SEC Company Response from Science Applications International Corp (SAIC) (CIK 0001571123) (SAIC) — Jan 19, 2017
Science Applications International Corp (SAIC) (CIK 0001571123)
Date: Jan. 19, 2017 · CIK: 0001571123 · Accession: 0001564590-17-000422
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-35832
Referenced dates: January 4, 2017
Letter
VIA EDGAR Office of Information Technologies and Services Science Applications International Corporation Form 10-K for the Fiscal Year Ended January 29, 2016 Filed March 29, 2016 File No. 001-35832
Dear Mr. Wilson:
We are writing in response to the letter dated January 4, 2017 from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Science Applications International Corporation (the “Company”, “we”, “us”, or “our”). This letter sets forth the Company’s responses to that comment letter. For your convenience, we have reprinted the Staff’s original comments in bold, followed by our responses.
Pursuant to the provisions of Rule 12b-4 (“Rule 12b-4”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Rules of Practice of the Commission contained under 17 C.F.R § 200.83 (“Rule 83”), the Company has supplementally furnished and requests confidential treatment for the information attached to this letter as Supplement A (the “Material”). The Material contained in Supplement A has been omitted from the Company’s filing on EDGAR and is furnished separately to the Staff. The Company has filed a separate letter with the Office of Freedom of Information and Privacy Act Operations in connection with the confidential treatment request of the Material. If you have any questions regarding the confidential treatment request, please contact Maria Bishop, Corporate Controller, via telephone at (703) 676-6405.
In accordance with Rule 12b-4, the Company hereby requests that the Material be returned following completion of the Staff’s review thereof. The Material, as provided in Rule 12b-4, is not required to be filed with or deemed part of the Company’s Exchange Act reports. Please return the Material in the enclosed addressed, prepaid overnight delivery envelope when you have completed your review, or call the undersigned and we will arrange to have the Material retrieved from the Commission.
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
January 19, 2017
Form 10-K for the Fiscal Year Ended January 29, 2016
Key Customers, page 2
Comment 1:
We note that you generate revenues both as the prime contractor and as a subcontractor to other contractors. In this regard, please tell us the amount of revenues that you generate as a subcontractor and, to the extent material, also tell us what consideration you gave to disclosing revenues that you generate as a subcontractor as compared to revenues that you generate as a prime contractor within MD&A.
Response:
Within the government contracting industry we believe that there is substantially no difference in the characteristics of the revenue generated as the prime contractor with the U.S. government as compared to the revenue generated as the subcontractor to another company with the ending customer being the U.S. government. Margins on the types of services the Company performs within this industry fall within a relatively narrow range and are consistent between work performed on both prime and subcontract arrangements. Additionally, the risk profile of the work performed is substantially the same due to industry standard contractual regulations and requirements and there is no significant difference in the nature of the performance and delivery of services to the end customer. The position of prime contractor versus subcontractor is largely dependent on the technical expertise held by the labor within each company, and as such, large contracts tend to involve more than one company in order to meet the technical requirements requested by the U.S. government customer.
The Company’s revenues from prime contracts and subcontracts where the U.S. government was the end customer for each of the years presented in our Form 10-K for the fiscal year ended January 29, 2016 were:
Year Ended
January 29,
January 30,
January 31,
(in millions)
Revenues earned on prime contracts with the U.S. government
$
3,832
$
3,414
$
3,604
As a % of total revenues
%
%
%
Revenues earned on subcontracts with the U.S. government
As a % of total revenues
%
%
%
Revenues from non-U.S. government contracts
As a % of total revenues
%
%
%
Given the relatively immaterial nature of the revenue we generate from subcontracts, and the similarity in characteristics of revenue generated from prime contracts or subcontracts, we believe that disclosing these amounts within MD&A would provide little or no meaningful or relevant information to investors regarding our financial condition or results of operations.
Consolidated and Combined Statements of Income and Comprehensive Income, page F-3
Comment 2:
Based on your disclosures on page 33, it appears that materials related revenues comprise approximately 19% of total revenues. In addition, based on your third quarter earnings call, it appears that you are attempting to further expand the sales of manufactured products. In this regard, tell us what consideration you gave to separately presenting revenues and costs by services and tangible products as required by Rule 5-03(b)(1) and (2) of Regulation S-X.
- 2 -
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
January 19, 2017
Response:
The Company’s revenues are generated by the comprehensive technical and enterprise IT services our highly skilled employees and subcontractors provide to our customers, and are highly customized based on customer specifications and result in the delivery of a solution or the performance of best efforts for, or on behalf of, a customer. The Company may also provide materials which are used in the performance of the Company’s service obligations under its contracts. For example, the Company may provide operations and maintenance support as part of an IT infrastructure management program and may also procure computer hardware to refurbish and refresh the customer’s existing IT systems. As this type of service contract with the U.S. government would be accounted for under ASC 605-35, Construction-Type and Production-Type Contracts, this comprehensive service offering would generally be accounted for as a single profit center with our services constituting the primary deliverable. We do not currently manufacture goods or sell products on a stand-alone basis. As disclosed on page 33 of our Form 10-K, materials provided under such service arrangements comprised approximately 19% of total revenues for the year ended January 29, 2016. As noted in the table on page 33, 14% of the materials relate to supply chain contracts. Our supply chain services offer logistics management that provides end-to-end procurement, transportation, and delivery of materials through our integrated logistics systems developed and maintained by our highly skilled employees.
To provide additional clarity with regard to the above we will revise our disclosure within MD&A under the heading “Revenue Mix” in our Form 10-K for the year ending February 3, 2017 to read:
“We generate revenues by providing a customized mix of services to our customers. These services are primarily provided through the efforts of our employees (which we refer to below as labor-related revenues) and the efforts of our subcontractors (which we refer to below as subcontractor-related revenues). We may also provide materials which are used in the performance of our service obligations under our contracts. The revenues we generate on such materials, as well as the efforts of our subcontractors, generally have lower margins than the revenues we generate from our labor-related revenues. The following table presents changes in labor-related, subcontractor-related and materials-related revenues for the periods presented:”
As discussed during our third quarter earnings call, we are continuing to pursue opportunities to provide platform integration and other related services to various branches of the U.S. military such as the AAV, ACV and MK48 programs. These engineering and design services include developing and testing prototype solutions to meet the deployment needs of our customers. If our prototype solutions are accepted by the customer these programs may mature and result in the award of production-phase follow-on contracts. We will evaluate the necessity to present the revenues generated under such follow-on contracts separately as those contracts are awarded. See further discussion in our response to Comment 4, below.
As all of our revenues are generated from the services we provide to our customers we present all of our revenues in aggregate in accordance with the provisions of Rule 5-03(b)(1) and (2) of Regulation S-X.
Notes to consolidated and combined financial statements
Note 1 - Receivables, page F-11
Comment 3:
You indicate that receivables are primarily due from the U.S. government and are generally considered collectable. However, we note that you act both as the prime contractor and as a subcontractor to other contractors. In this regard, tell us how receivables due from prime contractors or subcontractors to which you are a subcontractor are currently presented and how your current disclosures comply with ASC 912-310-45-1.
- 3 -
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
January 19, 2017
Response:
ASC 912-310-45-1 states that, “Government contract receivables usually are shown separately from other receivables in the balance sheet (or otherwise disclosed).” The overall guidance to subtopics within the Contractors-Federal Government Topic at ASC 912-10-15-1 clarifies that, “Except where the text clearly indicates otherwise, the term contractor is used to denote either a prime contractor or a subcontractor, and the term contract to denote either a prime contract or a subcontract.”
Considering the overall guidance we believe that the standard’s requirement for the separate presentation of government contract receivables does not differentiate between government receivables on prime contracts and subcontracts. As such, we present receivables from prime contracts with the U.S. government and from subcontracts where the end customer is the U.S. government in the aggregate.
We consider our receivables in both of these cases to be collectible. The end customer in each case is the U.S government and the prime contractors for which we perform as subcontractors are well-established credit-worthy entities. Our historical experience with regard to the collection of receivables in either a prime or subcontractor position is essentially identical and do not merit separate disclosure in accordance with ASC 912-310-45-1.
To provide additional clarity, we will revise our disclosure under the heading, “Receivables” in Note 1 to the consolidated and combined financial statements in our Form 10-K for the year ending February 3, 2017 to read:
“…The Company’s receivables are primarily due from the U.S. government, or from prime contractors on which we are subcontractors and where the end customer is the U.S. government, and are generally considered collectible from the perspective of the customer’s ability to pay. Therefore, the Company does not have a material credit risk exposure…”
Note 14- Business segment information, page F-30
Comment 4:
Please provide us with an understanding of how the recent MK48 torpedo wins as well as the continued work on the AAV and ACV vehicle contracts impacted determination of your operating segments and your aggregation into a single reportable segment. In particular, in light of the apparent difference in the operations of manufactured products to the services you typically provide to your customers, as well as lower margins on your non-labor-related revenues (as disclosed on page 33), tell us how you considered such differences in arriving at your operating segments and aggregation into a single reportable segment. In your response please compare and contrast your operating segments aggregation relative to the characteristics listed in ASC 280-10-50-11(a) to (e). In addition, provide us with an update of your historical and projected revenues, gross margin, operating margin, and measure of operating segment profitability.
Response:
Background on Operating Segments
ASC 280-10-50-1 defines an operating segment as a component of a public entity that has all of the following characteristics:
•
That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise),
- 4 -
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
January 19, 2017
•
Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and
•
For which discrete financial information is available.
Discrete financial information is considered to be any measure of a segment’s profit or loss. This financial information also must be sufficiently detailed to allow the CODM to make decisions. Without a measure of profit or loss, the CODM does not have enough information to assess performance or make resource allocation decisions.
The Company is organized as a matrix comprised of five customer facing operating segments supported by several service line organizations. The five customer facing operating segments are responsible for customer relationships, business development and program management, and delivery and execution, while the service line organizations manage our workforce and the development of our offerings, solutions and capabilities. Each of the Company’s five operating segments is focused on providing our comprehensive technical and enterprise IT service offerings to its respective customer base. The majority of our contracts are accounted for under ASC 605-35, Construction-Type and Production-Type Contracts, for which comprehensive service offerings are generally tracked under a single profit center. Accordingly, we do not track revenue or profit by service line and since discrete financial information is not available for the service line organizations they do not have all of the characteristics of an operating segment. The Company has determined that its five customer facing organizations meet all of the characteristics of an operating segment as outlined above and are referred to as follows: Army; Department of Defense Agencies and Commands; Navy and Marine Corps; Federal Civilian; and Intelligence Community and Air Force.
For fiscal 2015 and fiscal 2016, revenues generated on our platform integration programs, comprising of the AAV, ACV, and MK48 torpedo programs, represent less than 5% of their respective operating segment’s revenues and measure of profit. These programs did not impact our determination of our operating segments because the Company’s CODM does not manage the business at the program level. Further, the aforementioned platform integration programs do not represent a significant portion of their respective operating segment (Navy and Marine Corps) to materially affect the quantitative and qualitative characteristics of that operating segment such that it would be dissimilar for aggregation purposes.
Our existing integrated platform programs are primarily engineering and design services, which include d
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CORRESP 1 filename1.htm saic-corresp.htm Charles A. Mathis Chief Financial Officer Science Applications International Corporation 1710 SAIC Drive Mclean, VA 22102 January 19, 2017 FOIA Confidential Treatment of Limited Portions Requested by Science Applications International Corporation Pursuant to Rule 83 (17 C.F.R. §200.83) and Rule 12b-4 of the Exchange Act VIA EDGAR Mr. Craig D. Wilson Sr. Asst. Chief Accountant Office of Information Technologies and Services 100 F Street NE Washington, D.C. 20549 RE: Science Applications International Corporation Form 10-K for the Fiscal Year Ended January 29, 2016 Filed March 29, 2016 File No. 001-35832 Dear Mr. Wilson: We are writing in response to the letter dated January 4, 2017 from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Science Applications International Corporation (the “Company”, “we”, “us”, or “our”). This letter sets forth the Company’s responses to that comment letter. For your convenience, we have reprinted the Staff’s original comments in bold, followed by our responses. Pursuant to the provisions of Rule 12b-4 (“Rule 12b-4”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Rules of Practice of the Commission contained under 17 C.F.R § 200.83 (“Rule 83”), the Company has supplementally furnished and requests confidential treatment for the information attached to this letter as Supplement A (the “Material”). The Material contained in Supplement A has been omitted from the Company’s filing on EDGAR and is furnished separately to the Staff. The Company has filed a separate letter with the Office of Freedom of Information and Privacy Act Operations in connection with the confidential treatment request of the Material. If you have any questions regarding the confidential treatment request, please contact Maria Bishop, Corporate Controller, via telephone at (703) 676-6405. In accordance with Rule 12b-4, the Company hereby requests that the Material be returned following completion of the Staff’s review thereof. The Material, as provided in Rule 12b-4, is not required to be filed with or deemed part of the Company’s Exchange Act reports. Please return the Material in the enclosed addressed, prepaid overnight delivery envelope when you have completed your review, or call the undersigned and we will arrange to have the Material retrieved from the Commission. Mr. Craig D. Wilson U.S. Securities and Exchange Commission January 19, 2017 Form 10-K for the Fiscal Year Ended January 29, 2016 Key Customers, page 2 Comment 1: We note that you generate revenues both as the prime contractor and as a subcontractor to other contractors. In this regard, please tell us the amount of revenues that you generate as a subcontractor and, to the extent material, also tell us what consideration you gave to disclosing revenues that you generate as a subcontractor as compared to revenues that you generate as a prime contractor within MD&A. Response: Within the government contracting industry we believe that there is substantially no difference in the characteristics of the revenue generated as the prime contractor with the U.S. government as compared to the revenue generated as the subcontractor to another company with the ending customer being the U.S. government. Margins on the types of services the Company performs within this industry fall within a relatively narrow range and are consistent between work performed on both prime and subcontract arrangements. Additionally, the risk profile of the work performed is substantially the same due to industry standard contractual regulations and requirements and there is no significant difference in the nature of the performance and delivery of services to the end customer. The position of prime contractor versus subcontractor is largely dependent on the technical expertise held by the labor within each company, and as such, large contracts tend to involve more than one company in order to meet the technical requirements requested by the U.S. government customer. The Company’s revenues from prime contracts and subcontracts where the U.S. government was the end customer for each of the years presented in our Form 10-K for the fiscal year ended January 29, 2016 were: Year Ended January 29, 2016 January 30, 2015 January 31, 2014 (in millions) Revenues earned on prime contracts with the U.S. government $ 3,832 $ 3,414 $ 3,604 As a % of total revenues 89 % 88 % 88 % Revenues earned on subcontracts with the U.S. government 388 366 421 As a % of total revenues 9 % 9 % 10 % Revenues from non-U.S. government contracts 95 105 96 As a % of total revenues 2 % 3 % 2 % Given the relatively immaterial nature of the revenue we generate from subcontracts, and the similarity in characteristics of revenue generated from prime contracts or subcontracts, we believe that disclosing these amounts within MD&A would provide little or no meaningful or relevant information to investors regarding our financial condition or results of operations. Consolidated and Combined Statements of Income and Comprehensive Income, page F-3 Comment 2: Based on your disclosures on page 33, it appears that materials related revenues comprise approximately 19% of total revenues. In addition, based on your third quarter earnings call, it appears that you are attempting to further expand the sales of manufactured products. In this regard, tell us what consideration you gave to separately presenting revenues and costs by services and tangible products as required by Rule 5-03(b)(1) and (2) of Regulation S-X. - 2 - Mr. Craig D. Wilson U.S. Securities and Exchange Commission January 19, 2017 Response: The Company’s revenues are generated by the comprehensive technical and enterprise IT services our highly skilled employees and subcontractors provide to our customers, and are highly customized based on customer specifications and result in the delivery of a solution or the performance of best efforts for, or on behalf of, a customer. The Company may also provide materials which are used in the performance of the Company’s service obligations under its contracts. For example, the Company may provide operations and maintenance support as part of an IT infrastructure management program and may also procure computer hardware to refurbish and refresh the customer’s existing IT systems. As this type of service contract with the U.S. government would be accounted for under ASC 605-35, Construction-Type and Production-Type Contracts, this comprehensive service offering would generally be accounted for as a single profit center with our services constituting the primary deliverable. We do not currently manufacture goods or sell products on a stand-alone basis. As disclosed on page 33 of our Form 10-K, materials provided under such service arrangements comprised approximately 19% of total revenues for the year ended January 29, 2016. As noted in the table on page 33, 14% of the materials relate to supply chain contracts. Our supply chain services offer logistics management that provides end-to-end procurement, transportation, and delivery of materials through our integrated logistics systems developed and maintained by our highly skilled employees. To provide additional clarity with regard to the above we will revise our disclosure within MD&A under the heading “Revenue Mix” in our Form 10-K for the year ending February 3, 2017 to read: “We generate revenues by providing a customized mix of services to our customers. These services are primarily provided through the efforts of our employees (which we refer to below as labor-related revenues) and the efforts of our subcontractors (which we refer to below as subcontractor-related revenues). We may also provide materials which are used in the performance of our service obligations under our contracts. The revenues we generate on such materials, as well as the efforts of our subcontractors, generally have lower margins than the revenues we generate from our labor-related revenues. The following table presents changes in labor-related, subcontractor-related and materials-related revenues for the periods presented:” As discussed during our third quarter earnings call, we are continuing to pursue opportunities to provide platform integration and other related services to various branches of the U.S. military such as the AAV, ACV and MK48 programs. These engineering and design services include developing and testing prototype solutions to meet the deployment needs of our customers. If our prototype solutions are accepted by the customer these programs may mature and result in the award of production-phase follow-on contracts. We will evaluate the necessity to present the revenues generated under such follow-on contracts separately as those contracts are awarded. See further discussion in our response to Comment 4, below. As all of our revenues are generated from the services we provide to our customers we present all of our revenues in aggregate in accordance with the provisions of Rule 5-03(b)(1) and (2) of Regulation S-X. Notes to consolidated and combined financial statements Note 1 - Receivables, page F-11 Comment 3: You indicate that receivables are primarily due from the U.S. government and are generally considered collectable. However, we note that you act both as the prime contractor and as a subcontractor to other contractors. In this regard, tell us how receivables due from prime contractors or subcontractors to which you are a subcontractor are currently presented and how your current disclosures comply with ASC 912-310-45-1. - 3 - Mr. Craig D. Wilson U.S. Securities and Exchange Commission January 19, 2017 Response: ASC 912-310-45-1 states that, “Government contract receivables usually are shown separately from other receivables in the balance sheet (or otherwise disclosed).” The overall guidance to subtopics within the Contractors-Federal Government Topic at ASC 912-10-15-1 clarifies that, “Except where the text clearly indicates otherwise, the term contractor is used to denote either a prime contractor or a subcontractor, and the term contract to denote either a prime contract or a subcontract.” Considering the overall guidance we believe that the standard’s requirement for the separate presentation of government contract receivables does not differentiate between government receivables on prime contracts and subcontracts. As such, we present receivables from prime contracts with the U.S. government and from subcontracts where the end customer is the U.S. government in the aggregate. We consider our receivables in both of these cases to be collectible. The end customer in each case is the U.S government and the prime contractors for which we perform as subcontractors are well-established credit-worthy entities. Our historical experience with regard to the collection of receivables in either a prime or subcontractor position is essentially identical and do not merit separate disclosure in accordance with ASC 912-310-45-1. To provide additional clarity, we will revise our disclosure under the heading, “Receivables” in Note 1 to the consolidated and combined financial statements in our Form 10-K for the year ending February 3, 2017 to read: “…The Company’s receivables are primarily due from the U.S. government, or from prime contractors on which we are subcontractors and where the end customer is the U.S. government, and are generally considered collectible from the perspective of the customer’s ability to pay. Therefore, the Company does not have a material credit risk exposure…” Note 14- Business segment information, page F-30 Comment 4: Please provide us with an understanding of how the recent MK48 torpedo wins as well as the continued work on the AAV and ACV vehicle contracts impacted determination of your operating segments and your aggregation into a single reportable segment. In particular, in light of the apparent difference in the operations of manufactured products to the services you typically provide to your customers, as well as lower margins on your non-labor-related revenues (as disclosed on page 33), tell us how you considered such differences in arriving at your operating segments and aggregation into a single reportable segment. In your response please compare and contrast your operating segments aggregation relative to the characteristics listed in ASC 280-10-50-11(a) to (e). In addition, provide us with an update of your historical and projected revenues, gross margin, operating margin, and measure of operating segment profitability. Response: Background on Operating Segments ASC 280-10-50-1 defines an operating segment as a component of a public entity that has all of the following characteristics: • That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise), - 4 - Mr. Craig D. Wilson U.S. Securities and Exchange Commission January 19, 2017 • Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and • For which discrete financial information is available. Discrete financial information is considered to be any measure of a segment’s profit or loss. This financial information also must be sufficiently detailed to allow the CODM to make decisions. Without a measure of profit or loss, the CODM does not have enough information to assess performance or make resource allocation decisions. The Company is organized as a matrix comprised of five customer facing operating segments supported by several service line organizations. The five customer facing operating segments are responsible for customer relationships, business development and program management, and delivery and execution, while the service line organizations manage our workforce and the development of our offerings, solutions and capabilities. Each of the Company’s five operating segments is focused on providing our comprehensive technical and enterprise IT service offerings to its respective customer base. The majority of our contracts are accounted for under ASC 605-35, Construction-Type and Production-Type Contracts, for which comprehensive service offerings are generally tracked under a single profit center. Accordingly, we do not track revenue or profit by service line and since discrete financial information is not available for the service line organizations they do not have all of the characteristics of an operating segment. The Company has determined that its five customer facing organizations meet all of the characteristics of an operating segment as outlined above and are referred to as follows: Army; Department of Defense Agencies and Commands; Navy and Marine Corps; Federal Civilian; and Intelligence Community and Air Force. For fiscal 2015 and fiscal 2016, revenues generated on our platform integration programs, comprising of the AAV, ACV, and MK48 torpedo programs, represent less than 5% of their respective operating segment’s revenues and measure of profit. These programs did not impact our determination of our operating segments because the Company’s CODM does not manage the business at the program level. Further, the aforementioned platform integration programs do not represent a significant portion of their respective operating segment (Navy and Marine Corps) to materially affect the quantitative and qualitative characteristics of that operating segment such that it would be dissimilar for aggregation purposes. Our existing integrated platform programs are primarily engineering and design services, which include d