FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from to
Commission file number 0-24787
AFFILIATED COMPUTER SERVICES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 51-0310342 | ||
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | ||
| 2828 North Haskell, Dallas, Texas | 75204 | ||
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (214) 841-6111
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Number of shares outstanding as of | ||||||
| Title of each class | November 11, 2002 | |||||
| Class A Common Stock, $.01 par value | 125,557,389 | |||||
| Class B Common Stock, $.01 par value | 6,599,372 | |||||
| 132,156,761 | ||||||
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
INDEX
| PAGE | |||||
PART I |
FINANCIAL INFORMATION | NUMBER | |||
Item 1 |
Consolidated Financial Statements: | ||||
| Consolidated Balance Sheets at September 30, 2002 and | |||||
| June 30, 2002 | 1 | ||||
| Consolidated Statements of Income for the Three Months | |||||
| Ended September 30, 2002 and 2001 | 2 | ||||
| Consolidated Statements of Cash Flows for the Three Months | |||||
| Ended September 30, 2002 and 2001 | 3 | ||||
| Notes to Consolidated Financial Statements | 4 – 8 | ||||
Item 2 |
Management's Discussion and Analysis of Financial Condition and | 9 – 16 | |||
| Results of Operations | |||||
Item 4 |
Controls and Procedures | 16 | |||
PART II |
OTHER INFORMATION | ||||
Item 1 |
Legal Proceedings | 17 | |||
Item 4 |
Submission of Matters to a Vote of Stockholders | 17 | |||
Item 5 |
Other Information | 18 | |||
Item 6 |
Exhibits and Reports on Form 8-K | 18 | |||
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
| September 30, | June 30, | |||||||||||
| 2002 | 2002 | |||||||||||
| (Unaudited) | (Audited) | |||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 53,309 | $ | 33,814 | ||||||||
Accounts receivable, net |
740,732 | 736,471 | ||||||||||
Inventory |
8,261 | 9,740 | ||||||||||
Prepaid expenses and other current assets |
82,633 | 94,464 | ||||||||||
Total current assets |
884,935 | 874,489 | ||||||||||
Property, equipment and software, net |
411,941 | 394,830 | ||||||||||
Goodwill, net |
1,846,467 | 1,846,482 | ||||||||||
Intangibles, net |
239,616 | 234,287 | ||||||||||
Long-term investments and other assets |
61,793 | 53,479 | ||||||||||
Total assets |
$ | 3,444,752 | $ | 3,403,567 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 75,141 | $ | 72,858 | ||||||||
Accrued compensation and benefits |
89,625 | 125,290 | ||||||||||
Other accrued liabilities |
197,709 | 210,003 | ||||||||||
Income taxes payable |
36,063 | 20,452 | ||||||||||
Deferred taxes |
8,036 | 7,344 | ||||||||||
Current portion of long-term debt |
944 | 1,330 | ||||||||||
Current portion of unearned revenue |
43,010 | 48,636 | ||||||||||
Total current liabilities |
450,528 | 485,913 | ||||||||||
Convertible notes |
316,990 | 316,990 | ||||||||||
Long-term debt |
382,288 | 391,243 | ||||||||||
Deferred taxes |
108,598 | 95,394 | ||||||||||
Other long-term liabilities |
21,358 | 18,607 | ||||||||||
Total liabilities |
1,279,762 | 1,308,147 | ||||||||||
Stockholders’ equity: |
||||||||||||
Class A common stock |
1,255 | 1,254 | ||||||||||
Class B common stock |
66 | 66 | ||||||||||
Additional paid-in capital |
1,330,848 | 1,330,533 | ||||||||||
Retained earnings |
832,821 | 763,567 | ||||||||||
Total stockholders’ equity |
2,164,990 | 2,095,420 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 3,444,752 | $ | 3,403,567 | ||||||||
The accompanying notes are an integral part of consolidated financial statements.
1
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
| Three Months Ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
Revenues |
$ | 897,876 | $ | 655,019 | |||||||
Expenses: |
|||||||||||
Wages and benefits |
402,899 | 296,873 | |||||||||
Services and supplies |
241,785 | 172,871 | |||||||||
Rent, lease and maintenance |
84,335 | 72,880 | |||||||||
Depreciation and amortization |
36,142 | 24,415 | |||||||||
Other operating expenses |
13,060 | 6,438 | |||||||||
Total operating expenses |
778,221 | 573,477 | |||||||||
Operating income |
119,655 | 81,542 | |||||||||
Interest expense |
7,054 | 12,599 | |||||||||
Other non-operating expense (income), net |
1,472 | (1,316 | ) | ||||||||
Pretax profit |
111,129 | 70,259 | |||||||||
Income tax expense |
41,673 | 26,346 | |||||||||
Net income |
$ | 69,456 | $ | 43,913 | |||||||
Earnings per common share: |
|||||||||||
Basic |
$ | .53 | $ | .43 | |||||||
Diluted |
$ | .50 | $ | .39 | |||||||
Shares used in computing earnings
per common share: |
|||||||||||
Basic |
132,073 | 101,580 | |||||||||
Diluted |
142,984 | 123,344 | |||||||||
The accompanying notes are an integral part of these financial statements.
2
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Three Months Ended | |||||||||||
| September 30, | |||||||||||
| 2002 | 2001 | ||||||||||
Cash flows from operating activities: |
|||||||||||
Net income |
$ | 69,456 | $ | 43,913 | |||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
|||||||||||
Depreciation and amortization |
36,142 | 24,415 | |||||||||
Impairment of long-term investments |
1,400 | (274 | ) | ||||||||
Other |
1,710 | 405 | |||||||||
Changes in assets and liabilities, net of effects from acquisitions: |
|||||||||||
Increase in accounts receivable |
(15,143 | ) | (44,661 | ) | |||||||
(Increase) decrease in inventory |
750 | (1,312 | ) | ||||||||
Decrease in prepaid expenses and other current assets |
5,396 | 3,478 | |||||||||
Change in deferred taxes |
13,717 | 5,635 | |||||||||
(Increase) decrease in other long-term assets |
(2,817 | ) | 1,740 | ||||||||
Increase in accounts payable |
2,282 | 6,267 | |||||||||
Decrease in accrued compensation and benefits |
(35,908 | ) | (30,590 | ) | |||||||
Increase (decrease) in other accrued liabilities |
(3,860 | ) | 7,234 | ||||||||
Change in income taxes payable |
16,635 | 19,883 | |||||||||
Increase (decrease) in unearned revenue |
(6,638 | ) | 1,952 | ||||||||
Increase in other long-term liabilities |
3,759 | 356 | |||||||||
Total adjustments |
17,425 | (5,472 | ) | ||||||||
Net cash provided by operating activities |
86,881 | 38,441 | |||||||||
Cash flows from investing activities: |
|||||||||||
Purchases of property, equipment and software, net of sales |
(44,788 | ) | (35,946 | ) | |||||||
Payments for acquisitions, net of cash acquired |
(4,905 | ) | (879,503 | ) | |||||||
Proceeds from divestitures, net of transaction costs |
6,664 | (1,701 | ) | ||||||||
Proceeds from sale of investment |
50 | — | |||||||||
Additions to other intangible assets |
(14,842 | ) | (5,812 | ) | |||||||
Additions to notes receivable |
(1,584 | ) | (2,687 | ) | |||||||
Proceeds received on notes receivable |
6,335 | 1,603 | |||||||||
Net cash used by investing activities |
(53,070 | ) | (924,046 | ) | |||||||
Cash flows from financing activities: |
|||||||||||
Proceeds from issuance of debt, net of issuance costs |
425,458 | 756,710 | |||||||||
Repayments of debt |
(439,066 | ) | (87,248 | ) | |||||||
Proceeds from stock options exercised |
589 | 7,734 | |||||||||
Other |
(1,297 | ) | (1 | ) | |||||||
Net cash provided (used) by financing activities |
(14,316 | ) | 677,195 | ||||||||
Net increase (decrease) in cash and cash equivalents |
19,495 | (208,410 | ) | ||||||||
Cash and cash equivalents at beginning of period |
33,814 | 242,458 | |||||||||
Cash and cash equivalents at end of period |
$ | 53,309 | $ | 34,048 | |||||||
The accompanying notes are an integral part of these financial statements.
3
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | BASIS OF PRESENTATION | |
| The consolidated financial statements include the accounts of Affiliated Computer Services, Inc. (“ACS”) and its majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. We are a Fortune 1000 company comprised of approximately 36,000 full-time equivalent employees in 47 countries providing business process and technology outsourcing solutions to commercial, state and local government and federal government clients. | ||
| The financial information presented should be read in conjunction with our consolidated financial statements for the year ended June 30, 2002. The foregoing unaudited consolidated financial statements reflect all adjustments (all of which are of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods. The results for the interim periods are not necessarily indicative of results to be expected for the year. | ||
| All share and per share information is presented after giving effect to the two-for-one stock split of our Class A and Class B common shares declared on January 22, 2002, paid on February 22, 2002 in the form of a stock dividend to shareholders of record as of February 15, 2002. | ||
| Significant accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2002. For discussion of our critical accounting policies, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” | ||
| 2. | DEBT | |
| In September 2002, we entered into a new $875 million senior unsecured revolving credit facility with a term of 39 months. This new facility replaced our $450 million credit facility and the $375 million interim credit facility, which was used to fund the acquisition of AFSA Data Corporation (“AFSA”) in June 2002. The new revolving credit agreement provides for unsecured borrowings at rates and fees based upon ACS’ credit ratings; therefore rates will fluctuate based upon future changes. Currently borrowings bear interest at LIBOR plus 0.575%, a facility fee of 0.175% per annum on the committed amount of the facility plus a usage fee of 0.125% per annum on the total amount of outstanding borrowings. After March 2003, the usage fee will be applicable only when borrowings exceed $437.5 million. The agreement matures in December 2005 and contains certain covenants, including maintaining specific interest coverage and debt-to-total EBITDA ratios. | ||
| As of September 30, 2002, we had approximately $323 million available for use under the new facility, after giving effect to outstanding letters of credit of $170 million that secure certain contractual performance and other obligations. | ||
| 3. | GOODWILL AND OTHER INTANGIBLE ASSETS | |
| The changes in the carrying amount of goodwill for the quarter ended September 30, 2002 are as follow (in thousands): |
| State and | ||||||||||||||||
| Local | ||||||||||||||||
| Government | Commercial | Federal Government | Total | |||||||||||||
Balance as of June 30, 2002 |
$ | 1,055,514 | $ | 654,744 | $ | 136,224 | $ | 1,846,482 | ||||||||
Goodwill activity during the quarter |
(1,015 | ) | 822 | 178 | (15 | ) | ||||||||||
Balance as of September 30, 2002 |
$ | 1,054,499 | $ | 655,566 | $ | 136,402 | $ | 1,846,467 | ||||||||
| Goodwill balances by segment as of June 30, 2002 have been restated to reflect a change in our internal organization that caused the composition of our reportable segments to change. Current quarter activity reflects the collection of indemnified amounts from the seller of a company acquired in fiscal year 2001, offset by additional transaction costs and other liabilities incurred related to the AFSA acquisition and other fiscal year 2002 acquisitions. |
4
AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following information relates to our intangibles as of September 30, 2002:
| As of September 30, 2002 (in thousands) | ||||||||||||
| Gross Carrying | Accumulated | |||||||||||
| Amount | Amortization | |||||||||||
Amortized intangible assets: |
||||||||||||
Acquired customer related intangibles |
$ | 146,785 | $ | (19,539 | ) | |||||||