Business Overview and History

Science Applications International Corporation (NASDAQ:SAIC) is a leading technology integrator providing full life cycle services and solutions in the technical, engineering, and enterprise information technology (IT) markets. With a rich history of over 50 years, SAIC has established itself as a trusted partner in addressing the most complex challenges faced by its customers, primarily in the U.S. government sector.

SAIC was founded in 1969 as a small research and engineering firm, initially focusing on government contracting. Over the decades, the company has evolved into a premier provider of technology-enabled solutions, serving a diverse range of customers across the defense, intelligence, civilian, and commercial sectors.

In the early years, SAIC focused on providing scientific and technical services to government customers. The company grew steadily through the 1970s and 1980s, expanding its capabilities and customer base. As SAIC evolved, it transitioned from a pure-play technology services provider to a more diversified business, offering a broader range of IT services and solutions.

A significant milestone in SAIC's history occurred in 2013 when the company underwent a major corporate restructuring. SAIC split into two publicly traded entities - SAIC and Leidos. This separation allowed SAIC to sharpen its focus on serving the U.S. government market. Following the split, SAIC continued to invest in developing its technical capabilities and expanding its customer relationships.

Throughout its history, SAIC has faced various challenges, including adapting to changes in government spending priorities and navigating the competitive landscape. One notable example occurred in 2018 when the company received a stop-work order from the U.S. Marine Corps on the Assault Amphibious Vehicle (AAV) contract, which was later terminated for convenience by the customer. SAIC had to navigate this contract termination and manage the associated financial impact.

Despite these challenges, SAIC has maintained its position as a leading provider of technical and IT services to the U.S. government. The company's strong track record of contract performance and continued investment in developing new capabilities to meet the evolving needs of its customers have been key factors in its success over the past five decades.

Today, SAIC is a leading provider of technical, engineering, and enterprise IT services, with a strong presence in the U.S. government market. The company's comprehensive portfolio of solutions spans areas such as digital modernization, cloud computing, artificial intelligence, mission systems support, and training and simulation. SAIC's deep domain expertise and long-standing customer relationships have made it a trusted partner in delivering mission-critical solutions that enable its clients to achieve their objectives.

Effective February 3, 2024, SAIC completed a business reorganization which replaced its previous two operating sectors with five customer-facing business groups supported by enterprise organizations, including the Innovation Factory. The five business groups, which are also its operating segments, are aggregated into two reportable segments for financial reporting purposes - the Defense and Intelligence segment and the Civilian segment.

The Defense and Intelligence segment provides a diverse portfolio of national security solutions to the defense and intelligence departments and agencies of the United States Government. The Civilian segment provides solutions to the civilian markets, encompassing federal, state, and local governments, in order to deliver services for citizen well-being and protecting lives.

The offerings of both reportable segments entail the integration of emerging technologies into mission-critical operations that modernize and enable national imperatives, including IT modernization, digital engineering, artificial intelligence, mission systems support and advisory, training and simulation, and ground vehicles support.

The Innovation Factory supports the operating segments by developing enterprise-class solutions which are delivered to customers as stand-alone solutions or integrated with and aligned to product offerings to meet complex customer needs and accelerate digital transformation.

Financial Performance and Ratios

SAIC's financial performance has been relatively stable over the past three fiscal years, with revenues ranging from $7.06 billion in fiscal year 2021 to $7.70 billion in fiscal year 2023. The company's net income has also shown a consistent upward trend, increasing from $209 million in fiscal year 2021 to $477 million in fiscal year 2024.

In the most recent fiscal year, SAIC reported annual revenue of $7.44 billion and annual net income of $477 million. The company's annual operating cash flow was $396 million, while annual free cash flow stood at $369 million.

For the most recent quarter, SAIC reported revenue of $1.98 billion, representing a 4% year-over-year growth. The increase in revenue was primarily due to ramp-up in volume on existing and new contracts, partially offset by contract completions. Net income for the quarter was $106 million.

The company's financial ratios reflect a well-managed and financially sound organization. As of the latest fiscal year, SAIC's current ratio stood at 0.87, indicating a moderate ability to meet its short-term obligations. The debt-to-equity ratio of 0.25 suggests a conservative capital structure, with a good balance between debt and equity financing.

SAIC's return on equity (ROE) and return on assets (ROA) have been relatively strong, averaging 17.9% and 5.7% respectively over the past three fiscal years. These metrics demonstrate the company's ability to generate solid returns for its shareholders and effectively utilize its assets to drive profitability.

Liquidity

In terms of liquidity, SAIC's operating cash flow and free cash flow have been robust, averaging $601 million and $519 million, respectively, over the past three fiscal years. This financial flexibility allows the company to invest in growth initiatives, fund capital expenditures, and return capital to shareholders through dividends and share repurchases.

As of the latest report, SAIC had $94 million in cash and cash equivalents. The company also has access to a $1 billion revolving credit facility due June 2027, providing additional financial flexibility. SAIC's quick ratio, which is the same as its current ratio at 0.87, indicates that the company has a moderate ability to cover its short-term liabilities with its most liquid assets.

Competitive Landscape and Market Positioning

SAIC operates in a highly competitive industry, with the government services and IT services markets being fiercely contested. The company faces competition from a diverse set of players, including large defense and aerospace companies, specialized IT services providers, and boutique consulting firms.

However, SAIC's long-standing relationships with the U.S. government, its deep domain expertise, and its comprehensive suite of technology-enabled solutions have enabled the company to maintain a strong market position. The company's focus on mission-critical operations, digital transformation, and emerging technologies has allowed it to differentiate itself from its competitors and capture a significant share of the government services market.

SAIC's ability to integrate cutting-edge technologies, such as artificial intelligence, cloud computing, and cybersecurity, into its solutions has been a key competitive advantage. The company's innovation capabilities, combined with its strong customer relationships and proven track record of successful project delivery, have contributed to its market leadership.

Risks and Challenges

SAIC's business operations are heavily dependent on the U.S. government, which accounted for approximately 98% of the company's revenues in the most recent fiscal year. This heavy reliance on a single customer base exposes SAIC to potential changes in government spending priorities, budget fluctuations, and political uncertainties.

Additionally, the company faces the risk of increased competition, both from traditional players and new entrants in the technology services market. The ability to continuously adapt to evolving customer needs, technological advancements, and market dynamics is crucial for SAIC to maintain its competitive edge.

Regulatory compliance and security requirements in the government services sector also pose significant challenges for SAIC. The company must ensure strict adherence to various industry regulations, security protocols, and data privacy standards to retain its government contracts and safeguard sensitive information.

Talent acquisition and retention are also critical factors for SAIC's success. The company's ability to attract, develop, and retain a highly skilled workforce with the necessary technical expertise and security clearances is essential for delivering innovative solutions and maintaining operational excellence.

Outlook and Growth Strategies

SAIC's management has outlined a comprehensive growth strategy focused on three key pillars: bid more, bid better, and win more. This approach aims to drive increased submits, improve the quality of the company's bid pipeline, and enhance its win rates across both new business and recompete opportunities.

For the current fiscal year, SAIC has increased its revenue guidance to a range of $7.425 billion to $7.475 billion, representing organic growth of approximately 3% for the year. The company has reiterated its prior guidance for adjusted EBITDA and free cash flow, while increasing its adjusted diluted earnings per share guidance by approximately $0.40, largely due to a lower effective tax rate and modestly lower share count.

Looking ahead to fiscal year 2026, SAIC expects revenue growth to be in the range of 2% to 4%, with slower growth in the first half of the year improving to around 5% by the end of the year. The company has also raised its target for bid submissions, now expecting to submit over $30 billion in bids in fiscal year 2027, up from their prior target of $22 billion for fiscal year 2025.

SAIC's strategic investments in emerging technologies, such as artificial intelligence, cloud computing, and cybersecurity, are expected to play a crucial role in capturing new business opportunities and expanding its footprint in the government and commercial markets. The company's focus on delivering integrated, end-to-end solutions that enable its customers to achieve their mission-critical objectives is a key driver of its growth outlook.

Furthermore, SAIC's strong cash flow generation and prudent capital allocation strategies have allowed the company to maintain a healthy balance sheet and return capital to shareholders through dividends and share repurchases. The company expects to repurchase approximately $500 million of shares this year and plans to execute against a new $1.2 billion share repurchase authorization, representing around 20% of its diluted shares outstanding.

Segment Performance

SAIC operates in two main reportable segments: Defense and Intelligence, and Civilian.

The Defense and Intelligence segment saw revenues of $1.51 billion in the third quarter of fiscal 2025, a 2% increase from the prior year period, driven by ramp-up in volume on existing and new contracts, partially offset by contract completions. For the nine-month period, Defense and Intelligence revenues were $4.37 billion, a 2% decrease from the prior year primarily due to the sale of the Supply Chain Business in the prior year, as well as contract completions, partially offset by ramp-up in volume on existing and new contracts. Adjusted operating income for this segment was $148 million in the third quarter, up 20% year-over-year, and $396 million for the nine-month period, up 2%, driven by the ramp-up in volume, the resolution of the Assault Amphibious Vehicle contract termination, and partially offset by contract completions.

The Civilian segment reported revenues of $461 million in the third quarter, up 11% year-over-year, and $1.27 billion for the nine-month period, up 3%, primarily due to ramp-up in volume on existing contracts. Adjusted operating income for the Civilian segment was $49 million in the third quarter, down 26% from the prior year period, and $141 million for the nine-month period, down 19%, primarily due to timing and volume mix.

Conclusion

Science Applications International Corporation (NASDAQ:SAIC) has established itself as a leading technology integrator, delivering mission-critical solutions to a diverse range of customers, primarily in the U.S. government sector. With a rich history of over 50 years, the company has continuously evolved its capabilities to meet the evolving demands of its clients, leveraging its deep domain expertise, innovative technology offerings, and strong customer relationships.

SAIC's financial performance has been relatively stable, with a focus on driving operational efficiencies, maintaining a healthy balance sheet, and generating robust cash flows. The company's competitive positioning, growth strategies, and prudent capital allocation have positioned it well to navigate the challenges and capitalize on the opportunities in the dynamic technology services market.

As SAIC continues to invest in emerging technologies, expand its service offerings, and deepen its customer relationships, the company is poised to play a vital role in enabling its clients to achieve their mission-critical objectives and drive digital transformation in the years to come. With a strong pipeline of bid opportunities and a focus on organic growth, SAIC is well-positioned to maintain its leadership in the government services and IT solutions market.