<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 OCTOBER 31, 2000
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
(858) 826-6000
(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 November 30, 2000, the Registrant had 226,453,501 shares of
Class A common stock, $.01 par value per share, issued and outstanding, and
282,999 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 STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 31, 2000 OCTOBER 31, 1999 OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 1,545,065 $ 1,421,756 $ 4,259,097 $ 3,967,046
Costs and expenses:
Cost of revenues 1,189,810 1,082,711 3,367,655 3,047,837
Selling, general and
administrative expenses 232,636 237,544 621,719 637,712
----------- ----------- ----------- -----------
Operating Income 122,619 101,501 269,723 281,497
Non-Operating income (expense):
Interest expense (4,237) (5,992) (15,204) (21,811)
Interest income 25,331 11,525 87,063 41,276
Other income, net (Note J) 48,449 20,890 277,482 18,765
Gain on sale of affiliate common stock 3,853,202 698,374
Minority interest in income
of consolidated subsidiaries (1,948) (12,364) (7,899) (27,325)
----------- ----------- ----------- -----------
Income before income taxes 190,214 115,560 4,464,367 990,776
Provision for income taxes 45,495 48,073 1,669,673 412,163
----------- ----------- ----------- -----------
Net income $ 144,719 $ 67,487 $ 2,794,694 $ 578,613
=========== =========== =========== ===========
Earnings per share:
Basic $ .62 $ .28 $ 11.82 $ 2.43
=========== =========== =========== ===========
Diluted $ .58 $ .26 $ 10.91 $ 2.25
=========== =========== =========== ===========
Common equivalent shares:
Basic 232,213 239,666 236,351 238,458
=========== =========== =========== ===========
Diluted 250,945 257,997 256,158 257,526
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-2
<PAGE> 4
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, 2000 JANUARY 31, 2000
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 667,165 $ 669,320
Restricted cash 6,718 8,781
Short-term investments in marketable securities 710,414 424,609
Receivables 1,366,372 1,339,763
Prepaid expenses and other current assets 73,398 143,163
Deferred income taxes 73,268 173,987
----------- -----------
Total current assets 2,897,335 2,759,623
Property and equipment (less accumulated depreciation
of $390,919 and $306,754 at October 31, 2000
and January 31, 2000, respectively) 267,123 351,429
Land and buildings (less accumulated depreciation of
$43,606 and $36,619 at October 31, 2000
and January 31, 2000, respectively) 221,409 225,458
Goodwill (less accumulated amortization of
$74,250 and $55,208 at October 31, 2000
and January 31, 2000, respectively) 189,744 170,137
Other intangible assets (less accumulated amortization of
$47,756 and $34,089 at October 31, 2000
and January 31, 2000, respectively) 57,947 69,301
Long-term investments in marketable securities 2,167,447 181,285
Prepaid pension assets 528,277 492,802
Other assets 178,405 155,213
----------- -----------
$ 6,507,687 $ 4,405,248
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 790,769 $ 1,409,477
Accrued payroll and employee benefits 429,293 357,014
Income taxes payable 312,882 90,337
Notes payable and current portion of long-term debt 25,878 54,093
----------- -----------
Total current liabilities 1,558,822 1,910,921
Long-term debt, net of current portion 115,257 121,289
Deferred income taxes 726,734 74,412
Other long-term liabilities 265,711 360,362
Commitments and contingencies (Note K)
Minority interest in consolidated subsidiaries 21,202 107,982
Stockholders' equity:
Common stock:
Class A, $.01 par value, 1,000,000 shares authorized; issued and
outstanding (228,367 shares and 236,079 shares at
October 31, 2000 and January 31, 2000, respectively) 2,284 2,361
Class B, $.05 par value, 5,000 shares authorized;
issued and outstanding (289 shares and 296 shares at
October 31, 2000 and January 31, 2000, respectively) 14 15
Additional paid-in capital 1,402,150 1,082,727
Retained earnings 2,953,534 704,562
Other stockholders' equity (46,008) (31,387)
Accumulated other comprehensive (loss) income (492,013) 72,004
----------- -----------
Total stockholders' equity 3,819,961 1,830,282
----------- -----------
$ 6,507,687 $ 4,405,248
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-3
<PAGE> 5
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,794,694 $ 578,613
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 137,960 132,044
Non-cash compensation 88,320 76,464
Gain on sale of subsidiary common stock (3,853,202) (698,374)
Net gain on sales of investments and other business assets (259,312) (24,572)
Other 12,435 71,844
Increase (decrease) in cash, excluding effects of acquisitions,
resulting from changes in:
Receivables (48,842) (17,440)
Prepaid expenses and other current assets 74,338 1,239
Progress payments (642) (1,662)
Deferred income taxes 928,192 (107,720)
Other assets (19,909) (18,651)
Accounts payable and accrued liabilities (319,292) (152,589)
Accrued payroll and employee benefits 81,742 60,064
Income taxes payable 240,557 158,763
Other long-term liabilities (6,414) 420
----------- -----------
(149,375) 58,443
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (69,495) (112,354)
Expenditures for land and buildings (1,448) (861)
Acquisitions of businesses, net of cash acquired (35,396) (219,665)
Purchases of debt and equity securities available-for-sale (681,246) (421,666)
Proceeds from sale of debt and equity securities available-for-sale 35,191 121,229
Proceeds from sale of affiliate common stock 1,589,575 729,000
Investments in affiliates (66,196) (52,705)
Proceeds from maturities of debt securities held to maturity 8,000
Proceeds from sales of certain business assets 2,854 65,051
Proceeds from disposal of property and equipment 86 269
----------- -----------
773,925 116,298
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and issuance of long-term debt 773
Payments of notes payable and long-term debt (6,487) (516)
Principal payments on capital lease obligations (38,093) (33,054)
Net proceeds from issuance of subsidiary common stock 3,725
Dividends paid to minority interest (10,561) (9,423)
Sales of common stock 39,540 63,524
Repurchases of common stock (609,702) (127,961)
----------- -----------
(625,303) (102,932)
----------- -----------
Effect of exchange rate changes on cash (1,402) (1,282)
----------- -----------
(Decrease) increase in cash and cash equivalents (2,155) 70,527
Cash and cash equivalents at beginning of period 669,320 389,026
----------- -----------
Cash and cash equivalents at end of period $ 667,165 $ 459,553
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Common stock exchanged upon exercise of stock options $ 36,930 $ 29,588
=========== ===========
Capital lease obligations for property and equipment $ 7,681 $ 18,985
=========== ===========
Fair value of assets acquired in acquisitions $ 62,959 $ 307,191
Cash paid in acquisitions (35,396) (233,504)
Issuance of common stock for assets acquired (3,000) (18,506)
----------- -----------
Liabilities assumed in acquisitions $ 24,563 $ 55,181
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
I-4
<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 accounting
principles generally accepted in the United States of America. The preparation
of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingencies at the date of the financial statements as well
as the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available
information and actual results could differ from those estimates.
Certain amounts from the three and nine months ended October 31, 1999 have been
reclassified in the condensed consolidated financial statements to conform to
the presentation of the three and nine months ended October 31, 2000.
In the opinion of management, the unaudited financial information as of October
31, 2000 and for the three and nine months ended October 31, 2000 and 1999
reflect all adjustments (which include only normal, recurring adjustments)
necessary for a fair presentation thereof. Operating results for the nine months
ended October 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2001. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's 2000 Annual Report on Form 10-K.
NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In December 1999, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
SAB No. 101 provides the SEC staff's views on applying generally accepted
accounting principles to selected revenue recognition issues. The Company will
adopt SAB No. 101 in the fourth quarter ending January 31, 2001 and does not
expect the adoption of SAB No. 101 to have a material impact on the Company's
consolidated financial position or results of operations.
NOTE C - SHORT-TERM AND LONG-TERM INVESTMENTS:
During the nine months ended October 31, 2000, the Company increased its
investments in available-for-sale debt and equity securities to $2,877,861,000.
The aggregate cost basis, gross unrealized gains and gross unrealized losses of
the available-for-sale securities at October 31, 2000 were $3,631,304,000,
$114,034,000, and $867,477,000, respectively.
NOTE D - RECEIVABLES:
Receivables include $43,566,000 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 October 31, 2000.
NOTE E - NOTES PAYABLE:
The Company has a five-year unsecured reducing revolving credit facility with a
group of financial institutions which allow borrowings until August 2002 and
which was reduced to $631,250,000 in accordance with the original terms.
Borrowings bear interest at the Company's option at various rates, based on the
base rate, bid rate or on margins over the CD rate or LIBOR. There were no
balances outstanding under the facility at October 31, 2000 and the entire
$631,250,000 was available. Financial covenants required by the credit facility
have been maintained as of October 31, 2000.
I-5
<PAGE> 7
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE F - BUSINESS SEGMENT INFORMATION:
The following table summarizes interim segment information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31 NINE MONTHS ENDED OCTOBER 31
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Regulated $ 1,148,451 $ 1,047,346 $ 2,720,225 $ 2,411,590
Non-Regulated 614,908 590,660 1,596,351 1,623,724
----------- ----------- ----------- -----------
Total segment revenues 1,763,359 1,638,006 4,316,576 4,035,314
Corporate and other (218,294) (216,250) (57,479) (68,268)
----------- ----------- ----------- -----------
Total consolidated revenues $ 1,545,065 $ 1,421,756 $ 4,259,097 $ 3,967,046
=========== =========== =========== ===========
Income (loss) before income taxes:
Regulated $ 84,018 $ 66,153 $ 175,254 $ 152,722
Non-Regulated 65,821 78,926 162,336 171,744
----------- ----------- ----------- -----------
Total segment income before income taxes 149,839 145,079 337,590 324,466
Corporate and other 40,375 (29,519) 4,126,777 666,310
----------- ----------- ----------- -----------
Total income before income taxes $ 190,214 $ 115,560 $ 4,464,367 $ 990,776
=========== =========== =========== ===========
</TABLE>
For the three months ended October 31, 2000, income before income taxes for the
Corporate and other segment includes a gain on the sale of an equity interest in
a French business (Note J). For the nine months ended October 31, 2000, the
gains on transactions with NSI Class A Common Stock as discussed in Note I are
also reflected in the Corporate and other segment. For the nine months ended
October 31, 1999, included in Corporate and other income before income taxes was
the gain on the sale of NSI Class A Common Stock which was completed in February
1999.
NOTE G - COMPREHENSIVE (LOSS) INCOME:
Comprehensive (loss) income, which combines net income, unrealized gains and
losses on the Company's available-for-sale securities and foreign currency
translation adjustments, consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31 NINE MONTHS ENDED OCTOBER 31
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 144,719 $ 67,487 $ 2,794,694 $ 578,613
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on securities (273,183) 6,971 (535,942) 20,819
Reclassification adjustment 6,343 (25,186)
Foreign currency translation adjustments (541) 250 (2,889) (349)
----------- ----------- ----------- -----------
(267,381) 7,221 (564,017) 20,470
----------- ----------- ----------- -----------
Total comprehensive (loss) income $ (122,662) $ 74,708 $ 2,230,677 $ 599,083
=========== =========== =========== ===========
</TABLE>
I-6
<PAGE> 8
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE H - EARNINGS PER SHARE (EPS):
A summary of the elements included in the computation of basic and diluted EPS
is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31 NINE MONTHS ENDED OCTOBER 31
---------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $ 144,719 $ 67,487 $2,794,694 $ 578,613
Weighted average shares 232,213 239,666 236,351 238,458
---------- ---------- ---------- ----------
Basic EPS $ .62 $ .28 $ 11.82 $ 2.43
========== ========== ========== ==========
DILUTED EPS:
Net income $ 144,719 $ 67,487 $2,794,694 $ 578,613
Effect of:
Majority-owned subsidiary's
dilutive securities (131) (160)
---------- ---------- ---------- ----------
Net income available to common
stockholders, as adjusted $ 144,719 $ 67,356 $2,794,694 $ 578,453
---------- ---------- ---------- ----------
Weighted average shares 232,213 239,666 236,351 238,458
Effect of:
Stock options 17,786 18,050 19,323 18,688
Other stock awards 946 281 484 380
---------- ---------- ---------- ----------
Weighted average shares, as adjusted 250,945 257,997 256,158 257,526
---------- ---------- ---------- ----------
Diluted EPS $ .58 $ .26 $ 10.91 $ 2.25
========== ========== ========== ==========
</TABLE>
NOTE I - SALE OF AFFILIATE COMMON STOCK:
On February 11, 2000, the Company's NSI subsidiary completed a secondary
offering of 8,889,500 shares of its Class A Common Stock. Of the shares sold in
the offering, the Company sold 6,700,000 shares, NSI sold 2,159,500 shares and
other selling stockholders sold 30,000 shares at $247 per share before deducting
underwriting commissions of $9.75 per share. The Company received net proceeds
from the offering of $1,589,575,000 and recognized a gain on the sale before
income taxes of $1,462,303,000. In addition, the Company recognized a gain as a
result of the shares sold by NSI by recording $132,377,000 directly to
additional paid-in capital. Upon completion of this secondary offering and
giving effect to NSI's 2-for-1 stock split, the Company held 16,300,000 shares
of NSI Class A Common Stock which represented a 22.6% interest in NSI. With the
recomposition of the NSI Board of Directors and the ownership interest in NSI,
the Company, in the first quarter ended April 30, 2000, no longer consolidated
NSI's financial statements and instead began recognizing its proportionate share
of NSI's net income under the equity method of accounting.
On June 8, 2000, NSI merged and became a wholly-owned subsidiary of VeriSign,
Inc. ("VeriSign"), a publicly traded company and leading provider of Internet
trust services. As a result of this transaction, the Company recognized a gain
before income taxes of $2,390,899,000 and holds approximately 9% of VeriSign's
outstanding shares.
I-7
<PAGE> 9
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE J - OTHER INCOME:
On April 5, 2000, Solect Technology Group Inc. ("Solect"), an entity in which
the Company held an investment, was acquired by Amdocs Limited ("Amdocs"), a
publicly traded company. In connection with this transaction, the Company
exchanged its equity interest in Solect for an approximate 2% equity interest in
Amdocs. The Company recognized a gain before income taxes of $191,222,000 on the
transaction, which is reflected in other income in the accompanying financial
statements.
On July 24, 2000, Telcordia sold a business unit in exchange for equity
securities of a publicly traded company and recognized a gain before income
taxes of $30,267,000, which is reflected in other income in the accompanying
financial statements.
During the three months ended October 31, 2000, the Company sold an equity
interest in a French business in exchange for equity securities of a French
public company and recognized a gain before income taxes of $32,348,000, which
is reflected in other income in the accompanying financial statements. The
Company also recognized a gain before income taxes of $9 million from the sale
of certain shares of its marketable equity securities classified as
available-for-sale.
NOTE K - COMMITMENTS AND CONTINGENCIES:
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.
NOTE L - SUBSEQUENT EVENT:
Subsequent to October 31, 2000, the fair value of the Company's equity
securities in VeriSign decreased. As of December 13, 2000, the gross unrealized
loss on this investment was $1,215,213,000 compared to a gross unrealized loss
of $820,957,000 as of October 31, 2000.
I-8
<PAGE> 10
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT TRANSACTIONS
During the nine months ended October 31, 2000, the Company decreased its
ownership in its NSI subsidiary through a series of transactions. On February
11, 2000, NSI completed a secondary offering of 8,889,500 shares of its Class A
Common Stock. Of the shares sold in the offering, the Company sold 6,700,000
shares, NSI sold 2,159,500 shares and other selling stockholders sold 30,000
shares at $247 per share before deducting underwriting commissions of $9.75 per
share. The Company received net proceeds from the offering of $1.6 billion and
recognized a gain on the sale before income taxes of $1.5 billion. In addition,
the Company recognized a gain as a result the shares sold by NSI by recording
$132 million directly to additional paid-in capital. Upon completion of this
secondary offering and giving effect to NSI's 2-for-1 stock split, the Company
held 16,300,000 shares of NSI Class A Common Stock which represented a 22.6%
interest in NSI. With the recomposition of the NSI Board of Directors and the
ownership interest in NSI, the Company, in the first quarter ended April 30,
2000, no longer consolidated NSI's financial statements ("deconsolidation") and
instead began recognizing its proportionate share of NSI's net income under the
equity method of accounting. On June 8, 2000, NSI merged into and became a
wholly-owned subsidiary of VeriSign, Inc. ("VeriSign"), a publicly traded
company and leading provider of Internet trust services. As a result of this
transaction, the Company recognized a gain before income taxes of $2.4 billion
and holds approximately 9% of VeriSign's outstanding shares.
The Company also completed several other transactions involving certain business
units, its equity investments and marketable securities which resulted in gains
before income taxes and are described in the other income discussion which
follows.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended October 31, 2000 increased 9% and
7%, respectively, compared to the same periods of the prior year. Excluding
NSI's revenues, revenues increased 13% and 11% for the three and nine months
ended October 31, 2000, respectively, which was primarily attributable to growth
at Telcordia and in the Company's traditional business areas. Regulated segment
revenues as a percentage of consolidated revenues were 74% and 64% for the three
and nine months ended October 31, 2000, respectively, compared to 74% and 61%
for the same periods of the prior year and increased 10% and 13%, respectively,
over the same periods of the prior year as a result of growth in the Company's
traditional business areas with departments and agencies of the U.S. Government
and through acquisitions. For the three and nine months ended October 31, 2000,
Regulated segment revenues from the Company's principal customer, the U.S.
Government, continued to shift toward the service type contracts which are
competitively priced utilizing lower cost structures. This trend 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 these lower cost service type
contracts. Non-Regulated segment revenues as a percentage of consolidated
revenues were 40% and 38% for the three and nine months ended October 31, 2000,
respectively, compared to 42% and 41% for the same periods of the prior year and
decreased as a percentage of revenues primarily due to the deconsolidation of
NSI, no current revenues from the TransCore business unit which was sold in the
third quarter of the prior year and lower revenues at INTESA. Excluding revenues
from NSI and TransCore for the prior three and nine months ended October 31,
1999, Non-Regulated segment revenues increased 21% and 13% for the three and
nine months ended October 31, 2000, respectively. The increase was primarily
attributable to Telcordia and certain commercial and international markets,
however, offsetting the increase in revenues in the Non-Regulated segment was
lower revenues at INTESA. Revenues on the Company's contracts are generated from
the efforts of its technical staff as well as the pass through of costs for
material and subcontract efforts, which primarily occur on large, multi-year
system integration type contracts. At October 31, 2000, the Company had
approximately 39,000 full-time employees compared to approximately 35,600 at
October 31, 1999. Material and subcontract ("M&S") revenues were $294 million
and $773 million for the three and nine months ended October 31, 2000,
respectively, compared to $273 million and $731 million for the same periods of
the prior year. As a percentage of total revenues, M&S revenues remained
constant at 19% and 18% for the three and nine months ended October 31, 2000 and
1999, respectively.
The percentage of the Company's revenues attributable to the higher risk, firm
fixed-price ("FFP") contracts decreased to 37% for the nine months ended October
31, 2000 compared to 38% for the same period of the prior year. For the year
ended January 31, 2000, revenues from FFP contracts were 41%. 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. Fixed-price level-of-effort ("FP-LOE") and
time-and-materials ("T&M") type contracts represented 29% and 28% of revenues
for the nine months ended October 31, 2000 and 1999, respectively, while cost
reimbursement contracts were 34% for the same periods, respectively.
Cost of revenues as a percentage of revenues increased to 77.0% and 79.1% for
the three and nine months ended October 31, 2000, respectively, compared to
76.2% and 76.8% for the same periods of the prior year. Excluding NSI in the
prior year, cost of revenues as a percentage of revenues were 77.9% and 78.3%
for the three and nine months ended October 31, 1999, respectively. The increase
as a percentage of revenues for the nine months ended October 31, 2000 is
primarily attributable to overruns on certain FFP contracts at Telcordia and
lower than historical margins on certain other contracts at INTESA and
Telcordia. Cost of revenues as a percentage of revenues, excluding Telcordia,
NSI and INTESA, was 86.2% and 87.4% for the three and nine months ended October
31, 2000 compared to 88.1% and 88.0% for the same periods of the prior year.
Selling, general and administrative ("SG&A") expenses are comprised of general
and administrative ("G&A"), bid and proposal ("B&P") and independent research
and development ("IR&D") expenses. SG&A expenses as a percentage of revenues
were 15.1% and 14.6% for the three and nine months ended October 31, 2000,
respectively compared to 16.7% and 16.1% for the same periods of the prior year.
The decrease is primarily attributable to the deconsolidation of NSI; excluding
NSI, SG&A expenses as a percentage of revenues for the three and nine months
ended October 31, 1999 were 15.4% and 14.9%.
I-9
<PAGE> 11
SG&A expenses as a percentage of revenues, excluding NSI, Telcordia and INTESA,
all of which have more of their associated costs in SG&A as opposed to cost of
revenues, were 9.0% and 8.7% for the three and nine months ended October 31,
2000, respectively, compared to 11.0% and 9.2% for the same periods of the prior
year. SG&A, excluding NSI, Telcordia and INTESA, was higher in the prior year
because of impairment losses of $28.4 million that were recognized in the three
months ended October 31, 1999 on goodwill and other intangible assets of a
business unit in the Non-Regulated segment. During the three months ended
October 31, 2000, the Company assessed the recoverability of goodwill on two
acquisitions which resulted in impairment losses of $4 million. Overall, G&A
costs have decreased as certain commercial and international subsidiaries
monitor their costs during a slower growth period while marketing and B&P costs
have increased in the Company's traditional business areas, Telcordia and
commercial business areas. IR&D costs have historically fluctuated depending on
the stage of development for various hardware and software systems and decreased
slightly as a percentage of revenues for the three and nine months ended October
31, 2000.
Operating profit margins (income before income taxes as a percentage of
revenues) by segment are strongly correlated to the Company's financial
performance on the contracts within each segment. The operating profit margin in
the Regulated segment was 7% and 6% for the three and nine months ended October
31, 2000, respectively, compared to 6% for the same periods of the prior year.
In the Non-Regulated segment, operating profit margin was 11% and 10% for the
three and nine months ended October 31, 2000, respectively, and in the nine
months ended October 31, 2000 included a gain on the sale of a Telcordia
business unit as discussed in "Other Income" below. Excluding this gain,
Non-Regulated segment operating profit margin was 8% for the nine months ended
October 31, 2000, compared to 11% for the same period of the prior year. This
decrease in operating profit margin was primarily attributable to the
deconsolidation of NSI, greater than expected operating losses in a business
that was acquired in the prior year, operating losses and reduced profit margins
in certain commercial and foreign business units and overruns on certain FFP
contracts at Telcordia.
Interest expense of $4 million and $15 million for the three and nine months
ended October 31, 2000, respectively, decreased from $6 million and $22 million
for the same periods of the prior year, respectively, and primarily relates to
interest on the Company's outstanding public debt securities, a building
mortgage, deferred compensation arrangements, capital lease obligations and
notes payable. The decrease in interest expense is primarily driven by a
decrease in capital lease obligations at INTESA.
Interest income of $25 million and $87 million for the three and nine months
ended October 31, 2000, respectively, increased $14 million and $46 million,
respectively, over the same periods of the prior year due to higher average
cash, cash equivalents and short-term investments. The Company increased its
cash available for investment in the nine months ended October 31, 2000
primarily due to the sale of NSI common stock, which occurred in the first
quarter ended April 30, 2000.
Other income, net, was $48 million and $277 million for the three and nine
months ended October 31, 2000, respectively, compared to $21 million and $19
million for the same periods of the prior year. During the three months ended
October 31, 2000, the Company sold its equity interest in a French business in
exchange for equity securities of a French public company and recognized a gain
before income taxes of $32 million and also recognized a gain before income
taxes of $9 million from the sale of certain shares of the Company's marketable
equity securities that are available-for-sale. For the same period of the prior
year, the Company recognized a gain before income taxes of $23 million on the
sale of its TransCore business unit. In addition to the transactions that
occurred in the three months ended October 31, 2000, for the nine months ended
October 31, 2000, the Company recognized a gain of $191 million in April 2000
from the exchange of the Company's equity interest in Solect Technology Group
for an approximate 2% equity interest in Amdocs Limited, a publicly traded
company, and a gain of $30 million in July 2000 from the sale of a Telcordia
business unit in exchange for equity securities of a publicly traded company.
Minority interest in income of consolidated subsidiaries was $2 million and $8
million for the three and nine months ended October 31, 2000, respectively,
compared to $12 million and $27 million for the same periods of the prior year.
The decrease is attributable to the deconsolidation of NSI. Offsetting the
decrease is the minority interest in a joint venture, Amsec LLC, which was
formed in the second quarter of the prior year.
The provision for income taxes as a percentage of income before income taxes was
23.9% and 37.4% for the three and nine months ended October 31, 2000,
respectively, compared to 41.6% for the same periods of the prior year. The
provision for the three months ended October 31, 2000 reflects an overall
reduction in the provision from 38.0% for the six months ended July 31, 2000 and
was a result of favorable net changes associated with the filing of the fiscal
year 2000 income tax returns. The lower effective tax rate for the nine months
ended October 31, 2000 reflects the resolution of certain tax positions related
to the Company's on-going appeals process with the IRS for fiscal years 1988
through 1993, certain tax elections that apply to open tax years, and a lower
effective tax rate on the gain on the sale of NSI common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity continue to be funds provided by
operations and a five-year revolving credit facility. In addition, the proceeds
from the sale of NSI common stock in February 2000 provided an additional source
of liquidity for the Company. At October 31, 2000 and January 31, 2000, there
were no borrowings outstanding under the credit facility and cash and
cash-equivalents and short-term investments in marketable securities totaled
$1.4 billion and $1.1 billion, respectively. Cash flows used in operating
activities were $149 million for the nine months ended October 31, 2000 compared
to cash flows generated from operating activities of $58 million for the same
period of the prior year.
Cash flows generated from investing activities were $774 million for the nine
months ended October 31, 2000 compared to $116 million for the same period of
the prior year. For the nine months ended October 31, 2000, cash was primarily
generated from the sale of shares
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of NSI common stock in the first quarter ended April 30, 2000 and used to
purchase investments in debt and equity securities and make investments in other
companies throughout the nine months ended October 31, 2000.
The Company used $625 million for financing activities for the nine months ended
October 31, 2000 compared to $103 million for the same period of the prior year.
The primary use of cash for the nine months ended October 31, 2000 was for
repurchases of $265 million of the Company's common stock held by terminated
employees in the Company's CODA plans. In addition, the Company continued to
repurchase its common stock from employees upon termination, repurchase its
common stock from its other retirement and profit sharing plans as well as
participate in the quarterly stock trades as a buyer for shares being offered
for sale by its stockholders.
The Company's existing cash, cash equivalents, short-term investments in
marketable securities, cash flows from operations and borrowing capacity are
expected to provide sufficient funds for the Company's operations, common stock
repurchases, capital expenditures, future long-term debt requirements,
acquisitions of businesses and equity investments.
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 ability to conduct
business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements."
SAB No. 101 provides the SEC staffs views on applying generally accepted
accounting principles to selected revenue recognition issues. The Company will
adopt SAB No. 101 in the fourth quarter ending January 31, 2001 and does not
expect the adoption of SAB No. 101 to have a material impact on the Company's
consolidated financial position or results of operations.
YEAR 2000
As discussed in the Company's Form 10-K for the fiscal year ended January 31,
2000 and as of the date of this filing, the Company has not encountered any
material Year 2000 issues with its information technology ("IT") systems, non-IT
systems, critical service suppliers and vendors, or the Company's services and
products and does not expect to incur material costs in the future attributable
to Year 2000 related issues.
FORWARD-LOOKING INFORMATION
The foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements,
including statements regarding the intent, belief or current expectations of the
Company and its officers with respect to, among other things, trends affecting
the Company's financial condition or results of operation and the impact of
competition. Such statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those in the forward-looking statements as a result of various factors. Some of
these factors include, but are not limited to the risk factors set forth in the
Company's 2000 Annual Report on Form 10-K. Due to such uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which are inherent in the
Company's financial instruments which arise from transactions entered into in
the normal course of business. The following information about the Company's
market sensitive financial instruments contains forward-looking statements.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio, short and long-term receivables
and long-term debt obligations. Interest rate risk remained relatively
consistent with amounts disclosed in the Company's 2000 Annual Report on Form
10-K, except for the following:
- In connection with the sale of shares of NSI common stock, the Company
received cash proceeds of $1.6 billion. The majority of these funds are
invested in cash equivalents and short-term investments.
FOREIGN CURRENCY RISK
In the three months ended October 31, 2000, the Company increased the number of
foreign currency forward contracts that it holds, mainly related to the Canadian
dollar. The Company's policy for managing exposure to foreign currency exchange
rate fluctuations includes the use of natural hedges and forward foreign
exchange contracts.
The Company performed a sensitivity analysis, similar to the one performed at
January 31, 2000 by assessing the risk of loss in fair values from the impact of
hypothetical changes in foreign currency exchange rates. The market values for
foreign exchange forward contracts are computed based upon spot rates in effect
on October 31, 2000. The differences that result from comparing hypothetical
foreign exchange rates and actual spot rates at October 31, 2000 are
hypothetical gains and losses associated with foreign currency risk.
A 10% adverse movement in levels of foreign currency exchange rates relative to
the U.S. dollar as of October 31, 2000 with all other variables held constant,
would result in a decrease in fair values of forward foreign exchange contracts
by approximately $3.6 million.
EQUITY PRICE RISK
On June 8, 2000, the merger of NSI and VeriSign was completed as discussed in
the notes to the condensed consolidated financial statements. As a result of the
merger, the Company holds approximately 9% of VeriSign's outstanding shares
which have market risk similar to the Company's other available-for-sale equity
securities.
At October 31, 2000, the fair value of the Company's available-for-sale equity
securities was approximately $2.2 billion. The aggregate net unrealized loss
from these investments was $757 million. The market risk associated with these
equity investments is the potential loss in fair value resulting from a decrease
in market prices. A 10% decrease in market prices, with all other variables held
constant, would result in a decrease in fair value of the equity instruments of
approximately $216 million.
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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.
During the fiscal quarter for which this report is filed, the following
report(s) on Form 8-K were filed by the Registrant:
(i) Form 8-K filed October 18, 2000, Item 5, Other events
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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: December 15, 2000 /s/ Thomas E. Darcy
------------------------------------------
Executive Vice President and
Chief Financial Officer and
as a duly authorized officer
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EXHIBIT INDEX
FISCAL QUARTER ENDED OCTOBER 31, 2000
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibits Page No.
------- ----------------------- ----------
<S> <C> <C>
27 Financial Data Schedule __________
</TABLE>
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