AFFILIATED COMPUTER SERVICES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from to

Commission file number 001-12665

AFFILIATED COMPUTER SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware		51-0310342

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


2828 North Haskell, Dallas, Texas			75204

(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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	February 13, 2004

Class A Common Stock, $.01 par value		122,141,739
Class B Common Stock, $.01 par value		6,599,372

		128,741,111

TABLE OF CONTENTS


PART I
	ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
Bylaws, as Amended and in Effect Sept. 11, 2003
Amendment to Executive Retirement Agreement
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES

INDEX


		PAGE
		NUMBER
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets at December 31, 2003 and June 30, 2003	1
	Consolidated Statements of Income for the Three Months and Six Months Ended December 31, 2003 and 2002	2
	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2003 and 2002	3
	Notes to Consolidated Financial Statements	4 - 12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13 - 25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 2.	Changes in Securities and Use of Proceeds	27
Item 5.	Other Information	28
Item 6.	Exhibits and Reports on Form 8-K	28

PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)


				December 31,			June 30,
				2003			2003
				(Unaudited)			(Audited)

			ASSETS
Current assets:
	Cash and cash equivalents			$	244,252		$	51,170
	Accounts receivable, net				830,003			835,478
	Inventory				6,432			6,245
	Other current assets				93,187			86,605
	Assets held for sale				7,049			—

		Total current assets			1,180,923			979,498

Property, equipment and software, net					463,001			478,212
Goodwill, net					1,856,901			1,905,878
Intangibles, net					278,753			265,091
Other long-term assets					79,301			70,026

		Total assets		$	3,858,879		$	3,698,705

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	38,979		$	58,376
	Accrued compensation and benefits				97,828			132,027
	Other accrued liabilities				374,097			272,578
	Income taxes payable				114,593			17,057
	Deferred taxes				36,913			26,054
	Current portion of long-term debt				1,742			1,764
	Current portion of unearned revenue				58,857			49,620
	Liabilities related to assets held for sale				2,520			—

		Total current liabilities			725,529			557,476

Convertible notes					316,990			316,990
Long-term debt					2,776			181,350
Deferred taxes					193,286			176,484
Other long-term liabilities					42,684			37,217

		Total liabilities			1,281,265			1,269,517

Stockholders’ equity:
	Class A common stock				1,273			1,266
	Class B common stock				66			66
	Additional paid-in capital				1,376,108			1,358,418
	Accumulated other comprehensive income, net				(840	)		(971	)
	Retained earnings				1,410,246			1,070,409
	Treasury stock				(209,239	)		—

		Total stockholders’ equity			2,577,614			2,429,188

		Total liabilities and stockholders’ equity		$	3,858,879		$	3,698,705

The accompanying notes are an integral part of these consolidated financial statements.

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)


			Three Months Ended					Six Months Ended
			December 31,					December 31,

			2003			2002		2003			2002

Revenues			$	997,879		$	908,814	$	2,034,514		$	1,791,395

Expenses:
	Wages and benefits			443,555			403,880		920,667			806,779
	Services and supplies			271,962			244,196		536,926			470,686
	Rent, lease and maintenance			96,920			86,944		192,850			171,279
	Depreciation and amortization			42,216			35,717		83,627			71,859
	Gain on sale of business			(284,346	)		—		(284,346	)		—
	Other operating expenses			24,591			13,111		37,880			26,171

		Total operating expenses		594,898			783,848		1,487,604			1,546,774

	Operating income			402,981			124,966		546,910			244,621

Interest expense				5,325			6,147		10,545			13,201
Other non-operating (income) expense, net				(988	)		417		(1,168	)		1,889

	Pretax profit			398,644			118,402		537,533			229,531

Income tax expense				145,614			44,401		197,695			86,074

	Net income		$	253,030		$	74,001	$	339,838		$	143,457

Earnings per common share:
	Basic		$	1.93		$	0.56	$	2.57		$	1.09

	Diluted		$	1.80		$	0.53	$	2.41		$	1.03

Shares used in computing earnings per common share:
	Basic			131,001			132,175		132,087			132,124
	Diluted			141,880			143,295		142,889			143,139

The accompanying notes are an integral part of these consolidated financial statements.

AFFILIATED COMPUTER SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)


				Six Months Ended
				December 31,

				2003			2002

Cash flows from operating activities:
	Net income			$	339,838		$	143,457

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			83,627			71,859
		Gain on sale of business			(284,346	)		—
		Impairment of long-term investments			—			2,000
		Tax benefit on stock options			8,113			3,682
		Deferred income tax expense			36,528			42,412
		Other non-cash activities			8,585			5,880
		Changes in assets and liabilities, net of effects from acquisitions:
			Increase in accounts receivable		(123,770	)		(41,638	)
			(Increase) decrease in inventory		(377	)		152
			Increase in other current assets		(9,606	)		(4,694	)
			(Increase) decrease in other long-term assets		(12,526	)		2,498
			Decrease in accounts payable		(2,170	)		(25,716	)
			Decrease in accrued compensation and benefits		(18,250	)		(27,152	)
			Increase in other accrued liabilities		71,209			42,453
			Change in income taxes payable		97,536			(2,395	)
			Increase in unearned revenue		9,198			15,792
			Increase in other long-term liabilities		7,514			4,989

		Total adjustments			(128,735	)		90,122

		Net cash provided by operating activities			211,103			233,579

Cash flows from investing activities:
	Purchases of property, equipment and software, net				(93,144	)		(92,540	)
	Payments for acquisitions, net of cash acquired				(112,451	)		(6,381	)
	Proceeds from divestitures, net of transaction costs				584,627			5,802
	Additions to other intangible assets				(14,851	)		(25,819	)
	Additions to notes receivable				(2,681	)		(2,871	)
	Proceeds received on notes receivable				3,072			7,555
	Other				23			132

		Net cash provided by (used in) investing activities			364,595			(114,122	)

Cash flows from financing activities:
	Proceeds from issuance of debt				521,055			519,062
	Repayments of debt				(703,733	)		(613,567	)
	Purchase of treasury shares				(209,239	)		—
	Proceeds from stock options exercised				10,655			2,037
	Other				(1,354	)		(1,903	)

		Net cash used in financing activities			(382,616	)		(94,371	)

Net increase in cash and cash equivalents					193,082			25,086

Cash and cash equivalents at beginning of period					51,170			33,814

Cash and cash equivalents at end of period				$	244,252		$	58,900

The accompanying notes are an integral part of these consolidated financial statements.

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 500 company with approximately 38,000 people providing business process and technology outsourcing solutions to commercial and government clients.

The financial information presented should be read in conjunction with our consolidated financial statements for the year ended June 30, 2003. Certain reclassifications have been made to prior period financial statements to conform to current presentation. 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.

Based on the criteria set forth in Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”), we have two reportable segments as of December 31, 2003: commercial and government. The segments presented in prior periods differ from the current presentation. The sale of the majority of our Federal business necessitated an assessment of our reportable segments under SFAS 131. As a result, we combined our former State and Local Governments segment with the remainder of our Federal segment into our Government segment. Prior period reporting has been restated to conform to the new segment reporting.

Significant accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2003. For discussion of our critical accounting policies, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

2. STOCK-BASED COMPENSATION

We follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) in accounting for our stock-based compensation plans. Under APB 25, no compensation expense is recognized for our stock-based compensation plans since the exercise price of awards under our plans are at the current market price of our stock on the date of grant. Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant date under those plans consistent with the fair value method of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation”, our net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):


		Three Months Ended				Six Months Ended
		December 31,				December 31,

		2003		2002		2003		2002

Net Income
	As reported	$	253,030	$	74,001	$	339,838	$	143,457
	Less: Pro forma employee compensation cost of stock-based compensation plans, net of tax		5,051		4,333		9,857		8,253

	Pro forma	$	247,979	$	69,668	$	329,981	$	135,204

Basic earnings per share
	As reported	$	1.93	$	0.56	$	2.57	$	1.09
	Pro forma	$	1.89	$	0.53	$	2.50	$	1.02
Diluted earnings per share

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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 500 company with approximately 38,000 people providing business process and technology outsourcing solutions to commercial and government clients.

		The financial information presented should be read in conjunction with our consolidated financial statements for the year ended June 30, 2003. Certain reclassifications have been made to prior period financial statements to conform to current presentation. 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.

		Based on the criteria set forth in Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”), we have two reportable segments as of December 31, 2003: commercial and government. The segments presented in prior periods differ from the current presentation. The sale of the majority of our Federal business necessitated an assessment of our reportable segments under SFAS 131. As a result, we combined our former State and Local Governments segment with the remainder of our Federal segment into our Government segment. Prior period reporting has been restated to conform to the new segment reporting.

		Significant accounting policies are detailed in our Annual Report on Form 10-K for the year ended June 30, 2003. For discussion of our critical accounting policies, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

2.		STOCK-BASED COMPENSATION

		We follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) in accounting for our stock-based compensation plans. Under APB 25, no compensation expense is recognized for our stock-based compensation plans since the exercise price of awards under our plans are at the current market price of our stock on the date of grant. Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant date under those plans consistent with the fair value method of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation”, our net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):