saic-10q_20170804.htm

 

 

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 August 4, 2017

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

 

  

 

12010 Sunset Hills Road, Reston, VA 20190

  

 

  

 

 

  

 

703-676-4300

  

 

  

 

 

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 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      No              

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 August 25, 2017 was as follows:

43,240,542 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

  

8

 

 

Note 3—Stock-Based Compensation

  

8

 

 

Note 4—Income Taxes

  

9

 

 

Note 5—Debt Obligations

  

9

 

 

Note 6—Derivative Instruments Designated as Cash Flow Hedges

  

10

 

 

Note 7—Changes in Accumulated Other Comprehensive Loss by Component

  

11

 

 

Note 8—Legal Proceedings and Other Commitments and Contingencies

  

11

 

 

 

Item 2

 

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

  

14

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  

22

 

 

 

Item 4

 

Controls and Procedures

  

22

 

 

 

Part II

 

Other Information

  

 

 

 

 

Item 1

 

Legal Proceedings

  

23

 

 

 

Item 1A

 

Risk Factors

  

23

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

23

 

 

 

Item 3

 

Defaults Upon Senior Securities

  

23

 

 

 

Item 4

 

Mine Safety Disclosures

  

23

 

 

 

Item 5

 

Other Information

  

23

 

 

 

Item 6

 

Exhibits

  

24

 

 

 

 

 

Signatures

  

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-i-


Table of Contents

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

 

 

Six Months Ended

 

 

 

August 4,

2017

 

 

August 5,

2016

 

 

August 4,

2017

 

 

August 5,

2016

 

 

 

(in millions, except per share amounts)

 

Revenues

 

$

1,078

 

 

$

1,095

 

 

$

2,181

 

 

$

2,310

 

Cost of revenues

 

 

979

 

 

 

986

 

 

 

1,986

 

 

 

2,084

 

Selling, general and administrative expenses

 

 

40

 

 

 

39

 

 

 

73

 

 

 

90

 

Operating income

 

 

59

 

 

 

70

 

 

 

122

 

 

 

136

 

Interest expense

 

 

10

 

 

 

12

 

 

 

21

 

 

 

26

 

Income before income taxes

 

 

49

 

 

 

58

 

 

 

101

 

 

 

110

 

Provision for income taxes (Note 4)

 

 

(13

)

 

 

(21

)

 

 

(16

)

 

 

(40

)

Net income

 

$

36

 

 

$

37

 

 

$

85

 

 

$

70

 

Other comprehensive income, net of tax (Note 7)

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

Comprehensive income

 

$

36

 

 

$

37

 

 

$

86

 

 

$

70

 

Earnings per share (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.83

 

 

$

0.83

 

 

$

1.95

 

 

$

1.56

 

Diluted

 

$

0.80

 

 

$

0.81

 

 

$

1.88

 

 

$

1.52

 

Cash dividends declared and paid per share

 

$

0.31

 

 

$

0.31

 

 

$

0.62

 

 

$

0.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-1-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

August 4,

2017

 

 

February 3,

2017

 

 

 

(in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

140

 

 

$

210

 

Receivables, net

 

 

639

 

 

 

539

 

Inventory, prepaid expenses and other current assets

 

 

113

 

 

 

152

 

Total current assets

 

 

892

 

 

 

901

 

Goodwill

 

 

863

 

 

 

863

 

Intangible assets (net of accumulated amortization of $45 million and $40 million at August 4, 2017 and February 3, 2017, respectively)

 

 

189

 

 

 

200

 

Property, plant, and equipment (net of accumulated depreciation of $136 million and $126 million at August 4, 2017 and February 3, 2017, respectively)

 

 

57

 

 

 

60

 

Other assets

 

 

18

 

 

 

18

 

Total assets

 

$

2,019

 

 

$

2,042

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

420

 

 

$

432

 

Accrued payroll and employee benefits

 

 

156

 

 

 

158

 

Long-term debt, current portion (Note 5)

 

 

58

 

 

 

25

 

Total current liabilities

 

 

634

 

 

 

615

 

Long-term debt, net of current portion (Note 5)

 

 

1,006

 

 

 

1,022

 

Deferred income taxes

 

 

13

 

 

 

13

 

Other long-term liabilities

 

 

41

 

 

 

38

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $.0001 par value, 1 billion shares authorized, 44 million shares issued and outstanding as of August 4, 2017 and February 3, 2017

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

4

 

 

 

91

 

Retained earnings

 

 

322

 

 

 

265

 

Accumulated other comprehensive loss (Note 7)

 

 

(1

)

 

 

(2

)

Total equity

 

 

325

 

 

 

354

 

Total liabilities and equity

 

$

2,019

 

 

$

2,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

-2-


Table of Contents

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 February 3, 2017

 

 

44

 

 

$

91

 

 

$

265

 

 

$

(2

)

 

$

354

 

Net income

 

 

-

 

 

 

-

 

 

 

85

 

 

 

-

 

 

 

85

 

Issuances of stock

 

 

1

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

4

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

Cash dividends of $0.62 per share

 

 

-

 

 

 

-

 

 

 

(28

)

 

 

-

 

 

 

(28

)

Stock-based compensation

 

 

-

 

 

 

(13

)

 

 

-

 

 

 

-

 

 

 

(13

)

Repurchases of stock

 

 

(1

)

 

 

(78

)

 

 

-

 

 

 

-

 

 

 

(78

)

Balance at August 4, 2017

 

 

44

 

 

$

4

 

 

$

322

 

 

$

(1

)

 

$

325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed and consolidated financial statements.

 

 

-3-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

Six Months Ended

 

 

 

August 4,

2017

 

 

August 5,

2016

 

 

 

(in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

85

 

 

$

70

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22

 

 

 

28

 

Stock-based compensation expense

 

 

15

 

 

 

18

 

Excess tax benefits from stock-based compensation

 

 

-

 

 

 

(9

)

Increase (decrease) resulting from changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(100

)

 

 

(20

)

Inventory, prepaid expenses and other current assets

 

 

38

 

 

 

(19

)

Other assets

 

 

-

 

 

 

(1

)

Accounts payable and accrued liabilities

 

 

(8

)

 

 

(5

)

Accrued payroll and employee benefits

 

 

(2

)

 

 

(4

)

Other long-term liabilities

 

 

3

 

 

 

-

 

Net cash provided by operating activities

 

 

53

 

 

 

58

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant, and equipment

 

 

(7

)

 

 

(8

)

Net cash used in investing activities

 

 

(7

)

 

 

(8

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividend payments to stockholders

 

 

(28

)

 

 

(27

)

Principal payments on borrowings

 

 

(9

)

 

 

(26

)

Issuances of stock

 

 

3

 

 

 

2

 

Stock repurchased and retired or withheld for taxes on equity awards

 

 

(105

)

 

 

(88

)

Excess tax benefits from stock-based compensation

 

 

-

 

 

 

9

 

Disbursements for obligations assumed from Scitor acquisition

 

 

(2

)

 

 

(3

)

Proceeds from borrowings

 

 

25

 

 

 

-

 

Net cash used in financing activities

 

 

(116

)

 

 

(133

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(70

)

 

 

(83

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

218

 

 

 

209

 

Cash, cash equivalents and restricted cash at end of period (Note 1)

 

$

148

 

 

$

126

 

 

 

 

 

 

 

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

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 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. The Company is organized as a matrix comprised of five customer facing organizations supported by several service line organizations. Each of the Company’s customer facing organizations is focused on providing the Company’s comprehensive technical and enterprise IT service offerings to one or more agencies of the U.S federal government. During the quarter, the Company made operational and organizational changes to its management reporting structure resulting in the identification of a single operating and reportable segment.

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 February 3, 2017.

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, 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.

Changes in estimates of revenues, cost of revenues or profits related to contracts accounted for using the cost-to-cost and efforts expended methods of percentage-of-completion accounting 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 routinely occur over the contract performance period for a variety of reasons, which include: 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 ($0.01 per diluted share) for the three months ended August 4, 2017, decreased operating income by $4 million ($0.06 per diluted share) for the six months ended August 4, 2017, and increased operating income by $7 million ($0.10 per diluted share) and $13 million ($0.18 per diluted share) for the three and six months ended August 5, 2016, respectively.

-5-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 2017 began on January 30, 2016 and ended on February 3, 2017, while fiscal 2018 began on February 4, 2017 and ends on February 2, 2018. The number of weeks for each quarter for fiscal 2018 and 2017 are as follows:

 

 

Fiscal 2018

 

 

Fiscal 2017

 

 

(weeks)

First Quarter

 

 

13

 

 

14

Second Quarter

 

 

13

 

 

13

Third Quarter

 

 

13

 

 

13

Fourth Quarter

 

 

13

 

 

13

Fiscal Year

 

 

52

 

 

53

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 6 for further discussion on the Company’s derivative instruments designated as cash flow hedges.

Cash, Cash Equivalents and Restricted cash

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

 

 

August 4,

2017

 

 

February 3,

2017

 

 

 

(in millions)

 

Cash and cash equivalents

 

 

140

 

 

 

210

 

Restricted cash included in inventory, prepaid expenses and other current assets

 

 

-

 

 

 

1

 

Restricted cash included in other assets

 

 

8

 

 

 

7

 

Cash, cash equivalents and restricted cash

 

$

148

 

 

$

218

 

-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 and some cost guidance included in the Accounting Standards Codification (ASC). 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. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, resulting in a one-year deferral of the effective date of ASU 2014-09, which will become effective for the Company in the first quarter of fiscal 2019, using one of two retrospective methods of adoption.

The Company intends to adopt the standard as of February 3, 2018, using the modified retrospective transition method. Upon adoption, the Company will recognize the cumulative effect of adopting this standard as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted, but the Company will maintain dual reporting for the year of initial application disclosing the effect of adoption.

The Company continues to evaluate the potential effects on its financial statements and is currently in the process of revising its accounting policies, business processes, systems, controls and procedures to conform to the new standard. The Company has not yet determined the potential impact from the future adoption of the new standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing lease accounting standards (Topic 840). Under the new guidance, a lessee will be required to recognize lease assets and lease liabilities for all leases with lease terms in excess of twelve months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as either a finance lease or operating lease. The criteria for distinction between a finance lease and an operating lease are substantially similar to existing lease guidance for capital leases and operating leases. Some changes to lessor accounting have been made to conform and align that guidance with the lessee guidance and other areas within GAAP, such as Revenue from Contracts with Customers (Topic 606). ASU 2016-02 becomes effective for the Company in the first quarter of fiscal 2020 and will be adopted using a modified retrospective approach. The Company has commenced the assessment phase of the project and is evaluating the impact on its financial statements from the future adoption of the standard.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which provides amendments to simplify several aspects of the accounting for share-based payment transactions. Among other requirements in the new standard, the ASU requires that an entity, (i) recognize excess tax benefits and deficiencies related to employee share-based payment transactions in the provision for income taxes, instead of in equity; (ii) classify excess tax benefits as an operating activity on the statement of cash flows, instead of the previous classification as a financing activity; (iii) classify all cash payments made to the taxing authorities on the employees’ behalf for withheld shares as financing activities on the statement of cash flows; and (iv) make a policy election to either estimate expected forfeitures or to account for them as they occur. The Company adopted the standard in the first quarter of fiscal 2018. As a result for the three and six months ended August 4, 2017, the Company recognized a $4 million and $20 million tax benefit, respectively, which is included in the provision for income taxes on the condensed and consolidated statements of income and comprehensive income and as an operating activity in the condensed and consolidated statement of cash flows. The Company will continue to classify cash paid for tax withholding purposes as a financing activity in the statement of cash flows and to estimate forfeitures rather than account for them as they occur.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company early adopted this new standard during the first quarter of fiscal 2018, which resulted in a $3 million reduction to cash flows from investing activities for the six months ended August 5, 2016. A reconciliation of cash, cash equivalents and restricted cash for each period presented is provided above under the heading “Cash, Cash Equivalents and Restricted Cash.”

Other Accounting Standards Updates effective after August 4, 2017 are not expected to have a material effect on the Company’s financial statements.

-7-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2—Earnings Per Share:

Basic earnings per share (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

 

 

Six Months Ended

 

 

 

August 4,

2017

 

 

August 5,

2016

 

 

August 4,

2017

 

 

August 5,

2016

 

 

 

(in millions)

 

Basic weighted-average number of shares outstanding

 

 

43.6

 

 

 

44.7

 

 

 

43.7

 

 

 

44.9

 

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

 

 

1.1

 

 

 

1.3

 

 

 

1.4

 

 

 

1.3

 

Diluted weighted-average number of shares outstanding

 

 

44.7

 

 

 

46.0

 

 

 

45.1

 

 

 

46.2

 

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 4,

2017

 

 

August 5,

2016

 

 

August 4,

2017

 

 

August 5,

2016

 

 

 

(in millions)

 

Antidilutive stock options excluded

 

 

0.2

 

 

 

0.3

 

 

 

0.2

 

 

 

0.5

 

 

Note 3—Stock-Based Compensation:

Stock Options

During the six months ended August 4, 2017, the Company granted certain employees 0.2 million stock options with a weighted-average exercise price and weighted-average grant date fair value of $73.36 and $16.34, 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.

Restricted Stock Units (RSUs)

During the six months ended August 4, 2017, the Company granted certain employees 0.4 million RSUs with a weighted-average grant date fair value of $72.99, which will vest ratably on each anniversary of the grant date over a four-year period.

Performance Shares

During the six months ended August 4, 2017, the Company granted to certain employees 0.1 million performance share awards with a grant date fair value of $72.91 per award. These awards will cliff vest at the end of the third fiscal year following 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 specified target shares.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 4—Income Taxes:

Provision for income taxes as a percentage of income before income taxes was 26.5% and 15.8% for the three and six months ended August 4, 2017, respectively, and 36.3% and 36.4% for the three and six months ended August 5, 2016, respectively. Tax rates were lower as compared to the same periods in the prior year primarily due to a $4 million and $20 million excess tax benefit recognized for the three and six months ended August 4, 2017, respectively, related to employee share-based compensation as a result of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, see “Accounting Standards Updates” in Note 1. Increased research and development credits in the current periods were offset by a decreased domestic manufacturing tax deduction. Tax rates for the periods ended August 4, 2017 were lower than the combined federal and state statutory rates due to excess tax benefits related to employee share-based compensation and due to permanent tax benefits, including research and development credits and the manufacturer’s tax deduction.

As of August 4, 2017, the balance of unrecognized tax benefits included liabilities for uncertainty in income taxes of $6 million, $5 million of which is classified as other long-term liabilities on the condensed and consolidated balance sheets and $1 million of which is classified as a reduction to the corresponding deferred tax asset and is presented in other assets on the condensed and consolidated balance sheets. $6 million of unrecognized tax benefits, if recognized, would affect the effective income tax rate for the Company. While the Company believes it has adequate accruals for uncertainty in income taxes, the tax authorities, on review of the Company’s tax filings, may determine that the Company owes taxes in excess of recorded accruals, or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities. Although the timing of such reviews is not certain, we do not believe that it is reasonably possible that the unrecognized tax benefits will materially change in the next 12 months.

Note 5—Debt Obligations:

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

 

 

 

August 4, 2017

 

 

February 3, 2017

 

 

 

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 August 2021

 

 

3.25

%

 

 

3.36

%

 

$

651

 

 

$

(2

)

 

$

649

 

 

$

660

 

 

$

(2

)

 

$

658

 

Term Loan B Facility due May 2022

 

 

3.69

%

 

 

4.28

%

 

 

400

 

 

 

(10

)

 

 

390

 

 

 

400

 

 

 

(11

)

 

 

389

 

Revolving Credit Facility due August 2021

 

 

5.25

%

 

 

 

 

 

 

25

 

 

 

-

 

 

 

25

 

 

 

-

 

 

 

-

 

 

 

-

 

Total long-term debt

 

 

 

 

 

 

 

 

 

$

1,076

 

 

$

(12

)

 

$

1,064

 

 

$

1,060

 

 

$

(13

)

 

$

1,047

 

Less current portion

 

 

 

 

 

 

 

 

 

 

58

 

 

 

-

 

 

 

58

 

 

 

25

 

 

 

-

 

 

 

25

 

Total long-term debt, net of current portion

 

 

 

 

 

 

 

 

 

$

1,018

 

 

$

(12

)

 

$

1,006

 

 

$

1,035

 

 

$

(13

)

 

$

1,022

 

As of August 4, 2017, the Company has a $1.3 billion credit facility (the Credit Facility), which consists of a $200 million secured revolving credit facility (the Revolving Credit Facility) with an available capacity of $175 million for additional borrowings, a $651 million secured term facility (Term Loan A Facility), and a $400 million secured term facility (Term Loan B Facility) (together, the Term Loan Facilities). On August 2, 2017, the Company borrowed $25 million under the Revolving Credit Facility, which was repaid in full subsequent to quarter end on August 18, 2017. As of August 4, 2017, the outstanding principal under the Revolving Credit Facility was classified as current portion of long-term debt on the condensed and consolidated balance sheets.

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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 including a requirement to maintain a Senior Secured Leverage Ratio (as defined in the Second Amended and Restated 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 and Restated Credit Agreement). As of August 4, 2017, the Company was in compliance with the covenants under its Credit Facility.

As of August 4, 2017 and February 3, 2017, 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 6—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 August 4, 2017

 

 

Pay Fixed Rate

 

 

Receive Variable Rate

 

Settlement and Termination

 

August 4, 2017

 

 

February 3, 2017

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Term loan A interest rate swaps

 

$

388

 

 

 

1.41

%

 

1-month LIBOR

 

Monthly through September 26, 2018

 

$

-

 

 

$

1

 

Term loan B interest rate swaps

 

 

350

 

 

 

1.88

%

 

3-month LIBOR (2)

 

Quarterly through May 7, 2020

 

 

3

 

 

 

2

 

Total

 

$

738

 

 

 

 

 

 

 

 

 

 

$

3

 

 

$

3

 

 

(1)  The fair value of the fixed interest rate swaps liability is included in accounts payable and accrued liabilities on the condensed and consolidated balance sheets.

(2)  Subject to a 0.75% floor.

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 7 for the effective portion of the unrealized change in fair values on cash flow hedges recognized in other comprehensive loss and the amounts reclassified from accumulated other comprehensive loss into earnings for the current and comparative periods presented. There was no ineffectiveness during any of the periods presented. The Company estimates that it will reclassify $2 million of unrealized losses from accumulated other comprehensive loss into earnings in the twelve months following August 4, 2017.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 7—Changes in Accumulated Other Comprehensive Loss by Component:

The following table presents the changes in accumulated other comprehensive loss attributable to the Company’s fixed interest rate swap cash flow hedges that are discussed in Note 6.

 

 

 

Unrealized Losses on Fixed Interest Rate

Swap Cash Flow Hedges

 

 

 

Pre-Tax

Amount (1)

 

 

 

 

Income

Tax (2)

 

 

Net

Amount

 

 

 

(in millions)

 

Three months ended August 4, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 5, 2017

 

$

2

 

 

 

 

$

(1

)

 

$

1

 

Other comprehensive loss before reclassifications

 

 

1

 

 

 

 

 

-

 

 

 

1

 

Amounts reclassified from accumulated other comprehensive loss

 

 

(1

)

 

 

 

 

-

 

 

 

(1

)

Net other comprehensive income

 

 

-

 

 

 

 

 

-

 

 

 

-

 

Balance at August 4, 2017

 

$

2

 

 

 

 

$

(1

)

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended August 5, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 6, 2016

 

$

14

 

 

 

 

$

(5

)

 

$

9

 

Other comprehensive loss before reclassifications

 

 

2

 

 

 

 

 

(1

)

 

 

1

 

Amounts reclassified from accumulated other comprehensive loss

 

 

(2

)

 

 

 

 

1

 

 

 

(1

)

Net other comprehensive income

 

 

-

 

 

 

 

 

-

 

 

 

-

 

Balance at August 5, 2016

 

$

14

 

 

 

 

$

(5

)

 

$

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended August 4, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 3, 2017

 

$

3

 

 

 

 

$

(1

)

 

$

2

 

Other comprehensive loss before reclassifications

 

 

1

 

 

 

 

 

-

 

 

 

1

 

Amounts reclassified from accumulated other comprehensive loss

 

 

(2

)

 

 

 

 

-

 

 

 

(2

)

Net other comprehensive income

 

 

(1

)

 

 

 

 

-

 

 

 

(1

)

Balance at August 4, 2017

 

$

2

 

 

 

 

$

(1

)

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended August 5, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 29, 2016

 

$

14

 

 

 

 

$

(5

)

 

$

9

 

Other comprehensive loss before reclassifications

 

 

4

 

 

 

 

 

(2

)

 

 

2

 

Amounts reclassified from accumulated other comprehensive loss

 

 

(4

)

 

 

 

 

2

 

 

 

(2

)

Net other comprehensive income

 

 

-

 

 

 

 

 

-

 

 

 

-

 

Balance at August 5, 2016

 

$

14

 

 

 

 

$

(5

)

 

$

9

 

 

(1) 

The amount reclassified from accumulated other comprehensive loss was included in interest expense.

(2) 

The amount reclassified from accumulated other comprehensive loss was included in the provision for income taxes.

 

Note 8—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.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 increased borrowings. Purchase consideration paid to acquire Scitor was $764 million (net of cash acquired), including $43 million which was deposited to escrow accounts. In August 2015 $3 million was released from escrow to the sellers after finalizing the working capital adjustment and another $13 million was released in September 2016 that was held to secure a portion of the sellers’ indemnification obligations. Any remaining amount in escrow at the end of the indemnification period will be distributed to the sellers.

Agreements with 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.).

Former Parent and the Company executed various agreements to provide mechanisms for an orderly transition and to govern certain ongoing relationships between the companies following the separation. The agreements include a Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Master Transition Services Agreement, and Master Transitional Contracting Agreement (MTCA). These agreements generally provide that each party is responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax-related assets and liabilities. The MTCA also governs the relationship between former Parent and the Company with regard to the treatment of contracts, proposals, and teaming arrangements where both companies are or will be jointly performing work after separation. Each of former Parent and the Company indemnify the other party for work performed by it under the MTCA.

Contingent losses that were unknown at the time of separation and arise from the operation of the Company’s historical business or the former Parent’s historical corporate losses will be shared between the parties to the extent that losses in any such category exceed $50 million in the aggregate. If they arise and exceed the $50 million threshold, the Company will be responsible for 30% of the former Parent’s incremental contingent losses on corporate claims (and former Parent will be responsible for 70% of the Company’s incremental losses on claims relating to operations that exceed $50 million).

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 fiscal 2012 and subsequent years. Although the Company has recorded contract revenues subsequent to and including fiscal 2012 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.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company has recorded reserves for estimated net amounts to be refunded to customers for potential adjustments for indirect cost audits and compliance with Cost Accounting Standards, which include indemnification obligations owing to former Parent for periods prior to the Distribution Date. As of August 4, 2017, the Company has recorded a total liability of $39 million for estimated net amounts to be refunded to customers for potential adjustments from audits of contract costs, which is presented in accounts payable and accrued liabilities on the condensed and consolidated balance sheets. Any additional amounts which may be determined to be owed for periods prior to the separation will be allocated to former Parent and the Company in proportions determined in accordance with the Distribution Agreement.

Army Brigade Combat Team Modernization Engineering, Manufacturing and Development (BCTM) Program

The BCTM program was terminated for convenience by the Department of Defense (DoD) effective in September 2011. From October 2009 through termination, the Company and its prime contractor performed on this program under an undefinitized change order with a provision that allowed the Company to receive a provisional fixed fee (contract profit) lower than the estimated fixed fee due, pending completion of contract negotiations. The Company recognized revenues of approximately $480 million (including provisional fixed fee) from October 2009 through August 2013 under the undefinitized change order. In July 2017 the final contract termination proposal was accepted by the DoD. The Company had an outstanding receivable of approximately $2 million on this contract as of August 4, 2017. The remaining administrative actions related to the finalization of the contract termination are expected to be completed in the second half of fiscal 2018.

Letters of Credit and Surety Bonds

The Company has outstanding obligations relating to letters of credit of $9 million as of August 4, 2017, principally related to guarantees on insurance policies. The Company also has outstanding obligations relating to surety bonds in the amount of $17 million, principally related to performance and payment bonds on the Company’s contracts. The majority of the surety bonds outstanding were initially obtained by former Parent and the Company is required to satisfy these obligations under the terms of the Distribution Agreement.

 

 

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

 

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 the Scitor acquisition. Such statements are not guarantees of future performance and involve risk, uncertainties and assumptions, 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 material 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 “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 2017 began on January 30, 2016 and ended on February 3, 2017, while fiscal 2018 began on February 4, 2017 and ends on February 2, 2018. The number of weeks for each quarter for fiscal 2018 and 2017 are as follows:

 

 

 

Fiscal 2018

 

 

Fiscal 2017

 

 

(weeks)

First Quarter

 

 

13

 

 

14

Second Quarter

 

 

13

 

 

13

Third Quarter

 

 

13

 

 

13

Fourth Quarter

 

 

13

 

 

13

Fiscal Year

 

 

52

 

 

53

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 45 years. As one of the largest pure-play technical 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. 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.

Economic Opportunities, Challenges, and Risks

In fiscal 2017, we generated greater than 95% 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. While we believe that national security will continue to be a priority, the U.S. government budget deficit and the national debt have created pressure to examine and reduce spending across all federal agencies. Baseline spending for the Department of Defense (DoD) through U.S. government fiscal year 2023 has been reduced and there may be further changes that negatively impact discretionary spending trends across all government agencies. Adverse changes in fiscal and economic conditions could materially impact our business. Some changes that could have an adverse impact on our business are the manner in which spending reductions are implemented (including sequestration), future government shutdowns and issues related to required increases to the nation’s debt ceiling.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

 

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. We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process.

Despite the budget and competitive pressures impacting 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 contracts. We believe our long-term, trusted customer relationships and deep technical expertise provide us with the sophistication to handle highly complex mission-critical contracts. SAIC’s 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, inspired through innovation, are based on best practices and technology transfer. Our past performance was achieved by employee dedication and customer focus. Our current cost structure, as well as our ongoing efforts to reduce costs by strategic sourcing and developing repeatable offerings, is expected to allow us to compete effectively on price in an evolving environment. Our ability to be competitive in the future will continue to be driven by our reputation of successful program execution, competitive cost structure and efficiencies in assigning the right people, at the right time, in support of our contracts.

Management of Operating Performance and Reporting

We manage our business to achieve our long-term financial targets, which we expect to accomplish on average and over time. These financial targets include:

 

low single digit annual internal revenue growth percentage,

 

margin expansion of 10 to 20 basis points annually, and

 

return of capital in excess of operating needs.

Internal revenue growth (or internal revenue contraction if negative) is the method by which we evaluate the growth generated by SAIC. We calculate internal revenue growth percentage by comparing our reported revenue for the current year to the reported revenue for the prior year comparable period adjusted to include any pre-acquisition historical revenue of acquired businesses. Internal revenue growth percentage is a non-GAAP financial measure described in more detail in “Non-GAAP Measures” below.

Our business and program management process is directed by professional managers focused on satisfying our customers by providing high quality services in achieving contract requirements. These managers carefully monitor contract margin performance by constantly evaluating contract risks and opportunities. Through each contract’s life cycle, program managers review performance and update contract performance estimates to reflect their understanding of the best information available. For contracts accounted for under the percentage-of-completion method in which incurred costs or efforts expended are used as a measure of progress to project completion, updates to estimates are recognized on inception-to-date activity, during the period of adjustment, resulting in either a favorable or unfavorable impact to operating income.

We evaluate our results of operations by considering the drivers causing changes in revenues, operating income and operating cash flows. Given that revenues fluctuate on our contract portfolio over time due to contract awards and completions, changes in customer requirements, and increases or decreases in ordering volume of materials, we evaluate significant trends and fluctuations in these terms. Whether performed by our employees or by our subcontractors, we primarily provide services and, as a result, our cost of revenues are predominantly variable. We also analyze our cost mix (labor, subcontractor or materials) in order to understand operating margin because contracts performed with a higher proportion of SAIC labor are generally more profitable. Changes in costs of revenues as a percentage of revenue 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 contract estimates.

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SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

 

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

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

 

 

Six Months Ended

 

 

 

August 4,

2017

 

 

Percent

change

 

 

August 5,

2016

 

 

August 4,

2017

 

 

Percent change

 

 

August 5,

2016

 

 

 

(in millions)

 

Revenues

 

$

1,078

 

 

 

(2

%)

 

$

1,095

 

 

$

2,181

 

 

 

(6

%)

 

$

2,310

 

Cost of revenues

 

 

979

 

 

 

(1

%)

 

 

986

 

 

 

1,986

 

 

 

(5

%)