10-Q: SAIC Reports Mixed Q1 Results with Revenue Growth Amidst Profitability Decline and Increased Debt

Science Applications International Corporation (SAIC) announced its first-quarter fiscal year 2026 results, showing a 2% increase in revenues but an 8% decrease in operating income and a 12% drop in net income compared to the prior year.

Summary

• SAIC reported revenues of $1,877 million for the three months ended May 2, 2025, a 2% increase from $1,847 million in the same period last year.
• Operating income decreased by 8% to $121 million, down from $131 million in the prior year, with operating income as a percentage of revenues falling to 6.4% from 7.1%.
• Net income for the quarter was $68 million, a 12% decrease from $77 million in the comparable prior year period.
• Diluted Earnings Per Share (EPS) declined to $1.42 from $1.48 year-over-year.
• The Civilian segment's revenues increased by 8% to $444 million, while the Defense and Intelligence segment's revenues slightly decreased by $3 million to $1,433 million.
• Net bookings for the quarter were an estimated $2.4 billion, contributing to a total backlog of $22.3 billion as of May 2, 2025, up from $21.9 billion at January 31, 2025.
• Funded backlog, however, decreased to $3,265 million from $3,444 million.
• Net cash provided by operating activities increased slightly to $100 million from $98 million.
• The company repurchased approximately 1.2 million shares of common stock for $125 million during the quarter.
• A quarterly dividend of $0.37 per share was declared and paid, with another $0.37 per share declared for July 25, 2025 payment.
• Total debt increased to $2,281 million as of May 2, 2025, from $2,220 million at January 31, 2025, with $750 million borrowed and $665 million repaid under the Revolving Credit Facility.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to a significant decline in profitability metrics (operating income, net income, EPS) despite top-line revenue growth. While bookings and total backlog are strong, the decrease in funded backlog and increased debt are concerns. Ongoing legal proceedings and government spending uncertainties add to the cautious outlook.

Positives

• Total revenues increased by 2% to $1,877 million, driven by ramp-up in volume on existing and new contracts.
• The Civilian segment demonstrated strong growth, with revenues increasing by 8% to $444 million.
• Net bookings were robust at an estimated $2.4 billion for the quarter, indicating future revenue potential.
• Total backlog grew to $22.3 billion as of May 2, 2025, up from $21.9 billion at the end of the previous fiscal year.
• Net cash provided by operating activities saw a slight increase to $100 million, reflecting improved cash generation from operations.
• The company continued its capital return to shareholders, repurchasing $125 million in common stock and maintaining a consistent quarterly dividend of $0.37 per share.
• SAIC remains in compliance with all covenants under its $2.6 billion secured credit facility.

Negatives

• Operating income decreased by 8% to $121 million, and operating income as a percentage of revenues declined to 6.4% from 7.1%, primarily due to timing and volume mix in the contract portfolio.
• Net income fell by 12% to $68 million, and diluted EPS decreased to $1.42 from $1.48.
• The Defense and Intelligence segment experienced a slight revenue decrease of $3 million.
• The effective income tax rate increased to 20.6% from 19.0%, mainly due to lower tax benefits from employee share-based compensation.
• Net cash used in investing activities increased to $15 million from $7 million in the prior year.
• Total debt increased to $2,281 million, with the current portion of debt rising to $405 million from $313 million.
• Funded backlog decreased to $3,265 million from $3,444 million, indicating a reduction in immediately available funded work.

Risks

• The company's business performance is highly dependent on the overall level of U.S. government spending and alignment with budget priorities, with 98% of revenues derived from U.S. government contracts.
• Continuing resolutions (CRs) and potential 1% sequestration cuts under the Fiscal Responsibility Act could adversely affect future funding.
• New U.S. government administration executive orders and the Department of Government Efficiency's initiatives may slow new contract awards and lead to comprehensive reviews of existing contracts.
• Failure to resolve the Federal debt ceiling could negatively impact the business, and any agreement to raise the ceiling that significantly reduces future funding could affect the addressable market.
• Increased reliance on competitive bidding processes (IDIQ, GSA schedules) and emphasis on small business prime set-aside contracts are leading to greater competition and pricing pressure.
• Ongoing Federal Grand Jury Subpoenas from the U.S. Department of Justice, Antitrust Division, in connection with a criminal investigation, pose a risk of fines, penalties, or further liabilities.
• Routine government investigations, audits (e.g., DCAA), and reviews could lead to disallowance of previously billed costs, penalties, fines, compensatory damages, or suspension/debarment from government business.
• Estimates inherent in financial statements, such as profitability of long-term contracts and fair value measurements, could differ from actual results.
• The Tax Cuts and Jobs Act of 2017 requiring amortization of R&D expenditures over five years impacts income taxes payable, though the impact is expected to decrease over time.
• Global trade restrictions, including economic tariffs and trade war initiatives, could increase costs for materials or hinder procurement from international suppliers.

Future Outlook

SAIC expects to recognize revenue on approximately 83% of its remaining performance obligations over the next 12 months and 93% over the next 24 months. The company believes it is well-positioned to protect and expand existing customer relationships and capitalize on new opportunities due to its scale, size, and prime contractor leadership. Management anticipates that its current cost structure and ongoing efforts to reduce costs through strategic sourcing and developing repeatable 'as a service' offerings will enable effective price competition. Future competitiveness is expected to be driven by a strong reputation for program execution, a competitive cost structure, new pricing and business models, and efficient staffing. The company believes its existing cash, future operating cash flows, and access to bank financing and capital markets will adequately meet short-term liquidity and long-term capital needs.

Management Comments

• "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."
• "We have not experienced a material financial statement impact from recent executive orders or program cancellations across the government, however decreases in, or delays in contract awards and in government spending on the types of programs that we support, and terminations or stop-work-orders on government contracts on which we are currently performing could adversely affect our future revenues and profitability."
• "Despite the budget and competitive pressures affecting the industry, we believe we are well-positioned to protect and expand existing customer relationships and benefit from opportunities that we have not previously pursued."
• "Our scale, size, and prime contractor leadership position are expected to help differentiate us from our competitors, especially on large contract opportunities."
• "Our current cost structure and ongoing efforts to reduce costs by strategic sourcing and developing repeatable offerings sold 'as a service' and as managed services in a more commercial business model are expected to allow us to compete effectively on price in an evolving environment."
• "Nevertheless, we believe that our existing cash on hand, generation of future operating cash flows, and access to bank financing and capital markets will provide adequate resources to meet our short-term liquidity and long-term capital needs."

Industry Context

SAIC operates predominantly within the U.S. government's technical, engineering, and enterprise IT services markets. The industry is significantly influenced by U.S. government spending levels, budget priorities, and legislative actions such as continuing resolutions and the Fiscal Responsibility Act. The market is characterized by increasing competition and pricing pressure due to competitive bidding processes and a renewed emphasis on small business prime set-aside contracts. However, government spending packages, including the infrastructure bill, Inflation Reduction Act, and CHIPS and Science Act, present opportunities in areas like digital modernization, cyber, microelectronics support, and climate resiliency. The current U.S. government administration's focus on efficiency and reviews of contracting activity could lead to slower new awards across federal agencies.

Comparison to Industry Standards

• The document does not provide specific comparable companies, projects, or results to assess SAIC's performance against global benchmarks.
• SAIC highlights its scale, size, and prime contractor leadership as differentiators in a competitive U.S. government contracting market, suggesting a strong relative position within its niche.
• The company's focus on IT modernization, digital engineering, AI, and cybersecurity aligns with broader industry trends in government technology services, indicating a strategic positioning for future growth areas.

Corporate Governance

Legal Proceedings

• The company received Federal Grand Jury Subpoenas in April 2022 and October 2023 in connection with a criminal investigation by the U.S. Department of Justice, Antitrust Division, and is fully cooperating.
• The company is routinely subject to investigations and reviews by U.S. government agencies (e.g., DCAA) regarding compliance with laws and regulations, contract performance, indirect rates, and business systems.
• Indirect cost audits by the DCAA remain open for certain prior and current years, with the potential for future audit adjustments exceeding reserves.

Stakeholder Impact

• Shareholders: Experienced a decrease in EPS but continued to receive consistent quarterly dividends and benefited from share repurchases.
• Employees: The company's effective tax rate was impacted by lower tax benefits from employee share-based compensation.
• Customers (U.S. Government): SAIC continues to be a leading provider of services, but potential delays in contract awards and changes in government priorities could affect future engagements.
• Creditors: Debt levels increased, but the company remains in compliance with its credit facility covenants, indicating continued financial stability for lenders.
• Suppliers/Subcontractors: The company's cost structure includes significant subcontractor-related costs, indicating ongoing engagement with its supply chain.

Next Steps

• The company plans to adopt the annual disclosure requirements of ASU No. 2023-07 (Segment Reporting) in fiscal 2025 and the interim disclosure requirements in fiscal 2026.
• The company plans to adopt ASU No. 2023-09 (Income Taxes) prospectively in fiscal 2026.
• The company is currently evaluating the impact of adopting ASU No. 2024-03 (Income Statement Expense Disaggregation), effective for fiscal years beginning after December 15, 2026.
• A quarterly dividend of $0.37 per share is payable on July 25, 2025, to stockholders of record on July 11, 2025.

Key Dates

Recommendation

Keywords

Government Contractor, IT Services, Defense, Intelligence, Civilian Agencies, Digital Modernization, Cybersecurity, Artificial Intelligence, Engineering, Backlog, Bookings, SEC Filing, 10-Q, Financial Results