

Stock repurchased and retired or withheld for taxes on equity awards

 

 

(36

)

 

 

(123

)

Excess tax benefits from stock-based compensation

 

 

9

 

 

 

2

 

Disbursements for obligations assumed from Scitor acquisition

 

 

(3

)

 

 

-

 

Deferred financing costs

 

 

(17

)

 

 

-

 

Total cash flows provided by (used in) financing activities

 

 

556

 

 

 

(166

)

Total decrease in cash and cash equivalents

 

 

(117

)

 

 

-

 

Cash and cash equivalents at beginning of period

 

 

301

 

 

 

254

 

Cash and cash equivalents at end of period

 

$

184

 

 

$

254

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-4-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

Overview

Description of Business. Science Applications International Corporation (collectively, with its consolidated subsidiaries, the “Company”) is a leading provider of technical, engineering and enterprise information technology (IT) services primarily to the U.S. government. The Company provides systems engineering and integration services for large, complex projects and offers a broad range of services with a targeted emphasis on higher-end, differentiated technology services. Each of the Company’s operating segments is focused on providing the Company’s comprehensive technical and enterprise IT service offerings to its respective customer base. The Company’s operating segments have been aggregated into one reporting segment for financial reporting purposes.

Acquisition of Scitor Holdings, Inc. On May 4, 2015, the Company acquired 100% of privately held Scitor Holdings, Inc. (Scitor), a leading provider of technical services primarily to the intelligence community. As discussed in Note 3, the Company funded the transaction from increased borrowings and cash on hand.

Separation from Former Parent. The Company commenced its operations on September 27, 2013 (the Distribution Date) following completion of a tax-free spin-off transaction from its former parent company, Leidos Holdings, Inc. (formerly SAIC, Inc., collectively with its consolidated subsidiaries, “former Parent”). In the spin-off transaction, former Parent’s technical, engineering and enterprise IT services business was separated (the separation) into an independent, publicly traded company named Science Applications International Corporation (formerly SAIC Gemini, Inc.).

Principles of Consolidation and Basis of Presentation

The accompanying financial information has been 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, statement 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, which consist of normal recurring 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 January 30, 2015.

Revenues and Cost of Revenues Performed by Former Parent

As a part of former Parent, the Company entered into contracts jointly with former Parent and continues to be a party to contracts jointly performed by former Parent and the Company following the separation. These transactions are recorded at revenue equal to cost to reflect that no additional profit is charged to the customer for work performed by former Parent and are presented separately in the condensed and consolidated statements of income and comprehensive income.

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. Management evaluates these estimates and assumptions on an ongoing basis, including those related to: allowances for doubtful accounts; depreciation and amortization; leases; inventories; income taxes; estimated profitability of long-term contracts; bonus and other incentive compensation; stock-based compensation expense; fair value of financial instruments; accrued liabilities; contingencies and litigation; the fair value of assets and liabilities recorded in connection with business combinations (goodwill and other intangible assets); asset valuation allowances and impairments, among others. 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.

-5-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Changes in estimates of revenues, cost of revenues or profits related to contracts accounted for using the cost-to-cost percentage-of-completion method of accounting are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. If it is determined that a loss will result from the performance of a contract, the entire amount of the estimable future loss is charged against income in the period the loss is identified. Changes in these estimates can routinely occur over the contract performance period for a variety of reasons, including changes in contract scope, changes in contract cost estimates due to unanticipated cost growth or reassessments of risks impacting costs, changes in estimated incentive or award fees, and performance being better or worse than previously estimated. Aggregate changes in contract estimates increased operating income by $1 million ($0.02 per diluted share) and $9 million ($0.12 per diluted share) for the three and nine months ended October 30, 2015, respectively, and increased operating income by $4 million ($0.05 per diluted share) and $9 million ($0.12 per diluted share) for the three and nine months ended October 31, 2014, respectively.

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 2015 began on February 1, 2014 and ended on January 30, 2015, while fiscal 2016 began on January 31, 2015 and ends on January 29, 2016. The third quarter of fiscal 2015 ended on October 31, 2014, while the third quarter of fiscal 2016 ended on October 30, 2015.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash in banks and highly liquid instruments, primarily consisting of investments in institutional money market funds which invest primarily in short-term debt securities. The Company does not invest in high yield or high risk securities. The cash in bank accounts at times may exceed federally insured limits.

Restricted Cash

Restricted cash consists of cash on deposit in rabbi trusts that are contractually restricted from use in operations, but are subject to future claims of creditors. At October 30, 2015, $10 million of restricted cash was held in rabbi trust accounts restricted to fund future payment obligations through April 2017 assumed in connection with the acquisition of Scitor, of which $3 million is presented in other assets and $7 million in inventory, prepaid expenses and other current assets in the condensed and consolidated balance sheets. In addition, $6 million of restricted cash is held in rabbi trusts to fund obligations in connection with deferred compensation plans, and is included in other assets on the condensed and consolidated balance sheets.

Operating Cycle

The Company’s operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. Contract-related assets and liabilities are classified as current assets and current liabilities.

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 (loss) income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized immediately in earnings.

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 or canceled. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges.

-6-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Section 605, Revenue Recognition and some cost guidance included in ASC Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The ASU was originally scheduled to become effective for the Company beginning in the first quarter of fiscal 2018, using one of two retrospective methods of adoption. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which resulted in a one-year deferral of the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with an option to early adopt the standard on the original effective date. Early adoption prior to the original effective date is not permitted. The Company has neither selected a method for adoption nor determined the potential effects on its financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The Company early adopted ASU 2015-03 as of the end of the second quarter of fiscal 2016, and applied its provisions retrospectively. This resulted in reclassification of $1 million of the current portion of unamortized debt issuance costs related to the Company’s Term Loan Facility from inventory, prepaid expenses and other current assets to the current portion of long-term debt, and $2 million of the non-current portion of unamortized debt issuance costs from other assets to long-term debt, net of current portion, within the condensed and consolidated balance sheets as of January 30, 2015. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on the Company’s financial statements.

Other Accounting Standards Updates effective after October 30, 2015 are not expected to have a material effect on the Company’s financial statements.

Note 2—Earnings Per Share (EPS):

Basic EPS is computed by dividing net income 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.

A reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS was:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 30,

2015

 

 

October 31,

2014

 

 

October 30,

2015

 

 

October 31,

2014

 

 

 

(in millions)

 

Basic weighted-average number of shares outstanding

 

 

46.0

 

 

 

46.5

 

 

 

45.9

 

 

 

47.4

 

Dilutive common share equivalents - stock options and other stock-based awards

 

 

1.4

 

 

 

1.7

 

 

 

1.6

 

 

 

1.4

 

Diluted weighted-average number of shares outstanding

 

 

47.4

 

 

 

48.2

 

 

 

47.5

 

 

 

48.8

 

 

-7-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following stock-based awards were excluded from the weighted-average number of shares outstanding used to compute diluted EPS:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 30,

2015

 

 

October 31,

2014

 

 

October 30,

2015

 

 

October 31,

2014

 

 

 

(in millions)

 

Antidilutive stock options excluded

 

 

0.3

 

 

 

-

 

 

 

0.3

 

 

 

0.4

 

Note 3—Scitor Acquisition:

On May 4, 2015 the Company completed the acquisition of Scitor, a leading global provider of technical services to the U.S. intelligence community and other U.S. government customers. The acquisition was funded from cash on hand and, as discussed in Note 7, increased borrowings.

This strategic acquisition enables the Company to gain access to new customers primarily in the intelligence community, and leverage capabilities of the combined company to better serve the Company’s customers. The acquisition increases the number of the Company’s employees by approximately 1,500, many of whom hold security clearances necessary to perform work on classified contracts.

Purchase consideration paid to acquire Scitor was $764 million (net of cash acquired), including $43 million which was deposited to escrow accounts pending final determination of the working capital adjustment and to secure the sellers’ indemnification obligations. Any remaining amount in escrow at the end of the indemnification period will be distributed to the sellers. The working capital adjustment was finalized in August 2015 and $3 million of the amount deposited to escrow was released to the sellers.

The purchase price was allocated among assets acquired and liabilities assumed at fair value based on the best available information, with the excess purchase price recorded as goodwill. The Company’s allocation of the purchase price is subject to change on receipt of additional information, including, but not limited to, the finalization of intangible asset valuations and the Company’s review of Scitor’s historical government accounting practices that could potentially result in the recognition of additional liabilities on Scitor’s opening balance sheet and an adjustment to goodwill. The Company expects to have sufficient information available to resolve these items by the first quarter of fiscal 2017. The Company recorded purchase accounting entries on a preliminary basis as follows:

 

 

 

 

 

(in millions)

 

Cash and cash equivalents

 

 

 

$

39

 

Accounts receivable

 

 

 

 

86

 

Deferred income taxes, current

 

 

 

 

6

 

Prepaid and other current assets

 

 

 

 

7

 

Deferred income taxes, non-current

 

 

 

 

4

 

Equipment and leasehold improvements

 

 

 

 

21

 

Intangible assets

 

 

 

 

255

 

Goodwill

 

 

 

 

481

 

Other noncurrent assets

 

 

 

 

1

 

Total assets acquired

 

 

 

 

900

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

 

44

 

Accrued payroll and employee benefits

 

 

 

 

35

 

Other noncurrent liabilities

 

 

 

 

18

 

Total liabilities assumed

 

 

 

 

97

 

Net assets acquired

 

 

 

$

803

 

Amount of tax deductible goodwill

 

 

 

$

136

 

As discussed in Note 6, the Company inherited Scitor’s historical tax basis in deductible goodwill, certain other intangible assets, and net operating loss carryforwards.

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Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The intangible assets included above consist of the following:

 

 

Amount

 

 

Weighted-Average Amortization Period

 

 

(in millions)

 

 

(in years)

Backlog

 

$

14

 

 

1

Trade name

 

 

9

 

 

2

Customer relationships

 

 

232

 

 

12

Total intangible assets

 

$

255

 

 

11

 

The value of the backlog intangible asset was estimated from funded backlog as of the acquisition date. The customer relationships intangible asset consists of unfunded backlog as of the acquisition date and estimated future renewals. The backlog and customer relationships intangible assets were valued using the excess earnings method (income approach) in which the value is derived from an estimation of the after-tax cash flows specifically attributable to backlog and customer relationships. The analysis included assumptions for projections of revenues and expenses, contributory asset charges, discount rates, and a tax amortization benefit.

The trade name intangible asset was valued using the relief from royalty method (income approach) in which the value is derived by estimation of the after-tax royalty savings attributable to owning the assets. Assumptions in this analysis included projections of revenues, royalty rates representing costs avoided due to ownership of the assets, discount rates, and a tax amortization benefit.

The Company incurred $34 million in acquisition-related costs, including $17 million of deferred financing fees that will be amortized to interest expense using the interest method. Acquisition-related expenses were $10 million for the nine months ended October 30, 2015 and are included in acquisition and integration costs on the condensed and consolidated statements of income and comprehensive income. There were no acquisition-related expenses for the three months ended October 30, 2015. $1 million of acquisition-related expenses were incurred in the fourth quarter of fiscal 2015. For the three and nine months ended October 30, 2015, the Company also incurred $1 million and $6 million, respectively, of costs in connection with the integration of Scitor, primarily for strategic consulting services, vacant space reserves, severance costs, and other integration-related costs.

The amount of Scitor’s revenue included in the condensed and consolidated statements of income and comprehensive income was $148 million and $295 million for the three and nine months ended October 30, 2015, respectively, and the amount of net income included in the condensed and consolidated statements of income and comprehensive income was $3 million and $5 million for the three and nine months ended October 30, 2015, respectively.

The following unaudited pro forma financial information presents the combined results of operations for Scitor and the Company for the three and nine months ended October 30, 2015 and October 31, 2014, respectively:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 30,

2015

 

 

October 31,

2014

 

 

October 30,

2015

 

 

October 31,

2014

 

 

 

(in millions, except per share amounts)

 

Total revenues

 

$

1,136

 

 

$

1,162

 

 

$

3,392

 

 

$

3,399

 

Net income

 

$

37

 

 

$

35

 

 

$

105

 

 

$

87

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.81

 

 

$

0.75

 

 

$

2.29

 

 

$

1.84

 

Diluted

 

$

0.78

 

 

$

0.72

 

 

$

2.21

 

 

$

1.78

 

The unaudited pro forma combined financial information presented above has been prepared from historical financial statements that have been adjusted to give effect to the acquisition of Scitor as though it had occurred on February 1, 2014. They include adjustments for intangible asset amortization; interest expense and debt issuance costs on long-term debt; acquisition, integration, and other transaction costs; and the elimination of intercompany revenue and costs.

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Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 4Goodwill and Intangible Assets:

Goodwill

Goodwill had a carrying value of $860 million and $379 million as of October 30, 2015 and January 30, 2015, respectively. Goodwill increased by $481 million during the nine months ended October 30, 2015 due to the acquisition of Scitor. There were no impairments of goodwill during the periods presented.

Intangible Assets

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

 

 

 

October 30, 2015

 

 

January 30, 2015

 

 

 

Gross carrying value

 

 

Accumulated amortization

 

 

Net carrying value

 

 

Gross carrying value

 

 

Accumulated amortization

 

 

Net carrying value

 

 

 

(in millions)

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

238

 

 

$

(15

)

 

$

223

 

 

$

10

 

 

$

(8

)

 

$

2

 

Trade name

 

 

9

 

 

 

(3

)

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

Backlog

 

 

14

 

 

 

(9

)

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

Software technology

 

 

6

 

 

 

(6

)

 

 

-

 

 

 

25

 

 

 

(25

)

 

 

-

 

Total intangible assets

 

$

267

 

 

$

(33

)

 

$

234

 

 

$

35

 

 

$

(33

)

 

$

2

 

Intangible assets with a gross carrying value of $23 million became fully amortized during the three months ended October 30, 2015 and are no longer reflected in the gross carrying value after becoming fully amortized. Amortization expense related to intangible assets was $12 million and $23 million for the three and nine months ended October 30, 2015, respectively, and zero and $1 million for the three and nine months ended October 31, 2014, respectively. There were no intangible asset impairment losses during the periods presented.

The estimated annual amortization expense related to intangible assets as of October 30, 2015 was as follows:

 

Fiscal Year Ending

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Remainder of 2016

 

 

 

 

 

 

 

 

 

 

 

$

10

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

26

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

20

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

20

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

20

 

2021 and thereafter

 

 

 

 

 

 

 

 

 

 

 

 

138

 

Total

 

 

 

 

 

 

 

 

 

 

 

$

234

 

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

Note 5—Stock-Based Compensation:

Stock Options

During the nine months ended October 30, 2015, the Company granted certain employees 0.3 million stock options with a weighted-average exercise price and weighted-average grant date fair value of $52.18 and $11.76, respectively. These options will expire on the seventh anniversary of the grant date and will vest ratably on each anniversary of the grant date over a three-year period.

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Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Restricted Stock Units (RSUs)

During the nine months ended October 30, 2015, the Company granted certain employees 0.5 million RSUs with a weighted-average grant date fair value of $51.97, which will vest ratably on each anniversary of the grant date over a four-year period.

Performance Shares

During the nine months ended October 30, 2015, the Company granted to certain employees 0.1 million performance share awards with a grant date fair value of $52.11 per award. These awards will cliff vest on the third anniversary of the grant date, subject to meeting the minimum service requirements and the achievement of certain annual and cumulative financial metrics of the Company’s performance, with the number of shares ultimately issued, if any, ranging up to 150% of the performance share awards granted.

Note 6—Income Taxes:

As of October 30, 2015, the Company evaluated its tax positions and determined that it does not have a liability for any uncertainty in income taxes. The tax authorities, however, may determine that the Company owes additional taxes upon review of the Company’s tax filings.

Provision for income taxes as a percentage of income before income taxes was 32.1% and 37.5% for the three and nine months ended October 30, 2015, respectively, and 37.3% and 37.5% for the three and nine months ended October 31, 2014, respectively. Tax rates for the three months ended October 30, 2015 were lower than for the three months ended October 31, 2014 primarily due to the identification of additional expenditures that qualified for the manufacturers’ tax deduction and the federal research tax credit in prior fiscal years. Tax rates for the nine months ended October 30, 2015 remained consistent with tax rates for the nine months ended October 31, 2014 due to higher permanent tax benefits offset by non-deductible acquisition costs in fiscal 2016. Tax rates for the period ended October 30, 2015 were lower than the combined federal and state statutory rates due to higher permanent tax benefits.

On May 4, 2015, the Company acquired all of Scitor’s stock in a transaction taxable to the selling shareholders. The Company inherited Scitor’s historical tax basis in deductible goodwill, certain other intangible assets, and operating loss carryforwards. The tax deductible goodwill was $136 million and the tax deductible identified intangible assets were $163 million. The Company inherited a federal and state net operating loss of $89 million subject to Internal Revenue Service Section 382 limitations. The Company expects to utilize these losses over the next 6 years.

Note 7—Debt Obligations:

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

 

 

 

October 30, 2015

 

 

January 30, 2015

 

 

 

Stated interest rate

 

 

Effective interest rate

 

 

Principal

 

 

Unamortized Debt Issuance Costs

 

 

Net

 

 

Principal

 

 

Unamortized Debt Issuance Costs

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Term loan A facility due September 2018

 

 

3.00

%

 

 

3.17

%

 

$

563

 

 

$

(2

)

 

$

561

 

 

$

489

 

 

$

(3

)

 

$

486

 

Term loan B facility due May 2022

 

 

3.75

%

 

 

4.26

%

 

 

567

 

 

 

(16

)

 

 

551

 

 

 

-

 

 

 

-

 

 

 

-

 

Total long-term debt

 

 

 

 

 

 

 

 

 

$

1,130

 

 

$

(18

)

 

$

1,112

 

 

$

489

 

 

$

(3

)

 

$

486

 

Less current portion

 

 

 

 

 

 

 

 

 

 

70

 

 

 

(3

)

 

 

67

 

 

 

32

 

 

 

(1

)

 

 

31

 

Total long-term debt, net of current portion

 

 

 

 

 

 

 

 

 

$

1,060

 

 

$

(15

)

 

$

1,045

 

 

$

457

 

 

$

(2

)

 

$

455

 

 


-11-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As of October 30, 2015, the Company has a $1.3 billion credit facility (the Credit Facility) between the Company, as borrower, and Citibank, N.A. (Citibank), as administrative agent, which consists of a $200 million secured revolving credit facility (the Revolving Credit Facility), a $563 million secured term facility (Term Loan A Facility), and a $567 million secured term facility (Term Loan B Facility) (together, the Term Loan Facilities). The Revolving Credit Facility capacity is available to the Company through September 2018, but no draws have been made. Borrowings under the Revolving Credit Facility must be repaid in full by September 2018.

The Term Loan A Facility was funded in September 2013 in an initial aggregate principal amount of $500 million (Initial Term Loan A Facility). In order to fund the Scitor acquisition and related transaction costs, on May 4, 2015, through an amendment to the Credit Facility (Second Amended Credit Agreement), the Term Loan A Facility principal amount was increased by $100 million (Incremental Term Loan A); the Term Loan B Facility was funded with an initial aggregate principal amount of $570 million; and the prior existing Term Loan A and Revolving Credit Facility were converted from unsecured to secured facilities. Any obligations under the Credit Facility are secured by liens on substantially all of the assets of the Company and its subsidiaries.

Borrowings under the Credit Facilities bear a variable rate of interest based on Eurocurrency Rate or Base Rate, plus applicable margin. The applicable margin with respect to Term Loan A Facility and borrowings under the Revolving Credit Facility range from 1.50% to 2.75% for Eurocurrency Rate loans, and 0.50% to 1.75% for Base Rate loans. Interest rate margins for the Term Loan B Facility are 3.00%, subject to a 0.75% floor for Eurocurrency Rate loans or 2.00% for Base Rate loans. The Company also pays a commitment fee with respect to undrawn amounts under the Revolving Credit Facility ranging from 0.25% to 0.50%. Except for the Term Loan B Facility, the applicable margin and commitment fees will vary based on the Company’s leverage ratio.

Interest payments under the terms of the Second Amended Credit Agreement are due based on the type of loan selected. Interest in respect of Base Rate loans is payable quarterly in arrears on the last day of each calendar quarter. Interest in respect of Eurocurrency Rate loans is payable in arrears on the last day of the applicable interest period and every three months in the case of interest periods in excess of three months.

 

Initially funded as Base Rate loans, on May 7, 2015 the Company converted the Incremental Term Loan A and the Term Loan B Facility to the Eurocurrency Rate indexed to 1-month LIBOR and 3-month LIBOR, respectively. The interest period for Incremental Term Loan A is aligned with the Initial Term Loan A Facility, such that interest is due on the last business day of every month. Interest on the Term Loan B Facility is paid quarterly on the 7th of every August, November, February, and May.

 

The Term Loan A Facility principal under the Second Amended Credit Agreement is repaid quarterly on the last business day of each July, October, January, and April, commencing on July 31, 2015 in an amount equal to a specified percentage of the Term Loan A Facility aggregate principal amount outstanding as of May 4, 2015 (1.299% for July 31, 2015; 1.948% for October 31, 2015 to July 31, 2016; and 2.597% for October 31, 2016 until the Term Loan A Facility matures). Prior to the Second Amended Credit Agreement, the Company repaid principal on the Initial Term Loan Facility in quarterly installments of $6 million commencing October 2014 through April 2015. The Term Loan B Facility principal amortizes quarterly in an amount equal to 0.25% of the initial aggregate principal amount of Term Loan B Facility plus accrued interest on the amount of principal repaid, which is payable on each October 31, January 31, April 30, and July 31 until it matures. Principal amortization began July 31, 2015. The scheduled principal repayments for Term Loan A, Term Loan B, or both, may be further reduced or eliminated by voluntary or mandatory principal prepayments. Voluntary principal prepayments may be applied to either or both loans at the Company’s direction. Mandatory principal prepayments are allocated to Term Loan A and Term Loan B on a pro rata basis and reduce the remaining scheduled principal installments for each facility.

The Credit Facility requires the maintenance of a Senior Secured Leverage Ratio (as defined in the Second Amended Credit Agreement) of not greater than 4.00 to 1.00 until July 31, 2016, and not greater than 3.75 to 1.00 thereafter, and requires the Company to make an annual prepayment as a portion of its Excess Cash Flow (as defined in the Second Amended Credit Agreement). As of October 30, 2015, the current portion of long-term debt includes estimated mandatory prepayments for Excess Cash Flow of $18 million due in the first quarter of fiscal 2017.


-12-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Credit Facility contains certain restrictive covenants applicable to the Company and its subsidiaries, which include limitations on the ability to merge or consolidate with other entities; enter into property sale and lease-back transactions and pay dividends or make stock repurchases under certain leverage ratios. The Credit Facility also contains certain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events, nonpayment, cross-defaults to other debt, breach of specified covenants, ERISA events, material monetary judgments, change of control events and the material inaccuracy of the Company’s representations and warranties. If an event of default occurs and is continuing under the Credit Facility, the administrative agent shall at the request of the required lenders or may with the consent of the required lenders terminate the commitments thereunder, declare amounts outstanding (including principal and accrued interest and fees) payable immediately, and enforce any and all rights and interests. As of October 30, 2015 the Company was in compliance with the covenants under its Credit Facility.

Maturities of long-term debt as of October 30, 2015 are:

Fiscal Year Ending

 

 

 

 

 

 

 

Total (1)

 

 

 

 

 

 

 

 

 

(in millions)

 

Remainder of fiscal 2016

 

 

 

 

 

 

 

$

13

 

2017

 

 

 

 

 

 

 

 

59

 

2018

 

 

 

 

 

 

 

 

66

 

2019

 

 

 

 

 

 

 

 

443

 

2020

 

 

 

 

 

 

 

 

6

 

2021 and thereafter

 

 

 

 

 

 

 

 

543

 

Total principal payments

 

 

 

 

 

 

 

$

1,130

 

(1)

Amounts exclude the effect from estimated mandatory prepayments for Excess Cash Flow.

As of October 30, 2015 and January 30, 2015, 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.

Note 8—Derivative Instruments Designated as Cash Flow Hedges:

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Fair Value (1) at

 

 

 

Notional Amount at October 30, 2015

 

 

Pay Fixed Rate

 

 

Receive Variable Rate

 

Settlement and Termination

 

October 30,

2015

 

 

January 30, 2015

 

 

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