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 consolidated financial statements and the related notes included in this Form 10-K, as well as Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedJanuary 29, 2021 , which provides additional information on comparisons of fiscal 2021 and 2020. 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 this report), including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations; backlog; our industry; government budgets and spending; market opportunities; the impact of competition; and the impact of acquisitions. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Risks, uncertainties and assumptions that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Part I of this report. Due to such risks, uncertainties and assumptions, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future results or developments.
We use the terms “SAIC”, the “Company”, “we”, “us” and “our” to refer to
The Company utilizes a 52/53 week fiscal year ending on the Friday closest toJanuary 31 , with fiscal quarters typically consisting of 13 weeks. Fiscal 2022 began onJanuary 30, 2021 and ended onJanuary 28, 2022 , fiscal 2021 began onFebruary 1, 2020 and ended onJanuary 29, 2021 , and fiscal 2020 began onFebruary 2, 2019 and ended onJanuary 31, 2020 .
Company overview
We are a leading technology integrator providing full life cycle services and solutions in the technical, engineering and enterprise information technology (IT) markets. We developed our brand by addressing our customers' mission critical needs and solving their most complex problems for over 50 years. As one of the largest pure-play technology service providers to theU.S. government, we serve markets of significant scale and opportunity. Our primary customers are the departments and agencies of theU.S. government. We serve our customers through approximately 1,900 active contracts and task orders and employ approximately 26,000 individuals who are led by an experienced executive team of proven industry leaders. Our long history of serving theU.S. government has afforded us the ability to develop strong and longstanding relationships with some of the largest customers in the markets we serve. Substantially all of our revenues and tangible long-lived assets are generated by or owned by entities located inthe United States .
Economic opportunities, challenges and risks
In fiscal 2022, we generated 98% of our revenues from contracts with theU.S. government, including subcontracts on which we perform. Our business performance is affected by the overall level ofU.S. government spending and the alignment of our offerings and capabilities with the budget priorities of theU.S. government. Appropriations measures passed inMarch 2022 provided full funding for the federal government through the end of government fiscal year 2022. TheAugust 2019 Bipartisan Budget Act agreement suspended the Federal debt ceiling untilJuly 31, 2021 . InOctober 2021 , the Federal debt ceiling was increased by$480 billion and inDecember 2021 was further increased by$2.5 trillion which is expected to allow theU.S. government to operate into 2023. It is unlikely but possible these measures could expire without extension and lead to a partial or full government shutdown. Adverse changes in fiscal and economic conditions could materially impact our business. Some changes that could have an adverse impact on our business include the implementation of future spending reductions (including sequestration), delayed passage of appropriations bills resulting in temporary or full-year continuing resolutions, extreme inflationary increases adversely impacting fixed price contracts, inability to increase or suspend the Federal debt ceiling, and potential government shutdowns.
Spending sets, including the infrastructure bill and potential future spending sets, may provide additional opportunities in SAIC’s areas of focus such as broadband, cybersecurity and climate resilience.
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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 a majority of the business we seek in the
foreseeable future will be awarded through a competitive bidding process.
Despite the budget and competitive pressures affecting the industry, we believe
we are well-positioned to protect and expand existing customer relationships and
benefit from opportunities that we have not previously pursued. Our scale, size,
and prime contractor leadership position are expected to help differentiate us
from our competitors, especially on large contract opportunities. We believe our
long-term, trusted customer relationships and deep technical expertise provide
us with the sophistication to handle highly complex, mission-critical contracts.
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 are inspired
through innovation based on adoption of best practices and technology
integration of the best capabilities available. Our past performance was
achieved by employees dedicated to supporting our customers' most challenging
missions. Our current cost structure and ongoing efforts to reduce costs by
strategic sourcing and developing repeatable offerings sold "as a service" and
as managed services in a more commercial business model are expected to allow us
to compete effectively on price in an evolving environment. Our ability to be
competitive in the future will continue to be driven by our reputation for
successful program execution, competitive cost structure, development of new
pricing and business models, and efficiencies in assigning the right people, at
the right time, in support of our contracts.
On July 2, 2021 , we completed the acquisition of Halfaker and Associates, LLC
(Halfaker). The acquisition of Halfaker, in alignment with our long-term
strategy, grows the Company's digital transformation portfolio while expanding
its ability to support the government's healthcare mission.
At
See “Risk Factors” in Part I of this report for additional discussion of our industry and regulatory environment.
Impacts of the COVID-19 pandemic
We are continuing to monitor the ongoing outbreak of the coronavirus disease 2019 (COVID-19) and we continue to work with our stakeholders to assess further possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences. Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a mechanism to recover our labor costs where our employees are ready and able to work but unable to access required facilities due to COVID-19. This support from the CARES Act expired onSeptember 30, 2021 . Reduced activity on contracts, including travel and other direct costs, caused revenues to be approximately$125 million lower for fiscal 2022 (net of$62 million of labor recovered under the provisions of the CARES Act described above to maintain our workforce in a stand-ready state). We are generally not able to bill profit on those costs and, in some cases, funding limitations and the necessity for contract modifications may cause us not to be able to recover all of the labor costs. As a result, operating income for fiscal 2022 was reduced by approximately$8 million .
In addition, the CARES Act authorized the deferral of certain payroll tax payments through
InSeptember 2021 , the President issued an executive order which requires all federal employees and contractors to be fully vaccinated byJanuary 18, 2022 , unless an employee is legally entitled to an accommodation. InDecember 2021 , a federal district judge issued an order, which temporarily enjoined the federal contractor vaccine mandate. We had taken steps to comply with the vaccine mandate across our workforce until it was enjoined. We 23
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continue to monitor the impact that the application of this executive order will have on our workforce and operations, but at this stage the impact has not been material.
We have not experienced a significant impact to our liquidity or access to capital as a result of the COVID-19 pandemic. As discussed in "Liquidity and Capital Resources" 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. As ofJanuary 28, 2022 we were in compliance with our debt covenants and we have not been required to obtain additional financing, or make significant modifications to our capital deployment strategy, as a result of the COVID-19 pandemic. While we continue to navigate the impacts of the COVID-19 pandemic, COVID-19 did not have as significant an impact on revenues and operating income as compared to the prior year. The full extent of the impact of COVID-19 on our business and our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, all of which are uncertain and cannot be predicted.
See “Risk Factors” in Part I of this report for additional discussion of the risks associated with the COVID-19 pandemic.
Operational performance management and reporting
Our business and program management process is directed by professional managers
focused on serving our customers by providing high quality services in achieving
program requirements. These managers carefully monitor contract margin
performance by constantly evaluating contract risks and opportunities.
Throughout each contract's life cycle, program managers review performance and
update contract performance estimates to reflect their understanding of the best
information available. For performance obligations satisfied over time, 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 programs 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 estimates.
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.
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Operating results
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:
Year Ended
January 28, Percent January 29, Percent January 31,
2022 change 2021 change 2020
(dollars in millions)
Revenues $ 7,394 5 % $ 7,056 11 % $ 6,379
Cost of revenues 6,535 4 % 6,264 10 % 5,673
As a percentage of revenues 88.4 % 88.8 % 88.9 %
Selling, general and administrative expenses 344 (2) % 352 22 % 288
Acquisition and integration costs 56 4 % 54 13 % 48
Other operating income (3) (25) % (4) 100 % -
Operating income 462 18 % 390 5 % 370
As a percentage of revenues 6.2 % 5.5 % 5.8 %
Net income attributable to common
stockholders $ 277 33 % $ 209 (8) % $ 226
Cash flows provided by operating activities $ 518 (31) % $ 755 65 % $ 458
Revenues. Revenues increased $338 million from fiscal 2021 to fiscal 2022 due to
ramp up on new and existing contracts, the acquisitions of Unisys Federal (which
occurred in the first quarter of the prior year period) and Halfaker, net
favorable changes in contract estimates, and the accelerated amortization on
certain off-market liability contracts, partially offset by contract
completions. Adjusting for the impact of acquired revenues and divested
revenues, revenues grew 2.5% primarily due to new awards and net increases in
program volume.
Cost of Revenues. Cost of revenues increased $271 million from fiscal 2021 to
fiscal 2022 primarily due to an increase in volume on existing contracts and the
acquisitions of Unisys Federal (which occurred in the first quarter of the prior
year period) and Halfaker. Cost of revenues as a percentage of revenues
decreased due to improved profitability across our contract portfolio, net
favorable changes in contract estimates, and the accelerated amortization on
certain off-market liability contracts, partially offset by higher indirect
costs.
Selling, General and Administrative Expenses. SG&A decreased $8 million from
fiscal 2021 to fiscal 2022 primarily due to decreased intangible asset
amortization related to the acquisition of Unisys Federal and lower bid and
proposal costs in the current year, partially offset by intangible amortization
related to the acquisition of Halfaker, gains related to the resolution of
certain legal matters in the prior year, and the acquisitions of Unisys Federal
(which occurred in the first quarter of the prior year period) and Halfaker.
Operating Income. Operating income as a percentage of revenues increased to 6.2%
for fiscal 2022, compared to 5.5% for fiscal 2021, primarily due to improved
profitability across our contract portfolio, net favorable changes in contract
estimates, benefit from a net favorable settlement of prior indirect rate years,
and the accelerated amortization on certain off-market liability contracts,
partially offset by higher indirect costs in the current year and gains related
to the resolution of certain legal and other program contract matters in the
prior year.
Cash Flows Provided by Operating Activities. Cash flows provided by operating
activities were $518 million for fiscal 2022, which represented a decrease of
$237 million from fiscal 2021. The decrease was primarily due to higher cash
provided by the Master Accounts Receivable Purchase Agreement (MARPA Facility)
in the prior year ($170 million ), when we initially entered into the facility,
and working capital impact related to the deferred payroll taxes allowed under
the CARES Act, partially offset by lower cash paid for income taxes and higher
net earnings.
Non-GAAP Measures
Earnings before interest, taxes, depreciation and amortization (EBITDA), and
adjusted EBITDA are non-GAAP financial measures. While we believe that these
non-GAAP financial measures may be useful in evaluating our financial
information, they should be considered as supplemental in nature and not as a
substitute for financial information prepared in accordance with GAAP.
Reconciliations, definitions, and how we believe these measures
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useful to management and investors are presented below. Other companies may define similar measures differently.
EBITDA and Adjusted EBITDA. The performance measure EBITDA is calculated by taking net income and excluding interest and loss on sale of receivables, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing performance. Adjusted EBITDA is calculated by taking EBITDA and excluding acquisition and integration costs, impairments, restructuring costs, and any other material non-recurring costs. Integration costs are costs to integrate acquired companies including costs of strategic consulting services, facility consolidation and employee related costs such as retention and severance costs. The acquisition and integration costs relate to the Company's acquisitions ofEngility Holdings, Inc. , Unisys Federal, Halfaker, and Koverse. See Note 5 to the consolidated financial statements contained within this report for description of our restructuring and impairment costs. We believe that EBITDA and adjusted EBITDA provide management and investors with useful information in assessing trends in our ongoing operating performance and may provide greater visibility in understanding the long-term financial performance of the Company. EBITDA and adjusted EBITDA for the periods presented were calculated as follows: Year Ended January 28, 2022 January 29, 2021 January 31, 2020 (in millions) Net income $ 279 $ 211 $ 229 Interest expense and loss on sale of receivables 107 124 90 Interest income - (1) (4) Provision for income taxes 79 60 57 Depreciation and amortization 165 179 131 EBITDA 630 573 503 EBITDA as a percentage of revenues 8.5 % 8.1 % 7.9 % Acquisition and integration costs 56 54 48 Restructuring and impairment costs 2 4 -
Depreciation included in acquisition and integration costs
(1) (1) (5) Recovery of acquisition and integration costs and restructuring and impairment costs(1) (1) (3) (8) Adjusted EBITDA $ 686 $ 627 $ 538 Adjusted EBITDA as a percentage of revenues 9.3 % 8.9 % 8.4 %
(1) The adjustment reflects the portion of acquisition and integration costs and restructuring and impairment costs recovered by the Company’s indirect rates in accordance with cost accounting standards.
Adjusted EBITDA as a percentage of revenues increased to 9.3% for fiscal 2022, compared to 8.9% for fiscal 2021, driven by a net increase in profitability across our existing contract portfolio, net favorable changes in contract estimates, benefit from a net favorable settlement of prior indirect rate years, and revenue resulting from the accelerated amortization on certain off-market liability contracts, partially offset by higher indirect costs in the current year and gains related to the resolution of certain legal and other program contract matters in the prior year.
Other key performance measures
In addition to the financial measures described above, we believe that bookings
and backlog are useful measures for management and investors to evaluate our
potential future revenues. We also consider measures such as contract types and
cost of revenues mix to be useful for management and investors to evaluate our
operating income and performance.
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Net Bookings and Backlog. Net bookings represent the estimated amount of
revenues to be earned in the future from funded and negotiated unfunded contract
awards that were received during the period, net of adjustments to estimates on
previously awarded contracts. We calculate net bookings as the period's ending
backlog plus the period's revenues less the prior period's ending backlog and
initial backlog obtained through acquisitions.
Backlog represents the estimated amount of future revenues to be recognized
under negotiated contracts as work is performed. We do not include in backlog
estimates of revenues to be derived from IDIQ contracts, but rather record
backlog and bookings when task orders are awarded on these contracts. Given that
much of our revenue is derived from IDIQ contract task orders that renew
annually, bookings on these contracts tend to refresh annually as the task
orders are renewed. Additionally, we do not include in backlog contract awards
that are under protest until the protest is resolved in our favor.
We separate our backlog into two categories as follows:
•Funded Backlog. Funded backlog for contracts with government agencies primarily represents estimated amounts of revenue to be earned in the future from contracts for which funding is appropriated less revenues previously recognized on these contracts. It does not include the unfunded portion of contracts in which funding is incrementally appropriated or authorized on a quarterly or annual basis by theU.S. government and other customers even though the contract may call for performance over a number of years. Funded backlog for contracts with non-government customers represents the estimated value on contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts.
• Negotiated unfunded arrears. Negotiated unfunded backlog represents the estimated amounts of revenue to be earned in the future from negotiated contracts for which funding has not been earmarked or otherwise authorized and from unexercised priced contract options. The Negotiated Unfunded Backlog does not include any estimates of potential future task orders expected to be awarded under IDIQ, GSA Appendices, or other Master Agreement contractual vehicles.
We expect to recognize revenue from a substantial portion of our funded backlog within the next twelve months. However, theU.S. government can adjust the scope of services of or cancel contracts at any time. Similarly, certain contracts with commercial customers include provisions that allow the customer to cancel prior to contract completion. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees (contract profit) for work performed.
The estimated value of our total backlog at the dates presented was:
January 28, 2022 January 29, 2021
(in millions)
Funded backlog $ 3,491 $ 3,024
Negotiated unfunded backlog 20,601 18,524
Total backlog $ 24,092 $ 21,548
We had net bookings worth an estimated $9.4 billion and $11.9 billion during
fiscal 2022 and 2021, respectively. Fiscal 2022 total backlog has increased from
the prior year primarily due to several large awards received during the period
from the U.S. Army and U.S. Navy . In addition, $0.6 billion of acquired backlog
from Halfaker was recorded as an increase to backlog as of the acquisition date.
Types of contract. Our earnings and profitability can vary significantly based on changes in the proportional amount of revenue from each type of contract. For a discussion of the types of contracts under which we
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generate revenues, see "Business-Contract Types" in Part I of this report. The
following table summarizes revenues by contract type as a percentage of revenues
for the periods presented:
Year Ended
January 28, 2022 January 29, 2021 January 31, 2020
Cost reimbursement 54 % 54 % 57 %
Time and materials (T&M) 20 % 22 % 20 %
Firm-fixed price (FFP) 26 % 24 % 23 %
Total 100 % 100 % 100 %
Our contract mix reflects an increase in firm-fixed price type contracts due in
part to the acquisitions of Unisys Federal (which occurred in the first quarter
of the prior year period) and Halfaker, which historically had a higher
proportion of these contracts.
Cost of Revenues Mix. We generate revenues by providing a customized mix of
services to our customers. The profit generated from our service contracts is
affected by the proportion of cost of revenues incurred from the efforts of our
employees (which we refer to below as labor-related cost of revenues), the
efforts of our subcontractors and the cost of materials used in the performance
of our service obligations under our contracts. Contracts performed with a
higher proportion of SAIC labor are generally more profitable. The following
table presents cost mix for the periods presented:
Year Ended
(as a % of total cost of revenues)
Labor-related cost of revenues 54 % 55 % 54 %
Subcontractor-related cost of revenues 29 % 29 % 29 %
Supply chain materials-related cost of revenues 8 % 8 % 11 %
Other materials-related cost of revenues 9 % 8 % 6 %
Total 100 % 100 % 100 %
The revenue cost mix for fiscal 2022 remained consistent with the prior year.
Cash and capital resources
As a services provider, our business generally requires minimal infrastructure investment. We expect to fund our ongoing working capital, commitments and any other discretionary investments with cash on hand, future operating cash flows and, if needed, borrowings under our$400 million Revolving Credit Facility and$300 million MARPA Facility. We anticipate that our future cash needs will be for working capital, capital expenditures, and contractual and other commitments. We consider various financial measures when we develop and update our capital deployment strategy, which include evaluating cash provided by operating activities, free cash flow and financial leverage. When our cash generation enables us to exceed our target average minimum cash balance, we intend to deploy excess cash through dividends, share repurchases, debt prepayments or strategic acquisitions. Our ability to fund these needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our direct control. Although we believe that the financing arrangements in place will permit us to finance our operations on acceptable terms and conditions for at least the next year, our future access to, and the availability of financing on acceptable terms and conditions will be impacted by many factors (including our credit rating, capital market liquidity and overall economic conditions). Therefore, we cannot ensure that such financing will be available to us on acceptable terms or that such financing will be available at all. Nevertheless, we believe that our existing cash on hand, generation of future operating cash flows, and access to bank financing and capital markets will provide adequate resources to meet our short-term liquidity and long-term capital needs. 28
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Upon the acquisition of Halfaker, we drew $100 million on our incremental senior
secured Term Loan A2 Facility due October 2023 . The proceeds were used for the
purchase of Halfaker.
Upon the acquisition of Unisys Federal in fiscal 2021, we drew $600 million on
our incremental senior secured Term Loan B2 Facility due March 2027 and issued
$400 million of Senior Notes due 2028. In addition, in February 2020 we sold
$200 million of accounts receivable under our MARPA Facility. The proceeds were
used for the purchase of Unisys Federal.
Borrowings under our Term Loan Facilities, our MARPA Facility and, if used in
the future, our Revolving Credit Facility incur interest at a variable rate. In
accordance with our risk management objectives, we hold fixed interest rate swap
agreements to hedge the variability in interest payment cash flows on a
substantial portion of our outstanding variable rate debt. These instruments are
accounted for as cash flow hedges. Under the swap agreements, we pay the fixed
rate and the counterparties to the agreement pay a floating interest rate.
Our Credit Facility contains customary terms and conditions including financial
covenants and covenants restricting the Company's ability to merge or
consolidate with another entity or undertake other fundamental changes, enter
into property sale and leaseback transactions, and incur liens. The Company's
dividends and share repurchases may be limited under certain leverage ratios,
and we may be required to make an annual debt prepayment based on our cash flows
from operating activities. See Note 11 to the consolidated financial statements
contained within this report for a more complete understanding of our Credit
Facility.
We currently maintain credit ratings from major U.S. rating agencies. Failure to
maintain acceptable ratings could have an adverse effect on the Company's future
cost of capital and any significant increase in the level of our borrowings
could negatively impact these ratings.
Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 requires the
capitalization of research and development costs for tax purposes, which can
then be amortized over five years. Congress has proposed tax legislation to
delay the effective date of this change to 2026, but it is uncertain whether the
proposed legislation will ultimately be enacted into law. If the current
effective date remains in place, the Company's initial assessment is that the
Company would experience a material decrease in cash from operations in fiscal
2023, but our net deferred tax assets will increase by a similar amount.
Management is currently evaluating the potential impact on our operating cash
flows.
In fiscal 2022, we repurchased approximately 2.4 million common shares for
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The following table summarizes our principal contractual commitments as of
January 28, 2022 :
Total Due in Fiscal 2023
(in millions)
Long-term debt including current portion $ 2,540 $
148
Interest payments on long-term debt(1) 338
77
Operating lease obligations 265
59
Estimated purchase obligations(2) 114
76
Other liabilities(3) 155
98
Total contractual obligations$ 3,412 $
458
(1)Amounts include an estimate of future variable interest payments on the Term Loan Facilities based on scheduled outstanding principal amounts, current applicable margin and projected 1-month LIBOR as ofJanuary 28, 2022 . The amounts presented in this table exclude the effects of interest rate swaps used to hedge against changes in 1-month LIBOR. (2)Excludes purchase orders for services or products to be delivered pursuant toU.S. government contracts in which we have full recourse under normal contract termination clauses. (3)Other liabilities primarily consist of liabilities associated with deferred compensation plan obligations, liabilities for unrecognized tax benefits, and the deferral of certain payroll tax payments as permitted by the CARES Act. Deferred compensation plan obligations due in fiscal 2023 are based on participants' payment elections on retirement and estimated retirement ages. Liabilities for unrecognized tax benefits due in fiscal 2023 are based on the fiscal year in which the statute of limitations is currently expected to expire. See respective notes to the consolidated financial statements contained within this report for further information about our long-term debt (Note 11), lease payment obligations (Note 15), liabilities for unrecognized tax benefits (Note 10), and letters of credit and surety bonds (Note 17).
Historical cash flow trends
The following table summarizes our cash flows:
Year Ended
January 28, January 29, January 31,
2022 2021 2020
(in millions)
Net cash provided by operating activities $ 518 $ 755 $ 458
Net cash used in investing activities (292) (1,231) (47)
Net cash (used in) provided by financing activities (301) 464 (455)
Total decrease in cash, cash equivalents and restricted cash
$ (75)
Cash Provided by Operating Activities. Refer to "Results of Operations" above for a discussion of the changes in cash provided by operating activities between fiscal 2022 and 2021. Cash Used in Investing Activities. Cash used in investing activities decreased in fiscal 2022 compared to the prior year period primarily due to cash paid for the acquisition of Unisys Federal in the prior year period, partially offset by cash paid for the acquisitions of Halfaker and Koverse in the current year period. Cash Used in/Provided by Financing Activities. Cash used in financing activities in fiscal 2022 was$301 million compared to cash provided by financing activities of$464 million in fiscal 2021. This change is primarily due to proceeds from borrowings obtained to finance the Unisys Federal acquisition in the prior year period and higher share repurchases in the current year period, partially offset by higher voluntary principal prepayments in the prior year period and borrowings to finance the Halfaker acquisition in the current year period. 30
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Commitments and contingencies
We are subject to a number of reviews, investigations, claims, lawsuits and other uncertainties related to our business. For an analysis of these items, see Note 17 to the consolidated financial statements contained in this report.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies, as well as the reported amounts of revenues, expenses, gains and losses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information and, in some cases, are our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions may change in the future as more current information is available. Management believes that our critical accounting policies are those that are both material to the presentation of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments difficult, subjective and complex have to do with making estimates about the effect of matters that are inherently uncertain. These policies are described below. Revenue Recognition. We generate our revenues primarily from long-term contracts in which we provide technical, engineering and enterprise IT services directly for theU.S. government and as a subcontractor with other contractors engaged in work for theU.S. government. We evaluate the nature of the contract and the services provided when determining the accounting method utilized for each contract. We recognize a significant portion of our revenues using a cost input measure of progress that requires us to rely on the skill and expertise of our engineers, program managers and business management professionals in the many areas of cost estimation. These estimates of costs can span several years and take into account many factors including the availability, productivity and cost of labor, potential delays in our performance and the level of future indirect cost allocations. We provide for anticipated losses on long-term production type contracts and service contracts with theU.S. government by recording an expense for the total expected contract loss during the period when the loss is determined. Contract costs incurred forU.S. government contracts (including allocated indirect costs) are subject to audit and adjustment through negotiations with government representatives. Revenues onU.S. government contracts have been recorded in amounts that are expected to be realized on final settlement. Many of our contracts include forms of variable consideration such as reimbursable costs, award and incentive fees, usage-based pricing, service-level penalties, performance bonuses, and other provisions that can either increase or decrease the transaction price. Variable amounts are generally determined upon our achievement of certain performance metrics, program milestones or cost targets and may be based upon customer discretion. At contract inception, we estimate the transaction price and may include variable consideration in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. When developing these estimates, we consider the customer, contract terms, the complexity of the work and related risks, the extent of customer discretion, historical experience and the potential of a significant reversal of revenue. Changes in Estimates on Contracts. Changes in estimates of revenues, cost of revenues or profits related to performance obligations satisfied over time are recognized in operating income in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can occur routinely over the performance period for a variety of reasons, which include: changes in scope; changes in cost estimates due to unanticipated cost growth or reassessments of risks impacting costs; changes in the estimated transaction price, such as variable amounts for incentive or award fees; and performance being better or worse than previously estimated. Many of the Company's contracts recognize revenue on performance obligations using a cost input measure (cost-to-cost), which requires estimates of total costs at completion. In cases when total expected costs exceed total estimated revenues for a performance obligation, the Company recognizes the total estimated loss in the quarter identified. Total estimated losses are inclusive of any unexercised options that are probable of award, only if they increase the amount of the loss. Aggregate net changes in contract estimates increased operating 31
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income by $13 million , $9 million and $22 million for fiscal 2022, 2021 and
2020, respectively. For additional information related to changes in estimates
on contracts, including gross favorable and unfavorable adjustments as well as
the impact to earnings per share, see Note 3 to the consolidated financial
statements contained within this report.
Business Combinations. We record all tangible and intangible assets acquired and
liabilities assumed in a business combination at fair value as of the
acquisition date. The excess amount of the aggregated purchase consideration
paid over the fair value of the net of assets acquired and liabilities assumed
is recorded as goodwill.
The fair values of assets acquired and liabilities assumed are determined using
either an income, cost or market approach. Each of these valuation methods
requires significant judgment, including analysis of historical performance and
estimates of future performance. Estimates can be affected by contract
performance and other factors that may cause final amounts to differ materially
from original estimates.
Under the income approach, fair value is based on the present value of future
cash flows to be generated over the remaining economic life of an asset or
liability being measured. This method includes estimates for projections of
revenues and expenses, royalty rates, tax rates, contributory asset charges,
discount rates, and tax amortization benefits. Under the cost approach, fair
value is measured by determining the replacement cost of an asset. Under the
market approach, the fair value reflects the price and other relevant
information of market transactions for comparable assets, liabilities or groups
of assets and liabilities. Valuation techniques consistent with the market
approach often use market multiples derived from a set of comparables.
The valuations are based on information that existed as of the acquisition date.
During the measurement period that shall not exceed one year from the
acquisition date, we may adjust provisional amounts recorded for assets acquired
and liabilities assumed to reflect new information that we have subsequently
obtained regarding facts and circumstances that existed as of the acquisition
date.
Goodwill and Intangible Assets. Goodwill is recorded as the difference between
the aggregate consideration paid for an acquisition and the fair value of the
net tangible and intangible assets acquired and liabilities assumed. Goodwill is
not amortized, but rather tested for potential impairment annually at the
beginning of the fourth quarter, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
The goodwill impairment test is performed at the reporting unit level. The
Company estimates and compares the fair value of each reporting unit to its
respective carrying value including goodwill. If the fair value is less than the
carrying value, the amount of impairment expense is equal to the difference
between the reporting unit's fair value and the reporting unit's carrying value.
Determining the fair value of each reporting unit involves judgment and the use
of estimates and assumptions. We estimate the fair value of our reporting units
using either a market approach, income approach, or a combination of both. For
our annual impairment analysis, we reconcile the aggregate fair value of all of
our reporting units to our market capitalization as of the measurement date.
Under the income approach, we estimate the fair value of a reporting unit using
a multi-year discounted cash flow model that involves assumptions about
projected future revenue growth, operating margins, income tax rates, capital
expenditures, discount rate and terminal value. The discount rate is an estimate
of the cost of capital that a market participant would expect for the respective
reporting unit. The terminal value represents the present value in the last year
of the projection period of all subsequent cash flows into perpetuity.
Under the market approach, we estimate the fair value of a reporting unit based
on multiples of earnings derived from observable market data of comparable
public companies. We evaluate companies within our industry that have operations
with observable and comparable economic characteristics and are similar in
nature, scope and size to the reporting unit being compared. We analyze
historical acquisitions in our industry to estimate a control premium that we
incorporate into the fair value estimate of a reporting unit under the market
approach.
During the fourth quarter of fiscal 2022, we performed our annual goodwill impairment test and determined that the fair value of each reporting unit significantly exceeded its carrying value.
In addition, determining the carrying value of each reporting unit requires
judgment and involves the assignment of assets and liabilities to the reporting
units based on a systematic and rational allocation methodology. Certain assets
and liabilities may be specifically identified and assigned to a reporting unit
based on the information
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contained in our financial systems; while other assets and liabilities can be allocated using measurable relationships or other allocation bases.
Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Income Taxes. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid and includes judgments related to matters for which ultimate resolution may not become known until the final resolution of an examination by taxing authorities or the statute of limitations lapses. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent operating results. If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance, which would either decrease or increase, respectively, the provision for income taxes.
Accounting pronouncements recently issued but not yet adopted
For more information on recently issued but not yet adopted accounting pronouncements, see Note 1 to the consolidated financial statements contained in this report.
Effects of Inflation For any of the most recent three fiscal years endedJanuary 28, 2022 , inflation has not had a significant impact on revenues or costs. Most of our contracts are paid inU.S. dollars and our cost to perform on these contracts are generally paid inU.S. dollars, so inflation risk is generally limited to that which is related to theU.S. dollar. Approximately 54% of our revenues for fiscal 2022 were derived from cost-reimbursement type contracts, which have limited inflation risk because our contracts generally entail the provision of labor on a reimbursable basis, and, when materials are acquired, they provide for billing to the customer during the period in which the materials were received. Bids for longer-term FFP and T&M contracts typically include sufficient provisions for labor and other cost escalations to cover anticipated cost increases over the period of performance. As a result, if we were to experience significant levels of inflation, our revenues and costs for cost-type contracts would generally both increase commensurate with inflation and operating income as a percentage of total revenues would not be significantly affected. Operating income as a percentage of total revenues would not be significantly affected for longer-term FFP and T&M contracts to the extent that bid contract cost escalations are sufficient to cover heightened inflation levels.
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