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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
Form 10-Q
_________________________________________________________
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2019
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
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.0001 per share
SAIC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No              
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No              
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No         
The number of shares issued and outstanding of the registrant’s common stock as of November 22, 2019 was as follows:
57,723,783 shares of common stock ($.0001 par value per share)
 
 
 
 
 


SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS



 
 
 
Page
Part I
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
 
Item 3
 
 
 
 
Item 4
 
 
 
 
Part II
 
 
 
 
Item 1
 
 
 
 
Item 1A
 
 
 
 
Item 2
 
 
 
 
Item 3
 
 
 
 
Item 4
 
 
 
 
Item 5
 
 
 
 
Item 6
 
 
 
 
 
 


-i-


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
November 1,
2019

 
November 2,
2018

 
November 1,
2019

 
November 2,
2018

 
(in millions, except per share amounts)
Revenues
$
1,630

 
$
1,177

 
$
4,839

 
$
3,467

Cost of revenues
1,456

 
1,048

 
4,300

 
3,125

Selling, general and administrative expenses
68

 
42

 
227

 
115

Acquisition and integration costs (Note 4)
12

 
14

 
30

 
14

Operating income
94

 
73

 
282

 
213

Interest expense
22

 
16

 
69

 
38

Other (income) expense, net
(1
)
 
(1
)
 
(4
)
 
(2
)
Income before income taxes
73

 
58

 
217

 
177

Provision for income taxes (Note 6)
(17
)
 
(10
)
 
(48
)
 
(31
)
Net income
$
56

 
$
48

 
$
169

 
$
146

Net income attributable to non-controlling interest
1

 

 
2

 

Net income attributable to common stockholders
$
55

 
$
48

 
$
167

 
$
146

Earnings per share (Note 2):
 

 
 

 
 

 
 

Basic
$
0.95

 
$
1.13

 
$
2.85

 
$
3.44

Diluted
$
0.94

 
$
1.11

 
$
2.82

 
$
3.37


 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 



 
 
See accompanying notes to condensed and consolidated financial statements.

-1-


Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
November 1, 2019

 
November 2, 2018

 
November 1, 2019

 
November 2, 2018

 
(in millions)
Net income
$
56

 
$
48

 
$
169

 
$
146

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on derivative instruments, net of tax benefit (expense) of $1 million and $17 million for the three and nine months ended November 1, 2019, respectively, and $0 million and $(1) million for the three and nine months ended November 2, 2018, respectively
(4
)
 
1

 
(49
)
 
2

Reclassification adjustment for (benefits) costs realized in net income, net of tax expense (benefit) of $0 million and $0 million for the three and nine months ended November 1, 2019, respectively, and $0 million and $0 million for the three and nine months ended November 2, 2018, respectively
1

 

 
1

 
(1
)
Net unrealized (loss) gain on derivative instruments
(3
)
 
1

 
(48
)
 
1

Total other comprehensive (loss) income, net of tax
(3
)
 
1

 
(48
)
 
1

Comprehensive income
$
53

 
$
49

 
$
121

 
$
147

Comprehensive income attributable to non-controlling interest
1

 

 
2

 

Comprehensive income attributable to common stockholders
$
52

 
$
49

 
$
119

 
$
147



























See accompanying notes to condensed and consolidated financial statements.

-2-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
November 1,
2019

 
February 1,
2019

 
(in millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
162

 
$
237

Receivables, net
1,118

 
1,050

Inventory, prepaid expenses and other current assets
144

 
146

Total current assets
1,424

 
1,433

Goodwill
2,134

 
2,120

Intangible assets (net of accumulated amortization of $150 million and $79 million at November 1, 2019 and February 1, 2019, respectively)
733

 
803

Property, plant, and equipment (net of accumulated depreciation of $177 million and $159 million at November 1, 2019 and February 1, 2019, respectively)
94

 
103

Other assets
315

 
104

Total assets
$
4,700

 
$
4,563

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
808

 
$
632

Accrued payroll and employee benefits
319

 
241

Long-term debt, current portion (Note 7)
64

 
24

Total current liabilities
1,191

 
897

Long-term debt, net of current portion (Note 7)
1,872

 
2,065

Other long-term liabilities
248

 
102

Commitments and contingencies (Note 11)

 

Equity:
 
 
 
Common stock, $.0001 par value, 1 billion shares authorized, 58 million and 60 million shares issued and outstanding as of November 1, 2019 and February 1, 2019, respectively

 

Additional paid-in capital
974

 
1,132

Retained earnings
468

 
367

Accumulated other comprehensive loss
(62
)
 
(14
)
Total common stockholders' equity
1,380

 
1,485

Non-controlling interest
9

 
14

Total stockholders' equity
1,389

 
1,499

Total liabilities and stockholders' equity
$
4,700

 
$
4,563

 
 
 
 
   
 



See accompanying notes to condensed and consolidated financial statements.

-3-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
 
Shares of
common
stock

 
Additional
paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
(loss)
income

 
Non-controlling interest

 
Total

 
(in millions)
Balance at August 2, 2019
58

 
$
963

 
$
435

 
$
(59
)
 
$
10

 
$
1,349

Net income

 

 
55

 

 
1

 
56

Issuances of stock

 
3

 

 

 

 
3

Other comprehensive loss, net of tax

 

 

 
(3
)
 

 
(3
)
Cash dividends of $0.37 per share

 

 
(22
)
 

 

 
(22
)
Stock-based compensation

 
9

 

 

 

 
9

Repurchases of stock

 
(1
)
 

 

 

 
(1
)
Distributions to non-controlling interest

 

 

 

 
(2
)
 
(2
)
Balance at November 1, 2019
58

 
$
974

 
$
468

 
$
(62
)
 
$
9

 
$
1,389

 
 
 
 
 
 
 
 
 
 
 
 
Balance at February 1, 2019
60

 
$
1,132

 
$
367

 
$
(14
)
 
$
14

 
$
1,499

Net income

 

 
167

 

 
2

 
169

Issuances of stock

 
9

 

 

 

 
9

Other comprehensive loss, net of tax

 

 

 
(48
)
 

 
(48
)
Cash dividends of $1.11 per share

 

 
(66
)
 

 

 
(66
)
Stock-based compensation

 
14

 

 

 

 
14

Repurchases of stock
(2
)
 
(181
)
 

 

 

 
(181
)
Distributions to non-controlling interest

 

 

 

 
(7
)
 
(7
)
Balance at November 1, 2019
58

 
$
974

 
$
468

 
$
(62
)
 
$
9

 
$
1,389

 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 3, 2018
43

 
$
8

 
$
355

 
$
4

 
$

 
$
367

Net income

 

 
48

 

 

 
48

Issuances of stock

 
1

 

 

 

 
1

Other comprehensive income, net of tax

 

 

 
1

 

 
1

Cash dividends of $0.31 per share

 

 
(13
)
 

 

 
(13
)
Stock-based compensation

 
8

 

 

 

 
8

Repurchases of stock

 
(1
)
 

 

 

 
(1
)
Balance at November 2, 2018
43

 
$
16

 
$
390

 
$
5

 
$

 
$
411

 
 
 
 
 
 
 
 
 
 
 
 
Balance at February 2, 2018
43

 
$

 
$
323

 
$
4

 
$

 
$
327

Cumulative impact from adopting ASC 606 on February 3, 2018

 

 
3

 

 

 
3

Net income

 

 
146

 

 

 
146

Issuances of stock
1

 
5

 

 

 

 
5

Other comprehensive income, net of tax

 

 

 
1

 

 
1

Cash dividends of $0.93 per share

 

 
(40
)
 

 

 
(40
)
Stock-based compensation

 
12

 
(9
)
 

 

 
3

Repurchases of stock
(1
)
 
(1
)
 
(33
)
 

 

 
(34
)
Balance at November 2, 2018
43

 
$
16

 
$
390

 
$
5

 
$

 
$
411

See accompanying notes to condensed and consolidated financial statements.

-4-


Table of Contents

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended
 
November 1,
2019

 
November 2,
2018

 
(in millions)
Cash flows from operating activities:
 

 
 

Net income
$
169

 
$
146

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

Depreciation and amortization
103

 
33

Deferred income taxes
27

 

Stock-based compensation expense
29

 
24

Loss on extinguishment of debt

 
4

Provision for inventory

 
25

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

 
 

Receivables
(68
)
 
(86
)
Inventory, prepaid expenses and other current assets
(9
)
 
(5
)
Other assets
43

 
(9
)
Accounts payable and accrued liabilities
78

 
(47
)
Accrued payroll and employee benefits
78

 
69

Other long-term liabilities
(61
)
 
8

Net cash provided by operating activities
389

 
162

Cash flows from investing activities:
 

 
 

Expenditures for property, plant, and equipment
(14
)
 
(24
)
Purchases of marketable securities
(23
)
 

Sales of marketable securities
2

 

Other
(5
)
 
1

Net cash used in investing activities
(40
)
 
(23
)
Cash flows from financing activities:
 

 
 

Dividend payments to stockholders
(65
)
 
(40
)
Principal payments on borrowings
(258
)
 
(776
)
Issuances of stock
7

 
5

Stock repurchased and retired or withheld for taxes on equity awards
(196
)
 
(56
)
Proceeds from borrowings
100

 
791

Debt issuance costs

 
(13
)
Distributions to non-controlling interest
(7
)
 

Net cash used in financing activities
(419
)
 
(89
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(70
)
 
50

Cash, cash equivalents and restricted cash at beginning of period
246

 
152

Cash, cash equivalents and restricted cash at end of period (Note 1)
$
176

 
$
202

 





See accompanying notes to condensed and consolidated financial statements.

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



Note 1Business 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 three customer facing operating segments supported by a solutions and technology group. Each of the Company’s three customer facing operating segments 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. The Company's operating segments are aggregated into one reportable segment for financial reporting purposes.
On January 14, 2019, the Company completed the acquisition of Engility Holdings, Inc. (collectively with its consolidated subsidiaries, "Engility"), which provides increased customer and market access, as well as increased scale in strategic business areas of national interest, such as defense, federal civilian agencies, intelligence and space.
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, statements of equity and statements of cash flows. These financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and account balances within the Company have been eliminated. The financial statements are unaudited, but in the opinion of management include all adjustments, 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 1, 2019.
Non-controlling Interest. As a result of the acquisition of Engility, the Company holds a 50.1% majority interest in Forfeiture Support Associates J.V. (FSA). The results of operations of FSA are included in the Company's condensed and consolidated statements of income and comprehensive income. The non-controlling interest reported on the condensed and consolidated balance sheets represents the portion of FSA's equity that is attributable to the non-controlling interest.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Significant estimates inherent in the preparation of the financial statements may include, but are not limited to estimated profitability of long-term contracts, income taxes, fair value measurements, fair value of goodwill and other intangible assets, pension and defined benefit plan obligations, and contingencies. Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates.
Reporting Periods
The Company utilizes a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2019 began on February 3, 2018 and ended on February 1, 2019, while fiscal 2020 began on February 2, 2019 and ends on January 31, 2020.
Operating Cycle
The Company’s operating cycle may be greater than one year and is measured by the average time intervening between the inception and the completion of contracts.

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


Derivative Instruments Designated as Cash Flow Hedges
Derivative instruments are recorded on the condensed and consolidated balance sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.
The Company’s fixed interest rate swaps are considered over-the-counter derivatives, and fair value is calculated using a standard pricing model for interest rate swaps with contractual terms for maturities, amortization and interest rates. Level 2, or market observable inputs (such as yield and credit curves), are used within the standard pricing models in order to determine fair value. The fair value is an estimate of the amount that the Company would pay or receive as of a measurement date if the agreements were transferred to a third party or canceled. See Note 8 for further discussion on the Company’s derivative instruments designated as cash flow hedges.
Inventory
Inventory is substantially comprised of finished goods inventory purchased for resale to customers, such as tires and lubricants, and is valued at the lower of cost or net realizable value, generally using the average method. The Company evaluates current inventory against historical and planned usage to estimate the appropriate provision for obsolete inventory.
Marketable Securities
Investments in marketable securities consist of equity securities which are recorded at fair value using observable inputs such as quoted prices in active markets (Level 1). As of November 1, 2019 and February 1, 2019, the fair value of our investments total $26 million and $4 million, respectively, and was included in other assets on the condensed and consolidated balance sheets. The Company's investments are primarily held in a custodial account, which includes investments to fund our deferred compensation plan liabilities.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed and consolidated balance sheets for the periods presented:
 
November 1,
2019

 
February 1,
2019

 
(in millions)
Cash and cash equivalents
$
162

 
$
237

Restricted cash included in inventory, prepaid expenses and other current assets
4

 

Restricted cash included in other assets
10

 
9

Cash, cash equivalents and restricted cash
$
176

 
$
246


Accounting Standards Updates
In February 2016, the FASB issued Accounting Standards Update (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). In July 2018, the FASB provided an optional transition method of adoption, permitting entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as opposed to the beginning of the earliest period presented in the financial statements.
ASU 2016-02 became effective for the Company in the first quarter of fiscal 2020. The Company adopted the standard using the optional transition method. Accordingly, the prior periods were not recast, and all prior period amounts disclosed are presented under ASC 840. The Company elected certain practical expedients provided under the standard, including the package of practical expedients, which allows entities not to reassess whether

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


existing contracts are or contain leases. Therefore, at adoption, existing leases have been identified using the criteria of ASC 840.
As a result of the adoption of the new standard, on February 2, 2019, the Company recognized approximately $169 million of right of use operating assets and $184 million of operating lease liabilities, of which $140 million was noncurrent. The adoption did not have a material impact on retained earnings, the condensed and consolidated statements of income, or the condensed and consolidated statements of cash flows.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software (Subtopic 350-40). ASU 2018-15 becomes effective for the Company in the first quarter of fiscal 2021. During the third quarter of fiscal 2020, the Company early adopted ASU 2018-15 and applied its provisions prospectively. Adoption of the standard did not have a material impact on the Company’s condensed and consolidated financial statements.
Other Accounting Standards Updates effective after November 1, 2019 are not expected to have a material effect on the Company’s financial statements.
Note 2Earnings Per Share:
Basic earnings per share (EPS) is computed by dividing net income attributable to common stockholders by the basic weighted-average number of shares outstanding. Diluted EPS is computed similarly to basic EPS, except the weighted-average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.
A reconciliation of the weighted-average number of shares outstanding used to compute basic and diluted EPS was:
 
Three Months Ended
 
Nine Months Ended
 
November 1,
2019

 
November 2,
2018

 
November 1,
2019

 
November 2,
2018

 
(in millions)
Basic weighted-average number of shares outstanding
57.7

 
42.5

 
58.5

 
42.5

Dilutive common share equivalents - stock options and other stock-based awards
0.6

 
0.7

 
0.7

 
0.8

Diluted weighted-average number of shares outstanding
58.3

 
43.2

 
59.2

 
43.3


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
 
November 1,
2019

 
November 2,
2018

 
November 1,
2019

 
November 2,
2018

 
(in millions)
Antidilutive stock options excluded
0.3

 
0.3

 
0.3

 
0.2



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


Note 3Revenues:
Changes in Estimates
Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can routinely occur over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated. In cases when total expected costs exceed total estimated revenues for a performance obligation, the Company recognizes the total estimated loss in the quarter identified. Total estimated losses are inclusive of any unexercised options that are probable of award, only if they increase the amount of the loss.
Aggregate changes in these estimates increased operating income by $3 million ($0.05 per diluted share) and $15 million ($0.20 per diluted share) for the three and nine months ended November 1, 2019, respectively, and increased operating income by $19 million ($0.33 per diluted share) and $16 million ($0.28 per diluted share) for the three and nine months ended November 2, 2018, respectively. Changes in these estimates increased net income by $3 million and $12 million for the three and nine months ended November 1, 2019, respectively. In addition, revenues were $2 million and $16 million higher for the three and nine months ended November 1, 2019, respectively, due to net revenue recognized from performance obligations satisfied in prior periods.
Disaggregation of Revenues
The Company's revenues are generated primarily from long-term contracts with the U.S. government including subcontracts with other contractors engaged in work for the U.S. government. The Company disaggregates revenues by customer, contract-type and prime vs. subcontractor to the federal government.
Disaggregated revenues by customer were as follows:
 
Three Months Ended
 
Nine Months Ended
 
November 1, 2019

 
November 2, 2018

 
November 1, 2019

 
November 2, 2018

 
(in millions)
Department of Defense
$
854

 
$
683

 
$
2,564

 
$
2,107

Other federal government agencies
743

 
430

 
2,181

 
1,260

Commercial, state and local
33

 
64

 
94

 
100

Total
$
1,630

 
$
1,177

 
$
4,839

 
$
3,467

Disaggregated revenues by contract-type were as follows:
 
Three Months Ended
 
Nine Months Ended
 
November 1, 2019

 
November 2, 2018

 
November 1, 2019

 
November 2, 2018

 
(in millions)
Cost reimbursement
$
925

 
$
598

 
$
2,764

 
$
1,663

Time and materials (T&M)
333

 
253

 
979

 
863

Firm-fixed price (FFP)
372

 
326

 
1,096

 
941

Total
$
1,630

 
$
1,177

 
$
4,839

 
$
3,467


-9-

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


Disaggregated revenues by prime vs. subcontractor were as follows:
 
Three Months Ended
 
Nine Months Ended
 
November 1, 2019

 
November 2, 2018

 
November 1, 2019

 
November 2, 2018

 
(in millions)
Prime contractor to federal government
$
1,452

 
$
1,032

 
$
4,291

 
$
3,123

Subcontractor to federal government
145

 
81

 
454

 
244

Other
33

 
64

 
94

 
100

Total
$
1,630

 
$
1,177

 
$
4,839

 
$
3,467


Contract Balances
Contract balances for the periods presented were as follows:
 
Balance Sheet line item
November 1,
2019

 
February 1,
2019

 
 
(in millions)
Billed and billable receivables, net(1)
Receivables, net
$
806

 
$
740

Contract assets - unbillable receivables
Receivables, net
312

 
310

Contract assets - contract retentions
Other assets
16

 
13

Contract liabilities - current
Accounts payable and accrued liabilities
34

 
34

Contract liabilities - non-current
Other long-term liabilities
$
9

 
$
6

(1)
Net of allowance for doubtful accounts of $3 million and $2 million as of November 1, 2019 and February 1, 2019, respectively.
During the nine months ended November 1, 2019 and November 2, 2018, the Company recognized revenues of $21 million and $10 million relating to amounts that were included in the opening balance of contract liabilities as of February 1, 2019 and February 3, 2018, respectively. During the three months ended November 1, 2019 and November 2, 2018, the Company recognized revenues of $2 million and $1 million relating to amounts that were included in the opening balance of contract liabilities as of February 1, 2019 and February 3, 2018.
Deferred Costs
Deferred costs for the periods presented were as follows:
 
Balance Sheet line item
November 1,
2019

 
February 1,
2019

 
 
(in millions)
Pre-contract costs
Inventory, prepaid expenses and other current assets
$
2

 
$
1

Fulfillment costs - non-current
Other assets
$
13

 
$
13


Pre-contract costs of $1 million were expensed during the nine months ended November 1, 2019 and $1 million and $3 million were expensed during the three and nine months ended November 2, 2018, respectively. Fulfillment costs of $1 million and $3 million were amortized during the three and nine months ended November 1, 2019 and $2 million were amortized during the three and nine months ended November 2, 2018.
Remaining Performance Obligations
As of November 1, 2019, the Company had $4.4 billion of remaining performance obligations. Remaining performance obligations exclude any variable consideration that is allocated entirely to unsatisfied performance obligations on our supply chain contracts. The Company expects to recognize revenue on approximately 80% of the remaining performance obligations over the next 12 months and approximately 95% over the next 24 months, with the remaining recognized thereafter.


-10-

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


Note 4Engility Acquisition:
On January 14, 2019, the Company completed the acquisition of Engility Holdings, Inc., a leading provider of integrated solutions and services supporting U.S. government customers in the defense, federal civilian, and intelligence and space communities. This strategic acquisition enables greater market and customer access, particularly in the intelligence and space communities, and enhances the Company's portfolio of capabilities, particularly in the area of systems engineering and integration. The acquisition enables acceleration of revenue growth through increased market and customer access, increased investment capacity, addition of cleared personnel and strategic alignment with key customers. The acquisition also enables increased profitability and cash generation with an improved margin profile and greater financial flexibility for investment and capital deployment.
The acquisition was funded through a combination of SAIC common stock and additional borrowings. At the effective time of the acquisition, each outstanding share of Engility common stock was automatically cancelled and converted into the right to receive 0.45 shares of the Science Applications International Corporation common stock. The Company amended its credit agreement to provide for a new five-year senior secured $1.1 billion term loan facility. SAIC borrowed the entire amount of the term loan facility, the proceeds of which were immediately used to repay Engility's existing credit facility and outstanding notes and to pay fees and expenses associated with the acquisition, with the balance retained by SAIC to be used for general corporate purposes.
The purchase consideration for the acquisition of Engility was as follows:
 
(in millions)

Common stock issued to Engility shareholders(1)
$
1,086

Converted vesting stock awards assumed(2)
22

Cash consideration paid to extinguish Engility outstanding debt
1,052

Purchase price
$
2,160

(1) 
Represents approximately 16.8 million new shares of SAIC common stock issued to Engility shareholders prior to the market opening on January 14, 2019, using the SAIC share price of $65.03 at the close of business on January 11, 2019.
(2) 
Represents the fair value of the converted vesting stock awards assumed attributable to pre-acquisition service.
The purchase price was allocated, on a preliminary basis, among assets acquired and liabilities assumed at fair value on the acquisition date, January 14, 2019, based on the best available information, with the excess purchase price recorded as goodwill. As of November 1, 2019, the Company had not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to, receivables, other current assets, deferred tax assets, property, plant, and equipment, other accrued liabilities and goodwill. The allocation of the purchase price is subject to change as the Company continues to obtain and assess relevant information that existed as of the acquisition date, including but not limited to, information pertaining to Engility’s historical government compliance accounting practices, legal proceedings, reserves, income taxes, contracts with customers, and pre-acquisition contingencies. The Company expects to have sufficient information available to resolve these items by the fourth quarter of fiscal 2020, which could potentially result in changes in assets or liabilities on Engility’s opening balance sheet and an adjustment to goodwill.
During the third quarter of fiscal 2020, the Company made adjustments to the preliminary purchase price resulting in a $14 million increase to goodwill. The measurement period adjustments included: $10 million decrease to other current assets associated with the valuation of pre-acquisition contingent receivables; $12 million increase to other accrued liabilities associated with Engility’s historical government compliance accounting practices; $3 million increase to customer relationship intangible assets; and, $5 million increase to deferred tax assets. The resulting impact to the Company’s condensed and consolidated statements of income and of comprehensive income were not material.

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


The adjusted preliminary purchase price allocation is as follows:
 
(in millions)

Cash and cash equivalents
$
51

Receivables
351

Inventories
5

Prepaid expenses
5

Other current assets
5

Property, plant, and equipment
39

Deferred tax assets
96

Other assets
7

Intangible assets
651

Goodwill
1,271

Total assets acquired
2,481

Accounts payable
115

Accrued payroll and other employee benefits
30

Accrued vacation
39

Other accrued liabilities
70

Other long-term liabilities
54

Total liabilities assumed
308

Non-controlling interest
13

Net assets acquired
$
2,160

Amount of tax deductible goodwill
$
441


Goodwill represents intellectual capital and an acquired assembled work force. The Company inherited Engility's historical tax basis in deductible goodwill, certain other intangible assets, and net operating loss carryforwards.
The following table summarizes the fair value of intangible assets and the related weighted-average useful lives:
 
Amount

 
Weighted-Average Amortization Period
 
(in millions)

 
(in years)
Backlog
$
30

 
1
Developed technology
2

 
10
Customer relationships
619

 
14
Total intangible assets
$
651

 
13

For the three and nine months ended November 1, 2019, the Company incurred $12 million and $30 million, respectively, of costs in connection with the integration of Engility, primarily for strategic consulting services, severance and other employee costs, facility consolidation costs, and other integration-related costs. For the three and nine months ended November 2, 2018, acquisition-related expenses were $10 million and costs incurred in connection with the integration of Engility were $4 million. These costs are included in acquisition and integration costs on the condensed and consolidated statements of income.
Note 5Stock-Based Compensation:
Stock Options
During the nine months ended November 1, 2019, the Company granted certain employees 0.1 million stock options with a weighted-average exercise price and weighted-average grant date fair value of $75.66 and $16.88, 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 November 1, 2019, the Company granted certain employees 0.4 million RSUs with a weighted-average grant date fair value of $75.68, which will vest ratably on each anniversary of the grant date over a three-year period.
Performance Shares
During the nine months ended November 1, 2019, the Company granted to certain employees 0.1 million performance share awards with a grant date fair value of $79.04 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.
Note 6Income Taxes:
The Company's effective income tax rate was 23.8% and 22.3% for the three and nine months ended November 1, 2019, respectively, and 17.7% and 17.4% for the three and nine months ended November 2, 2018, respectively. The Company's effective tax rate was higher for the three months ended November 1, 2019 compared to the prior year period due principally to lower excess tax benefits related to employee share-based compensation. Tax rates for the periods ended November 1, 2019 were lower than the combined federal and state statutory rates due principally to excess tax benefits related to employee share-based compensation, research and development credits, and other permanent book tax differences.
As of November 1, 2019, the balance of unrecognized tax benefits included liabilities for uncertainty in income taxes of $15 million, which is classified as other long-term liabilities on the condensed and consolidated balance sheets. Of this balance, $13 million, if recognized, would impact 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 believe it is reasonably possible that $2 million to $4 million of unrecognized tax benefits will reverse in the next 12 months due to the resolution of a tax authority examination and approximately $2 million as a result of statute of limitations expirations, along with associated interest and penalties.
Note 7Debt Obligations:
The Company’s long-term debt as of the dates presented was as follows:
 
November 1, 2019
 
February 1, 2019
 
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 October 2023
3.29
%
 
3.62
%
 
$
918

 
$
(10
)
 
$
908

 
$
1,068

 
$
(14
)
 
$
1,054

Term Loan B Facility due October 2025
3.54
%
 
3.74
%
 
1,039

 
(11
)
 
1,028

 
1,047

 
(12
)
 
1,035

Total long-term debt
 

 
 

 
$
1,957

 
$
(21
)
 
$
1,936

 
$
2,115

 
$
(26
)
 
$
2,089

Less current portion
 
 
 
 
64

 

 
64

 
24

 

 
24

Total long-term debt, net of current portion
 
 
 
 
$
1,893

 
$
(21
)
 
$
1,872

 
$
2,091

 
$
(26
)
 
$
2,065


As of November 1, 2019, the Company has a $2.4 billion credit facility (the Credit Facility) consisting of a $400 million secured Revolving Credit Facility, a $918 million secured Term Loan A Facility, and a $1,039 million secured Term Loan B Facility (together, the Term Loan Facilities). During the second quarter of fiscal 2020, the Company borrowed $100 million under the Revolving Credit Facility, which was repaid in full during the third quarter of fiscal 2020. There is no balance outstanding on the Revolving Credit Facility as of November 1, 2019. As of November 1, 2019, the Company was in compliance with the covenants under its Credit Facility.

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


As of November 1, 2019 and February 1, 2019, 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 8Derivative 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 November 1, 2019

 
Pay Fixed Rate

 
Receive Variable Rate
 
Settlement and Termination
 
November 1, 2019

 
February 1, 2019

 
(in millions)
 
 
 
 
 
 
 
(in millions)
Interest rate swaps #1
$
311

 
2.78
%
 
1-month LIBOR
 
Monthly through
July 30, 2021
 
$
(6
)
 
$
(2
)
Interest rate swaps #2
500

 
3.07
%
 
1-month LIBOR
 
Monthly through October 31, 2025
 
(58
)
 
(21
)
Interest rate swaps #3
525

 
2.49
%
 
1-month LIBOR
 
Monthly through October 31, 2023
 
(22
)
 
(1
)
Total
$
1,336

 
 

 
 
 
 
 
$
(86
)
 
$
(24
)
(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.
The Company is party to fixed interest rate swap instruments that are designated and accounted for as cash flow hedges to manage risks associated with interest rate fluctuations on a portion of the Company’s floating rate debt. The counterparties to all swap agreements are financial institutions. See Note 9 for the unrealized change in fair values on cash flow hedges recognized in other comprehensive loss and the amounts reclassified from accumulated other comprehensive loss into earnings for the current and comparative periods presented. The Company estimates that it will reclassify $14 million of unrealized losses from accumulated other comprehensive loss into earnings in the twelve months following November 1, 2019.
On October 31, 2018, the Company exited one of its interest rate swaps and discontinued hedge accounting. The Company received cash proceeds of $6 million upon the early settlement. The $6 million of deferred gains in accumulated other comprehensive loss will be reclassified into interest expense over the original contractual term of the interest rate swaps, which has a maturity date of May 7, 2020.

-14-

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


Note 9Changes 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 8.
 
 
Pre-Tax Amount
 
 
Unrealized Gains (Losses) on Fixed Interest Rate Swap Cash Flow Hedges(1)

 
 
(in millions)
Three months ended November 1, 2019
 
 
Balance at August 2, 2019
 
$
(80
)
Other comprehensive loss before reclassifications
 
(5
)
Amounts reclassified from accumulated other comprehensive loss
 
1

Net other comprehensive loss
 
(4
)
Balance at November 1, 2019
 
$
(84
)
 
 
 
Three months ended November 2, 2018
 
 
Balance at August 3, 2018
 
$
6

Other comprehensive income before reclassifications