SEC Company Response from Science Applications International Corp (SAIC) (CIK 0001571123) (SAIC) — Mar 3, 2017
Science Applications International Corp (SAIC) (CIK 0001571123)
Date: March 3, 2017 · CIK: 0001571123 · Accession: 0001564590-17-003337
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-35832
Referenced dates: February 9, 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 February 9, 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”, “SAIC”, “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.
Consolidated and Combined Statements of Income and Comprehensive Income, page F-3
Comment 1:
With regard to your response to our prior comment 2, you indicate that all of your revenues are generated from services and therefore are not required to present, separately, a category of product in the income statement for supply chain related materials and other materials pursuant to Rule 5-03(b)(1) and (2) of Regulation S-X. Please reconcile your accounting for these materials-related revenues to the relevant revenue recognition accounting policies on page F-8. Further clarify for us your basis for not separately presenting a product and service breakout on your income statement for your arrangements. In this regard, it also appears from your disclosures and investor presentations that you provide differing types of services and materials which appear to require disclosure under ASC 280-10-50-40. Regarding investor presentations, we refer to pages 7-12 of your July 2016 investor presentation.
With respect to our application of Rule 5-03(b) 1 and 2 regarding the separate disclosure of products and services, we recognize that judgment is involved in determining how a single transaction involving both labor and materials should be presented. The primary way we determine whether a single-element transaction is for a product or a service is to focus on the customer's expectations. We believe this is consistent with previous remarks by the SEC1. Given the integrated nature of the Company’s offerings, the company considers its revenues to be service related revenues. The Company believes it is in compliance with Rule 5-03(b) of Regulation S-X and is not required to separate the materials used in
See, for example, Remarks before the 2007 AICPA National Conference on Current SEC and PCAOB Developments by Mark Barrysmith.
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
March 3, 2017
support of its service contracts, including supply chain logistics, for which the primary offering to the customer is a service deliverable, as opposed to a product deliverable.
Our supply chain contracts provide a comprehensive service offering which provides value to our customers through the provision of an order fulfillment service that ensures the timely supply of conforming materials. The customer views themselves as acquiring an integrated supply chain service offering that provides end-to-end procurement, transportation, and delivery of materials through our integrated logistics systems developed and maintained by our highly skilled employees. These services span activities performed by the Company from material planning, procurement, receiving and inventory management, kitting and assembly, storage, fulfillment, reporting and account management. Effectively, we are an outsourced service provider.
We are not in the business of selling materials and as such, do not sell materials on a stand-alone basis. Our federal government customer has engaged our company to provide the logistics aspects of inventory procurement in order to outsource the complex nature of their inventory supply chain management (e.g. dealing with thousands of inventory parts with hundreds of suppliers). The government has the option to buy its supplies directly from its vendors, however they would have to develop in-house expertise to predict demand at their various locations around the globe and incur the cost of storing the inventory in warehouses. SAIC has served as a supply chain contractor for many years and thus has the expertise and requisite software developed to provide these services efficiently. The key to the success of these programs is to reduce the costs of our customers’ supply chain and logistics management by making the end-to-end process better, faster, and cheaper. As we are providing an overall solution contemplating a coordinated end-to-end inventory management process, we consider the revenues generated from our supply chain and logistics arrangements to be considered service revenues. Accordingly, the Company believes it is in compliance with Rule 5-03(b) of Regulation S-X because the transfer of materials to the Company’s clients is intrinsic to the Company’s integrated service offerings and therefore is properly reported as service revenues.
Our supply chain contracts include specific terms as to how invoices should be prepared in order for the customer to have visibility into the supplies being used and to evaluate the costs of outsourcing their supply chain management. The materials purchased are unique to each contract (materials are not shared between contracts or customers). The cost of materials and our service fees are billed together on the same invoice. The materials component of the invoice is broken out separately from the service component within an invoice. On average materials approximate 90% of the invoice amount and the services comprise the other 10%. While the materials cost represent the bulk of the invoice, the true value of the contract is driven by the procurement and logistics management. SAIC does not produce any of the thousands of products it procures through these contracts, but rather the materials provided under these service arrangements are reimbursed by the customer at SAIC’s cost. The profit we generate is for the timely fulfillment of conforming materials as delivered to the customer. From a revenue recognition standpoint, these contracts qualify for gross presentation (which will be further discussed below) due in part because the implications of not meeting the appropriate fill rates or providing non-conforming materials can result in contractual penalties reducing our fees.
SAIC’s policy is to account for contracts with the federal government under ASC 605-35, Construction-Type and Production-Type Contracts, and ASC 605-912, Contractors-Federal Government – Revenue Recognition2. Our policy is consistent with View A as discussed in the October 23, 2009, FASB Emerging Issues Task Force (EITF) Agenda Committee meeting discussion of the proposed issue Accounting for Service-Related Contracts with the Federal Government with respect to the application of FASB codification subtopic 605-35. View A provides for a broad application and accounts for all arrangements with the federal government within the scope of ASC 605-35.
ASC 912-605-05-1 This Subtopic provides incremental guidance to government contractors on revenue recognition. See Subtopic 605-35 for general guidance.
- 2 -
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
March 3, 2017
SAIC’s supply chain logistics revenues are generated from contracts with the U.S. government that are accounted for as a single profit center in accordance with ASC 605-35 for which the primary offering to the customer is a service deliverable, as opposed to a product deliverable. Our supply chain revenues are recorded on a gross basis in accordance with ASC 605-35-25-23 and 243, which indicates that a contractor should record costs and revenues for items when a contractor is responsible for the ultimate acceptability of performance or bears risk associated with the items. Further discussion and analysis on recording revenues gross is provided below in our response to comment 2. Since these contracts are accounted for under ASC 605-35 as a single profit center, we consider the revenues we generate under our supply chain logistics programs to be service revenues. We recognize revenue on our supply chain and logistics contracts as the services are provided to our customers using an output method (units-of delivery) measure of progress, which is disclosed in our revenue recognition accounting policies on page F-8 as follows:
“…Additionally, the Company utilizes the units-of-delivery method on contracts where separate units of output are produced. Under the units-of-delivery method, revenues are generally recognized when the units are delivered to the customer, provided that all other requirements for revenue recognition have been met.”
To provide additional clarity we will include an additional description of our revenue recognition policy with regard to logistics services contracts in our revenue recognition accounting policies in the Notes to our consolidated financial statements included in our Form 10-K for the year ended February 3, 2017:
“The Company recognizes revenue on our supply chain and logistics arrangements as the services are provided to the customer under a single profit center using an output method (units-of-delivery) measure of progress. Service revenues are recorded gross of reimbursable material costs, as well as fees, when the Company is responsible for the ultimate acceptability of performance of the contract based on the timely fulfillment of conforming materials delivered to the customer.”
Revenues generated from materials provided to our customers on contracts other than our logistics management contracts are incidental to the contract performance and we do not track the amount of revenues from these other materials by contract. We do not currently manufacture goods or sell products on a stand-alone basis. Accordingly, we will remove the following statement from our significant accounting policies to avoid further confusion.
“Revenues from the sale of manufactured products are recorded on passage of title and risk of loss to the customer, which is generally on delivery.”
The Company believes it is in compliance with Rule 5-03(b) of Regulation S-X and is not required to separate the materials used in support of its service contracts, including supply chain logistics, because the customer views the offering to be a service, as opposed to a product deliverable. We also note that this view is consistent with the underlying accounting for these arrangements involving both labor and material components, where both components are combined within a single profit center for revenue recognition.
With respect to your comment regarding our July 2016 investor presentation, we provide full lifecycle services and solutions to our customers through our highly customized and comprehensive integrated service offerings. Each of our contracts may provide services from a number of our service lines (for
ASC 605-35-25-23: If the contractor is responsible for the nature, type, characteristics, or specifications of material that the customer furnishes or that the contractor purchases as an agent of the customer, or if the contractor is responsible for the ultimate acceptability of performance of the project based on such material, the value of those items shall be included as contract price and reflected as revenue and costs in periodic reporting of operations.
ASC 605-35-25-24: As a general rule, revenues and costs shall include all items for which the contractor has an associated risk, including items on which his contractual fee was based.
- 3 -
Mr. Craig D. Wilson
U.S. Securities and Exchange Commission
March 3, 2017
example a single contract may provide end-to-end IT services including IT Managed Services, Software Integration and Cyber, Cloud and Data Science). The focus of the service lines (as shown on page 7 of the July 2016 investor presentation) is to provide resources to our operating segments in the execution of our integrated service offerings. We do not track, and do not practicably have the ability to track, revenue or profit by service line. We will enhance our disclosures to disclose this information within Note 1 to consolidated financial statements included in our Form 10-K for the year ended February 3, 2017. For a more complete description of our matrix organization please see the “Overview” section preceding our response to comment 3 below.
Comment 2:
To the extent that materials related revenues under supply chain contracts are being recognized on a gross basis, please provide us with a detailed analysis of how your accounting complies with ASC 605-45-45. Also, if these supply chain contract revenues are recognized on a gross basis, provide us with a detailed analysis of your conclusion that the sale of material under these contracts, which as noted on page 28 generate lower gross margins than services, should not be broken out separately in accordance with Rule 5-03(b)(1) and (2) of Regulation S-X.
SAIC’s supply chain revenues are generated from contracts with the U.S. government and are reported on a gross basis in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. We do not believe ASC 605-45-45 considerations apply to these contracts, as government contractors are explicitly scoped out in ASC 605-45-15-4.
Our supply chain revenues are recorded on a gross basis in accordance with ASC 605-35-25-23 and 24, which indicates that a contractor should record costs and revenues for items when a contractor is responsible for the ultimate acceptability of performance or bears risk associated with the items. Additionally, ASC 912-605-25-194, Contractors-Federal Government Revenue Recognition, indicates that for cost-type supply contracts with the Federal Government, the contractor is more than an agent and it is appropriate to include reimbursable costs, as well as fees, in revenues.
The terms and scope of services vary by customer contract, such that each contract must be separately evaluated for the purpose of revenue recognition, including making determinations with respect to gross versus net reporting of revenue. The judgments place particular emphasis on determining SAIC’s contract responsibilities with respect to fulfillment and ultimate acceptability of performance as well as risk associated with the materials consumed through the performance of our service.
We record our supply chain contracts with the federal government on a gross basis when SAIC is responsible for the ultimate acceptability of performance of the contract based on the timely fulfillment of conforming materials delivered to the customer. The implications of not meeting the appropriate fill rates or providing non-conforming materials can result in contractual penalties reducing contractor fees. We manage inventory at appropriate levels to fulfill our service level agreement requirements, which may result in inventory excess and obsolescence risks born by the Company.
As discussed in our response to comment 1, the Company believes it is in compliance with Rule 5-03(b) of Regulation S-X because the transfer of these materials to the Company’s clients is intrinsic to the Company’s supply chain logistics service offerings and therefore is appropriately reported as service revenues.
ASC 905-605-25-19: In the circumstance of supply contracts, however, the contractor is more than an agent. For instance, the contractor is responsible to creditors for materials and services purchased and to employees for salaries and wages. The contractor ordinarily uses its own facilities in carrying out its agreement; and i
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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 March 3, 2017 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 February 9, 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”, “SAIC”, “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. Consolidated and Combined Statements of Income and Comprehensive Income, page F-3 Comment 1: With regard to your response to our prior comment 2, you indicate that all of your revenues are generated from services and therefore are not required to present, separately, a category of product in the income statement for supply chain related materials and other materials pursuant to Rule 5-03(b)(1) and (2) of Regulation S-X. Please reconcile your accounting for these materials-related revenues to the relevant revenue recognition accounting policies on page F-8. Further clarify for us your basis for not separately presenting a product and service breakout on your income statement for your arrangements. In this regard, it also appears from your disclosures and investor presentations that you provide differing types of services and materials which appear to require disclosure under ASC 280-10-50-40. Regarding investor presentations, we refer to pages 7-12 of your July 2016 investor presentation. With respect to our application of Rule 5-03(b) 1 and 2 regarding the separate disclosure of products and services, we recognize that judgment is involved in determining how a single transaction involving both labor and materials should be presented. The primary way we determine whether a single-element transaction is for a product or a service is to focus on the customer's expectations. We believe this is consistent with previous remarks by the SEC1. Given the integrated nature of the Company’s offerings, the company considers its revenues to be service related revenues. The Company believes it is in compliance with Rule 5-03(b) of Regulation S-X and is not required to separate the materials used in 1 See, for example, Remarks before the 2007 AICPA National Conference on Current SEC and PCAOB Developments by Mark Barrysmith. Mr. Craig D. Wilson U.S. Securities and Exchange Commission March 3, 2017 support of its service contracts, including supply chain logistics, for which the primary offering to the customer is a service deliverable, as opposed to a product deliverable. Our supply chain contracts provide a comprehensive service offering which provides value to our customers through the provision of an order fulfillment service that ensures the timely supply of conforming materials. The customer views themselves as acquiring an integrated supply chain service offering that provides end-to-end procurement, transportation, and delivery of materials through our integrated logistics systems developed and maintained by our highly skilled employees. These services span activities performed by the Company from material planning, procurement, receiving and inventory management, kitting and assembly, storage, fulfillment, reporting and account management. Effectively, we are an outsourced service provider. We are not in the business of selling materials and as such, do not sell materials on a stand-alone basis. Our federal government customer has engaged our company to provide the logistics aspects of inventory procurement in order to outsource the complex nature of their inventory supply chain management (e.g. dealing with thousands of inventory parts with hundreds of suppliers). The government has the option to buy its supplies directly from its vendors, however they would have to develop in-house expertise to predict demand at their various locations around the globe and incur the cost of storing the inventory in warehouses. SAIC has served as a supply chain contractor for many years and thus has the expertise and requisite software developed to provide these services efficiently. The key to the success of these programs is to reduce the costs of our customers’ supply chain and logistics management by making the end-to-end process better, faster, and cheaper. As we are providing an overall solution contemplating a coordinated end-to-end inventory management process, we consider the revenues generated from our supply chain and logistics arrangements to be considered service revenues. Accordingly, the Company believes it is in compliance with Rule 5-03(b) of Regulation S-X because the transfer of materials to the Company’s clients is intrinsic to the Company’s integrated service offerings and therefore is properly reported as service revenues. Our supply chain contracts include specific terms as to how invoices should be prepared in order for the customer to have visibility into the supplies being used and to evaluate the costs of outsourcing their supply chain management. The materials purchased are unique to each contract (materials are not shared between contracts or customers). The cost of materials and our service fees are billed together on the same invoice. The materials component of the invoice is broken out separately from the service component within an invoice. On average materials approximate 90% of the invoice amount and the services comprise the other 10%. While the materials cost represent the bulk of the invoice, the true value of the contract is driven by the procurement and logistics management. SAIC does not produce any of the thousands of products it procures through these contracts, but rather the materials provided under these service arrangements are reimbursed by the customer at SAIC’s cost. The profit we generate is for the timely fulfillment of conforming materials as delivered to the customer. From a revenue recognition standpoint, these contracts qualify for gross presentation (which will be further discussed below) due in part because the implications of not meeting the appropriate fill rates or providing non-conforming materials can result in contractual penalties reducing our fees. SAIC’s policy is to account for contracts with the federal government under ASC 605-35, Construction-Type and Production-Type Contracts, and ASC 605-912, Contractors-Federal Government – Revenue Recognition2. Our policy is consistent with View A as discussed in the October 23, 2009, FASB Emerging Issues Task Force (EITF) Agenda Committee meeting discussion of the proposed issue Accounting for Service-Related Contracts with the Federal Government with respect to the application of FASB codification subtopic 605-35. View A provides for a broad application and accounts for all arrangements with the federal government within the scope of ASC 605-35. 2 ASC 912-605-05-1 This Subtopic provides incremental guidance to government contractors on revenue recognition. See Subtopic 605-35 for general guidance. - 2 - Mr. Craig D. Wilson U.S. Securities and Exchange Commission March 3, 2017 SAIC’s supply chain logistics revenues are generated from contracts with the U.S. government that are accounted for as a single profit center in accordance with ASC 605-35 for which the primary offering to the customer is a service deliverable, as opposed to a product deliverable. Our supply chain revenues are recorded on a gross basis in accordance with ASC 605-35-25-23 and 243, which indicates that a contractor should record costs and revenues for items when a contractor is responsible for the ultimate acceptability of performance or bears risk associated with the items. Further discussion and analysis on recording revenues gross is provided below in our response to comment 2. Since these contracts are accounted for under ASC 605-35 as a single profit center, we consider the revenues we generate under our supply chain logistics programs to be service revenues. We recognize revenue on our supply chain and logistics contracts as the services are provided to our customers using an output method (units-of delivery) measure of progress, which is disclosed in our revenue recognition accounting policies on page F-8 as follows: “…Additionally, the Company utilizes the units-of-delivery method on contracts where separate units of output are produced. Under the units-of-delivery method, revenues are generally recognized when the units are delivered to the customer, provided that all other requirements for revenue recognition have been met.” To provide additional clarity we will include an additional description of our revenue recognition policy with regard to logistics services contracts in our revenue recognition accounting policies in the Notes to our consolidated financial statements included in our Form 10-K for the year ended February 3, 2017: “The Company recognizes revenue on our supply chain and logistics arrangements as the services are provided to the customer under a single profit center using an output method (units-of-delivery) measure of progress. Service revenues are recorded gross of reimbursable material costs, as well as fees, when the Company is responsible for the ultimate acceptability of performance of the contract based on the timely fulfillment of conforming materials delivered to the customer.” Revenues generated from materials provided to our customers on contracts other than our logistics management contracts are incidental to the contract performance and we do not track the amount of revenues from these other materials by contract. We do not currently manufacture goods or sell products on a stand-alone basis. Accordingly, we will remove the following statement from our significant accounting policies to avoid further confusion. “Revenues from the sale of manufactured products are recorded on passage of title and risk of loss to the customer, which is generally on delivery.” The Company believes it is in compliance with Rule 5-03(b) of Regulation S-X and is not required to separate the materials used in support of its service contracts, including supply chain logistics, because the customer views the offering to be a service, as opposed to a product deliverable. We also note that this view is consistent with the underlying accounting for these arrangements involving both labor and material components, where both components are combined within a single profit center for revenue recognition. With respect to your comment regarding our July 2016 investor presentation, we provide full lifecycle services and solutions to our customers through our highly customized and comprehensive integrated service offerings. Each of our contracts may provide services from a number of our service lines (for 3 ASC 605-35-25-23: If the contractor is responsible for the nature, type, characteristics, or specifications of material that the customer furnishes or that the contractor purchases as an agent of the customer, or if the contractor is responsible for the ultimate acceptability of performance of the project based on such material, the value of those items shall be included as contract price and reflected as revenue and costs in periodic reporting of operations. ASC 605-35-25-24: As a general rule, revenues and costs shall include all items for which the contractor has an associated risk, including items on which his contractual fee was based. - 3 - Mr. Craig D. Wilson U.S. Securities and Exchange Commission March 3, 2017 example a single contract may provide end-to-end IT services including IT Managed Services, Software Integration and Cyber, Cloud and Data Science). The focus of the service lines (as shown on page 7 of the July 2016 investor presentation) is to provide resources to our operating segments in the execution of our integrated service offerings. We do not track, and do not practicably have the ability to track, revenue or profit by service line. We will enhance our disclosures to disclose this information within Note 1 to consolidated financial statements included in our Form 10-K for the year ended February 3, 2017. For a more complete description of our matrix organization please see the “Overview” section preceding our response to comment 3 below. Comment 2: To the extent that materials related revenues under supply chain contracts are being recognized on a gross basis, please provide us with a detailed analysis of how your accounting complies with ASC 605-45-45. Also, if these supply chain contract revenues are recognized on a gross basis, provide us with a detailed analysis of your conclusion that the sale of material under these contracts, which as noted on page 28 generate lower gross margins than services, should not be broken out separately in accordance with Rule 5-03(b)(1) and (2) of Regulation S-X. SAIC’s supply chain revenues are generated from contracts with the U.S. government and are reported on a gross basis in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. We do not believe ASC 605-45-45 considerations apply to these contracts, as government contractors are explicitly scoped out in ASC 605-45-15-4. Our supply chain revenues are recorded on a gross basis in accordance with ASC 605-35-25-23 and 24, which indicates that a contractor should record costs and revenues for items when a contractor is responsible for the ultimate acceptability of performance or bears risk associated with the items. Additionally, ASC 912-605-25-194, Contractors-Federal Government Revenue Recognition, indicates that for cost-type supply contracts with the Federal Government, the contractor is more than an agent and it is appropriate to include reimbursable costs, as well as fees, in revenues. The terms and scope of services vary by customer contract, such that each contract must be separately evaluated for the purpose of revenue recognition, including making determinations with respect to gross versus net reporting of revenue. The judgments place particular emphasis on determining SAIC’s contract responsibilities with respect to fulfillment and ultimate acceptability of performance as well as risk associated with the materials consumed through the performance of our service. We record our supply chain contracts with the federal government on a gross basis when SAIC is responsible for the ultimate acceptability of performance of the contract based on the timely fulfillment of conforming materials delivered to the customer. The implications of not meeting the appropriate fill rates or providing non-conforming materials can result in contractual penalties reducing contractor fees. We manage inventory at appropriate levels to fulfill our service level agreement requirements, which may result in inventory excess and obsolescence risks born by the Company. As discussed in our response to comment 1, the Company believes it is in compliance with Rule 5-03(b) of Regulation S-X because the transfer of these materials to the Company’s clients is intrinsic to the Company’s supply chain logistics service offerings and therefore is appropriately reported as service revenues. 4 ASC 905-605-25-19: In the circumstance of supply contracts, however, the contractor is more than an agent. For instance, the contractor is responsible to creditors for materials and services purchased and to employees for salaries and wages. The contractor ordinarily uses its own facilities in carrying out its agreement; and i