<PAGE> 1
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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 APRIL 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-12771
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3630868
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10260 CAMPUS POINT DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 546-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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 ___
As of May 31, 1997, the registrant had 49,614,025 shares of Class A
common stock, $.01 par value per share, issued and outstanding, and 321,203
shares of Class B common stock, $.05 par value per share, issued and
outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<PAGE> 3
Item 1. Financial Statements
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Statement of Income
(Unaudited, in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended
--------------------------------
April 30, 1997 April 30, 1996
-------------- --------------
<S> <C> <C>
Revenues $624,527 $516,921
-------- --------
Costs and expenses:
Cost of revenues 545,786 451,853
Selling, general and administrative expenses 45,423 40,617
Interest expense 1,545 1,064
Minority interest in income of consolidated subsidiary 1,088
-------- --------
593,842 493,534
-------- --------
Income before income taxes 30,685 23,387
Provision for income taxes 13,809 10,290
-------- --------
Net income $ 16,876 $ 13,097
-------- --------
Earnings per share $ .32 $ .26
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
April 30, 1997 January 31, 1997
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 147,810 $ 45,279
Restricted cash 25,283 14,456
Receivables 507,021 567,634
Inventories 15,571 33,983
Prepaid expenses and other current assets 11,457 12,708
Deferred income taxes 42,890 37,155
----------- ----------
Total current assets 750,032 711,215
Property and equipment (less accumulated depreciation
of $125,987 and $130,488 at April 30, 1997
and January 31, 1997, respectively) 88,507 89,027
Land and buildings (less accumulated depreciation of
$14,133 and $13,444 at April 30, 1997
and January 31, 1997, respectively) 112,546 96,768
Intangible assets (less accumulated amortization of 57,060 59,569
$46,386 and $43,870 at April 30, 1997
and January 31, 1997, respectively)
Other assets 56,559 55,883
----------- ----------
$ 1,064,704 $1,012,462
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 279,152 $ 271,282
Accrued payroll and employee benefits 129,599 131,234
Income taxes payable 24,611 16,859
Notes payable and current portion of long-term liabilities 20,184 21,287
----------- ----------
Total current liabilities 453,546 440,662
----------- ----------
Long-term liabilities 50,786 44,341
----------- ----------
Minority interest in consolidated subsidiary 1,088
-----------
Stockholders' equity:
Common stock:
Class A, $.01 par value
Authorized: 100,000 shares
Issued and outstanding:
April 30, 1997 - 49,251 shares 492
January 31, 1997 - 48,013 shares 480
Class B, $.05 par value
Authorized: 5,000 shares
Issued and outstanding:
April 30, 1997 - 321 shares 16
January 31, 1997 - 326 shares 16
Additional paid-in capital 346,496 304,658
Retained earnings 223,178 232,562
Other stockholders' equity (10,898) (10,257)
----------- ----------
Total stockholders' equity 559,284 527,459
----------- ----------
$ 1,064,704 $1,012,462
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Condensed Consolidated Statement of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three months ended
April 30, 1997 April 30, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,876 $ 13,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,176 8,270
Non-cash compensation 16,574 12,877
Minority interest in income of consolidated subsidiary 1,088
Loss on disposal of property and equipment 188 354
Increase (decrease) in cash, excluding effects of
acquisitions, resulting from changes in:
Receivables 42,892 30,459
Inventories 4,462 3,655
Prepaid expenses and other current assets 1,012 1,141
Progress payments 1,161 4,784
Deferred income taxes (5,735) 252
Other assets (5,336) 1,582
Accounts payable and accrued liabilities (13,710) (14,800)
Accrued payroll and employee benefits (429) (33,224)
Income taxes payable 7,752 2,254
--------- ---------
76,971 30,701
--------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (12,416) (7,108)
Expenditures for land and buildings (16,728) (3,676)
Acquisitions of certain business assets (150)
Proceeds from sale of certain business assets 47,488
Proceeds from disposal of property and equipment 3,649 100
Proceeds from sale of debt securities available for sale 5,602
--------- ---------
21,843 (5,082)
--------- ---------
Cash flows from financing activities:
Increase in notes payable and long-term liabilities 2,643
Reduction of notes payable and long-term liabilities (291) (1,070)
Income tax benefit from employee stock transactions 2,310 1,311
Sales of common stock 23,005 5,650
Repurchases of common stock (23,950) (12,832)
--------- ---------
3,717 (6,941)
--------- ---------
Increase in cash and cash equivalents 102,531 18,678
Cash and cash equivalents at beginning of period 45,279 22,765
--------- ---------
Cash and cash equivalents at end of period $ 147,810 $ 41,443
========= =========
Supplemental schedule of non-cash investing and financing activities:
Repurchases of common stock upon exercise of stock options $ 10,488 $ 8,296
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note A - Basis of Presentation:
The accompanying financial information has been prepared in accordance with the
instructions to Form 10-Q and therefore does not necessarily include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
Certain amounts from the three months ended April 30, 1996 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three months ended April 30, 1997.
In the opinion of management, the unaudited financial information for the three
months ended April 30, 1997 and 1996 reflect all adjustments (which include only
normal, recurring adjustments) necessary for a fair presentation thereof.
Operating results for the three months ended April 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 1998. For further information, refer to the consolidated financial
statements and footnotes included in the Company's 1997 Annual Report to
Stockholders.
Note B - Restricted Cash:
The Company's wholly-owned subsidiary, Network Solutions, Inc. ("NSI") has an
agreement with the National Science Foundation which requires NSI to set aside
30% of the cash collections from domain name registrations revenue to be
reinvested for the enhancement of the intellectual infrastructure of the
Internet. The Company also has a contract to provide support services to the
National Cancer Institute's Frederick Cancer Research and Development Center
("Center"). As part of the contract, the Company is responsible for paying for
materials, equipment and other direct costs of the Center through the use of a
restricted cash account which is pre-funded by the U.S. Government.
Note C - Receivables:
Unbilled accounts receivable include $19,051,000 of costs incurred on projects
for which the Company has been requested by the customer to begin work under a
new contract, or extend work under an existing contract, but for which formal
contracts or contract modifications have not been executed at April 30, 1997.
Note D - Composition of Certain Financial Statement Captions:
<TABLE>
<CAPTION>
April 30, 1997
--------------
(in thousands)
<S> <C>
Inventories:
Contracts-in-process $ 6,113
Raw materials 9,458
-------
$15,571
=======
</TABLE>
Note E - Notes Payable:
The Company has substantially equivalent unsecured revolving credit loan
agreements with three banks with commitments totaling $105,000,000 which allow
borrowings on a revolving basis until March 31, 2000. The agreements enable
borrowings at various interest rates, at the Company's option, based on prime,
money market, certificate of deposit, or interbank offshore borrowing rates.
Annual facility fees are 1/8 of 1% of the total commitment during the revolving
credit term. There were no balances outstanding under the credit loan agreements
at April 30, 1997 and the entire $105,000,000 was available under the most
restrictive debt covenants of the credit loan agreements.
Note F - Income Taxes:
Income taxes for interim periods are computed using the estimated annual
effective rate method.
Note G - Commitments and Contingencies:
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of
<PAGE> 7
which, in the opinion of the Company's management, will have a material adverse
effect on its consolidated financial position, results of operations, cash flows
or its ability to conduct business.
The Company leases a general purpose office building and has guaranteed a
$12,250,000 loan on behalf of the building owner. Certain financial ratios and
balances required by the guarantee have been maintained.
Note H - Sale of SAIT Business Unit:
On March 7, 1997, the Company sold the majority of the net assets of the SAIT
business unit. The purchase price is subject to potential adjustments, plus
contingent payments if certain milestones are achieved by the business post
closing. Under the agreement, the Company also retains certain contingent
liabilities. The closing statement of position has been submitted to the buyer.
As of April 30, 1997, final settlement and adjustments with the buyer were
pending. Given the stage of the settlement period and certain contingent
liabilities, the net assets sold are no longer included in the consolidated
financial position, however, the impact of the sale on the consolidated results
of operations will not be recorded until such time that the final closing
statement and any contingent liabilities have been finalized. The Company,
however, does not anticipate a loss on the sale.
<PAGE> 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Revenues for the three months ended April 30, 1997 increased 20.8% compared to
the same period of the prior year. INTESA, the Company's consolidated 60% owned
joint venture which was formed on January 2, 1997, was directly responsible for
5.5% of the increase. INTESA was formed with Venezuela's national oil company to
provide information technology services in Latin America. The remaining increase
in revenues of 15.3% was attributable to internal growth in the traditional
business areas which continued to shift toward lower cost service type
contracts. This business shift reflects the increasingly competitive business
environment in the Company's traditional business areas, as well as the
Company's increased success in the engineering and field services market, which
typically involve lower cost contracts.
Revenues are generated from the efforts of the Company's technical staff as well
as the pass through of costs for materials and subcontract efforts, which
primarily occur on large, multi-year contracts. At April 30, 1997, the Company
had approximately 22,200 full-time employees compared to approximately 19,900 at
April 30, 1996. Material and subcontract ("M&S") revenues were $156 million and
$125 million for the three months ended April 30, 1997 and 1996, respectively.
As a percentage of total revenues, M&S revenues have remained relatively
constant at 25% and 24% for the three months ended April 30, 1997 and 1996,
respectively.
Revenues by contract type indicate that the percentage of the Company's revenues
attributable to the higher risk, firm fixed-price ("FFP") contracts increased to
27% for the three months ended April 30, 1997 compared to 19% for the same
period of the prior year. The increase in revenues from FFP contracts is related
to the growth in non-U.S. Government revenues. The Company's non-U.S. Government
customers typically do not contract on a cost-reimbursement basis. Fixed-price
level-of-effort ("FP-LOE") and time-and-materials ("T&M") type contracts
represented 17% and 26% of revenues for the three months ended April 30, 1997
and 1996, respectively, while cost reimbursement contracts were 56% and 55% for
the same periods, respectively. The Company assumes greater performance risk on
FFP contracts and the failure to accurately estimate ultimate costs or to
control costs during performance of the work may result in reduced profits or
losses.
The cost of revenues as a percentage of revenues (excluding interest income)
remained constant at 87.5% for the three months ended April 30, 1997 and 1996.
Selling, general and administrative ("SG&A") expenses as a percentage of
revenues (excluding interest income) were 7.3% and 7.9% for the three months
ended April 30, 1997 and 1996, respectively. SG&A is comprised of general and
administrative ("G&A"), bid and proposal ("B&P") and independent research and
development ("IR&D") expenses. B&P costs decreased as a percentage of revenues.
The level of B&P activity and costs has historically fluctuated depending on the
availability of bidding opportunities and resources. IR&D and G&A costs remained
constant as a percentage of revenues.
Interest expense for the three months ended April 30, 1997 and 1996 primarily
relates to interest on building mortgages, deferred compensation, notes payable
and borrowings under the Company's revolving credit loan agreements.
The consummation of the acquisition of Bell Communications Research, Inc.
("Bellcore") is subject to certain conditions and contingencies, including
regulatory approvals which are expected to be obtained within four to nine
months from April 30, 1997. The Company has no assurance that the acquisition
will be completed. The acquisition, if completed, would result in a substantial
growth in both the employee base and commercial revenues of the Company. The
Company intends to finance a substantial portion of the purchase price of
Bellcore with debt financing. The growth and additional debt of this potential
acquisition may place a significant strain on the Company's management,
operational and financial resources. There can be no assurance that the Company
will be able to effectively manage the expansion of its operations or that the
Company's systems, procedures or controls will be adequate to support the
integration of the acquired business. Any inability to effectively manage the
growth could have a material adverse effect on the Company's consolidated
financial position, results of operations and cash flows.
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or its ability to conduct
business.
Liquidity and Capital Resources
The Company's primary sources of liquidity continue to be funds provided by
operations and revolving credit loan agreements. At April 30, 1997 and 1996,
there were no borrowings outstanding under such agreements, and cash and
cash-equivalents totaled $148 million and $41 million, respectively.
<PAGE> 9
Cash flows generated from operating activities were $77 million for the three
months ended April 30, 1997 compared to $31 million for the same period of the
prior year. Receivable days outstanding as of April 30, 1997 were 59 days
compared to 63 days for the same period of the prior year. Average receivable
days outstanding for the three months ended April 30, 1997 were 68 days compared
to 66 days for the same period of the prior year. The Company continues to
actively monitor receivables with emphasis placed on collection activities and
the negotiation of more favorable payment terms.
Cash flows from investing activities generated cash of $22 million for the three
months ended April 30, 1997 compared to a use of cash of $5 million for the same
period of the prior year. The source of cash was primarily generated from the
sale of net assets of the SAIT business unit, which is discussed in the Notes to
Condensed Consolidated Financial Statements, and was partially offset by the
purchase of land and buildings and increased expenditures for property and
equipment.
The Company generated $4 million in cash from financing activities for the three
months ended April 30, 1997 compared to a use of cash of $7 million for the same
period for the prior year. The source of cash for financing activities for the
three months ended April 30, 1997 was generated from an increase in long-term
liabilities and the income tax benefit derived from employee stock options,
whereas for the same period of the prior year, the Company utilized cash for
repurchases of common stock.
The Company's cash flows from operations plus borrowing capacity are expected to
provide sufficient funds for the Company's operations, common stock repurchases,
capital expenditures and future long-term debt requirements. However, the
Company intends to obtain financing, including debt, to complete the acquisition
of Bellcore and expects to finance other acquisitions in the future from
operations and borrowing capacity as well as with the issuance of Company common
stock.
<PAGE> 10
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various investigations, claims and lawsuits arising
in the normal conduct of its business, none of which, in the opinion of the
Company's management, will have a material adverse effect on its consolidated
financial position, results of operations, cash flows or its ability to conduct
business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fiscal
quarter for which this report is filed.
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENCE APPLICATIONS
INTERNATIONAL CORPORATION
Date: June 12, 1997 /s/W. A. Roper
Senior Vice President and
Chief Financial Officer and
as a duly authorized officer
<PAGE> 12
Exhibit Index
Science Applications International Corporation
Fiscal Quarter Ended April 30, 1997
Exhibit Sequential
No. Description of Exhibits Page No.
- ------- ------------------------------------------------ ----------
11 Statement re: Computation of Per Share Earnings ----------
27 Financial Data Schedule ----------
<PAGE> 1
EXHIBIT 11
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
EXHIBIT TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPUTATION OF PER SHARE EARNINGS
(Unaudited, in thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended
-------------------------------
April 30, 1997 April 30, 1996
-------------- --------------
<S> <C> <C>
PRIMARY:
Net income $16,876 $13,097
Reduction of interest expense, net of
income tax expense on assumed retirement
of short-term and long-term debt 270 241
Interest earned, net of income tax expense
on assumed investment of U.S. government
securities or commercial paper -- 101
------- -------
Adjusted net income $17,146 $13,439
======= =======
Weighted average shares outstanding 50,415 48,849
Dilutive stock options, based on the modified
treasury stock method, using average fair value 3,369 3,389
------- -------
Total average shares outstanding 53,784 52,238
======= =======
Per Share Amount $ .32 $ .26
======= =======
FULLY DILUTED:
Net income $16,876 $13,097
Reduction of interest expense, net of
income tax expense on assumed retirement
of short-term and long-term debt 244 241
Interest earned, net of income tax expense
on assumed investment of U.S. government
securities or commercial paper -- 64
------- -------
Adjusted net income $17,120 $13,402
======= =======
Weighted average shares outstanding 50,415 48,849
Dilutive stock options, based on the modified
treasury stock method, using quarter-end
or exercise date established price if higher than
average fair value 3,369 3,389
------- -------
Total average shares outstanding 53,784 52,238
======= =======
Per Share Amount $ .32 $ .26
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED CONDENSED STATEMENTS OF INCOME
AND CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 173,093
<SECURITIES> 0
<RECEIVABLES> 507,021
<ALLOWANCES> 19,427
<INVENTORY> 15,571
<CURRENT-ASSETS> 750,032
<PP&E> 341,173
<DEPRECIATION> 140,120
<TOTAL-ASSETS> 1,064,704
<CURRENT-LIABILITIES> 453,546
<BONDS> 50,786
0
0
<COMMON> 508
<OTHER-SE> 558,776
<TOTAL-LIABILITY-AND-EQUITY> 1,064,704
<SALES> 0
<TOTAL-REVENUES> 624,527
<CGS> 0
<TOTAL-COSTS> 545,786
<OTHER-EXPENSES> 46,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,545
<INCOME-PRETAX> 30,685
<INCOME-TAX> 13,809
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,876
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
